Saturday, May 28, 2022

Will Medicare Advantage swallow fee-for-service Medicare?

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Medicare Advantage, the private-plan alternative to traditional fee-for-service (FFS) Medicare, is threatening to swallow the program. MA enrollment has been growing by leaps and bounds and is projected to surpass 50% of total Medicare enrollment by next year.

That raises the danger, as J. Michael McWilliams points out in Health Affairs, that traditional fee-for-service (FFS) Medicare will lose its capacity to serve as a reliable benchmark for MA pricing.  At present, the federal government pays MA plans a per-enrollee fee that's based, with regional variations and a complex array of adjustments, on the per-enrollee cost of FFS Medicare.  Thanks to that tether, MA plans pay providers roughly what FFS Medicare pays them. And FFS Medicare pays rates set by the federal Center for Medicare and Medicaid Services, albeit with arguably too much influence from powerful physician groups* that help set Part B (physician) rates.

Whatever its weaknesses, the fiat pricing imposed by CMS on FFS Medicare is virtually the only brake on healthcare providers' runaway pricing power in the U.S.'s uniquely expensive healthcare system. Employer-sponsored health plans, which cover about half of all Americans, pay more than twice Medicare rates to hospitals and somewhere between of 130-160% Medicare to physicians. If MA plans were benchmarked against each other, as Paul Ryan repeatedly proposed when he was chair of the House Budget Committee (with, say, the second cheapest plan or the median-priced plan in each area serving as benchmark), there's a danger that the prices MA insurers pay providers would rise in tandem, especially since MA markets are increasingly concentrated, with four insurers controlling 70% of the market (per McWilliams above). At present, the per-capita fees paid to MA plans are grounded in CMS's fiat fee-for-service pricing, and that grounding essentially licenses MA plans to pay Medicare rates, rather than commercial rates, to providers. 

Medicare Advantage enrollment keeps growing because for the broad middle of new enrollees -- those with too much income and/or assets to qualify for Medicare Savings Programs and too little to feel they can readily afford Medigap policies -- MA is the only way to plug major gaps in FFS Medicare coverage, including FFS Medicare's lack of a cap on annual out-of-pocket costs.  

In 2021, 65% of MA enrollees paid nothing above the $170/month Medicare Part B premium, with the premium for an inclusive Part D (prescription drug) plan rolled in.  That contrasts with $300-400 per month for FFS Medicare (Parts B and D) plus a good Medigap policy -- without which FFS Medicare provides no cap on annual out-of-pocket costs.  While Medigap-enhanced FFS Medicare coverage is superior to MA coverage, MA coverage is far superior to FFS Medicare coverage without Medigap. The basic MA tradeoff is as follows:


  • Lower premium
  • Annual out-of-pocket cap (averaging ~ $5,000 for in-network care in 2021, per KFF)
  • Extra services generally including varying (often quite limited) degrees of dental, hearing and vision coverage, as well as out-of-country coverage
  • Limited provider network
  • Subjection to prior authorization and step therapy for prescription drugs (requirements to try a less expensive allegedly equivalent drug if prescribed a more expensive drug)
  • Higher out-of-pocket costs than in Medigap policies, the most popular of which cover virtually all OOP costs for covered services after the deductible

Off the cuff, the prospect of paying $170/month versus, say, $350/month for FFS Medicare + Medigap, while getting coverage that looks adequate and includes attractive perks, is going to draw a lot of people. MA enrollment is also simpler: you choose one plan from competing offers instead of two (Part D plus Medigap, while also enrolling in Part B).

In short, Medicare Advantage has been U.S. policymakers' back door to plugging major holes in FFS Medicare coverage. The 2003 Medicare Modernization Act, which created the Part D benefit, provided for payments to MA plans generously in excess of FFS costs. The Affordable Care Act cut those fees back pretty sharply but left enough margin for MA plans to keep providing excess benefits, which have in fact been increasing.  

Writ large, the current tradeoff, according to the MEDPAC 2021 annual report (see Chapter 1), is as follows.  

  • The benchmark per-enrollee fees the federal government sets for Medicare Advantage (MA) plans average 108% of the cost of traditional, fee-for-service (FFS) Medicare when the quality bonuses that most plans earn are figured in. MA plans bid against the benchmark, and their bids average 87% of FFS Medicare spending.  They are rebated between 50% and 70% of the difference between their bid and the benchmark (averaging 65%), and they are required to use the rebate either to reduce enrollee costs or to add extra benefits (generally a blend of both; in 2022, 43% of rebates went to reducing enrollee costs, down from 52% in 2018). 

  • MA plans provide extra benefits to enrollees worth an average of $1,700 per enrollee in 2021 (up from $972 in 2017). The efficacy of those extra benefits is difficult to track because of a lack of standardization and limitations in the data MA plans are required to provide.

The 2021 MEDPAC report recommends shaving benchmark payments in various pretty technical ways which their modeling suggests would not induce plans to pare back benefits. According to the 2022 MEDPAC report, this year the average plan bid was 15% below what FFS Medicare would spend for those enrollees -- but the plans were paid 4% more than the cost of providing FFS Medicare to their enrollees (pp 409-410). 

While MEDPAC regards benchmark and rebate reform as feasible and necessary, reducing MA plans' ability to game the risk adjustment system is a stronger imperative. Of the 4% excess payment to MA plans, MEDPAC attributes 3.6 percentage points to "uncorrected coding intensity" -- that is, to inflated risk adjustment scores the plans attribute to their members. In fact, the current payment formula assumes that MA plans will code enrollees RA scores 5.9 percentage points higher than they would be coded in FFS MA and reduces their risk scores by that amount. The 3.6 excess percentage points in actual payments is over and above that discount. (McWilliams, cited above, cites a study finding a much higher gain.)  A 2021 HHS Inspector General report spotlighted various techniques to raise risk scores, including Health Risk Assessments (HRAs) designed to identify conditions that may not require treatment and Chart Reviews conducted by third party vendors, designed to suss out diagnoses that treating physicians might have made but did not. For several years, MEDPAC has recommended excluding diagnoses that appear only on HRAs and do not any medical treatment; basic risk assessment on two years' claims data; and intensifying the annual adjustment for coding intensity (i.e., the current 5.9% reduction in MA plans' risk scores.

All their plus-ups aside, how do MA plans manage to bid at per-enrollee rates below the cost of FFS Medicare? In MEDPAC parlance, MA plans provide "more efficient" coverage than FFS Medicare -- that is, they spend less per member to provide Medicare's mandatory benefits, and they use a portion of the savings to provide additional benefits. (One of these, an annual cap on enrollees' out-of-pocket costs, which in 2022 can be as high as $7,550 for in-network and $11,300 for out-of-network care, is essential to coverage that can be considered comprehensive.) The "efficiency" derives from limiting provider networks and implementing treatment protocols, including via prior authorization and, more recently, step therapy for prescription drugs.  In 2021, 99% of MA enrollees were subject to prior authorization for at least some services, according to a brief from the Kaiser Family Foundation (up from 80% in 2018).

Physicians, and many patients, hate prior authorization and step therapy, both of which are often implemented in blindly bureaucratic and indiscriminate ways -- e.g., requiring patients on lifetime medications to apply for reauthorization every 3 months, or requiring a patient for whom a cheaper medication has already proved inefficacious to try it before getting approval for a prescribed drug.  On the other hand, many healthcare providers in the U.S. -- dominant hospital groups, private equity-owned physician practice conglomerates -- are so maximized for revenue that they require some oversight. 

The 2018 KFF brief cited above overviews the problems with prior authorization in MA plans as follows:

Whether prior authorization serves as an appropriate tool for limiting use of unnecessary care or a worrisome barrier to medically necessary care is an important question for both lawmakers and beneficiaries. Recently, more than 100 Members of Congress sent a letter to the Centers for Medicare and Medicaid Services (CMS) Administrator, Seema Verma, expressing concern about Medicare Advantage plans’ use of prior authorization, and asked CMS to collect data on the scope of prior authorization practices to enable better oversight. The HHS Office of the Inspector General (OIG) recently found that Medicare Advantage plans deny care – inappropriately – at relatively high rates. To the extent that the OIG findings are more the norm than the exception, they raise concerns for enrollees and questions as to whether prior authorization rules contribute to the relatively high rates of disenrollment among sicker Medicare Advantage enrollees.

A subsequent HHS Inspector General report published just last month found that "among the prior authorization requests that MAOs denied, 13 percent met Medicare coverage rules; in other words, these services likely would have been approved for these beneficiaries under original Medicare."

Progress on a consensus statement on improving prior authorization, signed by the major hospital, physician and insurer trade groups, has been slow. States regulate it to widely varying degrees, but only in the minority of employer-sponsored plans that are not self-funded. KFF overviews recent state and federal action to constrain, standardize or streamline prior authorization here.

In recent years, MA plans have decreased premiums, increased benefits,  ramped up prior authorization, and introduced step therapy.  While association isn't causation, the tradeoffs appear to be intensifying.

For healthy new enrollees in Medicare, FFS + Medigap may appear rather as a Chubb insurance policy appears to homeowners: a kind of Cadillac plan requiring much higher up-front costs in exchange for a possible future benefit.  The most popular Medigap policy types cover almost all out-of-pocket costs, however, with almost no constraint on provider choice, while MA plans expose enrollees to potentially thousands in annual out-of-pocket costs. As enrollees age, those costs usually become more salient, and a significant number exit MA. In most states, however, Medigap polices are offered without medical underwriting only in a six-month window beginning when an enrollee first qualifies for Medicare at age 65. The accelerating stampede to MA may saddle more seniors with higher out-of-pocket costs over time, while also eroding the federal government's ability to constrain provider payment rates.

To an outsider's eye (or a Republican's), a payment scheme that pays plans 104% of FFS Medicare costs while yielding an extra $2,000 per member per year in excess benefits (including reduced out-of-pocket costs) may not sound like a bad deal. But MEDPAC isn't having it. The annual reports insist with increasing urgency on the program's mandate to provide extra services to enrollees while reducing costs to the Treasury. The 2022 report sounds an alarm:

In particular, coding intensity inflates payments to MA plans and undermines the goal of plans competing to improve quality and reduce health care costs; the quality bonus program boosts plan payments for nearly all enrollees but does not meaningfully reflect plan quality, from the perspective of enrollees or the Medicare program; and MA benchmarks are set at an abundantly high level such that the government subsidizes MA plans’ substantial and ever-higher levels of extra benefits for MA enrollees. Apart from payments, the Commission finds that the plan-submitted data about beneficiaries’ health care encounters are incomplete, preventing policymakers from understanding plan efficiencies or implementing program oversight. These policy flaws diminish the integrity of the program and generate waste from beneficiary premiums and taxpayer funds. A major overhaul of MA policies is therefore urgently needed....

under current policies, as MA enrollment continues to grow, it will further worsen Medicare’s fiscal sustainability. It is imperative that the Congress and the Secretary make policy improvements. To encourage efficiency and innovation, MA plans need to face appropriate financial pressure.

KFF similarly complains in a 2021 MA overview that the data required of MA plans is not sufficient to assess the program's value. The value of extra services provided can't readily be assessed, because there is huge variation among them (e.g., in the scope of dental benefits), and plans do not report how much the benefits are actually used. Also lacking is data as to enrollees' actual out-of-pocket costs. 

While data on Medicare Advantage plan availability and enrollment and plan offerings is robust, the same cannot be said about service utilization and out-of-pocket spending patterns, which is essential for assessing how well the program is meeting its goals in terms of value and quality and to help Medicare beneficiaries compare coverage options. As enrollment in Medicare Advantage and federal payments to private plans continues to grow, this information will become increasingly important.


* Physicians help shape Medicare payment rates via a multispecialty committee, managed by the AMA, that's commissioned to estimate the relative value of each medical procedure (the RUC, or relative value update committee).  By multiple accounts, this committee overvalues the work of many specialties relative to primary care and mental health care.

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Photo by Kampus Production


  1. Good post. I learned a lot.

    Just adding a thing here:

    One other reason likely contributing to Medicare Advantage swallowing up traditional Medicare is that Medicare Advantage can be gotten by a person 65 or over any year, regardless of pre-existing conditions, while traditional Medicare, plus a supplemental Medigap has a pre-existing condition screen with deniable enrollment or higher rates on the Medigap after the first 6 months of Medicare.

    That feature of Medigap is from here: , (in the first two paragraphs).

    Thus, if a person chooses a Medicare Advantage at any point (over traditional Medicare plus a Medigap) they may never be able to get back to traditional Medicare plus a Medigap. They're trapped on MA!

    (This feature of our system is also a consideration, besides higher out-of-pocket costs in the long term, that might make people with foresight avoid Medicare Advantage.)

  2. Another important feature slanting the table in Medicare Advantage's direction: large employers save Medicare premium $$ by mandatorily slamming their employees into MA plans. In order to harvest their employer's retiree health benefits, retirees from companies who switch to MA actually don't functionally have a choice between MA and traditional Medicare: they have to take MA, whether they like it or not. So, much of the seeming stampede to MA may be unwilling -- people getting slammed into MA, not really freely choosing in a free marketplace.