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Medicare Advantage (MA) or Medicare Part C, is an alternative to traditional Medicare (Medicare Part A and Part B). Under MA, people with Medicare receive coverage through health plans

offered by private insurance companies. After a decade of particularly rapid growth, enrollment in MA plans now makes up almost half (48 percent) of total Medicare enrollment and MA is

predicted to cover more people than traditional Medicare does by 2027. Per-person spending for MA has also been growing and Medicare now spends more for each MA enrollee than it does for

similar individuals with traditional Medicare. This Spotlight draws from current evidence to identify the key features of the complex MA payment system that contribute to higher MA plan

payments as compared with traditional Medicare. The report highlights opportunities for policy changes to improve the current MA payment system, while also calling attention to the critical

importance of keeping consumers front and center in considering any changes to MA payment policies. HIGHER MEDICARE ADVANTAGE PAYMENTS INCREASE MEDICARE SPENDING Traditional Medicare

generally pays health care providers for the cost of each delivered service, but MA insurers are paid a set monthly per-enrollee amount to provide Medicare benefits to people enrolled in

their plans. That payment amount is determined by a complex formula based on the plan’s estimated costs to deliver Medicare services, with adjustments for plan enrollees’ health status and

for the plan’s quality ratings. Experts estimate that current payments to MA plans are 4 percentage points higher than what Medicare  would have paid to care for similar people in

traditional Medicare. The impact of these higher per-person payments is significant. In 2022, Medicare paid an average of $540 more for each person enrolled in Medicare’s private plan

alternative than it did for beneficiaries in traditional Medicare. Across the more than 30 million MA enrollees, this higher payment increased the Medicare program’s total spending by an

estimated $16 billion last year. KEY DRIVERS OF HIGHER MEDICARE ADVANTAGE PAYMENTS This report takes a detailed look at three key drivers of higher payments to MA plans: _Inflated risk

adjustments (“upcoding” or “coding intensity”)_ Under the current approach, insurers receive higher payments for enrollees with greater health needs (measured as a “risk score”) whose care

is expected to cost more. The goal of this policy is to ensure that plans have sufficient resources to serve individuals with greater health needs and to discourage insurers from

disproportionately enrolling healthy enrollees. Yet, it also creates a strong financial incentive for insurers to inflate their enrollees’ risk scores (by thoroughly identifying and

submitting data for more health conditions), driving up payments to MA plans. _Generous quality bonus payments_ To incentivize insurers to deliver high-quality care, MA plans that perform

well on a five-point Quality Star Ratings system receive additional payments known as “quality bonus payments”. Today, the vast majority of MA plans (nearly 70 percent) receive high

ratings—substantially increasing Medicare’s overall spending and leading observers to question whether MA’s quality bonus program sufficiently distinguishes quality differences between

plans. _Relatively high county benchmarks _ MA plan payments are calculated based on benchmarks set as a percentage of traditional Medicare spending in a given geographic area, with higher

benchmarks leading to higher MA payments. Despite the fact that most MA plans assert (through a process of plan bids) that they are able to provide Medicare benefits for less than the cost

of traditional Medicare, the average benchmark is currently 8 percentage points higher than spending under traditional Medicare. THE CONSUMER COST OF OVERLOOKING MEDICARE ADVANTAGE PAYMENT

INEFFICIENCIES Excess payments to MA plans have important implications for the broader Medicare population, including higher Part B premiums for all Medicare beneficiaries. Higher MA

payments allow MA insurers to offer coverage of supplemental benefits (e.g. dental, hearing and vision care). Because access to supplemental benefits is one of the main reasons why Medicare

beneficiaries choose MA, higher payments to MA plans indirectly contribute to continued significant MA enrollment growth. Yet, rather than enhancing coverage for all Medicare beneficiaries,

increased Medicare spending from MA payment inefficiencies benefit only those enrolled in the MA option. For people choosing between Medicare alternatives, opting for MA also means losing

beneficial features of traditional Medicare, such as access to Medicare providers nationwide. MODERNIZING MEDICARE ADVANTAGE PAYMENTS WITH CONSUMERS AT THE FOREFRONT Over the MA program’s

evolution, policymakers have, when needed, taken steps to improve MA payment policies, correct flaws evident at the time, and better align payments to MA plans with spending under

traditional Medicare. Evidence indicates that there are areas of MA payment policy where corrections to inefficiencies and the resulting excess spending in MA are once again needed. Experts

have proposed a range of policy approaches to modernize the MA payment system. As policymakers weigh the benefits and disadvantages of various MA payment reform proposals, they should keep

people with Medicare and their families front and center of policy development and implementation. Any changes to MA payment policies should balance the importance of ensuring that Medicare

remains on a solid financial footing with the need to preserve access to features of MA that enrollees value, while considering opportunities for improvements that benefit the entire

Medicare population and not just those in MA. Policymakers must also guard against potential negative impacts on, for example, consumers’ access to needed care, out-of-pocket costs,

experience of care, care quality, and plan choice. All options to modernize MA payments must include strong consumer protections that safeguard important priorities such as health equity and

mitigate unintended consequences on Medicare’s most vulnerable populations.    Keeping the needs and preferences of people with Medicare at the center of any policies to modernize Medicare

Advantage payments is key to ensuring  a strong Medicare program for all beneficiaries and their families. SUGGESTED CITATION: Noel-Miller, Claire, and Jane Sung. Improving Medicare

Advantage Payment Policy While Focusing on Implications for Consumers. Washington, DC: AARP Public Policy Institute, January 17, 2023. https://doi.org/10.26419/ppi.00183.001.