Medicare Advantage: Payments

The Affordable Care Act modified how Medicare Advantage (MA) plans are paid. This brought MA payments more in line with Traditional Medicare. It also provided plans with financial incentives to improve quality and efficiency and made other changes to ensure that MA plans were neither being underpaid nor overpaid.

Affordable Care Act (ACA) benchmarks in all counties were fully phased in by 2017. Counties in the highest-spending quartile have benchmarks of 95 percent of county spending in Traditional Medicare. Intermediate-quartile counties receive 100 percent and 107.5 percent, respectively. And the lowest-spending quartile has benchmarks of 115 percent of county spending in Traditional Medicare.

Under the ACA, the Centers for Medicare & Medicaid Services (CMS) 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), lower premiums, 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 would 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 who are sicker and require more complex care than other enrollees. Thus, MA plans have a financial incentive to find and report enrollees’ conditions more intensively (“upcoding”) than physicians in Traditional Medicare. No such incentive exists in the traditional program.

A 2014 Department of Health and Human Services (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. 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.