Medicare Advantage (MA) plans overpaid by 22 to 39 percent

A Brief designed explanation taken from the Center for American Progress commentary and analysis. It finds Medicare Advantage (MA) plans are overpaid by 22 to 39 percent. Instead of overpaying Medicare Advantage the curbing of MA overpayments should be used to improve the Medicare program for all beneficiaries.

This is nothing new and I have one post to finish showing how the overpayments have been happing for years.

As taken from “Ending Overpayment in Medicare Advantage.” Center for American Progress

A new CAP analysis estimates that MA plans are overpaid by 22 to 39 percent, corresponding to between $83 billion and $127 billion in overpayments in 2024. The lower estimate, 22 percent, indicates how much more MA plans are paid relative to what traditional Medicare would spend for equivalent patients. These types of over-payments are primarily driven by MA plans’ intense risk-coding efforts as well as selection bias. According to estimates from the Medicare Payment Advisory Commission (MedPAC), the independent congressional agency that advises the U.S. Congress on issues affecting the Medicare program, risk coding results in 13 percent overpayment to MA plans, and selection bias results in an additional 9 percent.

CAP report’s higher estimate includes the additional subsidizing effects of quality bonuses and county adjustments MA plans receive, as well as the inflationary effect that supplemental coverage has on the traditional Medicare benchmarks against which MA plan bids are considered. Accounting for these additional subsidies to MA would suggest that MA plans may actually be “overpaid” by as much as 39 percent.

The Drivers of MA Overpayments?

• Upcoding or risk-score gaming: CMS uses a risk adjustment process to determine how much to pay an MA plan for any given patient, as patients have varying health needs. A key factor in determining risk scores is a patient’s diagnosis codes. As a result, MA plans have an incentive to maximize the number of diagnosis codes attributed to each patient—and to push the limits in terms of which codes can be legitimately assigned to a given patient.

• Selection bias: MA plans tend to enroll beneficiaries who are healthier and more profitable than beneficiaries who choose traditional Medicare, even after accounting for risk scores. Health plans have a significant and obvious financial incentive to enroll beneficiaries who are healthier than average at the same risk score.

• Quality bonuses and county adjustments: MA quality bonus program intends to incentivize and reward high quality among MA plans. As detailed in a recent Urban Institute report. The net impact of the program is overly generous payments to MA plans absent any clear impact on quality. Furthermore, the MA quality bonus program exacerbates health inequities. The program assigns each MA contract a rating of 1 to 5 stars based on performance across dozens of measures. 

• The effects of supplemental coverage on traditional Medicare benchmarks: MA plans submit bids to CMS which are compared against traditional Medicare benchmarks. They do so based on their expected cost of covering the traditional Medicare benefit package, the services covered by Parts A and B. However, traditional Medicare benchmarks are not set based on Medicare’s spending on beneficiaries with Medicare Parts A and B alone; they also account for enrollees’ supplemental coverage, which facilitates increased use of Parts A and B covered services. ~ 90 percent of traditional Medicare beneficiaries carry additional supplemental coverage, including Medicaid or private “Medigap” plans. They reduce out-of-pocket cost exposure for Parts A and B covered services. That means MA bids are benchmarked to total traditional Medicare spending, which includes standard Parts A and B coverage and any supplemental coverage a beneficiary has.

A conclusion is with traditional Medicare alone considered the baseline, the effects of supplemental coverage in benchmark calculations can be considered a source of overpayment to MA relative to traditional Medicare. A recent estimate suggests that the effects of supplemental coverage increase traditional Medicare benchmarks by approximately 18 percent. This implies approximately 12 percent in overpayments.

If I ever get to complete the review of the last CPAC report, you will have more detail on the overpayments to MA plans.