The current rate setting structure for Medicare Advantage (MA) plan payments results in plan overpayments of more than 20%, according to a new study from the University of Southern California Schaeffer Center. This finding is particularly galling when these same plans are often paying Skilled Nursing Facilities(SNFs) and Home Health(HH) agencies only 60-80% of what Medicare FFS pays and denying MA enrollees access to medically necessary Medicare A & B services.

The USC Shaeffer study answered a question highlighted but not answered by the Medicare Payment Advisory Commission (MedPAC) in its March 2023 report on the MA program – What impact does favorable selection have on what MA plans are paid in comparison to FFS?

The study examined data from individuals who switched from Medicare FFS to an MA plan during the annual enrollment periods in 2006-2019 and compared them to the beneficiaries who remained in FFS. They found those beneficiaries who migrated from Medicare FFS to enroll in MA had lower risk-score adjusted expenditures. This was a consistent pattern over the 14 years of data examined. This is an important finding because MA payments are based upon how much it costs to care for the average Medicare beneficiary in traditional FFS Medicare. In other words, as lower-cost Medicare beneficiaries exit Medicare FFS, the average Medicare FFS beneficiary spending rises because the higher-need, higher cost beneficiaries’ remain. This, in turn, increases MA payment rates, which are based on the remaining higher need/cost population. The study concludes that this favorable selection – lower-cost beneficiaries disproportionately migrating to MA plans from Medicare FFS – results in MA plans being overpaid by 14.4%. However, favorable selection is but one factor contributing to MA plan overpayments.

MedPAC describes other factors that contribute to MA plan overpayments including coding intensity, quality bonus payments and how MA benchmarks are set. It estimates these factors contribute to MA plans being paid 6% more for their enrollees than CMS would pay for these individuals in Medicare FFS. In 2023, these factors are projected to result in an additional $27B being paid to MA plans from the Medicare Trust Fund and by taxpayers. When we take account for all of these contributing factors, MA plans are overpaid by 20%.

These findings, in addition to the fact that the number of Medicare FFS beneficiaries is declining, underscore why policymakers must re-examine how MA plan payments are set. LeadingAge continues to advocate to CMS and Congress for changes to the MA program to ensure adequate rates, beneficiary access to medically necessary care and reductions in administrative burden for providers. For more information on the challenges faced and solutions offered, check out our white paper, Fulfilling the Promise: Medicare Advantage.

For a chronological summary of past LeadingAge MA policy and research updates, see the serial post, Improving Medicare Advantage.