Medicare Advantage Healthcare Spending Exceeds Original Medicare

Escalations in Medicare Advantage healthcare spending—along with higher traditional Medicare spending—could drive scarcity in the Medicare hospital insurance trust fund and could boost Medicare Part B premiums, Kaiser Family Foundation researchers found.

Despite the savings that a value-based care model affords for beneficiaries, Medicare Advantage spending is higher than traditional Medicare. Furthermore, healthcare spending is growing at a faster rate in Medicare Advantage than fee-for-service Medicare.

The researchers leveraged publicly available data through CMS to analyze current spending trends in traditional Medicare Part A and Part B and to project future spending trajectories.

On average, in 2019 Medicare Advantage plans spent $321 more per person than traditional Medicare, largely due to the supplemental benefits that are a trademark of Medicare Advantage. Booming Medicare Advantage enrollment provides another reason for the increase in enrollee spending overall.

Researchers projected that this trend of Medicare Advantage spending exceeding fee-for-service Medicare spending would increase over time, as will enrollment.

By 2029, enrollment growth will have contributed $104 billion—or half—of Medicare Advantage spending. Higher payments per enrollees will make up the other half of Medicare Advantage spending through 2029 ($105 billion).

The escalating costs per Medicare Advantage enrollee are partly due to the projected growth in rebate payments (eight percent annually, on average). As quality bonus payments and benchmarks rise, rebates will increase as well.

However, the researchers also attributed the escalating costs to Medicare Advantage plans’ sicker populations. Studies show that Medicare Advantage plans tend to attract more members with chronic disease management needs as well as low-income populations and dual eligibles.

Overall, Medicare Advantage outpaces traditional Medicare spending. The Medicare Advantage model has never produced savings when compared to traditional Medicare plans, the researchers stated.

However, future Medicare Advantage spending might not be as high as the projections indicate, based on certain factors.

For instance, the projections would be very influenced by potential changes to the determination process for per-enrollee spending. A MedPAC proposal has suggested changes that would diminish annual Medicare Advantage spending by two percent per enrollee.

“MedPAC recently recommended changes to how plan payments are calculated, observing that because most plans currently bid well below the cost of providing Part A and B services in traditional Medicare, there is an opportunity for the Medicare program to share in these efficiencies,” the brief explained.

If these changes went into effect, total Medicare Advantage spending might be $82 billion less than the projected $664 billion in total Medicare Advantage spending from 2022 through 2029.

Alternatively, if Medicare Advantage spending growth matched traditional Medicare growth from 2021 to 2029, then overall Medicare Advantage spending might be $183 billion lower than the projected total.

“Comparing the two alternative scenarios, the reduction in Medicare Advantage spending is similar in the initial years of the time period,” the researchers stated. 

“However, the Medicare savings accrue more rapidly under the scenario where growth in payments per Medicare Advantage enrollee is equal to the rate of growth in spending per person in traditional Medicare. This is because savings from lower growth compound over time.”

The researchers warned that higher spending in both Medicare Advantage and traditional Medicare could come back to beneficiaries in the form of higher Part B premiums. These trends could also create scarcity in the Medicare hospital insurance (HI) trust fund.

The higher rebates to Medicare Advantage plans could create inequity between Medicare Advantage and traditional Medicare, the researchers added.

The results of this brief indicated that policymakers may want to consider diminishing the inequities between Medicare Advantage payments and traditional Medicare payments. However, the researchers acknowledged that this could lead to less rich supplemental benefits for Medicare Advantage enrollees.