New Report Confirms Need to Improve the Medicare Advantage Payment System

A new analysis by the influential Medicare Payment Advisory Commission (MedPAC, a nonpartisan federal agency that advises Congress on Medicare policy) concludes that the Medicare program spends more for someone enrolled in Medicare Advantage (Medicare’s private plan alternative, also known as MA) than it would if that same person were enrolled in traditional Medicare (also known as Original Medicare or fee-for-service Medicare). In our recent Spotlight, we wrote about the significance of this for people with Medicare.  

Here’s a look at why Medicare is spending more for MA, how higher MA payments affect consumers, and why it is critically important to keep consumers front and center in considering any changes to how Medicare pays MA insurers.

Higher Spending for Both the Medicare Program and Consumers

According to the newest MedPAC report, as of 2023, Medicare pays MA private insurers six percent more than it would have spent for similar individuals enrolled in traditional Medicare. This is two percentage points higher than MedPAC’s previous estimate for 2022, continuing an upward trend in higher payments to MA plans that started in 2017. The analysis estimates that, across today’s 32 million MA enrollees, this six percent translates into MA plan payments that are $27 billion higher than what Medicare would spend if those individuals were enrolled in traditional Medicare.

The higher spending impacts more than the Medicare program’s finances. Everyone with Medicare, regardless of whether they are in MA or traditional Medicare, is also directly impacted through higher Medicare premiums. This is because premiums for Medicare Part B (which helps beneficiaries pay for physician, outpatient, some home health, and preventive services) increase automatically with greater Medicare program spending. And while, in part, higher payments to MA plans allow insurers to offer MA enrollees additional benefits (e.g., dental care, vision care, transportation, or meals beyond a limited basis), these benefits are not generally available to people with traditional Medicare unless they purchase separate coverage or pay out of pocket.

Drivers of Higher Medicare Advantage Spending

As we explained in our recent report, Medicare’s higher payments to MA plans result from three key drivers:

• “Upcoding” or “coding intensity”
  Based on data from MA plans, Medicare pays private insurers more for enrollees with greater health needs to ensure that plans have sufficient resources to serve these individuals. This policy, while reasonable on its face, also creates a strong financial incentive for insurers to identify and submit more medical conditions, or “upcode,” which drives up the payments they receive.
  
• Generous quality bonus payments
  MA plans that do well on a five-point Quality Star Ratings system get a “quality bonus payment.” But now that a large majority of MA enrollees are in plans that receive high quality scores, this policy substantially increases Medicare’s overall spending, yet may not meaningfully distinguish quality differences between plans.
  
• Relatively high spending benchmarks
  As a part of calculating payments for each MA plan, the overwhelming majority of MA insurers submit bids that indicate they can provide Medicare benefits for less than the cost of traditional Medicare. However, MA plan bids and payments are based on spending benchmarks that are actually higher than spending under traditional Medicare—+9 percentage points on average, according to MedPAC’s analysis—which leads to higher MA payments.
  

Modernizing Medicare Advantage Payments Requires Putting Consumers at the Center

Until 2009, MA accounted for less than a quarter of overall Medicare enrollment, with fewer than 12 million individuals in MA. Since then, the number of MA enrollees has almost tripled. After a decade of particularly rapid growth, 32 million people—representing almost half (48 percent) of total Medicare enrollment— are in an MA plan today. Projections indicate that this trend is likely to persist and that, by 2027, MA will cover more people than traditional Medicare. 

Given MA’s ever-increasing role in Medicare, accumulating evidence of higher payments to MA private insurers points to the need for policymakers to take steps to improve the MA payment system. As we noted previously, in weighing different MA payment reform proposals to achieve this goal, it is critical that policymakers focus on the needs of people with Medicare and their families, and mitigate unintended consequences, especially for the most vulnerable. Only by doing so can we ensure a strong Medicare program for all current and future Medicare beneficiaries.