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Correcting The Record: Medicare Advantage Costs Far Less Than Fee-for-Service Medicare

posted by Lynn Nonnemaker, VP of Medicare Policy, AHIP & Mark Hamelburg, SVP of Federal Programs, AHIP

on February 24, 2021

The past decade has seen huge growth in the number of Medicare-eligible Americans who have chosen to receive their Medicare benefits through the Medicare Advantage (MA) program. In fact, the program has grown from about 12 million enrollees in 2011 to more than 26 million in 2021. Under MA, the government makes capitated payments to private health plans, which curate a network of providers to deliver Medicare benefits and services to enrollees, while providing protection against high out-of-pocket costs and supplemental benefits like vision and dental services and benefits designed to reduce socioeconomic barriers like healthy food and non-medical transportation.

It is no surprise then that the growing number of beneficiaries who choose MA report overwhelming satisfaction (94%) with their plans.

A fair comparison of MA and the traditional Medicare program, or Fee-for-Service (FFS), clearly shows that spending in MA is lower than spending in the FFS program, and a better value for Americans. However, a Medicare Payment Advisory Commission (MedPAC) presentation asserts that Medicare’s per beneficiary spending for MA enrollees is higher than per beneficiary spending in FFS Medicare. This assertion stems from two errors in MedPAC’s analysis:

  • The first is a technical error in calculating per enrollee spending in Medicare Part B. A recent Health Management Associates (HMA) analysis shows that, once this error is corrected, average per enrollee spending in MA was lower than per enrollee FFS spending from 2010 to 2018.
  • The second issue involves MedPAC’s failure to make an “apples to apples” comparison of program enrollees. Spending on MA enrollees includes services from both Medicare Parts A and B.  However, MedPAC’s analysis compares spending for these MA enrollees to beneficiaries enrolled in Part A and/or Part B.

When both adjustments are made, average FFS spending per enrollee is 6.4% higher than MA spending per enrollee, rather than 8.5% lower as asserted by MedPAC. This is the case even though, unlike the FFS Medicare program, MA plans cap out-of-pocket costs and generally provide a more comprehensive, robust set of benefits. The data clearly show MA has delivered on its promise of lower costs and higher quality.

An Incorrect Analysis of Spending

This result may seem contrary to those who saw the MedPAC presentation, but HMA’s analysis sets the record straight. HMA demonstrates that two components of MedPAC’s analysis make per beneficiary spending in FFS Medicare look artificially low compared to MA, skewing the comparison between the two programs. The first is a technical error in calculating per enrollee spending in Medicare Part B. The second is MedPAC’s decision to include in FFS Medicare costs a group of beneficiaries who are not eligible to enroll in MA. These beneficiaries have significantly lower costs than those who are eligible for MA, and their inclusion skews the comparison between the two programs.

Let’s address the error in MedPAC’s analysis first. In calculating spending in the FFS Medicare program, MedPAC calculated per enrollee spending as the sum of two fractions: per enrollee spending for Part A, and per enrollee spending for Part B. The problem stems from how MedPAC calculated the Part B number.

Specifically, HMA deduced that MedPAC included people in the denominator of the Part B fraction who were only enrolled in Part A and did not have Part B coverage. This is not an insignificant error; nearly 14% of Medicare’s Part A enrollees are without Part B coverage. This group has zero Part B spending, so including them in the denominator makes average FFS spending in Part B—and thus total FFS spending—substantially lower than it actually is. Using the correct denominator in calculating Part B spending—those beneficiaries enrolled in Part B—increases the average FFS spending per beneficiary by 8.3%. Importantly, if only this error is corrected, HMA shows that for nine of the past 10 years, average per enrollee spending in MA was lower than per enrollee FFS spending.

Making a Fair Comparison

The second issue involves MedPAC’s failure to make an “apples to apples” comparison of program enrollees. To be eligible to enroll in MA, a Medicare beneficiary must have both Parts A and B. Therefore, per enrollee spending in MA by definition includes spending for services across both segments of the program. However, MedPAC compared spending for these MA enrollees to beneficiaries enrolled in Part A and/or Part B of the traditional Medicare program, even though MedPAC has previously called out this inconsistency and recommended CMS change the way MA benchmarks are calculated to include only those FFS beneficiaries with both Parts A and B.

As noted earlier, almost 14% of FFS Medicare enrollees have Part A but not Part B (a share that has been steadily growing over the last decade), and they account for 2% of total Part A spending. Beneficiaries with only Part A tend to be younger, healthier, and more likely to still be working (so Medicare is the secondary payer to employer-sponsored insurance), which leads to lower average Medicare costs even for Part A alone than those enrolled in both segments of the program. Adjusting the analysis to exclude spending for those FFS enrollees who do not have both Parts A and B—creating an “apples to apples” comparison—shows average per enrollee FFS spending for the comparable group is another 8% higher than MedPAC suggests.

Factoring in both adjustments together, average FFS spending per enrollee is 6.4% higher than MA spending per enrollee, rather than 8.5% lower as asserted by MedPAC. The MA program clearly delivers on its promise of greater value for the Medicare program.

It is also important to understand that MA plans provide beneficiaries with far greater benefits than FFS for the dollars spent. Spending for FFS beneficiaries reflects costs paid by the Medicare program for Medicare-covered services. In contrast, MA spending includes Medicare-covered services plus reduced beneficiary cost sharing such as the out-of-pocket maximum required in all MA plan, plus added services not covered by Medicare, such as dental, vision, and hearing benefits, plus benefits designed to reduce socioeconomic barriers to health such as transportation, meals, assistance with housing, or modifications to support remaining in the home. MA plans also offer additional services such as enhanced care coordination, disease management programs, customer service support and nurse lines. In the end, Medicare program spending on MA provides enrollees substantially more benefits and services than does FFS spending.

A fair comparison of MA and FFS spending shows that average per enrollee spending in MA is consistently and significantly lower than average spending in the FFS program. Understanding this is critical so policymakers have a clear and accurate assessment of MA and FFS spending—as well as the value derived from that spending—when considering the best approach for delivering high-quality, efficient care to the Medicare population.