Medicare Advantage Plans Have Great Promise But They Are Not Delivering

Medicare Advantage (MA) managed care plans have the potential to vastly improve care for older adults in the US. A fully-integrated health model that combines primary and specialty care, physical therapy, hospital care and even some limited personal supports could improve the quality of life for patients and save the government a substantial amount of money.

But increasingly, analysts say these managed care plans, often run by for-profit insurance companies, neither save money nor deliver better care than traditional, fee-for-service Medicare.

One reason, they say, is that plans have gotten better at gaming the payment system. Because the government pays plans based on the health status of their members, the insurers find ways to make their patients appear as sick as possible, thus significantly increasing their profits.

How MA works

Nearly 27 million people, close to half of all Medicare beneficiaries, are enrolled in MA plans. Last year, Medicare paid the plans nearly $350 billion, excluding drug benefits.

Unlike traditional Medicare, where enrollees carry separate coverage for Part A hospital care, Part B physician care, Part D drug benefits, and often Medicare Supplement (Medigap) insurance, MA beneficiaries get all their health insurance in one place. And many plans offer additional benefits for vision, hearing, gym memberships, and even limited personal care.

Medicare pays the plans a monthly per-member-per-month fee (PMPM) that average roughly $1000. That fee is risk-adjusted to reflect the health care needs of a plan’s patients. In addition, plans can earn bonuses (called rebates) for providing efficient care. They use these payments to provide additional services to their members, which makes them more attractive to potential customers.

The theory behind Medicare managed care is sound: Because a plan is at risk for the health care costs of its members, it has a strong incentive to keep its members as healthy as possible. In contrast to disorganized fee-for-service medicine, MA plans can effectively manage the health of their members, making sure they get the treatment they need while avoiding redundant or unnecessary care. That should, in turn, keep members healthier and save money—a win/win for beneficiaries, the government, and the plan.

Cost and quality

There are two problems with this.

This first is the evidence that MA plans keep their members healthier is mixed at best. By some measures the plans do well. But by others they are no better, and sometimes worse, than fee-for-service Medicare.

The second is cost. And some highly-regarded critics point to data that suggests MA is less efficient and more expensive than traditional Medicare.

According to the Medicare Payment Advisory Commission (MedPac), which advises Congress on the program, average MA bids for 2022 were 15 percent lower than Medicare would pay for fee-for-service enrollees. Yet, Medicare spends 4 percent more for MA enrollees than if they remained in traditional Medicare.

Gaming the system

There are lots of reasons. One is that the plans use those efficiency bonuses to expand supplemental benefits, making their offerings more attractive to potential buyers.

But another goes back to those risk-adjustment payments. MedPac estimates that by aggressively coding for members’ medical conditions, plans increased their Medicare payments by $12 billion in 2020.

Plans use multiple techniques to maximize those payments. In some cases, the Justice Department alleges some are committing fraud, effectively lying to the government about the health status of their members to increase profits. More often, they use computer modeling and aggressive rewards to providers who identify more health issues for their members and increase government payments.

It works like this: A provider such as a home care nurse or doctor assigned by the plan to treat one condition identifies additional medical issues. Imagine, for example, a patient is being treated for an injury from a fall. A nurse or doctor then identifies heart disease and arthritis as well.

The risk score story

In a recent article for the journal Health Affairs, two widely-respected health care experts, Richard Gilfillan and Don Berwick, estimated that by manipulating these risk scores, plans could increase their monthly per member profit from $43 to as much as $77.

They estimate each 0.1 percent increase in a member’s risk score could boost profits by as much as 25 percent and increase Medicare payments by $58 million for each 100,000 beneficiaries. For every additional $25 in PMPM payments, they figure an average plan would use roughly $14 to lower premiums and improve benefits but keep $11 for profit.

Gilfillan and Berwick put it this way, “As plans code more, risk scores go up, [government] provides more subsidies, benefits and premiums get better, and buyers choose the improved plans that cost taxpayers more.”

Sometimes plans pay docs and nurses extra for identifying additional issues. Increasingly, they are employing doctors or home care nurses and making aggressive coding part of their jobs.

The plans say there is nothing nefarious about this and that providers simply are unearthing medical conditions that otherwise would have gone untreated, thus benefiting their members.

Perhaps. But MA, which was supposed to improve patient care and save money, may be doing neither. It can. And I hope it does. But Medicare needs to get its financial incentives right. And it hasn’t done that yet.