Report: Medicare Advantage 'Extra Payments' Will Reach $11.4 Billion This Year

Les Masterson, for HealthLeaders Media , May 4, 2009

The federal government will pay private insurers $11.4 billion more for Medicare Advantage plans this year than what the same beneficiaries would cost traditional Medicare, according to a new report from The Commonwealth Fund. The report adds more ammunition for critics, including the Obama administration and Democrats, who think the private Medicare program is too expensive.

Brian Biles, professor of health policy at George Washington University, and his co-authors reported in the analysis that private insurers have received $43 billion in "extra payments" since 2004. The extra Medicare Advantage payments this year will amount to an average of $1,138 or 13% over the fee-for-service costs for the 10 million Medicare beneficiaries enrolled in Medicare Advantage.

The $11.4 billion figure is a 34% increase over 2008 payments, which totaled $8.5 billion. The increase was because of payment rate and plan enrollment increases, the authors wrote.

Medicare Advantage, which was created in the Medicare Modernization Act of 2003, was an attempt by the Republican-controlled White House and Congress to privatize Medicare. Medicare Advantage has seen its enrollment more than double since 2004. In fact, Health Affairs and the Robert Wood Johnson Foundation recently reported that one in four Medicare beneficiaries is in Medicare Advantage, including 41% of Oregon beneficiaries and 34% of California beneficiaries.

Since Obama took office, the president and Democrats have taken aim at the program. CMS lowered Medicare Advantage reimbursements to health insurers by between 4% and 4.5% for 2010.

The Obama administration also implemented stricter terms for health insurers that offer Medicare Advantage. In the new regulations, health insurers will not be able to charge sick, low-income patients more than they would pay under traditional Medicare. The administration's move was a preemptive strike to prevent Medicare Advantage insurers from transferring costs onto the most vulnerable beneficiaries once the payment cuts went into effect.

The Commonwealth Fund President Karen Davis said Medicare Advantage payment cuts are an "excellent first step," but warned that policymakers should review whether the government could spend Medicare Advantage dollars more wisely.

The report's authors wrote that eliminating the extra payments to private insurers would provide $150 billion in savings over 10 years, which could help fund expanded health coverage to the 47 million uninsured Americans or offset the costs of Medicare policy improvements, such as reducing the Part B premiums or increasing eligibility for low-income Americans.

Given Obama's statements that private Medicare plans should be paid at the same levels as traditional fee-for-service Medicare, the authors suggested that future analysis could focus on creating a way to make the payments more comparable to Medicare fee-for-service costs.

They added that any Medicare Advantage payment reform should "provide increased incentives for private plans to better accomplish their intended role—to develop innovations in quality, efficiency, and patient service; to spur traditional Medicare to better performance; and to offer beneficiaries a choice of the best of both worlds," they wrote.

While the private Medicare program has been bashed by Democrats, Medicare Advantage supporters say the program offers benefits beyond traditional Medicare, including care coordination and vision and drug coverage. Medicare Advantage is also the home of special needs plans, which cover institutionalized beneficiaries who are dual eligibles and suffer from disabling chronic diseases.

Les Masterson is an editor for HealthLeaders Media.

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