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Medicarebriefs

MEDICARE ADVANTAGE BENCHMARKS AND 

PAYMENTS COMPARED WITH AVERAGE 

MEDICARE FEE-FOR-SERVICE SPENDING

The purpose of this report is to present 

data on the level of Medicare Advantage 

(MA) payments for Parts A and B services 

relative to the spending on similar 

benefi ciaries in Medicare’s traditional 

fee-for-service (FFS) program. This 

responds to requests from Congressional 

committees to update our past analyses. 

The last time MedPAC staff estimated this 

relationship, in April 2004, we found that 

the average payment to MA plans was 107 

percent of the cost of demographically and 

geographically similar benefi ciaries in the 

FFS program. The 107 percent fi gure did 

not account for any health risk differences 

between the plan and FFS populations 

because we could not independently 

estimate those differences.

Several changes in MA payment have 

occurred that require us to update our 

modeling of the relative payment analysis. 

First, Medicare payments to plans are 

determined differently than in 2004. CMS 

no longer determines MA plan payments 

based solely on administratively set 

payment rates. Plans now submit formal 

bids, and then CMS compares the bids 

with benchmarks to determine payment. 

Benchmarks are bidding targets that CMS 

sets for every county administratively, 

as directed by law. The exception is the 

case of MA regional preferred provider 

organizations (PPOs), for which the 

benchmarks are based in part on bids 

that are submitted by the plans. For both 

local plans and regional PPOs, Medicare’s 

payment declines if bids are lower than 

the benchmarks.

Also, there are more plans and greater 

benefi ciary enrollment in plans than 

in 2004. In 2006, virtually all Medicare 

benefi ciaries have an MA plan available. 

(More detail on plan availability can 

be found in Chapter 9 of MedPAC’s 

forthcoming June 2006 report.) Plan 

service areas have expanded to more rural 

and other areas with benchmarks that are 

high relative to Medicare FFS spending. 

The benchmarks were relatively high 

because these areas were given increases 

in payment rates under earlier law.

Finally, the risk adjustment system has 

changed payment rates. In 2004, the 

Centers for Medicare & Medicaid Services 

(CMS) adjusted plan payments with a 

blend of 70 percent demographic factors 

and 30 percent health risk factors. For 

2006, 25 percent of each payment is based 

on the demographic factors and 75 percent 

is based on the health risk factors. By 

2007, payments will be based 100 percent 

on risk-adjusted rates.

2004 fi ndings

Our fi ndings in April 2004 were based on 

2004 county payment rates and enrollment 

as of December 2002 as published by 

CMS for aged benefi ciaries.1

 We found 

that the MA payment rates resulted in 

payments to MA plans averaging 107 

percent of expected Medicare FFS costs 

for demographically and geographically 

similar benefi ciaries. We noted in our 

presentation of this fi nding that any 

effects of health risk differences between 

the plan and FFS populations were not 

accounted for with this analysis.

Updating and refi ning the analysis

We update the analysis through the use 

of 2006 data for enrollment and payment 

changes. CMS no longer sets purely 

administrative payment rates. Instead, the 

agency publishes county (and regional) 

benchmarks. The 2006 benchmarks are the 

2005 MA county payment rates, updated 

by the projected national growth rate in 

per capita Medicare spending.2
2 Medicare Advantage benchmarks and payments compared with average Medicare FFS spending Medicarebriefs

CMS bases the payment for private plans 

on the relationship between their bids and 

the benchmarks. If a plan’s bid falls above 

the benchmark, then the plan receives 

the benchmark as its payment and the 

enrollees will have to pay an additional 

premium that equals the difference 

between the bid and the benchmark. If the 

plan’s bid falls below the benchmark, the 

Medicare program retains 25 percent of 

the difference, and the plan receives the 

other 75 percent as a rebate, in addition to 

the amount of its bid. The plan must return 

the rebate to its enrollees in the form of 

lower Medicare cost sharing, lower Part 

B or Part D premiums, or non-Medicare 

supplemental benefi ts. Thus Medicare 

will never pay the plan more than the 

benchmark and will usually pay less than 

the benchmark. For 2006, 95 percent of 

plans bid below their benchmarks. (More 

detail on plan bidding is available in 

Chapter 9 of MedPAC’s forthcoming June 

2006 report.)

The fi rst two columns of Table 1 show 

the effects of updating the enrollment 

data and comparing 2004 and 2006 MA 

payments relative to FFS on a common 

basis—that is adjusting for demography 

and geography only. The comparison also 

includes the change from administratively 

set payment rates to the new bidding 

process. The weighted benchmarks rose 

slightly relative to FFS Medicare spending 

(from 107 percent to 108 percent) because 

enrollment grew in areas with higher 

benchmarks relative to FFS. At the same 

time, the bidding lowered plan payments 

below the benchmarks. In 2004, MA plans 

were paid an average of 107 percent 

of the FFS Medicare spending for the 

demographic share of payments, compared 

with 104 percent projected in 2006.

However, this percentage does not tell the 

whole story. Our April 2004 calculation did 

not account for the relative disease burden 

of the MA enrollees. CMS’s estimate 

of that disease burden indicated that 

managed care enrollees were healthier 

than those in fee-for-service Medicare. 

(CMS’s estimate of the disease burden 

is published each year in the fi nal MA 

payment notice.) Our earlier fi gure of 

107 percent would have been higher if 

we had included those estimates of risk 

differences.

With the introduction of risk adjustment, 

the payment system now explicitly takes 

into account the relative disease burden 

of the MA population. Risk adjustment 

(applied to 75 percent of payments in 

2006) generally would lower payments to 

plans if they enrolled benefi ciaries who 

were healthier. But CMS has taken steps 

to prevent overall payments to plans from 

going down. A hold-harmless adjustment 

increases the benchmark rates in 2006 by 

the amount that CMS expects payments 

would fall because of risk adjustment.

Table 1 Medicare Advantage benchmarks and payments compared with average Medicare FFS spending

2004 demographic 

payments based on 

2002 enrollment without 

risk adjustment

2006 demographic 

payments based on 

2005 enrollment without 

risk adjustment

2006 demographic and 

risk payments based on 

2005 enrollment with 

hold-harmless adjustment

Benchmarks 

(or 2004 payment rates) 

relative to FFS 107% 108% 115%

Medicare plan payments 

relative to FFS 107 104 111

Note: FFS (fee-for-service). All enrollment data are for December. 2004 demographic data are for aged benefi ciaries.

Source: MedPAC analysis of plan bids, enrollment, and benchmarks published in the 2006 Medicare Advantage rate fi nal notice.
3 Medicare Advantage benchmarks and payments compared with average Medicare FFS spending Medicarebriefs

Even though the hold-harmless adjustment 

is scheduled to fall over time as a result 

of the Defi cit Reduction Act of 2005, in 

2006 it still has the effect of raising the 

benchmarks signifi cantly. In 2007 (and 

subsequent years), the hold-harmless 

effect on the benchmarks will decline. The 

impact of the decline in the hold-harmless 

effect on payments, of course, can not 

be estimated because payments depend 

strongly of future plan bids.

The last column on the table shows the 

result of all these changes together 

for 2006. We fi nd that the combined 

benchmarks are set at an average of 115 

percent of FFS Medicare in 2006. After 

taking into account the amount that 

plans return to the trust fund through 

the bidding process, the 115 percent 

fi gure falls to 111 percent. In sum, this 

111 percent includes all three factors we 

have discussed: the relationship of the 

MA benchmarks to FFS rates, the effect of 

bidding and returning funds to the trust 

funds, and the hold-harmless provisions.

Bear in mind that these calculations are 

national averages, and there are areas of 

the country where MA payments are less 

than FFS. Moreover, calculations carried 

out on more recent and detailed data could 

produce estimates that vary somewhat. ■

1 December 2002 was the most recent count of aged 

enrollees.

2 If a local MA plan serves a multicounty area, the 

benchmark against which it bids is an average of the 

different benchmarks for the counties it serves, weighted 

by its projected enrollment from each county.