MedPAC is asking Congress to change how MA payments are calculated. Here's how

Medicare Advantage
The Medicare Payment Advisory Commission is recommending to Congress several changes in how Medicare Advantage plan benchmarks are calculated to better yield savings for Medicare. (Getty/designer491)

The Medicare Payment Advisory Commission (MedPAC) wants to change how Medicare Advantage (MA) benchmarks are calculated due to concerns that plans have not yielded net savings for Medicare.

The recommendation, outlined in a report to Congress released Tuesday (PDF), aims to address a disparity where Medicare pays 4% more for beneficiaries enrolled in MA plans compared to similar enrollees in fee-for-service.

“Despite the apparently relative efficiency of MA, no iteration of private plan contracting has yielded net aggregate savings for Medicare,” a release on the report said.

MedPAC wants to change how the MA benchmark, which is the maximum payment amount for plans, is adjusted for geographic variation.

Currently, Medicare pays MA plans more if they cover an area with lower fee-for-service spending. This is despite most plans bidding below fee-for-service in these areas; further, “payments are 9% higher than the areas’ [fee-for-service] spending, and MA enrollment is disproportionately higher than in many other areas.”

At the same time, plans in areas where fee-for-service spending is higher offer plan bids that are lower relative to their benchmark and therefore get more rebate dollars. The rebates are the amount that equals the difference between the bid and the benchmark.

“Because the rebate dollars must be used to provide extra benefits, large rebates result in plans offering a disproportionate level of extra benefits,” the report said. “Moreover, as MA rebates increase, a smaller share of those rebates is used for cost-sharing and premium reductions—benefits that have more transparent value and provide an affordable alternative to Medigap coverage.”

MA plan bids have in general declined well below fee-for-service spending, an indicator that Medicare could see greater savings by reducing payment benchmarks, the report said.

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MedPAC proposes to use an equal blend of per capita local area fee-for-service spending and national fee-for-service spending.

By incorporating national spending, it can reduce variation in local benchmarks and accommodate MA plans “both in areas where [fee-for-service] spending is high and in areas where it is low,” MedPAC said.

The change would mean benchmarks in low fee-for-service spending areas would be “aligned more closely with [fee-for-service] spending areas but would remain above local [fee-for-service] spending,” the report added.

Benchmarks in areas with high spending, on the other hand, would see a modest decrease relative to current policy.

MedPAC is also recommending a rebate of at least 75%. Currently, an MA plan’s rebate percentage ranges from 65% to 70% and is dependent on its star rating.

“The average plan rebate is currently 65%; this alternative would ensure overall rebates of at least 75%,” MedPAC said.

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The report also calls for a discount rate of at least 2% to reduce local and national blended spending amounts, the goal of which is to “integrate the efficiency of MA into the benchmark calculation.”

MedPAC ran simulations of how its benchmark policy would affect participation compared to existing policy using 2020 MA bids and spending data.

The simulations showed that the blend of local and national spending reduced benchmarks in the two lowest spending quartiles by about four to five percentage points and reduced benchmarks by an average of one percentage point in the highest spending areas.

The Centers for Medicare & Medicaid Services could “feasibly implement our recommended policy with likely little impact on plan participation,” the report added.