How Much Does the Government Pay Medicare Advantage Plans?

Medicare Advantage plans are private health insurance plans that provide Medicare benefits to beneficiaries who enroll in them. The government pays Medicare Advantage plans a set amount per enrollee per month to provide coverage. This payment system is different from traditional Medicare, where the government pays healthcare providers directly for each service rendered.

Understanding how much the government pays Medicare Advantage plans, and how that amount is determined, is important for evaluating the value of these private plans within the Medicare program. Below is an in-depth look at Medicare Advantage plan payments and what they mean for Medicare beneficiaries and taxpayers.

A Primer on Medicare Advantage Plan Payments

• Medicare Advantage plans are offered by private insurance companies that contract with the federal government. Plans agree to cover all Medicare Part A and Part B services in exchange for a monthly capitated payment per enrollee from the Centers for Medicare & Medicaid Services (CMS).

• The capitated payments to plans are set based on benchmarks that are determined as a percentage of estimated spending under traditional Medicare. Benchmarks vary by county and average between 115% and 95% of traditional Medicare spending in each area.

• Medicare Advantage plans submit annual bids to CMS indicating the estimated cost to provide standard Medicare coverage for an average enrollee in a given area. If a plan’s bid is lower than the benchmark, the plan and Medicare split the difference between the bid and benchmark. The plan’s share is called a “rebate” and can be used to fund supplemental benefits or lower premiums and cost sharing.

• Capitated payments are risk-adjusted to account for the health status of each plan’s enrollees. Plans receive higher payments for sicker enrollees based on health conditions coded and submitted to CMS.

• Medicare Advantage plans can also qualify for bonus payments based on quality ratings assigned by CMS. Higher payments are provided to plans with 4 or more stars on a 5-star scale.

Medicare Advantage Plans Cost More Per Person Than Traditional Medicare

• In 2019, the government spent approximately $321 more per Medicare Advantage enrollee than for people in traditional Medicare.

• Total additional spending on Medicare Advantage plans amounted to $7 billion in 2019.

• On average, Medicare paid $11,844 per Medicare Advantage enrollee compared to $11,523 per person in traditional Medicare.

• The higher payments to Medicare Advantage plans lead to higher overall Medicare spending and higher Medicare Part B premiums for all beneficiaries.

Why Do Medicare Advantage Plans Cost More?

There are several reasons why Medicare Advantage plans receive higher payments per enrollee than what the government spends on average for those in traditional Medicare:

County Benchmarks Set Above Traditional Medicare Spending

• Benchmarks that determine the maximum payments to Medicare Advantage plans are set between 95-115% of projected traditional Medicare spending in each county.

• This means in most counties, benchmarks exceed what average spending would otherwise be, resulting in higher payments to plans.

Bids Tend to Be Lower Than Benchmarks

• Because benchmarks are set above traditional Medicare spending on average, most plan bids also tend to be lower than the benchmarks.

• When bids are lower, plans get to keep a share of the difference between the bid and benchmark as a rebate. This further increases payments to plans beyond just the bid amount.

Quality Bonuses Increase Benchmarks and Rebates

• Medicare Advantage plans can receive bonus payments on top of their benchmarks and rebates based on quality ratings from CMS.

• Nearly half of Medicare Advantage enrollees are in plans with 4 or more stars, qualifying them for bonus payments that increase plan revenues.

Risk Adjustment Raises Payments for Sick Enrollees

• Risk adjustment was implemented to pay plans appropriately for their enrollees’ health status, but there is controversy around how this is executed.

• Medicare Advantage plans code enrollees to identify more health conditions, on average, than what is captured for beneficiaries in traditional Medicare.

• Critics argue plans “upcode” enrollees to inappropriately inflate risk scores and raise payments. Insurers contend their risk coding is more complete and accurate.

• Regardless, risk coding differences result in higher predicted costs and payments for Medicare Advantage enrollees versus what their costs likely would be in traditional Medicare.

• Some proposals call for modifying risk adjustment methodology to address upcoding concerns and lower payments.

Extra Benefits Funded by Rebates Don’t Raise Costs

• Critics of higher Medicare Advantage payments point out that extra benefits covered by plans are funded through rebates so do not raise overall costs.

• Proponents counter that additional benefits make the plans more attractive to seniors and support enrollment growth.

• Extra benefits account for an increasing share of the difference in spending per enrollee between Medicare Advantage and traditional Medicare. In 2019, extra benefits made up around 40% of the higher spending on Medicare Advantage.

Projected Per Enrollee Payment Growth Adds to Medicare Spending Concerns

• Medicare Advantage enrollment has been growing steadily, reaching 26 million enrollees in 2023. Enrollment growth is expected to account for about half of the increase in Medicare Advantage spending over the next decade.

• However, spending per Medicare Advantage enrollee is also projected to rise faster than inflation over the next 10 years.

• Rising payments per enrollee are expected due in part to continued increases in quality bonus payments to plans.

• Total Medicare Advantage spending is projected to reach $664 billion by 2029, up from $348 billion in 2023.

• If the rate of growth in spending per Medicare Advantage enrollee matched growth in spending for traditional Medicare over the next decade, total Medicare spending would be reduced by $183 billion.

Policy Options to Control Medicare Advantage Spending

Concerns over higher payments and faster spending growth for Medicare Advantage have prompted debate around how to reform plan payments:

• Modify benchmarks so they are closer to 100% of traditional Medicare spending in more counties. Benchmarks are currently held to 95% of traditional Medicare spending in only 15% of counties.

• Curtail quality bonus increases, which add to benchmarks and rebates, if they are not clearly linked to improved outcomes.

• Adjust risk coding methodology to account for differences in coding intensity between Medicare Advantage and traditional Medicare.

• Increase scrutiny of plan bids and prohibit bids that fall below traditional Medicare costs absent clear efficiencies.

• Cap rebates as a percentage of benchmarks to limit excessive profit margins.

• Introduce competitive bidding in more areas to drive down Medicare Advantage plan costs.

The Bottom Line

• Medicare pays Medicare Advantage plans higher rates per enrollee, on average, than what it spends for beneficiaries in traditional Medicare.

• This results in higher overall Medicare spending, which adds to solvency concerns and higher premium costs for beneficiaries.

• Projected growth in per enrollee Medicare Advantage payments is expected to further drive up Medicare spending in the coming decade.

• Policymakers are considering reforms to Medicare Advantage payment policy to introduce more competition and control costs while preserving plan options for beneficiaries.

• Finding an appropriate balance will be crucial to enabling choice and efficiency within Medicare while protecting the program’s fiscal integrity.