Bloomberg Law
March 28, 2023, 9:25 AM

Medicare Panel Targets Rate-Setting Process for Private Plans

Tony Pugh
Tony Pugh

A congressional advisory panel is exploring possible options to overhaul the way Medicare managed care plans are paid because their enrollment of less-costly beneficiaries is leading to excess payments.

This “favorable selection”—the movement of traditional fee-for-service beneficiaries with lower-than-predicted medical costs into Medicare Advantage—allows MA plans “to bid lower than fee-for-service spending before producing any efficiencies in care delivery,” Luis Serna, an analyst with the Medicare Payment Advisory Commission, said during a recent commission meeting. “This creates both overpayments for MA plans and introduces bias” in the comparison of spending between MA and traditional Medicare.

Commission researchers found that “because of favorable selection alone, Medicare payments to MA plans for the Part A and B benefit should have been about 11% lower” in 2019, Serna said. “These findings raise concerns about the appropriateness of basing MA benchmarks exclusively on fee-for-service spending data,” Serna added.

Efforts to curb excess payments to the fast-growing MA plans—which were paid $403 billion in 2022 and now cover more than 30 million Medicare beneficiaries—have taken on new urgency for lawmakers, regulators, insurers and patient advocates. As the plans move to usurp traditional Medicare as the dominant form of beneficiary coverage, greater scrutiny of their costs, quality, and accountability are needed to keep Medicare spending on a sustainable path. Major MA plan providers include UnitedHealthcare, Humana, Anthem, Cigna, and Centene.

Payments to private MA plans are largely based on bids they submit for the cost of providing Medicare hospital and outpatient coverage. Those bids are made relative to a county payment benchmark, which is based on the cost of care for fee-for-service beneficiaries in that area.

So the benchmarks “reflect the higher level of costs associated with the fee-for-service enrolled population rather than” an MA plan’s enrollees, Serna said. As more lower-cost fee-for-service beneficiaries move to MA plans, those remaining in fee-for-service Medicare have higher medical costs that drive up the benchmark rates and increase payments to MA plans.

Three Proposals

The commission is studying three proposals designed to reduce or eliminate the use of fee-for-service spending data in setting MA benchmarks, which represent the maximum amount that Medicare will pay an MA plan to provide coverage.

One proposal would use both fee-for-service spending data and MA spending data to calculate benchmarks. Another option would set and update MA benchmarks using a fixed growth rate. And a “competitive bidding” proposal would set benchmarks based on MA plan bids, allowing plans to compete more on price.

The commission will include an informational chapter about the proposals in its June report to Congress, but will not recommend a course of action for lawmakers.

“But it would be useful for the commissioners to signal where they think some additional analytic work from the staff would be useful to help us start to zero in on which, if any, of these policy options will move towards recommendations in the next cycle,” James Mathews, MedPAC’s executive director, said at the March meeting.

A 2018 proposal by the USC-Brookings Schaeffer Initiative for Health Policy calls for replacing the benchmarking system with competitive bidding, limiting organizations to just three MA plan offerings, and requiring standardized MA plans that cover a slate of mandatory benefits.

The authors estimated the proposal would save about $10 billion annually in MA payments, and reduce beneficiary spending on Part B premiums by about $1.5 billion a year.

The estimated savings would likely be even larger in 2023, said Loren Adler, associate director of the USC-Brookings Schaeffer Initiative for Health Policy.

While the cost-saving proposal would likely bring about a narrowing in MA provider networks, Adler said, it would make it easier for beneficiaries to comparison shop for MA plans.

“The idea would be that there’d be a little bit more competition on price, and you’d lower spending because instead of those benchmarks that are administratively set, we’d now be setting these benchmarks based on the actual bids of these plans,” Adler said.

A recent study estimated that a $1,000 per year decrease in benchmarks would lead to annual premiums hikes of roughly $60, while annual deductibles would increase about $27.

This year Medicare Advantage benchmarks averaged an estimated 109% of projected fee-for-service spending, up from 108% in 2022, MedPAC reported. MA plan bids fell to 83% of projected fee-for-service (FFS) spending this year, a record low.

When plan bids are below the benchmark, plans keep a portion of the difference as a rebate. The rebates help fund extra supplemental benefits like vision and dental coverage that traditional Medicare doesn’t offer.

This year the rebates average a record-high $196 per month, per MA plan enrollee (excluding MA employer plans and Special Needs Plans), the commission reported. It’s the seventh straight year of record-high average rebates, which now account for 17% of all MA plan payments. Since 2018, the average monthly rebate has more than doubled.

Supplemental Benefits for All

In addition to replacing the benchmarking system with competitive bidding, Ezekiel Emanuel, a professor of health-care management at the University of Pennsylvania’s Wharton School, said he’d like to see MA plan rebates eliminated and have the savings go toward making supplemental benefits available to all Medicare beneficiaries.

“Having just Medicare Advantage patients get the benefit of these additional services seems to me fundamentally unfair,” said Emanuel, a former special adviser for health policy in the Obama White House.

In its June 2021 report to Congress, MedPAC called for Congress to replace the benchmark system with a commission proposal that would “produce savings for the Medicare program.”

With Medicare spending projected to more than double to $1.8 trillion in 2031—and Medicare’s Hospital Insurance Trust Fund facing insolvency in 2028, trimming program spending is a high priority.

This year alone, Medicare spending is projected to increase by $110 billion, or 16%, to $820 billion. That’s due mainly to a projected 2% increase in enrollment, higher provider and supplier payment rates, and care-related spending, the CBO reported.

MA plans now cover more than 30.2 million of Medicare’s 65.3 million beneficiaries, with enrollment expected to approach 32 million later this year.

The migration of less-costly beneficiaries to Medicare Advantage and the “payment induced growth in MA will increasingly create challenges for benchmark setting because beneficiaries remaining in FFS” may have higher medical costs, MedPAC said in its March 2023 report to Congress.

Unlike traditional fee-for-service Medicare, which pays for each medical service provided, MA plans receive a flat monthly payment to cover each beneficiary’s cost of care.

Popular With Healthy Beneficiaries

For beneficiaries with few health problems, Medicare Advantage is becoming an increasingly popular choice, offering out-of-pocket spending limits, plans with no premiums, and an array of supplemental benefits.

“As people are choosing whether to join Medicare Advantage, it makes sense that healthier people are going to be more likely to join than sicker people. And that’s the biggest part of the favorable selection dynamic. And there’s good evidence that that happens,” said Richard Kronick, professor of public health at the University of California San Diego, during a Kaiser Family Foundation webinar March 21.

Likewise, sicker people with higher levels of health-care need are more likely to disenroll from MA as they apparently seek “the greater freedom, the lack of network restrictions in fee-for-service Medicare,” Kronick said.

Monthly Medicare payments to MA plans are based on a beneficiary’s health risk factors, which are used to calculate their individual “risk score.” Risk scores reflect a patient’s projected cost of care and are largely based on the diagnoses that providers list, or “code.”

“The research literature suggests that risk scores on average overpredict spending for the MA population,” Serna told commissioners. “This is before any coding differences occur between fee-for-service and MA.”

“Because MA benchmarks rely on risk-standardized fee-for-service Medicare spending, they reflect the higher level of costs associated with the fee for-service enrolled population rather than a plan’s enrollees,” Serna explained.

Basing MA benchmarks on fee-for-service spending could also become problematic as traditional Medicare enrolls fewer beneficiaries, Eric Rollins, a MedPAC principal policy analyst, said during the commission’s March meeting.

“Apart from favorable selection, we have not identified a problem with the way fee-for-service spending data are used to calculate benchmarks at this point in time, but problems could arise in the future if fee-for-service enrollment continues to decline,” Rollins said.

To contact the reporter on this story: Tony Pugh in Washington at

To contact the editors responsible for this story: Brent Bierman at; Karl Hardy at

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