Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs
Released: 2008-02-28T00:00:00

Letter

Background

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.

MA Plans Projected That They Would Allocate Relatively Little of Their Rebates to Additional Benefits and the Majority to Reduced Cost Sharing

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.

MA Plans Used Rebates and Additional Premiums to Cover Additional Benefits Such as Dental, Hearing, and Vision

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.

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

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.

Approximately 87 Percent of Total Revenue Projected to Be Allocated to Medical Expenses, but Projections Varied among Individual Plans

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.)

Concluding Observations

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.

Agency and Other External Comments and Our Evaluation

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.

CMS Comments

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.

AHIP Comments

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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Appendix I: Example of a Rebate Calculation

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.

Appendix II: Scope and Methodology

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.

Appendix III: Plan Variation in Rebate Amounts

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.)

Appendix IV: Plan Variation in the Out-of- Pocket Maximum

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.)

Appendix V: Comments from the Centers for Medicare & Medicaid Services

Appendix VI: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.