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Payments to Medicare Advantage Plans

Country: 
USA
Partner Institute: 
Johns Hopkins Bloomberg School of Public Health, Department of Health Policy and Management
Survey no: 
(13) 2009
Author(s): 
Petigara, Tanaz and Gerard Anderson
Health Policy Issues: 
Role Private Sector, Political Context, Funding / Pooling, Benefit Basket, Access, Remuneration / Payment
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no yes yes yes no

Abstract

The 2003 Medicare Modernization Act increased payments to private health plans participating in the Medicare program. Between 2004-2008, extra payments to private plans amounted to $33 billion. These payments have been controversial, reflecting the varied levels of support that private plans have received over the past two decades. Recent legislation will reduce these payments.

Purpose of health policy or idea

The Medicare program allows Medicare beneficiaries to participate in a private sector option where they enroll in managed care plans instead of fee-for service. Approximatly 23 percent of Medicare beneficiares have chosen this option. Medicare payments to managed care plans have been significantly higher than for the traditional fee-for-service option. This issue has been controversial. Proponents argue that higher payments encourage private plans to participate in Medicare, while critics claim that higher payments are unaffordable and the quality of care in private plans is not significantly higher than in fee-for-service plans. In 2008, the Democratic-controlled Congress passed legislation that reduced these payments. Although managed care plans have participated in the Medicare program for decades, support for these plans and the policies directed towards them have changed relatively frequently. These lessons can potentially be useful for countries who want to introduce managed care plans alongside their traditional programs.

The Medicare Modernization Act (MMA) of 2003 contained provisions to expand the role of private health plans in the Medicare program by increasing payment to them. Beginning in 2004, private plans were paid more per enrollee than for comparable beneficiaries in Medicare fee-for-service. The extra payments were intended to incentivize private health insurance companies to participate in Medicare, and simultaneously increase beneficiary enrolment in private plans (Biles, 2004).

In 2008, payments to private health plans were determined by four policies established by the MMA: (1) A county-level benchmark set by the Centers for Medicare and Medicaid Services (CMS), which exceeded fee-for-service costs by 16.7 percent on average in 2008; (2) A "budget-neutral" risk adjustment mechanism which increased county benchmarks by 1.7 percent in 2008. Although CMS was directed to implement a more accurate risk adjustment mechanism for private plans, budget neutrality ensured that payments to private plans would not decrease; (3) Medicare payments for Indirect Medical Education (IME), which are included in the county benchmark rate, as well as paid directly to teaching hospitals; (4) A bidding sytem under which plans submit bids to provide Medicare benefits to their enrollees. If the bid is less than the county benchmark, Medicare keeps 25 percent of the difference, and the plan must pass the remaining 75 percent to the enrolee either through additional benefits or reduced premiums (Biles, 2008; CBO, 2008).

As a result of these four policies, Medicare paid an additional $986 per private plan enrollee, which amounted to $8.5 billion in 2008. The most significant spending increase occurred in Private Fee-For-Services plans (PFFS). Unlike HMOs or PPOs, these plans are not required to establish provider networks, and do not implement care coordination or other utilization controls like traditional managed care plans. However, like other private plans in Medicare Advantage, they are paid more than the costs for comparable FFS enrollees. Between 2004 and 2008, more than 2 million Medicare beneficiaries enrolled in PFFS plans (Biles, 2008). Enrollees in PFFS plans are typically healthier than enrollees in other Medicare Advantage plans as well as Medicare fee-for-service (GAO, 2008). Estimated payments to PFFS plans were 5 percent higher than payments to Medicare HMO and PPO plans in 2008 (Biles, 2008).

It was antcipated that competition among private plans would reduce Medicare spending in the long term. In 2008, payments to private plans have exceeded fee-for-service costs by 12 percent on average. Two laws - the Deficit Reduction Act of 2005 (DRA) and The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) contained provisions to reduce extra payments to private plans participating in the Medicare Advantage program. The DRA directed CMS to phase out the budget neutral risk adjustment policy between 2006-2010. The MIPPA additionally phases out payments to plans for Indirect Medical Education by 2010, and also requires PFFS plans to establish provider networks and quality improvement programs (Biles, 2008).

Main points

Main objectives

To reduce extra payments to private health plans participating in the Medicare Advantage program.

Type of incentives

Financial incentives.

Groups affected

Centers for Medicare and Medicaid Services, Democrat and Republican parties, Physician organizations; Private Insurers

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Characteristics of this policy

Degree of Innovation traditional rather traditional innovative
Degree of Controversy consensual controversial highly controversial
Structural or Systemic Impact marginal rather fundamental fundamental
Public Visibility very low low very high
Transferability strongly system-dependent system-dependent system-neutral

Political and economic background

Between 2004 and 2008, extra payments  to private health plans amounted to $33 billion (CBO, 2008). CMS actuaries estimate that these extra payments will increase premiums for beneficiaries enrolled in Medicare FFS by $3 per month in 2008 (Zarabozo, 2009). The payments will also deplete the Medicare Hospital Trust Fund two years earlier than anticipated. Although these payments have increased private plan participation and enrollment in Medicare Advantage, critics argue that these funds should be used to finance other health care programs and priorities (Zarabozo 2008; Biles 2008).

Complies with

Increased Medicare spending as a result of extra payments to private health plans participating in the Medicare Advantage program.

Purpose and process analysis

Current Process Stages

Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no yes yes yes no

Origins of health policy idea

In 2008, approximately 77 percent of Medicare were enrolled in the traditional fee-for-service program which pays providers for each service they deliver. The remaining is enrolled in Medicare Advantage, and receive Medicare benefits through private health plans. The main types of Medicare Advantage plans are HMOs, PPOs, and Private Fee-For-Service plans. Medicare Advantage plans receive a capitated payment per beneficiary (KFF, 2008).

In 1982, the capitated payment was set at 95 percent of the county fee-for-service rate for comparable FFS enrollees. The assumption was that private plans would operate more efficiently than traditional Medicare; Medicare would save 5 percent per enrollee and private plans would also offer more comprehensive benefits to their enrollees. However, two issues arose as a result of this payment mechanism. First, in counties with small numbers of FFS enrolees, capitation payments varied widely from year to year. Private plans were also incentivized to operate in counties with higher fee-for-service rates, and offered more comprehensive benefits to enrollees in these areas (Christensen, 1998). Second, the risk adjustment mechanism did not account for the health status of enrollees. Although Medicare should have saved 5 percent per enrollee, because of favorable selection into private plans, Medicare was paying nearly 6 percent more than if these beneficiaries were enrolled in Medicare FFS (Berenson, 2008).

In response to these issues, the 1997 Balanced Budget Act established a minimum rate in rural counties with low fee-for-service costs in order to encourage plans to participate in these areas. It also created a combined payment rate based on county and nationwide FFS costs in order to reduce variation from year to year. However, to constrain spending, the BBA reduced annual increases in capitation payments between 1999 and 2002 (Christensen, 1998). Consequently, the growth of private health plans and enrollment slowed substantially between 1999 and 2003 (Biles, 2008).

The Medicare Modernization Act of 2003 increased payments to private health plans in order to incentivize them to participate in Medicare. Estimates from the Congressional Budget Office (CBO) and the Medicare Payment Advisory Commission (MedPAC) have shown that since 2004, extra payments to Medicare Advantage plans have increased Medicare spending each year beyond what Medicare would have spent if these beneficiaries were enrolled in the fee-for-service plan. The Deficit Reduction Act of 2005 and more recently the Medicare Improvement for Patients and Providers Act of 2008 included provisions to reduce these payments.

Initiators of idea/main actors

  • Government: CMS adminstrators in the Bush Administration have opposed reductions in payments to Medicare Advantage plans. The Obama Administration has taken a different perspective.
  • Providers: Physician organizations have supported reduced payments in order to prevent a scheduled 10 percent cut in Medicare payments to physicians.
  • Payers: Insurance companies have argued that the extra payments are used to provide additional benefits and reduced premiums to enrollees. They suggest that reductions would disproportionately hurt minorities who face lower out-of-pocket costs in these plans.
  • Political Parties: Democrats who hold a majority in Congress, overrode President Bush's veto of the MIPAA. Many supported Medicare Advantage cuts as a method to finance other health programs and priorities. Most Republicans are opposed to these cuts. Republicans were instrumental in inserting the additional payments for private plans in the 2003 MMA, and support the expansion of private plans in Medicare.

Approach of idea

The approach of the idea is described as:
renewed: The role of private plans in Medicare has been debated for decades.

Innovation or pilot project

Stakeholder positions

Republicans support the expansion of private plans in the Medicare program, and included provisions for higher payments in the 2003 Medicare Modernization Act in order to increase competition in the Medicare system. Democrats do not support these payments, and are concerned with reports which show that the quality of care in Medicare Advantage plans is not comparable to that in Medicaid and commercial plans (Gold, 2009). President Bush vetoed the Medicare Improvements for Patients and Providers Act in 2008 specifically due to the provisions which would reduce payments to private plans. However, the Democratic-controlled Congress was able to override his veto (Berenson, 2008).

 

 

Actors and positions

Description of actors and their positions
Government
Centers for Medicare and Medicaid Servicesvery supportiveneutral strongly opposed
Providers
Physician organizationsvery supportivesupportive strongly opposed
Payers
Insurance companiesvery supportivestrongly opposed strongly opposed
Political Parties
Democratsvery supportivevery supportive strongly opposed
Republicansvery supportivestrongly opposed strongly opposed

Influences in policy making and legislation

The Medicare Improvements for Patients and Providers Act was enacted into law in July 2008 after Congress overrode President Bush's veto.

Legislative outcome

success

Actors and influence

Description of actors and their influence

Government
Centers for Medicare and Medicaid Servicesvery strongweak none
Providers
Physician organizationsvery strongstrong none
Payers
Insurance companiesvery strongstrong none
Political Parties
Democratsvery strongvery strong none
Republicansvery strongweak none
DemocratsPhysician organizationsCenters for Medicare and Medicaid ServicesRepublicansInsurance companies

Positions and Influences at a glance

Graphical actors vs. influence map representing the above actors vs. influences table.

Adoption and implementation

The Centers for Medicare and Medicaid Services (CMS) is responsible for implementing the provisions in the 2008 MIPPA. Most of the provisions will implemented in phases through 2011. The MIPPA will reduce payments to Medicare Advantage plans and restructure Private Fee-For-Service plans.

Review mechanisms

n/a

Results of evaluation

The Congressional Budget Office estimates that reductions in Medicare Advantage payments through the MIPAA will reduce Medicare spending by $13.6 billion between 2008-2013 and $48.7 billion between 2008-2018. Specifically, by reducing payments to plans for Indirect Medical Education (IME), and requiring Private Fee-for-Service plans to establish provider networks will reduce spending by $12.5 million between 2008-2013 and $47.5 billion between 2008-2018. Elimination of the stabilization fund will reduce spending by $1.3 billion. These provisions, however, will also decrease projected enrollment in Medicare Advantage plans by 2.3 million by 2013.

There is additional concern that the risk adjustment mechanism - the CMS-Hierachical Condition Categories (CMS-HCC) underestimates expenditures for beneficiaries with multiple chronic conditions (Anderson, 2005). One study found that the CMS-HCC model underestimated payments for beneficiaries with hypertension, lung disease, chronic heart failure, and dementia because it did not adjust for functional limitations (Noyes, 2008).   

Expected outcome

The 2008 MIPPA reduced but did not completely eliminate extra payments to Medicare Advantage plans, and the effect of this legislation will not be fully realized until 2011. The CBO has estimated that both Medicare spending as well as enrollment in private plans will decrease. The role of private plans in the Medicare program will likely continue to be a source of debate and controversy in the future.

Impact of this policy

Quality of Health Care Services marginal neutral fundamental
Level of Equity system less equitable neutral system more equitable
Cost Efficiency very low high very high

The provisions in the MIPPA will reduce Medicare spending, and can potentially improve access and quality of care in Private-Fee-For-Service plans.

References

Sources of Information

  • Biles B, Nicholas LH, and Cooper BS. The Cost of Privatization: Extra Payments to Medicare Advantage Plans. The Commonwealth Fund. Issue Brief # 750; December 2004.
  • Biles B, Adrion E, and Guterman S. The Continuing Cost of Privatization: Extra Payments to Medicare Advantage Plans in 2008. The Commonwealth Fund. Issue Brief #1169; September 2008.
  • Biles B, Adrion E, and Guterman S. Medicare Advantage's Private Fee-For-Service Plans: Paying for Coordinated Care Without the Coordination. The Commonwealth Fund. Issue Brief # 1183; October 2008.
  • Congressional Budget Office. Medicare Advantage: Private Health Plans in Medicare. Economic and Budget Issue Brief.  July 28, 2007.
  • Government Accountability Office. Medicare Advantage: Characteristics, Financial Risk, and Disenrollment of Beneficiaries in Private Fee-For-Service Plans. GAO-09-25; December 2008.
  • Zarabozo C and Harrison S. Payment Policy and the Growth of Medicare Advantage. Health Affairs Web Exclusive November 24 2008; w55-w67.
  • Kaiser Family Foundation. Medicare Advantage. Fact Sheet; September 2008.
  • Congressional Budget Office. Cost Estimate - H.R. 6331 Medicare Improvements for Patients and Providers Act of 2008 (July 23, 2008).
  • Christensen S. Medicare + Choice Provisions in the 1997 BBA. Health Affairs July/August 1998; 17(4): 224-231.
  • Berenson RA and Dowd BE. Medicare Advantage Plans at a Crossroads - Yet Again. Health Affairs Web Exclusive November 2008; w29-w40.
  • Berenson RA. From Politics to Policy: A New Payment Approach In Medicare Advantage. Health Affairs Web Exclusive 4 March 2008; ww156-164.
  • Gold M. Medicare's Private Plans: A Report Card on Medicare Advantage. Health Affairs Web Exclusive 28 November 2008; w41-w54.
  • Anderson GF. Medicare and Chronic Conditions. New England Journal of Medicine July 21 2005; 353(3): 305-309.
  • Noyes K, Hangsheng L, and Temkin-Greener H. Medicare Capitation Model, Functional Status, and Multiple Comorbidities: Model Accuracy. American Journal of Managed Care. October 2008; 14(10): 679-690.

Author/s and/or contributors to this survey

Petigara, Tanaz and Gerard Anderson

Suggested citation for this online article

Petigara, Tanaz and Gerard Anderson. "Payments to Medicare Advantage Plans". Health Policy Monitor, April 2009. Available at http://www.hpm.org/survey/us/b13/1