Medicare Advantage

Medicare Advantage is a way that seniors can receive their Medicare benefits in a plan administered by a health insurer. Seniors enrolling in a Medicare Advantage plan receive hospital, outpatient, and physician coverage through the plan which typically includes prescription drug coverage and supplementary benefits such as vision and dental coverage.

Key Research

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Improving Medicare Through Medicare Advantage

February 21, 2024

Joe Albanese

Two Paths for Medicare’s Future: Medicare Advantage and Accountable Care Organizations

January 15, 2025

Joe Albanese

To save Medicare, build on what works

February 28, 2024

Joe Albanese

Paragon Pics

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January 15, 2025

Medicare Changes Payment Rates at Different Rates Over Time

The start of 2025 means that Medicare’s new payment rates, finalized in regulations during the previous year, have officially taken effect. These updates are usually quite technical, but they set the stage for some of the biggest policy fights in the new Congress. This week’s Paragon Pic, derived from a recent Paragon Prognosis post, “Money Changes Everything,” displays the cumulative changes in Medicare payment rates for select providers since 2016.

As the figure shows, the clear outlier has been physician rates. Since the enactment of the Medicare Access and CHIP Reauthorization Act of 2015, they have seen several years of Medicare payment rate reductions that have led to a cumulative 10 percent decline over the past decade. Congress usually steps in to mitigate the cuts with a “Doc Fix,” but that hasn’t happened yet for 2025.

Meanwhile, the big winners have been hospitals and post-acute care facilities – on average, payment rates for these providers have gone up by 25 percent in the last 10 years. The health care system, unsurprisingly, embraces these financial incentives. For example, Medicare payment policies are a major reason why health care providers are consolidating within hospital systems. For this reason, there have been numerous proposals to control hospital and post-acute care spending, especially by using site neutrality policies to equalize rates across sites of service.

October 16, 2024

Medicare Catches Falling Stars

On October 10, the Centers for Medicare and Medicaid Services (CMS) released its Medicare Advantage (MA) and Medicare Part D star ratings for 2025. As the figure shows, MA prescription drug (MA-PD) plans next year will have lower star ratings on average and fewer enrollees will be in highly rated plans. Average star ratings (weighted by enrollment) peaked at 4.37 in 2022 and declined to 3.92 in 2025, while the share of enrollees in a plan with 4 or more stars fell from a peak of 90 percent to 62 percent. For those same years, the number of contracts earning 4 or more stars fell from 68 to 40 percent, and those earning a perfect 5-star rating fell from 16 percent (74 contracts) to 1 percent (7 contracts).

Star ratings measure overall quality for MA and Part D contracts based on metrics related to enrollee health outcomes, patient experience, and adherence to certain clinical processes. Plans prioritize getting high star ratings to attract enrollees and earn performance-based rewards from the government. MA plans get higher benchmarks and larger rebates for high star ratings, leading to more payments and the ability to offer more supplemental benefits.

Does this mean that plan quality is declining in 2025? Not necessarily – technical changes to how CMS calculates star ratings are likely a bigger factor.

Star ratings peaked in 2022 and began to fall after COVID-19 protections expired in 2023. CMS has also changed how it treats outliers when calculating the threshold between each star rating, called “cut points.” Rising cut points will make it harder for plans to earn more stars (although changes to these cut points are capped at 5 percent per year). These changes were first applied to this year’s star ratings but, notably, CMS recalculated its 2024 star ratings earlier this year in response to legal challenges from plans.

A higher bar for star ratings may prevent excessive “grade inflation” that allows many plans to easily earn the best ratings. However, despite star ratings purportedly reflecting the quality of Medicare coverage, researchers have questioned their usefulness. For example, the stars rely on a large number of measures that do not meaningfully assess the quality of health outcomes and do not capture the performance of contracts in local markets.

Despite these flaws, the star ratings distort plans’ business practices because the bonuses associated with them encourage a focus on maximizing performance against government-selected metrics rather than accountability to enrollees directly. As a result, the cost of quality bonuses has increased over the past decade. For these reasons, Paragon has recommended eliminating quality bonuses to plan benchmarks alongside numerous other policies to improve MA while achieving reasonable taxpayer savings.

February 28, 2024

Medicare Advantage Plans Typically Cover Benefits Below Traditional Medicare Costs

Medicare Advantage (MA) plans receive payments from the government to provide health care coverage for their enrollees. These payments are calculated using a complex bidding process. Data from these bids suggest that MA plans are usually more efficient than traditional fee-for-service (FFS) Medicare.

Each MA market area (usually a county) receives a “benchmark” that corresponds to the level of FFS spending in that area. There are four benchmark levels under current law: 95 percent, 100 percent, 107.5 percent, and 115 percent of FFS spending. The lowest quartile of counties in terms of FFS spending receives benchmarks of 115 percent, the second lowest quartile receives 107.5 percent, the second highest receives 100 percent, and the highest receives 95 percent.

Plans submit a “bid” that reflects the expected cost of covering Part A and Part B benefits. If a plan bids above its benchmark, then the government sets its payment at the benchmark and requires it to collect the difference through additional premiums. If a bid falls below the benchmark, the difference is split between the government and a “rebate” that the plan must use to reduce its premiums or provide supplemental benefits.

In 2023, bids were 83 percent of FFS costs on average. In each county quartile, bids at the 75^th percentile ranged from 79 to 93 percent of FFS costs—demonstrating that the vast majority of plans can deliver core Medicare benefits at significantly lower cost than FFS. These efficiencies present policymakers with an opportunity to achieve targeted savings in MA without compromising access to benefits or coverage options.

Capping MA benchmarks so that they cannot exceed 100 percent of FFS costs – at least in areas where access to MA coverage is not a concern – would pass along more savings to taxpayers. Most plans would continue receiving rebates to provide extra benefits. Paragon proposes to pair these changes with other policies to improve the accuracy of its benchmark calculations by using only cost data from individuals who .

February 21, 2024

Medicare Advantage Beats Expectations

Medicare Advantage is now the most popular form of coverage in Medicare. MA enrollment has steadily increased and enrollment now far exceeds previous expectations of scorekeepers like the Congressional Budget Office (CBO). CBO’s 2013 projection forecasted that 30% of Medicare enrollees would be in MA in 2023—well below the 51% of enrollees choosing MA last year.

CBO’s 2008 projections took place soon after the program’s inception in 2006 when it replaced the previous Medicare+Choice program. Its 2013 projections took place after the enactment of the Affordable Care Act, which contained significant payment reductions to Medicare and MA. CBO believed the ACA changes would stall growth in MA. The Office of the Chief Actuary (OACT) at CMS expected that the ACA would lead MA enrollment to fall by half. However, MA’s strong growth continued, demonstrating its high value to seniors.

CBO only began to project that MA would cover a majority of beneficiaries in their March 2020 baseline estimates, and even then it only expected this to occur in 2030. Thus, even MA’s recent growth continues to defy expectations.

Policymakers try to evaluate the success of government programs with many types of metrics and data, but the decisions of individuals are among the best signal of what they value. While there are opportunities to improve MA and address concerns that overall MA spending is higher than FFS, MA has demonstrated better health outcomes, lower costs for basic Medicare benefits, and better value for beneficiaries (more benefits like vision, dental, and hearing coverage plus lower out-of-pocket costs).

Related Glossary Terms

Coding Intensity

Coding intensity refers to the difference in risk scores between enrollees in Medicare Advantage (MA) and in traditional fee-for-service (FFS) Medicare. The Centers for Medicare & Medicaid Services (CMS) assigns enrollees risk scores based on demographic factors and health status to denote the estimated relative costs of providing health care coverage (i.e., an enrollee with a risk score of 1.10 is estimated to have health care costs that are 10 percent higher than average). Payments to MA plans are risk-adjusted, meaning plans receive more payment for enrollees with higher risk scores, which encourages them to make sure patient diagnoses are…

Favorable Selection

Favorable selection in health care programs is a form of selection bias where a patient population has systemically lower health care costs than its target population, which can create payment challenges for government programs. In other words, this is a situation where many Medicare beneficiaries who cost less than average enroll in Medicare Advantage so that Medicare pays more for these beneficiaries than would have been the case if they were in Original Medicare. As an example, if Medicare Advantage (MA) plans attract enrollees with lower-than-expected costs relative to traditional fee-for-service (FFS) Medicare enrollees (with the same level of health…

Fee-for-service

Fee-for-service is a health care payment model where a medical provider is paid for services on an individual basis. In other words, payment is made per treatment, as opposed to a bundled payment for multiple services delivered during a specific episode of care (e.g. a heart attack) or a monthly capitated amount paid for the ongoing care of a patient. Fee-for-service is often blamed for high American health care costs because of the financial incentive the model provides for over-treatment. Over-treatment, in this context, means excess medical care and services that do not provide a material improvement in health outcomes…

Medicare Advantage

Medicare Advantage are private health insurance plans that deliver the benefits of Medicare Part A and Part B to its enrollees along with supplemental benefits. As a health plan, Medicare Advantage delivers its benefits through a network of health care providers (such as an HMO or PPO). Original Medicare, in contrast, does not restrict enrollees to a network, though a health care provider must accept Medicare’s payment rates as payment in full. Medicare Advantage enrollees must be Medicare-eligible and have applied for coverage during the annual Open Enrollment Period unless there was a qualifying condition for a Special enrollment Period.…

MedPAC

MedPAC, or The Medicare Payment Advisory Commission, is a non-partisan agency established by the Balanced Budget Act of 1997 to provide recommendations to Congress on Medicare. MedPAC’s recommendations are not binding on Congress but they do have considerable influence. MedPAC’s advice is often built on analysis of Medicare data and trends. Additional Resources Medicare Part D Medicare Advantage

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Key Research

Improving Medicare Through Medicare Advantage

Two Paths for Medicare’s Future: Medicare Advantage and Accountable Care Organizations

To save Medicare, build on what works

Paragon Pics

Medicare Changes Payment Rates at Different Rates Over Time

Medicare Catches Falling Stars

Medicare Advantage Plans Typically Cover Benefits Below Traditional Medicare Costs

Medicare Advantage Beats Expectations

Related Glossary Terms

Coding Intensity

Favorable Selection

Fee-for-service

Medicare Advantage

MedPAC

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