- Issue: Medicare Advantage (MA) enrollment has grown significantly since 2009, despite legislation that reduced what Medicare pays these plans to provide care to enrollees. MA payments, on average, now approach parity with costs in traditional Medicare.
- Goal: Examine changes in per enrollee costs between 2009 and 2014 to better understand how MA plans have continued to thrive even as payments decreased.
- Methods: Analysis of Medicare data on MA plan bids, net of rebates.
- Findings: While spending per beneficiary in traditional Medicare rose 5.0 percent between 2009 and 2014, MA payment benchmarks rose 1.5 percent and payment to plans decreased by 0.7 percent. Plans’ expected per enrollee costs grew 2.6 percent. Plans where payment rates decreased generally had slower growth in their expected costs. HMOs, which saw their payments decline the most, had the slowest expected cost growth.
- Conclusions: In general, MA plans responded to lower payment by containing costs. By preserving most of the margin between Medicare payments and their bids in the form of rebates, they could continue to offer additional benefits to attract enrollees. The magnitude of this response varied by geographic area and plan type. Despite this slower growth in expected per enrollee costs, greater efficiencies by MA plans may still be achievable.
Proponents of a larger role for private plans in Medicare argue that they are likely to be more efficient than the government-sponsored program, and that competition among such plans will increase the choices available to beneficiaries and control costs. But for most of its history, Medicare payment policies have not provided private plans with strong incentives to achieve efficiency. Under the Medicare Modernization Act of 2003, payment levels for private plans in most counties exceeded per beneficiary costs in traditional Medicare.1
The Affordable Care Act of 2010 sharply reduced the growth of per enrollee payments to private plans, now known as Medicare Advantage (MA) plans, narrowing the discrepancy between those payment rates and per beneficiary spending in traditional Medicare.2 As a result, the ratio of per enrollee payments to MA plans to projected spending per beneficiary in traditional Medicare, which was 114 percent in 2009, fell to 100 percent by 2017 (Exhibit 1).3,4,5 This reduction is particularly striking in the context of slow growth in traditional Medicare; between 2009 and 2017, spending per beneficiary in traditional Medicare is estimated to have grown at an annual rate of only 1.6 percent.
The decline in payments to MA plans led to predictions of a decline in private-plan enrollment, as had occurred in the late 1990s.6,7 However, MA plan enrollment has continued to grow rapidly, from 10.5 million in 2009 to 18.5 million in 2017, with private plans serving about one-third of all beneficiaries.8
How have Medicare Advantage plans continued to thrive in recent years despite less generous payment? Little is known about how they have controlled their costs in response to decreased payment. In this issue brief, we examine changes in Medicare per enrollee payments to plans and their expected per enrollee costs across counties and types of plans, using data from the Centers for Medicare and Medicaid Services (CMS) from 2009 and 2014 (see How We Conducted This Study).9
Changes in Medicare Advantage Plan Payments, 2009–2014
Per enrollee payments to MA plans are determined by two parameters: the benchmark rate set for each county, determined by a statutory formula that reflects the county’s traditional Medicare spending per beneficiary, and the bid submitted by each plan. If a plan’s bid is less than the benchmark rate, it receives its bid plus an additional rebate (equal to a proportion of the difference between its bid and the benchmark) as total payment per enrollee. If a plan’s bid is greater than the benchmark rate, its total payment per enrollee is limited to the benchmark rate.10
These parameters changed considerably between 2009 and 2014. The benchmark rates are now set at 95 percent, 100 percent, 107.5 percent, or 115 percent of traditional Medicare spending per beneficiary, depending on the county’s costliness (i.e., Medicare spending per beneficiary). The rebate has been reduced from 75 percent to 50 percent of the difference between the benchmark and the plan’s bid, and the benchmark and/or rebate also may vary depending on the plan’s quality rating. These changes have reduced the growth of per enrollee payments to MA plans and shifted a greater share of payments to high-performing plans.11
How Have Plans Responded?
Using data from 2009 and 2014, we examine how Medicare per enrollee payments to plans and plans’ bids (which generally represent their expected total costs per enrollee of providing Medicare Part A and Part B benefits, including medical expenditures, administrative costs, and a predetermined profit rate) changed over that period.12,13 In the aggregate, while projected spending per beneficiary in traditional Medicare increased by 5.0 percent in the five years between 2009 and 2014, MA plan benchmarks increased only 1.5 percent (Exhibit 2). Plan bids, representing their expected costs per enrollee, increased only 2.6 percent — half as much as in traditional Medicare. Total per enrollee payments to plans, including rebates, actually decreased, by 0.7 percent. Nonetheless, MA plan enrollment increased across the board, growing 48 percent nationwide. These changes, however, varied across counties and by type of plan.
Changes by County-Level Medicare Spending Per Beneficiary
To examine changes at the county level, we ranked counties by traditional Medicare spending per beneficiary in 2009, from low to high, and grouped them into four quartiles, each with roughly equal numbers of counties. Not surprisingly, there was wide variation in traditional Medicare spending per beneficiary across the quartiles in 2014, ranging from an average of $7,764 in the quartile with the lowest spending to $10,499 in the quartile with the highest spending — a 35 percent spread. The counties with the highest traditional Medicare spending per beneficiary in 2009 tended to experience the smallest increases over the next five years, and vice versa.
There was a similar pattern in MA benchmarks and per enrollee payments to MA plans, with the plans in the highest-spending counties experiencing a decline of 0.5 percent in benchmarks and 2.4 percent in per enrollee payments between 2009 and 2014 (Exhibit 3).
The change in MA plan bids (i.e., expected per enrollee costs) also varied across the county quartiles, in roughly the same pattern as the change in Medicare per enrollee payment to plans (Exhibit 4). This indicates that MA plans may have responded to substantial payment pressure by reducing their own costs.14 Notably, though, even in the group of counties that experienced the largest declines, total Medicare payments to MA plans in 2014 were still 13 percent higher than their expected costs per enrollee of providing Medicare Part A and Part B benefits (Exhibit 5).
Changes by Type of Plan
We also grouped plans into three types: health maintenance organizations (HMOs), the most tightly structured type of plan in terms of managing care, and local preferred provider organizations (PPOs) and regional PPOs, each of which are less structured than HMOs.15 In terms of enrollment, HMOs have more than 70 percent of MA enrollees, while local and regional PPOs, with about 25 percent of all MA enrollees combined, are the fastest-growing plan type.
HMOs experienced essentially flat growth in benchmarks between 2009 and 2014 (0.1 percent) and the largest average decline in per enrollee payments of any plan type, with a decrease of 2.1 percent between 2009 and 2014 (Exhibit 6). They also had the smallest increase in their bids (1.5 percent) over the five years. Local and regional PPOs had benchmarks that grew by 1.4 percent and 3.8 percent, respectively; they experienced a small increase or slight decrease in per enrollee payments to them over the same period, and their bids grew faster than those of the HMOs.
Despite the slow growth in Medicare benchmarks faced by each type of plan, plans were able to keep their bids below those benchmarks rates, which enabled them to continue to receive rebates (Exhibit 7). HMOs, for whom benchmarks remained essentially flat, nonetheless were most successful, on average, in controlling their per enrollee costs. However, per enrollee payments to HMOs in 2014 were still 12 percent higher than their expected per enrollee costs of providing Medicare Part A and Part B benefits.
Our analysis indicates that, in the face of pressure from slow — and in some cases negative — benchmark growth, MA plans responded by controlling their cost growth. However, Medicare per enrollee payments to MA plans are still greater on average than plans’ bids, which means Medicare is paying substantially more than plans’ expected total costs of providing Medicare benefits to their enrollees. MA plans retain a portion of these extra payments as administrative fees and by law must use the remaining extra payments to offer additional benefits, which tend to attract new enrollees. This may help explain the continued enrollment growth in Medicare Advantage.
The fact that MA plans, in the aggregate, have responded to declining payment rates by controlling costs is encouraging news and lends credence to the theory that plans would respond to competitive market conditions by increasing efficiencies while also serving the needs of their enrollees. These results also undercut arguments that increased payment pressure would lead to the demise of Medicare Advantage; in fact, enrollment has continued to grow. Moreover, there may be further opportunities for MA plans to show how efficient they can be as their payments continue to exceed their costs and traditional Medicare spending per beneficiary in many counties — and while traditional Medicare moves from volume-based to value-based payments.16
Various proposals have called for different roles for private plans as Medicare enters its second 50 years. Some would increase the role of private plans, but critics worry that beneficiaries lack the information needed to choose among plans, and that many of those proposals might end up costing beneficiaries more and concentrating older and sicker beneficiaries in traditional Medicare.17,18 Alternatively, improvements in traditional Medicare’s structure and benefit package have been proposed that could enable it to compete on a more level playing field with private plans.19
In any case, more attention needs to be devoted to how private plans are paid. Until recently, Medicare payment policy did not provide strong incentives for private plans to perform effectively and efficiently or link payment to performance. More data should enable better analysis of these issues and — particularly given the growth of Medicare Advantage enrollment and calls for increased competition between traditional Medicare and private plans — the focus should be on improving both MA plans and traditional Medicare, to the benefit of all Medicare beneficiaries.