1. Medicare Advantage Payment System Mark Miller, PhD Medicare Payment Advisory Commission May 4, 2009

2. 2 Principle of Medicare Advantage payments FFS is a fragmented delivery system No focus on coordination or quality MA plans paid monthly capitated amount to provide Medicare benefits Ability to coordinate care, target quality improvements, negotiate provider networks and rates Underlying principle: savings from efficiency allow plans to provide extra benefits and increase enrollment Original payments: 95% of FFS

3. 3 Bids and benchmarks MA plans bid against county-level bidding targets, known as benchmarks If a plans bid exceeds the benchmark: Program pays benchmark Enrollee pays the remainder as premium If bid is less than the benchmark: Program pays the bid + 75% of difference to plan for extra benefits to beneficiary Program keeps 25% of difference

4. 4 Examples of bids in one county Plan APlan B Benchmark: $800 Bid: $700Bid: $840 Difference: $100 ($75 to plan, $25 to treasury) Difference: -$40 Medicare pays: $775 Beneficiary pays: $0 Medicare pays: $800 Beneficiary pays: $40 Extra benefits to enrollee: $75 Extra benefits to enrollee: $0

5. 5 MA benchmarks and FFS spending MA benchmarks are administratively set and related to a countys FFS spending Counties with high per beneficiary FFS costs (high utilization) have higher benchmarks Greater ability to offer extra benefits Conversely, counties with low per beneficiary FFS costs (low utilization) have lower benchmarks Less ability to offer extra benefits Led to exceptions, e.g., rural and urban floors

6. 6 Floor Benchmark Current Benchmark LowHigh Local FFS spending Low High Current MA benchmarks simplified

7. 7 Benchmarks, bids, and payments relative to FFS for 2009 Benchmarks/Bids/Payments/ FFS All MA plans118%102%114% Plan type HMO118 98113 Local PPO121108118 Regional PPO114106112 PFFS120113118 SNP122 99116 Employer-only117109115 Source: MedPAC analysis of CMS bid and rate data

8. 8 Implications of MA payment system Non-neutrality: Payments 14 percent above FFS Each enrollee in MA results in costs to Medicare relative to FFS No incentive for efficiency: All extra benefits are subsidized on average $1.30 per $1.00 of extra benefits, or $3.26 per $1.00 of extra benefits in a PFFS plan No incentive for care coordination: High benchmarks encourage plans that are not designed to coordinate care and improve quality Costs subsidized by taxpayers and Part B premium higher for all beneficiaries in MA or not