Higher Payments for MA Plans May Be Offset By “Spillover” Benefits Throughout the Health System

In recent years, the Medicare Advantage (MA) program has come under increased scrutiny because the private insurance plans that offer MA coverage get paid at a rate that is higher than what CMS pays for beneficiaries enrolled in traditional fee-for-service Medicare. But a paper from the National Bureau of Economic Research (NBER) concludes that the higher payments are worth it because they are offset by “spillover effects” that go to other Medicare beneficiaries, as well as the non-Medicare population.


The 2013 Report of the Medicare Boards of Trustees  notes that since 2004, CMS has paid higher rates to private health plans to encourage the expansion of Medicare managed care. MA rates are determined on a county-wide basis and they could range from 100 percent to 140 percent of fee-for-service rates in the same county. In 2012, about 27 percent of all Medicare beneficiaries were enrolled in MA plans.

The Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148) made fundamental changes to MA funding by linking MA rates to Medicare fee-for-service costs and by requiring the use of quality measures to determine eligibility for bonuses.

In 2012, two reports from the Government Accountability Office (GAO-12-719T and GAO-12-51) noted that payments to MA plans should better reflect the health status of beneficiaries, and differences should be adjusted between MA plans and traditional Medicare providers in reporting beneficiary diagnoses. In doing so, CMS could achieve “billions of dollars” in additional savings. According to the GAO, CMS is not doing enough to improve the accuracy of the adjustment made for differences in coding practices between MA plans and traditional fee-for-service, and CMS needs to use more current data, allowing for all relevant differences in beneficiary characteristics between the two beneficiary populations.

Managed Care’s Varied Techniques

The NBER paper suggests that attempts to equalize MA and fee-for-service payments may be somewhat short-sighted. “Managed care plans deploy a number of techniques to control utilization, such as pre-authorization, utilization review, referral requirements, restricted networks, and (full or partial) capitation,” according to the authors. “These tools may change how physicians practice medicine for all of their patients – not just those in the managed care plan.” 

Further, “managed care can influence health care investment and the adoption of technology that can in turn affect system-wide utilization. For example, an increase in managed care activity in an area could lead to a decrease in the number of MRI machines and thereby the total number of MRIs performed.” 

Managed care penetration in a given area could lead to lower prices, which would primarily benefit younger patients who are not covered by Medicare, since many prices for fee-for-service Medicare patients are set administratively.   

In summary, the authors state “that increasing MA penetration results in lower hospitalization costs and shorter lengths of stay system-wide. The magnitude of these spillovers is substantial, and taking them into account suggests higher optimal MA payments than would otherwise be the case.”