Medicare Advantage plans pay hospitals less than does traditional Medicare

By Laurence C. Baker, M. Kate Bundorf, Aileen M. Devlin and Daniel P. Kessler
Health Affairs, August 2016


There is ongoing debate about how prices paid to providers by Medicare Advantage plans compare to prices paid by fee-for-service Medicare. We used data from Medicare and the Health Care Cost Institute to identify the prices paid for hospital services by fee-for-service (FFS) Medicare, Medicare Advantage plans, and commercial insurers in 2009 and 2012. We calculated the average price per admission, and its trend over time, in each of the three types of insurance for fixed baskets of hospital admissions across metropolitan areas. After accounting for differences in hospital networks, geographic areas, and case-mix between Medicare Advantage and FFS Medicare, we found that Medicare Advantage plans paid 5.6 percent less for hospital services than FFS Medicare did. Without taking into account the narrower networks of Medicare Advantage, the program paid 8.0 percent less than FFS Medicare. We also found that the rates paid by commercial plans were much higher than those of either Medicare Advantage or FFS Medicare, and growing. At least some of this difference comes from the much higher prices that commercial plans pay for profitable service lines.

From the Discussion

Knowing how Medicare Advantage prices compare to those of FFS Medicare is important for public policy. Health spending is the product of price and quantity. If Medicare Advantage prices are lower than those of FFS Medicare, then Medicare can obtain the same quantity of services for less money through Medicare Advantage than through FFS Medicare.

Contrary to conventional wisdom, we found that Medicare Advantage plans paid lower prices for hospital services than FFS Medicare — around 8 percent lower in both 2009 and 2012 — once the DRG and geographic-area mix of FFS Medicare was made comparable to those of Medicare Advantage.

If differences in hospital mix are also accounted for, Medicare Advantage’s hospital prices are about 5.6 percent less than those of FFS Medicare. Thus, about a third of the 8 percent difference is attributable to the narrower hospital networks in Medicare Advantage, compared to FFS Medicare.

Our results also show how Medicare Advantage can be used to get a better deal (at least from hospitals) for the Medicare program as a whole, by adjusting administered prices across geographic areas and DRGs to better reflect the market.

Finally, consistent with previous research, we found that the rates commercial plans pay to hospitals are significantly higher than those of either Medicare Advantage or FFS Medicare and that they are rising.



By Don McCanne, M.D.

The pro-market authors of this study have shown that the private Medicare Advantage plans pay hospitals less than traditional Medicare pays, concluding that the private plans “get a better deal for the Medicare program.” But that conclusion is not true if you look at the whole picture.

Because the private Medicare Advantage plans were being paid more than what was being paid for comparable care in the traditional Medicare program, Congress included in the Affordable Care Act adjustments to reduce the overpayments. However, the private plans have continued with their mastery of gaming the system to increase their payment rates, such as selective marketing to healthier populations and upcoding to receive greater payments through risk adjustment. This has been with the complicity of the people in HHS who have used innovative administrative tools and creative accounting to more than offset the required reductions. The private plans are still receiving greater payments than are being made for comparable patients in the traditional Medicare program.

Since the private plans are receiving larger payments, and, according to this study, are paying less for health care, the Medicare program is getting a worse deal, and it is the private insurers themselves who are getting a great deal, at a cost to taxpayers. This extra money that the insurers are siphoning out of the system is going to overpriced administrative services and, yes, to extra profits.

Although the private insurers are pulling out of the ACA exchanges because they cannot make their business model work there, they boast to their investors that their commercial accounts are highly profitable (employer-sponsored plans) and that their government accounts - especially the Medicare Advantage plans - are producing extraordinary returns for the investors (and humongous compensation packages for the corporate executives). We are paying for this through higher premiums for private plans and greater taxes for privately-managed government programs. A well designed single payer system should fix that.