Higher Payments to Medicare Advantage Plans Remain a Significant Concern

A recent report by the influential Medicare Payment Advisory Commission (MedPAC) — the independent agency that advises Congress on Medicare policy — finds that Medicare pays 20 percent more per enrollee in a private Medicare Advantage (MA) plan than it would if that same individual was instead covered under the federally run traditional Medicare option.

The figure, which comes from MedPAC’s annual look at the MA program, translates to $84 billion in additional Medicare spending in 2025 alone. Given that MA now covers more than half of all people with Medicare and that strong MA enrollment growth is expected to continue, excessive payments to MA plans raise significant concern, underscoring the need to better align payments between the two Medicare options. As we’ve written before, these higher MA payments have important implications for people with Medicare and for the program itself.

The Medicare Advantage payment contradiction

MedPAC’s report highlights a consequential paradox. Despite private plans having been introduced into Medicare on the premise that they could deliver health care coverage more efficiently than traditional Medicare, the program pays MA insurers significantly more for comparable individuals. And those higher payments — which are shouldered by taxpayers and everyone with Medicare — are occurring despite the vast majority of MA plans estimating they can deliver Medicare’s benefits at a notably lower cost than traditional Medicare. Those estimates, referred to as plan bids, are 7% lower on average than traditional Medicare’s costs in 2025, according to MedPAC.

Drivers of higher Medicare Advantage payments

Higher federal payments for MA enrollees result from flaws in the complicated process Medicare uses to pay private plans, which we break down in this animation. MedPAC and other experts point to several problems with MA’s payment system, as described below.

Upcoding. Through a process known as risk adjustment, Medicare pays private insurers more for enrollees with greater health needs to ensure that plans have sufficient resources to serve these individuals. This gives MA insurers a strong financial incentive to identify and record more medical conditions, a practice known as upcoding.

Favorable selection. The federal government pays MA insurers based on the average cost of traditional Medicare beneficiaries, without adequately accounting for relatively healthier people’s tendency to switch from traditional Medicare to MA. Such people, who use fewer health care services than the average person with traditional Medicare, cost MA plans less than assumed by the payment methodology.

Quality bonus payments. MA plans that do well on a five-point quality Star Ratings system receive bonus payments. A large share of MA plans get quality bonuses. However, observers question whether these ratings actually reflect high-quality. Meanwhile, unlike other Medicare quality incentive programs, MA’s quality bonus program is not budget-neutral; rather, it increases payments to high-performing plans without corresponding financial penalties on low-performing ones.

Payment benchmarks. MA payments are calculated from plan bids against administratively set county-level benchmarks. Those benchmarks are based on traditional Medicare’s spending in the area. Some experts argue that, in many counties, benchmarks are too high, leading to high plan payments. Observers also question using traditional Medicare spending as the starting point for benchmarks since the decreasing traditional Medicare population may be less representative of all Medicare beneficiaries than when the payment methodology was originally drawn up.

Advantages and disadvantages

Higher MA payments have made MA plans more attractive and helped fuel rapid increases in MA enrollment in recent years. Those payments allow MA insurers to offer plans with greater financial protections such as lower cost-sharing and no MA premiums in addition to the Medicare Part B premium, which most people are responsible for (Part B covers physician and other outpatient services). They also help MA insurers finance supplemental benefits (e.g. dental, vision, hearing care) that are generally not available under traditional Medicare (although there is little information available on the extent to which MA enrollees use those benefits).

However, evidence shows that higher federal payments to MA plans worsen Medicare’s financial outlook and increase the nation’s health expenditures. Importantly, higher MA payments lead to higher out-of-pocket costs for everyone with Medicare, including people with traditional Medicare who cannot access MA’s supplemental benefits and financial protections. This is because Part B premiums increase with total Part B spending. MedPAC estimates that higher payments to MA plans will make total Medicare Part B premiums about $13 billion higher in 2025, equivalent to $198 more per person in additional premium costs. By using significant resources to finance improved coverage available only to MA enrollees, the program forgoes the opportunity to make upgrades that could more broadly benefit everyone with Medicare.

Updating Medicare Advantage payment approaches to benefit program and consumers

The current MA payment system remains largely unchanged since 2010, despite dramatic transformations in the Medicare landscape. This presents an important opportunity for reform. Better aligning Medicare’s payments for MA enrollees with those for people with traditional Medicare could help ensure MA plans’ efficiencies translate to savings for the Medicare program and improve coverage and financial protections for everyone who relies on Medicare. While critics of updating MA payment rules argue such a change could have negative implications for MA, evidence suggests that payment reductions would have a limited effect on consumers’ access to Medicare’s private plans, result in just small increases in MA out-of-pocket costs, and result in only modest declines in the availability of supplemental benefits.

Ultimately, the central goal of any improvements to MA payment policies should be to ensure a strong Medicare program for the millions of individuals who rely on it to meet their health care needs today and in the future, regardless of whether they are enrolled in MA or traditional Medicare.