Medicare Advantage Plans Face Payment Cuts

The Centers for Medicare and Medicaid Services (CMS) announced that it is changing the method it uses to calculate payments to Medicare Advantage (MA) plans, on January 31, potentially compounding the effects of coverage reductions in discouraging seniors from enrollment.

In 2023, CMS eliminated 2,000 diagnostic codes for MA, “which meant less coverage for seniors in Medicare Advantage plans than conventional Medicare fee-for-service,” Drew Johnson, a senior fellow with the National Center for Public Policy Research, wrote in an opinion piece on the Fox News website, on January 24. “CMS also instituted an absurd 48-hour waiting period for seniors hoping to chat with agents or brokers to discuss insurance plans.”

Diagnostic codes are used in MA to adjust for risk. CMS pays providers based on the risk level of the enrollee. Fewer codes mean less coverage for seniors.

Bundled Coverage Popular

MA (also known as Part C) is “[a] Medicare-approved plan from a private company that offers an alternative to Original Medicare for your health and drug coverage,” states an article on the Medicare website. “These ‘bundled’ plans include Part A, Part B, and usually Part D. In many cases, you can only use doctors who are in the plan’s network.”

KFF, formerly the Kaiser Family Foundation, reports MA enrollment surpassed 50 percent of total Medicare enrollment in 2023.

KFF says that “in 2021, more than 3 million people with traditional Medicare, mostly low to modest-income beneficiaries, had no supplemental coverage, placing them at risk of facing high out-of-pocket spending, or going without needed medical care due to costs. As more beneficiaries have shifted to Medicare Advantage plans, the number and share of traditional Medicare beneficiaries with no additional coverage has declined from 5.6 million (10% of total Medicare population) in 2018 to 3.2 million (6% of total Medicare population) in 2021.”

Medicare Spending

A new policy brief by Joe Albanese, a senior fellow at the Paragon Health Institute, indicates the arguments CMS could use to justify lower payments to MA plans.

“In its January 12, 2024, public meeting, Medicare Payment Advisory Commission (MedPAC) staff estimated that 2024 MA spending is 23 percent higher than FFS ($88 billion) due to coding intensity (14 percent of $54 billion) and favorable selection (9 percent or $36 billion),” Albanese wrote. “…Ensuring efficient Medicare spending is an important goal, but policymakers should understand the full context of this analysis.”

“Coding intensity” and “favorable selection” are technical terms used by MedPAC to conclude MA spending is higher than in FFS Medicare, says Albanese.

Risk-Adjusted Plan Payments

Payments to MA plans are risk-adjusted, writes Albanese, “which means that plans receive higher payments for enrollees with higher expected costs and lower payments for enrollees with lower expected costs. This is intended to counteract the incentive that would otherwise exist for plans to avoid expensive enrollees.”

After calculating risk-adjustment factors based on age, sex, disability, Medicaid eligibility, and patient health, CMS estimates enrollees’ expected costs.

“Because plans receive more payment for patients with more risk factors, they have an incentive to report more diagnoses more thoroughly than FFS does,” wrote Albanese. “‘Coding intensity’ refers to higher MA risk scores—and score growth—relative to FFS.”

‘Overestimates MA’s Excess Payments’

“Because FFS payments are largely not risk-adjusted, there is less incentive to thoroughly record diagnoses for FFS patients,” wrote Albanese. “Similar efforts to systematically increase coding accuracy in FFS would likely increase its risk scores and reduce coding intensity.”

MA payments are based on average FFS costs, an arrangement rooted in the assumption that risk-adjusted health care spending in MA is equal to FFS, says Albanese.

“‘Favorable selection’ occurs if MA consistently attracts enrollees with lower spending than expected by their risk scores,” wrote Albanese. In its January 2024 finding, MedPAC said   MA benchmarks “do not accurately reflect the costs of MA enrollees, leading to overpayments that are additive to those from coding intensity,” according to Albanese.

“Policymakers should keep in mind structural and policy differences between MA and FFS,” wrote Albanese. “While coding intensity and favorable selection are important issues, MedPAC likely overestimates MA’s excess payments from these factors.”

‘Imposing New Costs’

“Policymakers are facing a lot of pressure to enact new regulations on Medicare Advantage,” Albanese told Health Care News. “But its rapid growth shows it offers significant value to seniors through lower out-of-pocket costs and more benefits. Adding too much red tape could make it harder to preserve these strengths.”

MA has long been seen as the biggest free-market threat to those pushing for a government-run health care system, says Merrill Mathews, Ph.D., a resident scholar at the Institute for Policy Innovation.

“The Biden administration has been looking for ways to make MA plans less attractive by imposing new costs and restrictions, even as MA plans seek to make them more attractive,” Matthews told Health Care News. “For example, Humana, which has one of the most popular MA plans, recently announced a $540 million quarterly loss amidst ‘navigating significant regulatory changes while absorbing unprecedented increases in medical cost trends.”

‘Hits Hardest’ Lower-Income Seniors

Ratcheting down payments to MA plans harms the constituents of progressive politicians, says Matthews.

“Ironically, a disproportionately larger percentage of lower-income and inner-city seniors choose MA plans, since there is no need to spend money on a Medicare supplemental plan,” said Matthews. “Thus, Democrats’ efforts to undermine MA plans hit hardest the very population Democrats say they want to protect.”

Bonner Russell Cohen, Ph.D. (bcohen@nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.