CBO

TESTIMONY

Statement of

Peter R. Orszag

Director

The Medicare Advantage Program:

Enrollment Trends and Budgetary Effects

before the

Committee on Finance

United States Senate

April 11, 2007

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

This document is embargoed until it is delivered at

10:00 a.m. (EDT) on Wednesday, April 11, 2007.

The contents may not be published, transmitted, or

otherwise communicated by any print, broadcast,

or electronic media before that time.

Mr. Chairman, Senator Grassley, and Members of the Committee, I am pleased to

appear before you today to discuss the Medicare Advantage program. My testimony focuses on several themes:

B Unexpectedly strong growth in enrollment in the Medicare Advantage program

during 2006 and the beginning of 2007 led the Congressional Budget Office

(CBO) to increase its projections for both enrollment in and spending on the

program.

B Medicare’s payments for beneficiaries enrolled in Medicare Advantage plans

are higher, on average, than what the program would spend if those beneficiaries were in the traditional fee-for-service (FFS) sector. As a result, shifts in

enrollment out of the FFS program and into private plans increase net Medicare

spending. Policymakers need to weigh that additional cost against any differential benefits provided by Medicare Advantage plans.

B The rate of growth in enrollment and the cost differential with the traditional

fee-for-service sector are particularly large in private fee-for-service (PFFS)

plans, whose enrollment is concentrated largely in rural and some suburban

areas.

B Reducing the payment differential between Medicare Advantage and the feefor-service program could result in substantial savings to the Medicare program

but also in a reduction in the supplemental benefits and cash rebates that Medicare Advantage plans can offer to enrollees and reduced enrollment in those

plans.

B Many Medicare Advantage plans offer disease management, care coordination,

and preventive care programs, but little information is available on the degree to

which the plans generate better health outcomes than the traditional Medicare

program. Expanded reporting of health outcomes would be helpful in assessing

the value of the care management services provided by the plans.

B The central long-term fiscal challenge facing the nation involves health care

costs. Policymakers face both challenges and opportunities in addressing those

costs. Over long periods of time, cost growth per beneficiary in Medicare and

Medicaid has tended to track cost trends in private-sector health markets. Many

analysts therefore believe that significantly constraining the growth of costs for

Medicare and Medicaid is likely to occur only in conjunction with slowing cost

growth in the health sector as a whole. A variety of evidence suggests opportunities to constrain health care costs without adverse health consequences. So a

basic challenge will be to restrain cost growth without harming incentives for
2

innovation or Americans’ health (and perhaps even improving it). Moving the

nation toward that possibility—which will inevitably be an iterative process in

which policy steps are tried, evaluated, and perhaps reconsidered—is essential

to putting the country on a sounder long-term fiscal path. Changes to the Medicare program should be evaluated with that broader perspective in mind.

Background on Medicare Advantage Plans

Medicare provides federal health insurance for 42 million people who are aged or

disabled or who have end-stage renal disease. Part A of Medicare (Hospital Insurance) covers inpatient services provided by hospitals as well as skilled nursing and

hospice care. Part B of Medicare (Supplementary Medical Insurance) covers services provided by physicians and other practitioners, hospitals’ outpatient departments, and suppliers of medical equipment. Home health care is covered by Part A

and Part B. The Medicare Prescription Drug, Improvement, and Modernization

Act of 2003 (MMA) added a voluntary prescription drug benefit beginning in

2006 under Part D.

The majority of Medicare beneficiaries receive services through the traditional

fee-for-service part of the program, which compensates providers using a set fee

for each service. In nearly all areas of the country, however, Medicare beneficiaries have the option of enrolling in Medicare Advantage—the program through

which private plans participate in Medicare—rather than receiving their care

through the FFS program.1 As of January 2007, about 19 percent of beneficiaries

were enrolled in private health plans, which accept the responsibility and financial

risk for providing Medicare benefits.2 Although the payment system for private

plans has been modified several times during the more than 20 years that they have

participated in Medicare, a key feature of the system has remained intact: Plans

that offer Medicare benefits for less than the amount of their payment from the

government are required to give enrollees additional benefits or, in an option that

became available recently, rebates on their Part B or Part D premiums.3 Those

additional benefits and rebates of premiums are a major incentive for beneficiaries

to enroll in Medicare Advantage plans and are particularly attractive to people

without Medicaid or employer-sponsored supplemental health insurance.

About 75 percent of the Medicare beneficiaries enrolled in private plans are in

health maintenance organizations (HMOs) or preferred provider organizations

1. The program through which private plans participate in Medicare is also called Part C. Previously, the Medicare Advantage program was called Medicare+Choice.

2. That figure includes about 1 percent of beneficiaries who are enrolled in group plans besides

Medicare Advantage plans (which include cost-reimbursed plans, health care prepayment

plans, a program of all-inclusive care for the elderly, and demonstration plans).

3. Plans have had the option of giving their enrollees rebates on their Part B premiums since 2003.

Beginning in 2006, plans can also offer rebates on the Part D premiums.
3

(PPOs). Both HMOs and PPOs have comprehensive networks of providers, but

PPOs allow beneficiaries to obtain care outside the network if they pay a higher

amount. Some HMOs offer coverage for services received outside their network

(and thus resemble PPOs), while others require that their enrollees receive all of

their nonemergency care within the network. PPOs under Medicare Advantage are

either local or regional; regional PPOs, an option that became available in 2006,

are required to serve broad regions of the country rather than defining their service

areas on a county-by-county basis. A key feature of many HMO and PPO plans is

care management services, which are intended to promote better coordination and

more effective use of health care.

The other main type of Medicare Advantage plans is private fee for service. PFFS

plans allow their enrollees to obtain care from any provider who will furnish it and

are not required to maintain networks of providers. Providers must decide each

time they see a patient whether to accept a PFFS plan’s terms of participation and

thus agree to its payment rates, usually those of Medicare’s FFS program.

In 2007, 82 percent of beneficiaries live in a county served by an HMO or a local

PPO, up from 67 percent in 2005.4 Nearly all beneficiaries who do not have access

to a local HMO or PPO have access to a regional PPO (and 99 percent have access

to one of the three). All beneficiaries have access to a PFFS plan in 2007, up from

80 percent in 2006 and only 45 percent in 2005.

The Payment System for Private Health Plans

The latest changes to the payment system for private health plans were enacted in

2003 in the Medicare Modernization Act. The modified payment system is analogous to the previous system, and the incentives facing plans and beneficiaries are

similar.

Beginning in 2006, private plans wanting to participate in Medicare must submit

bids indicating the per capita payment for which they are willing to provide Medicare’s Part A and Part B benefits.5 The government compares those bids with

county-level benchmarks that are determined in advance through statutory rules.

4. See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (March 2007), Chapter 4, “Update on Medicare Private Plans,” pp. 237–266.

5. Plans must also submit bids for the voluntary prescription drug benefit and their premiums for

any supplemental benefits they intend to offer.
4

Table 1.

Private Plans’ Bids for Providing Medicare Benefits

Relative to Costs in the FFS Program, 2007

Source: Congressional Budget Office based on data submitted by private plans to the Medicare 

program for 2007.

Note: FFS = fee-for-service.

The benchmarks are the maximum payments that the government will make for

enrollees in private plans.6,7

Under current law, benchmarks are required to be at least as great as per capita

FFS expenditures in every county and are higher than FFS expenditures in many

counties. For 2007, CBO calculates that benchmarks will be 17 percent higher, on

average, than projected per capita FFS expenditures nationwide. Net payments to

plans will be approximately 12 percent higher than per capita FFS costs. Bench6. The description of the MMA payment mechanism in this section pertains to plans that participate in Medicare on a county-by-county basis (or local plans). The payment mechanism for

regional PPOs is analogous to the mechanism described here for local plans but uses a modified

approach to compute benchmarks. See Medicare Payment Advisory Commission, Report to the

Congress: Issues in a Modernized Medicare Program (June 2005), pp. 59–81.

7. The benchmark for a plan that serves more than one county is a weighted average of the countylevel benchmarks in its service area (using the plan’s expected enrollment in every county as

weights). Plans are paid their bid (up to the benchmark) plus 75 percent of the amount by which

the benchmark exceeds their bid. Plans must return that 75 percent to beneficiaries as additional

benefits or as rebates of their Part B or Part D premiums. Plans whose bid is above the benchmark are required to charge enrollees the full difference between the two as an additional premium for the Medicare benefit package. For 2007, the Medicare Payment Advisory

Commission reports that nearly all (99 percent) of beneficiaries have access to Medicare

Advantage plans that do not require an additional premium for Parts A and B benefits and any

supplemental benefits offered by the plans but not offered by Medicare. See Medicare Payment

Advisory Commission, Medicare Payment Policy, p. 248.

Average per Capita FFS 

Expenditures in Plans' 

Service Areas (Dollars)

More Than 750 -9 26

700 to 749 1 19

650 to 699 3 25

600 to 649 9 17

Less Than 600 16 13

National Average 2 100

Difference Between 

Plans' Bids and per Capita 

FFS Expenditures (Percent)

Plans' Projected 2007 

Enrollment in Category (Percent)
5

marks are updated each year by either the growth in national per capita Medicare

spending or 2 percent, whichever is greater.8,9

For 2008, the Centers for Medicare & Medicaid Services recently announced that

benchmarks for Medicare Advantage plans will increase by 3.5 percent.10 Plans’

bidding behavior, geographic patterns of enrollment, and other factors will also

affect the ultimate change in spending per capita in 2008.

Geographic Patterns of Enrollment

The relationship between the cost of offering Medicare benefits and the benchmarks is an important determinant of the types of plans that are available in various areas of the country. To offer a product that is attractive to beneficiaries, a plan

must have a cost of offering Medicare benefits that is low enough, relative to the

benchmarks, to enable it to provide some combination of additional benefits and

cash rebates. Those additional benefits—which generally are similar to the

supplemental benefits offered by medigap insurance—often include reduced cost

sharing for medical services or prescription drugs. They may also include coverage of services that are not covered by Medicare, such as dental care, and they

8. The benchmarks for 2007 were updated from the payment rates for private plans that were

established by the Balanced Budget Act of 1997 (BBA) and modified through subsequent legislation. Before the enactment of the BBA, plans were generally paid 95 percent of the local per

capita FFS costs. Under the BBA, the payment rate in each county was the greatest of three

amounts: a minimum, or “floor,” rate; a blend of a local rate and the national average rate; and a

minimum increase from the previous year’s rate (which was equal to 2 percent in most years).

The floor amount established in 1998 ($367 a month that year) was increased each year by the

national rate of increase in per capita Medicare spending. The Medicare, Medicaid, and SCHIP

Benefits Improvement and Protection Act of 2000 increased that floor amount to $475 for 2001

and established a $525 floor for metropolitan areas with at least 250,000 residents. Those

amounts also were increased each year by the national rate of increase in per capita Medicare

spending.

9. The BBA’s rules resulted in rates in some counties that were higher—in some cases, by a substantial amount—than local per capita spending in the FFS program. In other counties, however, the update mechanism resulted in payment rates that were lower than local per capita FFS

spending. The MMA modified the benchmarks to be the higher of the BBA benchmarks or

local per capita spending. The MMA also requires that the government “rebase,” or reestimate,

per capita FFS expenditures in each county at least once every three years using the most current data available. In those years in which rebasing occurs, the benchmark for each county will

be the greater of the rebased per capita FFS expenditures or the update from the previous year’s

rate. The Centers for Medicare & Medicaid Services rebased the FFS rates in 2004, 2005, and

2007.

10. In response to projected increases in risk scores (measures calculated for the purpose of having

payments to plans reflect their enrollees’ health), the Centers for Medicare & Medicaid Studies

will reduce them across the board by 1.1 percentage points. Plans with increases exceeding

1.1 percentage points will see payment increases above 3.5 percent; those with lower increases

in risk scores will see lower increases in payments.
6

often include disease management, care coordination, and preventive care programs to promote better use of services.

HMOs and PPOs incur substantial administrative costs to establish and maintain

networks of providers, to acquire and maintain enrollment, and to manage utilization. To the extent that they negotiate payment rates with providers that are higher

than Medicare’s payment rates for services furnished in the fee-for-service sector,

those plans may also incur higher costs for medical services. Private health plans

that participate in Medicare have higher administrative costs per enrollee than the

traditional Medicare program does because of their smaller scale of operations and

their costs associated with network development and retention, care management,

marketing, and reinsurance. As a result, private plans can provide Medicare services at a lower cost than the FFS program only if they can achieve savings

through lower utilization or reductions in payment rates for providers that more

than offset their higher administrative costs. The ability of plans to achieve such

savings varies greatly among geographic areas.

Previous work by CBO has shown that plans’ bids for operating Medicare Advantage plans vary less from county to county than per capita FFS spending does (see

Table 1 on page 4). As a result, in areas with high FFS costs per capita, Medicare

Advantage plans’ bids are relatively low in comparison with FFS spending, and

vice versa. In particular, in areas with the highest per capita FFS spending, health

plans’ bids are about 9 percent below FFS spending. By contrast, in the lowestcost FFS areas, health plans’ bids are about 16 percent above FFS spending.

Benchmark rates in those areas vary in similar fashion, from an average of about

4 percent above FFS costs in high-cost FFS areas to an average of about 26 percent

above in low-cost areas.

Most enrollment in HMOs and PPOs tends to be in relatively densely populated

areas (where it is easier to establish provider networks) with relatively high benchmarks and generally high per capita FFS spending.11 Because private plans try to

restrain medical costs by managing the level and intensity of service utilization,

they have greater potential to achieve savings relative to the FFS program in geographic areas where FFS practice involves relatively high utilization of costly services—which also tend to be areas with high per capita FFS expenditures. Private

plans have much less opportunity to achieve such savings in areas where utilization rates for expensive services in the FFS sector are already relatively low.

11. It is easier for a plan to establish a network in a relatively densely populated area that has a relatively large number of providers than in a more sparsely populated area because the plan’s

leverage in negotiations with providers (to get them to accept relatively low payment rates and

to cooperate with the plan’s efforts to manage utilization) is to promise them some volume of

business by diverting to them patients from providers who do not participate in the network.
7

In contrast to HMOs and PPOs, private fee-for-service plans do not incur the costs

of establishing and maintaining networks of providers or managing utilization, and

the payment rates PFFS plans receive generally are the same as Medicare rates.

However, PFFS plans incur administrative costs for acquiring and maintaining

enrollment, and they do not realize comparable savings from utilization management, which is often cited by supporters as an important public policy benefit from

other types of Medicare Advantage plans.12

The structure of the payment system and plans’ characteristics result in significant

variation in the supplemental benefits and rebates offered to beneficiaries by

region and county. HMOs are generally more successful in urban and suburban

areas but struggle to operate in rural areas because of the difficulty and expense of

creating provider networks in sparsely populated communities. PFFS plans have

generally targeted rural and suburban areas of the country. PFFS and regional PPO

plans are the only options for beneficiaries wishing to enroll in private health plans

in some places—where HMOs find it difficult to create networks but relatively

high benchmarks allow plans with limited networks to submit bids well above

local FFS costs and still offer some extra benefits or rebates to attract beneficiaries. (That phenomenon is particularly notable in the rural counties with benchmarks at the floor amounts.13) And the PFFS plans may also find it difficult to

compete in urban areas, where the benchmarks tend to be closer to FFS costs.

Care Management in Medicare Advantage

Medicare’s FFS program provides a generally unmanaged approach to the delivery

of medicine because providers are paid for the number of services they deliver and

not for the quality of the outcomes they bring about.14 Health plans may be more

able to manage care through their knowledge of members’ health conditions, contact with providers, and centralized administrative arrangements. Medicare

Advantage plans also have strong incentive to manage care to reduce costs, as any

savings that they can generate accrue directly to them. Health plans’ various

efforts at disease management, care coordination, and preventive care often

include:

12. Some PFFS plans employ certain utilization controls, such as counseling and monitoring of

patients with phone calls from nurses.

13. In 2006, the average benchmark in urban counties with benchmarks at the floor amounts was

121 percent of per capita FFS spending, the benchmark in other “floor counties” (largely rural)

was 134 percent, and the benchmark in other counties was 111 percent. (A floor county is paid

at one of the two minimum rates established by the Medicare, Medicaid, SCHIP Benefits

Improvement and Protection Act of 2000 and updated each year.) See Medicare Payment Advisory Commission, Medicare Payment Policy, p. 244.

14. See Medicare Payment Advisory Commission, Report to the Congress: Increasing the Value of

Medicare (June 2006), Chapter 2, “Care Coordination in Fee-for-Service Medicare,” pp. 53–80.
8

B Phone calls from nurses or caseworkers to provide reminders and periodic

health assessments,

B Health coaches to encourage healthy behaviors,

B Educational programs to teach members and physicians about guidelines for

effective treatment, and

B Efforts to connect members with resources in the community.15

Such programs have the potential to reduce plans’ costs to the extent that they

eliminate unnecessary services or manage chronic conditions so as to avoid relatively costly episodes (such as extended hospital stays). Initially, any cost savings

that health plans realize (after bids and premiums are set) from such activities

accrue entirely to the plans, not to the government. Medicare spending would not

be reduced, for instance, if inpatient admissions in Medicare Advantage plans

decline in 2007. Plans (except for regional PPOs for a limited period of time)

accept the full risk for their beneficiaries, so, within the payment period, they also

realize all gains from their medical management strategies.

In the long run, any reductions in cost achieved by health plans should be passed

back to the beneficiaries (75 percent) and the government (25 percent) through the

operation of the bidding mechanism. If a plan can provide services for a lower

cost, it has a strong incentive to reduce its bid in order to increase the extra benefits

and rebates that it can use to attract members. Similarly, any care management

technologies that cause plans to increase their bids will result in reduced benefits

and rebates for beneficiaries and increased costs to the government. Even if

improvements in care management yielded significant improvements in efficiency

in Medicare Advantage, the government would realize, at most, 25 percent of

those savings.

Reporting on Measures of Health Plans’ Quality

One possible benefit of the Medicare Advantage program is the higher quality of

care beneficiaries may receive through more disease management, care coordination, and preventive care than they would receive in the Medicare fee-for-service

program. But the extent to which such services lead to improved health outcomes

is difficult to assess with the currently available data. Policymakers may therefore

want to explore options for expanded reporting of outcomes.

Most Medicare Advantage plans are required to report on the quality of care they

provide, as measured by several surveys administered by the National Committee

for Quality Assurance (NCQA):

15. See Blue Cross and Blue Shield Association, Medicare Advantage: Improving Care Through

Prevention, Coordination, and Management (February 2007); and America’s Health Insurance

Plans, Innovations in Chronic Care (March 2007).
9

B The Health Plan Employer Data and Information Set (HEDIS), which collects

information on the quality of care delivered by plans and their affiliated

providers;

B The Consumer Assessment of Healthcare Providers and Systems (CAHPS),

which collects information on members’ experience in interacting with plans

and their affiliated providers; and

B The Health Outcomes Survey (HOS), which collects information on the overall

mental and physical health of plans’ populations.

Some of the information collected is made available to the public through Medicare’s “plan finder” Web site and other distribution channels.

The current data sources and reporting requirements, however, do not provide sufficient information to assess whether health plans produce better health outcomes

or deliver more cost-effective care than the FFS sector (as indicated by the quality

of care per dollar of federal spending). PFFS plans, the fastest growing component

of Medicare Advantage, are exempt from many of the reporting requirements.16

Furthermore, the measures collected by the HEDIS and CAHPS surveys largely

measure the quality of the process of delivering health care rather than the outcomes of that care. Plans are surveyed about their adherence to medical recommendations (for instance, treatment of heart attack patients with beta blockers and

management of antidepressants), ability to deliver preventive health services and

screenings (for instance, controlling high blood pressure and providing breast cancer screenings), availability of care, and members’ perceptions of their responsiveness and accessibility. The HOS collects population-level health information on

each plan but does not provide insight into the plans’ efficiency of operations.

Though Medicare Advantage plans cost more than care under the FFS program

does, on average, they would be more cost-effective if they delivered a sufficiently

higher quality of care. The limited measures available suggest that the plans are no

more cost-effective than the FFS program.17 The development of reporting systems to comprehensively measure health outcomes in the Medicare Advantage and

16. PPO plans are also exempt from some reporting requirements. In comparison to HMOs, both

PFFS and PPO plans have less access to medical records, making some reporting requirements

more difficult for them. All plans are required to report on only a subset of the measures in

HEDIS; in particular, plans are not required to report on the cost-of-care measures implemented

in recent versions of the survey.

17. See Medicare Payment Advisory Commission, Issues in a Modernized Medicare Program,

p. 70.
10

Figure 1.

Enrollment in Medicare Advantage as a Percentage of

Total Enrollment in Medicare, 1995 to 2017

(Percentage of Part A enrollment)

Source: Congressional Budget Office based on data from the Centers for Medicare & Medicaid 

Services.

Note: The figure shows fiscal year averages calculated as a percentage of Part A enrollment. 

FFS programs would be helpful in assessing the value of disease management and

other techniques employed by Medicare Advantage plans. Expanded reporting on

outcomes would also allow analysis of varying approaches adopted by different

plans, which could be a valuable tool in the search for ways to restrain the cost of

health care in the United States while maintaining or improving the quality.

Anticipated Trends in the Medicare

Advantage Program

Increasing spending in Medicare Advantage is driven by rapidly increasing enrollment in private plans and is partially offset by decreasing enrollment and spending

in FFS Medicare. Payments to private health plans in the Medicare Advantage program increased from about $40 billion in 2004 to about $56 billion in 2006. CBO

projects that those payments will increase to $75 billion in 2007 and $194 billion

by 2017 and will total $1.5 trillion over the 2007–2017 period.18 Because payments to Medicare Advantage plans are higher than payments made to FFS

18. Those amounts include payments to group health plans besides Medicare Advantage plans

(which include cost-reimbursed plans, health care prepayment plans, a program of all-inclusive

care for the elderly, and demonstration plans). Under current law, CBO projects, payments to

those group plans outside of the Medicare Advantage program will decline from $4 billion in

2007 to $1 billion in 2017.

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

0

5

10

15

20

25

30

Actual Projected CBO's March 2007 Projection

CBO's March 2006 Projection
11

providers, shifts of enrollment to Medicare Advantage plans result in higher net

costs for the Medicare program overall. CBO projects that the share of Medicare

spending for Part A and Part B benefits that is paid to Medicare Advantage plans

will increase from 17 percent in 2006 to 27 percent in 2017.

Increasing Enrollment in Medicare Advantage

In 2004, Medicare Advantage plans accounted for 13 percent of enrollment in

Medicare, the lowest level since 1996. Over the past two years, however, enrollment in those health plans has increased to about 19 percent of all enrollment, or

8.3 million beneficiaries.19 That increase resulted from changes enacted in the

Medicare Modernization Act that increased payment rates and added the prescription drug benefit to complement the medical benefits provided under Parts A and

B of Medicare. CBO projects that enrollment in Medicare health plans will continue to increase rapidly in coming years, to 22 percent of total Medicare enrollment in 2008 and 26 percent by 2017 (see Figure 1).

The projected increase in enrollment in Medicare Advantage is driven largely by

CBO’s expectation of continuing growth in enrollment in private fee-for-service

plans, which rose from 200,000 members at the end of 2005 to more than 1.3 million members in January (see Table 2). Nearly 500,000 of those members were

added in January 2007 alone. CBO projects that enrollment in PFFS plans will

reach 5 million members by 2017, accounting for one-third of all Medicare

Advantage enrollment at that time, up from about one-sixth now.

HMOs and local PPOs grew strongly in 2006, as well, adding approximately

1.1 million members from the end of 2005 to January 2007. Membership in such

plans now numbers approximately 6.2 million. Growth in January 2007 for these

types of Medicare Advantage plans was somewhat slower than that for 2006, however, and, according to CBO’s projections, that portion of the program will grow

more slowly than the PFFS portion over the next several years. In addition, the

expiration of the authorization for a special needs program after December 31,

2008, will eliminate one of the fastest-growing components of local HMOs and

PPOs, limiting the future growth of such plans under current law.20

The recent growth of PFFS plans has changed the geographic pattern of Medicare

Advantage enrollment. In 2006, PFFS plans drew 39 percent of their membership

from rural areas, while HMOs and local PPOs drew only 4 percent and 10 percent,

19. Those figures include about 1 percent of beneficiaries (or about 600,000) who are enrolled in

group plans besides Medicare Advantage plans.

20. Special needs plans were authorized by section 231 of the Medicare Modernization Act. Currently, about 840,000 beneficiaries are enrolled in such plans, the majority of whom are in

HMOs. Those plans are permitted to market to and restrict enrollment to specific subgroups of

beneficiaries, including people who are dually eligible for Medicare and Medicaid, who have

chronic conditions, and who reside in institutions.
12

Table 2.

Recent Enrollment in Medicare Advantage and Other

Group Health Plans

(Thousands of people)

Source: Congressional Budget Office based on data from the Centers for Medicare & Medicaid 

Services.

Notes: HMO = health maintenance organization; PPO = preferred provider organization. 

Figures do not add up to totals because of rounding.

a. Other group plans include cost-reimbursed plans, health care prepayment plans, a program of 

all-inclusive care for the elderly, and some demonstration plans.

respectively, of their membership from such areas.21 The disproportionately rapid

growth of PFFS plans thus increased the market share of private plans in rural

areas from about 4 percent in 2005 to about 7 percent in 2006, and CBO expects

that market share to continue to grow under current law as PFFS plans play an

increasingly large role in the Medicare Advantage program.

Rising Costs for Medicare Advantage

CBO projects that payments to health plans will rise from an estimated $64 billion

in calendar year 2006 to $197 billion in 2017, or at an annual average growth rate

of 11 percent (see Table 3).22 Spending in Medicare Advantage is projected to

total approximately $1.5 trillion over that 11-year period.

CBO projects that private fee-for-service plans will account for a rapidly growing

share of Medicare Advantage spending, with payments to them increasing from

approximately $5 billion in 2006 to $13 billion in 2007 and $59 billion in 2017.

21. See Medicare Payment Advisory Commission, Medicare Payment Policy, p. 248.

22. As noted in the text above, spending during fiscal year 2006 was $56 billion. The discussion

here focuses on calendar years because changes in enrollment (open seasons) and payment rates

are implemented on a calendar year basis and because spending on a fiscal year basis is complicated by timing shifts. (Plans are paid on a monthly basis. There can be 11, 12, or 13 payments

during a fiscal year; there are always 12 payments during a calendar year.)

Medicare Advantage

Local HMOs and PPOs 5,160 840 240 6,240

Private fee for service 210 660 470 1,350

Regional PPOs 0 100 20 120 _____ _____ ____ _____

Subtotal, Medicare Advantage 5,370 1,600 730 7,700

Other Group Health Plansa 760 -130 -40 590

Total, All Group Health Plans 6,120 1,470 690 8,290

Total,

December 2005 During 2006

Additions

2007

Total,

January 2007

In January
13

That increase represents an annual average nominal growth rate of 25 percent over

the 11-year period and reflects a 20 percent average rate of growth in enrollment

and a 4 percent average annual rate of growth in net payments per enrollee. In

2006, PFFS plans accounted for approximately 8 percent of Medicare Advantage

spending; CBO anticipates that those plans will account for 17 percent of that

spending in 2007 and 29 percent in 2017.

Despite the rapid projected growth in PFFS plans, local HMOs and PPOs are

projected to continue to account for the largest portion of spending throughout

the projection window. According to CBO’s estimates, payments to those organizations will increase from approximately $54 billion in 2006 to approximately

$63 billion in 2007 and $127 billion in 2017, reflecting an annual average nominal

growth rate of 8 percent. That increase results from projected annual average

growth of 4 percent in enrollment and 4 percent in net per capita payments.

Growth in enrollment is more rapid in the early portion of the period, with 11 percent projected for 2007.

Regional PPOs are projected to grow from the current 120,000 members to about

800,000 in 2017 (under an assumption that current law remains in place). Payments to such plans were approximately $1 billion in 2006 and, by CBO’s projections, will be $1 billion in 2007 and $10 billion in 2017—representing an annual

growth rate of 8 percent, 4 percent from enrollment and 4 percent from growth in

net per capita payments.

CBO’s baseline projections also include approximately $3.5 billion in spending in

2012 and 2013 from the “stabilization fund” established under the Medicare Modernization Act to encourage regional PPOs’ participation in the Medicare Advantage program.

Recent Changes in CBO’s Projections

Enrollment in the Medicare Advantage program has been growing more rapidly

than CBO had anticipated, and the agency expects that rapid growth to continue

under current law. Accordingly, since last year, CBO has raised its projections of

Medicare Advantage enrollment and spending. In March 2006, CBO anticipated

that 18 percent of Medicare beneficiaries would be enrolled in Medicare Advantage by the end of the projection window at that time (2016); the current projection

for that year is 26 percent (see Table 4 on page 16). That 8 percentage-point difference translates to an increase of almost 5 million beneficiaries who will be

enrolled in Medicare Advantage plans in 2016.

Most of that increase is attributable to increased projections of enrollment in PFFS

plans. In 2006, CBO projected that enrollment in those plans would be 400,000 in

2016; that projection has since risen sharply, to 4.9 million beneficiaries. CBO has

also raised its projection of enrollment in local HMOs and PPOs but has lowered

its projection of enrollment in regional PPOs.
14

Table 3.

CBO’s Baseline Estimates for Medicare Advantage

Continued

The changes in CBO’s projections of spending for Medicare Advantage are largely accounted for by the

higher enrollment projections. The baseline issued in March 2006 projected spending for Medicare

Advantage of $66 billion in fiscal year 2007, $134 billion in 2016, and $967 billion over the 2007–2016

period (see Table 4).23 CBO currently projects spending of $75 billion in fiscal year 2007, $179 billion in

2016, and $1.31 trillion over the 2007–2016 period. The current 10-year figure represents an increase of

23. This discussion uses fiscal years to facilitate comparison with the baseline estimates for the fee-for-service components of

Medicare. Effects of timing shifts are removed.

2008- 2008- 2006-

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2012 2017 2017

Local HMOs and PPOs 5,740 6,400 6,790 7,230 7,380 7,460 7,560 7,720 7,920 8,120 8,320 8,530

PFFS 650 1,670 2,290 3,120 3,720 4,170 4,490 4,680 4,770 4,840 4,900 4,960

Regional PPOs 70 140 180 240 290 350 420 490 570 650 730 810 _____ _____ _____ ______ ______ ______ ______ ______ ______ ______ ______ ______

Subtotal, Medicare

Advantage 6,460 8,210 9,260 10,590 11,390 11,980 12,470 12,890 13,260 13,610 13,950 14,300

Other Group Plansa 640 590 520 310 160 160 150 150 150 150 150 140

Total, Medicare Group Plansb 7,100 8,800 9,780 10,900 11,550 12,140 12,620 13,040 13,410 13,760 14,100 14,440

Group Plan Enrollment as a 

Percentage of Hospital 17 20 22 24 25 26 26 26 26 26 26 26

Insurance Enrollment

Local HMOs and PPOs 54 63 70 78 83 87 92 97 103 110 118 127 411 965

PFFS 5 13 19 27 33 39 44 47 50 52 55 59 162 424

Regional PPOs 1 1 2 2 3 4 4 5 6 8 9 10 15 53 __ __ __ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ _____

Subtotal, Medicare

Advantage 60 77 91 107 119 130 140 149 159 169 182 196 587 1,442

Other Group Plansa 4 4 4 2 1 1 1 1 1 1 1 1 8 13

Total, Medicare Group Plansb 64 81 95 109 120 131 141 150 160 170 183 197 596 1,455

Fiscal Year Outlaysc,d 56 75 91 106 117 140 128 150 158 167 195 194 582 1,446

Number of Capitation Paymentsd 11 12 12 12 12 13 11 12 12 12 13 12 60 121

Local HMOs and PPOs 16 11 6 6 2 1 1 2 3 2 3 3 3 3 4

PFFS 435 156 37 36 19 12 8 4 2 1 1 1 22 12 20

Regional PPOs n.a. 98 30 36 23 21 19 16 16 14 12 11 25 19 25 ___ ___ __ __ __ __ __ __ __ __ __ __ __ __ __

Subtotal, Medicare

Advantage 27 27 13 14 8 5 4 3 3 3 3 3967

Other Group Plansa -13 -8 -11 -41 -48 -1 -1 -1 -1 -1 -1 -1 -24 -13 -13

Total, Medicare Group Plansb 22 24 11 11 6 5 4 3 3 3 3 3 7 5 7

Enrollment (Calendar year average, in thousands)

Spending (Calendar year incurred, in billions of dollars)

Enrollment Growth (Percent)
15

Table 3.

Continued

Source: Congressional Budget Office.

Notes: HMO = health maintenance organization; PPO = preferred provider organization; PFFS = private fee-for-service; 

n.a. = not applicable.

a. Other group plans include cost-reimbursed plans, health care prepayment plans, a program of all-inclusive care for the elderly, and some demonstration programs.

b. Does not include spending from the stabilization fund for regional PPOs or for certain demonstration programs.

c. Includes spending from the stabilization fund for regional PPOs and for certain demonstration programs.

d. In general, capitation payments to group health plans and prescription drug plans for the month of October are accelerated 

into the preceding fiscal year when October 1st falls on a weekend. However, the Balanced Budget Act of 1997 required that 

the October payment in 2006 be made on October 2 instead of September 29. 

36 percent over the previous 10-year figure. Because beneficiaries can be enrolled in only the Medicare

Advantage program or the FFS program, increasing enrollment in the former leads to partially offsetting

decreasing spending in the latter. However, because payments to Medicare Advantage plans are higher,

on average, than costs in the FFS sector, shifts in enrollment out of the FFS program and into private

plans increase net Medicare spending.

Estimated Spending Reductions from Alternative Policies

A number of policy options exist that would reduce spending on Medicare Advantage. This testimony

presents three options drawn from CBO’s recent Budget Options report.24

24. Congressional Budget Office, Budget Options (February 2007). See Options 570-2, 570-3, and 570-4.

2008- 2008- 2006-

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2012 2017 2017

Local HMOs and PPOs 8 4 6 4 4 4 4 3 4 4 5 5 4 4 4

PFFS 046 4 4 4 4 3 4 4 5 5444

Regional PPOs n.a. 4 6 4 4 4 4 3 4 4 5 5 4 4 4 ___ __ __ __ __ __ __ __ __ __ __ __ __ __ __

Subtotal, Medicare

Advantage 6 2 5 3 3 4 3 3 4 4 5 5444

Other Group Plansa 5 4 4 -5 -18 4 4 3 4 4 5 5 -3 1 1

Total, Medicare Group Plansb 735 4 4 4 3 3 4 4 5 5444

Local HMOs and PPOs 26 16 12 11 6 5 5 6 6 6 7 8 8 7 8

PFFS 437 167 45 42 24 17 12 8 6 5 6 6 27 16 25

Regional PPOs n.a. 107 38 42 28 26 23 20 20 19 18 17 31 25 31 ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___ ___

Subtotal, Medicare

Advantage 36 30 18 18 11 9 8 7 7 6 7 8 13 10 11

Other Group Plansa -9 -4 -8 -44 -58 3 2 2 2 2 3 4 -25 -13 -12

Total, Medicare Group Plansb 32 27 17 16 10 9 8 7 7 6 7 8 12 9 11

Annual Spending Growth (Percent)

Annual Net per Capita Spending Growth (Percent)
16

Table 4.

Change in CBO’s Baseline Projections for Medicare Advantage

(Billions of dollars, by fiscal year)

Source: Congressional Budget Office.

Notes: n.a. = not applicable.

Figures do not add up to totals because of rounding.

This table uses fiscal years (rather than calendar years, as in the other parts of the testimony) to provide a better 

comparison to the baseline estimates for the fee-for-service components of Medicare. 

Effects of timing shifts are removed to simplify the presentation.

Pay Plans at Local FFS Rates

The first policy would reduce the county-level benchmarks under Medicare Advantage to the level of

local per capita FFS spending. Relative to spending under current law, CBO estimates, this policy would

save $9.5 billion in 2009, $54 billion over the 2009–2012 period, and $149 billion over the 2009–2017

period (see Table 5).25

25. The county-level benchmarks for 2008 have been announced, and the bidding process is under way. The estimates assume

that the policies under discussion would take effect in 2009 to avoid interrupting the bidding process for 2008.

2007-

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2016

March 2007

Medicare outlays for Part A and B benefits 373 397 420 445 472 502 535 568 605 649 700 4,965

Outlays for group plans 75 91 106 117 128 140 150 158 167 179 193 1,311

Outlays for group plans as a share of Medicare 

outlays for Part A and B benefits (Percent) 20 23 25 26 27 28 28 28 28 28 27 n.a.

Group plan enrollment as a share of Hospital

Insurance enrollment (Percent) 20 22 24 25 26 26 26 26 26 26 26 n.a.

March 2006

Medicare outlays for Part A and B benefits 380 399 423 448 477 508 547 590 637 690 n.a. 5,100

Outlays for group plans 66 72 78 83 91 99 106 115 124 134 n.a. 967

Outlays for group plans as a share of Medicare 

outlays for Part A and B benefits (Percent) 17 18 18 19 19 19 19 19 19 19 n.a. n.a.

Group plan enrollment as a share of Hospital

Insurance enrollment (Percent) 16 17 17 17 18 18 18 18 18 18 n.a. n.a.

Difference (March 2007 minus March 2006)

Medicare outlays for Part A and B benefits -7 -3 -3 -4 -5 -6 -12 -22 -33 -40 n.a. -135

Outlays for group plans 10 19 28 34 37 41 43 43 44 45 n.a. 344

Outlays for group plans as a share of Medicare 

outlays for Part A and B benefits (Percent) 3 5 7 8 8 8 9 8 8 8 n.a. n.a.

Group plan enrollment as a share of Hospital

Insurance enrollment (Percent) 4 5 7 8 8 8 8 8 8 8 n.a. n.a.
17

Table 5.

Estimated Budgetary Effects of Alternative Policies

(Billions of dollars, by fiscal year)

Source: Congressional Budget Office.

Notes: Figures do not add up to totals because of rounding.

The estimates are net of changes in premium receipts resulting from policy changes. 

All counties have benchmarks set at or above local FFS rates. Many counties have

rates well above local per capita FFS costs, particularly counties where the floor

payment rates were in effect before the enactment of the Medicare Modernization

Act. Reducing payment rates to FFS levels would result in a significant reduction

in payment rates in most counties. CBO estimates that in 2007, the average payment will be 12 percent above FFS rates; that difference will be greater for PFFS

plans and lower for HMOs and PPOs. The continuing growth of PFFS plans is

likely to push that payment difference still higher in the future (although other

changes to the calculation of the county rates and the reported health characteristics of enrollees could offset or reinforce that increase).

Reducing payment rates would leave less money for health plans to offer reduced

premiums or supplemental benefits. That change, in turn, would make the program

less attractive to beneficiaries and lead some to return to the traditional fee-forservice program. Others who would have joined Medicare Advantage plans would

remain in the fee-for-service program. The change also would make the Medicare

Advantage program less attractive for health plans and cause some to leave the

program, as they did after the Congress cut payment rates in the Balanced Budget

Act of 1997. By CBO’s estimates, enacting this policy would reduce enrollment in

Medicare Advantage by about 6.2 million beneficiaries in 2012 relative to the

baseline projection, a decline of about 50 percent from projected levels—leaving

total Medicare Advantage enrollment at about 6.5 million (and the program’s share

of total enrollment in Medicare at 13 percent), which is roughly 1.8 million enrollees fewer than there are today.

CBO also has estimated the budgetary effect of variations on this option that

would limit the benchmarks to certain levels above local FFS costs (see Table 6).

For example, the Congress could limit all local benchmarks to 110 percent or

2008- 2008-

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2012 2017

Pay Plans at Local FFS Rates 0 -9.5 -13.7 -16.2 -14.6 -16.8 -17.7 -18.5 -21.2 -20.8 -54.0 -149.1

Eliminate Double Payments for 

Indirect Medical Education 0 -0.8 -1.1 -1.3 -1.1 -1.3 -1.4 -1.5 -1.8 -1.7 -4.2 -12.0

Eliminate the Remainder of the 

Regional PPO Stabilization Fund 0 0 0 0 -1.6 -1.6 -0.4 0 0 0 -1.6 -3.5
18

Table 6.

Estimated Budgetary Effects of Policies

Capping the Benchmarks under Medicare Advantage

(Billions of dollars, by fiscal year)

Source: Congressional Budget Office.

Notes: MA = Medicare Advantage; FFS = fee for service. 

The estimates are net of changes in premium receipts resulting from policy changes. Each 

policy would limit the Medicare Advantage program's county benchmarks to some level 

above local per capita FFS costs. 

120 percent of local per capita FFS spending. Such policies would have similar,

but smaller, effects on payments to plans and enrollment. CBO estimates that capping payment rates at 110 percent of local per capita FFS costs would reduce

spending by $32 billion over the 2009–2012 period and $90 billion over the 2009–

2017 period. Capping rates at 120 percent of FFS costs would save $15 billion

from 2009 to 2012 and $42 billion from 2009 to 2017.

In general, those spending reductions mirror the spending distribution of Medicare

Advantage payments. About 52 percent of Medicare Advantage spending is in

counties where the benchmark is greater than 110 percent of local FFS costs,

meaning that about one-half of spending would be affected by reducing benchmarks to be no more than 110 percent of local FFS costs (see Table 7). (That fact

does not mean, however, that one-half of spending would be cut from the program,

because the portion of spending below 110 percent of local FFS costs in those

counties would be unaffected by the change. CBO anticipates that such cuts would

lead to decreases in enrollment, bringing some additional savings as beneficiaries

left private plans and returned to the FFS program.)

Because the payment reductions would be largest in counties with the highest rates

relative to local FFS costs, the reductions in extra benefits and declines in enrollment under the policy would be largest in those areas. Plans in counties paid at one

Limit on MA Benchmarks as a 

Percentage of FFS Costs

100 -54 -149

105 -43 -120

110 -32 -90

115 -23 -64

120 -15 -42

125 -10 -28

130 -6 -18

135 -4 -10

140 -2 -7

145 -2 -5

150 -2 -4

Change in Direct Spending

2008–2012 2008–2017
19

Table 7.

Distribution of Medicare Advantage Spending by

Ratio of County Benchmarks to Local per Capita

FFS Costs

(Percent)

Source: Congressional Budget Office.

Note: The ratio used is the Medicare Advantage program’s local county rate divided by the local 

fee-for-service (FFS) rate. The total spending is calculated as if all bids were equal to the 

benchmark and all beneficiaries had average expected costs. It is intended to be an illustrative simplification of the calculations used in the Congressional Budget Office’s cost estimates. The analysis includes all counties with reported FFS spending for 2007 (including 

Puerto Rico).

of the two floor rates would experience the largest payment and enrollment reductions; those counties are generally rural ones or suburban and urban counties with

low FFS costs. Plans in counties with payment rates nearest FFS costs would see

the smallest payment and enrollment reductions; those counties are generally

urban and suburban counties with relatively high local FFS costs. In virtually no

county would plans avoid a payment cut, however; the minimum update requirement has kept the rates for counties where payments were at FFS rates in 2004 (the

first year plans were paid at the local FFS level) above FFS costs subsequently in

the majority of cases.

Eliminate Double Payments for Indirect Medical Education

Medicare’s payments to teaching hospitals for inpatient services in the traditional

fee-for-service sector include an “indirect medical education” (IME) adjustment.

That adjustment is intended to account for the fact that teaching hospitals tend to

have greater expenses than other hospitals. For example, teaching hospitals typically offer more technically sophisticated services than other hospitals do and treat

patients who have more-complex conditions.

Those IME payments are included in the benchmarks in counties where the benchmark is tied to historical spending in the fee-for-service sector. Nevertheless,

Medicare also pays the IME amount to teaching hospitals that treat patients

enrolled in Medicare Advantage plans.

Ratio of Benchmark

to FFS Costs 

100 10 100

100 to 109.9 38 90

110 to 119.9 31 52

120 to 129.9 12 21

130 to 139.9 5 9

140 to 149.9 1 4

150 and Higher 3 3

Portion of Medicare Advantage Spending 

Within Category Within or Above Category
20

This policy would eliminate that double payments by removing IME payments

from the benchmarks in counties where the benchmark is tied to historical spending in the fee-for-service sector. By CBO’s estimates, such a change would save

$0.8 billion in 2009, $4 billion over the 2009–2012 period, and $12 billion over

the 2009–2017 period (compared with spending under current law).

This option is only one method of implementing such a payment reduction. The

Administration’s budget for fiscal year 2008 proposed an alternative approach:

remove the double payments for IME in all counties (not just the FFS-based counties) by eliminating the separate IME payments for Medicare Advantage enrollees

treated in teaching hospitals. The Administration’s proposal would phase in that

change over the 2008–2016 period. According to CBO’s estimates, that provision

would save $500 million in 2008, $5 billion over the 2008–2012 period and

$19 billion over the 2008–2017 period (this policy generates savings in 2008

because payments to hospitals can be cut more quickly than payments to plans

made through the bidding system). The choice of whether to eliminate the double

payments from the health plan side or from the hospital side could have important

financial consequences for health plans and teaching hospitals.

Eliminate the Remainder of the Regional PPO Stabilization Fund

The stabilization fund established by the MMA was authorized to spend $10 billion over the 2007–2013 period to encourage the participation of regional PPOs in

the Medicare Advantage program. The Tax Relief and Health Care Act of 2006

repealed $6.5 billion of that amount and prohibited spending the remainder until

2012. This option would eliminate that fund and would save an estimated $1.6 billion in 2012 and $3.5 billion over the 2008–2017 period.

Conclusion

The Medicare Advantage program has been growing rapidly and is projected to

continue to do so. Such growth, under current payment policies, increases net costs

to Medicare because payments made to Medicare Advantage plans exceed costs

under the traditional fee-for-service program. Policymakers evaluating options for

reducing payments to Medicare Advantage plans need to weigh the cost savings

against any benefits that the plans provide in managing care, the effect on health

care costs overall, and the impact on beneficiaries. Finally, expanded reporting on

health outcomes may help policymakers better evaluate both the overall effects

and specific care management results of Medicare Advantage plans.