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TAXPAYERS SPEND 22% MORE PER PATIENT TO SUPPORT MEDICARE ADVANTAGE
– THE PRIVATE ALTERNATIVE TO MEDICARE THAT PROMISED TO COST LESS  
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Grace McCormack, Erin Duffy
November 26, 2024
The Conversation
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_ Medicare Advantage – the commercial alternative to traditional
Medicare – is drawing down federal health care funds, costing
taxpayers an extra 22% per enrollee to the tune of US$83 billion a
year. _

,

 

Medicare Advantage – the commercial alternative to traditional
Medicare – is drawing down federal health care funds, costing
taxpayers an extra 22% per enrollee
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to the tune of US$83 billion a year
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Medicare Advantage, also known as Part C, was supposed to save the
government money
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The competition among private insurance companies, and with
traditional Medicare, to manage patient care was meant to give
insurance companies an incentive to find efficiencies. Instead, the
program’s payment rules overpay insurance companies on the
taxpayer’s dime.

We are health care
[[link removed]]
policy experts
[[link removed]] who study
Medicare, including how the structure of the Medicare payment system
is, in the case of Medicare Advantage, working against taxpayers.

Medicare beneficiaries choose an insurance plan
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turn 65. Younger people can also become eligible for Medicare due to
chronic conditions or disabilities. Beneficiaries have a variety of
options
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including the traditional Medicare program administered by the U.S.
government, Medigap supplements to that program administered by
private companies, and all-in-one Medicare Advantage plans
administered by private companies.

Commercial Medicare Advantage plans are increasingly popular – over
half of Medicare beneficiaries are enrolled
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in them, and this share continues to grow. People are attracted to
these plans for their extra benefits and out-of-pocket spending
limits. But due to a loophole in most states, enrolling in or
switching to Medicare Advantage is effectively a one-way street
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The Senate Finance Committee has also found that some plans have used
deceptive, aggressive and potentially harmful sales and marketing
tactics
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to increase enrollment
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Baked into the plan

Researchers have found that the overpayment to Medicare Advantage
companies, which has grown over time, was, intentionally or not, baked
into the Medicare Advantage payment system. Medicare Advantage plans
are paid more for enrolling people who seem sicker
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because these people typically use more care and so would be more
expensive to cover in traditional Medicare.

However, differences in how people’s illnesses are recorded
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plans causes enrollees to seem sicker and costlier on paper than they
are in real life. This issue, alongside other adjustments to payments
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taxpayer dollars to insurance companies.

Some of this extra money is spent to
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lower cost sharing, lower prescription drug premiums and increase
supplemental benefits like vision and dental care. Though Medicare
Advantage enrollees may like these benefits, funding them this way is
expensive. For every extra dollar that taxpayers pay to Medicare
Advantage companies, only roughly 50
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goes to beneficiaries in the form of lower premiums or extra benefits
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As Medicare Advantage becomes increasingly expensive, the Medicare
program continues to face funding challenges
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In our view, in order for Medicare to survive long term
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Medicare Advantage reform is needed
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The way the government pays the private insurers who administer
Medicare Advantage plans, which may seem like a black box, is key to
why the government overpays Medicare Advantage plans relative to
traditional Medicare.

Paying Medicare Advantage

Private plans have been a part of the Medicare system since 1966
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and have been paid through several different systems
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They garnered only a very small share of enrollment until 2006.

The current Medicare Advantage payment system, implemented in 2006
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by the Affordable Care Act in 2010, had two policy goals. It was
designed to encourage private plans to offer the same or better
coverage than traditional Medicare at equal or lesser cost. And, to
make sure beneficiaries would have multiple Medicare Advantage plans
to choose from, the system was also designed to be profitable enough
for insurers to entice them to offer multiple plans throughout the
country.

To accomplish this, Medicare established benchmark estimates
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for each county. This benchmark calculation begins with an estimate of
what the government-administered traditional Medicare plan would spend
on the average county resident. This value is adjusted based on
several factors
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including enrollee location and plan quality ratings, to give each
plan its own benchmark.

Medicare Advantage plans then submit bids, or estimates, of what they
expect their plans to spend on the average county enrollee. If a
plan’s spending estimate is above the benchmark, enrollees pay the
difference as a Part C premium
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Most plans’ spending estimates are below the
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benchmark, however, meaning they project that the plans will provide
coverage that is equivalent to traditional Medicare at a lower cost
than the benchmark. These plans don’t charge patients a Part C
premium. Instead, they receive a portion of the difference between
their spending estimate and the benchmark as a rebate that they are
supposed to pass on to their enrollees as extras
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like reductions in cost-sharing, lower prescription drug premiums and
supplemental benefits.

Finally, in a process known as risk adjustment
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Medicare payments to Medicare Advantage health plans are adjusted
based on the health of their enrollees. The plans are paid more for
enrollees who seem sicker
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[Two sets of stacked boxes sit below a vertical bar labeled
Risk-Adjusted Benchmark. A vertical line bisecting the boxes is
labelled what Medicare would actually spend on an enrollee in
traditional Medicare]

The government pays Medicare Advantage plans based on Medicare’s
cost estimates for a given county. The benchmark is an estimate from
the Centers for Medicare & Medicaid Services of what it would cost to
cover an average county enrollee in traditional Medicare, plus
adjustments including quartile payments and quality bonuses. The
risk-adjusted benchmark also takes into consideration an enrollee’s
health. Samantha Randall at USC, CC BY-ND
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Theory versus reality

In theory, this payment system should save the Medicare system money
because the risk-adjusted benchmark that Medicare estimates for each
plan should run, on average, equal to what Medicare would actually
spend on a plan’s enrollees if they had enrolled in traditional
Medicare instead.

In reality, the risk-adjusted benchmark estimates are far above
traditional Medicare costs
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This causes Medicare – really, taxpayers – to spend more for each
person who is enrolled in Medicare Advantage than if that person had
enrolled in traditional Medicare.

Why are payment estimates so high? There are two main culprits:
benchmark modifications designed to encourage Medicare Advantage plan
availability, and risk adjustments that overestimate how sick Medicare
Advantage enrollees are.

[Two sets of stacked boxes with dotted arrows on the left side of each
labeled Medicare Advantage Plan Bid sit below vertical bars labeled
Benchmark and Risk-Adjusted Benchmark.]
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High risk-adjusted benchmarks lead to overpayments from the government
to the private companies that administer Medicare Advantage plans.
Samantha Randall at USC, CC BY-ND
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Benchmark modifications

Since the current Medicare Advantage payment system started in 2006
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modifications have made Medicare’s benchmark estimates less tied to
what the plan spends
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on each enrollee.

In 2012, as part of the Affordable Care Act, Medicare Advantage
benchmark estimates received another layer: “quartile adjustments
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benchmark estimates, and therefore payments to Medicare Advantage
companies, higher in areas with low traditional Medicare spending and
lower in areas with high traditional Medicare spending. This benchmark
adjustment was meant to encourage more equitable access
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options.

In that same year, Medicare Advantage plans started receiving
“quality bonus payments
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with plans that have higher “star ratings” based on quality
factors such as enrollee health outcomes and care for chronic
conditions receiving higher bonuses.

However, research shows that ratings have not necessarily improved
quality [[link removed]] and may have
exacerbated racial inequality
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Even before fully taking into account risk adjustment, recent
estimates peg the benchmarks, on average, as 8% higher than average
traditional Medicare spending
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This means that a Medicare Advantage plan’s spending estimate could
be below the benchmark and the plan would still get paid more for its
enrollees than it would have cost the government to cover those same
enrollees in traditional Medicare.

Overestimating enrollee sickness

The second major source of overpayment is health risk adjustment,
which tends to overestimate how sick Medicare Advantage enrollees are.

Each year, Medicare studies traditional Medicare diagnoses, such as
diabetes, depression and arthritis, to understand which have higher
treatment costs. Medicare uses this information to adjust its payments
for Medicare Advantage plans. Payments are lowered for plans with
lower predicted costs based on diagnoses and raised for plans with
higher predicted costs. This process is known as risk adjustment.
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But there is a critical bias baked into risk adjustment. Medicare
Advantage companies know that they’re paid more if their enrollees
seem more sick, so they diligently make sure each enrollee has as many
diagnoses recorded as possible
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This can include legal activities like reviewing enrollee charts
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to ensure that diagnoses are recorded accurately. It can also
occasionally entail outright fraud
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where charts are “upcoded” to include diagnoses that patients
don’t actually have.

In traditional Medicare, most providers – the exception being
Accountable Care Organizations
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– are not paid more for recording diagnoses. This difference means
that the same beneficiary is likely to have fewer recorded diagnoses
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Medicare rather than a private insurer’s Medicare Advantage plan.
Policy experts refer to this phenomenon as a difference in “coding
intensity
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between Medicare Advantage and traditional Medicare.

[Human figure with arrows to two boxes. Left box has two plus symbols
labelled recorded diagnoses and one dollar sign. Right box has five
symbols and three dollar signs.]
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The same person is likely to be documented with more illnesses if they
enroll in Medicare Advantage rather than traditional Medicare – and
cost taxpayers more money. Samantha Randall at USC, CC BY-ND
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In addition, Medicare Advantage plans often try to recruit
beneficiaries whose health care costs will be lower
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than their diagnoses would predict, such as someone with a very mild
form of arthritis. This is known as “favorable selection.”

The differences in coding and favorable selection make beneficiaries
look sicker when they enroll in Medicare Advantage instead of
traditional Medicare. This makes cost estimates higher than they
should be [[link removed]]. Research shows
that this mismatch – and resulting overpayment – is likely only
going to get worse [[link removed]] as
Medicare Advantage grows.

Where the money goes

Some of the excess payments
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to Medicare Advantage are returned to enrollees through extra
benefits, funded by rebates
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Extra benefits include cost-sharing reductions for medical care and
prescription drugs, lower Part B and D premiums, and extra
“supplemental benefits” like hearing aids
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and dental care that traditional Medicare doesn’t cover
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Medicare Advantage enrollees may enjoy these benefits, which could be
considered a reward for enrolling in Medicare Advantage, which, unlike
traditional Medicare, has prior authorization requirements and limited
provider networks
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However, according to some policy experts, the current means of
funding these extra benefits
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is unnecessarily expensive and inequitable
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It also makes it difficult for traditional Medicare to compete with
Medicare Advantage.

Traditional Medicare, which tends to cost the Medicare program less
per enrollee, is only allowed to provide
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standard Medicare benefits package. If its enrollees want dental
coverage or hearing aids, they have to purchase these separately,
alongside a Part D plan for prescription drugs
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lower their deductibles and co-payments.

[Page from text document]
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Medicare Advantage plans offer extras, but at a high cost to the
Medicare system – and taxpayers. Only 50-60 cents of a dollar spent
is returned to enrollees as decreased costs or increased benefits. AP
Photo/Pablo Martinez Monsivais
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The system sets up Medicare Advantage plans to not only be overpaid
but also be increasingly popular, all on the taxpayers’ dime. Plans
heavily advertise
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to prospective enrollees who, once enrolled in Medicare Advantage,
will likely have difficulty switching into traditional Medicare
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even if they decide the extra benefits are not worth the prior
authorization hassles and the limited provider networks. In contrast,
traditional Medicare typically does not engage in as much direct
advertising. The federal government only accounts for 7% of
Medicare-related ads
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At the same time, some people who need more health care and are having
trouble getting it
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through their Medicare Advantage plan – and are able to switch back
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to traditional Medicare – are doing so, according to an
investigation by The Wall Street Journal
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This leaves taxpayers to pick up care for these patients just as their
needs rise.

Where do we go from here?

Many researchers have proposed ways to reduce excess government
spending on Medicare Advantage, including expanding risk adjustment
audits [[link removed]], reducing or
eliminating quality bonus payments
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or using more data to improve benchmark estimates of enrollee costs.
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Others have proposed even more fundamental reforms to the Medicare
Advantage payment system, including changing the basis of plan
payments
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so that Medicare Advantage plans will compete more with each other.

Reducing payments to plans may have to be traded off with reductions
in plan benefits, though projections suggest the reductions would be
modest [[link removed]].

There is a long-running debate over what type of coverage should be
required under both traditional Medicare and Medicare Advantage.
Recently, policy experts have advocated for introducing an
out-of-pocket maximum
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to traditional Medicare. There have also been multiple unsuccessful
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efforts
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to make dental, vision, and hearing services
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part of the standard Medicare benefits package.

Although all older people require regular dental care and many of them
require hearing aids, providing these benefits to everyone enrolled in
traditional Medicare would not be cheap. One approach to providing
these important benefits without significantly raising costs is to
make these benefits means-tested
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would allow people with lower incomes to purchase them at a lower
price than higher-income people. However, means-testing in Medicare
can be controversial
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There is also debate over how much Medicare Advantage plans should be
allowed to vary. The average Medicare beneficiary has over 40 Medicare
Advantage plans
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to choose from, making it overwhelming to compare plans
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For instance, right now, the average person eligible for Medicare
would have to sift through the fine print of dozens of different plans
to compare important factors, such as out-of-pocket maximums for
medical care, coverage for dental cleanings, cost-sharing for
inpatient stays, and provider networks.

Although millions of people are in suboptimal plans
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70% of people don’t even compare plans
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let alone switch plans, during the annual enrollment period at the end
of the year, likely because the process of comparing plans and
switching is difficult, especially for older Americans.

MedPAC, a congressional advising committee, suggests that limiting
variation in certain important benefits
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like out-of-pocket maximums and dental, vision and hearing benefits,
could help the plan selection process work better, while still
allowing for flexibility in other benefits. The challenge is figuring
out how to standardize
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without unduly reducing consumers’ options.

The Medicare Advantage program enrolls over half of Medicare
beneficiaries
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However, the $83-billion-per-year overpayment of plans, which amounts
to more than 8% of Medicare’s total budget
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is
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unsustainable
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We believe the Medicare Advantage payment system needs a broad reform
that aligns insurers’ incentives with the needs of Medicare
beneficiaries and American taxpayers.

_This article is part of an occasional series examining the U.S.
Medicare system._

_Past articles in the series:_

_Medicare vs. Medicare Advantage: sales pitches are often from biased
sources, the choices can be overwhelming and impartial help is not
equally available to all
[[link removed]]_[The
Conversation]

Grace McCormack
[[link removed]],
Postdoctoral researcher of Health Policy and Economics, _University of
Southern California
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and Erin Duffy
[[link removed]], Research
Scientist and Director of Research Training in Health Policy and
Economics, _University of Southern California
[[link removed]]_

This article is republished from The Conversation
[[link removed]] under a Creative Commons license. Read
the original article
[[link removed]].

* Healthcare
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* Medicare
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* corporate profits
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* taxes
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* government waste
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*
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*
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*
*
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