Medicare Advantage plans using benchmarks and rebates to further game the system

Do Medicare Advantage Plans Minimize Costs? Investigating the Relationship Between Benchmarks, Costs, and Rebates

By Stephen Zuckerman, Laura Skopec, Stuart Guterman
The Commonwealth Fund, December 21, 2017


Issue: Medicare Advantage (MA), the program that allows people to receive their Medicare benefits through private health plans, uses a benchmark-and-bidding system to induce plans to provide benefits at lower costs. However, prior research suggests medical costs, profits, and other plan costs are not as low under this system as they might otherwise be.

Goal: To examine how well the current system encourages MA plans to bid their lowest cost by examining the relationship between costs and bonuses (rebates) and the benchmarks Medicare uses in determining plan payments.

Methods: Regression analysis using 2015 data for HMO and local PPO plans.

Findings: Costs and rebates are higher for MA plans in areas with higher benchmarks, and plan costs vary less than benchmarks do. A one-dollar increase in benchmarks is associated with 32-cent-higher plan costs and a 52-cent-higher rebate, even when controlling for market and plan factors that can affect costs. This suggests the current benchmark-and-bidding system allows plans to bid higher than local input prices and other market conditions would seem to warrant.

Conclusion: To incentivize MA plans to maximize efficiency and minimize costs, Medicare could change the way benchmarks are set or used.

From the Discussion

Prior to the Affordable Care Act, research indicated that Medicare Advantage plan costs, as reflected in plan bids, were not as low as they might have been, in part because of overly generous benchmarks. This study indicates that, after the ACA lowered MA benchmarks, plans in areas with high benchmarks have continued to exhibit their market power through costs that are higher than those for plans in areas with low benchmarks (holding input prices and other factors constant).

MA plans also receive higher rebates in regions where benchmarks are high. It appears that plans use some of the additional revenue resulting from these high benchmarks to provide an even greater level of benefits or reduced cost-sharing to attract enrollees compared to what plans in other areas provide. (Plans receive between 50 percent and 70 percent of the difference between their bid and the benchmark as a rebate if their bid is lower than the benchmark. Plans must, by law, use rebates to provide supplemental benefits or lower premiums to enrollees, less a portion to cover administrative costs and profits.) Overall, for each one-dollar difference in benchmarks, we find that plan costs (including profits) are 32 cents higher and rebates 52 cents higher. Thus, high benchmarks allow plans to be less efficient than they might be otherwise. That is because they can still earn sufficient rebates to fund the extra benefits that attract enrollees, even after controlling for plan cost determinants such as beneficiary health risks, input prices, plan type, plan quality, and MA market concentration. Clearly, the MA bidding system is not fostering a highly competitive Medicare Advantage market, and costs to the Medicare program could likely be lower with more robust competition.

MA plans may continue to capture some of the variation in benchmarks as extra revenue — above and beyond factors that would justifiably drive cost differences — without passing along all potential gains to beneficiaries in the form of extra benefits or to the Medicare program in the form of savings.



By Don McCanne, M.D.

This is yet one more study that shows that the taxpayers are paying the private Medicare Advantage plans too much - as the authors state, more than they would be paid if this were a truly competitive market. Even the rebates, which are to be used to increase benefits, are also used to increase payment for the excessive administrative services that they are selling us, and, egregiously, to increase profits. No wonder that the private insurers continue to expand their participation in the Medicare Advantage markets.

This, of course, fits in with Paul Ryan's agenda to shift to a premium support (voucher) model for Medicare. Overpay the plans so they can displace the traditional Medicare program and then ratchet down the value of the premium support voucher. That will shift ever more of the costs of health care onto the backs of the Medicare beneficiaries. That's unfortunate, but with the tax legislation signed by President Trump today the budget deficit will be out of control and we will have no other choice, according to Ryan.

Bah! Humbug! We do have a much better choice. Improve the traditional Medicare program and then expand it to cover everyone. And paying for it? The new tax legislation has created a massive amount of untapped reserves. We will have no choice but to make use of those funds to fill the gap left by those workers who cannot afford the taxes that would be required to pay a full, equally divided portion of our national health expenditures. In this Holiday Season we should give thanks in advance to those who are wealthy enough to help ensure that each of us has the health care that we need.

Happy Holidays!

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