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Informing the Debate About Curbing Medicare Advantage Overpayments

Bipartisan Senate negotiators are now working on the details of Medicare legislation that would avert a cut in physician payments scheduled to take effect at the end of June. This legislation could also serve as an opportunity to curb, at least to a modest extent, overpayments to private insurance plans that participate in the Medicare Advantage program; doing so could offset, in full or in part, the cost of that legislation. There continues to be significant confusion, however, about these overpayments, the benefits that Medicare Advantage plans offer, who enrolls in those plans, and the marketing practices some of those plans employ. Adding to this confusion, some material on these matters being disseminated by the health insurance industry presents data very selectively and makes dubious claims.

This primer uses a question-and-answer format to clear up possible misunderstandings or confusion on various issues related to private plans that participate in the Medicare Advantage program. The primer is intended to help inform the debate on these issues.

  1. Do private plans cost more than it costs the regular Medicare program to cover the same beneficiaries?
  2. How do Medicare Advantage overpayments affect Medicare’s finances?
  3. How do Medicare Advantage overpayments affect beneficiary premiums?
  4. Did the private plans once take the position that they should be paid at the same levels as regular Medicare?
  5. If private plans were paid at the same rates as regular Medicare, would risk remain that Medicare Advantage plans still would be overpaid to some degree?
  6. Can private plans reduce some existing Medicare benefits?
  7. Do private plans disproportionately enroll low-income and minority beneficiaries?
  8. What is the most efficient approach to help low-income and minority Medicare beneficiaries afford health care?
  9. Do private plans disproportionately enroll rural beneficiaries?
  10. Do private plans offer quality of care that is higher, the same, or lower than under regular Medicare?
  11. Do the abusive marketing practices of some Medicare Advantage plans bear similarities to past marketing abuses associated with Medigap policies or the EITC health insurance tax credit of the early 1990s?
  1. Question: Do private plans cost more than it costs the regular Medicare program to cover the same beneficiaries?

    Answer: The Medicare Payment Advisory Commission (MedPAC) — Congress’ expert advisory body on Medicare payment policy — estimates that in 2008, private plans are paid 13 percent more, on average, than it would cost traditional Medicare to cover the same beneficiaries.[1] According to analysis by George Washington University researchers for the Commonwealth Fund, these overpayments are estimated to average approximately $1,000 for each beneficiary enrolled in a private plan.[2]

    The private plans and the Administration have previously attempted to cast some doubt on these estimates, contending they may be inflated.[3] Such claims do not have merit. The Congressional Budget Office’s director, Peter Orszag, has testified that “such claims are simply inaccurate.”[4] MedPAC similarly dismissed such claims in its June 2007 report to Congress.[5]

    Moreover, according to CBO, the overpayment per beneficiary is likely to rise in the future because enrollment growth in the private plans is concentrating in geographic areas with the highest overpayment rates.[6]

  2. Question: How do Medicare Advantage overpayments affect Medicare’s finances?

    Answer: Last year, CBO estimated that setting payments to private plans at the same level it would cost traditional Medicare to serve the same beneficiaries would save $54 billion over five years (2008-2012) and $149 billion over ten years (2008-2017). These are the amounts by which the private plans are overpaid.[7]

    The Chief Actuary at the Centers for Medicare and Medicaid Services (CMS) has testified that the overpayments advance the date when the Medicare Hospital Insurance Trust Fund will become insolvent by 18 months.[8] Because of the overpayments, restoring solvency will require substantially larger benefit cuts and/or tax increases than would otherwise be needed. In testimony before the Health Subcommittee of the House Ways and Means Committee earlier this year, Glenn Hackbarth, MedPAC’s chairman, warned that “these added expenditures contribute to the worsening long-range financial sustainability of the Medicare program.”[9] Hackbarth similarly warned last year that the Medicare program faces “a very clear and imminent risk from this overpayment that will put this country in an untenable position.”[10]

  3. Question: How do Medicare Advantage overpayments affect beneficiary premiums?

    Answer: Under Medicare Part B, beneficiaries are charged a monthly premium equal to 25 percent of the costs of Part B-related services, which include physician visits and other types of outpatient care. Because private-plan overpayments increase Medicare costs under both Part A (hospital and nursing home services) and Part B, they increase the Part B premiums that beneficiaries must pay. According to the Chief Actuary at the Centers for Medicare and Medicaid Services, the Medicare Advantage overpayments raise Part B premiums by about $3 per month per person, or $72 a year for a couple, in 2008.[11]

    This means that the 32 million seniors and people with disabilities enrolled in Part B and regular Medicare are charged higher premiums every month in order to help subsidize the cost of the overpayments related to the approximately 9 million beneficiaries who are enrolled in private plans. (Approximately 8 million of the 32 million beneficiaries charged the higher premiums are low-income beneficiaries whose premiums are paid for them by the Medicaid program; the costs of the higher Medicare premium for these individuals are borne by the federal government and the states, which jointly fund Medicaid. Some beneficiaries enrolled in Medicare Advantage also pay higher Part B premiums if the private plans in which they are enrolled do not use a portion of the overpayments to lower the Medicare premiums their enrollees pay.)

  4. Question: Did the private plans once take the position that they should be paid at the same levels as regular Medicare?

    Answer: Private plans were originally brought into the Medicare program on the theory that they could deliver Medicare services at lower cost. Plan payment rates were initially set at 95 percent of the cost of traditional Medicare. Private plans at that time called for payment increases to pay them at 100 percent of the cost of Medicare fee-for-service. The private plans said that reimbursing them at levels equal to those under regular Medicare would close a “fairness gap” and “create a level playing field between [private plans] and fee-for-service.[12]

    Today, however, particularly as a result of provisions written into the 2003 Medicare prescription drug law that throw billions of dollars at the plans, the plans are paid substantially more than it costs to treat the same patients under regular Medicare. As noted above, they are paid 13 percent more on average (or 113 percent of Medicare fee-for-service costs). Now that MedPAC has recommended for a number of years that Congress equalize payments between the private plans and regular Medicare to create a level playing field — the very position the plans themselves took in the late 1990s — the plans are adamantly opposing it.

  5. 5. Question: If private plans were paid at 100 percent of fee-for-service, would a significant risk remain that Medicare Advantage plans still would be overpaid to some degree?

    Answer: When private plan payments were set at 95 percent of Medicare fee-for-service in the 1990s, many private plans still received excessive payments. This occurred because the plans enrolled Medicare beneficiaries who were healthier, on average — and thus less costly to treat — than beneficiaries in the traditional Medicare fee-for-service program. An effective “risk adjustment” system had not been developed to lower plan payments if plan enrollees were healthier. As a result, Medicare ended up overpaying many of the private plans.[13]

    If Congress enacted the MedPAC recommendation to “level the playing field” by paying private plans at 100 percent of Medicare fee-for-service costs, there would still be a substantial risk of overpayments if the plans continue enrolling beneficiaries who are healthier than average and the improved risk adjustment system developed in recent years (and only now being fully implemented) is less than fully effective in adjusting payments downward based on how much healthier these enrollees are. (MedPAC reported last year that private plan enrollees continue to be healthier, on average, than those in regular Medicare.[14]) Both CBO and leading experts in the field have said that norisk adjustment system has yet been developed that fully captures all differences in health status.[15]

    Moreover, both CBO and CMS have identified recent patterns of “upcoding” in Medicare Advantage.[16] Upcoding involves unexplained changes in the reported health status of Medicare Advantage enrollees that make them appear sicker even if there is no actual change in their health status.[17] (There is an incentive for upcoding because, under the Medicare risk adjustment system, upcoding results in Medicare Advantage plans receiving higher payments from the Medicare program.) Since successful risk adjustment depends on an accurate comparison of the relative health of private plan enrollees and enrollees in traditional Medicare, upcoding undermines the effectiveness of the Medicare risk adjustment system. As a result, private plans likely would continue to be overpaid, potentially to a substantial degree, if the MedPAC recommendation to level the playing field were adopted.[18]

  6. Question: Can private plans reduce existing Medicare benefits, as well as offer some additional benefits?

    Answer: A portion of the overpayments that private plans receive goes to provide additional benefits to enrollees, such as services that Medicare otherwise does not cover or lower cost-sharing than Medicare otherwise charges. (The rest of the overpayments go to administrative costs, marketing, and profits.) What is still not widely understood, however is that the private plans not only have the flexibility to offer additional benefits but also the discretion to scale back existing Medicare benefits, so long as the actuarial value of their overall benefit package is not less than the value of the package under traditional Medicare.[19]

    Some private insurers evidently use this flexibility to design the benefits packages they offer to entice healthy Medicare beneficiaries, who are less costly to treat, while deterringsickerand more costly beneficiaries from enrolling.[20] For example, some private plans scale back certain Medicare benefits used primarily by sicker individuals; they may impose substantially higher co-payment charges for days in the hospital or costly treatments like chemotherapy. Some beneficiaries in poorer health consequently can wind up significantly worse off if they enroll in Medicare Advantage.

    Analyses by the Medicare Rights Center, the Commonwealth Fund, the Kaiser Family Foundation, MedPAC, and the Government Accountability Office (GAO) all have found that, to some extent, certain Medicare Advantage beneficiaries who need hospital care, home health care, and other specialty services may end up paying more out-of-pocket for such services, or receiving less of a covered service, under the benefits packages the private plans offer.[21] (Even CMS has acknowledged this problem and stated last year that it will scrutinize cost-sharing levels among Medicare Advantage plans for certain services like physician-administered chemotherapy drugs and dialysis services.[22])

  7. Question: Do private plans disproportionately enroll low-income and minority beneficiaries?

    Answer: Despite the claims of private plans to the contrary over the last year,[23] low-income and minority beneficiaries generally do not enroll disproportionately in Medicare Advantage plans.[24] Beneficiaries with incomes below $10,000 enroll in Medicare Advantage to a lesser degree than other beneficiaries do, and African-American beneficiaries enroll in Medicare Advantage to about the same degree as other Medicare beneficiaries do. Moreover, for every racial/ethnic group, the number of Medicare beneficiaries who are enrolled in regular Medicare rather than in Medicare Advantage plans — and who consequently are charged higher Medicare premiums to help cover the cost of the Medicare Advantage overpayments — is about three to seven times greater than the number enrolled in Medicare Advantage.

    For low-income and minority beneficiaries, the most common form of supplemental coverage (i.e., coverage that supplements Medicare) is Medicaid, not Medicare Advantage.

    • Nearly half (48 percent) of all Medicare beneficiaries with incomes below $10,000 were enrolled in Medicaid in 2004, nearly five times the proportion enrolled in Medicare Advantage plans.
    • Minority beneficiaries also are much more likely to be enrolled in Medicaid than Medicare Advantage. In 2004, most Asian-American Medicare beneficiaries (58 percent) and a plurality of African-American (30 percent) and Hispanic beneficiaries (34 percent) received supplemental coverage through Medicaid. By contrast, the percentages of minority beneficiaries enrolled in private plans — 14 percent of Asian Americans, 13 percent of African Americans and 25 percent of Hispanics — were considerably smaller.

    African American and Asian American beneficiaries make up the same or a smaller proportion of Medicare Advantage enrollment than they do of the overall Medicare population. Hispanics are modestly more likely to enroll in Medicare Advantage, but this simply reflects where they live.[25] Half of all Hispanic Medicare Advantage enrollees live in California and Florida. In those states, the proportion of people enrolled in managed care plans — through employer-based coverage as well as through Medicare — is higher than in other parts of the country.[26]

  8. Question: What is the most efficient approach to help low-income and minority Medicare beneficiaries afford health care?

    Answer: Private insurance companies participating in Medicare Advantage offer some benefits not available through regular Medicare that assist low-income and minority Medicare beneficiaries enrolled in such plans. As noted above, however, the additional benefits are notthe only, or necessarily the primary, place that the overpayments go. For example, MedPAC found that among “private fee-for-service” plans — the type of Medicare Advantage plan that receives the largest overpayments and is growing the fastest — about half of the revenue from the overpayments goes to profits, marketing, and administrative costs (which are much higher than under regular Medicare), rather than to additional benefits.[27] Moreover, MedPAC has noted that these overpayments are a poorly targeted approach to assist low-income and minority beneficiaries because they subsidize extra benefits for both high-income and low-income beneficiaries who are enrolled in private plans.[28]

    A more targeted, effective, and less costly way to aid low-income Medicare beneficiaries would be to expand and improve three existing programs, known as the “Medicare Savings Programs,” that help low- and moderate-income beneficiaries pay their Medicare premiums and cost-sharing.[29] MedPAC and others, including the Medicare Rights Center,[30] have suggested such an approach.[31] For example, MedPAC has noted that “if the justification for higher payments to [private] plans is that extra payments are being provided to low-income beneficiaries who choose such plans, there are less costly and more efficient ways to achieve this result,” such as by improving the Medicare Savings Programs or strengthening the low-income subsidy in the Medicare prescription drug benefit.[32] Similarly, the GAO has concluded that “if the policy objective is to subsidize health care costs of low-income Medicare beneficiaries, it may be more efficient to directly target subsidies to a defined low-income population than to subsidize premiums and cost sharing for all MA beneficiaries, including those who are well off.”[33]

  9. Question: Do private plans disproportionately enroll rural beneficiaries?

    Answer: Although a quarter of all Medicare beneficiaries live in rural areas,[34] only eight percent of Medicare Advantage enrollees did in 2006,[35] and only 11 percent of all rural beneficiaries were enrolled in such plans in 2007.[36] While enrollment among rural beneficiaries in Medicare Advantage plans has grown significantly of late,[37] enrollment in private plans remains disproportionately low in rural areas.

    More than half of rural beneficiaries in Medicare Advantage are enrolled in private fee-for-service plans. (About 80 percent of the growth in enrollment among rural beneficiaries between 2006 and 2007 occurred in such plans.). Private fee-for-service is the type of private plan that receives the largest overpayments; on average, these plans are paid 17 percent more than it costs to treat comparable beneficiaries in regular Medicare. In addition, private fee-for-service plans are generally the least efficient type of private plan in Medicare and the only type that does not coordinate care.[38] Private fee-for-service plans also have spurred complaints from some beneficiaries, hospitals, and providers in rural (as well as urban) areas about patient access to care and prompt payment of providers.[39]

  10. Question: Do private plans offer quality of care that is higher, the same, or lower than under regular Medicare?

    Answer: Some plans have sought to justify the overpayments they receive as promoting better quality of care relative to traditional Medicare. MedPAC recently reported, however, that although many Medicare Advantage plans perform well on quality measures, such plans are not exhibiting the same rate of improvement in quality of care as plans that operate in the private insurance market or as managed care plans that contract with state Medicaid programs.[40] In addition, newer plans that first began participating in Medicare Advantage in 2004 or later did worse on quality measures than older plans. While it is difficult to assess differences in the quality of care between Medicare Advantage and fee-for-service due to the lack of comparative quality measures, levels of beneficiary satisfaction were relatively similar, with traditional Medicare receiving slightly higher ratings than Medicare Advantage with regard to beneficiaries receiving care they needed, overall quality of care, and patient satisfaction.[41]

    The quality of care appears to vary widely across private plans.[42] The Congressional Budget Office concluded that “though Medicare Advantage plans cost more than care under the FFS program does, on average, they would be mor