GAO-13-279SP: Health: 27. Medicare Advantage Quality Bonus Payment Demonstration

Health > 27. Medicare Advantage Quality Bonus Payment Demonstration

Rather than implementing the Medicare Advantage quality bonus payment program specifically established by law, the Centers for Medicare & Medicaid Services is testing an alternative bonus payment structure under a broad demonstration authority through a 3-year demonstration that has design flaws, raises legal concerns, and is estimated to cost over $8 billion; about $2 billion could be saved if it were canceled for its last year, 2014.

Why This Area Is Important

GAO has designated Medicare as a high-risk program in part because of major payment challenges involving the Medicare Advantage (MA) program.[1] The MA program, an alternative to the original Medicare program, provides health care coverage to about a quarter of all Medicare beneficiaries through private health plans offered by organizations under contract with the Centers for Medicare & Medicaid Services (CMS). MA organizations generally offer beneficiaries one or more plans to choose from—with different coverage, premiums, and cost-sharing features—in the areas they serve. To help beneficiaries select an MA plan, CMS rates MA contractors on a 5-star scale, with 5 stars indicating the highest quality.[2]

The 2010 Patient Protection and Affordable Care Act as amended (PPACA) changed the way Medicare pays MA plans in several ways. CMS’s actuaries estimated that the implementation of PPACA’s reforms would reduce Medicare payments to MA plans by $145 billion over 9 years and would cause plans to offer less generous benefit packages.[3] They also projected that MA enrollment in 2017 would be half as much as it would have been in PPACA’s absence. Among its reforms, PPACA provided that plans with 4 or more stars receive quality bonus payments that were to be phased in from 2012 to 2014. However, rather than implementing PPACA’s quality bonus program, CMS initiated a 3-year demonstration to test an alternative bonus payment structure under authority provided in section 402 of the Social Security Amendments of 1967 as amended. This authority allows CMS to conduct demonstration projects to determine whether, and if so which, changes in payment methods would increase the efficiency and economy of Medicare services through the creation of additional incentives, without adversely affecting quality. Compared with PPACA, the MA Quality Bonus Payment Demonstration extends the bonuses to plans with 3 or more stars, accelerates the phase-in of the bonuses for plans with 4 or more stars, and increases the size of the bonuses in 2012 and 2013. Whereas about one-third of MA enrollees would have been covered by contracts eligible for a bonus in 2012 and 2013 under PPACA, about 90 percent of enrollees are covered by such contracts in these 2 years under the demonstration.



[1]See GAO, Medicare Advantage: Quality Bonus Payment Demonstration Undermined by High Estimated Costs and Design Shortcomings, GAO-12-409R (Washington, D.C.:
Mar. 21, 2012).

[2]MA plans’ overall star ratings indicate their performance relative to that of all other plans on about 50 measures of clinical quality, patient experience, and contractor performance.

[3]See CMS’s Office of the Actuary, Estimated Financial Effects of the “Patient Protection and Affordable Care Act,” as Amended (Baltimore, Md.: Apr. 22, 2010).

What GAO Found

As GAO reported in March 2012, CMS’s actuaries have estimated that the MA Quality Bonus Payment Demonstration will cost $8.35 billion over 10 years, most of which will be paid to plans with average performance—those receiving 3 and 3.5 stars.[1] About $5.34 billion of this estimate is attributed to bonuses more generous than those prescribed in PPACA. Most of the remaining projected cost stems from higher MA enrollment because the bonuses enable MA plans to offer beneficiaries more benefits or lower premiums. Taken together, the expanded bonuses and higher MA enrollment mainly benefit 3-star and 3.5-star plans. In addition, CMS’s actuaries have estimated that the demonstration will offset (i.e., compensate plans for money they would otherwise be losing) more than one-third of the reduction in MA payments projected to occur under PPACA during the demonstration years. The largest annual offset is estimated to have occurred in 2012—71 percent—followed by 32 percent in 2013 and 16 percent in 2014.

The MA Quality Bonus Payment Demonstration does not—and is not required by law to—conform to the principles of budget neutrality (i.e., the total costs of a demonstration cannot exceed the total costs in its absence). Officials from the Office of Management and Budget told us that they considered the costs of the demonstration in the context of other administrative actions in the Medicare program that are expected to generate savings, such as an adjustment to skilled nursing facility payment rates. However, they did not confirm whether specific offsets were identified to account for the total costs of the demonstration.

The MA Quality Bonus Payment Demonstration dwarfs all other Medicare demonstrations—both mandatory and discretionary—conducted since 1995 in its estimated budgetary impact and is larger in size and scope than many of them. The estimated budgetary impact of the demonstration, adjusted for inflation, is at least seven times larger than that of any other Medicare demonstration conducted since 1995 and is greater than the combined budgetary impact of all of those demonstrations. While the demonstration is similar in scale to some Medicare Part D demonstrations, it is unlike many Medicare pay-for-performance demonstrations in that it is implemented nationwide and allows all eligible entities to participate.[2]

The design of the demonstration precludes a credible evaluation of its effectiveness in achieving CMS’s stated research goal—to test whether a scaled bonus structure leads to larger and faster annual quality improvement compared with what would have occurred under PPACA. Notably, because the demonstration lacks an appropriate comparison group that can represent what would have occurred under PPACA, it is not possible to isolate its effects. Furthermore, the demonstration’s bonus payments are based largely on plan performance that predates the demonstration. All the performance data used to determine the 2012 bonus payments and nearly all the data used to determine the 2013 bonus payments were collected before the demonstration’s final specifications were published. Accordingly, the demonstration’s incentives to improve quality can have a full impact only in 2014, the demonstration’s last year. In addition, the demonstration’s design is inconsistent with CMS’s research goal. First, the demonstration’s bonus percentages are not continuously scaled. For example, in 2014, plans with 4, 4.5, and 5 stars will all receive the same bonus percentage. Second, the demonstration’s bonus percentages in 2014 do not offer all plans better incentives than PPACA to achieve higher star ratings. In particular, most plans improving from 3.5 to 4 stars in 2014 would receive a larger increase in their bonus payment under PPACA. Furthermore, any effects that are observed could be attributable, at least in part, to other MA payment and policy changes.

As GAO reported in July 2012, the demonstration’s design also raises legal concerns about whether it falls within the Department of Health and Human Services’ demonstration authority. Section 402(a)(1)(A) of the Social Security Amendments of 1967 as amended provides the Secretary of Health and Human Services with broad authority to modify Medicare payment methods; however, payment changes initiated under this authority must meet the criteria set forth in the statute, including providing additional incentives to increase the efficiency and economy of Medicare services and enabling a determination of whether the changes in payment methods actually increase the efficiency and economy of such services. Although a demonstration need not in fact result in increased efficiency and economy, it must meet these criteria. However, CMS has not established that either of these elements is present in the MA Quality Bonus Payment Demonstration.



[1]According to CMS’s actuaries, most of the cost of the demonstration is estimated to be concentrated in the 3 demonstration years—2012 through 2014—but some of the cost is estimated to occur in the post-demonstration years mostly because of continued higher enrollment in MA as a result of the demonstration.

[2]The Medicare Part D program provides voluntary, outpatient prescription drug coverage for eligible individuals.

Actions Needed

GAO recommended in March 2012 that the Secretary of Health and Human Services should take the following action:

  • cancel the MA Quality Bonus Payment Demonstration and allow the MA quality bonus payment system established by PPACA to take effect. If, at a future date, the Secretary finds that this system does not adequately promote quality improvement, the Department of Health and Human Services should determine ways to modify that system, which could include conducting an appropriately designed demonstration.

Although the demonstration is now in its second year, the Department of Health and Human Services still has an opportunity to achieve significant cost savings—about $2 billion, based on GAO’s analysis of CMS actuaries’ estimates—if it cancels the demonstration for 2014.[1]



[1]Because all MA contracts for 2013 were in place by mid-September 2012, canceling the demonstration in 2013 can only produce cost savings in 2014 or later.

How GAO Conducted Its Work

The information contained in this analysis is based on findings from the products in the related GAO products section. GAO reviewed 10-year cost estimates, evaluation plans, and other documents related to the MA Quality Bonus Payment Demonstration. GAO also reviewed the budget neutrality policy for Medicare demonstrations, Office of Management and Budget cost estimates and CMS documents on Medicare demonstrations, and literature on evaluating Medicare demonstrations. In addition, GAO interviewed officials from CMS and the Office of Management and Budget. Finally, GAO reviewed the law governing Medicare demonstrations under section 402 of the Social Security Amendments of 1967 as amended and CMS’s response to questions about how the MA Quality Bonus Payment Demonstration meets the law’s requirements.

Agency Comments & GAO Contact

In commenting on the March 2012 report on which this analysis is based, the Department of Health and Human Services disagreed with GAO’s recommendation to cancel the demonstration and its finding about the demonstration’s design shortcomings. The agency stated that, unlike PPACA’s quality bonus payment system, the demonstration provides an immediate incentive for many plans to improve the quality of care delivered to MA beneficiaries. The Department of Health and Human Services also noted that (1) the demonstration provides an incrementally larger quality bonus for each increase in an MA plan’s star rating, with the exception of bonuses to plans with 4 or more stars in 2014, (2) it will compare the impact of the demonstration—as measured by plans’ 2012 and 2013 star ratings—to what would have occurred under PPACA—as shown in their 2014 star ratings, and (3) it will determine the demonstration’s impact on quality improvement by comparing MA plans’ performance with that of non-MA plans.

After reviewing the Department of Health and Human Services’ response, GAO determined in its March 2012 report that its recommendation is warranted and its finding is sound. Regarding the Department of Health and Human Services’ disagreement with the recommendation, GAO noted that the bonuses paid in 2012 and 2013 under both PPACA and the demonstration would primarily reward past performance, with the demonstration doing so far more generously. In addition, PPACA’s bonus structure in 2014 provides many plans better incentives than the demonstration to achieve higher star ratings. In response to the Department of Health and Human Services’ disagreement with the finding on the demonstration’s design, GAO noted that 4-star and 4.5-star plans receive the same bonus percentage in all 3 years of the demonstration. In addition, GAO noted that the Department of Health and Human Services’ planned comparison methodology fails to distinguish between predemonstration and demonstration performance. Specifically, the 2012 star ratings are based on data collected almost entirely before the demonstration’s final specifications were published and, therefore, cannot be used to measure the demonstration’s impact. The 2014 star ratings will be based on data collected during the demonstration and, therefore, will reflect the demonstration’s incentives. Finally, GAO stated that non-MA plans are not an appropriate comparison group because they may serve different populations, may follow different regulations or policies, and may have different incentives to improve quality than MA plans.

GAO provided a draft of this report section to the Department of Health and Human Services for review and comment. The Department of Health and Human Services did not provide comments on this report section.

For additional information about this area, contact James C. Cosgrove at (202) 512-7114 or cosgrovej@gao.gov.