The Medicare Advantage program (also known as Medicare Part C) has long been touted for its potential to lower costs, expand consumer choice, and improve health outcomes.[i] The popularity of Medicare Advantage (MA) plans has increased in the past decade with prospective enrollees enticed by benefits ranging from dental care to pest control and targeted by advertising campaigns with lines such as “If you don’t have a Medicare Part C plan, call now.”
A bipartisan letter of support for the program dated Feb. 18, 2022, and signed by 60 U.S. senators described the MA program as providing a “holistic approach to care, including by addressing social determinants of health to meet seniors’ needs and improving health equity.”
Individual MA enrollees tend to be as satisfied with their plans as are enrollees in traditional fee-for-service (FFS) Medicare programs[ii] and have similar health outcomes. But recent reports from the Office of the Inspector General of the U.S. Department of Health and Human Services, the Medicare Payment Advisory Council (MedPAC), and the Congressional Budget Office have raised questions about the collective costs of the MA program and how to ensure that the promises of the program continue to be realized.
Payment structure
The MA program allows Medicare beneficiaries to enroll in private managed care plans rather than participate in Medicare’s FFS program. The MA plans are paid on a capitated basis under the program’s Health Maintenance (HMO) or Preferred Provider Organization (PPO) models. This structure incentivizes innovation as a means of achieving value rather than volume as a pathway to profit.
The amount a plan receives per enrollee varies between counties or specified geographical regions based upon benchmarks determined by the Centers for Medicare & Medicaid Services (CMS).
The calculation of a benchmark begins with the estimated annual cost of the provision of care for a traditional FFS Medicare beneficiary in the specified geographic market. This amount is then ranked nationally by quartile. The final benchmark for each region is determined by multiplying its average cost of FFS care by a factor that ranges from 0.95 to 1.15 depending upon quartile ranking. To encourage efficiencies, quartiles with higher FFS expenses are multiplied by the lowest factor and those with lower expenses are multiplied by the highest.
When an MA plan submits a bid that is lower than the benchmark amount for a county or region, the plan receives a portion of the difference between its bid for services and the benchmark amount in the form of rebate.
MA plans also receive bonus payments based upon their ratings for quality as measured under CMS’s Star system. Star Ratings are determined by a plan’s scores on more than three dozen measures across nine different categories ranging from “Member Complaints” to “Managing Chronic Conditions,” with patient experience measures being given increased weight in recent years. Scoring is on a scale of 1 to 5 stars, with five stars being the highest or preferred score. Plans receiving at least four stars are eligible for bonus payments.
Finally, to ensure that MA organizations are appropriately compensated for coverage of enrollees who can reasonably be expected to have higher healthcare use and costs, CMS provides for health risk adjustments (HRAs) to the risk scores used in calculating monthly capitated payments.
Assessing program costs
There are currently approximately 27 million Americans enrolled in MA plans. This represents 42% of all Medicare beneficiaries.[iii] If the program’s promises of cost reduction were being realized, one would reasonably expect that MA expenditures as a percentage of all Medicare spending would be less than 42%. However, MA plans account for 46% of all federal Medicare spending.
Simply put, MA plans currently cost Medicare more per member than traditional plans. Analysis by the Kaiser Family Foundation found that spending per MA member in 2019 averaged $321 more than spending for those enrolled in traditional FFS Medicare and resulted in an additional $7 billion in total spending.
A portion of this spending can be attributed to increases in rebates under the benchmark bidding system and more MA plans qualifying for Star Rating bonuses. What concerns many critics is the percentage of spending that stems directly from HRA allowances.
Ideally, HRAs originate with an enrollee’s assessment by a healthcare provider, who, in addition to identifying and documenting ICD-10 diagnoses, initiates appropriate care or treatment plans. However, some MA organizations have a pattern of basing HRAs on data mining of healthcare records and/or interviews with enrollees conducted by third-party companies, without the MA enrollee ever being seen by their provider, let alone treated.
In a report published last September, the Office of Inspector General (OIG) for the U.S. Department of Health & Human Services (HHS) found that “[t]wenty MA companies drove over half of the risk-adjusted payments from diagnoses submitted solely on chart reviews and HRAs, yet they enrolled only 31 percent of MA beneficiaries.”
The opportunity to profit through HRAs has given rise to a niche industry of “risk adjustment vendors” ready to assist MA organizations in data mining and optimizing enrollee risk scores. One such vendor offers a case study outlining how what they describe as an “improvement to risk scores” benefited a plan with 10,000 subscribers to the tune of $3 million. Whether the plan’s enrollees benefited from better management of chronic or more complex conditions is not mentioned, raising the question of what Medicare beneficiaries received in exchange for the additional $3 million in Medicare spending.
MedPAC has described some policies in the MA payment system as “deeply flawed and… in need of immediate improvement.” Writing in Health Affairs in September 2021, Richard Gilfillan and former CMS administrator Donald M. Berwick characterized the MA marketplace as “perverse” and accused MA organizations of “risk score gaming.”
There is some data to support this claim. In a retrospective study prepared for the Committee for a Responsible Federal Budget, Richard Kronick, the former director of the Agency for Healthcare Research and Quality, and F. Michael Chua found that Medicare Advantage relative risk scores increased faster than the scores on related measures of demographic status, pharmaceutical data and mortality data during the same period.
The U.S. Department of Justice has suggested that the current payment system creates financial incentives for MA organizations to pursue and submit diagnosis codes that will increase their payments from Medicare. In one case, U.S. Attorney James Kennedy, Jr. of the Western District of New York, stated “When insurance providers take advantage of Medicare and falsely claim that they are entitled to repayment for unsupported diagnoses, American taxpayers suffer in the form of higher costs.”
Measuring quality
Per member cost is not the only measure for assessing the success of the MA program. Of at least equal importance is the quality of care delivery associated with MA plans.
CMS’s Star Ratings are a convenient reference for consumers comparing and selecting plans. CMS also uses the ratings in making determinations regarding the continuation of plan participation in the MA program— contracts with plans scoring less than three stars for three years in a row can be terminated.
The 60 senators who wrote in support of the MA program emphasized that “90 percent of enrollees are in Medicare Advantage plans rated 4 or more stars,” using the Star measure as a direct proxy for quality.
However, in its Medicare Payment Policy Report to Congress in March of last year, MedPAC characterized quality in Medicare Advantage programs as “difficult to evaluate.” Reiterating a previously voiced concern with CMS’s Star Rating, MedPAC’s report stated unequivocally that “(t)he Commission can no longer provide an accurate description of the quality of care in MA.”
A study by the Commonwealth Fund found that hospitalization rates and emergency department use for FFS and MA beneficiaries were equivalent. It concluded that care management for diabetes was marginally better for MA enrollees.
Individual experiences
While MA plans may cost the federal government more per beneficiary, they can save individual enrollees money. That is part of what makes them especially attractive to seniors on fixed incomes.
The Better Medicare Alliance (BMA), a DC-based organization that advocates for “a strong Medicare Advantage program,” states that, when compared with enrollees in traditional FFS Medicare, MA enrollees see average annual cost savings of $1,640 for out-of-pocket cost sharing plus premium costs. This is a significant amount of money for the more than half of MA enrollees with annual incomes of less than $24,500.
Given the many variables involved, it can be difficult to definitively compare out-of-pocket expenses for inpatient care between MA enrollees and FFS Medicare beneficiaries. BMA states that traditional Medicare FFS beneficiaries have out-of-pocket expenses seven times higher than those of their MA counterparts for inpatient facility stays.
The Kaiser Family Foundation, however, estimates that, while MA enrollees would see cost-savings for an inpatient stay of three days, at least half would pay more than traditional Medicare beneficiaries for stays of five days or more.
J.D. Power surveys have found that overall customer satisfaction with Medicare Advantage plans continues to increase annually.
Promises realized, promises to keep
In providing such services as dental care, meal delivery, and transportation, MA plans reflect an expanding definition of healthcare and growing appreciation for the social determinants of health. In this sense, the MA program’s promise of innovation continues to be realized.
Medicare Advantage retains its potential to achieve cost savings and realize greater efficiencies in the Medicare program by incentivizing value rather than volume. With Medicare’s Board of Trustees predicting that the Medicare Hospital Insurance (HI) Trust Fund will be insolvent by 2026, achieving this potential is more critical than ever. This will require a careful reexamination of the program’s payment structure.
[i] See: The Better Medicare Alliance
[ii] https://www.commonwealthfund.org/publications/issue-briefs/2021/oct/medicare-advantage-vs-traditional-medicare-beneficiaries-differ
[iii] https://www.cms.gov/newsroom/news-alert/cms-releases-latest-enrollment-figures-medicare-medicaid-and-childrens-health-insurance-program-chip