Medicare Advantage Overpayments Expected to Surpass $75B in 2023

Medicare Advantage overpayments may exceed $75 billion in 2023 due to favorable selection of Medicare Advantage plans, data from the USC Schaeffer Center for Health Policy & Economics revealed.

Medicare Advantage plan payment rates are primarily based on Medicare fee-for-service spending, which frequently leads to significant overpayments to Medicare Advantage plans.

The Medicare Payment Advisory Commission (MedPAC) estimated that Medicare Advantage plans would be overpaid $27 billion or 6 percent in 2023. This estimate reflects aggressive coding of beneficiary health conditions and easily achieved bonus payments related to quality, according to MedPAC.

However, MedPAC’s estimate does not consider the high share of beneficiaries that have switched from traditional Medicare to Medicare Advantage.

The data from USC researchers explained how Medicare beneficiaries who switched to Medicare Advantage plans have lower spending than those with similar health risks who did not switch.

In 2019, 1.7 million of the 29 million FFS beneficiaries moved to a Medicare Advantage plan. With risk-score adjustment, spending for all FFS beneficiaries averaged $11,439. Spending on those who switched to Medicare Advantage was $9,094, while spending for those who stayed was $11,589.

Furthermore, 46.9 percent of Medicare Advantage beneficiaries in 2020 had switched from traditional Medicare between 2006 and 2019. Almost 30 percent switched to Medicare Advantage from 2015 to 2019 alone, and plan payments for these beneficiaries were twice their expected expenditures.

This favorable selection of Medicare Advantage, which is expected to continue, more than doubles the overpayment estimates made by MedPAC. USC projects that Medicare Advantage overpayments will exceed $75 billion or 20 percent.

“The skewed distribution of expenditures and the consistent trend of beneficiaries with below-average spending choosing Medicare Advantage plans have significant financial implications and are adding to the fiscal strain on the Medicare system,” Steven Lieberman, a nonresident senior fellow at the USC Schaeffer Center, said in a press release.

“Reform options must strive to improve the relationship between FFS expenditures and Medicare Advantage payments. Another option is to delink Medicare Advantage payments from FFS as the current rate-setting system grows increasingly unreliable and problematic.”

Reforming the current approach could include creating measures to reduce the impact of aggressive coding by plans, such as eliminating the influence of codes with little connection to treatment. New data reporting requirements for Medicare Advantage could also help improve the accuracy and completeness of the data to make it more comparable to traditional Medicare claims data.

Alternatively, policymakers could abandon the current rate-setting approach and utilize competitive bidding. One route would include setting both Medicare Advantage and FFS premiums based on bids. The bid for FFS would reflect risk-score-adjusted expenditures in FFS. However, this method could disrupt the FFS system, USC researchers noted.

Another bidding method would restrict competitive bidding for setting payment rates for Medicare Advantage, using market forces to determine payments. This could allow taxpayers to benefit from the efficiency of Medicare Advantage plans instead of the gains leading to significant plan profits.

“Regardless of which approach is chosen, policymakers should proceed with a solution to shore up the fiscal solvency of the Medicare Trust Fund and the impact on overall federal budget deficits,” said Paul Ginsburg, senior fellow at the USC Schaeffer Center and professor of the practice at the USC Price School of Public Policy.