Medicare’s Structure and Payment Systems Part II: Medicare Advantage
The Medicare Advantage (MA) program (a.k.a., Medicare Part C) shifts the cost risk from the Medicare program to a private insurance company. For the moment think of an MA plan as an HMO or a PPO. Through an MA plan, beneficiaries receive the hospital (Part A) and outpatient (Part B) insurance they would otherwise get directly from FFS Medicare. Many MA plans offered a drug benefit before such benefits became available to all beneficiaries in 2006 (via Part D).
Medicare pays an MA plan a predetermined monthly rate for each beneficiary it covers, independent of the services used (the rate is adjusted to reflect the financial risk of the beneficiary to the plan). The plan may also charge enrollees a premium and other cost sharing. An MA plan may offer benefits more generous than FFS Medicare, covering more services at lower cost to the beneficiary. About 20% of Medicare beneficiaries are enrolled in an MA plan, and the program accounts for nearly the same proportion of Medicare spending.
Thus, an MA plan acts as a middleman between Medicare (the taxpayer) and the service provider (the doctor or hospital). The plans, not Congress, negotiate payments with service providers and are at risk for the cost of covering each enrolled beneficiary. Since MA plans are private entities bearing risk, negotiating with providers, and competing for beneficiaries the MA program has the patina of a “free market” solution to cost control.
But Congress sets the payment rates. The payment system uses terminology that sounds like competitive bidding. Plans “bid” against a “benchmark,” which is the payment rate cap (the most paid for an average-risk beneficiary). If the bid is below the benchmark, the plan receives 75% of the difference to fund additional benefits and/or lower cost sharing.
However, the benchmark has nothing to do with plan costs. It is set by Congress via a complex formula. Today, on average payments to MA plans are 14% higher than average FFS Medicare payments. This is not because MA plan enrollees are 14% more costly. In fact, evidence suggests that MA enrollees are, if anything, less costly than FFS beneficiaries. Besides, the payments are risk adjusted. No, MA plans are simply overpaid.
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