Medicare Advantage Payments: Why 100% Should Be Enough

Medicare Advantage (MA) plans are paid more by Medicare to insure a beneficiary than it would cost to cover that beneficiary’s care directly under traditional fee-for-service (FFS) Medicare. Some of the overpayment funds additional benefits. But one can ask the question: how much should MA plans be paid to provide exactly the FFS Medicare benefit? Perhaps every taxpayer, or at least those who are not Medicare beneficiaries, would answer, “no greater than 100% of average FFS costs.” That should be enough, right?

Actually, that should be more than enough. It turns out that MA enrollees are cheaper to cover than the average Medicare beneficiary, at least according to the balance of the scholarly literature on the topic. That is, MA plans experience favorable selection. They ought to be able to provide the FFS benefit for less than the FFS cost, using the extra for additional benefits and/or profit.

Below are three peer-reviewed journal articles that document selection into MA and the degree to which it is favorable, along with a few excerpts and comments from yours truly. Each publication references and describes the older literature on this topic.

(1) M Mello, S Stearns, E Norton, T Ricketts. (2003). Understanding Biased Selection in
Medicare HMOs. Health Services Research
38:3. June. [“We find that favorable selection persists in the cohort over time on some, but not all, measures…Most, but not all, studies of Medicare HMOs have found evidence of favorable HMO selection.” See Table 1 for a list of studies from for years no later than 1996.]

(2) J Ng, J Kasper, C Forrest, A Bierman. (2007). Predictors of Voluntary Disenrollment From Medicare Managed Care. Medical Care 45(6). June. [“Medicare plans experience favorable selection bias partly because sicker members are likelier to disenroll.”]

(3) S Shimada, A Zaslavsky, L Zaborski, A O’Malley, A Heller, P Cleary. (2009). Market and Beneficiary Characteristics Associated with Enrollment in Medicare Managed Care Plans and Fee-for-Service. Medical Care 47(5). May. [“…numerous studies have shown that Medicare managed care plans still attract healthier Medicare beneficiaries….Our findings extend prior research showing that [MA] plans experience favorable selection.”]

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