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The Medicare Advantage program is a popular option among many Medicare recipients, allowing beneficiaries enrolled in both Part A (Hospital Insurance) and Part B (Supplemental Medical Insurance) to receive benefits from private plans rather than from the traditional Medicare program.
The program was created with the intent of increasing beneficiary options and quality of care while streamlining costs. In 2022, 30 million people were enrolled in Medicare Advantage plans, nearly half of all Medicare enrollment. Although Medicare Advantage has the potential to reduce total Medicare spending, it is more expensive to the federal government than if those same individuals were enrolled in the traditional fee-for-service program.
The roots of the Medicare Advantage program can be traced to the Tax Equity and Fiscal Responsibility Act, enacted in 1982. The act authorized Medicare to contract with risk-based private health plans in exchange for a monthly payment per enrollee. Later the Balanced Budget Act of 1997 made the program official, calling it the Medicare+Choice program. The program was renamed as the Medicare Advantage Program (also known as “Part C” or “MA Plans”) in December 2003 under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. That act improved the choice of plans, altered benefit payment methods, created the Medicare prescription drug benefit (Part D), and adjusted the Part C program to require coordinated care plans to offer prescription drug coverage.
Medicare Advantage allows beneficiaries to select a private plan for health insurance to cover their Medicare Part A and Part B healthcare expenses, rather than traditional Medicare. Most of those plans provide additional benefits compared to coverage under the traditional program.
The most common types of Medicare Advantage Plans are Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Special Needs Plans (SNPs). An HMO plan (44 percent of enrollment) generally requires the enrollee to use in-network providers and hospital care. PPO plans (37 percent of enrollment) allow for similar coverage to HMO plans with an option for out-of-network care at a higher cost. Lastly, SNPs (17 percent of enrollment) offer coverage for individuals with certain diseases or characteristics to tailor benefits, providers, and drugs to meet the particular group’s needs.
Beneficiaries have an opportunity to select a new Medicare Advantage plan or to switch between MA and traditional fee-for-service on an annual basis, and plan offerings change each year.
Medicare Advantage is attractive to Medicare-eligible individuals because it provides some additional services, sets out-of-pocket-maximums, and may include drug benefits within one plan. Such advantages may come with tradeoffs to the beneficiary, such as closed networks, referral requirements, and the possibility of additional premiums.
Medicare Advantage plans often cover additional services beyond traditional Medicare, such as vision, hearing, and dental. The average MA enrollee had access to $2,000 in additional benefits beyond Medicare coverage during 2022. For 2023, Medicare Advantage plans that bid below the benchmark, which is the maximum the government is willing to pay for that care per number of people in an area, can provide supplemental benefits such as eyewear, hearing aids, dental benefits, access to medically-tailored meals, over-the-counter items, and fitness benefits. Some plans also offer non-emergency out of network coverage, caregiver support, or acupuncture. Those benefits make MA users more likely than fee-for service Medicare participants to have a treatment plan, prescription review, or a regular doctor or place of care.
Medicare Advantage has an annual maximum out-of-pocket payment, unlike traditional Medicare. After reaching that maximum, all other services that are part of Medicare Part A and Part B are fully covered by the insurer for the duration of the year. In 2023, the maximum in-network cost for HMOs and PPOs was $8,300 and $12,450 for combined in-network and out-of-network services for PPOs.
Another feature of many Medicare Advantage plans is the ability to combine drug coverage and medical coverage within one plan. Rather than paying for a separate Part D plan, a Medicare Advantage Prescription Drug Plan offers prescription drug coverage within the program. The average cost of the drug coverage portion of premiums for Medicare Advantage was $11 a month in comparison to $40 for a stand-alone Part D drug plan in 2022.
Enrollees in Medicare Advantage are generally limited to their provider’s network. A 2017 study by the Kaiser Family Foundation found that the average MA plan only includes about half of all providers in the United States.
Unlike traditional Medicare, Medicare Advantage enrollees may need a referral to see a specialist or prior approval for a care or service. If an enrollee is denied approval to see a specialist for treatments or other services, the care is not covered. A recent study by the Office of Inspector General in the Department of Health and Human Services found that 13 percent of Medicare Advantage’s prior authorization requests that were denied were within Medicare’s guidelines, meaning that traditional Medicare would have covered them if enrollees had opted for the fee-for-service model.
Some of the plans have a monthly premium in addition to the Part B premium all Medicare enrollees pay. Those premiums averaged $18 a month, and two-thirds of Medicare Advantage enrollees did not pay additional premiums in 2023.
In addition to monthly premiums from enrollees, Medicare Advantage plans receive an agreed-upon payment from the government for the beneficiaries that they cover. That is a set rate per enrollee, per year in exchange for the plan assuming responsibility for all Medicare Part A and Part B care and expenses related to the enrollee. That agreed-upon payment ranges from 95 to 115 percent of the Medicare fee-for-service costs in the local area, depending on whether an area has high or low spending.
The process of agreeing on a payment per enrollee starts by plans submitting their bid for how much it would cost to cover a certain number of people with certain characteristics in an area. The Centers for Medicare and Medicaid Services (CMS) then compares the bid to a corresponding benchmark. If a bid is below a benchmark, it is accepted and a rebate is given (50 to 70 percent of the difference between the bid and premium). Those rebates must be used to benefit enrollees; examples of that include adding benefits and/or reducing premiums. If a bid is above a benchmark, the benchmark amount is paid to the plan, and additional premiums from enrollees are used to cover the difference.
In 2021, Medicare paid $361 billion to private health plans to fund Medicare Advantage. That amount represented 43 percent of total Medicare spending that year—up from 27 percent in 2015. The cost of Medicare is increasing, but MA’s share of total Medicare spending is growing even faster: Projections from CMS anticipate that Medicare Advantage will represent 51 percent of Medicare spending in 2031.
In 2021, Medicare Advantage was 4 percent more expensive per enrollee than if those same individuals were enrolled in traditional Medicare, and increases in cost per enrollee are expected to continue. That increase in cost per enrollee is not explained by the health of Medicare enrollees versus Medicare Advantage enrollees. Furthermore, beyond beneficiaries having a treatment plan, prescription review, and a regular doctor or place of care, there is limited evidence to suggest MA plans are delivering better quality and access to care.
Medicare Advantage is more expensive for the government than traditional Medicare because the cost-saving areas of MA predominately benefit the private plans rather than the government. MA was structured to incentivize innovation of efficient care management and, subsequently, to lower costs. That has proven effective: for 2022, the average bid from Medicare Advantage plans was 15 percent less than what fee-for-service Medicare would spend.
However, a shortcoming is that the government does not realize most of those savings, largely because of inflated risk scores skewing (numbers that account for diagnoses and expected medical costs of a beneficiary) the benchmark. The more qualifying diagnoses a member has (i.e., higher risk score), the more Medicare pays to the MA plan for that enrollee. Because of that, private plans are incentivized to identify and submit all possible diagnoses to CMS whether the insured are actively being treated by providers or not, which inflates scores and thus payments to private plans in comparison to what a similar individual would cost under Medicare.
Risk scores are 9.5 percent higher for MA users when compared to similar fee-for-service Medicare users. CMS recognizes that plans are motivated to increase risk scores, so it adjusts risk scores downward across the board. However, experts still believe that the adjustment under-corrects MA code inflation. In 2020, the “coding intensity” adjustment still left a net 3.6 percent inflation of MA risk scores above such scores for similar beneficiaries under the fee-for-service program. According to MedPAC, those inflated coding practices within MA translated to $12 billion in unwarranted payments from Medicare to plans in 2020, allowing private plans to pocket savings in care costs rather than the government.
In short, while Medicare Advantage was intended to decrease costs and increase choice and quality of care, it has only partially met those goals. The program does offer more generous benefits but is also more expensive to the government per enrollee and provides only small improvements in quality of care.
In 2021, 82 percent of Medicare Advantage enrollees lived in urban metro areas. The average MA plan only includes about half of all providers who accept Medicare. In rural areas where there are fewer providers to begin with, it can be challenging for plans to establish a provider network that is large enough to be convenient. Additionally, premiums in rural areas can be higher than premiums in urban areas since such payments are based on pooled risk (with fewer people to pool risk with in rural areas).
A large portion of Medicare Advantage enrollment is in two plans: UnitedHealthcare and Humana. Together those companies account for nearly half of all Medicare Advantage enrollment in 2022. UnitedHealthcare has experienced the largest growth since 2010 of any organization that offers Medicare Advantage, increasing from 20 percent to 28 percent of total MA enrollment. Humana’s share of total MA enrollment has grown too, but only from 16 percent in 2010 to 18 percent in 2022.
A Kaiser Family Foundation brief points out that in 29 percent of counties, UnitedHealthcare and Humana account for 75 percent or more of MA enrollment. Those two firms are selected frequently in both urban and rural areas, accounting for 43 percent of the share of total MA enrollment in urban counties and 52 percent in rural counties.
The fact that Medicare Advantage is 4 percent more expensive per enrollee than traditional Medicare is significant for the federal budget. The MA option was originally introduced to reduce costs while improving choice and quality, but those goals have not been fully accomplished. As a higher percentage of Medicare-eligible individuals are choosing Medicare Advantage plans and are expected to continue to do so, the higher costs of coverage will strain federal spending and the solvency of the Hospital Insurance Trust Fund. It is important to improve the efficiency and equity of Medicare Advantage now in order to provide quality care to the American people at a sustainable cost to the U.S. government.
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