Medicare Advantage

Private health plans are entities that contract with Medicare to provide services to enrollees. The term includes managed care plans and other models, such as private fee-for-service plans. Private health plans have been available in Medicare almost since the program began. When Congress first authorized private plans in Medicare, its intent was to contain the growth in spending and improve the payment method for certain providers. It also sought to provide beneficiaries, including those residing in rural areas, with more choices and enhanced benefits. These objectives remain relevant. Medicare Advantage (MA), also known as Medicare Part C, is Medicare’s private plan program and is an alternative to Traditional fee-for-service (original) Medicare. MA plans must cover all Medicare benefits (except hospice) and may also provide additional benefits. Most MA plans offer Part D drug coverage as well.

To be eligible for an MA plan, a Medicare beneficiary must be eligible for Medicare Parts A and B. All MA plans are required to establish enrollee out-of-pocket spending limits that do not exceed annual maximums established by the Centers for Medicare & Medicaid Services. Maximums vary by plan type. The Centers for Medicare & Medicaid Services (CMS) sets a voluntary and a mandatory cap with the former being lower. CMS permits MA plans greater flexibility in establishing cost-sharing for Parts A and B services if they use the lower, voluntary limit. For 2018, a typical voluntary annual limit can be no higher than $3,400, while the mandatory maximum may not exceed $6,700 for in-network services.

MA has several plan types: health maintenance organizations (HMOs), provider-sponsored organizations (PSOs), preferred-provider organizations (PPOs), regional PPO plans, special-needs plans (SNPs), private fee-for-service (PFFS) plans, and medical savings accounts (MSAs). Most, but not all, rely on a specific network of covered or preferred providers rather than covering all Medicare participating providers.

Health maintenance organizations: An HMO may also offer a point-of-service option that allows an enrollee to obtain services out of network for higher out-of-pocket costs. MA HMOs may include different models of HMOs, including staff model, group model, or network model HMOs.

Provider-sponsored organizations: Similar to HMOs, PSOs are organized and operated by physicians and hospitals. They provide most services within their organized network.

Preferred-provider organizations: PPOs are networks of physicians and hospitals that have agreed to discount their rates for plan members. Enrollees may obtain services from non-network health professionals but must pay higher out-of-pocket costs if they do.

Regional PPO plans: Similar to local PPOs, regional PPOs cover a larger service area. They feature a single deductible for Part A and Part B services and an out-of-pocket limit for in-network care and expenditures for benefits also offered by Traditional Medicare.

Special-needs plans: SNPs focus on the needs of individuals who are institutionalized, are dually eligible for Medicare and Medicaid, or have severe or disabling chronic conditions. Most SNPs are HMOs.

Private fee-for-service plans: PFFS plans are risk-based plans that closely resemble Traditional Medicare but are operated by private insurance companies. They permit enrollees to go to any Medicare-approved doctor or hospital willing to accept the plan’s payment. Unlike other MA options, physicians in PFFS plans may balance-bill 15 percent above the plan’s fee schedule. This and other PFFS plan features have the potential to cause confusion for Medicare beneficiaries and make it difficult for them to distinguish this option from Traditional Medicare.

Medical savings accounts—MSAs have two components. The first is an MA plan with a high yearly deductible (which varies by plan) with premiums paid by Medicare; the plan pays for covered benefits once the deductible has been met. The second is a tax-free savings account to which both Medicare and beneficiaries contribute. It may be used to cover deductibles and coinsurance charges or to pay for health services that Medicare does not cover. Beneficiaries who choose the MSA option may not have Medicare Supplement Insurance.

Private health plans in Medicare pose both opportunities and risks for the program and its beneficiaries. The wide array of private health plan options gives beneficiaries greater opportunity to find plans that meet their needs and preferences. But giving beneficiaries more choices makes the task of selecting coverage more complicated and may be so confusing for some that it leads to poor decisions.

This concern is supported by behavioral economics research findings that indicate greater choice does not necessarily lead to better decisions. Although consumers value choice, it is necessary to balance the desirability of a wide range of complex choices with the cognitive burden of having to select from among too many. Experts advise that one strategy for improving consumer decision-making is to reduce cognitive burden by limiting the number of choices and by creating accessible and easy-to-interpret materials that allow clear comparisons of various choices.

Another problem is that many beneficiaries may not be aware of certain risks associated with MA plans. This includes provisions that plans may terminate their relationship with Medicare in any given year. They may change the premiums, cost-sharing charges, or benefits from year to year as well, including drug coverage. They may also drop physicians from their networks during the year. Beneficiaries may also be unaware that if they voluntarily leave an MA plan and return to Traditional fee-for-service Medicare, they may be subject to medical underwriting for a Medicare supplement (Medigap) policy. This underwriting may result in their being refused a policy or being required to pay higher rates.

Additionally, by having multiple coverage options and two pathways to coverage (MA and Traditional), the Medicare risk pool is segmented. There is some evidence that the healthiest beneficiaries are more likely to enroll in an MA option, leaving the sicker, more expensive beneficiaries in the Traditional Medicare program. This results in higher premiums for Traditional Medicare. Among the MA plan options, PFFS and MSA plans are likely to attract the healthiest beneficiaries of all.

The tendency of healthy beneficiaries to join MA plans underscores the importance of risk-adjusting Medicare payments to these plans. An accurate risk-adjustment mechanism can help to mitigate the effects of risk segmentation by increasing payments to health plans for high-cost or high-risk enrollees and reducing payments to plans with healthier enrollees. Without these corrections, Medicare will overpay providers with a larger proportion of healthier beneficiaries and underpay those with a larger proportion of sicker beneficiaries.

MA plans are an important alternative for many Medicare beneficiaries, especially those with low incomes. Data from the 2015 Medicare Current Beneficiary Survey indicate that:

• 38 percent of African American beneficiaries and 48 percent of Hispanic beneficiaries were in MA plans; and
• 53 percent of beneficiaries in MA plans had incomes of $30,000 or less (compared with 46 percent of all Medicare beneficiaries).