MEDICARE 

ADVANTAGE

2011 Profits Similar to 

Projections for Most 

Plans, but Higher for 

Plans with Specific 

Eligibility 

Requirements

Report to the Ranking Member, 

Committee on Ways and Means,

House of Representatives

December 2013

GAO-14-148

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-148, a report to the 

Ranking Member, Committee on Ways and 

Means, House of Representatives

December 2013

MEDICARE ADVANTAGE

2011 Profits Similar to Projections for Most Plans, but 

Higher for Plans with Specific Eligibility 

Requirements

Why GAO Did This Study

MA organizations are entities that 

contract with the Centers for Medicare 

& Medicaid Services (CMS) to offer 

one or more private plans as an 

alternative to the Medicare fee-forservice (FFS) program. These MA 

plans are generally available to all 

Medicare beneficiaries, although 

certain types of plans, such as 

employer group plans, have specific 

eligibility requirements. Payments to 

MA organizations are based, in part, 

on the projected expenses and profits 

that MA organizations submit to CMS. 

These projections also affect (1) the 

extent to which MA beneficiaries 

receive additional benefits not provided 

under FFS and (2) beneficiary costsharing and premium amounts. The 

Patient Protection and Affordable Care 

Act (PPACA) required that, starting in 

2014, MA organizations have a 

minimum medical loss ratio of 

85 percent—that is, they must spend 

85 percent of revenue on medical 

expenses, quality-improving activities, 

and reduced premiums.

This report examines how MA 

organizations’ actual expenses and 

profits for 2011 as a percentage of 

revenue and in dollars compared to 

projections for the same year, both for 

plans available to all Medicare 

beneficiaries and for plans with specific 

eligibility requirements. GAO analyzed 

data on MA organizations’ projected 

and actual allocation of revenue to 

expenses and profits. The percentage 

of revenue spent on medical expenses 

reported in GAO’s study is not directly 

comparable to the PPACA medical 

loss ratio calculation, as the final rule 

defining the calculation was issued 

after actual 2011 data were submitted.

What GAO Found

Medicare Advantage (MA) organizations’ actual medical expenses, nonmedical 

expenses (such as marketing, sales, and administration) and profits as a 

percentage of total revenue were, on average, similar to projected values for 

plans available to all beneficiaries in 2011, the most recent year for which data 

were available at the time of the request for this work. MA organizations’ actual 

medical expenses, nonmedical expenses, and profits were 86.3 percent, 

9.1 percent, and 4.5 percent of total revenue, respectively. As a percentage of 

revenue, all three categories were within 0.3 percentage points of what MA 

organizations had projected. In addition, MA organizations received, on average, 

$9,893 in total revenue per beneficiary, slightly higher than the projected amount 

of $9,635.

The percentage of revenue spent on medical expenses and profits varied 

between MA contracts. For example, while MA organizations spent an average of 

86.3 percent of revenue on medical expenses, 39 percent of beneficiaries were 

covered under contracts where less than 85 percent of revenue was spent on 

medical expenses. In addition, the accuracy of MA organizations’ projections 

varied on the basis of the type of plans offered under the contract. For example, 

contracts for private fee-for-service plans—a plan type with new provider network 

requirements in 2011—had average profit margins that were 4 percentage points 

lower than projected.

In 2011, plans offered by MA organizations with specific eligibility requirements 

had higher-than-projected profits. Special needs plans (SNP), which serve 

specific populations, such as those with specific chronic conditions, had an 

8.6 percent profit margin, but had projected 6.2 percent. This higher percentage, 

combined with higher-than-projected revenue, resulted in SNPs reporting an 

average profit per beneficiary of $1,115, or 44 percent higher than projected 

($777). Employer group plans, which are offered by employers or unions to their 

employees or retirees, as well as to Medicare-eligible spouses and dependants 

of participants in such plans, had a 7.6 percent profit margin, but had projected 

4.2 percent. The higher profit margin, combined with higher-than-projected 

revenue, resulted in employer plans receiving an average profit per beneficiary of 

$861, or 108 percent higher than projected ($413).

GAO requested comments from CMS, but none were provided.

View GAO-14-148. For more information, 

contact James Cosgrove at (202) 512-7114 or 

cosgrovej@gao.gov.
Page i GAO-14-148 Medicare Advantage Expenses

Letter 1 

Background 7

2011 Expenses and Profits Were Similar to Projections for Plans 

Available to All Beneficiaries, but Plans with Specific Eligibility 

Requirements Had Higher-than-Projected Profits 9

Agency Comments 17

Appendix I GAO Contact and Staff Acknowledgments 18

Tables

Table1: Actual and Projected Expenses and Profits as Amounts

and Percentages of Revenue, for Plans Available to all 

Beneficiaries, 2011 10

Table 2: Distribution of the Percentage of Total Revenue Spent on 

Medical Expenses and Profits, 2011 12

Table 3: Actual and Projected Expenses and Profits as Amounts 

and Percentages of Revenue by Contracts with High and 

Low Benchmarks, 2011 13

Table 4: Actual and Projected Expenses and Profits as Amounts 

and Percentages of Revenue among HMO, PPO, and 

PFFS Contracts, 2011 14

Table 5: Actual and Projected Expenses and Profits as Amounts 

and Percentages of Revenue for Special Needs Plans, 

2011 16

Table 6: Actual and Projected Expenses and Profits as Amounts 

and Percentages of Revenue for Employer Group Plans, 

2011 17

Contents
Page ii GAO-14-148 Medicare Advantage Expenses

Abbreviations

CMS Centers for Medicare & Medicaid Services

ESRD end-stage renal disease

FFS fee-for-service 

HMO health maintenance organization

MA Medicare Advantage

PFFS private fee-for-service 

PMPM per member per month

PPACA Patient Protection and Affordable Care Act

PPO preferred provider organization

SNP special needs plan

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Page 1 GAO-14-148 Medicare Advantage Expenses

441 G St. N.W.

Washington, DC 20548

December 19, 2013

The Honorable Sander M. Levin

Ranking Member

Committee on Ways and Means

House of Representatives

Dear Mr. Levin:

In 2011, the federal government paid Medicare Advantage (MA) 

organizations—entities that offer a private health plan alternative to 

Medicare fee-for-service (FFS)—approximately $124 billion, or about 

23 percent of all Medicare spending, to provide health care services to 

12.1 million Medicare beneficiaries. The private health plans offered by 

MA organizations are generally available to all Medicare beneficiaries in 

the plans’ service areas.1 However, certain types of plans, such as 

employer group plans—which are offered by employers or unions—and 

special needs plans (SNP)—which serve specific populations—have 

more specific eligibility requirements.2 Payments to MA organizations are

based in part on the projected medical expenses, nonmedical expenses 

(such as marketing, sales, and administration), and profits, which

organizations submit in their bids for providing Medicare-covered 

services, and on actual enrollment and beneficiary health status.3

 

1

Medicare beneficiaries with end-stage renal disease (ESRD) can only enroll in an MA 

plan if they meet certain criteria. For example, beneficiaries with ESRD may enroll in an 

MA plan if (1) they were already enrolled in the MA plan when they developed ESRD; 

(2) they are eligible for a plan offered by their current or former employer or union that has 

opted to enroll beneficiaries with ESRD; or (3) they had a successful kidney transplant.

In 

addition to projections, MA organizations are required to report actual 

2

Employer group plans can be offered to employers’ or unions’ Medicare-eligible retirees 

and Medicare-eligible active employees, as well as to Medicare-eligible spouses and 

dependants of participants in such plans. For active employees, the employer group plan 

would serve as a secondary payer, while the employer’s non-MA plan for active 

employees would serve as the primary payer. SNPs offer benefit packages tailored to 

beneficiaries who are dually eligible for Medicare and Medicaid, are institutionalized, or 

have certain chronic conditions. 

3

Profits refer to plans’ remaining revenue after medical expenses and nonmedical 

expenses are paid. In certain circumstances, such as for new market entrants, the 

Centers for Medicare & Medicaid Services (CMS) allows a plan to have a negative profit, 

meaning that the plan’s revenue is less than its combined medical and nonmedical 

expenses.
 

Page 2 GAO-14-148 Medicare Advantage Expenses

medical expenses, nonmedical expenses, and profits for the year 2 years 

prior to the upcoming year. For example, MA organizations reported their 

actual 2011 expenses in their bid submission for 2013.

In June and December 2008, we reported on MA organizations’ projected 

and actual medical expenses, nonmedical expenses, and profits for 2005 

and 2006, respectively.4

The accuracy of MA organizations’ projections is important because, in 

addition to determining Medicare payments to these organizations, these 

projections affect the extent to which MA beneficiaries receive additional 

benefits not provided under FFS and the amounts beneficiaries pay in 

cost-sharing and premiums. Specifically, once Medicare payments are 

determined, they are not modified if there are differences between actual 

and projected expenses. Thus, if MA organizations had more accurately 

projected their revenue and expenses in 2005 and 2006, they would 

have, on average, been able to provide beneficiaries with additional 

benefits or cost-sharing reductions and still maintain the level of profits 

projected.

We reported that, on average, MA organizations’ 

self-reported actual medical expenses as a percentage of revenue were 

lower in 2005 and 2006 than they had projected. Specifically, MA 

organizations projected that they would spend, on average, 90.2 percent 

of revenue on medical expenses in 2005 and 86.9 percent in 2006.

However, MA organizations’ self-reported actual medical expenses were 

85.7 percent of revenue, on average, in 2005, and 83.3 percent in 2006. 

The lower-than-projected expenses resulted in MA organizations 

receiving more profits, on average, than projected. Specifically, MA 

organizations earned profits of $1.1 billion more than projected in 2005 

and $1.3 billion more than projected in 2006.

The Patient Protection and Affordable Care Act (PPACA) included a new 

requirement that, starting in 2014, MA organizations’ must have a 

minimum medical loss ratio of 85 percent—that is, they must spend at 

least 85 percent of their revenue on medical expenses, quality improving 

 

4

See: GAO, Medicare Advantage Organizations: Actual Expenses and Profits Compared 

to Projections for 2005, GAO-08-827R (Washington, D.C.: June 24, 2008) and GAO, 

Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections 

for 2006, GAO-09-132R (Washington, D.C.: Dec. 8, 2008).
 

Page 3 GAO-14-148 Medicare Advantage Expenses

activities, and reduced premiums.5 If an MA organization spends less 

than 85 percent of its revenue on such expenses in a given year, it must 

refund payments to the Centers for Medicare & Medicaid Services (CMS) 

equal to 85 percent of its revenue less its actual expenses related to 

medical services, quality-improving activities, and reduced premiums.6

You asked us to provide baseline information on how MA organizations’ 

self-reported actual expenses and profits compared to their projections 

prior to the effective date of the PPACA requirement for an 85 percent 

medical loss ratio. In this report, we examine how MA organizations’ 

actual medical expenses, nonmedical expenses, and profits as a 

percentage of revenues and in dollars for 2011—the most recent year for 

which data were available at the time of your request—compared to 

projections for the same year, both for plans available to all Medicare 

beneficiaries and for plans with specific eligibility requirements.

If 

an MA organization fails to spend at least 85 percent of its revenue on 

medical expenses, quality-improving activities, and reduced premiums for 

more than 3 consecutive years, it will be subject to enrollment sanctions 

and, after 5 consecutive years, to contract termination.

To report actual 2011 medical expenses, nonmedical expenses, and 

profits, we analyzed 2013 bid data, which MA organizations submitted in 

 

5

Throughout this report, references to PPACA include any amendments made by the 

Health Care and Education Reconciliation Act of 2010. Health Care and Education 

Reconciliation Act of 2010, Pub. L. No. 111-152, § 1103, 124 Stat. 1029, 1047 (2010) 

(adding section 1857(e)(4) of the Social Security Act). CMS regulations set forth specific 

requirements for calculating the PPACA medical loss ratio. Medicare Program; Medical 

Loss Ratio Requirements for the Medicare Advantage and the Medicare Prescription Drug 

Benefit Programs, 78 Fed. Reg. 31284 (May 23, 2013) (to be codified at 42 CFR 

Part 422). PPACA similarly requires non-Medicare private health plans to spend a 

minimum percentage of the plans’ revenue on medical expenses and quality-improving 

activities. Effective January 1, 2011, plans that do not meet these requirements must 

provide a partial refund to those individuals enrolled in the plan. Pub. L. No. 111-148, 

§§ 1001(5), 10101(f), 124 Stat. 119, 130, 885 (2010) (inserting and amending a new 

section 2718 in the Public Health Service Act). For information on the early experiences 

associated with implementing these requirements, see GAO, Private Health Insurance: 

Early Experiences Implementing New Medical Loss Ratio Requirements, GAO-11-711

(Washington, D.C.: July 29, 2011).

6

CMS is the agency that administers the Medicare program.
 

Page 4 GAO-14-148 Medicare Advantage Expenses

2012 and which include MA organizations’ actual experience for 2011.7

To report projected 2011 expenses and profits, we analyzed 2011 bid 

data, which MA organizations submitted to CMS in 2010. Both the 2011 

and 2013 bid data contain self-reported information on plan-level 

expenses and profits. We excluded Part D benefits from our analysis.8

We also excluded (1) plans that were not included in both an MA 

organization’s 2011 and 2013 bids, (2) regional preferred provider 

organizations (PPO),9

We analyzed plans available to all Medicare beneficiaries at the contract 

level.

and (3) plans that had values equal to zero for per 

member per month (PMPM) total revenue, PMPM medical expenses, 

PMPM nonmedical expenses, or member months. To determine actual 

and projected expenses and profits for 2011, we multiplied both actual 

and projected PMPM expenses and profits by actual enrollment in 

member months for that year.

10

 

7

To secure the award of an MA contract, MA organizations must submit bids to CMS for 

each plan they intend to offer under the contract. In some cases, plans available in 2011 

were consolidated with other plans by 2013 or the plans were closed and the enrollees 

were expected to primarily be enrolled in other plans offered by the MA organizations in 

2013. In either of these situations, MA organizations may have reported data in their 2013 

bids that reflected the combined actual expenses and profits for more than one plan. The 

bid data were not structured in a way that allowed us to disaggregate the expenses and 

profits by plan in these cases. As a result, we assigned the expenses and profits reported 

on the bid to the plan that submitted the bid.

Because employer group plans and SNPs have specific eligibility 

requirements and are not available to all Medicare beneficiaries, we 

analyzed such plans separately and excluded them from this part of our 

analysis. We also excluded contracts with fewer than 24,000 member 

months (equivalent to 2,000 beneficiaries enrolled for a full year), 

because CMS officials stated they do not consider data from these 

contracts to be fully credible. After all exclusions, our analysis included 

8

Medicare Part D provides coverage for outpatient prescription drugs to beneficiaries 

purchasing such coverage. MA plans may provide coverage for Medicare Part D benefits 

and bid separately to offer this coverage.

9

Beneficiaries in PPOs can see both in-network and out-of-network providers but pay 

higher cost-sharing amounts if they use out-of-network services. Regional PPOs serve 

state or multistate regions established by CMS. We excluded regional PPOs from our 

analysis because of differences in the way such plans are paid by Medicare.

10MA organizations contract with CMS to provide health benefits to Medicare 

beneficiaries. Under each contract, MA organizations can offer multiple health plans from 

which beneficiaries choose.
 

Page 5 GAO-14-148 Medicare Advantage Expenses

322 contracts and 1,242 plans, which enrolled the equivalent of 

approximately 7.5 million beneficiaries—88 percent of the total MA 

enrollment in plans available to all Medicare beneficiaries in 2011. We 

also determined whether differences in projected and actual expenses 

and profits for plans available to all Medicare beneficiaries varied on the 

basis of the type of plans under each contract or whether contracts had a 

high or low benchmark—the maximum amount Medicare will pay plans to 

serve an average beneficiary and which vary based on plans’ service 

areas. We analyzed projected and actual expenses and profits for 

contracts that had the following plan types: health maintenance 

organizations (HMO), PPOs, and private fee-for-service (PFFS) plans.11

We calculated benchmarks at the contract level. Using county-level 

enrollment and benchmark data from CMS, we defined MA organizations’ 

contracts as having a high benchmark if their enrollment-weighted 

average benchmark was above the enrollment-weighted average 

benchmark for all MA contracts in our analysis.12

We analyzed plans with specific eligibility requirements at the plan level, 

because SNPs and employer group plans can be included in contracts 

with plans available to all Medicare beneficiaries. We excluded SNPs and 

employer group plans with fewer than 24,000 member months. After all 

exclusions, our SNP analysis included 99 contracts and 121 plans, which 

enrolled the equivalent of approximately 1.0 million beneficiaries— 

71 percent of the total SNP enrollment in 2011. After all exclusions, our 

employer group plan analysis included 77 contracts and 111 plans, which 

We defined MA 

organizations’ contracts as having a low benchmark if their enrollmentweighted average benchmark was equal to or below the enrollmentweighted average benchmark for all MA contracts in our analysis.

 

11While each contract may include more than one plan, each contract is designated as 

having only one plan type. Beneficiaries in HMOs are generally restricted to seeing 

providers within a network. Beneficiaries enrolled in PFFS plans may generally see any 

provider that accepts the plan’s payment terms; however, since 2011, these plans have 

been generally required to maintain a network of contracted providers, and beneficiaries 

that see out-of-network providers may pay higher cost-sharing amounts.

12We used CMS’s publicly available county-level MA enrollment data to calculate 

benchmark weights. These data do not include enrollment counts for counties in which a 

plan has 10 or fewer enrollees. Because of this exclusion, the population we used to 

calculate benchmark weights represented approximately 97 percent of the total MA 

population.
 

Page 6 GAO-14-148 Medicare Advantage Expenses

enrolled the equivalent of approximately 1.7 million beneficiaries— 

77 percent of the total MA employer group enrollment in 2011.13

The results are reported for 2011 and may not be representative of or 

generalizable to other years.14 In addition, the percentage of total revenue 

spent on medical expenses reported in our study is not directly 

comparable to the PPACA medical loss ratio calculation. CMS issued its 

final rule defining the PPACA medical loss ratio calculation in 2013, which 

was after MA organizations submitted their bids for 2013 that contained 

MA organizations’ actual 2011 expenses and profits.15

We took several steps to ensure that the data used to produce this report 

were sufficiently reliable. Specifically, we assessed the reliability of the 

CMS data we used by interviewing relevant officials, reviewing data 

documentation, and examining the data for obvious errors. We 

determined that the data were sufficiently reliable for the purposes of our 

study.

We conducted this performance audit from August 2013 through 

December 2013 in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives.

 

13Our total study population included approximately 10.1 million beneficiaries—83 percent 

of the total MA enrollment in 2011, when combining the three populations studied (MA 

beneficiaries enrolled in plans available to all Medicare beneficiaries, SNPs, and employer 

group plans).

14Because of differences in our methodologies, the results presented in this report are not 

directly comparable to our past reports on this topic. For instance, we analyzed SNPs 

separately in this report, whereas SNPs were not separated out in our previous reports 

because such data were not available.

15For example, CMS’s 2013 final rule defined quality-improving activities that could be 

included in the PPACA medical loss ratio calculation. While MA organizations’ 2013 bids 

included information on quality-improving activity expenditures, CMS officials had told MA 

organizations that the information was being collected for informational purposes only and 

told us that MA organizations’ methodologies used to calculate quality-improving activities 

and the accuracy of the information provided was unclear. See Medicare Program; 

Medical Loss Ratio Requirements for the Medicare Advantage and the Medicare 

Prescription Drug Benefit Programs; Final Rule, 78 Fed. Reg. 31,284 (May 23, 2013).
 

Page 7 GAO-14-148 Medicare Advantage Expenses

Payments to MA organizations are based on the MA organization’s bid 

and benchmark and are adjusted for differences in projected and actual 

enrollment, beneficiary residence, and health status. PPACA changed 

how the benchmark and rebate are calculated.

Payments to MA organizations and the additional benefits that MA 

organizations offer are based in part on the relationship between the MA 

organizations’ bids—their projection of the revenue required to provide 

beneficiaries with services that are covered under Medicare FFS—and a 

benchmark.16

CMS adjusts payments to MA organizations to account for differences in 

projected and actual enrollment, beneficiary residence, and health status.

CMS adjusts for differences in projected and actual enrollment through its 

method for paying MA organizations. Specifically, MA organizations get 

paid a PMPM amount and thus only get paid for actual enrollees. CMS 

also adjusts PMPM payments to MA organizations on the basis of the 

ratio of the benchmark rate in the beneficiary’s county to the plan 

benchmark. Thus, if a beneficiary comes from a county that has a 

benchmark rate that is lower than the plan’s benchmark, the plan will 

receive a lower PMPM payment for that beneficiary. Finally, to help 

ensure that health plans have the same financial incentive to enroll and 

care for beneficiaries regardless of their health status, payments to MA 

organizations are adjusted for beneficiary health status—a process 

known as risk adjustment. Final payments are adjusted to account for 

If an MA organization’s bid is higher than the benchmark, 

the organization must charge beneficiaries a premium to collect the 

amount by which the bid exceeds the benchmark. If an MA organization’s 

bid is lower than the benchmark, the organization receives the amount of 

the bid plus additional payments, known as rebates, equal to a 

percentage of the difference between the benchmark and the bid. MA 

organizations are required to use rebates to provide additional benefits, 

such as dental or vision services; reduce cost-sharing; reduce premiums; 

or some combination of the three.

 

16Benchmarks are based on county-level payment rates used to pay MA plans before 

2006. From 2007 through 2010, benchmarks were generally updated annually by the 

overall growth in Medicare expenditures. PPACA changed how benchmarks were 

calculated beginning in 2011, principally by more closely aligning the benchmark with 

Medicare FFS spending. Benchmarks are calculated differently for regional PPOs. 

Specifically, benchmarks for regional PPOs are updated by combining the county 

benchmarks in each region with a weighted average of regional plan bids.

Background

Payments to MA 

Organizations
 

Page 8 GAO-14-148 Medicare Advantage Expenses

differences between the projected average risk score—a relative measure 

of expected health care use for each beneficiary—submitted in plans’ bids 

and the actual risk scores for enrolled beneficiaries.

Bidding rules for employer health plans differ from those for MA plans 

available to all beneficiaries and SNPs. Specifically, MA organizations are 

able to negotiate specific benefit packages and cost-sharing amounts with 

employers after the MA organizations submit their bid for an employer 

group plan. In contrast, MA organizations’ bids for all other MA plans 

must reflect their actual benefit package—including additional benefits, 

reduced cost-sharing, and reduced premiums—and MA organizations 

cannot change the benefits after the bid is approved by CMS.

PPACA changed how the benchmark is calculated beginning in 2011.

These changes have resulted in a decrease, on average, in county 

benchmarks relative to average Medicare FFS expenditures. In 2011, 

benchmark rates were held constant at 2010 benchmark rates. From 

2012 through 2016, the benchmark will be a blend of the traditional 

benchmark formula and a new quartile-based formula. Counties will be 

stratified into quartiles based on their Medicare FFS expenditures, with 

the first quartile of counties (the 25 percent of counties that have the 

highest Medicare FFS expenditures) having a benchmark equal to 

95 percent of FFS expenditures. Counties in the second, third, and fourth 

quartiles will have benchmarks of 100 percent, 107.5 percent, and 

115 percent, respectively, of FFS expenditures. In addition, any MA 

organization that receives 3 or more stars on CMS’s 5-star quality rating 

system will receive a bonus to the PPACA portion of their blended 

benchmark.17

PPACA also changed how the rebate is calculated. This change resulted 

in decreased rebate amounts starting in 2012. By 2014, the rebate 

amounts will be equal to 50, 65, or 70 percent of the difference between 

In 2017 and future years, the quartile-based formula will 

determine 100 percent of the benchmark value.

 

17In 2008, CMS implemented a 5-star quality rating system—with 5 stars indicating the 

highest quality—for MA plans as a tool to help beneficiaries make enrollment decisions. 

Stars are assigned at the contract level, with every plan covered under the same contract 

receiving the same star rating. Plans’ overall star ratings indicate their performance 

relative to that of all other plans on about 50 measures of clinical quality, patient 

experience, and contract performance. 

Changes under PPACA
 

Page 9 GAO-14-148 Medicare Advantage Expenses

the benchmark and the bid, depending on the number of stars a plan 

receives on CMS’s 5-star quality scale. Prior to 2012, MA organizations 

received a rebate equal to 75 percent of the difference between the 

benchmark and the bid.

SNPs and employer group plans have specific eligibility requirements. 

SNPs serve specific populations, including beneficiaries who are dually 

eligible for Medicare and Medicaid, are institutionalized, or have certain 

chronic conditions. Employer group plans are MA plans offered by 

employers or unions to their Medicare-eligible retirees and Medicareeligible active employees, as well as to Medicare-eligible spouses and 

dependants of participants in such a plan. In those cases where an active 

employee is enrolled in an employer’s non-Medicare health plan, the 

Medicare employer group plan would serve as a secondary payer, while 

the employer’s non-MA plan for active employees would serve as the 

primary payer.

Among plans available to all beneficiaries, 2011 expenses and profits 

represented similar percentages of total revenue compared to projections.

Among plans with specific eligibility requirements—that is, SNPs and 

employer group plans—2011 expenses were lower and profits were 

higher as a percentage of revenue compared to projections.

MA Plans with Specific 

Eligibility Requirements

2011 Expenses and 

Profits Were Similar 

to Projections for 

Plans Available to All 

Beneficiaries, but 

Plans with Specific 

Eligibility 

Requirements Had 

Higher-than-Projected 

Profits
 

Page 10 GAO-14-148 Medicare Advantage Expenses

As a percentage of 2011 total revenue, MA organizations’ actual medical 

expenses, nonmedical expenses, and profits were, on average, similar to 

projected values for plans available to all beneficiaries.18 As a percentage 

of revenue, medical expenses and profits were slightly lower than 

projected, while nonmedical expenses were slightly higher. Also, as a 

percentage of revenue, all three categories were within 0.3 percentage 

points of what MA organizations had projected (see table 1).

Table1: Actual and Projected Expenses and Profits as Amounts and Percentages of Revenue, for Plans Available to all 

Beneficiaries, 2011

Actual Projected

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Medical expenses 86.3% $8,541 $63.6 86.5% $8,337 $62.1

Nonmedical expenses 9.1 905 6.7 8.8 844 6.3

Profits 4.5 447 3.3 4.7 453 3.4

Total revenue $9,893 $73.7 $9,635 $71.8

Source: GAO analysis of CMS data.

Notes: Table includes data from 322 contracts and 1,242 plans, which enrolled the equivalent of 

approximately 7.5 million beneficiaries—88 percent of the total MA enrollment in plans available to all 

Medicare beneficiaries in 2011. To determine actual and projected expenses and profits for 2011, we 

multiplied both actual and projected per member per month expenses and profits by actual enrollment 

in member months for that year. Data on actual and projected expenses and profits were selfreported by MA organizations. Percentages may not add to 100 and medical expenses, nonmedical 

expenses, and profits may not equal total revenue because of rounding.

MA plans that were available to all beneficiaries received slightly higher 

total revenue per beneficiary than projected, which could be a result of 

differences between actual and projected health status and geographic 

location of beneficiaries who enrolled. For instance, MA plans could have 

received additional Medicare payments if they enrolled beneficiaries who 

were expected to need more health care, who were disproportionately 

from counties with higher benchmarks, or a combination of these two 

reasons. Because of the higher total revenue, medical expenses as a 

percentage of revenue were 0.2 percentage points lower than projected, 

 

18Throughout this report, we examined aggregate expenses and profits by weighting the 

average per member per month profits and expenses for individual plans and contracts by 

actual enrollment.

For Plans Available to All 

Beneficiaries in 2011, 

Expenses and Profits 

Represented Similar 

Percentages of Total 

Revenue Compared to 

Projections
 

Page 11 GAO-14-148 Medicare Advantage Expenses

despite MA organizations’ spending more dollars on medical expenses 

than projected.

The percentage of revenue spent on medical expenses and profits varied 

substantially between MA contracts. For example, while MA organizations 

spent an average of 86.3 percent of revenue on medical expenses, 

approximately 39 percent of beneficiaries were covered by contracts 

where less than 85 percent of revenue was spent on medical expenses, 

and 13 percent of beneficiaries were covered by contracts where less 

than 80 percent of revenue was spent on medical expenses (see table 2).

Further, while the average profit margin was 4.5 percent among plans 

available to all beneficiaries, 26 percent of beneficiaries in our analysis 

were covered by contracts where profit margins were negative. In 

contrast, 15 percent of beneficiaries in our analysis were covered by 

contracts where profit margins were 10 percent or higher.19

 

19All contracts with profit margins of 10 percent or higher spent less than 85 percent of 

their total revenues on medical expenses. Among these contracts, the median percentage 

spent on medical expenses was approximately 77 percent. Throughout the report, we 

calculate profit margins by dividing profits by total revenue.
 

Page 12 GAO-14-148 Medicare Advantage Expenses

Table 2: Distribution of the Percentage of Total Revenue Spent on Medical 

Expenses and Profits, 2011

Number of 

contracts 

Number of 

beneficiaries

Percentage of

beneficiaries

Cumulative 

percentage of

beneficiaries

Percentage of total revenue spent on medical expenses

≥ 95 30 797,156 11% 100%

90 to <95 53 1,267,042 17 89

85 to <90 93 2,457,568 33 72

80 to <85 89 1,957,797 26 39

75 to <80 49 841,323 11 13

< 75 8 131,208 2 2 

Percentage of total revenues dedicated to profit

≥ 15 8 299,085 4 100

10 to <15 37 834,500 11 96

5 to <10 86 2,261,036 30 85

0 to <5 103 2,122,766 28 54

-5 to <0 53 1,471,869 20 26

< -5 35 462,837 6 6 

Source: GAO analysis of CMS data.

Notes: Table includes data from 322 contracts and 1,242 plans, which enrolled the equivalent of 

approximately 7.5 million beneficiaries—88 percent of the total MA enrollment in plans available to all 

Medicare beneficiaries in 2011. For each contract, we weighted the percentage of total revenue spent 

on medical expenses and profits by actual 2011 enrollment.

For MA organizations with either high or low benchmarks, profit margins 

and the percentage of total revenue devoted to expenses were, on 

average, similar to projections. As a percentage of revenue, MA 

organizations with high benchmarks had slightly lower-than-projected 

medical expenses but slightly higher-than-projected nonmedical 

expenses and profits (see table 3). As a percentage of revenue, MA 

organizations with low benchmarks had slightly higher-than-projected 

medical expenses and nonmedical expenses but slightly lower profits. In 

addition, MA organizations with high benchmarks had higher profit 

margins compared to those with low benchmarks. Specifically, 

organizations with high benchmarks had an average profit margin of 

5.9 percent and made $668 per beneficiary compared to 3.5 percent and 

$313 per beneficiary for organizations with low benchmarks.
 

Page 13 GAO-14-148 Medicare Advantage Expenses

Table 3: Actual and Projected Expenses and Profits as Amounts and Percentages of Revenue by Contracts with High and

Low Benchmarks, 2011

Actual Projected

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Contracts with high benchmarks

Contracts = 90

Beneficiaries = 2,821,676

Medical expenses 85.8% $9,737 $27.4 86.8% $9,641 $27.2

Nonmedical expenses 8.3 937 2.6 7.7 853 2.4

Profits 5.9 668 1.9 5.6 617 1.7

Total revenue $11,342 $32.0 $11,111 $31.4

Contracts with low benchmarks

Contracts = 232 

Beneficiaries = 4,630,418

Medical expenses 86.7 7,812 36.2 86.4 7,543 34.9

Nonmedical expenses 9.8 886 4.1 9.6 839 3.9

Profits 3.5 313 1.4 4.0 353 1.6

Total revenue $9,010 $41.7 $8,735 $40.4

Source: GAO analysis of CMS data.

Notes: Table includes data from 322 contracts and 1,242 plans, which enrolled the equivalent of 

approximately 7.5 million beneficiaries—88 percent of the total MA enrollment in plans available to all 

Medicare beneficiaries in 2011. To determine actual and projected expenses and profits for 2011, we 

multiplied both actual and projected per member per month expenses and profits by actual enrollment 

in member months for that year. Data on actual and projected expenses and profits were selfreported by MA organizations. Percentages may not add to 100 and medical expenses, nonmedical 

expenses, and profits may not equal total revenue because of rounding.

The accuracy of MA organizations’ projections varied on the basis of the 

type of plan they offered under each contract. Among the three plan types 

studied (HMO, PPO, and PFFS), PFFS contracts had the largest 

differences, in percentage point terms, between their actual and projected 

expenses and profits. For example, as a result of spending, on average, a 

higher-than-projected percentage of total revenue on medical and 

nonmedical expenses, PFFS contracts reported an actual profit margin of 

only 0.3 percent after projecting a 4.3 percent profit margin (see table 4).

HMO contracts had the highest profit margins and were the only type of 

contract, among the three studied, that averaged higher profits than 

projected. Specifically, HMO contracts had a 5.3 percent profit margin, 

which was slightly higher than projected—5.0 percent—and substantially 

higher than the profit margins of PPO and PPFS contracts—2.5 percent 

and 0.3 percent, respectively.
 

Page 14 GAO-14-148 Medicare Advantage Expenses

Table 4: Actual and Projected Expenses and Profits as Amounts and Percentages of Revenue among HMO, PPO, and PFFS

Contracts, 2011

Actual Projected

Difference between actual 

and projected

Percentage 

of revenue

Amount

(dollars 

in billions)

Percentage 

of revenue

Amount

(dollars 

in billions)

Percentage of 

revenue

(percentage points)

Amount

(dollars 

in billions)

HMO

Contracts = 214

Beneficiaries = 5,558,740

Medical expenses 86.0% $49.2 86.7% $48.1 -0.7 $1.1

Nonmedical expenses 8.7 5.0 8.4 4.6 0.3 0.3

Profits 5.3 3.0 5.0 2.7 0.3 0.3

PPO

Contracts = 95

Beneficiaries = 1,348,788

Medical expenses 87.3 10.2 86.4 9.9 0.9 0.3

Nonmedical expenses 10.2 1.2 9.9 1.1 0.3 0.1

Profits 2.5 0.3 3.7 0.4 -1.2 -0.1

PFFS

Contracts = 13

Beneficiaries = 544,565

Medical expenses 87.8 4.3 85.0 4.1 2.8 0.1

Nonmedical expenses 12.0 0.6 10.7 0.5 1.3 0.1

Profits 0.3 0.0 4.3 0.2 -4.0 -0.2

Source: GAO analysis of CMS data.

Notes: Table includes data from 322 contracts and 1,242 plans, which enrolled the equivalent of 

approximately 7.5 million beneficiaries—88 percent of the total MA enrollment in plans available to all 

Medicare beneficiaries in 2011. To determine actual and projected expenses and profits for 2011, we 

multiplied both actual and projected per member per month expenses and profits by actual enrollment 

in member months for that year. Data on actual and projected expenses and profits were selfreported by MA organizations. Percentages may not add to 100 and medical expenses, nonmedical 

expenses, and profits may not equal total revenue because of rounding. Regional PPOs were 

excluded from the PPO category in this analysis because of differences in the way such plans are 

paid by Medicare.
 

Page 15 GAO-14-148 Medicare Advantage Expenses

SNPs’ profits were higher than projected both in terms of a percentage of 

total revenue and in dollars. SNPs received somewhat higher revenue 

than projected and spent a lower percentage of total revenue on medical 

and nonmedical expenses than projected (see table 5). As a result of the 

higher-than-projected revenue and spending a lower percentage of 

revenue on expenses, SNPs reported an average profit per beneficiary of 

$1,115, which was 44 percent higher than projected ($777) and 

149 percent higher than the profit per beneficiary for plans available to all 

Medicare beneficiaries ($447).20 Compared to plans available to all 

Medicare beneficiaries, SNPs spent more in terms of amount per 

beneficiary, but less in percentage terms, on medical and nonmedical 

expenses. CMS officials said SNPs might have higher profit margins 

because of the potential additional risk of providing a plan that targets a 

specific population. For instance, the officials noted that it may be more 

difficult to predict revenue and spending for a SNP’s targeted population.

SNPs may face higher medical expenses because beneficiaries enrolled 

in such plans may have increased health care needs. According to CMS 

officials, SNPs may also face higher administrative expenses for several 

reasons, such as potentially higher marketing expenses associated with 

targeting SNPs’ designated population.

 

20Compared to plans available to all beneficiaries, SNPs had a higher median profit 

margin. In addition, SNPs’ average profit margin was higher than that of plans available to 

all beneficiaries after accounting for plan type (i.e., HMO or PPO), whether the plans had 

high or low benchmarks, and after excluding plans located in Puerto Rico, where the MA 

market has some unusual characteristics, such as having benchmarks that are 

substantially higher relative to Medicare FFS than other areas of the United States. 

Further, all three types of SNPs—dual-eligible, chronic condition, and institutional SNPs—

had profit margins of at least 8.4 percent. Because our exclusion criteria resulted in our

excluding a higher percentage of chronic care and institutional SNPs than dual-eligible 

SNPs, our SNP population was disproportionately composed of dual-eligible SNPs, and 

the population of chronic care and institutional SNPs studied was relatively small. For 

instance, 92 percent of the beneficiaries enrolled in the SNPs we studied were enrolled in 

dual-eligible SNPs, whereas approximately 81 percent of the total SNP population was 

enrolled in dual-eligible SNPs in 2011.

For Plans with Specific 

Eligibility Requirements in 

2011, Expenses Were 

Lower and Profits Were 

Higher as a Percentage of 

Total Revenue Compared 

to Projections
 

Page 16 GAO-14-148 Medicare Advantage Expenses

Table 5: Actual and Projected Expenses and Profits as Amounts and Percentages of Revenue for Special Needs Plans, 2011

Actual Projected

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Medical expenses 82.7% $10,711 $10.5 84.5% $10,588 $10.4

Nonmedical expenses 8.7 1,133 1.1 9.3 1,172 1.2

Profits 8.6 1,115 1.1 6.2 777 0.8

Total revenue $12,959 $12.8 $12,537 $12.3

Source: GAO analysis of CMS data.

Notes: Table includes data from 99 contracts and 121 plans, which enrolled the equivalent of 

approximately 1.0 million beneficiaries—71 percent of the total SNP enrollment in 2011. To eliminate 

the effects caused by any differences between actual and projected enrollment, we used actual 

enrollment to calculate both projected and actual expenses and profits. Data on actual and projected 

expenses and profits were self-reported by MA organizations. Medical expenses, nonmedical 

expenses, and profits may not equal total revenue because of rounding.

Employer group plans had higher revenue, had higher profit margins, and 

spent a lower percentage of total revenue on expenses than projected.

Specifically, total revenue per beneficiary was about 14 percent higher 

than projected—$11,364 compared to $9,957 (see table 6). In addition, 

employer group plans spent 86.3 and 6.1 percent of total revenue on 

medical expenses and nonmedical expenses, respectively, compared to a 

projected 89.5 and 6.3 percent, and these plans also had an actual profit 

margin of 7.6 percent compared to a 4.2 percent projected profit margin.

The combined effects of higher revenue and a higher profit margin 

translated into average profits per beneficiary of $861, which was 

108 percent higher than projected ($413) and 93 percent higher than the 

profit per beneficiary for plans available to all Medicare beneficiaries 

($447).21 Unlike other MA plans, projections for employer group plans 

may vary from their actual profits and expenses because MA 

organizations that offer such plans are able to negotiate specific benefit 

packages and cost-sharing amounts with employers after they submit 

their bids to CMS.

 

21Compared to plans available to all beneficiaries, employer group plans had a higher 

median profit margin. In addition, employer plans received higher total revenues per 

beneficiary and had a higher average profit margin than plans available to all beneficiaries 

after accounting for plan type (i.e., HMO or PPO) and whether the plans had high or low 

benchmarks.
 

Page 17 GAO-14-148 Medicare Advantage Expenses

Table 6: Actual and Projected Expenses and Profits as Amounts and Percentages of Revenue for Employer Group Plans, 

2011

Actual Projected

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Percentage 

of revenue

Amount per 

beneficiary

Amount

(dollars in billions)

Medical expenses 86.3% $9,806 $16.5 89.5% $8,912 $15.0

Nonmedical expenses 6.1 697 1.2 6.3 632 1.1

Profits 7.6 861 1.5 4.2 413 0.7

Total revenue $11,364 $19.2 $9,957 $16.8

Source: GAO analysis of CMS data.

Notes: Table includes data from 77 contracts and 111 plans, which enrolled the equivalent of 

approximately 1.7 million beneficiaries—77 percent of the total MA employer group enrollment in 

2011. To eliminate the effects caused by any differences between actual and projected enrollment, 

we used actual enrollment to calculate both projected and actual expenses and profits. Data on actual 

and projected expenses and profits were self-reported by MA organizations.

We requested comments from CMS, but none were provided. 

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Secretary of Health 

and Human Services, interested congressional committees, and others.

In addition, the report will be available at no charge on the GAO website 

at http://www.gao.gov. 

If you or your staff has any questions about this report, please contact me 

at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices 

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made major contributions to this report 

are listed in appendix I.

Sincerely yours,

James Cosgrove

Director, Health Care

Agency Comments
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 18 GAO-14-148 Medicare Advantage Expenses

James C. Cosgrove, (202) 512-7114 or cosgrovej@gao.gov

In addition to the contact named above, Christine Brudevold, Assistant 

Director; Sandra George; Gregory Giusto; Brian O’Donnell; and 

Elizabeth T. Morrison made key contributions to this report.

Appendix I: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(291137)
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