Medicare Advantage: Payments, Cost-Sharing, and Rebates

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The ACA significantly changed the MA payment approach to address multiple flaws in the previous payment system. The revised approach has gradually reduced MA payments so they more closely approximate fee-for-service payments. It also provides MA plans with financial incentives to improve quality and efficiency. The ACA benchmarks in all counties will be fully phased in by 2017. At that point, the counties in the highest-spending quartile will have benchmarks of 95 percent of county spending in traditional Medicare. The intermediate-quartile counties will receive 100 percent and 107.5 percent, respectively. And the lowest-spending quartile will have benchmarks of 115 percent of county spending in traditional Medicare.

The ACA also pays bonuses to plans that provide high-quality care, as determined by a 5-star rating system established by CMS. Qualifying MA plans located in certain locations (generally low-payment urban areas) are eligible to have their bonuses doubled.

Finally, the ACA reduced the amount of funding available for beneficiary rebates, also known as “extra benefits.” Rebates enable an MA plan to offer additional benefits (i.e., those that are not part of Medicare’s basic benefit package, such as dental or vision care) or reduced cost-sharing. Funding for these benefits is available when a plan’s bid is lower than the applicable benchmark payment set by Medicare to determine the plan’s payment. MA rebates were linked to plan performance in 2014. A plan earning at least 4.5 stars is eligible to receive 70 percent of the difference between its bid and the benchmark payment rate. Plans with 3.5 to 4.5 stars receive a rebate of 65 percent. Plans with fewer than 3.5 stars have a rebate of 50 percent. Thus the higher-performing plans that receive higher rebate percentages are better positioned to provide enrollees with additional benefits.

Tiered cost-sharing—in 2015 CMS clarified that it will permit tiered cost-sharing of medical benefits in MA plans. Tiered cost-sharing applied consistently among all enrollees may cover services from primary and specialty care physicians.

Adjustments for coding intensity—Medicare pays MA plans higher rates for enrollees with higher risk scores because they are sicker and require more complex care than those with lower risk scores. Thus MA plans have a financial incentive to code their enrollees’ conditions more intensively than physicians in traditional Medicare. No such incentive exists in the traditional program.

A 2014 HHS study found that over ten years the average risk score for MA plans increased 16 percent to 21 percent faster than the average fee-for-service risk score. HHS concluded that the increase appears to be related to diagnostic coding and not to differences in MA enrollees’ health conditions. Coding intensity varies widely by MA contract. Some code similarly to traditional Medicare and others code much more than the MA average.

Differences in coding intensity between traditional Medicare and MA have been addressed in statutes—most recently in the American Taxpayer Relief Act of 2012—by directing CMS to adjust for coding intensity. The law sets minimum coding intensity adjustments at 4.9 percent in 2014, rising to 5.91 percent in 2018.

CMS has also made some administrative changes to the Hierarchical Condition Categories risk adjustment model to discourage intensive coding practices. CMS could implement additional measures to recoup overpayments and clamp down on the coding intensity of MA plans. Potential Medicare savings from such measures could amount to as much as $140 billion over ten years.

Medicare Advantage: Payments, Cost-Sharing, and Rebates: Policy


In this policy: Federal

Medicare payments should be neutral with respect to coverage option. Congress should set the benchmarks upon which MA plan payments are based so that they do not exceed fee-for-service costs.

Congress should periodically evaluate the impact of the MA reimbursement methodology to ensure reasonable private health plan participation in the Medicare program and appropriate Medicare payments to participating plans.

To ensure that payments to MA plans are set correctly and to recognize appropriate risk factors, CMS should continue to refine the methodology that adjusts MA plan payments. Payment methodologies should align payment with desired performance as determined by an assessment of quality, resource use and efficiency, and beneficiaries’ experiences.

Coding intensity adjustments

In this policy: Federal

AARP encourages CMS to continue to examine and compare MA coding practices with those in the traditional program, and to recoup excessive payments and make necessary adjustments to the rules and procedures applicable to condition coding.

Tiered networks within MA plans

In this policy: Federal

Medicare should require and publish reports based on standardized methodologies and measures to assess the quality and cost of the provider tiers in MA plans.

If an MA plan offers one or more tiered networks, it must provide beneficiaries with useful comparative information derived from these metrics on the cost and quality of each tier. Such information should be tested on a range of consumers to determine that diverse types of beneficiaries understand the information.

Quality bonuses

In this policy: Federal

AARP supports the provision in the ACA that qualifies only high-performing health plans (4 or more stars in a 5-star rating system) for quality bonuses.