Medicare Advantage’s Favorable Selection Problem

Medicare Advantage plans could be on track to reach over $75B in overpayments this year – nearly 3x prior estimates – causing researchers at the USC Schaeffer Center for Health Policy and Economics to issue a pressing call for policy reform.

The USC study found that traditional fee-for-service Medicare beneficiaries with lower-than-average expenditures are significantly more likely to switch to Medicare Advantage plans. Favorable selection at its finest. 

  • For context, CMS sets MA rates based on the county-level expenditures of those in traditional FFS Medicare, and they’re intended for beneficiaries with average expenditures – not systematically below average.
  • As a result, risk-adjusted expenditures for the 16.9M new MA beneficiaries who made the switch from traditional Medicare between 2006 and 2019 were substantially below average, causing large overpayments due to the favorable selection effect.

This pattern of favorable selection more than doubles the $27B (6%) overpayment estimate from MedPAC for 2023, which primarily reflected “coding intensity” ($23B) and Star Rating (quality) bonuses, but didn’t include an adjustment for selection bias.

  • The researchers estimate that favorable selection alone could cause overpayments to the tune of 14.4%, which would surpass $75B when combined with MedPAC’s estimate of other factors.

The authors propose two potential strategies for improving the accuracy of MA rates:

  • Reform the current approach of linking MA rates to average expenditures of traditional Medicare beneficiaries by including measures to reduce the impact of aggressive coding and mandating new data reporting requirements to improve comparability.
  • Abandon the current approach and institute competitive bidding by MA plans to let market forces determine rates with the aim of capturing efficiency gains for taxpayers instead of increasing revenue for MA plans.

The Takeaway

Medicare Advantage enrollment has been skyrocketing over the past decade, and over half of all eligible beneficiaries are now enrolled in a private plan. As traditional Medicare enrollment continues to decline, basing MA rates on FFS expenditures will only grow increasingly problematic, and this study does a great job underscoring the need for some serious reform.

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