Medicare Advantage

**Medicare Advantage** is a type of health insurance plan that provides coverage within Part C of Medicare in the United States. Medicare Advantage health plans pay for managed health care based on a monthly fee per enrollee (capitation), rather than on the basis of billing a fee for each medical service provided (fee-for-service (FFS)), which is the way Original Medicare Parts A and B work. Most such plans are health maintenance organizations (HMOs) or preferred provider organizations (PPOs). Medicare Advantage plans finance at a minimum the same medical services as "Original" Parts A and B Medicare finance via FFS. Public Part C plans, including Medicare Advantage plans, also typically finance additional services, including additional health services, and most importantly include an annual out of pocket (OOP) spend limit not included in Parts A and B. A public Part C Medicare Advantage beneficiary must first sign up for both Part A and Part B of Medicare in order to choose Part C.

All four Parts of Medicare—A, B and C, and D—are administered by private companies under contract to the Centers for Medicare and Medicaid Services (CMS). Almost all these companies are insurance companies, except for those that administer most Medicare Advantage and other Part C plans. Most Medicare Advantage and other Part C plans are administered (CMS uses the term "sponsored") by non-profit integrated health delivery systems and their spin offs. Other sponsors include non-profit charities under their respective states' laws, and/or are under union or religious management.

Public Part C health plans, including Medicare Advantage plans, not only cover the same medical services as Parts A and B but also typically include an annual physical exam and vision and/or dental coverage of some sort not covered under Original Medicare Parts A and B. (Medicare Part A provides FFS payments for admitted in-patient hospital care, hospice, and skilled nursing services if a person is first admitted inpatient for three days. Part B provides payments for most physician and surgical services, even some that take place in hospitals and skilled nursing facilities after admittance, as well as for medically necessary outpatient hospital services such as ER, surgical center, laboratory, X-rays and diagnostic tests, certain preventative medical services, and certain durable medical equipment and supplies.) Less often, hearing and wellness benefits not found in Original Medicare are included in a Medicare Advantage plan. The most important difference between a Part C health plan and FFS Original Medicare is that all Part C plans, including Part C Medicare Advantage plans, include a limit on how much a beneficiary will have to spend annually OOP; that amount is unlimited in Original Medicare Parts A and B.

Most but not all Medicare Advantage plans (and many of the other public managed-care health plans within Medicare Part C) include integrated self-administered drug coverage similar to the standalone Part D prescription drug benefit plan. The federal government makes separate capitated-fee payments to Medicare Advantage plan sponsors for providing these Part-D-like benefits if applicable just as it does for the sponsor of a plan that anyone on Original Medicare using Part D might have.

Nearly all Medicare beneficiaries (99%) had access to at least one Medicare Advantage plan in 2015; the average beneficiary had access to 18 plans in 2015. This number varies yearly as new sponsors apply to CMS and/or old ones drop out.

## History

In the 1970s, less than a decade after the beginning of fee for service (FFS) Medicare, Medicare beneficiaries gained the option to receive their Medicare benefits through managed, capitated health plans, mainly HMOs, as an alternative to FFS Original Medicare. But initially this choice was only available under temporary Medicare demonstration programs. The Balanced Budget Act of 1997 formalized the demonstration programs into Medicare Part C, and introduced the term *Medicare+Choice* as a pseudo-brand for this option. Initially, fewer sponsors participated than expected, leading to less competition than expected by the Democrats who in 1995 conceived what became Part C in 1997. In a 2003 law, the Part C capitated-fee benchmark/framework/competitive-bidding process was changed effective in 2005 to increase sponsor participation, but also making the costs per person of the program variable (whereas during the demonstration projects and under BBA the cost was 95% of the FFS cost per person). However, on average counting all the various types of Part C health plans, over the period 1997-2017 the cost per person for a person on Part C has been lower than the cost per person not on Part C (but some years it has been as much as 6% negative and other years it has been as much as 6% positive).

### Medicare Prescription Drug, Improvement, and Modernization Act

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 renamed +Choice plans to "Medicare Advantage" plans. Other managed Medicare plans include COST plans, dual-eligible (Medicare/Medicaid) plans and PACE plans (which try to keep seniors that need non-medical custodial care in their homes). However 97% of the beneficiaries in Part C are in one of the roughly one dozen types of Medicare Advantage plans (HMO, EGWP, SNP, regional PPO, etc.), primarily in classic vanilla HMOs. The terms +Choice and Medicare Advantage were/are government artefacts and often are not visible to the beneficiary of the health plan.

Enrollment in the public Part C health plan program, including plans called Medicare Advantage since 2005, grew from zero in 1997 (not counting the pre-Part C demonstration projects) to well over 20 million in 2018. That 20,000,000-plus represents about 35% of the people on Medicare. And today over half the people fully signing up for Medicare for the first time, are choosing a public Part C plan of some type as opposed to FFS Original Medicare (reflected in the 0% to over 35% penetration rate in 20 years).

But the spending per person legislated in 2003 became too high for a short time (between 2007-2010) to sustain long term. In 2009, the Medicare Payment Advisory Commission (MedPAC) reported that Medicare Trustees would spend 14 percent more on Medicare Advantage beneficiaries per person that year than they did per person for "like beneficiaries" under Original Medicare, theoretically adding an additional 3% ($14 billion) to the cost of the overall Medicare program compared to spending without Part C But the 14% statistic was misleading in the opposite direction because MedPAC never defined what "like beneficiares" meant and later admitted that the comparison included FFS Medicare beneficiaries who only had Part A, which by definition would cause a false comparison because most Medicare spending happens in Part B (see slide 8 of the January 12, 2017 MedPAC session on Medicare Advantage and other MedPAC discussions on this subject since that time).

It turned out through deeper investigation by MedPAC (see any MedPAC report on Medicare Advantage, 2014-2018) and CMS that the disconnect with the original goal of Part C (to cost the Trust Funds less per person) was primarily caused by so-called Private Fee for Service (PFFS) plans (designed primarily for the rural and urban poor) introduced in 2003, special needs plans (SNPs), and Multiple Employer Group plans (which primarily served retired union members). A special situation relative to Puerto Rico contributed to the imbalance also. And the lack of parity even applied slightly to vanilla HMO and PPO plans nationwide for one year. The actual comparative absolute numbers (although still potentially misleading) can be found in Table II.B.1 of any Annual Medicare Trustees report. Over the 20 years of the program, the comparative absolute number has varied between 6% above parity (that is Part C cost more than Original Medicare per person) to 6% below parity. Given that the numbers have been at parity or below since 2011, and that millions more beneficiaries are on Part C since 2011 than before 2011, the cost per person for a person on Part C has been lower than the cost per person not on Part C over the history of the program (see Table II.B.1 of every Medicare Trustees Report or its analog since 1998).

This is good because that was the Part C program's intention from the time in 1995 when Democrats first proposed it. One such change ended the out-of-balance PFFS plan program except for grandfathered beneficiaries. The out-of-balance Employer Group plan program was cut back beginning in 2017. On an absolute basis, in 2017 Medicare spent 1% less on Medicare Advantage and other Part C beneficiaries per person than they did per person on Medicare beneficiaries under FFS Medicare. In 2016 the difference in parity on an absolute basis was 4% less per person on Part C. As a result of these 2009/2010 changes and other administrative choices by Centers for Medicare and Medicaid Services CMS, per-person expenditures for beneficiaries on Parts A/B/C and those not on A/B/C reached effective parity in 2018. It appears from both points of view—per "like beneficiary" and absolutely—that the latest formula delivers the original cost-saving promise of Managed Medicare. Exact parity would require major changes to Medicare law (so-called "premium support" proposals, for example).

### Patient Protection and Affordable Care Act

As part of a broad set of overall reforms aimed to control the total cost of Medicare (e.g., large cuts in hospital and skilled nursing facility payments under Part A; adding surtaxes to Part D), the Patient Protection and Affordable Care Act (ACA) changed Trustee payment formulas to Medicare Advantage and other Part C plans—versus what they otherwise would have been under the 2003 law—by adjusting the way the statutory county benchmarks that kick off the annual Part C Medicare Advantage bidding process were calculated.

ACA also provided bonus payments to plans with ratings of 4 (out of 5) stars or more. The Obama administration launched an $8.35 billion demonstration project in 2012 that increased the size of the bonus payments and increased the number of plans receiving bonus payments, providing bonus payments to the majority of Medicare Advantage plans. According to the Government Accountability Office (GAO) this demonstration project cost more than the previous 85 demonstration projects beginning in 1995 combined.

ACA required plans beginning in 2014 to maintain a medical loss ratio of at least 85%, restricting the share of premiums that Medicare Advantage plans can use for administrative expenses and "profits".

## Program structure

People can enroll in Medicare Advantage and other Part C health plans either by enrolling when they first become Medicare-eligible and first join both Parts A and B or by switching from traditional Medicare during an annual or special enrollment period as outlined in "Medicare and You, 2019" (there are over a dozen such enrollment periods). In 2019, a special Medicare Advantage Open Enrollment period extended from January to March during which the over 20,000,000 people on Part C Medicare Advantage could switch or drop plans. This open enrollment period is not to be confused with the annual election period that typically runs in the Fall of a given year and that was intended initially primarily for Part D of Medicare. The "new" January–March Open Enrollment period is actually a restoration of the way Part C worked before PPACA. Medicare Advantage Open Enrollment applies only to people on Medicare Advantage.

### Capitation

For each person who chooses to enroll in a Part C Medicare Advantage or other Part C plan, Medicare pays the health plan a set amount every month ("capitation"). The capitated fee associated with a Medicare Advantage and other Part C plan is specific to each county in the United States and is primarily driven by a government-administered benchmark/framework/competitive-bidding process that uses that county's average per-beneficiary FFS costs from a previous year as a starting point to determine the benchmark. The fee is then adjusted up or down based on the beneficiary's personal health condition; the intent of this adjustment is that the payments be spending neutral

### Private sponsors

Part C sponsors annually submit bids that allow them to participate in the program. All bids that meet the necessary requirements are accepted. The bids are compared to the pre-determined benchmark amounts set, which are the maximum amount Medicare will pay a plan in a given county, by law. If a plan's bid is higher than the benchmark, enrollees pay the difference between the benchmark and the bid in the form of a monthly premium, in addition to the Medicare Part B premium. (Because of the county-specific nature of the framework and the bidding process leading to these differences, the same sponsor might offer the same benefits under the same brandname in adjacent counties at different prices.) If the bid is lower than the benchmark, the plan and Medicare share the difference between the bid and the benchmark; the plan's share of this amount is known as a "rebate," which must be used by the plan's sponsor to provide additional benefits or reduced costs to enrollees. A rebate cannot contribute to "profit" ("profit" is in quotes because most Medicare Advantage and other Part C health plans are sponsored by non-profit organizations, primarily integrated health delivery systems).

This benchmark/bidding/rebate process accounts for from 97% to 100% of the cost of the given Medicare Advantage plan to the Medicare Trust Funds. The individual fee for each Part C beneficiary is also uplifted or downsized slightly (approximately 1%-3% in either direction on average) from the county-specific fee based on a risk-based formula tied to the personal health characteristics of the capitated individual. The theory is that the risk-based formula will not affect spending, but in practice it almost always increases cost per beneficiary by one or two percent, either because the Medicare Advantage plan is diligent in upcoding to a beneficiary's specific risks or because patients on Original FFS Medicare, where providers have no incentive to code at all, are undercoded.

### Benefits

Medicare Advantage plans are required to offer a benefit "package" that is at least equal to Original Medicare's and cover everything Medicare covers, but they may cover benefits in a different way. For example, plans that require higher out-of-pocket costs than Original Medicare for some benefits, such as skilled nursing facility care, might offer lower copayments for doctor visits to balance their benefits package. CMS limits the extent to which plans' cost-sharing can vary from that of Original Medicare. Medicare Advantage plans that receive "rebates" or quality-based bonus payments are required to use the money to provide benefits not covered by Original Medicare or to reduce premiums.

### Costs

Plans are required to limit out-of-pocket (OOP) spending by a beneficiary for Parts A and B to no more than $6,700 (as of 2018) per year for in-network providers. The OOP limit may be higher for out of network providers in a PPO; out of network providers are typically not permitted in an HMO. The average OOP limit in 2018 was around $5000. Note that an OOP limit is not a deductible as is often reported; it is instead a financial-protection benefit.

It is rare for a Medicare Advantage beneficiary to reach the annual OOP limit but it provides a stop-loss feature that is also found in most private health insurance except in Medicare. Original Medicare provides no similar OOP spending cap and the exposure of an Original Medicare beneficiary to a financial catastrophe is unlimited (but also rare). Once the OOP maximum is reached for an individual under a Part C health plan, the plan pays 100% of medical services for the remainder of the calendar year (with no lifetime maximum). This OOP limit does not apply to a Part C plan's Part-D-like self-administered drug coverage (which uses another means of addressing catastrophic costs).

### Provider network

As with all HMOs—no matter whether a person is on Medicare or not—persons who enroll in a Medicare Advantage or other Part C HMO cannot use certain specialist physicians or out-of-network providers without prior authorization from the HMO, except in emergencies. In almost all Medicare Advantage plans—HMO or otherwise—the beneficiary must choose a primary care physician (PCP) to provide referrals and the beneficiary must confirm that the plan authorizes the visit to which the beneficiary was referred by the PCP. As with all HMOs, this can be a problem for people who want to use out-of-network specialists or who are hospitalized and are forced to use out-of-network doctors while hospitalized. Many Medicare Advantage PPO plans permit a subscriber to use any physician or hospital without prior authorization, but at a somewhat higher expense.

If a patient's in-network physician orders tests or procedures or refers a patient to a specialty that are not available from an in-network provider, the plan pays for the patient's procedures or services at an out-of-network location and charges in-network rates to the patient, so long as the necessary services are normally covered by the plan (the beneficiary must still obtain authorization).

### Competition

One rationale for adding Managed Medicare into Medicare was the expectation that the introduction of competition among the participating sponsors would provide higher-quality care via plans that were more responsive to beneficiaries' needs than traditional Medicare, at similar or lower cost.

### Rating system

The Five-Star Quality Rating System rates Medicare Advantage (MA) plans on a scale of 1-5. MA plans and Prescription Drug Plans (PDPs) are rated separately. Health economist Uwe Reinhardt reviewed the academic literature and found little solid information on which to compare traditional Medicare to Medicare Advantage.

### Utilization management

As with private managed care plans which engage in utilization management, Medicare Advantage plans have prior authorization and various medical necessity requirements. In 2019, a proposed bill would require the plans to submit their list of prior authorization procedures to the HHS.

### Appeals

There are five levels of appeals, ending in a lawsuit in a federal district court. A review of claims denied between 2014 and 2016 found that 75% of denials were overturned on appeal. Providers may send in appeals on behalf of their patients.

## Usage

It is common for people to continue to work after joining Medicare at age 65, use both Original Medicare (often just Part A) and employer sponsored insurance, and delay deciding between FFS Medicare and capitated-fee Medicare until retirement.

Sicker people and people with higher medical expenditures are more likely to switch from Medicare Advantage plans to Original Medicare. This statistic is primarily driven by people on Medicaid in custodial care at nursing home; such people no longer have need of any Medicare supplement, either a public Part C plan or a private Medigap or group retirement plan. The Part C risk adjusted payments to Medicare Advantage plans are designed to limit this churn between types of Medicare (managed vs. FFS), but it is unclear how effective that policy is.

Evidence is mixed on how quality and access compare between Medicare Advantage and "traditional" Medicare. ("traditional" in quotes because it is not the same as Original Medicare; everyone in Medicare must begin by joining Original Medicare; the term "traditional" typically refers to FFS and almost always means the beneficiary has a private group or individually purchased supplement to Original Medicare). Most research suggests that enrollees in Medicare HMOs tend to receive more preventative services than beneficiaries in traditional Medicare; however, beneficiaries, especially those in poorer health, tend to rate the quality and access to care in traditional Medicare more favorably than in Medicare Advantage. It is difficult to generalize the results of studies across all plans participating in the program because performance on quality and access metrics varies widely across the types of Medicare Advantage plans and among the dozens of providers of Medicare Advantage plans.

## Regulatory authority

As of 2014, states had limited authority to sanction organizations sponsoring plans; instead, CMS had that responsibility and audited about a tenth of the plans per year.