Researchers with the USC Schaeffer Center for Health Policy & Economics warn that overpayments to Medicare Advantage (MA) plans now exceed 20 percent or $75 billion annually.
The analysis, funded by Arnold Ventures and the USC Schaeffer Center, points to the current MA payment structure and “favorable selection” for the reasons behind overpayments and stresses the urgent need for payment reform.
Enrollment in MA has grown so rapidly that it has recently surpassed enrollment in traditional Medicare. USC researchers found that the millions of beneficiaries in traditional Medicare who have switched to MA plans have lower spending than those with similar health risks who remain. This pattern of favorable selection more than doubles prior overpayment estimates made by the Medicare Payment Advisory Commission (MedPAC), which reflected aggressive coding of enrollee health conditions plus certain easily-achieved bonus payments related to quality–but did not include favorable selection.
The Centers for Medicare & Medicaid Services (CMS) sets MA payments based on county-level expenditures derived from claims data for those remaining in traditional Medicare, not data from MA expenditures–a payment mechanism that is fueling concern.
“The current Medicare Advantage payment structure results in overpayments markedly higher than previously understood,” Paul Ginsburg, senior fellow at the USC Schaeffer Center and professor of the practice at the USC Price School of Public Policy, said in the study announcement. “Our analysis highlights how Medicare Advantage currently operates and the need to reform how the plans are paid.”
Under traditional fee-for-service (FFS) Medicare, CMS acts as the insurer, processing claims and reimbursing most providers directly. But under MA, CMS transfers risk to private insurers, which receive a fixed monthly capitation amount per beneficiary. MA plans earn profit or incur loss based on enrollees’ health care service utilization.
MedPAC estimates that MA plans will be overpaid by $27 billion (6 percent) in 2023, primarily due to coding differences ($23 billion) and excessive Star rating (quality) bonuses. However, this estimate does not include the effects of differences in spending between those who enroll in MA and those who remain in traditional Medicare, researchers said.
Study authors found that MA beneficiaries had significantly lower expenditures than those remaining in traditional Medicare with similar risk factors. In 2020, approximately 47 percent (11.3 million) of MA enrollees had switched from traditional Medicare in 2006-2019; just counting the 29.5 percent (7.1 million) who switched to MA in 2015-2019, payments to plans for these beneficiaries were twice their expected expenditures.
“The skewed distribution of expenditures and the consistent trend of beneficiaries with below-average spending choosing Medicare Advantage plans have significant financial implications and are adding to the fiscal strain on the Medicare system,” said Steven Lieberman, a nonresident senior fellow at the USC Schaeffer Center. “Reform options must strive to improve the relationship between FFS expenditures and Medicare Advantage payments. Another option is to delink Medicare Advantage payments from FFS as the current rate-setting system grows increasingly unreliable and problematic.”
To improve the accuracy of MA rate setting, researchers suggest two strategies:
- Reform the current payment approach linking plan rates to average spending by traditional Medicare beneficiaries. This could include measures to reduce the impact of aggressive coding by plans and mandating new data reporting requirements for MA plans to improve accuracy, completeness, and comparability of the data to make it akin to claims data in traditional Medicare.
- Abandon the current approach and institute competitive bidding by MA plans. This option could use market forces to determine what Medicare pays MA plans with the aim of capturing efficiency gains for taxpayers instead of higher benefits or profits for MA plans.
“Regardless of which approach is chosen, policymakers should proceed with a solution to shore up the fiscal solvency of the Medicare Trust Fund and the impact on overall federal budget deficits,” notes Ginsburg.
Without reform, the researchers concluded that overpayments to MA plans will only increase, costing tens of billions in federal health care are spending and threatening the long-term viability of the Medicare program.