Reduce Medicare Advantage Benchmarks

Background

The Medicare Advantage program allows Medicare beneficiaries—people age 65 or older and those with disabilities—to enroll in private plans for their Medicare coverage instead of the publicly administered Medicare fee-for-service (FFS) program. About 26 million Medicare beneficiaries (or 42 percent of that population) were enrolled in a Medicare Advantage plan in 2021. Those private plans cover nearly all services, except for hospice care, that are included under Medicare Part A (Hospital Insurance) and Part B (Medical Insurance). Most plans also provide the prescription drug benefits covered under Part D and other benefits as well. Those other benefits include reduced cost sharing for services covered under Parts A and B and coverage of additional services, such as vision or dental care, that are not provided by Medicare FFS. More than 90 percent of beneficiaries have the option of enrolling in a Medicare Advantage plan that includes prescription drug coverage for no additional premium beyond the Part B premium. However, about one-third of Medicare Advantage beneficiaries enroll in plans that charge an additional premium.

Beneficiaries who enroll in Medicare FFS can purchase a separate medigap plan that covers a portion of their cost sharing, but premiums for those plans tend to be much higher than premiums for Medicare Advantage plans. The federal government pays Medicare Advantage plans a fixed amount for each beneficiary and the plans then bear the cost of any health care expenses incurred by the beneficiary for services covered by the plan.

Payments to Medicare Advantage plans depend in part on bids that the plans submit—indicating the per capita amount they will accept for providing the benefits covered by Parts A and B—and in part on how those bids compare with predetermined benchmarks set by the federal government. (Plans that provide prescription drug benefits also receive an additional payment from the Part D program that is not related to those benchmarks.) Most plans bid below the benchmark, and they receive their bid plus a rebate. That rebate—equal to a percentage of the difference between the bid and the benchmark—must be devoted primarily to reducing premiums for Part B or Part D, reducing cost sharing, or covering additional services that Medicare FFS does not cover. Those cost-sharing reductions and additional services can make Medicare Advantage plans more attractive to beneficiaries than Medicare FFS. The small share of plans that bid at or above the benchmark receive the benchmark and must collect an additional premium from enrollees that reflects any difference between the bid and the benchmark.

Payments are further adjusted using risk scores to reflect differences in beneficiaries' expected spending because of health conditions and other characteristics. Plans also receive additional payments—referred to as quality bonuses—that are tied to their average quality score. Quality scores are determined on the basis of a weighted average of ratings that reflect consumer satisfaction and the performance of plans' providers on a range of measures related to clinical processes and health outcomes.

Benchmarks are currently tied to the projected spending for an average beneficiary in Medicare FFS in the same county. Adjustments are made to decrease benchmarks in counties where those costs are projected to be high and to increase benchmarks in counties where those costs are projected to be low. Counties are divided into four equal groups, or quartiles, according to the ranking of their projected FFS costs. Counties in the lowest quartile of projected FFS costs are assigned benchmarks equal to those costs plus 15 percent, and counties in the second-lowest quartile are assigned benchmarks equal to their projected FFS costs plus 7.5 percent. Counties in the second-highest quartile are assigned benchmarks equal to their projected FFS costs, and counties in the highest quartile of projected FFS costs are assigned benchmarks equal to their projected FFS costs minus 5 percent.

The Medicare Payment Advisory Commission estimates that the federal government pays Medicare Advantage plans an average of 4 percent more than it would cost the Medicare FFS program to cover a similar beneficiary (Medicare Payment Advisory Commission, 2022). Three main factors account for the fact that payments to Medicare Advantage plans exceed FFS costs.

• First, about half of the people enrolled in Medicare Advantage plans reside in counties in which benchmarks, by design, are constructed to exceed estimated FFS costs by 7.5 percent or by 15 percent.
• Second, beneficiaries in Medicare Advantage have higher estimated risk scores, on average, than similar beneficiaries in Medicare FFS, in part because Medicare Advantage plans have an incentive to record more health conditions. That incentive exists because a plan's payment increases when the risk scores of its enrollees increase. The Medicare Payment Advisory Commission estimates that payments to Medicare Advantage plans were 3.6 percent higher in 2020 as a result of their tendency to record more health conditions.
• Third, quality bonuses apply only to Medicare Advantage plans—creating an additional cost that does not apply to Medicare FFS enrollees.

The additional payments to Medicare Advantage plans are allocated in part to additional benefits for Medicare Advantage enrollees and in part to plans' administrative costs and profits.

Option

This option would reduce benchmarks in the Medicare Advantage program by 10 percent, beginning in January 2025. That reduction would be applied uniformly across all counties. All other methods for calculating payments to Medicare Advantage plans would continue as required under current law.

Effects on the Budget

The Congressional Budget Office estimates that reducing benchmarks by 10 percent would reduce mandatory spending by $392 billion from 2025 through 2032. That estimate reflects both the direct reduction in Medicare Advantage spending that would occur because of reduced benchmarks and the increase in spending that would result because some beneficiaries would shift from Medicare Advantage plans to Medicare FFS.

CBO estimates that, before accounting for changes in enrollment, the reduction in benchmarks would reduce federal spending on Medicare Advantage by $405 billion. That reduction in spending would represent 6.6 percent of spending on Medicare Advantage between 2025 and 2032 under current law. All else being equal, a reduction in benchmarks would cause payments to plans to decrease, primarily because rebates would be reduced. Some additional savings would occur as plans adjusted their bids in response to the benchmark reductions. Holding plans' bids constant, smaller rebates would reduce the benefits (additional services and cost-sharing reductions) that plans would be allowed to offer, making them less attractive to beneficiaries. In CBO's assessment, plans would lower their bids by about 50 percent of the reduction in benchmarks to avoid decreasing their benefits by the full amount of the benchmark reductions and thereby ensure that the plans remained attractive to enrollees.

Changes in enrollment in Medicare Advantage plans under the option would cause much smaller budgetary effects, increasing federal spending by $13 billion from 2025 through 2032. CBO estimates that the percentage of Medicare beneficiaries who enrolled in a Medicare Advantage plan would continue to grow under the option, but that percentage would grow more slowly than it would under current law. Recent evidence suggests that plans would largely shield beneficiaries from reductions in benefits by reducing their bids in response to cuts in benchmarks.

Although insurers would reduce their plan benefits by a small percentage of the lower benchmarks, Medicare Advantage plans would remain an attractive choice for beneficiaries for two reasons. First, CBO anticipates that plans would reduce the benefits that enrollees value the least and retain the benefits that enrollees value the most. Second, plans would continue to offer coverage at a lower out-of-pocket cost to beneficiaries than the cost beneficiaries would pay to enroll in Medicare FFS and purchase a medigap plan. For those reasons, most people who enrolled in Medicare Advantage under current law would continue to find Medicare Advantage plans attractive, but a small percentage of beneficiaries would respond to the reductions in plan benefits by choosing not to enroll in a Medicare Advantage plan. In CBO's estimation, after the reduction in benchmarks, the federal government would pay slightly more, on average, to cover those beneficiaries in the Medicare FFS program than it would have if they enrolled in a Medicare Advantage plan. Changes in enrollment would therefore offset a small portion of the budgetary savings.

CBO anticipates that some plans might exit the Medicare Advantage market, but the budgetary effects of such actions would be minimal. Medicare Advantage insurers have canceled plans in some markets in response to past policy changes. However, most enrollees in canceled plans have been able to enroll in another Medicare Advantage plan.

CBO also anticipates that, to some extent, the amount of savings would increase or decrease proportionally with the reduction in benchmarks. Reducing benchmarks by an amount that was smaller than 10 percent would decrease the amount of savings by a roughly proportional amount. However, reducing benchmarks by a much larger amount than 10 percent (for example, by 20 percent or more) would increase savings by a smaller than proportional amount. Those very large reductions would lead to less than proportional savings because they would be more likely to cause private plans to exit the Medicare Advantage program in large numbers and lead more beneficiaries to enroll in the Medicare FFS program.

Uncertainty About the Budgetary Effects

The two largest sources of uncertainty underlying CBO's estimates are as follows: the extent to which plans would adjust their bids, and the extent to which fewer Medicare beneficiaries would enroll in Medicare Advantage plans in response to the reduction in benchmarks. CBO projects that plans would adjust their bids to partially offset reduced benchmarks. However, those adjustments could be larger or smaller than CBO anticipates. If plans reduced their bids by more than the agency anticipates, the budgetary savings would be larger, and if plans reduced their bids by less than CBO anticipates, the savings would be smaller.

Additionally, reducing benchmarks could affect people's decisions about enrolling in Medicare Advantage to a greater or lesser degree than the agency expects. CBO anticipates that most beneficiaries would continue to find Medicare Advantage plans attractive under the option, because plans would adapt to payment reductions in ways that would preserve the benefits enrollees value most; thus, in the agency's estimation, enrollment in Medicare Advantage would continue to grow under the option, albeit more slowly than under current law. In recent years, even when benchmarks have decreased, new and existing Medicare beneficiaries have continued to enroll in Medicare Advantage plans. However, if plans increased premiums or reduced the generosity of benefits in response to lower plan payments by more than CBO anticipates, then enrollment in Medicare Advantage could grow more slowly or decline. Slower growth in enrollment would decrease estimated savings. Alternatively, if enrollment did not change at all in response to lower benchmarks, then savings under the option would be larger than CBO estimates.

The budgetary effects of the option could also differ from CBO's estimates if other actors, such as regulators, responded in ways that the agency did not anticipate. For example, the budgetary savings could be smaller if the Centers for Medicare & Medicaid Services took steps to increase other types of payments to Medicare Advantage plans—as they did following the payment reductions enacted under the Affordable Care Act.

Distributional Effects

Because this option would affect the Medicare-enrolled population, it would primarily affect people age 65 or older, as well as people under 65 with long-term disabilities. In CBO's baseline projections of the distribution of income, income includes Social Security and Medicare benefits. As a result, people age 65 or older are slightly more likely than others to be in higher-income households. However, the reductions in the generosity of benefits under this option would be concentrated among Medicare beneficiaries who are currently enrolled in a Medicare Advantage plan. Those beneficiaries are more likely to have low to moderate household income than beneficiaries enrolled in the Medicare FFS program (Koma, Cubanski, and Neuman, 2021). Effects would also vary by geography within the Medicare Advantage program because enrollment, plan participation, and payments vary widely across counties under current law.

Medicare beneficiaries might not be the only group affected by the reduction in benchmarks. CBO anticipates that insurance companies that provide Medicare Advantage plans would reduce their bids in response to the lower benchmarks, which would reduce the profitability of those companies. As a result, the shareholders and employees of those companies would probably also be affected by the reduction in benchmarks.

Economic Effects

In addition to having the behavioral effects reflected in conventional budget estimates, such as the ones shown above, this option could affect people's decisions about saving and work. Those effects would be small or negligible. The option could have a very small effect on the saving behavior of Medicare beneficiaries. As Medicare Advantage plans became less generous, enrollees' out-of-pocket costs would increase. People could pay those additional costs by spending less on other goods and services, or by saving less. The option would have little impact on individuals' decisions about work. Some people might delay retirement and work longer because their choices for health insurance coverage in retirement would become less generous, but that effect would be very small. The option probably would not affect the labor supply decisions of existing Medicare beneficiaries who were already retired or not working for other reasons.

Other Considerations

CBO estimates that, under current law, Medicare's Hospital Insurance Trust Fund will be exhausted in 2030 when outlays will exceed the trust fund's available balance. This option would extend the exhaustion date for the trust fund a few years beyond 2032, which is the end of the agency's current 10-year budget window.

The option would also make it more likely that the Medicare Advantage program would attain one of its stated goals—achieving savings for the Medicare program. Over the course of the program's history, the federal government has paid private plans more than it would have cost Medicare to cover similar beneficiaries under the traditional FFS program. In some counties, where Medicare Advantage payments are much higher than FFS costs, those payments would continue to be higher than FFS costs under the option. In other counties, where payments are already close to or below FFS costs, Medicare Advantage payments would be lower than FFS costs.

Two other goals of the Medicare Advantage program are to provide beneficiaries with choices for their Medicare coverage and to provide additional benefits not offered under Medicare FFS. Although the number of plans might decrease in some areas, Medicare beneficiaries would continue to have access to a wide set of choices of private plans under this option, in CBO's assessment. However, the benefits available in those plans would become less generous because plans would not fully absorb the reductions in benchmarks by increasing their efficiency or lowering their profits. Additionally, some plans might begin charging a premium, and others might increase their premiums. Beneficiaries would continue to have lower out-of-pocket expenses for health care services and premiums if they enrolled in a Medicare Advantage plan than they would if they received their coverage through Medicare FFS and purchased a medigap plan that provided the types of reduced cost sharing that are typically included in Medicare Advantage plans.