---
type: source
title: "An Economic History of Medicare Part C"
author: "McWilliams et al. (Milbank Quarterly / PMC)"
url: https://pmc.ncbi.nlm.nih.gov/articles/PMC3117270/
date: 2011-06-01
domain: health
secondary_domains: []
format: paper
status: null-result
priority: high
tags: [medicare-advantage, medicare-history, political-economy, risk-adjustment, payment-formula, hmo]
processed_by: vida
processed_date: 2026-03-10
enrichments_applied: ["CMS 2027 chart review exclusion targets vertical integration profit arbitrage by removing upcoded diagnoses from MA risk scoring.md", "value-based care transitions stall at the payment boundary because 60 percent of payments touch value metrics but only 14 percent bear full risk.md", "the healthcare attractor state is a prevention-first system where aligned payment continuous monitoring and AI-augmented care delivery create a flywheel that profits from health rather than sickness.md", "Devoted is the fastest growing MA plan at 121 percent growth because purpose built technology outperforms acquisition based vertical integration during CMS tightening.md"]
extraction_model: "anthropic/claude-sonnet-4.5"
extraction_notes: "Extracted two major claims about MA's policy-contingent growth and the ideological shift in MMA 2003. Enriched four existing claims with historical context about payment policy cycles, risk-bearing incentives, attractor state misalignment, and Devoted's growth in context of quality bonuses. The BBA 1997-MMA 2003 crash-and-rescue cycle is the key extractable insight—it demonstrates that MA viability depends on above-FFS payments, not market efficiency or consumer preference. The ideological reframing from cost containment to market accommodation explains why overpayments have been sustained for two decades despite consistent evidence of inefficiency."
---

## Content

### Historical Timeline (synthesized from multiple search results including this paper)

**1966-1972: Origins**
- Private plans part of Medicare since inception (1966)
- 1972 Social Security Amendments: first authorized capitation payments for Parts A and B
- HMOs could contract with Medicare but on reasonable-cost basis

**1976-1985: Demonstration to Implementation**
- 1976: Medicare began demonstration projects with HMOs
- 1982 TEFRA: established risk-contract HMOs with prospective monthly capitation
- By 1985: rules fully implemented; enrollment at 2.8% of beneficiaries

**1997: BBA and Medicare+Choice**
- Medicare trustees projected Part A trust fund zero balance within 5 years
- Political pressure → BBA 1997: cost containment + expanded plan types (PPOs, PFFS, PSOs, MSAs)
- Reworked TEFRA payment formula, established health-status risk adjustment
- Created annual enrollment period to limit mid-year switching
- **Unintended consequences**: plans dropped from 407 to 285; enrollment fell 30% (6.3M→4.9M) between 1999-2003
- 2+ million beneficiaries involuntarily disenrolled as plans withdrew from counties

**2003: MMA and Medicare Advantage**
- Republican control of executive + legislative branches
- Political shift from cost containment to "accommodation" of private interests
- Renamed Medicare+Choice → Medicare Advantage
- Set minimum plan payments at 100% of FFS (was below)
- Created bid/benchmark/rebate framework
- Payments jumped 11% average between 2003-2004
- Created Regional PPOs, expanded PFFS, authorized Special Needs Plans

**2010: ACA Modifications**
- Reduced standard rebates but boosted for high-star plans (>3.5 stars)
- Created quality bonus system that accelerated growth

**2010-2024: Growth Acceleration**
- 2010: 24% penetration → 2024: 54% penetration
- From 10.8M to 32.8M enrollees
- Growth driven by: zero-premium plans, supplemental benefits, Star rating bonuses

### Political Economy Pattern
Each phase follows a cycle:
1. Cost concerns → restrictions → plan exits → beneficiary disruption
2. Political backlash → increased payments → plan entry → enrollment growth
3. Repeat with higher baseline spending

The MMA 2003 was the decisive inflection: shifted from cost-containment framing to market-competition framing. This ideological shift — not just the payment increase — explains why MA grew from 13% to 54%.

## Agent Notes
**Why this matters:** The full legislative arc reveals MA as a political creation, not a market outcome. Each payment increase was a political choice driven by ideology (market competition) and industry lobbying, not evidence of MA's superior efficiency. The system we have now — 54% penetration with $84B/year overpayments — was designed in, not an accident.
**What surprised me:** The BBA 1997 crash (30% enrollment decline, 2M involuntary disenrollments) is the counter-evidence to the narrative that MA growth is driven by consumer preference. When payments were constrained, plans exited. "Choice" is contingent on overpayment.
**KB connections:** [[proxy inertia is the most reliable predictor of incumbent failure because current profitability rationally discourages pursuit of viable futures]], [[industries are need-satisfaction systems and the attractor state is the configuration that most efficiently satisfies underlying human needs given available technology]]
**Extraction hints:** Claims about: (1) MA growth driven by political payment decisions not market efficiency, (2) the BBA-MMA cycle as evidence that MA viability depends on above-FFS payments, (3) the ideological shift from cost containment to market accommodation as the true inflection

## Curator Notes
PRIMARY CONNECTION: [[the healthcare attractor state is a prevention-first system where aligned payment continuous monitoring and AI-augmented care delivery create a flywheel that profits from health rather than sickness]]
WHY ARCHIVED: Essential historical context — you can't evaluate where MA is going without understanding the political economy of how it got here.
EXTRACTION HINT: The 1997-2003 crash-and-rescue cycle is the most extractable insight. It demonstrates that MA's growth is policy-contingent, not demand-driven.


## Key Facts
- 1966: Private plans part of Medicare since inception
- 1972: Social Security Amendments authorized capitation payments for Parts A and B
- 1976: Medicare began demonstration projects with HMOs
- 1982 TEFRA: established risk-contract HMOs with prospective monthly capitation
- 1985: TEFRA rules fully implemented; enrollment at 2.8% of beneficiaries
- 1997 BBA: Medicare trustees projected Part A trust fund zero balance within 5 years
- 1999-2003: Plans dropped from 407 to 285; enrollment fell from 6.3M to 4.9M (30% decline)
- 2003 MMA: Payments jumped 11% average between 2003-2004
- 2010: MA penetration at 24% (10.8M enrollees)
- 2024: MA penetration at 54% (32.8M enrollees)
- Current MA overpayments estimated at $84B/year (2024)
