Medicare Advantage (MA) has been at the center of partisan debate on the tradeoff between preserving Medicare solvency and protecting consumer choice. CMS’s recent release of preliminary payment policies for Medicare health plans — that is, plans offered through Medicare Advantage (MA) — is likely to refuel the ongoing debate on MA payments that continues despite efforts to resolve it in the Patient Protection and Affordable Care Act of 2010 (ACA).

At issue is the equity of MA payment reductions included in the ACA. Democrats argue that the changes establish closer parity between MA and the traditional program, correcting overpayments to MA that add to program costs and make it harder for the traditional program to compete. Republicans argue that the changes will remove important choices for beneficiaries that increase overall value in the Medicare program.  Both sides cite independent analysis to support their positions, particularly the Medicare Payment Advisory Board’s (MedPAC’s) documentation of the overpayments and the Congressional Budget Office’s (CBO’s) estimated dramatic declines in MA enrollment with the legislation.

With colleagues, I have been following the history of the MA program for many years both in its current incarnation and in its earlier lives (Medicare+Choice, Medicare risk contracting).  In this post, I try to cut through the rhetoric by summarizing what we know about the Medicare Advantage program and how beneficiaries are likely to be affected, positively or negatively, by health reform.

Medicare Advantage Today And Its Antecedents

MA payment policy has emerged over time through the cumulative, and perhaps unintentional, effect of policies seeking different goals. These policies converted a program that was originally viewed as generating savings for the Medicare program into one that paid more when beneficiaries selected a private plan over traditional Medicare. The health reform legislation sought to reverse this trend, generating savings that in part would offset the cost of expanded coverage to the under 65 population nationwide.

As of February 2011, 12.2 million Medicare beneficiaries were enrolled in Medicare Advantage and similar plans authorized under other authority. This reflects 25 percent of all Medicare beneficiaries and 36 percent  beneficiaries who enroll in Part D, Medicare’s prescription drug benefit. The MA market historically has been a particularly important source of coverage for beneficiaries who do not have access to subsidized retiree benefits through employers or Medicaid, particularly those with lower to moderate income.

Program enrollment has grown substantially since the Medicare Modernization Act of 2003 modified policies guiding plan payments. Between year-end 2003 and year-end 2010, enrollment more than doubled, growing from 5.5 million to 11.8 million. Though the majority of enrollees were in HMOs, the growth was heavily driven by enrollment in newer types of MA plans, particularly private fee for service (PFFS) plans. MA enrollment continues to grow despite legislative changes that have diminished the attraction of PFFS. Enrollment is increasingly is concentrated in a small number of major firms that historically have dominated the market  including UnitedHealthcare, Humana, Kaiser Permanente and Blue Cross-Blue Shield affiliates). MA penetration continues to be uneven across the country for a variety of sometimes idiosyncratic factors.

Evolution Of Current MA Payment Policy

The Medicare risk contracting program (1985-1997) was the first permanent private plan program in Medicare, providing access to HMOs. Program payments were linked to historical Medicare costs for similar beneficiaries in the same county, with payments pegged to 95 percent of costs and the plans required to use any savings between that and benefit costs to enhance options for beneficiaries (lower cost sharing, reduced premiums, extra benefits).

In 1997, this program was absorbed into the Medicare+Choice program as a result of the Balance Budget Act of 1997 (BBA). Medicare+Choice expanded the type of private plans available to Medicare beneficiaries and also made a series of changes in payment. While the intent was to gradually reduce payment variation across counties, the main operational effect in most counties was to limit payment increases to 2 percent annually. The BBA also added “floor”, or minimum payment levels, in rural counties. (Two years later authority for a second, and higher, “urban floor” was added.). These changes broke the link between fee-for-service (FFS) and MA payment levels in counties, and initiated changes which led to some counties being paid substantially more than FFS. The BBA also authorized the phase-in of a strengthened program of risk adjustments in rate setting that better reflected differences in the health status of enrollees in the programs. These adjustments are important since research on Medicare HMOs showed Medicare overpaying private plans by failing to adequately adjust for the health status of patients enrolled in them.

Enrollment in Medicare’s private plans declined substantially after the Medicare+Choice program was adopted, changes perceived as heavily driven by the slow growth in MA payments over this period. The Medicare Modernization Act of 2003 sought to stabilize and expand the MA program in anticipation of the introduction of the new Part D benefit in 2006. Under the Act,  the minimum annual increase would be the greater of either 2 percent  or the increase in the national growth rate, a change which led to substantially higher rates of increase than in previous years. The Act also raised the minimum county payment to at least 100 percent of FFS which, combined with other changes, meant that MA payments in each county exceeded those paid by the traditional program for similar beneficiaries.

According to MedPAC, the cumulative effect of all these changes in 2010 was that per capita payments to plans averaged an estimated  109-113 percent depending on assumptions made about physician payment in the traditional Medicare program. Based on MEDPAC  estimates, plans cost for Medicare Part A and Part B were at least the same as in traditional Medicare, with HMOs costing a few percent less and other plan types substantially more.

The health reform law sought to reduce the disparity in payment between traditional Medicare and MA. The Act froze MA plan payments in 2011 at the 2010 rate. In the following years, payments will be brought down by an amount that will vary with the current generosity of payments across geographic areas. Counties are divided into quartiles, based on current payments relative to fee for service in those counties. The highest paid counties will have benchmarks at 95 percent of FFS and the lowest at 115 percent, with the others in between. Plans that perform well on quality scores can offset some of the reduction with additional bonus payments for quality.

Likely Positive and Negative Effects of These Changes

Payment reductions in MA should enhance the fiscal solvency of the Medicare program because Medicare will no longer pay more when a beneficiary chooses Medicare Advantage over staying in the traditional program. The change also is likely to have a direct effect on the Part B premiums Medicare beneficiaries pay by slowing down the rate of growth in the program (According to MedPAC, the average Medicare beneficiary paid $3.34 more in Medicare Part B premiums each month in 2009 because of MA overpayments, with Medicare paying on average $1.08 for each $1 of extra benefits MA enrollees received.)

Beneficiaries currently enrolled in MA plans will be the ones to experience the main adverse effects of the payment changes. With payments rising less rapidly than in the past, plans are likely to eliminate or reduce some of the extra benefits that overpayments helped finance and premiums may rise.  However MA plans will still have to cover required Medicare benefits, including new preventive benefits authorized by the ACA. The change also creates more equity geographically since payment reductions will disproportionately be made in counties currently  most out of line with spending in the traditional program.

Proponents of the change believe this is equitable and creates a more level playing field between traditional Medicare and Medicare Advantage. Opponents disagree, arguing that payment reductions will make it less attractive for private plans to participate in Medicare, reducing beneficiary choice with effects targeted most heavily on the low to moderate income population attracted by MA.

Separating  Fact from Rhetoric

Proponents of higher MA payments argue that the differential is justified because private plans are more efficient, so it is worth paying more to encourage plan choices that may ultimately lead to a stronger Medicare program. However there is limited evidence to support this position.

  • Existing research provides no evidence that either traditional Medicare or Medicare Advantage perform consistently perform better than the other. From a cost perspective, HMOs in MA may be slightly more efficient on average, but other types of plans appear to cost more than traditional Medicare. Analysts might argue there is a wash between what some see as the greater flexibility in MA to innovate in delivery and traditional Medicare’s ability to use its market power to control provider payment rates. Obviously, there is considerable variation across the industry, with some plans undoubtedly better and some worse, at least on selected metrics.
  • The fear that MA payment reductions will dramatically reduce available private plan options for Medicare beneficiaries also appears, at least to date, overstated. While such a reduction may appear likely given historical experience under Medicare+Choice, MA enrollment to date shows continued growth in MA enrollment. Despite the freeze in payments, beneficiaries also still have many plan options in 2011 and though the number is less than in recent years it remains  far in excess of those generally available in the commercial market. Though benefit cuts through MA may target those less able to bear them, it probably is more equitable to enhance the overall Medicare benefit package or add to current programs targeting extra benefits for low income people than to tie receipt of such benefits to enrollment in MA and geographically uneven overpayments.

Projecting Future Change

While firms’ interest in MA participation obviously is affected by payment rates, the Medicare market may be more attractive now than it was previously. With an aging population, more and more beneficiaries ultimately will be in Medicare; at the same time privately sponsored insurance is declining. Further, there is the potential for growth in private plan products geared toward the dually eligible population enrolled both in Medicare and Medicaid.  If the alternative for beneficiaries is Medigap, firms also may have more opportunity to raise premiums without detracting from their market share. MA enrollment also is heavily concentrated in a small number of firms that are likely to find it hard to walk away from the Medicare market.

MA enrollment could hold steady or even increase. While CBO estimates assumed MA enrollment will decline dramatically as payment increases are limited, it is possible that CBO’s judgment that future trends will mirror historical experience under Medicare+Choice will not prove correct. For example, in their 2011 bids firms projected a net increase, rather than decrease,  in MA enrollment that at least some industry analysts project could continue in 2012. MA is arguably a more attractive product now to beneficiaries than it was previously as a result of changes in the economy. MA’s premiums arguably make the product more attractive now than previously compared with the higher priced Medigap benefit, especially for those with limited health care needs. MA enrollment also greatly simplifies choice for beneficiaries who enroll in an MA-PD plan and avoid the need to juggle Medigap supplements and, since 2006, Part D. MA’s PPO options also may be attractive to those previously discouraged by the closed HMO networks.

The Bottom Line

In conclusion, MA payment reductions included in the ACA have an empirical base and will lead to a stronger and more equitable Medicare program.  There also currently is little evidence to support concerns that the MA program is imploding, though that cannot be ruled out. While those opposing the MA cuts raise some legitimate points, their arguments seem insufficient to justify the additional resources it would take to offset the cuts at a time when federal budget expenditures of all kinds are under scrutiny.