Researchers Examine the Complexities of Medicare Advantage Payments

A huge debate has engulfed the Medicare Advantage program recently in the federal healthcare policy arena. Put succinctly, is the Medicare Advantage program bringing exceptional benefits to enrollees, or is it simply enhancing the profits of the private health plans that contract with the Medicare program to provide care management services to MA plan members?

Now, a group of healthcare policy and economics researchers has zeroed in on the question of whether MA plans are overpaid based on the levels of benefits they provide to MA plan members. Based on their analysis, they believe that the idea that cuts to MA benchmarks would devastate plans’ generosity in terms of benefits to plan members, have been overstated.

The article, published online on March 22 in Health Affairs, was authored by Michael E. Chernew, Keaton Miller, Amil Petrin, and Robert J. Town, and is entitled “Reducing Medicare Advantage Benchmarks Will Decrease Plan Generosity, But Those Effects Will Likely Be Modest.”

Michael E. Chernew, Ph.D., is the Leonard D. Schaffer Professor of Health Care Policy in the Department of Health Care Policy at Harvard Medical School and director of the Healthcare Markets and Regulation Lab at Harvard Medical School (Boston); Keaton Miller, Ph.D., is an assistant professor in the Department of Economics at the University of Oregon (Eugene); Amil Petrin, Ph.D., is a professor of economics at the University of Minnesota (Minneapolis); and Robert J. Town, PH.D., is a professor of economics at the University of Texas at Austin.

Chernew et al write that “Concerns that Medicare Advantage (MA) plans are overpaid have motivated calls to reduce MA benchmarks—the dollar amounts set by the Centers for Medicare and Medicaid Services (CMS) against which MA plans bid to set premiums and fund extra benefits. However, cutting benchmarks may lead to higher MA enrollee premiums and decreased plan generosity. We assessed the relationships between MA benchmarks and plan generosity and benefits. We estimated that a $1,000 per year decrease in benchmarks would lead to small increases in annual premiums of about $60 and increases in annual deductibles of about $27. Copays would also increase modestly, and the propensity to offer benefits would generally decline by less than 5 percentage points, with the greatest impact being on the availability of dental, hearing, and vision benefits. These results suggest that although cuts to MA benchmarks would adversely affect plan generosity, those effects would be modest.”

The authors note that “The growth of Medicare Advantage has spawned a range of controversies, particularly surrounding the MA payment system. Two narratives about the role of Medicare Advantage have emerged. The first draws on the original arguments for including private plans in Medicare: Specifically, it was believed (with some empirical support) that private plans could deliver the services covered by Medicare more efficiently than the traditional Medicare fee-for-service program.3 Those efficiencies could lower Medicare spending without sacrificing the quality of care delivered to beneficiaries. A belief in this “shared savings” narrative was manifested in plan payment policy early in the program: Payments to MA plan providers were set at 95 percent of local (county-level) traditional Medicare spending. The clear implication was that savings generated by plans should be shared with the taxpayer.”

They further note that “The second narrative, which has recently grown in prominence, is that the MA program is a vehicle to enhance Medicare benefits, which is necessary because the standard Medicare benefit package is incomplete. Specifically, savings generated by MA plans, and any payment to MA plans above what provision of the standard Medicare benefit package would cost, are largely used to fund supplemental benefits such as reduced cost sharing or coverage for services not covered by traditional Medicare (for example, transportation services). In the ‘enhanced benefits’ narrative, savings to Medicare are less important than improved benefit generosity. This narrative emphasizes the value of the benefits, often to vulnerable populations, who disproportionately enroll in Medicare Advantage. The generosity of MA benefits has grown in recent years, and recent Congresses have supported this second narrative, at least in part, as evidenced by benchmarks for MA plan providers being set above traditional Medicare spending in half of the counties in the US.”

To add to the complexity of the situation, the researchers write that “These narratives are not necessarily mutually exclusive. In theory, the efficiency of private plans could finance savings for Medicare and more generous benefits. Yet despite the fact that private plans spend less on care than traditional Medicare spends, historically the inclusion of private plans in the Medicare system has not reduced Medicare spending because the plans have been paid more than what care for MA enrollees would cost if those enrollees were served by traditional Medicare. This is partly because of policy decisions and partly a result of how providers code patient diagnoses that influence their risk scores, which in turn affects Centers for Medicare and Medicaid Services (CMS) payments to plans.”

The researchers note that “MA payments above traditional Medicare costs are problematic in part because they increase spending at a time when policy makers are looking to reduce Medicare spending and protect the Medicare Part A Trust Fund. Moreover, high MA payments, and thus high MA enrollment, may destabilize the traditional Medicare program by shrinking its population—on which MA payment benchmarks are set—and making it unrepresentative. In addition, the smaller sample size may make traditional Medicare spending estimates, and thus MA payment benchmarks, statistically less stable.7 Recent calls for reduced payment rates reflect both adherence to the shared savings narrative that originally justified the inclusion of private plans in Medicare and concerns related to the stability of traditional Medicare.”

Still, after doing very intricate analysis the researchers find that “Considerable evidence suggests that MA plans are, on average, paid more than Medicare would spend if MA beneficiaries were enrolled in traditional Medicare.6,14 This has led to proposals to reduce payments to MA plans. Yet because MA plans use a portion of the higher payments to support lower premiums and more generous coverage, there is resistance to reducing MA payments. Understanding what is bought with the added payments will help policy makers balance fiscal concerns with a desire to support greater benefits.”

The researchers write that “Our analysis suggests that premiums (including the Part D premium and Part B premiums net of buydowns) fell in response to benchmark increases, but the magnitude was small (a $60 combined premium reduction per $1,000 benchmark increase). Higher benchmarks also led to reductions in cost sharing. For all findings, smaller benchmark changes would yield proportionately smaller impacts.”

Ultimately, they conclude, “It is not surprising that MA beneficiaries are very satisfied and enrollment continues to grow, as MA plans provide richer benefits and lower out-of-pocket cost sharing at a lower premium. These benefits may be particularly valuable to disadvantaged and vulnerable populations. Yet the impact on benefits of reducing MA payments (by changing benchmarks) would be modest. Our analysis found that the impact of changing benchmarks on benefits is typically about 5 percentage points. The incremental effect of higher MA payments on added benefits largely manifests in dental, vision, and hearing services. There was little impact on benefits intended to address social determinants of health, such as meals and transportation, although that result may change in the future because of recent CMS rule changes that loosened restrictions on the ability to offer these services. Overall,” they write, “given the gaps in the standard Medicare benefit package, there is understandable interest in increasing coverage. MA has been a convenient vehicle to accomplish that goal, but policy makers must decide whether the added MA benefits are worth what the government is paying for them. This analysis helps quantify what would be lost if payment to MA plans were cut. The ultimate decisions about payment will depend on how policy makers value those benefits and whether they can identify more efficient ways to provide them.”