While most of Medicare's 46 million beneficiaries are covered by the traditional fee-for-service (FFS) program, about one in four beneficiaries receives benefits through private health plans under the Medicare Advantage (MA) program. Under the FFS program, Medicare pays health care providers for each covered service they furnish. While Medicare sets the price it pays, the volume of services--and, as a consequence, total spending--remains largely uncontrolled. In contrast, MA plans have more control over both the price they pay to providers and the quantity of services they deliver. As of September 2010, more than 11 million beneficiaries were enrolled in approximately 3,900 MA plans sponsored by 181 parent MA organizations (MAO). MAOs generally offer beneficiaries one or more plans to choose from--with different coverage, premiums, and cost sharing features--in the areas they serve. Also, MA plans may provide additional benefits not offered under FFS Medicare, such as reduced cost sharing or vision and dental coverage. Medicare pays plans a fixed amount per enrolled beneficiary monthly. In 2010, Medicare payments to MA plans totaled an estimated $115 billion. In June of each year, MA plans submit bids to the Centers for Medicare & Medicaid Services (CMS)--the agency that administers the Medicare program--prior to the start of the contract year that begins January 1. To assist plans in preparing their bids, CMS publishes projections of FFS spending by county. Plans' bids consist of their projected revenue requirements (including profit) for providing standard Medicare services to an average enrollee (risk- adjusted for differences in health status) in its service area. The bids also include county-level projections of enrollment and average beneficiary risk scores. Comparisons of plan bids to projected FFS spending indicate the extent to which MA revenue requirements are less or greater than spending for the same services under traditional Medicare. The payment to each plan is determined by the bid and a benchmark--the maximum amount Medicare will pay in each county within the plan's service area. The relationship of the bid to the benchmark determines whether the plan's enrollees pay additional premiums or receive additional benefits. If a plan's bid is higher than the benchmark, Medicare pays the plan its benchmark and enrollees pay the remainder in their monthly premium. If the bid is lower than the benchmark, the plan receives its bid and a portion of the difference as a rebate, which must be used to reduce premiums, reduce cost sharing, or provide extra coverage. However, because the benchmarks are generally greater than spending in FFS, even plans that bid below FFS spending levels in their service areas are paid above FFS spending amounts. Congress asked us to examine the relationship between MA plan bids and service area spending. In this report, we assessed: (1) how MA plan bids compare to FFS spending in their service areas overall and by plan type, FFS spending level, and payment benchmarks; (2) the association between the level of MAO market concentration and plan bids relative to FFS spending in their service areas; and (3) how the components of MA plan bids compare by plan and market characteristics.

In comparing 2010 MA plan bids to FFS spending in their service areas overall and by plan type, FFS spending level, and payment benchmarks, we found the following: (1) Overall, MA plans projected that they could cover their costs for providing Medicare's standard benefits for about 98 percent of the amount that would be spent under the FFS program. (2) HMOs were the only MA plan type that, in aggregate, submitted bids below FFS spending levels in their service areas. Bids relative to FFS spending also varied within plan types, particularly for HMOs. (3) Only MA plans with the majority of their enrollment in the highest FFS spending areas had, in aggregate, bids below FFS spending. Among those plans, only HMOs and regional PPOs submitted bids that were lower than FFS spending. (4) In aggregate, MA bids were generally lower than FFS spending in service areas where benchmarks were closer to FFS spending levels. In those areas, only the bids of HMOs and regional PPOs were lower than FFS spending. In comparing MA plan bids to FFS spending in their service areas by the level of MAO market concentration, we found the following: (1) Nearly all of the MA plans we studied operated in areas where three dominant MAOs accounted for over half of the MA enrollment. (2) When other factors are held constant, predicted bids relative to FFS spending are higher for plans with service areas where MAO market concentration is greater. (3) At all levels of market concentration, predicted bids of plans sponsored by the five largest MAOs nationwide exceed FFS spending, when other factors are held constant. (4) The FFS spending level, the benchmark amount, and plan type are more strongly associated with plans' bids relative to service area FFS spending than MAO market concentration. In comparing the distribution of MA plan bid components by plan and market characteristics, we found the following: (1) Projected profits were similar--4 percent to 5 percent--for HMOs, local PPOs and private FFS plans. (2) In general, plans of all types, in relatively high and low FFS spending areas, and in relatively high and low benchmark areas projected medical expenses to account for at least 85 percent of revenue. (3) Regardless of the relationship between their bids and service area FFS spending, plans differed little in the shares of their bids allocated to medical expenses, nonmedical expenses, and profit. (4) More than a third of MA enrollees were in plans that allocated less than 85 percent of their bid to medical expenses.

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