The number of people enrolled in Medicare has increased steadily in recent years, and along with it, Medicare spending. In particular, enrollment in Medicare Advantage, the private plan alternative to traditional Medicare, has more than doubled over the last decade. Notably, Medicare spending is higher and growing faster per person for beneficiaries in Medicare Advantage than in traditional Medicare. As enrollment in Medicare Advantage continues to grow, these trends have important implications for total Medicare spending, and costs incurred by beneficiaries. In its 2022 budget, the Biden Administration expressed support for reforming payments to private plans as part of efforts to extend the solvency of the Medicare Hospital Insurance (HI) Trust Fund and improve affordability for beneficiaries.

This analysis examines Medicare spending per person for beneficiaries in Medicare Advantage, relative to traditional Medicare. We build on prior work published by the Medicare Payment Advisory Commission (MedPAC) and the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary (OACT) to provide estimates of the amount Medicare would have spent for Medicare Advantage enrollees had they been covered under traditional Medicare in 2019 (the most recent year for which data are available). We use publicly available data from CMS that includes spending for people who were enrolled in both Part A and Part B of traditional Medicare, by category of service, as well as information on average risk scores and enrollment by county. This allows us to calculate per-person spending for beneficiaries in traditional Medicare on a basis comparable to federal payments per enrollee in Medicare Advantage. We also examine the extent to which the projected growth in Medicare Advantage spending is attributable to the growth in enrollment and the increase in spending per person. We then illustrate potential savings to the Medicare program between 2021 and 2029 under two alternative scenarios where Medicare Advantage spending per person is lower or grows slower than under current projections. (See Methodology for more details on the data and analytic approach.)

Our analysis finds:

  • Medicare spending for Medicare Advantage enrollees was $321 higher per person in 2019 than if enrollees had instead been covered by traditional Medicare. The Medicare Advantage spending amount includes the cost of extra benefits, funded by rebates, not available to traditional Medicare beneficiaries.
  • The higher Medicare spending per Medicare Advantage enrollee, compared to spending for similar beneficiaries under traditional Medicare, contributed an estimated $7 billion in additional spending in 2019.
  • Growth in Medicare Advantage enrollment explains half of the projected increase in total Medicare Advantage spending between 2021 and 2029 and half is attributable to growth in Medicare payments per Medicare Advantage enrollee, after accounting for inflation.
  • If spending per Medicare Advantage enrollee was 2 percent less each year than projected by the Medicare actuaries, similar to the projected impact of a recommendation made by MedPAC, total Medicare spending would be $82 billion lower between 2021 and 2029. If instead Medicare payments per Medicare Advantage enrollee grew at the same rate as is projected for spending per person in traditional Medicare (4.4% vs 5.3%), total Medicare spending would be $183 billion lower between 2021 and 2029.

Background on Payments to Medicare Advantage Plans

Medicare beneficiaries have the option to receive their Medicare benefits through either the traditional Medicare program or by enrolling in a private health plan, such as an HMO or PPO, that contracts with Medicare, called Medicare Advantage. Medicare pays Medicare Advantage plans a set amount for each enrollee. The payment is determined through an annual process in which plans submit “bids” for how much they estimate it will cost to provide benefits covered under Medicare Parts A and B for an average beneficiary. The bids submitted by each plan are compared to a benchmark, which is an amount based on a set percentage of the projected average spending for beneficiaries in traditional Medicare in the same county. The benchmarks range from 95 percent in high spending counties to 115 percent in low spending counties. The benchmarks are subject to caps, meaning they cannot exceed the benchmarks that were in place before the Affordable Care Act. In addition, the benchmarks are increased by 5 percent for plans that receive at least 4 out of 5 stars under the quality bonus program, and 10 percent in certain “double bonus” counties.

Plans that bid below the benchmark receive a portion of the difference between the bid and the benchmark as a “rebate” (50 percent for plans with 3 or fewer stars, 65 percent for plans with 3.5 or 4 stars, and 70 percent for plans with 5 stars). Rebates must be used to reduce cost sharing, subsidize the standard Part B and/or Part D premium, or pay for supplemental benefits (such as vision, dental, and hearing). A portion of the rebate may also be used for administrative costs or retained as profit. Plans that bid above their benchmark receive the benchmark amount, and enrollees pay an additional premium equal to the difference between the bid and benchmark. The payments to plans are risk adjusted, based on the health status and other characteristics of enrollees, including age, sex, and Medicaid enrollment. Medicare payments are higher for plans with higher average risk scores because their enrollees are expected to incur higher costs.

While traditional Medicare spending is used to establish benchmarks, actual payments to Medicare Advantage plans can be higher or lower than spending for comparable beneficiaries in traditional Medicare. Changes in the Affordable Care Act initially reduced Medicare Advantage benchmarks. However, since 2017, benchmarks have risen on average, which increases the maximum possible payment a plan can receive. When benchmarks increase, plans that bid below the benchmark may be able to retain the same amount of rebate dollars, and thus offer the same level of extra benefits, while increasing their bid for Part A and B services. Alternatively, these plans could bid the same (or even slightly less) and receive higher rebate payments as the difference between the benchmark and bid widens because the benchmark is higher. Either response increases the payment Medicare Advantage plans receive as benchmarks increase. One reason for the recent increase in benchmarks is that more plans are in bonus status, and thus have 5 percent (or 10 percent in double bonus counties) added to their benchmark. In 2021, 81 percent of Medicare Advantage enrollees are in plans that receive a bonus payment. Similarly, rebates increase as star ratings increase, because plans with higher star ratings retain a larger percent of the difference between the benchmark and bid as a rebate.

In addition, risk adjustment can lead to higher payments for Medicare Advantage enrollees than would have been spent in traditional Medicare. This is because risk scores are largely based on diagnoses, and more diagnoses generally increase a beneficiary’s risk score, providing an incentive for diagnoses to be coded more comprehensively for Medicare Advantage enrollees than occurs for traditional Medicare beneficiaries. MedPAC estimates that this more comprehensive coding of diagnoses in Medicare Advantage increased risk scores 9.1 percent relative to traditional Medicare in 2019. There is also some concern that Medicare Advantage plans submit inaccurate diagnoses that increase risk scores and result in overpayments. The Health and Human Services Office of the Inspector General is currently conducting a targeted review of documentation submitted by Medicare Advantage organizations to determine whether diagnoses and associated risk scores comply with federal regulations. And in July, the Department of Justice announced that they were intervening in a False Claims Act lawsuit alleging that Kaiser Permanente had submitted inaccurate diagnoses codes for Medicare Advantage enrollees.

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