Medicare Advantage: 2011 Profits Similar to Projections for Most Plans, but Higher for Plans with Specific Eligibility Requirements
Published: 2013-12-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: MA organizations are entities that contract with the Centers for Medicare & Medicaid Services (CMS) to offer one or more private plans as an alternative to the Medicare fee-for-service (FFS) program. These MA plans are generally available to all Medicare beneficiaries, although certain types of plans, such as employer group plans, have specific eligibility requirements. Payments to MA organizations are based, in part, on the projected expenses and profits that MA organizations submit to CMS. These projections also affect (1) the extent to which MA beneficiaries receive additional benefits not provided under FFS and (2) beneficiary cost-sharing and premium amounts. The Patient Protection and Affordable Care Act (PPACA) required that, starting in 2014, MA organizations have a minimum medical loss ratio of 85 percent--that is, they must spend 85 percent of revenue on medical expenses, quality-improving activities, and reduced premiums.
This report examines how MA organizations' actual expenses and profits for 2011 as a percentage of revenue and in dollars compared to projections for the same year, both for plans available to all Medicare beneficiaries and for plans with specific eligibility requirements. GAO analyzed data on MA organizations' projected and actual allocation of revenue to expenses and profits. The percentage of revenue spent on medical expenses reported in GAO's study is not directly comparable to the PPACA medical loss ratio calculation, as the final rule defining the calculation was issued after actual 2011 data were submitted.
section_title: What GAO Found
paragraphs: Medicare Advantage (MA) organizations' actual medical expenses, nonmedical expenses (such as marketing, sales, and administration) and profits as a percentage of total revenue were, on average, similar to projected values for plans available to all beneficiaries in 2011, the most recent year for which data were available at the time of the request for this work. MA organizations' actual medical expenses, nonmedical expenses, and profits were 86.3 percent, 9.1 percent, and 4.5 percent of total revenue, respectively. As a percentage of revenue, all three categories were within 0.3 percentage points of what MA organizations had projected. In addition, MA organizations received, on average, $9,893 in total revenue per beneficiary, slightly higher than the projected amount of $9,635.
The percentage of revenue spent on medical expenses and profits varied between MA contracts. For example, while MA organizations spent an average of 86.3 percent of revenue on medical expenses, 39 percent of beneficiaries were covered under contracts where less than 85 percent of revenue was spent on medical expenses. In addition, the accuracy of MA organizations' projections varied on the basis of the type of plans offered under the contract. For example, contracts for private fee-for-service plans--a plan type with new provider network requirements in 2011--had average profit margins that were 4 percentage points lower than projected.
In 2011, plans offered by MA organizations with specific eligibility requirements had higher-than-projected profits. Special needs plans (SNP), which serve specific populations, such as those with specific chronic conditions, had an 8.6 percent profit margin, but had projected 6.2 percent. This higher percentage, combined with higher-than-projected revenue, resulted in SNPs reporting an average profit per beneficiary of $1,115, or 44 percent higher than projected ($777). Employer group plans, which are offered by employers or unions to their employees or retirees, as well as to Medicare-eligible spouses and dependants of participants in such plans, had a 7.6 percent profit margin, but had projected 4.2 percent. The higher profit margin, combined with higher-than-projected revenue, resulted in employer plans receiving an average profit per beneficiary of $861, or 108 percent higher than projected ($413).
GAO requested comments from CMS, but none were provided.

section_title: Letter
paragraphs: In 2011, the federal government paid Medicare Advantage (MA)  organizations—entities that offer a private health plan alternative to  Medicare fee-for-service (FFS)—approximately $124 billion, or about   23 percent of all Medicare spending, to provide health care services to  12.1 million Medicare beneficiaries. The private health plans offered by  MA organizations are generally available to all Medicare beneficiaries in  the plans’ service areas. However, certain types of plans, such as  employer group plans—which are offered by employers or unions—and  special needs plans (SNP)—which serve specific populations—have  more specific eligibility requirements. Payments to MA organizations are  based in part on the projected medical expenses, nonmedical expenses  (such as marketing, sales, and administration), and profits, which  organizations submit in their bids for providing Medicare-covered  services, and on actual enrollment and beneficiary health status. In  addition to projections, MA organizations are required to report actual  medical expenses, nonmedical expenses, and profits for the year 2 years  prior to the upcoming year. For example, MA organizations reported their  actual 2011 expenses in their bid submission for 2013.
In June and December 2008, we reported on MA organizations’ projected  and actual medical expenses, nonmedical expenses, and profits for 2005  and 2006, respectively. We reported that, on average, MA organizations’  self-reported actual medical expenses as a percentage of revenue were  lower in 2005 and 2006 than they had projected. Specifically, MA  organizations projected that they would spend, on average, 90.2 percent  of revenue on medical expenses in 2005 and 86.9 percent in 2006.  However, MA organizations’ self-reported actual medical expenses were  85.7 percent of revenue, on average, in 2005, and 83.3 percent in 2006.  The lower-than-projected expenses resulted in MA organizations  receiving more profits, on average, than projected. Specifically, MA  organizations earned profits of $1.1 billion more than projected in 2005  and $1.3 billion more than projected in 2006.
The accuracy of MA organizations’ projections is important because, in  addition to determining Medicare payments to these organizations, these  projections affect the extent to which MA beneficiaries receive additional  benefits not provided under FFS and the amounts beneficiaries pay in  cost-sharing and premiums. Specifically, once Medicare payments are  determined, they are not modified if there are differences between actual  and projected expenses. Thus, if MA organizations had more accurately  projected their revenue and expenses in 2005 and 2006, they would  have, on average, been able to provide beneficiaries with additional  benefits or cost-sharing reductions and still maintain the level of profits  projected.
The Patient Protection and Affordable Care Act (PPACA) included a new  requirement that, starting in 2014, MA organizations’ must have a  minimum medical loss ratio of 85 percent—that is, they must spend at  least 85 percent of their revenue on medical expenses, quality improving  activities, and reduced premiums. If an MA organization spends less  than 85 percent of its revenue on such expenses in a given year, it must  refund payments to the Centers for Medicare & Medicaid Services (CMS)  equal to 85 percent of its revenue less its actual expenses related to  medical services, quality-improving activities, and reduced premiums.an MA organization fails to spend at least 85 percent of its revenue on  medical expenses, quality-improving activities, and reduced premiums for  more than 3 consecutive years, it will be subject to enrollment sanctions  and, after 5 consecutive years, to contract termination.
You asked us to provide baseline information on how MA organizations’  self-reported actual expenses and profits compared to their projections  prior to the effective date of the PPACA requirement for an 85 percent  medical loss ratio. In this report, we examine how MA organizations’  actual medical expenses, nonmedical expenses, and profits as a  percentage of revenues and in dollars for 2011—the most recent year for  which data were available at the time of your request—compared to  projections for the same year, both for plans available to all Medicare  beneficiaries and for plans with specific eligibility requirements.
To report actual 2011 medical expenses, nonmedical expenses, and  profits, we analyzed 2013 bid data, which MA organizations submitted in  2012 and which include MA organizations’ actual experience for 2011.  To report projected 2011 expenses and profits, we analyzed 2011 bid  data, which MA organizations submitted to CMS in 2010. Both the 2011  and 2013 bid data contain self-reported information on plan-level  expenses and profits. We excluded Part D benefits from our analysis.  We also excluded (1) plans that were not included in both an MA  organization’s 2011 and 2013 bids, (2) regional preferred provider  organizations (PPO), and (3) plans that had values equal to zero for per  member per month (PMPM) total revenue, PMPM medical expenses,  PMPM nonmedical expenses, or member months. To determine actual  and projected expenses and profits for 2011, we multiplied both actual  and projected PMPM expenses and profits by actual enrollment in  member months for that year.
We analyzed plans available to all Medicare beneficiaries at the contract  level. Because employer group plans and SNPs have specific eligibility  requirements and are not available to all Medicare beneficiaries, we  analyzed such plans separately and excluded them from this part of our  analysis. We also excluded contracts with fewer than 24,000 member  months (equivalent to 2,000 beneficiaries enrolled for a full year),  because CMS officials stated they do not consider data from these  contracts to be fully credible. After all exclusions, our analysis included  322 contracts and 1,242 plans, which enrolled the equivalent of  approximately 7.5 million beneficiaries—88 percent of the total MA  enrollment in plans available to all Medicare beneficiaries in 2011. We  also determined whether differences in projected and actual expenses  and profits for plans available to all Medicare beneficiaries varied on the  basis of the type of plans under each contract or whether contracts had a  high or low benchmark—the maximum amount Medicare will pay plans to  serve an average beneficiary and which vary based on plans’ service  areas. We analyzed projected and actual expenses and profits for  contracts that had the following plan types: health maintenance  organizations (HMO), PPOs, and private fee-for-service (PFFS) plans.  We calculated benchmarks at the contract level. Using county-level  enrollment and benchmark data from CMS, we defined MA organizations’  contracts as having a high benchmark if their enrollment-weighted  average benchmark was above the enrollment-weighted average  benchmark for all MA contracts in our analysis. We defined MA  organizations’ contracts as having a low benchmark if their enrollment- weighted average benchmark was equal to or below the enrollment- weighted average benchmark for all MA contracts in our analysis.
We analyzed plans with specific eligibility requirements at the plan level,  because SNPs and employer group plans can be included in contracts  with plans available to all Medicare beneficiaries. We excluded SNPs and  employer group plans with fewer than 24,000 member months. After all  exclusions, our SNP analysis included 99 contracts and 121 plans, which  enrolled the equivalent of approximately 1.0 million beneficiaries—  71 percent of the total SNP enrollment in 2011. After all exclusions, our  employer group plan analysis included 77 contracts and 111 plans, which  enrolled the equivalent of approximately 1.7 million beneficiaries—  77 percent of the total MA employer group enrollment in 2011.
The results are reported for 2011 and may not be representative of or  generalizable to other years. spent on medical expenses reported in our study is not directly  comparable to the PPACA medical loss ratio calculation. CMS issued its  final rule defining the PPACA medical loss ratio calculation in 2013, which  was after MA organizations submitted their bids for 2013 that contained  MA organizations’ actual 2011 expenses and profits.
In addition, the percentage of total revenue  We took several steps to ensure that the data used to produce this report  were sufficiently reliable. Specifically, we assessed the reliability of the  CMS data we used by interviewing relevant officials, reviewing data  documentation, and examining the data for obvious errors. We  determined that the data were sufficiently reliable for the purposes of our  study.
We conducted this performance audit from August 2013 through  December 2013 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
Because of differences in our methodologies, the results presented in this report are not  directly comparable to our past reports on this topic. For instance, we analyzed SNPs  separately in this report, whereas SNPs were not separated out in our previous reports  because such data were not available.
subsections: section_title: Background
paragraphs: Payments to MA organizations are based on the MA organization’s bid  and benchmark and are adjusted for differences in projected and actual  enrollment, beneficiary residence, and health status. PPACA changed  how the benchmark and rebate are calculated.
subsections: section_title: Payments to MA Organizations
paragraphs: Payments to MA organizations and the additional benefits that MA  organizations offer are based in part on the relationship between the MA  organizations’ bids—their projection of the revenue required to provide  beneficiaries with services that are covered under Medicare FFS—and a  benchmark. If an MA organization’s bid is higher than the benchmark,  the organization must charge beneficiaries a premium to collect the  amount by which the bid exceeds the benchmark. If an MA organization’s  bid is lower than the benchmark, the organization receives the amount of  the bid plus additional payments, known as rebates, equal to a  percentage of the difference between the benchmark and the bid. MA  organizations are required to use rebates to provide additional benefits,  such as dental or vision services; reduce cost-sharing; reduce premiums;  or some combination of the three.
CMS adjusts payments to MA organizations to account for differences in  projected and actual enrollment, beneficiary residence, and health status.  CMS adjusts for differences in projected and actual enrollment through its  method for paying MA organizations. Specifically, MA organizations get  paid a PMPM amount and thus only get paid for actual enrollees. CMS  also adjusts PMPM payments to MA organizations on the basis of the  ratio of the benchmark rate in the beneficiary’s county to the plan  benchmark. Thus, if a beneficiary comes from a county that has a  benchmark rate that is lower than the plan’s benchmark, the plan will  receive a lower PMPM payment for that beneficiary. Finally, to help  ensure that health plans have the same financial incentive to enroll and  care for beneficiaries regardless of their health status, payments to MA  organizations are adjusted for beneficiary health status—a process  known as risk adjustment. Final payments are adjusted to account for  differences between the projected average risk score—a relative measure  of expected health care use for each beneficiary—submitted in plans’ bids  and the actual risk scores for enrolled beneficiaries.
Bidding rules for employer health plans differ from those for MA plans  available to all beneficiaries and SNPs. Specifically, MA organizations are  able to negotiate specific benefit packages and cost-sharing amounts with  employers after the MA organizations submit their bid for an employer  group plan. In contrast, MA organizations’ bids for all other MA plans  must reflect their actual benefit package—including additional benefits,  reduced cost-sharing, and reduced premiums—and MA organizations  cannot change the benefits after the bid is approved by CMS.
section_title: Changes under PPACA
paragraphs: PPACA changed how the benchmark is calculated beginning in 2011.  These changes have resulted in a decrease, on average, in county  benchmarks relative to average Medicare FFS expenditures. In 2011,  benchmark rates were held constant at 2010 benchmark rates. From  2012 through 2016, the benchmark will be a blend of the traditional  benchmark formula and a new quartile-based formula. Counties will be  stratified into quartiles based on their Medicare FFS expenditures, with  the first quartile of counties (the 25 percent of counties that have the  highest Medicare FFS expenditures) having a benchmark equal to   95 percent of FFS expenditures. Counties in the second, third, and fourth  quartiles will have benchmarks of 100 percent, 107.5 percent, and   115 percent, respectively, of FFS expenditures. In addition, any MA  organization that receives 3 or more stars on CMS’s 5-star quality rating  system will receive a bonus to the PPACA portion of their blended  benchmark. In 2017 and future years, the quartile-based formula will  determine 100 percent of the benchmark value.
PPACA also changed how the rebate is calculated. This change resulted  in decreased rebate amounts starting in 2012. By 2014, the rebate  amounts will be equal to 50, 65, or 70 percent of the difference between  the benchmark and the bid, depending on the number of stars a plan  receives on CMS’s 5-star quality scale. Prior to 2012, MA organizations  received a rebate equal to 75 percent of the difference between the  benchmark and the bid.
section_title: MA Plans with Specific Eligibility Requirements
paragraphs: SNPs and employer group plans have specific eligibility requirements.  SNPs serve specific populations, including beneficiaries who are dually  eligible for Medicare and Medicaid, are institutionalized, or have certain  chronic conditions. Employer group plans are MA plans offered by  employers or unions to their Medicare-eligible retirees and Medicare- eligible active employees, as well as to Medicare-eligible spouses and  dependants of participants in such a plan. In those cases where an active  employee is enrolled in an employer’s non-Medicare health plan, the  Medicare employer group plan would serve as a secondary payer, while  the employer’s non-MA plan for active employees would serve as the  primary payer.
section_title: 2011 Expenses and Profits Were Similar to Projections for Plans Available to All Beneficiaries, but Plans with Specific Eligibility Requirements Had Higher-than-Projected Profits
paragraphs: Among plans available to all beneficiaries, 2011 expenses and profits  represented similar percentages of total revenue compared to projections.  Among plans with specific eligibility requirements—that is, SNPs and  employer group plans—2011 expenses were lower and profits were  higher as a percentage of revenue compared to projections.
subsections: section_title: For Plans Available to All Beneficiaries in 2011, Expenses and Profits Represented Similar Percentages of Total Revenue Compared to Projections
paragraphs: As a percentage of 2011 total revenue, MA organizations’ actual medical  expenses, nonmedical expenses, and profits were, on average, similar to  projected values for plans available to all beneficiaries. As a percentage  of revenue, medical expenses and profits were slightly lower than  projected, while nonmedical expenses were slightly higher. Also, as a  percentage of revenue, all three categories were within 0.3 percentage  points of what MA organizations had projected (see table 1).
MA plans that were available to all beneficiaries received slightly higher  total revenue per beneficiary than projected, which could be a result of  differences between actual and projected health status and geographic  location of beneficiaries who enrolled. For instance, MA plans could have  received additional Medicare payments if they enrolled beneficiaries who  were expected to need more health care, who were disproportionately  from counties with higher benchmarks, or a combination of these two  reasons. Because of the higher total revenue, medical expenses as a  percentage of revenue were 0.2 percentage points lower than projected,  despite MA organizations’ spending more dollars on medical expenses  than projected.
The percentage of revenue spent on medical expenses and profits varied  substantially between MA contracts. For example, while MA organizations  spent an average of 86.3 percent of revenue on medical expenses,  approximately 39 percent of beneficiaries were covered by contracts  where less than 85 percent of revenue was spent on medical expenses,  and 13 percent of beneficiaries were covered by contracts where less  than 80 percent of revenue was spent on medical expenses (see table 2).  Further, while the average profit margin was 4.5 percent among plans  available to all beneficiaries, 26 percent of beneficiaries in our analysis  were covered by contracts where profit margins were negative. In  contrast, 15 percent of beneficiaries in our analysis were covered by  contracts where profit margins were 10 percent or higher.
For MA organizations with either high or low benchmarks, profit margins  and the percentage of total revenue devoted to expenses were, on  average, similar to projections. As a percentage of revenue, MA  organizations with high benchmarks had slightly lower-than-projected  medical expenses but slightly higher-than-projected nonmedical  expenses and profits (see table 3). As a percentage of revenue, MA  organizations with low benchmarks had slightly higher-than-projected  medical expenses and nonmedical expenses but slightly lower profits. In  addition, MA organizations with high benchmarks had higher profit  margins compared to those with low benchmarks. Specifically,  organizations with high benchmarks had an average profit margin of   5.9 percent and made $668 per beneficiary compared to 3.5 percent and  $313 per beneficiary for organizations with low benchmarks.
The accuracy of MA organizations’ projections varied on the basis of the  type of plan they offered under each contract. Among the three plan types  studied (HMO, PPO, and PFFS), PFFS contracts had the largest  differences, in percentage point terms, between their actual and projected  expenses and profits. For example, as a result of spending, on average, a  higher-than-projected percentage of total revenue on medical and  nonmedical expenses, PFFS contracts reported an actual profit margin of  only 0.3 percent after projecting a 4.3 percent profit margin (see table 4).  HMO contracts had the highest profit margins and were the only type of  contract, among the three studied, that averaged higher profits than  projected. Specifically, HMO contracts had a 5.3 percent profit margin,  which was slightly higher than projected—5.0 percent—and substantially  higher than the profit margins of PPO and PPFS contracts—2.5 percent  and 0.3 percent, respectively.
section_title: For Plans with Specific Eligibility Requirements in 2011, Expenses Were Lower and Profits Were Higher as a Percentage of Total Revenue Compared to Projections
paragraphs: SNPs’ profits were higher than projected both in terms of a percentage of  total revenue and in dollars. SNPs received somewhat higher revenue  than projected and spent a lower percentage of total revenue on medical  and nonmedical expenses than projected (see table 5). As a result of the  higher-than-projected revenue and spending a lower percentage of  revenue on expenses, SNPs reported an average profit per beneficiary of  $1,115, which was 44 percent higher than projected ($777) and   149 percent higher than the profit per beneficiary for plans available to all  Medicare beneficiaries ($447). Compared to plans available to all  Medicare beneficiaries, SNPs spent more in terms of amount per  beneficiary, but less in percentage terms, on medical and nonmedical  expenses. CMS officials said SNPs might have higher profit margins  because of the potential additional risk of providing a plan that targets a  specific population. For instance, the officials noted that it may be more  difficult to predict revenue and spending for a SNP’s targeted population.  SNPs may face higher medical expenses because beneficiaries enrolled  in such plans may have increased health care needs. According to CMS  officials, SNPs may also face higher administrative expenses for several  reasons, such as potentially higher marketing expenses associated with  targeting SNPs’ designated population.
Employer group plans had higher revenue, had higher profit margins, and  spent a lower percentage of total revenue on expenses than projected.  Specifically, total revenue per beneficiary was about 14 percent higher  than projected—$11,364 compared to $9,957 (see table 6). In addition,  employer group plans spent 86.3 and 6.1 percent of total revenue on  medical expenses and nonmedical expenses, respectively, compared to a  projected 89.5 and 6.3 percent, and these plans also had an actual profit  margin of 7.6 percent compared to a 4.2 percent projected profit margin.  The combined effects of higher revenue and a higher profit margin  translated into average profits per beneficiary of $861, which was   108 percent higher than projected ($413) and 93 percent higher than the  profit per beneficiary for plans available to all Medicare beneficiaries  ($447). Unlike other MA plans, projections for employer group plans  may vary from their actual profits and expenses because MA  organizations that offer such plans are able to negotiate specific benefit  packages and cost-sharing amounts with employers after they submit  their bids to CMS.
section_title: Agency Comments
paragraphs: We requested comments from CMS, but none were provided.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Health  and Human Services, interested congressional committees, and others.  In addition, the report will be available at no charge on the GAO website  at http://www.gao.gov.
If you or your staff has any questions about this report, please contact me  at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix I.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Christine Brudevold, Assistant  Director; Sandra George; Gregory Giusto; Brian O’Donnell; and   Elizabeth T. Morrison made key contributions to this report.