Learning from Medicare: Medicare Advantage

August 2011

Three quarters of Medicare’s 47 million beneficiaries are enrolled in the traditional fee-for-service (FFS) program. The remainder receive benefits through private health plans, primarily health maintenance organizations (HMOs)1 as part of a program currently known as Medicare Advantage. In 2011, more than 12 million beneficiaries, or approximately 26 percent of all Medicare beneficiaries, were enrolled in Medicare Advantage.2   That represents a more than doubling of beneficiaries in the program from the 5.3 million enrolled in 2005. HCFO-funded research on costs and quality in Medicare Advantage helps to provide insights to policymakers during a time when the program is responding to changes mandated by the Patient Protection and Affordable Care Act (Affordable Care Act or ACA).

Background: History and Evolution of the Medicare Advantage Program

Prior to 1982, Medicare contained arrangements for some beneficiaries to receive coverage through older, established HMOs. These arrangements, however, were not widespread and Medicare reimbursed for actual costs incurred with the plans bearing no risk. In 1972, Social Security amendments authorized Medicare to contract with HMOs for reimbursement based on actual costs. Those contracts were only available to older, established HMOs and featured retrospective cost adjustments.4  The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) laid the foundation for the first period of growth of managed care in Medicare. Medicare contracting requirements were simplified, which created a system comparable to what managed care organizations used in their private sector business.5  For the first time, HMOs could insure Medicare beneficiaries on a risk contract basis without retrospective cost adjustment. Plans received prospective monthly capitated payments of 95 percent of FFS expenditures adjusted for various demographic and health factors.6

In 1997, the Balanced Budget Act (BBA) named Medicare’s managed care program “Medicare+Choice.” Provisions of the BBA were intended to give beneficiaries greater choice in private plans and to slow the growth of Medicare spending.7  The Medicare+Choice program established a new payment methodology for plans and established new rules for beneficiary and plan participation. The new structure was intended to reduce variations in payment by increasing amounts in areas where the payment was low and slowing the growth rate in higher areas.8  Those measures had limited success. Most rural residents still did not have access to Medicare+Choice plans and program enrollment growth slowed.9  The Medicare Modernization Act (MMA) of 2003 subsequently rebranded the program “Medicare Advantage.”10  The MMA expanded plan options by allowing for more varied types of managed care plans and raised the minimum plan payment from 95 to 100 percent of FFS costs.11

Medicare Advantage Today

Beneficiaries often choose to enroll in Medicare Advantage because these plans typically provide benefits beyond those covered by FFS Medicare (e.g., dental and vision services) and may offer reduced cost-sharing.12  There are several types of Medicare Advantage plans. The most popular are local HMOs and Preferred Provider Organizations (PPOs), which have provider networks and can serve individual counties but vary premiums across counties. Regional PPOs are offered across regions made up of one or more states and have network requirements that are less extensive than local PPOs.13  There are also several other types of private plans which account for a small percent of beneficiaries.14  Private fee-for-service (PFFS) plans were initially authorized in 1997 and originally not required to establish provider networks, but are required to do so starting in 2011. PFFS plans pay providers at plan-negotiated FFS rates, and the lack of a network requirement was originally intended to increase access for rural beneficiaries.15  Finally, Special Needs Plans (SNPs) are restricted to beneficiaries that are institutionalized, dually eligible for Medicare and Medicaid, or have certain chronic conditions. These plans are typically HMOs.16  A majority of Medicare Advantage enrollees are in plans offered by a few large companies, including United Healthcare, Blue Cross-Blue Shield affiliates, and Kaiser Permanente.17

Enrollment in Medicare Advantage differs between urban and rural areas.  Between 2009 and 2010, a larger share of urban beneficiaries was enrolled in Medicare Advantage (26 percent) than those living in rural areas (15 percent). Access to the program is stable across the United States with almost all beneficiaries having a Medicare Advantage option available to them (approximately .4 percent of beneficiaries have no access). Currently, 92 percent of beneficiaries have an HMO or PPO in their counties, and regional PPOs are available to 86 percent of beneficiaries.18 Enrollment growth is faster in rural areas than in urban areas. A large portion (42 percent) of rural Medicare Advantage enrollment is in PFFS plans.19  PFFS plans are able to grow in rural areas because they face little competition from other private plans.20  Rural areas offer higher payments to plans, but in spite of this it is still not feasible for many HMOs or PPOs to set up networks. PFFS plans are paid 17 percent above FFS costs which creates incentives for these plans to seek out rural areas.21  Recently, however, there has been a decline in rural PFFS beneficiaries. Factors contributing to the decline include decreasing payment rates and some plans leaving the market in anticipation of 2011 requirement to form provider networks.22 

Medicare Advantage plans are paid a fixed amount per beneficiary to provide enrollees with all Medicare Part A and Part B services. Plans submit estimates to Medicare for the cost of services and bids that meet necessary requirements are accepted. The bids are compared to benchmarks that vary by county and are the maximum amount that Medicare will reimburse in that area.23  Benchmarks must be as high as per capita county FFS expenditures, but in many cases they are higher. In 2007, the CBO estimated that benchmarks are an average of 17 percent higher than per capita FFS nationwide.24  If a plan submits a bid that is higher than the benchmark, then enrollees pay a monthly premium equal to the difference between the two. If it is lower, the plan receives 75 percent of the difference from Medicare in the form of a rebate that it must use to provide supplemental benefits to enrollees.25  Additionally, Medicare uses risk adjustment in payment to Medicare Advantage Plans to reflect beneficiaries’ health status and to encourage plans to compete on efficiency rather than selectively enroll healthier beneficiaries.26

Medicare Advantage and the Affordable Care Act

Because plan benchmarks are typically higher than FFS costs, government spending for beneficiaries in Medicare Advantage usually exceeds what it would spend if the beneficiaries were in traditional FFS.27 Overpayment is also attributable to managed care companies engaging in risk selection and enrolling healthier beneficiaries. Past efforts to risk adjust for health status have been inadequate and have not limited overpayment. 28 The ACA contains provisions to correct for this and to strengthen incentives for plans to compete on the basis of quality. ACA-mandated modifications to the program are projected to save $117 billion between fiscal years 2010 and 2019.29 

Beginning in 2011, the ACA freezes Medicare Advantage benchmarks at 2010 levels. From 2012 onward, additional reductions will be phased in to bring spending closer in line with FFS levels.30 In counties with high per capita Medicare costs, the benchmarks will be set at 95 percent of FFS costs. For the bottom quartile of counties with relatively low Medicare costs, the benchmarks will be set at 115 percent of FFS costs.31  Some counties will be given higher benchmarks to increase plan availability. The Medicare Payment Advisory Commission (MedPAC) estimates that the 2011 benchmarks, bids, and payments will average approximately 113 percent, 100 percent, and 110 percent, respectively, of FFS spending.32

In addition to the benchmark revisions, the ACA also introduced a quality bonus program to increase benchmarks and provide bonus payments to plans that achieve high quality. Medicare Advantage uses a five-star based system to rate plan quality. Under the original ACA structure, plans that received a four- or five-star rating were eligible for increases in their county benchmark rates beginning in 2012. Additionally, plan rebates were contingent on the number of stars a plan received.33  The quality bonus plan has been revised since the passage of the ACA. In November 2010, the Centers for Medicare & Medicaid Services (CMS) announced that it would implement the quality bonus program throughout the entire Medicare Advantage program through a demonstration project.  The demonstration changed the original quality bonus plan by also awarding bonuses to plans that achieved three-star ratings (although at a smaller percentage than four or five-star plans).  In a letter to CMS, MedPAC expressed concern that the demonstration program will result in significant additional costs to Medicare Advantage. They also cautioned that the demonstration program could have an adverse affect on plan quality by awarding bonuses to three-star plans. By awarding bonuses to plans that are rated as “average,” the demonstration “lessens the incentive to achieve the highest levels of performance.”34

HCFO Research on Medicare Advantage

Over the years, HCFO-funded research concerning the Medicare Advantage has sought to provide policymakers with insight into how the program affects the costs and quality of care received by beneficiaries as well as their access to it.  In 2004, HCFO funded Glenn Melnick, Ph.D., of the University of Southern California, to study the effect of Medicare managed care on access and quality for beneficiaries. Melnick and his colleagues examined inpatient hospitalization rates for ambulatory-sensitive conditions for Medicare HMO beneficiaries in the mid-1990s. They found that those beneficiaries had lower inpatient hospitalization rates and fewer inpatient days than FFS beneficiaries. Though the findings suggested that during the period studied, HMOs selected healthier beneficiaries, the results were not exclusively attributable to beneficiary health.35 They also found that reductions in inpatient utilization varied by type of HMO.36

Other HCFO research has examined specific aspects of clinical quality for Medicare Advantage beneficiaries. Work led by Mark Chassin, M.D., at the Mount Sinai School of Medicine, examined the impact of managed care on the appropriateness and outcomes of carotid endarterectomy (CEA). CEA is a surgical procedure used to prevent stroke. It was ideal to examine in this context because it is costly and risky, and a large body of evidence exists to assess its clinical appropriateness. Chassin and his colleagues found that managed care did not have any impact on the rate of inappropriate use of CEA. Their findings suggest that Medicare Advantage plans may want to make better use of available evidence to ensure rational use of costly procedures by beneficiaries.37 

Research on program costs in Medicare Advantage has attempted to predict the effects of initiatives intended to limit overpayment to plans. HCFO-funded work led by Steve Pizer, Ph.D., of the Boston VA Research Institute, examined the potential impact of payment cuts to PFFS Medicare Advantage plans. Payments for those plans have been well above the levels of traditional FFS due to the large number of rural enrollees in the plans. Because these high payment levels can have significant budgetary impacts, there have been calls for policy changes.  Pizer and his colleagues studied the issue and sought to predict how PFFS plans would respond to payment cuts. They found that small reductions would reduce PFFS participation, and that cuts to the level of traditional FFS would cause the vast majority of plans to exit the market.38

Current HCFO research is comparing the cost effectiveness of chronic care between Medicare Advantage and FFS Medicare. This ongoing work, led by Beth Virnig, Ph.D., of the University of Minnesota, compares the technical efficiency of care for chronically ill beneficiaries in different Medicare settings. She and her colleagues hope to provide policymakers with more information about the factors that contribute to efficiency and the relative strengths of Medicare Advantage and FFS for chronically ill beneficiaries.


Medicare Advantage has undergone significant policy changes since its beginnings in the early forms of managed care in Medicare. The program will continue to evolve as ACA-mandated changes are implemented. Research on program costs and quality can provide information to policymakers on the consequences of potential changes. Details on HCFO studies and related publications can be found at http://www.hcfo.org.

Related HCFO Grants

Title: Research on the Relationship Between Market Characteristics and the Number and Type of Medicare Enrollees in HMOs
Grantee Institution: University of Michigan
Principal Investigator: Catherine McLaughlin, Ph.D.
Grant Period: February 1, 1999-July 31, 2001

What factors help explain why Medicare beneficiaries choose to enroll in different types of Medicare plans? A research team at the University of Michigan examined this question by assessing whether certain market conditions encouraged enrollment in different types of plans. Using the Community Tracking Study Household Survey data, InterStudy Survey data, a telephone survey of the 10 largest sellers of Medigap insurance policies nationwide, and a survey of three insurers selling Medigap policies in each of the 60 Community Tracking Study markets, they compared individuals who chose to enroll in Medicare HMOs to those who chose to enroll in Medicare fee-for-service plans. Market characteristics examined included prevalence and types of supplemental premiums offered, HMO reimbursement rates, and measures of HMO competition. One hypothesis tested was that Medicare HMOs market their products more aggressively in areas where Medicare pays a high Average Adjusted Per Capita Costs (AAPCC) rate. Their objective was to better understand the role of market forces on Medicare, and subsequently on enrollees in Medicare HMOs.

Title: Medicare Risk Contracting: Impact on Access and Quality for Medicare HMO Enrollees and Vulnerable Populations
Grantee Institution: University of Southern California
Principal Investigator: Glenn Melnick, Ph.D.
Grant Period: February 1, 2001-January 31, 2005

What are the effects of Medicare managed care on access and quality (compared to fee-for-service Medicare) for the general population of managed care beneficiaries and vulnerable populations, in particular? Based on previous studies finding that managed care works best for those who know how to work the system, the researchers at the University of Southern California hypothesize that vulnerable populations are more likely to plan than their non-vulnerable equivalents. They will test this hypothesis at both the patient and plan levels, examining the following questions: 1) Do vulnerable populations enrolled in Medicare managed care receive different levels or quality of care than their less vulnerable counterparts? and 2) Do health plan characteristics (e.g. type of ownership, organizational structure, or experience with Medicare risk contracting) influence the level of care vulnerable populations receive? The goal of this study is to provide policymakers with a deep and broad analysis of the experiences of Medicare managed care enrollees. They will also conduct a series of case studies to assess the technical feasibility of adding outpatient, pharmacy, and long-term care data from health plans to the OSPHD database.

Title: The Treatment of Dying Medicare Managed Care Patients: The Role of Social and Economic Factors
Grantee Institution: Health Research and Educational Trust
Principal Investigator: Jon Gabel
Grant Period: November 1, 2002-June 30, 2005

What is the cost and utilization of services during the last two years of life for Medicare managed care patients and fee-for-service Medicare patients? The researchers analyzed data from provider, beneficiary, plan benefit, prescription drug, clinic and office encounters, and laboratory and x-ray services database files for the managed care and fee-for-service populations. Patients who disenrolled from United HealthCare's Medicare managed care and returned to fee for service were also studied. Major causes of death such as cancer, chronic obstructive pulmonary disease (COPD], chronic heart failure, stroke, and dementia were analyzed for utilization and costs. The researchers addressed the following questions: 1) What are the costs and use of services associated with end-of-life care for major causes of death? 2) For the major causes of death being studied, how do cost and treatment patterns in end-of-life care vary according to area resources and financial arrangements? 3) What are differences in the site of death of Medicare managed care patients for these three major causes of death? 4) How does continuity of care vary among managed care settings? 5) What are the economic and other factors that determine continuity of care? 6) What is the cost of prescription drug coverage for end-of-life patients? 7) What is the appropriate method of prescribing and dispensing for the five study conditions? 8) What economic and socio-demographic factors explain differences across areas in end-of-life prescribing? The objective of the project was to guide administrators, legislators, and providers as they make decisions about end-of-life care.

Title: The Impact of Managed Care on the Appropriateness and Outcomes of Carotid Endarterectomy
Grantee Institution: Mount Sinai School of Medicine
Principal Investigator: Mark Chassin, M.D.
Grant Period: March 1, 2003-September 30, 2005

 What is the impact of managed care versus fee for service on overuse of carotid endarterectomy? The researchers examined the effectiveness of specific managed care interventions in reducing overuse. Specifically, the researchers addressed the following specific research questions: 1) Did Medicare beneficiaries enrolled in Medicare+Choice managed plans undergo carotid endarterectomy less often for inappropriate reasons compared with their counterparts in fee-for-service Medicare? 2) Compared with fee-for-service Medicare, did Medicare managed care enrollees receive carotid endarterectomy more frequently at high-volume hospitals or from high-volume surgeons? 3) Compared with fee-for-service Medicare, did Medicare managed care enrollees have carotid endarterectomy performed more frequently at hospitals or by surgeons with low risk-adjusted perioperative complication rates (i.e., at higher quality hospitals)? 4) What specific mechanisms for assessing appropriateness and quality did these plans use to prevent inappropriate carotid endarterectomies or to select providers with higher quality? What specific plan structural attributes, operational characteristics, or management programs are associated with lower (or higher) rates of inappropriate surgery? Which are associated with better (or worse) risk-adjusted complication rates? 5) Is there evidence of a managed care “spill-over effect” on quality of care such that appropriateness or complication rates are better among fee-for-service Medicare patients in regions with greater managed care market penetration than in regions with less managed care market share? The objective of the project was to inform the policy debate about what cost containment mechanisms may be effective in the current environment.

Title: Managed Care and Medicare Expenditures
Grantee Institution: University of Michigan
Principal Investigator: Michael Chernew, Ph.D.
Grant Period: January 1, 2004-December 31, 2004

 How do Medicare+Choice (M+C) payment rates affect M+C and FFS utilization and expenditures? The researchers: 1) assessed the impact of changes in payment rates to Medicare HMOs on enrollment in HMOs by Medicare beneficiaries; 2) assessed the aggregate impact of Medicare HMO enrollment on FFS Medicare utilization and expenditure; and 3) disaggregated the impact of Medicare HMO enrollment on FFS Medicare utilization and expenditure into a spillover effect and a selection effect. This study revised the assumptions surrounding the impact of managed care on Medicare expenditures in order to assist policymakers in assessing the financial health of the Medicare Trust Funds.

Title: Measuring the Costs and Benefits of Medicare Private Fee-for-Service
Grantee Institution: Boston VA Research Institute, Inc.
Principal Investigator: Steven Pizer, Ph.D.
Grant Period: February 1, 2008-July 31, 2010

The researchers will explore how private fee-for-service (PFFS) plans and beneficiary choices are affected by Medicare payment policy. PFFS plans cover services from any Medicare-qualified provider and pay physicians by fee for service. The researchers will measure the effects of payment changes on PFFS plan decisions regarding market entry, benefit design, and premiums and then analyze the effects of changes in benefits and premiums on enrollment. They will address the following research questions: 1) How would plan availability be affected if payment rates were reduced? 2) How would premiums and benefits be affected by changes in payment rates? and 3) How does the value to beneficiaries of the PFFS option compare to its cost to the taxpayers? The objective of the proposed project is to inform policymakers about the costs and benefits of paying private Medicare health insurance plans.

Title: Comparing the Cost-Effectiveness of Chronic Care Between Medicare Advantage and FFS Medicare Beneficiaries
Grantee Institution: University of Minnesota
Principal Investigator: Beth Virnig, Ph.D.
Grant Period: July 1, 2008-October 31, 2011

Researchers at the University of Minnesota will compare the technical efficiency of care—a measure that links resource inputs with quality outcomes—for chronically ill Medicare Advantage (MA) and fee-for-service (FFS) beneficiaries. MA health plans are viewed by some as providing an opportunity to improve care for beneficiaries with chronic illnesses. Because MA plans do not submit encounter data to CMS, however, it has not been possible to directly address whether MA plans are more efficient than traditional Medicare FFS plans in caring for these beneficiaries. In particular, the researchers will: 1) validate that the new HEDIS Relative Resource Use (RRU) measures can be applied to FFS; and 2) compare RRUs in FFS and MA plans within geographic areas. The objective of the project is to provide policymakers with more information about the factors that contribute to efficiency and to identify the relative strengths of MA and FFS for chronically ill beneficiaries.           

1. Henry J. Kaiser Family Foundation. Fact Sheet: Medicare Advantage. September 2010. See also: http://www.kff.org/medicare/upload/2052-14.pdf
2. Machta, R. and Gold, M. Tracking Medicare Health and Prescription Drug Plans: Monthly Report for June 2011, Mathematica Policy Research. 
3. Kaiser Family Foundation, 2010.
4. Oberlander, J.B. “Managed Care and Medicare Reform,” Journal of Health Politics, Policy, and Law, Vol. 22, No. 2, 1997, pp. 595-631.
5. Moore, J.D. 1996. Improving the Medicare Market: Adding Choice and Protections. Washington, D.C.: National Academies Press. 
6. Oberlander, 1997. 
7. Medicare Payment Advisory Commission (2000). Report to the Congress: Medicare Payment Policy. Washington, DC: MedPAC. 
8. Chaikind, H.R. and Morgan, P.C. “Medicare + Choice Payments,” Report to Congress. Congressional Research Service., 2003. 
9. Medicare Payment Advisory Commission, 2000. 
10. Kaiser Family Foundation, 2010. 
11. McGuire, T.G. et al. “An Economic History of Medicare Part C,” The Millbank Quarterly, Vol. 89, No. 2, 2011, pp. 289-332.
12. Congressional Budget Office. (2007). Medicare Advantage: Private Plans in Medicare. Economic and Budget Issue Brief. See also: http://www.cbo.gov/ftpdocs/82xx/doc8268/06-28-Medicare_Advantage.pdf.
13. Medicare Payment Advisory Commission (2011). Report to the Congress: Medicare Payment Policy. Washington, DC: MedPAC. 
14. Kaiser Family Foundation, 2010. These plans include local point-of –service (POS), medical savings accounts, and cost plans. These account for three percent of Medicare Advantage enrollment. 
15. Biles, B. et al. “Medicare Advantage’s Private Fee-for-Service Plans: Paying for Coordinated Care Without the Coordination,” Issue Brief. Commonwealth Fund, October 2008. See also: http://www.commonwealthfund.org/Publications/Issue-Briefs/2008/Oct/Medicare-Advantages-Private-Fee-for-Service-Plans--Paying-for-Coordinated-Care-Without-the-Coordinat.aspx
16. Kaiser Family Foundation, 2010. 
17. Cassidy, A. “Medicare Advantage Plans,” Health Affairs Health Policy Brief. June 15, 2011. See also: http://www.healthaffairs.org/healthpolicybriefs/brief.php?brief_id=48
18. Medicare Payment Advisory Commission, 2011.
19. Ibid.
20. Congressional Budget Office, 2007. 
21. Campbell, Y.Y. et al. “Rural Enrollment in Medicare Advantage Continues to Grow in 2008, Led by Private Fee-for-Service Plans,” RUPRI Center for Rural Health Policy Analysis, Rural Policy Brief, No. 2008-03, August 2008. See also: http://www.unmc.edu/ruprihealth/Pubs/b2008-3%20MA%20Enrollment.pdf.. 
22. Kemper, L. et al. “February 2010: A Dramatic Shift Away from Private Fee-for-Service Plans in Rural Medicare Advantage Enrollment,” RUPRI Center for Rural Health Policy Analysis, Rural Policy Brief, No. 2010-3, March 2010. See also: http://www.unmc.edu/ruprihealth/Pubs/MAUpdates/March%202010%20MA%20032210.pdf
23. Kaiser Family Foundation, 2010. 
24. Congressional Budget Office, 2007. 
25. Kaiser Family Foundation, 2010. 
26. Congressional Budget Office, 2007.
27. Ibid.
28. Biles, B. et al. “Medicare Advantage: Déjà vu All Over Again?,” Health Affairs, Web Exclusive, 2004, w. 586-w.597.
29. Cassidy, 2011. 
30. Ibid. 
31. Kaiser Family Foundation, 2010. 
32. Medicare Payment Advisory Commission, 2011. 
33. Ibid. 
34. Hackbarth, G.M. Letter to Donald Berwick, MD, Administrator of Centers for Medicare & Medicaid Services. January 6, 2011.  
35. Zeng, F. et al. “The Effect of Health Maitenance Organizations on Hospitalization Rates for Ambulatory Care-Sensitive Conditions,” Medicare Care, Vol. 44, No. 10, 2006, pp. 900-907.
36. Dhanani, N. et al. “The Effect of HMOs on the Inpatient Utilization of Medicare Beneficiaries,” Health Services Research, Vol. 39. No. 5, 2004, pp. 1607-1628. 
37. Halm, E.A. et al. “Does Managed Care Affect Quality? Appropriateness, Referral Patterns, and Outcomes for Carotid Endarterectomy,” American Journal of Medical Quality, Vol. 23, No. 6, 2008, pp. 448-456. 
38. Frakt, A.B. et al. “Payment Reduction and Medicare Private Fee-for-Service Plans,” Health Care Financing Review, Vol. 30, No. 3, 2009, pp. 15-24.