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Medicare Advantage: Quality Bonus Payment Demonstration Has Design Flaws and Raises Legal Concerns

GAO-12-964T Published: Jul 25, 2012. Publicly Released: Jul 24, 2012.
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What GAO Found

Our March 2012 review found that the CMS Office of the Actuary’s (OACT) estimated cost of the demonstration exceeds $8 billion over 10 years. About $5.34 billion of this estimate is attributed to quality bonus payments more generous than those prescribed in PPACA, specifically to (1) higher bonuses for 4-star and 5-star plans, (2) new bonuses for 3-star and 3.5-star plans, (3) applying bonuses to plans’ entire benchmarks during the phase-in of PPACA’s new payment methodology, and (4) allowing plans’ benchmarks to exceed their pre-PPACA levels. Most of the remaining projected demonstration spending 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 enrollment mainly benefit average-performing plans—those receiving 3 and 3.5-star ratings. Also, while a reduction in MA payments was projected to occur as a result of PPACA’s payment reforms, OACT estimated that the demonstration would offset more than one-third of these payment reductions projected for 2012 through 2014.

Our March 2012 report identified several shortcomings of the demonstration’s design that preclude 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. Subsequently, in our July 2012 letter, we raised concerns about whether the demonstration meets the requirements of section 402 and, therefore, falls within the agency’s authority.

Notably, the bonus payments are based largely on plan performance that predates the demonstration. All of the performance data used to determine the 2012 bonus payments and nearly all of the data used to determine the 2013 bonus payments were collected before the demonstration’s final specifications were published. The demonstration’s incentives to improve quality can have a full impact only in 2014. Therefore, we are concerned about the demonstration’s ability to provide additional incentives to increase the efficiency and economy of Medicare services. In response to our inquiries on this issue, CMS acknowledged that payments in 2012 and 2013 reward plans for their past performance, but asserted that these payment changes are consistent with the requirements of section 402.

Why GAO Did This Study

This tesimony discusses the Medicare Advantage (MA) Quality Bonus Payment Demonstration, which the Centers for Medicare & Medicaid Services (CMS) initiated rather than implementing the MA quality bonus payment program established in the Patient Protection and Affordable Care Act (PPACA). This testimony discusses our March 2012 review of the 3-year demonstration’s cost and design, as well as our July 2012 letter to the Secretary of Health and Human Services (HHS) regarding the agency’s authority to conduct the demonstration. Our March 2012 report concluded that the demonstration, with an estimated cost of over $8 billion over 10 years, is unlikely to produce meaningful results. It recommended that the Secretary of HHS cancel the demonstration and allow the MA quality bonus payment system established by PPACA to take effect. That review also gave rise to concerns about the agency’s authority to conduct the demonstration under the Social Security Amendments of 1967. In our July 2012 letter, we noted that the statute provides broad authority, but found that the agency has not established that the demonstration meets the criteria set forth in that statute.

For more information, contact James Cosgrove at or (202) 512-7029, or Edda Emmanuelli-Perez at or (202) 512-2853.

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