Medicare Advantage: Higher Spending Relative to Medicare Fee-for-Service May Not Ensure Lower Out-of-Pocket Costs for Beneficiaries
Published: 2008-02-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Although private health plans were originally envisioned in the 1980s as a potential source of Medicare savings, such plans have generally increased program spending. In 2006, Medicare paid $59 billion to Medicare Advantage (MA) plans--an estimated $7.1 billion more than Medicare would have spent if MA beneficiaries had received care in Medicare fee-for-service (FFS). MA plans receive a per member per month (PMPM) payment to provide services covered under Medicare FFS. Almost all MA plans receive an additional Medicare payment, known as a rebate. Plans use rebates and sometimes additional beneficiary premiums to fund benefits not covered under Medicare fee-for-service; reduce premiums; or reduce beneficiary cost sharing. In 2007, MA plans received about $8.3 billion in rebate payments. This testimony is based on GAO's report, Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs ( GAO-08-359 , February 2008). For this testimony, GAO examined MA plans' (1) projected allocation of rebates, (2) projected cost sharing, and (3) projected revenues and expenses. GAO used 2007 data on MA plans' projected revenues and covered benefits, accounting for 71 percent of beneficiaries in MA plans.
section_title: What GAO Found
paragraphs: GAO found that MA plans projected they would use their rebates primarily to reduce cost sharing, with relatively little of their rebates projected to be spent on additional benefits. Nearly all plans--91 percent of the 2,055 plans in the study--received a rebate. Of the average rebate payment of $87 PMPM, plans projected they would allocate about $78 PMPM (89 percent) to reduced cost sharing and reduced premiums and $10 PMPM (11 percent) to additional benefits. The average projected PMPM costs of specific additional benefits across all MA plans ranged from $0.11 PMPM for international outpatient emergency services to $4 PMPM for dental care. While MA plans projected that, on average, beneficiaries in their plans would have cost sharing that was 42 percent of Medicare FFS cost-sharing estimates, some beneficiaries could have higher cost sharing for certain service categories. For example, some plans projected that their beneficiaries would have higher cost sharing, on average, for home health services and inpatient stays, than in Medicare FFS. If beneficiaries frequently used these services that required higher cost sharing than Medicare FFS, it was possible that their overall cost sharing was higher than what they would have paid under Medicare FFS. Out of total revenues of $783 PMPM, on average, MA plans projected that they would allocate about 87 percent ($683 PMPM) to medical expenses. MA plans projected they would allocate, on average, about 9 percent of total revenue ($71 PMPM) to nonmedical expenses, including administration and marketing expenses; and about 4 percent ($30 PMPM) to the plans' profits. About 30 percent of beneficiaries were enrolled in plans that projected they would allocate less than 85 percent of their revenues to medical expenses. As GAO concluded in its report, whether the value that MA beneficiaries receive in the form of reduced cost sharing, lower premiums, and additional benefits is worth the additional cost to Medicare is a decision for policymakers. However, if the policy objective is to subsidize health care costs of low-income Medicare beneficiaries, it may be more efficient to directly target subsidies to a defined low-income population than to subsidize premiums and cost sharing for all MA beneficiaries, including those who are well off. As Congress considers the design and cost of MA, it will be important for policymakers to balance the needs of beneficiaries and the necessity of addressing Medicare's long-term financial health.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the findings from our February  2008 report, Medicare Advantage: Increased Spending Relative to  Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of- Pocket Costs. Under the Medicare Advantage (MA) program, which  represents an alternative to Medicare’s traditional fee-for-service (FFS)  program, beneficiaries may receive their covered benefits through private  health plans that contract with Medicare. As of August 2007,  approximately 20 percent of beneficiaries—or about 8.1 million  beneficiaries—were enrolled in private plans, up from about 11 percent in  2003. The growth in enrollment was largely due to provisions of the  Medicare Prescription Drug, Improvement, and Modernization Act of 2003  (MMA). The MMA, among other things, increased payment rates for  private plans to encourage their participation and enable plans to enhance  their benefit packages to attract beneficiaries. The subsequent rapid  growth of Medicare spending on the MA program, resulting from increases  in both payment rates and enrollment, underscores the importance of  today’s hearing and the need to better understand how MA plans use the  funding they receive.
In 2006, Medicare paid $59 billion to MA plans—an estimated $7.1 billion  more than Medicare would have spent if MA plan beneficiaries had instead  received care through the FFS program. Although adding a private health  plan component to Medicare was envisioned in the 1980s as a potential  source of program savings, private health plans have generally increased  overall Medicare spending. Spending pressures increased as policy  objectives evolved to foster private health plan participation and provide  Medicare beneficiaries with more health plan choices. According to  Medicare’s Office of the Actuary, the additional spending for the MA  program has hastened the exhaustion of the Federal Hospital Insurance  Trust Fund that helps finance Medicare. It has also resulted in higher  Medicare premiums for all beneficiaries—including those in the FFS  program—because premiums paid by Medicare FFS beneficiaries are tied  to the costs of both Medicare FFS and MA programs. The Congressional  Budget Office estimated that $54 billion in projected Medicare spending  from 2009 through 2012 is the result of setting MA plan payments above  Medicare FFS spending. The continued cost escalation associated with  MA plans relative to Medicare FFS raise further concerns about the long- term financial implications of the MA program on the financial health of  the Medicare program. Even without the added costs of the MA program,  Medicare faces serious long-term financial challenges due to factors such  as the rising cost of care and the retirement of the baby boom generation.
The federal government spends relatively more for beneficiaries in MA  plans, in part, because most MA plans receive payments known as rebates,  in addition to the payments they receive for providing Medicare-covered  services. Beginning in 2006, MA plans were required to submit bids for  providing Medicare-covered services. An MA plan qualifies for a rebate if  its bid is less than a predetermined amount known as a benchmark. A  portion, 75 percent, of the difference between the benchmark and the  plan’s bid, is returned to the plan in the form of a rebate. In 2007, the total  amount of rebates paid to MA plans was about $8.3 billion. Plans must use  rebates to provide benefits or reduce beneficiary out-of-pocket costs in  any combination of the following ways: (1) provide additional benefits not  covered under Medicare FFS, such as dental and hearing benefits;   (2) reduce beneficiary cost sharing; or (3) reduce premiums.
Proponents of the MA program note that rebates enable plans to provide  valuable extra benefits to beneficiaries and reduce beneficiary out-of- pocket costs, thereby making health care more affordable. They point out  that individuals with low incomes who do not qualify for other government  health care coverage may receive some financial relief by enrolling in an  MA plan. Critics question the cost of the current MA program and suggest  that if the policy objective is to subsidize the health care costs of  individuals with low incomes, it would be more efficient to directly target  subsidies to a well-defined low-income population instead of subsidizing  the cost of all MA beneficiaries. Further, they are concerned that the  additional payments to MA plans are funded in part by the approximately  80 percent of beneficiaries in the FFS program who do not receive  enhanced benefits.
My remarks today are based on the findings of our recent report.  Specifically, my testimony will focus on (1) how plans projected they  would allocate their rebates to additional benefits, reduced cost sharing,  and reduced premiums; (2) how projected cost sharing in MA plans  compared to projected cost sharing in Medicare FFS; and (3) how MA  plans projected they would allocate their revenue to medical and other  expenses.
To conduct our work for the report, we analyzed MA plans’ 2007 projected  revenues, projected costs, and covered benefits from data that plans  submitted to the Centers for Medicare & Medicaid Services (CMS), the  agency that administers Medicare. We were limited to analyzing  projections because MA plans are not required to submit detailed  information on actual revenues or costs. We excluded plans that restricted  enrollment and plans with service areas that are exclusively outside the   50 states and the District of Columbia. After all exclusions, we had 2,055  plans in our study that accounted for 71 percent of all MA beneficiaries.  Our results are weighted by August 2007 plan enrollment and are  standardized to represent a Medicare beneficiary of average health status.  Our work for the report was conducted from April 2007 through February  2008 in accordance with generally accepted government auditing  standards.
In summary, we found that most of the MA plans we reviewed received  rebates and allocated them primarily to beneficiary cost sharing and  premium reductions. In 2007, 91 percent of these MA plans (1,874 of 2,055)  received an average rebate of about $87 per member per month (PMPM).  Based on the projections submitted to CMS, MA plans allocated about   89 percent of their rebates to beneficiary cost sharing and premium  reductions. Plans allocated about 11 percent of the rebates to provide  additional benefits, such as dental services, that are not covered under  Medicare FFS. The average dollar amounts plans projected they would pay  for additional benefits ranged from $0.11 PMPM for international  outpatient emergency services to $4 PMPM for dental care. Some plans  charged an additional premium that supplements the rebate to pay for  additional benefits, cost-sharing reductions, or a combination of the two.  We also found that, despite the rebates paid to MA plans, some  beneficiaries in MA plans could pay more for services than they would in  FFS. For example, depending on the MA plan in which they were enrolled  and their health care needs, some beneficiaries who frequently used home  health or inpatient services could have had overall cost sharing that was  higher than what they would have paid under Medicare FFS. Finally, we  found that MA plans projected spending, on average, 87 percent of total  revenues ($683 of $783 PMPM) on medical expenses. They projected that  the remainder would be allocated to a combination of nonmedical  expenses (9 percent), such as administration and marketing expenses, and  plans’ profits (4 percent). However, the percentage allocated to medical  expenses varied widely by plan. About 30 percent of MA beneficiaries  were enrolled in plans that projected spending less than 85 percent on  medical expenses.
subsections: section_title: Background
paragraphs: Medicare FFS consists of Part A, hospital insurance, which covers  inpatient stays, care in skilled nursing facilities, hospice care, and some  home health care; and Part B, which covers certain physician visits,  outpatient hospital treatments, and laboratory services, among other  services. Most persons aged 65 and older, certain individuals with  disabilities, and most individuals with end-stage renal disease are eligible  to receive coverage for Part A services at no premium. Individuals eligible  for Part A can also enroll in Part B, although they are charged a Part B  premium. MA plans are required to provide benefits that are covered  under the Medicare FFS program. Most Medicare beneficiaries who are  eligible for Medicare FFS can choose to enroll in the MA program,  operated through Medicare Part C, instead of Medicare FFS. All Medicare  beneficiaries, regardless of their source of coverage, can choose to receive  outpatient prescription drug coverage through Medicare Part D.
Beneficiaries in both Medicare FFS and MA face cost-sharing requirements  for medical services. In Medicare FFS, cost sharing includes a Part A and a  Part B deductible, the amount beneficiaries must pay for services before  Medicare FFS begins to pay. Medicare FFS cost sharing also includes  coinsurance—a percentage payment for a given service that a beneficiary  must pay, and copayments—a standard amount a beneficiary must pay  for a medical service. Medicare allows MA plans to have cost-sharing  requirements that are different from Medicare FFS’s cost-sharing  requirements, although an MA plan cannot require overall projected  average cost sharing that exceeds what beneficiaries would be expected to  pay under Medicare FFS. MA plans are permitted to establish dollar limits  on the amount a beneficiary spends on cost sharing in a year of coverage,  although Medicare FFS has no total cost-sharing limit. MA plans can use  both out-of-pocket maximums, limits that can apply to all services but can  exclude certain service categories, and service-specific maximums, which  are limits that apply to a single service category. These limits help provide  financial protection to beneficiaries who might otherwise have high cost- sharing expenses.
section_title: MA Plans Projected They Would Allocate Most of the Rebates to Beneficiaries in the Form of Reduced Cost Sharing and Reduced Premiums
paragraphs: MA plans projected that, on average, they would allocate most of the  rebates to beneficiaries as reduced cost sharing and reduced premiums for  Part B services, Part D services, or both. In 2007, almost all MA plans in  our study (1,874 of the 2,055 plans, or 91 percent) received a rebate  payment from Medicare that averaged $87 PMPM. MA plans projected they  would allocate 69 percent of the rebate ($61 PMPM) to reduced cost  sharing and 20 percent ($17 PMPM) to reduced premiums. MA plans  projected they would allocate relatively little of the rebates (11 percent or  $10 PMPM) to additional benefits that are not covered under Medicare  FFS. (See fig. 1.) On average, for plans that provided detailed cost  estimates, the projected dollar amounts of the common additional benefits  ranged from a low of $0.11 PMPM for international outpatient emergency  services to $4 PMPM for dental services. Additional benefits commonly  offered included dental services, health education services, and hearing  services.
About 41 percent of beneficiaries, or 2.3 million people, were enrolled in  an MA plan that also charged additional premiums to pay for additional  benefits, reduced cost sharing, or a combination of the two. The average  additional premium charged was $58 PMPM. Based on plans’ projections,  we estimated that about 77 percent of the additional benefits and  reduction in beneficiary cost sharing was funded by rebates, with the  remainder being funded by additional beneficiary premiums.
section_title: MA Plans Projected that MA Beneficiaries, on Average, Would Have Lower Cost Sharing than if They Were in Medicare FFS, but Some MA Beneficiaries Could Pay More
paragraphs: For 2007, MA plans projected that MA beneficiary cost sharing, funded by  both rebates and additional premiums, would be 42 percent of estimated  cost sharing in Medicare FFS. Plans projected that their beneficiaries, on  average, would pay $49 PMPM in cost sharing, and they estimated that the  Medicare FFS equivalent cost sharing for their beneficiaries was   $116 PMPM.
Although plans projected that beneficiaries’ overall cost sharing was  lower, on average, than Medicare FFS cost-sharing estimates, some MA  plans projected that cost sharing for certain categories of services was  higher than Medicare FFS cost-sharing estimates. This is because overall  cost sharing in MA plans is required to be actuarially equivalent or lower  compared to overall cost sharing in Medicare FFS, but may be higher or  lower for specific categories of services. For example, 19 percent of MA  beneficiaries were enrolled in plans that projected higher cost sharing for  home health services, on average, than in Medicare FFS, which does not  require any cost sharing for home health services. Similarly, 16 percent of  MA beneficiaries were in plans with higher projected cost sharing for  inpatient services relative to Medicare FFS. (See table 1.) Some MA  beneficiaries who frequently used these services with higher cost sharing  than Medicare FFS could have had overall cost sharing that was higher  than what they would pay under Medicare FFS.
Cost sharing for particular categories of services varied substantially  among MA plans. For example, with regards to inpatient cost sharing,  more than half a million beneficiaries were in MA plans that had no cost  sharing at all. In contrast, a similar number of beneficiaries were in MA  plans that required cost sharing that could result in $2,000 or more for a  10-day hospital stay and $3,000 or more for three average-length hospital  stays. In Medicare FFS in 2007, beneficiaries paid a $992 deductible for  the first hospital stay in a benefit period, no deductible for subsequent  hospital stays in the same benefit period, and a 20 percent coinsurance for  physician services that averaged $73 per day for the first 4 days of a  hospital stay and $58 per day for subsequent days in the stay.
Figure 2 provides an illustrative example of an MA plan that could have  exposed a beneficiary to higher inpatient costs than under Medicare FFS.  While the plan in this illustrative example had lower cost sharing than  Medicare FFS for initial hospital stays of 4 days or less as well as initial  hospital stays of 30 days or more, for stays of other lengths the MA plan  could have cost beneficiaries more than $1,000 above out-of-pocket costs  under Medicare FFS. The disparity between out-of-pocket costs under the  MA plan and costs under Medicare FFS was largest when comparing  additional hospital visits in the same benefit period, since Medicare FFS  does not charge a deductible if an admission occurs within 60 days of a  previous admission.
Some MA plans had out-of-pocket maximums, which help protect  beneficiaries against high spending on cost sharing. As of August 2007,  about 48 percent of beneficiaries were enrolled in plans that had an out-of- pocket maximum. However, some plans excluded certain services from  the out-of-pocket maximum. Services that were typically excluded were  Part B drugs obtained from a pharmacy, outpatient substance abuse and  mental health services, home health services, and durable medical  equipment.
section_title: MA Plans Projected Approximately 87 Percent of Total Revenue Would be Spent on Medical Expenses
paragraphs: For 2007, MA plans projected that of their total revenues ($783 PMPM),  they would spend approximately 87 percent ($683 PMPM) on medical  expenses. Plans further projected they would spend approximately   9 percent of total revenue ($71 PMPM) on nonmedical expenses, such as  administration expenses and marketing expenses, and approximately   4 percent ($30 PMPM) on the plans’ profits, on average. There was  variation among individual plans in the percent of revenues projected to  be spent on medical expenses. For example, about 30 percent of  beneficiaries—1.7 million—were enrolled in plans that projected spending  less than 85 percent on medical expenses. While there is no definitive  standard for the percentage of revenues that should be spent on medical  expenses, Congress adopted the 85 percent threshold to require minimum  thresholds for MA plans in the Children’s Health and Medicare Protection  Act of 2007.
MA plans projected expenses separately for certain categories of  nonmedical expenses, including marketing and sales. One type of MA  plan—Private Fee-for-Service (PFFS)—allocated a larger percentage of  revenue to marketing and sales than other plan types. On average, as a  percentage of total revenue, marketing and sales expenses were   3.6 percent for PFFS plans compared to 2.4 percent for all MA plans.
section_title: Concluding Observations
paragraphs: Medicare spends more per beneficiary in MA than it does for beneficiaries  in Medicare FFS, at an estimated additional cost to Medicare of $54 billion  from 2009 through 2012. In 2007, the average MA plan receives a Medicare  rebate equal to approximately $87 PMPM, on average. MA plans projected  they would allocate the vast majority of their rebates—approximately   89 percent—to beneficiaries to reduce premiums and to lower their cost- sharing for Medicare-covered services. Plans projected they would use a  relatively small portion of their rebates—approximately 11 percent—to  provide additional benefits that are not covered under Medicare FFS.  Although the rebates generally have helped to make health care more  affordable for many beneficiaries enrolled in MA plans, some beneficiaries  may face higher expenses than they would in Medicare FFS. Further,  because premiums paid by beneficiaries in Medicare FFS are tied to both  Medicare FFS and MA costs, beneficiaries covered under Medicare FFS  are subsidizing the additional benefits and lower costs that MA  beneficiaries receive. Whether the value that MA beneficiaries receive in  the form of reduced cost sharing, lower premiums, and extra benefits is  worth the increased cost borne by beneficiaries in Medicare FFS is a  decision for policymakers. However, if the policy objective is to subsidize  health-care costs of low-income Medicare beneficiaries, it may be more  efficient to directly target subsidies to a defined low-income population  than to subsidize premiums and cost sharing for all MA beneficiaries,  including those who are well off. As Congress considers the design and  cost of the MA program, it will be important for policymakers to balance  the needs of beneficiaries—including those in MA plans and those in  Medicare FFS—with the necessity of addressing Medicare’s long-term  financial health.
Mr. Chairman, this completes my prepared remarks. I would be happy to  respond to any questions you or other Members of the Subcommittee may  have at this time.
For further information about this testimony, please contact   James Cosgrove 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 statement. Christine Brudevold, Assistant Director;   Jennie Apter, Alexander Dworkowitz, Gregory Giusto, Drew Long, and  Christina C. Serna made key contributions to this statement.
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