Joanne: Medicare Advantage plans are also known as Part C of Medicare, and they've become increasingly popular options for Medicare beneficiaries. Currently, the majority of Medicare Advantage plans provide extra benefits not covered by Original Medicare while at the same time having a $0 per month premium.

This leads to the most common question that we get asked about Medicare Advantage. What's the catch? 

Cameron: But before we answer that, my name is Cameron Giardini and together with my co-host, Joanne Giardini Russell, We operate Giardini Medicare, which is an independent insurance agency based out of Southeast Michigan.

Although we are based in Michigan, we do work virtually over the phone to directly help consumers in about 13 states find the right Medicare coverage for them. Now, if we do not work in your state, we will still connect you with another trusted independent agent who will be able to help you find the coverage you want.

Also, we now have a free online course that is available for you that you can register for to learn pretty much any Medicare topic you can think of. You can access this course by going to gmedcourse.com. So, with that out of the way, let's go over a brief overview of today's episode. We will talk about the basics of Medicare Advantage funding.

We will give a brief history of why Medicare Advantage plans were created in the first place. Of course, we will also talk about the funding differences between original or traditional Medicare versus Medicare Advantage plans. We'll give an overview of the Medicare Advantage funding process, and then we will also talk about the impact that these funding processes have on you, the consumer, we'll even talk about some of the problems that we see with the current system and how it is structured.

And then last but not least, we'll try to finish with what has been proposed solutions to the Medicare Advantage funding system. And I know I mentioned it earlier, we'll talk about the basics of this system, but in reality, there's not a whole lot that's basic about this. It is a pretty complex topic. So try your best to follow along.

But again, this is a lot of details. So we just had to put it out there and see how it goes. Yeah, this 

Joanne: is an in-the-weeds podcast. If you like that, just keep listening. let's talk about when and why Medicare Advantage plans were created.

Although Medicare Advantage plans have become much more popular in recent years, CMS has contracted with private insurance companies to offer Medicare benefits starting back in the 80s through an act called TEFRA. Then, the Balanced Budget Act of 1997 established what we call Part C of Medicare, then it was known as the Medicare Plus Choice Program.

Finally, fast forward, due to the passage of the Medicare Prescription Drug Improvement and Monetization Act, which is called the MMA, and this happened in 2003, this program was updated to increase the insurer's participation and created current Medicare Advantage Plans. Finally, in 2010, the Affordable Care Act made large changes to Medicare Advantage Plan payments when it was signed into law in 2010.

So Medicare Advantage Plans, remember, they're private alternatives to original Medicare. They bundle all of the benefits of Part A and B, and typically your Part D, which is drugs, into one entire package.  And most are going to offer additional benefits that are not covered by original Medicare. Remember that these are managed care programs and they're offered again by the private insurance companies and they're commonly HMO or PPO plans.

So, a few things that these were designed to, give to the consumer is the number one choice. These were aimed to give beneficiaries an additional choice beyond just traditional Medicare and they do that. Now, in 2024, Medicare consumers have access to more Medicare Advantage plan options than ever before.

They were also created to increase efficiency and cost savings with the belief that the private sector managing care can result in efficient delivery of health care and therefore savings would be given over the original Medicare program. They were also brought to provide innovation and quality improvement.

So Medicare Advantage plans also offer additional benefits not covered by original Medicare and they're incentivized to provide higher quality care. Yep, 

Cameron: that's why it was created in the first place and now we'll talk about what has happened with that in mind. So we already talked briefly about the fact that these are supposed to be more efficient ways of administering Medicare than using the traditional system and hopefully, here's an overview of current or in recent past Medicare Advantage spending.

According to the Kaiser Family Foundation, in 2021, Medicare accounted for 10 percent of the federal budget, and it is projected to rise to 18 percent of the federal budget by 2032. Funding for Medicare mostly comes from general revenues, payroll tax revenues, and premiums paid by you, the Medicare beneficiary.

Also, according to the Kaiser Family Foundation, the Medicare Advantage program, it gets its funding from the same funds that are allocated or set aside for the original Medicare program. With Medicare Advantage plans, the Part A services they provide are funded by the Part A Hospital Trust Fund, and Part B and Part D benefits are drawn from the Part B side of the trust fund. We already talked about the explosion in recent years of Medicare Advantage popularity, and you can see this with the Kaiser Family Foundation reporting that Medicare payments to Medicare Advantage plans have nearly tripled from 2011 to 2021. This has increased from $124 billion to $370 billion.

61 billion dollars, which represents Medicare Advantage spending going from 26 percent of total Medicare spending up to 47 percent of total Medicare spending. This is projected to reach 60 percent of total Medicare spending by 2031. And in 2023, Medicare spent more on Part A and Part B benefits for those with Medicare Advantage compared to traditional Medicare.

So just to summarize that. As of now, Medicare Advantage plans are costing the federal government more than traditional Medicare. And when it comes to Medicare Advantage pricing, the majority of Medicare Advantage plans, again, are offered for 0 per month premiums, which often brings up the question of how is that even possible?

We often hear people say that sounds too good to be true. Well, It is true, and more importantly, we will break down why it's possible in this episode. Just keep in mind throughout this episode that when we talk about what you have to spend for Medicare Advantage plans, you still have to pay your Part B premium, which in 2024 has a base premium of 174.70/month. 

Joanne: So before diving into how Medicare Advantage plans are funded in more detail, it's important to get a general idea of the differences. between how Medicare Advantage plans receive payments compared to traditional Medicare. Let's talk about original Medicare first or traditional Medicare.

Remember, those are the same. So Original Medicare, which includes Part A and Part B, uses a fee-for-service payment system. This essentially operates just how it sounds by paying providers based on the number of services that they provide. According to the Kaiser Family Foundation, Medicare predetermines a base payment for a unit of service.

For example, a CT scan will have a set payment when it's completed. These payments are also adjusted based on geographic location and then the complexity of the patient's health care needs. Let's contrast that to Medicare Advantage. So according to the Better Medicare Alliance, CMS, which again is Medicare, pays Medicare Advantage plans using what we call a capitated system.

It's essentially a fixed amount of money to cover the cost of care for each beneficiary that is enrolled in the plan. These payments are adjusted based on the anticipated cost to cover beneficiaries with varying healthcare needs and other factors, which we're going to discuss soon. So plans don't receive additional funds if their member spending ends up being higher than anticipated.

So having a set payment from Medicare, in theory, incentivizes the private insurance companies that are providing these Medicare Advantage plans to take a more hands-on approach when it comes to disease and care management and then the services that their members are using. 

Cameron: Yeah, so to kind of break that down a little bit, original Medicare, like Joanne said, it's more a pay-as-you-go.

When you go for a treatment, the doctor bills Medicare and then the payments go out. So it's for everything that is done as it gets done. Whereas, as you'll see Medicare Advantage plans, it's more of a lump sum payment based on a lot of different factors that they get from the government. Then they have to use that lump sum payment or that predetermined payment throughout the year to pay for their members, medical needs, and other services.

Now we're going to get in more detail about Medicare Advantage funding and how it works. So here are some topics and some terms that are important for you to know and to understand to appreciate how Medicare Advantage plans earn their money from the federal government. Don't worry, we will try to spare some of the even more complex details and the boring details, frankly, in this episode, but just keep in mind this is an overview and there is more to it.

So if anyone does want those details, You can always email us and we'll be happy to send them to you. first, understand what a benchmark is. The Centers for Medicare and Medicaid Services set what is called a benchmark for each county in the U. S. This benchmark, represents the average cost to cover a beneficiary with Original Medicare in that county.

So for example, if CMS determines that the average beneficiary would cost the government $1,000 per month to cover with Original Medicare in that county. Then the benchmark would also just be set at $1,000 in the county. Now to go with the benchmark there, you'll have to also know what a bid is. A bid is from the private insurance companies that provide Medicare Advantage plans.

And what they do is they make a bid for how much they think it would cost them to provide those same Part A and Part B services to that average beneficiary in the county. So this relationship between the bid and the benchmark plays a key role in Medicare Advantage funding. Next, you have risk scores and adjustments.

You might've seen this in the news or articles, but this is also a really big factor when it comes to overall payments. Essentially, what happens is enrollees that have more health care needs will cost more money for the Medicare Advantage plan to cover because if they're using more services, they have to pay more out of that pool of money that they get.

So, to compensate for this, Medicare Advantage Plans, get an adjusted risk score payment to increase their payments if their members need more care. So, an example of this is if a member has a risk score of 1, just 1.0, they are expected to cost as much as the average beneficiary we talked about.

But if you have a risk score of 1.05, that's just a fancy way of saying they're about percent more expensive than the average Medicare beneficiary. So again, keep all of these in mind. We're just going through some of these terms and topics. Next, you have star ratings and quality bonus payments. You've probably seen those star ratings already when you look at Medicare Advantage plans, but just know that Medicare Advantage plans, receive star ratings that range from one up to five with five being the maximum.

And they get these star ratings from CMS or Medicare. These star ratings, function as a type of quality measure for consumers to compare plans, but plans with a four-star or higher rating, also receive additional payments from the government in the form of quality bonus payments. This is designed to incentivize plans to improve the quality of their plan enrollees.

And then last but not least, we have the term, which is rebate. So when a Medicare Advantage insurance company, if they bid below that benchmark, so if the benchmark's a thousand and they say, hey, we can cover this person for $900, they receive a portion of that difference in the form of a rebate. These rebates are actually what goes towards providing plan members with either lower premiums or lower cost sharing, like lower co-pays or out-of-pocket costs.

And they also go towards providing extra benefits that are not covered by original Medicare. So we've talked about the idea of Medicare Advantage plans being designed as a private, more streamlined alternative to Medicare that is designed to save the overall system money, but does that happen?

Joanne: So, according to the Medicare Payment Advisory Commission, which is known as MEDPAC, this is a quote from them, when risk-based payment for private plans was first added to Medicare in 1985, payments to private plans were set at 95 percent of the fee for service payments because it was expected that the plans would share savings from their efficiencies relative to the fee for service with the taxpayers.

But private plans in the aggregate have never been paid less than the fee for service Medicare due to policies that have explicitly elevated payments to the Medicare Advantage above the fee for service equivalent. 

Cameron: So just to break that down into layman's terms or just to make that make more sense, basically, yeah, no is the answer.

But what MedPAC is saying, they're saying when Medicare Advantage plans were first implemented, they were paid less than what Medicare costs. So they're saying, we think that these private alternatives to Medicare will save the government money, therefore we will give them less money. But that has never actually happened, and on average, Medicare Advantage plans continue to receive more money than it costs the government to administer the same benefits to somebody with Medicare.

Joanne: The intent was there. It's just not playing out necessarily as intended. Okay. So again, according to MedPAC, total Medicare payments to Medicare Advantage plans in 2023, which includes the rebates that finance all of those extra benefits, are projected to be $27 billion higher. than if Medicare Advantage enrollees were enrolled in fee-for-service original Medicare.

Federal spending on Medicare Advantage bonus payments has increased every year since 2015, and they will reach at least $12.8 billion in 2023, which is an increase of nearly 30 percent since 2022. So in one year, it's a $2.8 billion increase. Since 2018, the portion of Medicare Advantage payments that are used to fund extra benefits These are rebates has doubled from $1,140 per enrollee to $2,352 per enrollee in 2023, so pretty significant increases as you can hear.

Overall Medicare spending for Medicare Advantage enrollees was $321 higher per person. in 2019 than if the enrollee had instead been covered by traditional Medicare. The Medicare Advantage spending amount includes the cost of extra benefits and they are funded by rebates that are not available to traditional Medicare beneficiaries.

So, some studies disagree with this. A study done by Wakely Consulting on behalf of AHIP found that Medicare Advantage spending was about 7 percent lower than original Medicare. However, it's important to point out that AHIP is an American political advocacy and trade association of health insurance companies that do provide Medicare Advantage plans.

Cameron: Yeah, so basically AHIP wants Medicare Advantage to look better is how we look at it. That's what it comes down to. So, if Medicare Advantage plans might be costing the system more money, what are the potential problems that are leading to this? Well, first, we already talked about risk adjustment, but overall, Medicare's payments for Medicare Advantage plans, assume after risk adjustment that the average spending for Medicare Advantage enrollees is essentially equal to the average spending of a fee for service or an original Medicare beneficiary.

That's the whole point of the risk adjustment. Is that the case? Well, again, going back to MedPAC and their analysis of 2021 data, it shows that higher diagnosis coding intensity resulted in Medicare Advantage risk scores that were 10.8 percent higher than scores for similar fees for service beneficiaries.

Now Medicare does provide a reduction to this difference in the risk scores and they reduce them by 5.9 percent across the board to try to bring them closer to being in line. But this still results overall, according to MedPAC, in Medicare Advantage risk scores being about 5 percent higher than what they would have been if that same Medicare Advantage enrollee was enrolled in traditional Medicare.

Just this difference in risk scores resulted in $17 billion in excess payments to Medicare Advantage plans in 2021. So just to put that in a quick summary, basically Medicare Advantage plan participants are being made to seem less healthy than they actually should be. And then we also talked about coding intensity, which also plays into it.

This is the difference between the risk scores with Medicare Advantage plans versus traditional Medicare. And again, this is caused by what's called coding intensity. Long story short, this essentially means that Medicare Advantage plans, are more incentivized to document diagnosis codes versus.

When somebody is on original Medicare, so they're trying to find people that have these extra diagnosis codes that they can put in the system like diabetes, heart disease, whatever it might be. According to Medpack, documenting more diagnostic codes with a Medicare Advantage plan increases the risk score that the plan gets, which gives the plan two benefits.

 It gives them increased monthly payments that the plans receive, and it increases the rebates that they can use for extra benefits to provide to the consumer. Essentially, higher coding intensity from the Advantage plan, the insurance company, it provides a competitive advantage compared to other insurance companies.

On the other hand, with original Medicare, payments are again, they're based on the services provided rather than the number of diagnoses that a patient has. So there's very little incentive for them to diagnose more coding if you have original So other potential problems continued here. There's also favorable selection.

This means Medicare Advantage plans, may also benefit from favorable selection, essentially meaning that healthier individuals with lower expected health care costs are more likely to enroll in a Medicare Advantage plan compared to original Medicare. The University of Southern California released a study Study in 2023 about the impacts of favorable selection on Medicare Advantage funding.

And this is what they found. So in 2020, Medicare Advantage plans were overpaid by 14.4 percent due to favorable selection. Now you combine this with the overpayments they're getting for coding intensity, and all of a sudden the overpayments for Medicare Advantage plans go up to 20 percent compared to traditional Medicare.

They found that beneficiaries with the lowest Health care expenditures. So basically the healthiest of individuals were twice as likely to choose a Medicare Advantage plan versus the middle tier of people with the average health issues when it comes to choosing Medicare Advantage plans. So healthier people on average will gravitate towards Medicare Advantage.

So according to this, if the USC study is correct, it could bring the MedPAC estimated overpayments from 2023. It could bring those from $27 billion up to $75 billion or more when compared to traditional Medicare. Overall, this favorable selection, it's likely because individuals with less healthcare needs are likely to be attracted, again, to the low monthly premiums and the extra benefits provided by Medicare Advantage plans, while being less worried about higher out-of-pocket potential medical costs and prior authorization we often think about.

And then last but not least, insurance companies, may also try to attract low-cost consumers since in a recent Kaiser Family Foundation study, they found that one in four Medicare Advantage commercials promoted physically fit seniors doing activities like tennis, yoga, hiking, and bouncing on trampolines.

Just kind of something to throw in there because, again, the companies are actively trying to seek out people with less healthcare needs. And then Joanne can finish with one of the final problems with the Medicare Advantage funding system. And 

Joanne: this problem is called up coding. So unlike with the coding intensity and favorable selection like Cameron just discussed, up coding can be a bit shadier when it comes to the tactics that are used by some of the Medicare Advantage insurance companies.

Now up coding is essentially when companies assign a diagnostic code that would suggest that a patient is sicker than they are. Insurance companies use a variety of tactics to increase their diagnostic coding of patients. And these can include some of the following ways to do that.

Number one is chart reviews, and this is when a Medicare Advantage plan, employs a third party to examine the beneficiary's medical records to find diagnoses that are not previously submitted. There's something else called a health risk assessment, and these are used to collect information from beneficiaries about their health status, their risk, their daily activities, and things like that.

And there's even free. In-home assessments are where a nurse or a physician assistant visits the consumer's house to ask about the same types of things, your health status, risk, things like that. So according to a 2021 study from the U. S. Office of Inspector General, found that 20 of the 162 Medicare Advantage companies drove a disproportionate share of $9.2 billion worth of payments from the diagnoses reported in the chart reviews and the health risk assessments as not on any other service records. The New York Times reported in 2022 that four of the five largest Medicare Advantage insurance companies have faced federal lawsuits over efforts to overdiagnose these beneficiaries.

Cameron: Yeah, exactly. So to sum that up, There are people, whose sole job is to look at charts and look at your past medical records to see if they missed diagnoses or any possible ways that they can say, well, this person has diabetes or they're pre-diabetic to go with their other ailments, which increases the amount of funding that they're getting from the government for the Advantage Plans.

And like Joanne said, some of these overpayments that they're getting, are simply from chart reviews and people looking on the backend and not what was being reported initially when you went to the doctor. But why does any of this even matter? Well, these excess payments, put a financial strain on the Medicare system, and this directly impacts everybody, especially you, the consumer.

 According to a 2021 study by Richard Kronick and Michael Chua, I'm sorry if I mispronounced that, but they estimated that keeping the current coding intensity adjustment, or keeping the system as it is, Could result in Medicare payments to Medicare Advantage plans being $600 billion higher between the years of 2023 and 2031 than if they were to properly adjust them.

$85 billion of this would be paid by consumers through higher Medicare premiums and $515 billion in the form of higher Medicare spending. Which also impacts taxpayers, which is also probably you. Now, another thing to consider is that Medicare Advantage plans are being incentivized to find more diagnostic codes for patients.

It can also be linked to a more detailed understanding of a patient's health with the Medicare Advantage plan. So this could lead to better-tailored care and management. Chronic conditions and better health outcomes, according to some studies. So it's not always bad that they're trying to find what's wrong with you.

That is a good thing. You know, if they can find actual conditions or diseases that you didn't know you had, or somebody missed, that's exactly what it's designed to do. The problem is when things get overinflated just for the sake of getting higher reimbursement. So, overall, our thoughts are the Medicare Advantage program, has delivered on its goal of providing a good alternative option to Original Medicare and providing additional benefits.

It's come down to this point where they're 50-50 Medicare Advantage versus people with Original Medicare, and we think that's a good thing. These plans have greatly benefited many of our clients directly as well. So it's going to be hard to put the genie back in the bottle when it comes to Medicare Advantage payments.

If payments are adjusted, like studies suggest to better match what is going on with original Medicare, this could result in lower payments to Medicare Advantage plans, which means reducing additional benefits that enrollees have. Medicare Advantage plans. So this could negatively impact roughly more than 50 percent of Medicare beneficiaries at this point who have chosen to enroll in Medicare Advantage plans.

So either Medicare beneficiaries are going to have to take a hit when it comes to coverage and benefits to save money, Or we just have to come to terms with the fact that Medicare Advantage plans, provide a much-needed choice for consumers while managing their healthcare and providing important benefits, but they don't deliver on their promise of saving the Medicare program and taxpayers money.

As always, please leave us a review on your podcast app and subscribe so you can listen to future episodes. You can also find more Medicare content from us by going to YouTube and searching Giardini Medicare. If you want to schedule a one-on-one phone call with us or a licensed broker, You can schedule online at gmedicareteam.com

Last but not least, if you have any questions about this episode or anything Medicare-related, send us an email to info at gmedicareteam.com. But thanks for listening and have a good day.