Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs
Published: 2008-02-22T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2006, the federal government spent about $59 billion on Medicare Advantage (MA) plans, an alternative to the original Medicare fee-for-service (FFS) program. Although health plans were originally envisioned in the 1980s as a potential source of Medicare savings, such plans have generally increased program spending. Payments to MA plans have been estimated to be 12 percent greater than what Medicare would have spent in 2006 had MA beneficiaries been enrolled in Medicare FFS. Some policymakers are concerned about the cost of the MA program and its contribution to overall spending on the Medicare program, which already faces serious long-term financial challenges. 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 FFS, reduce premiums, or reduce beneficiary cost sharing. This report examines for 2007 (1) MA plans' projected rebate allocations; (2) additional benefits MA plans commonly covered and their costs; (3) MA plans' projected cost sharing; and (4) MA plans' allocation of projected revenues and expenses. GAO analyzed data on MA plans' projected revenues and covered benefits for the most common types of MA plans, accounting for 71 percent of all beneficiaries in MA plans.
section_title: What GAO Found
paragraphs: In 2007, plans projected that relatively little of their rebates would be spent on additional benefits compared to cost-sharing and premium reductions. Of the average projected rebate amount of $87 PMPM, plans projected they would allocate about $10 PMPM (11 percent) to additional benefits, about $61 PMPM (69 percent) to reduced cost sharing, and about $17 PMPM (20 percent) to reduced premiums. Using funding from both rebates and additional premiums, plans covered a variety of additional benefits not covered by Medicare FFS in 2007, including dental and vision benefits. On the basis of plans' projections, GAO estimated that rebates would pay for approximately 77 percent of additional benefits and additional beneficiary premiums would pay for the remaining 23 percent. MA plans projected that, on average, beneficiaries in their plans would have lower cost sharing than Medicare FFS cost-sharing estimates, although some MA plans projected that their beneficiaries would have higher cost sharing for certain service categories, such as home health care and inpatient services. Because cost sharing was projected to be higher for some categories of services, beneficiaries who frequently used these services could have had overall cost sharing that would be higher than under Medicare FFS. On average, MA plans projected that they would allocate about 87 percent of total revenue ($683 of $783 PMPM) to medical expenses; approximately 9 percent ($71 PMPM) to non-medical expenses, including administration, marketing, and sales; and approximately 4 percent ($30 PMPM) to the plans' margin, sometimes called the plans' profit. About 30 percent of beneficiaries were enrolled in plans that projected they would allocate less than 85 percent of their revenues to medical expenses. Whether the value that MA beneficiaries receive in the form of reduced cost sharing, lower premiums, and additional benefits is worth the additional cost 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. In commenting on a draft of this report, the Centers for Medicare & Medicaid Services expressed concern that the report was not balanced because it did not sufficiently focus on the advantages of MA plans. GAO disagrees. This report provides information on how plans projected they would use rebates and identified instances in which MA beneficiaries could have out-of-pocket costs higher than they would have experienced under Medicare FFS.

section_title: Letter
paragraphs: In 2006, the federal government spent an estimated $59 billion on the  Medicare Advantage (MA) program, an alternative to the original Medicare  fee-for-service (FFS) program. The MA program provides health care  coverage to Medicare beneficiaries through private health plans, referred  to as MA plans. As of August 2007, 8.1 million people—about one out of  every five Medicare beneficiaries—were enrolled in an MA plan. Although  private health plans were originally envisioned in the 1980s as a potential  source of Medicare savings, such plans have generally increased overall  program spending. Medicare spending on private health plans has  increased rapidly since the enactment of the Medicare Prescription Drug,  Improvement, and Modernization Act of 2003 (MMA), rising 64 percent  from 2004 to 2006, while enrollment has increased by more than   50 percent. The MMA increased payment rates for private health plans and  allowed for larger annual rate increases, among other things. These  payment increases enabled MA plans to spend more money on additional  benefits relative to those available under Medicare FFS, such as vision and  hearing coverage; reductions in cost sharing—the amount a beneficiary  pays for covered services; and reductions in the premiums that many  Medicare FFS beneficiaries pay for coverage of outpatient services and  outpatient drugs. Beginning in 2006, MA plans were required to submit  bids for providing Medicare-covered services. MA plans that submitted  bids below predetermined benchmarks received additional payments,  known as rebates, and were required to spend their rebates on additional  benefits, reduced cost sharing, reduced premiums, or a combination of the  three.
As the MA program has grown, some policymakers and congressional  advisors have raised concerns about the design and cost of the program as  well as its effect on overall Medicare spending. The Medicare Payment  Advisory Commission (MedPAC) found that payments to MA plans in 2006  exceeded by 12 percent what Medicare would have paid had MA  beneficiaries received services through Medicare FFS. 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. MA plans’ payments thus place an additional  financial burden on the Medicare program, which the Comptroller General  and others have noted already faces serious long-term financial challenges  resulting from rising health care costs and the retirement of the baby  boom generation. Proponents of the MA program assert that the current  level of MA plan payments has allowed plans to offer valuable additional  benefits and make health care services more affordable for beneficiaries,  particularly in rural areas where private plan options had been very  limited. Further, they note that the MA program provides beneficiaries  with private plan choices and enables them to select plans that reflect  their preferences for premiums and cost sharing. They also 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 of the current MA program suggest that if the policy  objective is to subsidize the health care 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 health care costs of all MA  beneficiaries. Program critics also assert that a large portion of the  additional payments to MA plans goes to profit and administrative costs  and that some MA beneficiaries face higher cost sharing than they would if  they received coverage through Medicare FFS. Questions have also been  raised that while the MA program provides beneficiaries with many health  plan choices, it can be difficult for even a sophisticated buyer to  understand the implications of different cost-sharing arrangements. In  addition, some policymakers are concerned that because premiums paid  by beneficiaries in Medicare FFS are tied to both Medicare FFS and MA  program spending, the excess payments to MA plans result in higher  premiums for all Medicare beneficiaries.
Medicare pays MA plans a per member per month (PMPM) amount that is  based on a plan’s bid—its projection of the revenue it requires to provide a  beneficiary with services that are covered under Medicare FFS, and a  benchmark—the maximum amount Medicare will pay the plan to serve an  average beneficiary. Benchmarks vary by county, and in 2007, every  county in the United States had a benchmark that was at least as high as  average Medicare FFS spending PMPM in that county. If the plan’s bid is  higher than the benchmark, Medicare pays the plan the amount of the  benchmark, and the plan must charge beneficiaries a premium to collect  the amount by which the bid exceeds the benchmark. If the plan’s bid is  lower than the benchmark, Medicare pays the plan the amount of the bid  and makes an additional rebate payment to the plan equal to 75 percent of  the difference between the benchmark and the bid. Plans use the rebate to  provide their beneficiaries with additional benefits beyond those offered in  Medicare FFS, reduce premiums, reduce cost sharing, or any combination  of the three. In 2007, the total amount of rebates paid to MA plans was  about $8.3 billion. (See app. I for more information about how rebates are  calculated.) Regardless of whether a plan’s bid is above or below the  benchmark, a plan may charge its beneficiaries an additional premium to  provide additional benefits or reductions in cost sharing that are not  otherwise financed by rebates.
Given the additional spending—including rebates—for the MA program,  you asked that we undertake a study on MA plans’ rebates, benefit  packages, and revenues. This report examines for 2007 (1) how MA plans  projected they would allocate the rebates they receive, (2) what additional  benefits MA plans commonly covered with the rebates and additional  premiums and the projected costs of these additional benefits, (3) how MA  plans’ projected beneficiary cost sharing overall and by type of service  compared to Medicare FFS, and (4) how MA plans projected they would  allocate their revenue to medical and other expenses.
We used two primary data sources in our analyses, the 2007 Bid Pricing  Tool data and the 2007 Plan Benefit Package data that MA plans submitted  to the Centers for Medicare & Medicaid Services (CMS), the agency that  administers Medicare. The bid pricing data contain MA plans’ projections  of their revenue requirements and revenue sources. Specifically, the bid  pricing data contain information on the amount of rebates and additional  premiums plans project they will require to fund additional benefits,  reduced premiums, and reduced cost sharing. The bid pricing data also  contain information about how plans’ projected cost sharing compared to  estimates of cost sharing in Medicare FFS and plans’ projections of  revenue requirements—spending on medical expenses, spending on non- medical expenses (such as marketing, sales, and administration) and their  margins. The benefit package data contain detailed information on the  benefits and cost-sharing arrangements of plans.
We analyzed bid pricing data and benefit package data from four different  plan types, which together account for 98 percent of MA enrollment— including Health Maintenance Organizations (HMO), Private Fee-for- Service (PFFS) Plans, Preferred Provider Organizations (PPO), and  Provider-Sponsored Organizations (PSO). Because there were only 22  PSOs and enrollment in those plans was only 1 percent of total MA  enrollment, we did not report results separately for PSOs, but included  them in the aggregated results we reported for all MA plans. We excluded  plans that have restrictions on enrollment—such as employer plans and  Special Needs Plans (SNP)—and bids for plans that only cover certain  Medicare FFS services. We also excluded 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 beneficiaries in MA plans. Unless otherwise noted, the analyses were  based on these 2,055 plans and their beneficiaries. To address our study  questions, we did the following:    To determine how plans projected they would allocate the rebates they  receive, we used the bid pricing data. We applied the proportion of the  combined rebate and additional premium allocated to additional benefits,  reduced premiums, and reduced cost sharing to the projected total. We  restricted this analysis to those plans that received a rebate—1,874 of the  2,055 plans.
To identify the additional benefits MA plans commonly covered with  rebates and additional premiums, and the projected costs of these  additional benefits, we analyzed both the benefit package and bid pricing  data. We used the benefit package data to identify the additional benefits  plans covered and used the bid pricing data to identify the projected cost  of these additional benefits. When we analyzed the projected cost of  additional benefits, we included both the rebate payments and additional  premiums. We included rebates and additional premiums, rather than  solely considering the effects of rebates, because rebates and premiums  together fund the additional benefits that MA beneficiaries will receive. If  we had estimated the cost of additional benefits funded only by the  rebates, that amount would have been lower than the amount we report.
To compare projected beneficiary cost sharing in the MA and Medicare  FFS programs, we used both the bid pricing and the benefit package data.  We used the bid pricing data to quantify the projected cost-sharing  reduction, using the plans projections of the average cost-sharing  expenditure on a PMPM basis, and compared this to CMS estimates of  what the average PMPM cost-sharing expenditure would be in Medicare  FFS. To obtain details on the specific cost-sharing arrangements used by  the plans, we used the benefit package data. As was the case for our  analysis of additional benefits, the amounts we reported for average  PMPM cost sharing and cost-sharing reductions were based on the  amounts projected by the plans and included funding from both rebates  and additional premiums. If we had estimated the amount of cost sharing  funded only by the rebates, the PMPM cost-sharing amounts would have  been higher and the cost-sharing reduction amounts would have been  lower.
To identify how plans projected they would allocate their revenue to  medical and other expenses, we used the bid pricing data.
Throughout the report, dollar amounts are adjusted to reflect a beneficiary  of average health status. Where noted, we used August 2007 MA plan  enrollment numbers to weight our results.
To determine the reliability of the bid pricing, benefits, and enrollment  data, we spoke with CMS officials about the strengths and limitations of  these data sets. We also conducted logic tests to ensure that the bid  pricing data were reasonable and consistent, and compared the bid pricing  and benefits data to ensure consistency, where applicable, across the data  sets. In some cases, there were discrepancies between the two data  sources. For example, some plans indicated that they had an additional  benefit in the benefit package data, but did not price that additional  benefit in the bid pricing data. CMS officials indicated that these  discrepancies could be due, in part, to the different purposes of the benefit  package and bid pricing data sets, and resulting different benefit  categorizations. CMS officials said discrepancies may also be the result of  some plans with low projected amounts for additional benefits  categorizing those benefits as Medicare-covered services, or the bid  pricing data may accurately reflect low projected prices that round to  zero. In general, based on CMS’s recommendations, we used the benefit  package data as the most reliable data source for identifying specific  benefits covered by plans, and used the bid pricing data to identify costs.  We determined that the data used were sufficiently reliable for the  purposes of this report. However, verifying that the projections presented  in the bid pricing data actually reflect plan revenues and expenditures was  beyond the scope of our work. See appendix II for more details on our  scope and methodology. We conducted our work from April 2007 through  February 2008 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: MA plans are required to cover benefits that are covered under the  Medicare FFS program. 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, outpatient hospital, and laboratory services, among  other services. Persons aged 65 and older who meet Medicare’s work  requirement, certain individuals with disabilities, and most individuals  with end-stage renal disease receive coverage for Part A services and pay  no premium. Individuals eligible for Part A can also enroll in Part B,  although they are charged a Part B premium. For 2007, the monthly   Part B premium was set at $93.50, although high-income beneficiaries paid  more. Most Medicare beneficiaries who are eligible for Medicare FFS can  choose to enroll in the MA program instead of Medicare FFS. MA plans  operate under Medicare Part C.
All Medicare beneficiaries, regardless of their source of coverage, can  choose to receive prescription drug coverage through Medicare Part D.  Medicare FFS beneficiaries can enroll in stand-alone prescription drug  plans, which are operated by private plan sponsors, and they generally  must pay a premium to receive Part D coverage. MA beneficiaries who opt  for prescription drug coverage generally receive that coverage through  their MA plans, which may or may not charge an additional premium for  Part D coverage. Beneficiaries enrolled in a PFFS plan that does not offer  Part D coverage are allowed to enroll in a stand-alone prescription drug  plan.
Beneficiaries in both Medicare FFS and MA face cost-sharing requirements  for medical services. Cost sharing gives beneficiaries a financial incentive  to be mindful of the costs associated with using services. Medicare FFS  cost sharing takes different forms. It includes both a Part A and a Part B  deductible, which is the amount a beneficiary pays for services before  Medicare FFS begins to pay. For 2007, Medicare FFS required a deductible  payment of $992 before it began paying for an inpatient stay, and $131  before it began paying for any Part B services. Cost sharing also includes  coinsurance—a percentage payment for a given service that a beneficiary  must pay, such as 20 percent of the total payment for physician visits, and  copayments—a standard amount a beneficiary must pay for a medical  service, such as $248 per day for days 61 through 90 of an inpatient stay in  2007.
Medicare allows MA plans to have cost-sharing requirements that are  different from Medicare FFS’s cost-sharing requirements. Plans may  require more or less cost sharing than Medicare FFS for a given service,  although, on average, a plan cannot require overall cost sharing that  exceeds what beneficiaries would be expected to pay under Medicare FFS.
MA plans may establish dollar limits on the amount a beneficiary spends  on cost sharing in a year of coverage. In contrast, Medicare FFS has no  total cost-sharing limit. 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, limits that apply to one service  category. These limits help provide financial protection to beneficiaries  who might otherwise have high cost-sharing expenses.
CMS officials said that they evaluate the cost-sharing arrangements of MA  plans to determine if cost sharing is too high for services likely to be used  by a beneficiary with below average health status. According to CMS  officials, in 2007, if an MA plan (1) had no out-of-pocket maximum, (2) had  an out-of-pocket maximum above $3,100, or (3) had an out-of-pocket  maximum of $3,100 or below and excluded certain categories of service  from that maximum, CMS compared the plan’s cost sharing for certain  service categories to thresholds that CMS based on Medicare FFS cost- sharing levels. If a plan exceeded one or more thresholds, CMS may have  sought to negotiate with the plan over its cost sharing. According to CMS  officials, the decision to negotiate was based on various factors, including  the extent to which the thresholds were exceeded, local market  comparisons, and the extent to which high cost sharing in one category  was balanced with low cost sharing in another.
section_title: MA Plans Projected That They Would Allocate Relatively Little of Their Rebates to Additional Benefits and the Majority to Reduced Cost Sharing
paragraphs: MA plans that received rebates projected, on average, that their rebates  would be $87 PMPM. The plans projected that they would allocate a  relatively small amount to additional benefits, compared to cost-sharing  and premium reductions. Plans projected that, on average, about 11  percent of their rebates would be allocated to additional benefits, 69  percent to reduced cost sharing, 17 percent to Part D premium reductions,  and 3 percent to Part B premium reductions. The average projected rebate  allocation to additional benefits and reduced premiums varied by plan  type. For example, PPOs projected that they would allocate less to Part D  premium reductions and more to additional benefits than other plan types.  PFFS plans projected that they would allocate less to additional benefits  than other plan types. (See fig. 1.)
In dollar terms, the average projected rebates varied by plan type, from  $55 PMPM for PPOs to $93 PMPM for HMOs. The dollar portions of the  rebates that plans allocated to cost sharing varied, reflecting the variation  in the average amount of the rebate. For example, on average, both PFFS  plans and PPOs projected that they would allocate 73 percent of their  rebate to cost-sharing reductions, but PFFS plans projected this would  average $51 PMPM while PPOs projected this would average $41 PMPM.  (See table 1.) For more information on the variation in how plans allocated  rebates and the rebate amounts, see appendix III.
While nearly all MA enrollees were in plans that received rebates, some  plans charged additional premiums either in addition to the rebate or as  the sole funding source to pay for additional benefits, reduced cost  sharing, or a combination of the two. In 2007, approximately 41 percent of  beneficiaries (about 2.3 million people) were enrolled in an MA plan that  charged an additional premium. There were differences in the extent to  which plans charged additional premiums by plan type. For example,   31 percent of beneficiaries enrolled in PFFS plans were charged an  additional premium, compared to 83 percent of beneficiaries enrolled in  PPOs. Of plans that charged an additional premium, the average additional  premium was $58 PMPM. (See table 2.) Plans that received rebates and  charged additional premiums had lower rebates ($54 PMPM on average),  than plans that received rebates and did not charge an additional premium  ($107 PMPM on average), and these plans allocated less of their rebates to  premium reductions and more to additional benefits and cost-sharing  reductions.
section_title: MA Plans Used Rebates and Additional Premiums to Cover Additional Benefits Such as Dental, Hearing, and Vision
paragraphs: MA plans covered several common additional benefits with the rebates,  additional premiums, or both. These benefits included    dental benefits, which may include oral exams, teeth cleanings, fluoride  treatments, dental X-rays, or emergency dental services;   health education benefits, which may include nutritional training, smoking  cessation, health club memberships, or nursing hotlines;   hearing benefits, which may include coverage for hearing tests, hearing aid  fittings, and hearing aid evaluations; inpatient facility stays, which may include additional inpatient facility days  beyond those covered under Medicare FFS; international coverage for outpatient emergency services;   skilled nursing facility stays, which include days in a skilled nursing  facility beyond those covered under Medicare FFS; and   vision benefits, which may include coverage for routine eye exams,  contacts, or eyeglasses (lenses and frames).
Almost all plans covered international outpatient emergency services and  additional days in a skilled nursing facility and inpatient facility beyond  what Medicare FFS covers. The percentage of plans covering dental,  vision, or hearing services varied by plan type. For example, PFFS plans  were more likely to cover hearing and less likely to cover dental and vision  services than HMOs and PPOs. (See fig. 2.)
The average projected dollar amount of the common additional benefits  across all MA plans ranged from $0.11 PMPM for international outpatient  emergency services to $4 PMPM for dental care. These estimates were  based on the subset of plans that provided cost projections in the  categories associated with the benefits. The number of plans included in  the averages varies from the number of plans offering the benefits in part  because some plans did not consistently include the same additional  services in the same benefit categories. For example, some plans  categorized all or part of the costs associated with additional vision  benefits in other categories, such as professional services. These  estimates are also based on plans’ reported funding for additional benefits  from both rebates and additional premiums. Had we limited our analysis  to additional benefits funded only from rebates, the estimated amounts of  the additional benefits would have been lower. On the basis of plan  projections, we estimated that rebates would pay for most of the  additional benefits plans provided (77 percent), while additional premiums  would pay for the remainder (23 percent). Table 3 provides a summary of  the projected costs of additional benefits.
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 would be  42 percent of estimated cost sharing in Medicare FFS. (See fig 3.) Plans  projected that their beneficiaries, on average, would pay $49 PMPM in cost  sharing, and they estimated that Medicare FFS equivalent cost sharing for  their beneficiaries was $116 PMPM. On the basis of plans’ projections, we  estimated that about 77 percent of the reduction in beneficiary cost  sharing was funded by rebates with the remainder being funded by  additional beneficiary premiums.
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. For example, 19 percent  of MA beneficiaries were enrolled in plans that projected higher cost  sharing for home health services, on average, than Medicare FFS, which  has no cost sharing for this service at all, and 16 percent of beneficiaries  were enrolled in plans that projected higher cost sharing for inpatient  services compared to Medicare FFS estimates. (See table 4.) Because  cost sharing is higher for some categories of services, some beneficiaries  who frequently use these services can have overall cost sharing that is  higher than what they would pay under Medicare FFS.
Cost sharing for particular categories of services varied substantially  among MA plans. For example, we found significant variation in cost  sharing for inpatient services. Some MA beneficiaries were in plans with  no cost sharing for inpatient services. More than half a million MA  beneficiaries, representing 9 percent of MA beneficiaries, were in 193  plans with no deductibles, copayments, or coinsurance requirements for  inpatient services as of August 2007. Beneficiaries in these plans with long  or frequent hospital stays could have saved thousands compared to what  their cost sharing would have been if they were enrolled in Medicare FFS,  which typically included a $992 deductible, a $248 daily copayment for  hospital stays lasting between 61 and 90 days, and additional coinsurance  payments for professional services provided in the hospital.
Other MA beneficiaries, however, could have paid substantially more than  Medicare FFS beneficiaries for inpatient care. We found 80 MA plans that  charged a daily copayment of $200 or more for the first 10 days of a  hospital admission and placed high or no limits on out-of-pocket costs for  inpatient services. These 80 MA plans also had more than half a million  beneficiaries. Beneficiary cost sharing in these 80 plans could have been  $2,000 or more for a 10-day hospital stay, and $3,000 or more for three  average-length hospital stays. Figure 4 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.
As of August 2007, about 48 percent of MA beneficiaries were enrolled in  plans that had an out-of-pocket maximum, which helps protect  beneficiaries against high spending on cost sharing. (See fig. 5.) Of the  three most common MA plan types, beneficiaries in PFFS plans were the  most likely to be in a plan with an out-of-pocket maximum, but PFFS plans  also had the highest average out-of-pocket maximum. For MA plans that  had an out-of-pocket maximum, the average amount was $3,463. See  appendix IV for further details on out-of-pocket maximums.
An out-of-pocket maximum does not always cover all categories of  services. Some MA plans excluded some services from the out-of-pocket  maximum. Beneficiaries who use these excluded services may pay more in  total cost sharing than is indicated by the plan’s out-of-pocket maximum.  Part B drugs, which include drugs that are typically physician- administered drugs, were most often excluded from the out-of-pocket  maximum—29 percent of MA plans with an out-of-pocket maximum  excluded some Part B drugs from that maximum. (See table 5.) Plans that  excluded a certain service category from the out-of-pocket maximum did  not necessarily exclude all services from that category. For example, many  plans excluded Part B drugs from the out-of-pocket maximum if they were  obtained from a pharmacy, but according to CMS, did not exclude Part B  drugs administered by a physician.
section_title: Approximately 87 Percent of Total Revenue Projected to Be Allocated to Medical Expenses, but Projections Varied among Individual Plans
paragraphs: For 2007, MA plans projected that of their total revenues ($783 PMPM),  they would allocate approximately 87 percent ($683 PMPM) to medical  expenses, resulting in an average medical loss ratio of approximately 0.87.  MA plans projected that they would allocate approximately 9 percent of  total revenue ($71 PMPM) to non-medical expenses, and approximately   4 percent ($30 PMPM) to the plans’ margin, on average.
While there was little variation in the average projected medical loss ratio  by plan type, there was variation among individual plans. For example, we  found that about 30 percent of beneficiaries—about 1.7 million—were  enrolled in plans with a medical loss ratio of less than 0.85—the threshold  included in the Children’s Health and Medicare Protection Act of 2007  (CHAMP Act). (See fig. 6.) A CMS official we spoke to stated that the  medical loss ratio may vary for reasons other than utilization and the cost  of providing care. For example, some MA plans may categorize the costs  of delivering care management services as a medical expense, while other  plans may include this as a non-medical expense.
MA plans projected expenses separately for four distinct non-medical  expense categories—marketing and sales, direct administration, indirect  administration, and the net cost of private reinsurance. On average, MA  plans projected allocating total revenue to non-medical expenses  approximately as follows:    2.4 percent to marketing and sales;    2.9 percent to direct administration, such as customer service and medical    3.7 percent to indirect administration, such as accounting operations and    0.1 percent to the net cost of private reinsurance.
Of these four non-medical expense categories, the largest difference  between plan types’ allocation of revenue to non-medical expenses was in  the category of marketing and sales. On average, as a percentage of total  revenue, projected marketing and sales expenses were 2 percent ($16  PMPM) for HMOs, 3.6 percent ($27 PMPM) for PFFS plans, and 2 percent  ($17 PMPM) for PPOs. (See fig. 7.)
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. Under the current payment system, the average  MA plan receives a Medicare rebate equal to approximately $87 PMPM, on  average. In 2007, MA plans projected that they would use the vast majority  of their rebates—approximately 89 percent—to reduce enrollees’  premiums and to lower their out-of-pocket costs for Medicare-covered  services. Plans projected that they would use a relatively small portion of  their rebates—approximately 11 percent—to provide 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, the additional  payments to MA plans have increased the premiums paid by beneficiaries  in Medicare FFS as well as contributed to the substantial long-term  financial challenge that Medicare faces. 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 and other taxpayers 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.
section_title: Agency and Other External Comments and Our Evaluation
paragraphs: CMS provided us with written comments on a draft of this report which  are reprinted in appendix V, and AHIP, a national association that  represents companies providing health insurance coverage, provided us  with oral comments.
subsections: section_title: CMS Comments
paragraphs: In general, CMS commented that the report did not recognize that the  majority of MA benefit packages in 2007 were better and provided more  protection for out-of-pocket costs than Medicare FFS. It stated that the  report failed to acknowledge that MA plans provide beneficiaries with the  ability to choose a plan that best meets individual medical and financial  needs. CMS also expressed concern that the report was not balanced  because it did not sufficiently focus on the advantages of MA plans. We  disagree with CMS that we did not consider that most MA plans offered  better cost sharing than Medicare FFS. We noted in the first paragraph of  our cost sharing finding that, overall, plans projected MA beneficiary cost  sharing that was 42 percent of estimated cost sharing in Medicare FFS.  Regarding the absence of information about MA plans providing  beneficiaries with choices, this was not the focus of our research.  However, we agree the issue provides important context and therefore we  noted in the report’s introduction the additional choice MA plans provide  Medicare beneficiaries. We disagree that the report is not balanced. We  provided a fact-based assessment of how rebates were projected to be  used in 2007, and identified important issues related to cost sharing. Even  though cost sharing would be less, on average, in MA plans than in  Medicare FFS, an important finding of our report is that beneficiaries who  use certain services with high cost sharing in MA plans could have higher  overall out-of-pocket costs than under Medicare FFS.
CMS provided several additional comments. CMS commented that it did  not disagree with our finding that 16 percent of beneficiaries were in plans  with higher inpatient cost sharing than Medicare FFS. However, it noted  that our discussion of the issue and accompanying table and figure did not  account for several factors that would have mitigated the impact of the  finding. Specifically, CMS commented that we should have considered that  MA plans generally combine physician cost sharing in the hospital with  inpatient hospital cost sharing, which would have decreased the difference  in cost sharing between MA plans and Medicare FFS. Although we had  noted this in table notes in the draft, we agree that this should be clearer  and modified our text and accompanying figure comparing MA and  Medicare FFS cost sharing, and clarified existing table notes. We also  modified the text and accompanying figure to differentiate between first  and subsequent admissions within the same benefit period, in response to  CMS comments. These changes did not affect our finding that some  beneficiaries could have cost sharing that was considerably higher than in  Medicare FFS.
CMS also commented that we should have discussed the mitigating impact  of particularly long hospitalizations because beneficiaries with long  inpatient hospitals stays in MA plans are likely to have lower cost sharing  than under Medicare FFS. We acknowledged CMS’s point and addressed  this issue in the finding and modified the accompanying figure. However,  most beneficiaries have relatively short lengths of stay. For example, in  2005, the average length for an inpatient stay was 5.4 days. This  modification did not change our message that some beneficiaries in MA  plans could have higher out-of-pocket costs.
In addition, CMS commented that we should have noted that many plans  have “effective” out-of-pocket maximums for inpatient stays even if they  are not specified as such in the plan benefit package. For example, plans  may require copayments for specific days of an inpatient stay, such as  days 1 through 6, but not for any days beyond the sixth day, thereby  capping maximum cost sharing for the stay. We agree that most plans have  “effective” or actual out-of-pocket maximums for inpatient hospital  services. We also agree that in many cases these maximums can limit  beneficiary inpatient cost sharing to levels below inpatient cost sharing  under Medicare FFS. However, MA plans projected that about 16 percent  of beneficiaries were enrolled in plans that projected higher cost sharing  than under Medicare FFS even after accounting for “effective” or actual  out-of-pocket maximums. While some of the 16 percent of plans may have  bundled physician services with their inpatient estimates, we also showed  that 80 plans with high out-of-pocket maximums for inpatient services  could have higher cost sharing than Medicare FFS even with “effective”  out-of-pocket maximums for inpatient hospital services.
CMS raised other concerns about our out-of-pocket maximum analysis,  specifically stating that we overestimated the impact of the exclusion of  Part B drugs from out-of-pocket maximums. It noted that Part B drugs  administered in a physician’s office would be included under an out-of- pocket maximum and that only a subset of plans excluded Part B drugs  obtained from a pharmacy from the out-of-pocket maximum. We relied on  the Plan Benefit Package for information regarding the analysis of Part B  drug exclusions from out-of-pocket maximums. According to these data,  there were 1.1 million beneficiaries in plans that reported such exclusions  in 2007. We noted that the exclusions applied to Part B drugs obtained  from a pharmacy and that the plans did not indicate the coverage for   Part B drugs administered by a physician. We sought clarification from  CMS for which Part B drugs were excluded from the out-of-pocket  maximum and were told by a CMS official that plans excluded spending on  Part B drugs from the out-of-pocket maximum if beneficiaries received  them on an outpatient basis. We added this point of clarification to a  footnote in the draft. Given CMS’s subsequent agency comments on this  issue, we clarified in the text that the exclusions applied to Part B drugs  obtained from a pharmacy and do not typically apply to Part B drugs  administered by a physician. However, we are concerned that the  information in the Plan Benefit Package—information that beneficiaries  rely on when they are seeking benefit coverage information—does not  indicate whether chemotherapy drugs are included or excluded under the  out-of-pocket maximums.
CMS also provided technical comments and clarifications, which we  incorporated as appropriate.
section_title: AHIP Comments
paragraphs: AHIP representatives stated that they agreed with our methodology, but  raised certain points that they thought the report should have made or  emphasized.
AHIP representatives said that while they understood why we made a  distinction between additional benefits and cost-sharing reductions, they  believed that we characterized additional benefits as being the more  valuable of the two. We disagreed with AHIP’s assessment. While we did  include a discussion of how MA plans projected they would allocate their  rebates to additional benefits, premium reductions, and cost-sharing  reductions, it was beyond the scope of our work to assess the relative  value of the allocation options.
With regard to our cost-sharing finding, AHIP stated that while MA  beneficiaries may have higher cost sharing for some categories of services,  these may be offset by lower cost sharing for other categories of services.  Like CMS, AHIP contended that our example of an MA plan with higher  cost sharing for inpatient services, relative to FFS, did not account for the  additional cost sharing Medicare FFS beneficiaries would pay for  physician services during their inpatient stays. As both CMS and AHIP  pointed out, most MA plans do not charge extra for physician services  during inpatient stays. We have made changes to the text of our report and  the accompanying figure to clarify this point. However, as our report  noted, beneficiaries who frequently use high cost-sharing services could  have overall cost sharing that would be higher than under Medicare FFS.
AHIP stated that although some beneficiaries may face higher cost sharing  under an MA plan than if they were enrolled in Medicare FFS, their out-of- pocket costs could be lower if their MA plan has a lower premium than  Medicare FFS. While this may be true in some cases—we found that, on  average, plans used 3 percent of their rebates to reduce Part B  premiums—it was beyond the scope of our work to make such a  determination. AHIP further stated that MA plans provide beneficiaries  with options. Beneficiaries who prefer more predictable expenses can  choose MA plans with higher premiums and lower cost sharing, while  beneficiaries who are less averse to risk can choose MA plans with lower  premiums and higher cost sharing. We agree that the MA program provides  beneficiaries with options and have added this point to the text of our  report.
With regard to our reporting on MA plan medical loss ratios, AHIP  representatives indicated that our point was fairly stated, but they asked  us to mention this point in the Results in Brief section of the report. We  believed that we made this point clear in our discussion of medical loss  ratios and that the issue did not warrant mentioning in our high-level  summary.
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If you or your staffs have 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 VI.
section_title: Appendix I: Example of a Rebate Calculation
paragraphs: For most Medicare Advantage (MA) plan types, Medicare provides plans  with a rebate if the plan’s bid is below the benchmark, but provides no  rebate if the plan’s bid exceeds the benchmark. Table 6 is an example of  rebate calculations for two hypothetical plans, both in the same county.
Both plans have the same benchmark because they are in the same county.  Plan A submits a bid of $700 per member per month (PMPM). Because the  plan’s bid is $100 PMPM below the benchmark, it receives a rebate equal  to 75 percent of that amount, or $75 PMPM. Plan A must use the $75  PMPM rebate to provide additional benefits, reduced premiums, reduced  cost sharing, or any combination of the three. Plan B, however, submits a  bid that is $40 PMPM above the benchmark. As a result, the plan receives  no rebate. Medicare’s payments to plans cannot exceed the benchmark, so  Medicare’s payment to Plan B is set at $800 PMPM, the amount of the  benchmark. Plan B must make up the remainder of the bid by charging its  beneficiaries a mandatory plan premium of $40 PMPM. Since Plan A has  extra benefits and no additional premium, while Plan B has no extra  benefits and an additional premium, Plan A may attract more beneficiaries.  If most beneficiaries choose Plan A over Plan B, Plan B is given an  incentive to become more efficient in the following year and lower its bid.
section_title: Appendix II: Scope and Methodology
paragraphs: This section describes the scope and methodology used to analyze our  four objectives: (1) how MA plans projected they would allocate the  rebates they receive, (2) what additional benefits MA plans commonly  covered with the rebates and additional premiums, and the projected costs  of these additional benefits, (3) how MA plans’ projected beneficiary cost  sharing, overall and by type of service, compared to Medicare fee-for- service (FFS), and (4) how MA plans projected they would allocate their  revenue to medical and other expenses.
We used two primary data sources to analyze our four objectives: the 2007  Bid Pricing Tool data and the 2007 Plan Benefit Package data. These data  are submitted by MA plans to the Centers for Medicare & Medicaid  Services (CMS), the agency that administers Medicare. The bid pricing  data contain MA plans’ projections of their revenue requirements and  revenue sources. Specifically, the bid pricing data include MA plans’  projections of revenue requirements—spending on medical expenses,  spending on non-medical expenses, and the margin. The bid pricing data  also contain information on the benefits and cost-sharing arrangements of  plans, including how MA plans’ projected cost sharing compares to cost  sharing in Medicare FFS. In addition, the bid pricing data contain  information on the amount of rebates and additional premiums plans  project they will require to fund additional benefits, reduced premiums,  and reduced cost sharing. The benefit package data contain detailed  information about the benefits and cost-sharing requirements that MA  plans offer to Medicare beneficiaries.
For our objectives, we focused our analysis on plan types that account for  98 percent of MA enrollment: Health Maintenance Organizations (HMO)  (71 percent), Private Fee-for-Service (PFFS) Plans (21 percent), Preferred  Provider Organizations (PPO) (5 percent), and Provider-Sponsored  Organizations (PSO) (1 percent). We excluded Medical Savings Account  plans and regional PPOs from our analysis because they follow a different  bidding process. We excluded plan types that have unique restrictions on  enrollment—such as employer plans, Special Needs Plans (SNP), and  demonstration plans—and bids for plans that only cover Part B services.  We also excluded plans with service areas that are exclusively outside the  50 states and the District of Columbia. Plans sponsors are permitted to  submit separate bids for a single package of benefits by dividing the  service area into segments; in these cases, benefits would be the same for  each segment, but each segment’s cost sharing and premiums may differ.  We counted each segment as a separate plan. We used August 2007  enrollment numbers to weight our results. As a result of our methodology,  we included 2,055 plans and 5,764,368 beneficiaries (71 percent of total  MA enrollment) in our analysis—these numbers apply to all tables and  figures in the report, unless otherwise noted. Because there were only 22  PSOs after the exclusions, and enrollment in those plans was 1 percent of  MA enrollment, we do not report results separately for PSOs, but we  include them in the aggregated results we report for all MA plans.
To determine how plans projected they would allocate the rebate to  additional benefits, reduced premiums, and reduced cost sharing, we used  the bid pricing data. The bid pricing data contain the total amounts plans  projected they would spend on additional benefits, reduced premiums, and  reduced cost sharing. However, since MA plans use both rebates and  additional premiums as a funding source for these additional benefits,  reduced premiums, and reduced cost sharing, we calculated the  proportion of total funding plans projected they would spend on additional  benefits, reduced premiums, and reduced cost sharing and applied these  projections to the projected rebate. We restricted our analysis of rebate  allocations to the 1,874 plans that received a rebate.
To identify the additional benefits that MA plans commonly covered with  rebates and additional premiums, we used the benefit package data. The  benefit package data provide the most detailed and accurate information  about benefits offered, including additional benefits. We used the  crosswalk CMS recommended—but did not require—plans to use to  match service categories in the benefit package data to categories in the  bid pricing data, and identified the percentage of beneficiaries in plans  that offered additional benefits using bid pricing categories.
To identify the costs associated with these additional benefits, we used the  bid pricing data. Plans did not use consistent categories for their  additional benefits in the bid pricing data. For example, some plans  categorized additional vision benefits under the category of other non- covered services. Therefore, our estimates of the costs of additional  benefits do not include all plans that offer those benefits, but are based on  a smaller number of plans that specified that additional benefit and the  associated cost of providing that benefit. In addition, some categories,  such as professional services and other non-covered services, were  identified by CMS as unreliable because they likely included a variety of  services, and we excluded these categories from our analysis. Other  categories of additional services may include some inconsistent services,  and the cost estimates for additional benefits should therefore be  considered as approximations.
To calculate estimated costs for each of the additional service categories,  we identified plans that offered the additional benefit and that had  projected a cost of at least $0.01 PMPM. The projected amounts of plans’  additional benefits were adjusted for the health status of the plans’  projected population by dividing the amount of the plans’ additional  benefits by the plans’ projected risk scores—a number representing how a  plan’s beneficiaries’ health expenditures are predicted to differ from the  average beneficiary in Medicare FFS. We then calculated the average  amount of the additional benefit, weighting the average by the number of  enrollees in the plans. If we had estimated the amount of additional  benefits funded only by the rebates, the PMPM amounts of additional  benefits would be lower.
To compare projected beneficiary cost sharing in MA plans and Medicare  FFS, we analyzed plans’ cost sharing for Medicare-covered services as  reported in the bid pricing data and the equivalent Medicare FFS cost- sharing amounts, also included in the bid pricing data. The equivalent  Medicare FFS cost sharing represents an MA beneficiary’s expected cost  sharing under Medicare FFS if the beneficiary’s MA plan had the same  pricing and utilization as Medicare FFS. The Medicare FFS equivalent cost  sharing for each service category was calculated by applying the average  cost-sharing percentage under Medicare FFS for a given service category  to each plan’s total cost estimates for providing benefits in that service  category. For example, if the cost-sharing percentage under Medicare FFS  for inpatient services is 10 percent for a given county, and an MA plan in  that county projects spending on inpatient services at $200 PMPM, then  the equivalent inpatient cost sharing is 10 percent of $200, or $20 PMPM.  For Part A services, the cost-sharing percentage under Medicare FFS is  calculated for each county—one county may have an equivalent inpatient  cost-sharing percentage of 10 percent, while another county may have a  percentage of 8 percent. For Part B services, however, the cost-sharing  percentages are a national average, so the same percentages were applied  to all counties. We divided each plan’s estimated cost sharing and the  Medicare equivalent cost sharing by each plan’s projected risk score to get  estimated cost sharing for a beneficiary with average Medicare health  spending. We reported the percentage of plans that had cost sharing  higher than the estimated Medicare cost sharing for a given service  category.
When we calculated the amount of reduced cost sharing, we used the total  amounts reported in the bid pricing data. We included both rebates and  additional premiums because this provided the accurate amount of cost- sharing reductions that MA plans projected their beneficiaries will receive.  The amounts of the additional benefits and cost-sharing reductions in our  analyses would be lower if we had restricted our analysis to rebates as the  sole funding source.
To determine plans’ out-of-pocket maximums, we examined the in- network out-of-pocket maximum and the combined out-of-pocket  maximum (a maximum that applies to both in-network and out-of-network  services) fields in the benefit package data. If the two fields were the same  value, then we defined the out-of-pocket maximum as equal to that value.  If one of the fields was blank, and the other field was a positive number,  then we defined the out-of-pocket maximum as equal to the value of the  field with the positive number. If both fields had a positive number, but  they were not equal, then we defined the out-of-pocket maximum as equal  to the value of the field with the lower value. We categorized a plan as  having an out-of-pocket maximum even if the plan excluded certain  categories of service from that maximum. We did not categorize a plan  that had only a service-specific maximum as having an out-of-pocket  maximum.
To determine the percentage of total revenue allocated to medical  expenses and other expenses, we used the bid pricing data and calculated  the projected values of medical expenses, non-medical expenses, and  margin as a percentage of revenue for all plans and by plan type. We  reported the percentages of beneficiaries in plans that projected medical  expenses less than 85 percent. We also analyzed the percentage of revenue  projected to go to sales and marketing from the bid pricing data.
section_title: Appendix III: Plan Variation in Rebate Amounts
paragraphs: Rebate amounts, as well as the allocation of rebates, varied considerably  from plan to plan. To provide a measure of this variation, we calculated  rebate amounts and the amounts of additional benefits, reduced  premiums, and reduced cost sharing at the 25th and 75th percentiles,  weighted for enrollment. A percentile is the value below which a certain  percentage of beneficiaries fall. For example, the value of the cost-sharing  reduction at the 25th percentile was $39.02 PMPM and at the 75th  percentile was $78.90 PMPM, meaning that at least 25 percent of  beneficiaries were in plans that projected a cost-sharing reduction of  $39.02 PMPM or less, and at least 75 percent of beneficiaries were in plans  that projected a cost-sharing reduction of $78.90 PMPM or less. (See   table 7.)
section_title: Appendix IV: Plan Variation in the Out-of- Pocket Maximum
paragraphs: In 2007, about half of MA beneficiaries were in plans that had an out-of- pocket maximum, a dollar limit on a beneficiary’s cost sharing. The out-of- pocket maximum varied from plan to plan. To provide a measure of this  out-of-pocket maximum variation, we calculated the out-of-pocket  maximum at the 25th and 75th percentiles, weighted for enrollment. A  percentile is the value below which a certain percentage of beneficiaries  fall. For example, the out-of-pocket maximum at the 25th percentile was  $2,750, and at the 75th percentile it was $4,600, meaning that at least   25 percent of beneficiaries were in plans with an out-of-pocket maximum  $2,750 or less, and at least 75 percent of beneficiaries were in plans with  an out-of-pocket maximum of $4,600 or less. (See table 8.)
section_title: Appendix V: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Other contributors to this report include Christine Brudevold, Assistant  Director; Jennie Apter; William Black; Alexander Dworkowitz; Gregory  Giusto; Dan Lee; Hillary Loeffler; and Christina C. Serna.