Managed Care Better in Medicare than Medicaid, Congress Examining Tax-Exempt Hospitals, and the IRA’s Damage

Tomorrow marks 25 years since the September 11 terrorist attacks. I was an undergrad at Penn State, walking across campus on a beautiful morning, when I first heard that a plane had struck the World Trade Center. Like so many Americans, I spent the rest of that day watching the horrific events unfold.

What I remember most from the days and weeks that followed was the extraordinary bravery of the first responders and ordinary Americans who ran toward danger, and the sense of unity across the country. September 11 is a reminder both of the evil our country has faced and of the courage, sacrifice, and common purpose Americans are capable of showing.

Turning to health policy, today’s newsletter highlights a new policy brief from Chris Pope explaining why Medicare Advantage works much better than Medicaid managed care, a new Prognosis from John R. Graham on why Congress is right to scrutinize the community benefits claimed by tax-exempt hospitals, and an update on the IRA’s costly redesign of Medicare Part D.

Medicaid’s Disadvantage: Why Private Plans Work Better in Medicare Than in Medicaid

More than half of Medicare beneficiaries are enrolled in Medicare Advantage (MA), while nearly four out of five Medicaid beneficiaries are enrolled in comprehensive managed care. Yet the results have been very different. MA has added meaningful choice and competition to Medicare, while the evidence does not suggest that managed care has improved quality or lowered costs in Medicaid.

In a new policy brief, the Manhattan Institute’s Chris Pope explains why. The problem is Medicaid’s structure, which weakens or reverses the incentives that make private competition useful. Chris identifies three fundamental differences.

• MA operates much more like a defined contribution: plans receive payments tied to Medicare fee-for-service spending, and plans that lower their costs can use savings to offer lower premiums or richer benefits. Medicaid managed care plans, by contrast, generally cannot charge enrollees premiums, and federal actuarial soundness rules and policy require states to set payments sufficient to cover plans’ expected costs. Higher costs therefore translate into higher government payments. This weakens the incentive to economize and limits meaningful competition among plans.
• Medicaid eligibility is far more discretionary and difficult to police than Medicare eligibility. Managed care plans receive a monthly payment for each person enrolled, and many enrollees do not even know they are covered. Plans can therefore continue receiving payments when people move, obtain other coverage, or otherwise become ineligible. CMS estimated that in 2024, roughly 3 million people were enrolled in multiple state Medicaid programs or in both Medicaid and an Affordable Care Act (ACA) exchange plan. And Paragon research by Liam Sigaud estimates that more than 9 million ACA Medicaid expansion enrollees were improperly enrolled in 2024.
• Medicaid managed care has increasingly become a vehicle for corporate welfare. Rather than empowering insurers to negotiate lower prices, states have used state-directed payments (SDPs) to require plans to pay favored providers rates as high as average commercial rates—well above Medicare rates. These arrangements reached $124 billion across 39 states in 2025, allowing states to steer enormous federal subsidies to hospitals and other providers.

We are still accepting submissions—until September 18—for essays on the future of Medicaid managed care and whether policymakers should reform it or move to a different model for this safety-net program.

Scrutinizing the Hospital Community Benefit Standard

John R. Graham’s latest Prognosis examines legislation passed by the House Ways and Means Committee to increase scrutiny of tax-exempt hospitals. Nearly three-quarters of privately operated community hospitals are tax-exempt. American Hospital Association-commissioned research valued the federal exemption at $13.2 billion in 2022, with another $41.1 billion in state and local tax benefits.

Since 1969, the IRS has relied on a broad “community benefit” standard rather than requiring a specific amount of charity care. Last year, the Treasury Inspector General for Tax Administration called that standard “vague and outdated.” Hospitals can count quality improvement, nonclinical programs, and even certain advertising and sponsorship expenses as community benefits.

Congress is beginning to ask important questions. The Tax Exempt Hospital Transparency Act would require more detailed reporting of what hospitals claim as community benefits, including reporting by facility and service line. It would also require greater transparency around hospitals’ 340B operations, where discounted drugs intended to support safety-net care have become significant profit centers for many hospital systems.

This is a useful first step. Hospitals receiving billions of dollars in tax benefits should have to demonstrate commensurate value for patients and communities. Ultimately, the most meaningful community benefit would be for hospitals to charge more affordable prices. Better transparency will help policymakers determine whether hospitals are actually providing enough community benefit to justify their tax breaks.

MedPAC on the Part D Spending Explosion

Last week, the Medicare Payment Advisory Commission released new data about the state of the Part D program. The clear takeaway: the Inflation Reduction Act’s redesign of Part D has produced a much larger increase in federal costs than originally projected.

MedPAC’s preliminary analysis found that gross Part D spending jumped 22 percent in a single year, from $289 billion in 2024 to $351 billion in 2025. In February, the Congressional Budget Office increased its projection of Medicare Part D outlays by roughly $600 billion, reflecting, in significant part, the much higher cost of the IRA’s Part D provisions.

The new benefit design also pushed far more beneficiaries into catastrophic coverage, where the federal government bears much of the cost. Among beneficiaries who do not receive the low-income subsidy, 18 percent reached the out-of-pocket cap in 2025, up from just 4 percent in 2024. Yet median out-of-pocket spending was only about $960 because supplemental benefits from enhanced plans count toward the cap. MedPAC estimates that if only beneficiaries’ actual payments counted toward the cap, the share of enhanced-plan enrollees reaching the cap could fall by roughly half.

It is clearer than ever that the IRA raised overall costs and resulted in dramatically higher premiums and larger federal deficits. Congress should prioritize fixing the IRA’s Part D redesign, and we have suggested several ways to do so.