Introduction and summary
Through the Medicare Advantage (MA) program, private insurers are expected to save money by reducing waste, avoiding overuse, and providing more coordinated care than is available through traditional Medicare.1 Yet research finds that MA plans are significantly overpaid relative to the traditional Medicare program—without delivering a higher-quality product.2
In 2023, a record high of slightly more than half of eligible Medicare beneficiaries were enrolled in MA plans.3 MA overpayments are a key driver of increasing MA enrollment: High payment levels attract insurers to the MA market and enable the funding of supplemental benefits that, in turn, attract beneficiaries. These high payments also enable MA plans to finance advertising campaigns to further build their market share.4 The combination of rapid growth in MA enrollment and overpayment to MA plans poses a serious threat to the financial sustainability of the Medicare Hospital Insurance Trust Fund.
Overpayment to MA is more than just a fiscal problem; it undermines the goals of the Medicare program itself. An accompanying Center for American Progress proposal, “Medicare 2.0,” contends that the goals of the Medicare program should be to guarantee simple and comprehensive coverage, ensure affordable out-of-pocket costs, modernize prescription drug coverage, strengthen primary care, and promote population health and health equity.5 MA overpayment undermines several of these goals: Inflated MA payments increase Part B premiums for beneficiaries across Medicare, contribute to greater fragmentation and complexity in health care coverage and delivery systems, divert attention and resources to medical coding tactics rather than improving clinical care and population health, and appear to exacerbate at least some health disparities.
MA overpayment also threatens the long-term viability of traditional Medicare, which serves as a critically important lifeline for tens of millions of Americans who need a program they can depend on for the rest of their lives. Traditional Medicare’s broad access to providers is especially helpful for people with complex chronic conditions. A thriving traditional Medicare program would further important policy goals, including lowering Medicare’s administrative costs, providing more resources for clinical care, and offering coverage with public accountability to protect against harmful restrictions on care. Finally, MA overpayment consumes billions of public dollars that could instead be spent improving benefits and lowering costs for all Medicare beneficiaries.
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A combination of calculated insurer behaviors and policy design flaws leads Medicare to pay more when a person enrolls in MA rather than traditional Medicare. Two key overpayment contributors, as detailed in this report, include upcoding, which makes patients appear sicker than they actually are, and selection bias, which results in MA plans enrolling more profitable patients.6 MA quality bonuses and county adjustments unnecessarily boost payments to plans even further, as does the inflationary effect of supplemental coverage on traditional Medicare spending benchmarks, which serve as the basis for comparing MA bids.7 Accordingly, a new CAP analysis presented in this report estimates that MA plans are overpaid by 22 to 39 percent, with overpayments in 2024 alone estimated to total between $83 billion and $127 billion. Without reform, Medicare is at risk of overpaying MA plans between $1.3 trillion and $2 trillion over the next decade.8
Without reform, Medicare is at risk of overpaying MA plans between $1.3 trillion and $2 trillion over the next decade.
This report also details a policy proposal to end MA overpayments based on the core principle that Medicare should not pay more when a patient chooses MA over traditional Medicare. The proposed reforms comprise two basic parts: 1) improving the way that MA payment benchmarks are set by combating the key drivers of overpayment; and 2) paying MA plans based on these improved benchmarks or based on the average competitive bid by MA plans in a given county, whichever is lower. MA payment fixes should be linked to broad and robust improvements in the Medicare program overall, including expanded benefits and reduced out-of-pocket costs in the traditional Medicare program, as detailed in CAP’s Medicare 2.0 proposal.
Sources of Medicare Advantage overpayment
The federal government uses several steps to determine how much to pay MA plans. First, the Centers for Medicare and Medicaid Services (CMS) sets a “benchmark” that is meant to approximate the cost of providing coverage to an average patient under traditional Medicare. Next, each MA plan submits a “bid” that represents their expected cost for providing insurance to an average patient. If the bid is lower than the benchmark, the MA plan is paid their bid plus a portion of the difference between the bid and the benchmark—known as the “rebate”—which the MA plan can use to fund extra benefits or lower out-of-pocket costs.9
Importantly, because different patients have different expected costs, payments to MA plans are adjusted based on a “risk score” that considers all the diagnosis codes entered for a patient; typically, the more diagnosis codes entered, the higher the payment. MA plans use these lump sum payments to pay for the patient’s expenses, as well as to cover the plan’s administrative costs and profit.10 In recent years, administrative expenses and profits have accounted for about 15 percent of total MA spending, compared with less than 3 percent of spending in traditional Medicare.11
MA payment fixes should be linked to broad and robust improvements in the Medicare program overall, including expanded benefits and reduced out-of-pocket costs in the traditional Medicare program.
In theory, by benchmarking MA to traditional Medicare, the only way for MA plans to obtain a rebate, and therefore offer more benefits or lower out-of-pocket costs, is by reducing spending compared with traditional Medicare—for instance, by using narrower networks or controlling utilization.12 In reality, however, MA benchmarks and the resulting payments are inflated well above traditional Medicare costs because of inflated risk scores, selective MA enrollment of more profitable patients, quality bonuses and county adjustments, and the influence of supplemental coverage on traditional Medicare benchmark calculations.13
The scale of MA overpayments
As detailed below, a new CAP analysis estimates that MA plans are overpaid by 22 to 39 percent, corresponding to between $83 billion and $127 billion in overpayments in 2024.14 The lower estimate, 22 percent, indicates how much more MA plans are paid relative to what traditional Medicare would spend for equivalent patients. These types of overpayments are primarily driven by MA plans’ intense risk-coding efforts as well as selection bias. According to estimates from the Medicare Payment Advisory Commission (MedPAC), the independent congressional agency that advises the U.S. Congress on issues affecting the Medicare program, risk coding results in 13 percent overpayment to MA plans, and selection bias results in an additional 9 percent.15
This report’s higher estimate includes the additional subsidizing effects of quality bonuses and county adjustments MA plans receive, as well as the inflationary effect that supplemental coverage has on the traditional Medicare benchmarks against which MA plan bids are considered. Accounting for these additional subsidies to MA would suggest that MA plans may actually be “overpaid” by as much as 39 percent.16 Quality bonuses and county adjustments, combined, contribute a 5 percent overpayment,17 while the inflationary effect supplemental coverage has on traditional Medicare benchmark calculations contributes an additional 12 percent.18
When considered over the long term, the magnitude of MA overpayment is immense. The Medicare Board of Trustees projects that from 2023 to 2032, total payments to MA plans will surpass $7 trillion.19 Without reform, Medicare is at risk of overpaying MA plans between $1.3 trillion and $2 trillion over the same time period.20
Drivers of MA overpayment
Upcoding or risk-score gaming
CMS uses a risk adjustment process to determine how much to pay an MA plan for any given patient, as patients have varying health needs. A key factor in determining risk scores is a patient’s diagnosis codes.21 As a result, MA plans have an incentive to maximize the number of diagnosis codes attributed to each patient—and to push the limits in terms of which codes can be legitimately assigned to a given patient.22 The more lucrative the code, the higher the payment. In the traditional Medicare program, there is no comparable incentive to misuse diagnosis codes or to maximize the entry of valid codes; the process of finding and entering codes can be tedious and burdensome and distract from patient care.
This contrast is clearest when a patient moves from traditional Medicare to MA. Upon this transition, an MA plan can submit many more diagnosis codes to demonstrate how “sick” a patient is.23 Medicare then pays more for that patient because of these extra diagnosis codes, even though the patient is not any sicker, nor are their expected medical costs any higher than while they were covered by traditional Medicare. This “upcoding” in MA plans is a key source of overpayment: MedPAC estimates that MA risk scores will be inflated by approximately 20 percent in 2024.24 To partially account for this, CMS applies a “coding intensity adjustment” of slightly less than 6 percent. However, this still leaves overpayment levels of approximately 13 percent.25
Selection bias
MA plans tend to enroll beneficiaries who are healthier and more profitable than beneficiaries who choose traditional Medicare, even after accounting for risk scores.26 Health plans have a significant and obvious financial incentive to enroll beneficiaries who are healthier than average at the same risk score. As a result, plans employ a variety of business strategies to attract healthier beneficiaries. One classic example is through offering gym benefits, which tend to be of value to people who are relatively healthier, thus attracting to MA those who have fewer health needs.27
Another strategy is to limit network access to comprehensive cancer centers, which could make MA less attractive to patients with cancer and complex medical needs.28 MA plans can also deploy their significant marketing efforts to selectively target more profitable patients.29 From a patient perspective, traditional Medicare guarantees access to a broad network of providers, while MA plans come with more restricted networks.30 People with fewer health needs are more likely to accept MA’s restrictions on care.
The result of these practices is that MA enrolls patients with lower-than-average spending at any given risk score, leading to further overpayment to MA plans, which then get paid as if their members are sicker than they are. Further evidence of this comes from a KFF analysis that found patients who switched from traditional Medicare to MA spent less in the prior year than those patients who remained in traditional Medicare—emphasizing that patients who move from traditional Medicare to MA tend to be healthier.31
It is worth noting that selection bias also happens in the opposite direction: Patients who switch from MA to traditional Medicare have higher risk-adjusted spending than those patients who stay in MA.32 For instance, a patient in MA who receives a serious diagnosis such as cancer might face considerable difficulty finding an in-network cancer center or dealing with prior authorization requirements for recommended scans. Therefore, they may choose to switch to traditional Medicare, which provides better access to care.
MedPAC estimates that in 2024, favorable selection will cause MA plans to be overpaid by approximately 9 percent.33
Quality bonuses and county adjustments
The MA quality bonus program is intended to incentivize and reward high quality among MA plans. As detailed in a recent Urban Institute report, however, the net impact of the program is overly generous payments to MA plans absent any clear impact on quality.34 Furthermore, as designed, the MA quality bonus program exacerbates health inequities. The program assigns each MA contract a rating of 1 to 5 stars based on performance across dozens of measures. Notably, MA plans with higher star ratings—and, as a result, higher bonus payments—appear to have larger racial disparities than lower-rated plans.35 Plans in metropolitan areas with high MA enrollment and low traditional Medicare spending are also eligible to receive lucrative MA “double bonus” payments, but those payments have been found to worsen racial disparities without improving plan quality.36 One study found the net effect of double bonuses was to increase payments for Black beneficiaries by $60 per year, compared with $91 for white beneficiaries.37
In addition, the MA quality bonus program is not budget neutral, unlike other Medicare quality incentive programs. The program functions through an add-on payment that boosts spending to awarded MA plans above traditional Medicare levels. MA plans with higher star ratings receive a 5 percent bonus to their payment benchmark, and in those counties where a double bonus is available, plans receive a bonus of 10 percent to their benchmark.38 In 2024, spending on the MA quality bonus program is estimated to reach $15 billion.39
In addition to the MA quality bonus program, Congress has legislated that MA payment benchmarks be increased in counties with lower traditional Medicare spending. To calculate county benchmark adjustments, counties are split into quartiles; those counties with the lowest traditional Medicare spending receive 15 percent increases to their benchmarks, and counties with the highest levels of traditional Medicare spending have their benchmarks decreased by 5 percent.40 The original motivation for this payment adjustment was to protect against MA plans not entering counties with historically low traditional Medicare spending—and therefore lower payment benchmarks against which MA plans would have to bid.41 However, as more than half of all Medicare beneficiaries are now enrolled in MA—and as that share continues to grow—this extra incentive is arguably no longer needed. The effect of the payment adjustments as they exist today is unnecessary inflation of MA payments.42
MedPAC estimates indicate that in 2024, quality bonuses and county adjustments will inflate benchmarks by approximately 8 percent.43
The two overpayment estimates presented in this report classify this increase in different ways. The lower estimate does not include quality bonuses and county adjustments as a direct source of overpayment, instead considering these payments to offset savings that would otherwise accrue due to MA bids being below the traditional Medicare benchmark.44 The higher estimate, in contrast, classifies payments resulting from quality bonuses and county adjustments as a form of overpayments. Because plans receive a rebate that is a portion of the difference between their bid and the benchmark—typically 65 percent—this report’s higher estimate concludes that inflated benchmarks resulting from quality bonuses and county adjustments lead to overpayments of approximately 5 percent.45
The effects of supplemental coverage on traditional Medicare benchmarks
When MA plans submit their bids to CMS to be compared against traditional Medicare benchmarks, they do so based on their expected cost of covering the traditional Medicare benefit package—services covered by Parts A and B. However, traditional Medicare benchmarks are not set based on Medicare’s spending on beneficiaries with Medicare Parts A and B alone; they also account for enrollees’ supplemental coverage, which facilitates increased use of Parts A and B covered services. That is because roughly 90 percent of traditional Medicare beneficiaries carry additional supplemental coverage, including Medicaid or private “Medigap” plans that reduce out-of-pocket cost exposure for Parts A and B covered services.46 In effect, that means MA bids are benchmarked to total traditional Medicare spending, which includes standard Parts A and B coverage and any supplemental coverage a beneficiary has.47
Supplemental coverage lowers beneficiaries’ out-of-pocket cost exposure, facilitating increased use of care that is baked into the benchmarks used to set MA payments. Literature historically has referred to this increased use of care as “induced utilization,” though it is perhaps better described as alleviating the depressed utilization that patients experience when out-of-pocket cost exposure is high.
If traditional Medicare alone is to be considered the baseline, the effects of supplemental coverage in benchmark calculations can be considered a source of overpayment to MA relative to traditional Medicare. A recent estimate suggests that the effects of supplemental coverage increase traditional Medicare benchmarks by approximately 18 percent, which implies approximately 12 percent in overpayments.48
MA overpayments do not lead to improved quality or advance health equity
Overpayments to MA plans have not reliably translated into higher quality care. Three recent systematic reviews of studies comparing the health care quality and outcomes for people with traditional Medicare versus those with MA show a consistent overall finding: Results are mixed.49 In other words, some studies favor traditional Medicare, some studies favor MA, and many studies find no measurable quality difference between the two.50 For example, MA beneficiaries have slightly higher rates of breast cancer screening51 but, at the same time, are more likely to be cared for by lower-quality nursing facilities and home health agencies,52 less likely to get care at high-quality cancer centers,53 and more likely to die after cancer surgery.54 With respect to affordability, the evidence is clearer: Beneficiaries with MA have more difficulty affording care than those with traditional Medicare.55
Although most MA plans offer supplemental benefits not covered under traditional Medicare—including dental, vision, and hearing benefits—recent research raises serious concerns about their quality and value. For example, despite higher levels of dental coverage, MA beneficiaries do not use significantly more dental care than traditional Medicare beneficiaries.56 Traditional Medicare and MA beneficiaries are also equally likely to report access problems for dental, vision, and hearing services, and low-income beneficiaries across the two programs are equally likely to delay dental care or eye exams due to cost.57 The failure of MA’s supplemental benefits to meaningfully improve access to these services likely reflects a variety of factors, including restrictive networks, confusing benefit structures, burdensome prior authorization requirements, and high out-of-pocket costs.
Furthermore, while MA enrolls disproportionate shares of low-income, Black, and Hispanic Medicare beneficiaries, those patients are not necessarily better served by MA plans.58 Beneficiaries of color have more limited access to high-quality MA plans, compared with white beneficiaries.59 Black Medicare beneficiaries are also more likely than white beneficiaries to be enrolled in MA plans that have their contracts terminated, which can lead to disruptions in care and is a signal of poor plan quality.60 Compared with their peers in traditional Medicare, Black MA enrollees have higher rates of avoidable hospitalizations, report more difficulty affording care, and report more cost-related problems when in fair or poor health.61 MA plans also have worse racial disparities within their beneficiary populations than does the traditional Medicare program for avoidable hospitalizations and hospital readmissions.62 Asian American MA beneficiaries generally report worse experiences of care than do white MA beneficiaries, and Black and American Indian/Alaska Native MA beneficiaries tend to receive lower quality clinical care than their white counterparts.63
Goals for reforming MA payment
A minimum requirement of MA payment reform is that Medicare should not pay more when a patient chooses MA over traditional Medicare. Indeed, when risk-based payment to private plans was first introduced into Medicare in the 1980s, payments were deliberately set lower than in traditional Medicare.64 After all, the theory was that private plans would be more efficient than Medicare and could provide the same, or more, benefits at lower cost.65 The goal was to pay private plans less and allow Medicare and taxpayers to share in the savings.66 Viewed from this perspective, parity between payment levels in MA and traditional Medicare is a conservative goal for reform.
Paying MA plans no more than a patient would cost in traditional Medicare would have several important benefits. First, it would stop the spiral of inflated payments to MA—with overpayment leading to growth in MA and a bigger MA program leading to more overpayments—thereby protecting the Medicare Hospital Insurance Trust Fund. Second, cutting back on inflated MA payments would provide savings that can and should be used to finance improvements to Medicare overall, including expanded benefits, lower out-of-pocket cost exposure, and a greater investment in primary care—as detailed in CAP’s accompanying Medicare 2.0 proposal.67 Third, ending MA overpayment would create a more level playing field on which to reliably compare quality, access, and outcomes across MA and traditional Medicare, including for beneficiaries in accountable care organizations (ACOs) and other innovative Medicare payment models.
A minimum requirement of MA payment reform is that Medicare should not pay more when a patient chooses MA over traditional Medicare.
The savings associated with ending MA overpayment should be coupled with broad improvements to the Medicare program overall. This linkage is important from a political strategy standpoint: MA payment fixes can provide the financing for needed improvements, and in turn, these improvements can provide the political will to counteract the opposition that MA plans would likely bring when faced with the prospect of an end to overpayments. This linkage is also important from a policy standpoint: The best way to achieve parity between traditional Medicare and MA is not only cutting back on MA overpayment but also simultaneously strengthening traditional Medicare.
A proposal to end overpayments to Medicare Advantage
MA plans should be paid based on: 1) an improved traditional Medicare benchmark that more accurately reflects relevant spending; or 2) the average bid by MA plans in a given county—whichever is lower. Given that the reforms outlined in this section represent a significant transition from the current MA payment system, policymakers could decide to implement these changes concurrently or stepwise over several years.
Improve MA payment benchmarks to accurately reflect traditional Medicare spending
Achieving payment parity between MA and traditional Medicare would require changing the current method of setting benchmarks and correcting for the additional payment distortions between MA and traditional Medicare, as described below.
Eliminate risk adjustment system overpayments to minimize upcoding
Diagnosis codes generated by chart reviews and health risk assessments should be excluded from the risk scores used to set MA payments. MedPAC estimates that approximately half of increased coding intensity in MA is due to these tactics.68 In 2016, MA plans submitted more than 50 million chart reviews, arguably in an effort to claim additional diagnosis codes.69 During health risk assessments, MA plans generally arrange for a nurse or other staff member to visit an enrollee’s home to document more codes without providing clinical care.70 Cigna recently agreed to pay a $172 million settlement to resolve allegations that it submitted and failed to withdraw inaccurate and untruthful diagnosis codes in an effort to increase payments from Medicare.71 Traditional Medicare has no comparable incentive to conduct elaborate coding operations such as mass chart reviews or in-home visits.72
Despite the heavy use of these practices, however, excluding them from risk scores is only a partial solution. MA plans can continue to engage in other efforts to increase coding during legitimate clinical visits, such as through recurrent provider prompting in a patient’s electronic medical record to code diagnoses regardless of whether they are relevant to the visit.
For this reason, CMS must also reduce or eliminate the underlying financial incentives for providers to code more.73 For diagnosis-based risk scores to be reliable, clinicians should have the same incentive to enter diagnosis codes whether a patient is in traditional Medicare or MA. However, many MA plans give providers a direct financial incentive to enter more codes for MA patients—for example, via “percentage of premium” contracts or “pay for coding” programs where providers earn more if they generate more codes.74 These types of arrangements should be prohibited. The mechanism for this reform could be a “Stark Law” for MA that treats such arrangements as kickbacks and therefore prohibits MA plans from paying for them.75
In addition to these changes, CMS must enhance its current mechanism to correct for ongoing upcoding. MedPAC estimates that MA risk scores are inflated by approximately 20 percent in 2024, but CMS only corrects risk scores by less than 6 percent.76 CMS should correct for the full amount of upcoding. Because some MA plans use upcoding more intensively, CMS should aim to correct for upcoding at the plan level.
In March 2023, MedPac reported that audits were still in process for 2014 and 2015 and had not even started for 2016 or beyond.
To monitor the effectiveness of these changes, auditing of MA plans should be vastly strengthened. CMS’ current process for auditing—known as “risk adjustment data validation”—does not have the resources to adequately address the scale of the upcoding problem:77 In March 2023, MedPAC reported that audits were still in process for 2014 and 2015 and had not even started for 2016 and beyond.78 The administrative capacity of CMS to perform audits should be expanded, and MA plans should be required to finance audits. Under the principle of payment parity, auditing in traditional Medicare should continue to be funded from the traditional Medicare budget, and auditing in MA should be funded from MA plan budgets. MA plans that submit more inappropriate diagnoses should pay more for auditing. Moreover, enhanced Medicare auditing capacity should enable audits to be conducted in real time, not years after the fact. The results of audits should also be disaggregated across demographic groups to assess for any disparities in patient charts that MA plans utilize for higher payments. Finally, findings should be extrapolated to recapture overpayments across each MA contract.
Furthermore, CMS should commission a study to evaluate and ultimately adopt alternative approaches to risk adjusting. These could include collecting patient-reported outcome measures as well as considering social determinant of health indicators such as the Area Deprivation Index. One especially innovative option would be for CMS to survey patients directly about their health conditions and incorporate the responses into payment policy. Direct surveys—safeguarded from MA plan involvement—could be an important independent mechanism to collect data on beneficiaries, as they would not be influenced by financially motivated behaviors on the part of MA plans or providers. Any patient survey data should also be disaggregated to provide insight into disparities across different subpopulations and to surface areas for potential interventions to advance equity.
Account for selection bias in MA payments
MA payments must be corrected for selection bias. The fundamental structure of the current Medicare program—in which beneficiaries choose between the relatively unrestricted traditional Medicare and more restrictive MA—leads to selection bias for two reasons: 1) healthier people are more likely to accept MA’s restrictions on care; and 2) MA plans will always have a financial incentive to preferentially enroll beneficiaries who have lower expected expenses at a given risk score. As with upcoding, CMS should apply a correction factor to account for selection bias.
Eliminate overpayments from quality bonuses and county adjustments
Quality improvement programs in traditional Medicare, such as the Merit-based Incentive Payment System, are budget neutral: Higher payments for greater quality are balanced out by lower payments for lesser quality.79 In contrast, quality bonuses in MA represent a pure increase in spending on top of usual costs.80 This is especially problematic considering that MA’s current quality bonus program is ineffective.81 In 2024, roughly 3 in 4 MA beneficiaries are enrolled in plans rated four stars or higher—a situation that has been criticized as a “Lake Wobegon effect” in which virtually all MA plans are deemed above average and are paid bonuses as a result.82 As noted previously, the current quality bonus program also exacerbates health inequities by awarding most additional payments to plans with more white patients and to plans with larger racial disparities. Numerous proposals have been put forward to reform or replace the quality bonus program; a minimum requirement should be to make any MA quality improvement program budget neutral.83 Future programs must also be intentionally designed to promote and reward progress on health equity.
County adjustments—the practice of increasing MA payment benchmarks by up to 15 percent in areas with low traditional Medicare spending—also lead to significant MA overpayment. As discussed above, the initial motivation for giving MA plans an extra incentive to enter low-spending markets may have been understandable, but such an incentive is no longer necessary. The county adjustment system also creates an unlevel playing field between MA and traditional Medicare payments at the local level.84 Although Medicare reform overall must attend to the needs of low-cost rural counties—for instance, through increasing universal access to better coverage by improving the standard benefit in traditional Medicare—at a minimum, county adjustments should be made budget neutral.
Acknowledge the effects of supplemental coverage on traditional Medicare spending benchmarks
If traditional Medicare spending alone is to be considered the baseline level of coverage against which MA plans compete, MA payment benchmarks are significantly inflated. That is the case because nearly 90 percent of traditional Medicare beneficiaries now carry supplemental coverage—which greatly influences the total amount of Medicare Parts A and B spending considered “traditional Medicare” spending for the purposes of setting MA payments.85 One might argue that this should be addressed by lowering MA benchmarks to the level of spending on traditional Medicare beneficiaries absent the effects of supplemental coverage. However, a better approach would be to “raise up” traditional Medicare cost-sharing protections to be equivalent to or better than what MA plans currently offer; this would eliminate the differential between the standard traditional Medicare benefit and MA without the need for payment corrections.
Introduce competitive bidding into MA payment
MA plans should be paid based either on an improved traditional Medicare benchmark—by adopting the reforms described above—that more accurately reflects traditional Medicare spending or on the average bid by MA plans in a given county, whichever of the two amounts is lower.86
To make this determination, CMS should calculate the average MA plan bid in each county. If the average bid is higher than the revised traditional Medicare-based benchmark, then CMS should set payments using the traditional Medicare-based benchmark. If the average bid is lower than the traditional Medicare-based benchmark, then CMS would set payments using the average bid as the benchmark. Standardizing MA benefits, as proposed in CAP’s accompanying Medicare 2.0 proposal, would further improve competition and comparability in the bidding process.
Setting payments based on the lower of these two numbers would provide important safeguards. Even if MA plans were to try to inflate the revised, administratively set traditional Medicare benchmark, competitive pressure would still incentivize plans to submit lower bids. In that way, payment based on the average county bid would provide a backstop. Competitive bidding would be an especially useful strategy for combating the selection bias-related overpayment that has led to systematic differences in the MA and traditional Medicare populations. In contrast, in areas with too few MA plans to provide robust competition—or where plans might be tempted to collude or otherwise choose to strategically submit higher bids—the traditional Medicare-based benchmark could provide a backstop so that Medicare would not pay more to the MA plan than a patient would cost in traditional Medicare. As MedPAC has noted, pure competitive bidding reforms that do not provide additional safeguards run the risk of continuing to overpay MA plans.87 The reality that MA plans have been overpaid every year since their inception provides further support for setting MA payments based on the lower of these two measures.88
Ending MA overpayment and enhancing traditional Medicare benefits would strengthen Medicare for all beneficiaries
Adopting the proposals outlined in this report would markedly lower MA rebates—which are set as a percentage of the difference between bids and the benchmark—compared with the status quo. (see Table 1) Rebates are the main mechanism that MA plans use to fund supplemental benefits and lower cost-sharing arrangements. Accordingly, a possible counterargument to these reform proposals is that lower rebates might result in MA plans making their benefits less generous.89
But research suggests that benchmark changes would have only a modest effect on the coverage available in MA plans.90 Economists have estimated that only between one-eighth and roughly one-half of additional payments to MA plans are actually passed through to beneficiaries in the form of greater benefits or lower costs.91 Furthermore, researchers have found no evidence that increased payments to MA plans improve quality of care; in contrast, increased payments have been shown to lead to increased spending on advertising.92 In short, the link between MA payment levels and the coverage offered to beneficiaries is looser than commonly assumed. It is likely both more efficient and more equitable to make direct coverage improvements to the traditional Medicare program.
An improved traditional Medicare program would give all patients access to the comprehensive coverage that only some beneficiaries are currently able to afford.
Perhaps more importantly, the proposed improvements to traditional Medicare that are outlined in CAP’s Medicare 2.0 proposal would prevent any significant loss of benefits for MA enrollees. Rebates matter today because traditional Medicare has significant shortcomings in covered benefits and protections against out-of-pocket spending, so MA plans rely on rebates to fund their own improvements in these areas. Under Medicare 2.0 reforms, however, all Medicare beneficiaries would be guaranteed an expanded set of covered benefits and improved financial protections. (see Table 2) Medicare 2.0 calls for a strengthened traditional Medicare program that covers dental, vision, hearing, and long-term services and supports—specifically, home- and community-based services—and provides a cost-sharing structure that includes no deductible, no cost-sharing for primary care and an out-of-pocket maximum. According to program rules, MA plans must cover at least the services and cost-sharing that traditional Medicare provides for.93 A desirable effect of this reform package is that rebates would play a much smaller role; instead of relying on rebates, comprehensive coverage would be the standard across the Medicare program.
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Furthermore, combining MA payment reforms with improvements to traditional Medicare is an important strategy for advancing health equity. Under the current system, lower-income people who are not dually eligible for Medicare and Medicaid and are not otherwise able to afford or access supplemental coverage are often left with a difficult choice: Enroll in traditional Medicare with no limit on potential out-of-pocket expenses or enroll in MA and accept the restrictions on care that come from narrower networks, prior authorizations, and claims denials. Reflecting these limited options, available data illustrate that lower-income beneficiaries are more likely to enroll in traditional Medicare alone or in MA, and they are less likely to have traditional Medicare plus Medigap, which currently provides enrollees both broad access to providers and the best available financial protections.94 An improved traditional Medicare program would give all patients access to the comprehensive coverage that only some beneficiaries are currently able to afford.
Conclusion
MA plans are significantly overpaid compared with what traditional Medicare spends on beneficiaries, without any clear improvements in the quality or affordability of care. MA overpayments threaten the financial sustainability of the Medicare Hospital Insurance Trust Fund, put the traditional Medicare program at risk, and undermine the goals of the Medicare program overall.95
A conservative but important principle for ending MA overpayments is that Medicare should not pay an MA plan more than traditional Medicare would spend for the same patient. To institute this principle, the method of paying MA plans should be reformed to eliminate risk adjustment and upcoding overpayments, account for selection bias, eliminate overpayments from quality bonuses and county adjustments, and acknowledge that current traditional Medicare benchmarks that MA plans bid against include the effects of supplemental coverage. Plans should be paid based on the lesser of this improved benchmark or the local competitive MA bid. These reforms should be linked to improvements in the Medicare program overall, including greater out-of-pocket cost protections and expanded benefits in the traditional Medicare program, as well as increased investment in primary care for all Medicare beneficiaries. Together, these reforms would represent major progress toward making Medicare a simple, equitable, and comprehensive program that all Americans can rely on well into the future.
Acknowledgments
The authors extend their sincere appreciation to Brian Keyser for his thorough research assistance.
This work was conducted while Dr. Micah Johnson was a consultant with the Center for American Progress.