Obamacare was expected to kill off Medicare Advantage. Now, it’s one of the hottest areas for venture investment.

Reuters/Larry Downing

Peter Orszag, a former Obama administration official who’s now CEO of financial advisory at Lazard, said that the biggest prediction some experts got wrong after the Affordable Care Act went into action was thinking that Medicare Advantage was dead.
Medicare Advantage is the private component of the government-funded Medicare program for seniors, in which the government pays private insurers a set amount to cover members.
At the time, experts assumed that cuts in payments to Medicare Advantage would lead to fewer people signing up for the health plans.
Instead, the opposite’s happened. "I would say it’s on a more sustainable path precisely because the overpayments have been taken off the table," Orszag said at CNBC’s "Healthy Returns" conference in New York on Tuesday.
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Medicare Advantage, the private component of the government-funded Medicare program, is thriving even though experts once expected it to flame out.

Peter Orszag, a former Obama administration official and CEO of financial advisory at the investment bank Lazard, calls it one of the biggest predictions experts got wrong after the Affordable Care Act.

When the ACA, also called Obamacare, went into effect in 2010, it cut back payments to Medicare Advantage plans. At the time, the plans were overpaid relative to the cost of caring for individuals in the traditional Medicare program. The idea was to bring the funding in line with traditional Medicare.

When Obamacare passed, experts including the nonpartisan Congressional Budget Office predicted those cuts would lead to a decline in Medicare Advantage enrollment. Instead, enrollment has surged.

In the end, the business has become stronger, Orszag said.

"I would say it’s on a more sustainable path precisely because the overpayments have been taken off the table," Orszag said at CNBC’s "Healthy Returns" conference in New York on Tuesday.

Orszag served as the director of the Obama administration’s Office of Management and Budget from January 2009 to July 2010. He led CBO at the end of the George W. Bush administration.

People can typically choose to enroll in Traditional Medicare or Medicare Advantage plans when they turn 65. Either way, their health needs are largely funded by the US government.

Astrid Stawiarz / CNBC

Medicare Advantage works much like private insurance does for those under 65. It’s designed to allow people to shop around and choose from different plans, which may restrict which doctors and hospitals they can use. The US government, in turn, pays the insurers a certain amount for each person covered, creating an incentive for the insurer to try to keep that person healthy and out of the hospital. If the insurer does a good job of caring for its customer at a low cost, it can keep the extra funds as profits.

Around the time the ACA was being finalized, Medicare Advantage got called out because the Centers for Medicare and Medicaid Services was paying between 10-15% more for those plans compared to traditional Medicare plans. The ACA imposed cuts to Medicare Advantage payments. Experts at the time warned that the cuts could lead to insurers pulling out of the market, potentially collapsing the Medicare Advantage market.

Instead, the market grew. About a third of people on Medicare are now enrolled in private Medicare Advantage health plans. As of last year, more than 20 million Americans were enrolled in Medicare Advantage plans, nearly double the enrollment in 2010.

It’s now a growing market that startups are interested in getting a piece of, alongside entrenched insurers like Humana, UnitedHealth Group, and CVS Health. Over the past year, investors have poured $1.3 billion into health insurance startups with ambitions in the Medicare Advantage space, making it one of the hottest areas of venture investment.

"A lot of the new capital is moving into setting up new Medicare Advantage plans because they’re growing rapidly, and the future is bright, and because you don’t need as much initial scale to get off the ground," Orszag said.

Overall, Orszag noted, the ACA set off a chain reaction that’s led to changes in how healthcare is delivered, beyond the health law’s individual market.

"From a delivery system and from a change the healthcare perspective, the ACA has had a much larger impact that is commonly appreciated," Orszag said.

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