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. 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. 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. 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. 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. 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. 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. 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. 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.

Summary:
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. 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.