Lawsuits Target Troubled Medicare Managed Care Bonus Program

A pair of health insurer lawsuits have rekindled debate on whether to repair or replace a flawed bonus payment program for Medicare managed care plans.

Private Medicare Advantage insurers received an estimated $16 billion in quality bonus payments in 2023, according to the Medicare Payment Advisory Commission. That’s roughly five times the $3 billion that was paid in 2015, according to KFF. The bonus payments go to MA insurers that earn at least four of a possible five stars on a list of quality measures.

But after the Biden administration tweaked the methodology for calculating the 2024 star ratings, quality scores declined and program payouts are expected to follow suit next year when the impact of the 2024 changes are fully felt.

Medicare Advantage insurers Elevance Health and SCAN Health have sued the Department of Health and Human Services over their 2024 star ratings. Both companies claim the lower ratings calculations by the Centers for Medicare & Medicaid Services are unlawful, arbitrary and capricious, and should be vacated. Elevance expects revenue to drop by $500 million in 2025 because of the lower ratings. SCAN could lose $250 million, its lawsuit said.

With billions of dollars in bonus payments at stake, the lawsuits will test the ability of the HHS and the CMS to rein in a growing cost driver amid increased financial scrutiny of the entire Medicare Advantage program. The legal fight is the latest headwind for the MA star rating and bonus program. Its history of overpayments, ineffectiveness, and rising costs make it a prime target for reform—or the scrap heap, say researchers and analysts.

“If it were up to me, they would scrap this program entirely,” said Laura Skopec, a senior research associate at the Urban Institute who studies the program.

In a January letter to the CMS, Sen. Elizabeth Warren (D-Mass.), and Rep. Pramila Jayapal (D-Wash.) said “there is no evidence that quality bonus payments actually improve plan quality” and that the quality measurements are “highly flawed” because of a lack of plan performance data.

That data shortfall means the advisory commission “can no longer provide an accurate description of MA quality of care” and beneficiaries “lack good information on the quality of care provided by MA plans in their local market,” MedPAC reported.

Lack of Penalties

As of October 2023, Medicare Advantage enrolled 32.6 million people, or 49% of the program’s 66.6 million beneficiaries.

Unlike traditional fee-for-service Medicare, which pays for each medical service provided, Medicare Advantage plans receive a flat monthly payment to cover each beneficiary’s cost of care. And unlike quality incentive programs in traditional Medicare, MA “quality bonuses aren’t budget neutral but are instead financed by added program dollars,” according to the commission.

“Every other Medicare pay-for-performance program has penalties against low performing providers that balance out the bonuses to high performers. But there are no penalties at all in the quality bonus program. This is all just extra Medicare money that’s going to plans,” said Skopec.

Before 2020, some Medicare Advantage plans used contract consolidations to artificially increase star ratings, which led to unwarranted bonus payments, according to the commission. Plans in a low-performing contract could get a bonus payment if their contract was absorbed by another one rated four stars or higher. This activity coincided with a jump in the share of MA enrollees in four-star plans—from 60% in 2015 to 81% in 2020. In 2023, 85%, or 26 million MA enrollees, were in plans that received a bonus, according to KFF.

Since 2022, the bonus payments have increased $2.8 billion, or 28%, outpacing the 8% Medicare Advantage enrollment growth over the same period, KFF reported. And in 2023, 85%, or 26 million MA enrollees, were in plans that received a bonus.

“As with all things Medicare Advantage, it has kind of unexpectedly exploded, and now it’s this huge, very significant budget-line item. So I think it’s attracted more attention as to ‘what are we getting out of all these bonuses going to these plans?’” said Andrew Ryan, director of the Center for Advancing Health Policy through Research at Brown University.

MedPAC has recommended that Congress replace the MA bonus program with a budget-neutral incentive program. In the meantime, MA insurers will be fighting to keep the quality bonus payments flowing.

‘Almost Unlimited Discretion’

The Elevance and SCAN lawsuits—each filed late last year in US District Court for the District of Columbia—claim the companies’ 2024 star quality ratings were unfairly influenced by disputed results from “secret shopper” phone calls conducted by the CMS.

“The call alone triggered a reduction in SCAN’s Star Ratings,” SCAN’s lawsuit contends. “Without the call, SCAN’s Star Ratings would have been 4 stars.” SCAN earned ratings of 4.5 stars for five straight years before falling to 3.5 stars in the 2024 ratings.

While unsure of the legal arguments that Elevance and SCAN make, Ryan said the CMS has “almost unlimited discretion about how the stars get calculated and what the thresholds are.”

In a blog she co-authored earlier this year, Ceci Connolly, president and CEO of the Alliance of Community Health Plans, said most plans “get a trophy in the form of 4 or 5 stars, diluting the distinction of truly superior performance.”

As a result, the star ratings have been “watered down by easy-to-achieve process measures, resulting in nearly 75 percent of MA consumers in a plan with 4 or more stars,” said the piece that was co-written by Michael Bagel, associate vice president of public policy at the alliance.

The alliance wants to overhaul the program and eliminate 10 “outdated” quality measures that are either “poorly designed or have clustered rates of performance at the top of the measure,” Connolly and Bagel wrote. It also wants to limit the number of MA plans that earn a four-star rating or higher. This would reduce bonus payouts and save taxpayer dollars.

Warren and Jayapal also said that too many plans receive four- and five-star ratings.