Medicare Advantage plans provide many benefits to Medicare beneficiaries, including lower costs, added services, higher quality than traditional fee-for-service (FFS), and less paperwork.  However, the way Medicare paid Medicare Advantage health plans led to a situation where Medicare was paying health plans more than the average cost of Medicare FFS coverage.

Medicare Advantage plans are paid using a system based on the plan’s bid prices, submitted to the Centers for Medicare and Medicaid Services (CMS), a rebate percentage, and individual county benchmark rates. The highest dollar amount generated from eight payment formulas set the benchmark rates.

That system changed with the Affordable Care Act (ACA). The health reform law included two policies to reform Medicare Advantage payments, which will phase in from 2011 to 2017:

1. Reduce per-capita payments to Medicare Advantage health plans to match those of traditional FFS Medicare.
2. Give payment incentives to high-performing Medicare Advantage plans.

The Congressional Budget Office (CBO) estimated the changes would save $132 billion over 10 years. Some in the policy world have worried the payment cuts could harm Medicare Advantage beneficiaries. But so far the program has continued to grow quickly, reaching 27 percent of all Medicare beneficiaries in 2012, a 10 percent increase from the previous year. The Department of Health and Human Services (HHS) expects a similar growth rate next year as well.

Estimates of What Medicare Might Have Saved if Changes Had Come in 2009:

A recent brief from the Commonwealth Fund takes those savings estimates a step further, or rather, a step backward. Principal author Brian Biles, of George Washington University, and his co-authors estimated that the ACA’s payment policies would have saved $12.7 billion if they had been in place in 2009, two years before they actually began to take effect.

The report says Medicare Advantage payments will still be higher than those for traditional FFS Medicare, by about $1.4 billion per year or 2 percent.

Incentive Payment System to Reward High-Quality Plans:

Some Medicare Advantage plans will earn better payment rates by scoring well on the CMS star-based quality rating system. Plans that receive at least four or more stars, out of five, will receive a 5-percent bump in the benchmark rate, and plans that get at least 3.5 stars will receive higher rebate percentages.

CMS’s rating system is based on several parameters, including:

  • Frequency of member preventative care from providers, such as check-ups, vaccinations, and screenings
  • Chronic condition management
  • Member satisfaction with the plan and with physician communication
  • Number and handling of complaints, appeals, and members who drop the plan
  • Quality of telephone customer service

In a separate report, the Kaiser Family Foundation estimated that one in four Medicare Advantage enrollees was in a plan that earned at least four of five stars. The ACA’s incentive payment system likely will shift funding toward those plans that best serve the program’s large and growing number of beneficiaries.