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Payment Cuts Drive Medicare Advantage Plans to Contain Costs

Medicare Advantage plans controlled beneficiary costs and remained profitable over the past decade even though new policies reduced federal Medicare payments to the plans.

Medicare Advantage plans controlled beneficiary costs with payment cuts

Source: Thinkstock

By Thomas Beaton

- Medicare Advantage (MA) plans contained beneficiary costs and remained profitable despite reductions to federal MA payments from 2009 to 2014, according to new research from the Commonwealth Fund.

The report found that as Medicare reduced Medicare Advantage payments from 114 percent to 100 percent of costs per enrollee, MA plans internally worked to reduce per-beneficiary costs in an effort to cope with the new policies.

MA plans bid for government payments based on cost benchmarks and can earn rebates if the bids are lower than benchmark amounts. MA plans can also earn a rebate based on their quality scores.

“The benchmark rates are now set at 95 percent, 100 percent, 107.5 percent, or 115 percent of traditional Medicare spending per beneficiary, depending on the county’s costliness (i.e., Medicare spending per beneficiary),” the team said.

“The rebate has been reduced from 75 percent to 50 percent of the difference between the benchmark and the plan’s bid, and the benchmark and/or rebate also may vary depending on the plan’s quality rating.”

By reducing cost inefficiencies, Medicare Advantage plans were able to use their rebate payments to drive enrollment growth by financing competitive benefits not available in traditional Medicare, the Commonwealth Fund suggested.

As a result, enrollment rates have remained steady or increased while plans find increasingly competitive ways to contain spending.

Medicare Advantage HMO plans saw the largest payment reductions but also managed the largest improvements in efficiency while experiencing strong enrollment, the team found.

HMO cost benchmarks experienced near flat growth of 0.1 percent from 2009 to 2014, leaving it up to the plans to find cost efficiency opportunities. Nearly 70 percent of MA beneficiaries are enrolled in HMO plans. The plans have lowered their payment bids by 2.1 percent over the time period examined by the research team.  

Medicare Advantage PPOs have also been affected by Medicare Advantage payment reductions.

Regional Medicare Advantage PPO plans experienced large payment cuts but maintained reasonable health plan costs and enrollment numbers. The benchmarks for regional PPO plans grew by 3.8 percent but the plans only increased their payment bids by 2.5 percent.

Local PPO MA plans benchmarks grew by 1.4 percent from 2009 to 2014, but their payment bids grew by 5.7 percent.  This suggests that local PPO plans have not been able to improve cost efficiency as much as regional PPOs.  However, regional and local MA PPO plans combined maintain 25 percent of all MA enrollment.

The Commonwealth Fund’s report comes after industry groups like AHIP have expressed concerns with potentially inadequate payment rates to Medicare Advantage plans. AHIP argued that new MA payment rates proposed by CMS are not enough to maintain financial solvency within Medicare Advantage.

“The MA program is very popular and has seen large scale growth throughout the United States,” AHIP said. “We urge CMS to adopt policies in the forthcoming Advance Notice that preserve MA funding levels.”

Policymakers and stakeholders could use lessons from private plans in the Medicare Advantage program to maximize cost-efficiency opportunities. More research is needed to evaluate how private MA plans can address challenges related to finances and efficiency across the Medicare program.

“More data should enable better analysis of these issues and — particularly given the growth of Medicare Advantage enrollment and calls for increased competition between traditional Medicare and private plans — the focus should be on improving both MA plans and traditional Medicare, to the benefit of all Medicare beneficiaries,” the Commonwealth Fund concluded.


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