The Medicare Advantage Program in 2014. I. Overview


There has been considerable interest in the impact of the Affordable Care Act1 on the Medicare Advantage (MA) program. This paper provides an overview of pre-Affordable Care Act and post-Affordable Care Act trends in Medicare spending, plan premiums, beneficiary choice of plans, and quality in the MA program. The paper starts with a review of private plan contracting in Medicare to provide a broader context for understanding these trends.

A Brief History of Private Plans in the Medicare Program

  • Private health plans were expanded in the Medicare program in the early 1980s, a time of rapidly growing health spending, because of their potential to provide higher-quality care and enhanced benefits at a lower cost to taxpayers and beneficiaries.
  • At that time, Medicare private plans were paid 95 percent of the estimated cost of treating an average beneficiary in the traditional fee-for-service (FFS) program.
  • However, beginning in the late 1990s, the linkage between private plan payments and FFS costs was weakened, and by 2009, Medicare Advantage (MA) plans were being paid 114 percent of FFS costs on average – translating into an extra $1,280 per MA enrollee or $14 billion in higher payments, and a $3.35 per month increase in the Part B premiums paid by all Medicare beneficiaries during that year.
  • Despite the extra costs to the Medicare program, National Center for Quality Assurance surveys found that quality in MA plans was not better than that of the traditional program.
  • The Affordable Care Act implemented changes designed to reduce higher MA payments while providing incentives for quality improvements.
  • The health insurance industry has been profitable since the enactment of the Affordable Care Act, with total operating margins ranging between 5 and 6 percent on average between 2010 and 2013 for ten publicly-traded insurers participating in the MA program.
  • Health insurance companies have looked to Medicare Advantage as an area to increase enrollment as employer-sponsored insurance coverage has eroded.
  • The transition to fee-for-service-based rates is reducing previous higher payments to MA plans, which is encouraging MA plans to become more efficient without reductions in quality or access.
  • Beneficiaries continue to have a large number of MA plans to choose from. Beneficiary enrollment is increasing and is at historically high levels in early 2014. Additionally, beneficiaries are increasingly enrolling in MA plans with high-quality ratings; in 2014, over half (53 percent) of all MA enrollees are in plans with four or more stars, compared with 24 percent in 2011.

1 In this paper, The Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 are collectively known as the Affordable Care Act.

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