Medicare Part C – Medicare Advantage (MA Private Plans)

Medicare Advantage plans are private health plans that contract with Medicare to provide services to enrollees. Private health plans have been available in Medicare almost since the program began. But payment policy and rules about benefit design and quality measurement have evolved over time. 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 with more choices and enhanced coverage. These objectives remain relevant. Medicare Advantage (MA), also known as Medicare Part C, is Medicare’s private plan program. It is an alternative to Traditional fee-for-service (Original) Medicare. MA plans must cover all Part A and Part B Medicare benefits (except hospice) and may also provide additional benefits. Most MA plans include Part D outpatient prescription drug coverage as well. Enrollment is voluntary. It is illegal to sell a Medicare supplemental insurance policy (Medigap) to beneficiaries who are enrolled in an MA plan.

To be eligible for an MA plan, a Medicare beneficiary must be enrolled in Medicare Parts A and B. All MA plans are required to establish enrollee out-of-pocket spending limits for Parts A and B services. These limits cannot 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 2024, the voluntary annual limit can be no higher than $3,850, while the mandatory maximum may not exceed $8,850 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.

HMOs: An HMO typically has a tight network relative to other types of MA plans and uses financial incentives to encourage members to stay within network. However, HMOs may 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.

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

PPOs: 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.

SNPs: SNPs enroll only individuals who are institutionalized, are dually eligible for Medicare and Medicaid, or have severe or disabling chronic conditions. Most SNPs are HMOs. (For more discussion of special-needs plans, see Medicaid: Managed Care for Dually Eligible Beneficiaries.)

PFFS plans: PFFS plans 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.

MSA plans—Medicare 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.

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 more choices also make selecting coverage more complicated. Choosing coverage may be so confusing that it leads to poor decisions, with some individuals selecting an MA plan that does not best meet their health care needs.

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 reducing cognitive burden is one strategy for improving consumer decision-making. Strategies to do this include limiting the number of choices, standardizing options, or creating accessible and easy-to-interpret materials that allow clear comparisons of 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. Additionally, plans 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. Or providers themselves may opt to end their relationship with an MA plan. 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 outright, or being sold a policy that requires a preexisting condition waiting period, or requires them to pay higher rates.

Additionally, the Medicare risk pool is segmented by having multiple coverage options and two pathways to coverage (MA and Traditional). There was some historical evidence that the healthiest beneficiaries were more likely to enroll in a less-expensive MA option. This left sicker, more expensive beneficiaries in the Traditional Medicare program. Over time, the population enrolled in MA grew more similar to the overall Medicare population. But as enrollment in MA has grown to about half of all Medicare, recent evidence suggests some favorable selection of healthier individuals into MA compared to Traditional Medicare.

Under current MA rules, Medicare payments to MA plans are risk-adjusted. An accurate risk-adjustment mechanism helps 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. However, this also creates a financial incentive for MA plans to identify and report enrollees’ health conditions more intensively (see discussion below on upcoding and coding intensity adjustment).

MA plans, including SNPs, are an important alternative for many Medicare beneficiaries, especially those with low incomes. Data from the 2021 Medicare Current Beneficiary Survey indicate that:

• 59 percent of Black American beneficiaries and 61 percent of Hispanic/Latino beneficiaries were in MA plans, and
• 63 percent of beneficiaries in MA plans had incomes of $30,000 or less (compared with 53 percent of all Medicare beneficiaries).