Medicare Advantage plan payments under scrutiny

January 1, 2007

Washington, D.C.-Medicare pays private plans too much, and the system needs to be fixed, according to a new report from the Commonwealth Fund. The study finds that the government paid Medicare Advantage plans 12.4% more in 2005 than if the same patients had been enrolled in the traditional fee-for-service program. The extra payments totaled more than $5.2 billion in 2005, or an extra $922 for each of the 5.6 million MA enrollees.

WASHINGTON, D.C.-Medicare pays private plans too much, and the system needs to be fixed, according to a new report from the Commonwealth Fund. The study finds that the government paid Medicare Advantage plans 12.4% more in 2005 than if the same patients had been enrolled in the traditional fee-for-service program. The extra payments totaled more than $5.2 billion in 2005, or an extra $922 for each of the 5.6 million MA enrollees.

These numbers are similar to those calculated by the Congressional Budget Office, the Medicare Payment Advisory Commission and even by officials at the Centers for Medicare and Medicaid Services (CMS). The higher rates were authorized by the Medicare Modernization Act (MMA) of 2003 as a way to stabilize Medicare participation by private insurers, which had exited the program earlier in large numbers due to declining and uncertain fees. The legislation established higher benchmark payments and other policies that increased payments. At the same time, the MMA established a new, more accurate risk adjustment system designed to pay more only for high-cost beneficiaries. This approach has been phased in by CMS in a way that allowed rates to rise initially for MA plans, but now should decline to some extent.

The Commonwealth study indicates that the largest rate hikes went to MA plans in urban areas: California and New York alone accounted for about one-third of all extra payments. Moreover, those areas with the lowest prevailing fee-for-service (FFS) rates experienced the widest gap between MA and local FFS payments.

Rolling back MA plan payments is necessary to "protect Medicare from privatization," according to Rep. Pete Stark (D-Calif. ), new chairman of the House Ways and Means Health Subcommittee. He views the Bush administration's support for Medicare managed care as part of an effort to "end Medicare as an entitlement and turn it into a voucher plan." Stark says he will hold oversight hearings on the program and move slowly toward reform.

To justify higher payments, MA plans need to demonstrate that they can "do a much better job in the areas of disease management and care coordination," comments Paul Ginsburg, president of the Center for Studying Health System Change. Private Medicare plans can steer beneficiaries to higher performing providers and take other steps likely to control healthcare spending.

Meanwhile, Democrats are eyeing the extra MA payments as a potential source of funds to improve other aspects of the Medicare program. They'd like to use that extra $5 billion to fill in some of the "donut hole" in the prescription drug benefit or to offset planned increases in Part B premiums, among other changes.