Payments to Medicare Advantage Plans Boosted Medicare Spending by $7 Billion in 2019

The federal government spent $321 more per person for beneficiaries enrolled in Medicare Advantage plans than for those in traditional Medicare in 2019, a gap that amounted to $7 billion in additional spending on the increasingly popular private plans that year, finds a new KFF analysis.

The Medicare Advantage spending includes the cost of extra benefits, such as vision, dental and hearing coverage that are funded by rebates and not covered for beneficiaries in traditional Medicare. The extra benefits have likely contributed to years of steady increases in Medicare Advantage enrollment, which reached 22 million in 2019 (36% of all beneficiaries) and 26 million this year (42%).

At the same time, Medicare Advantage spending has risen steadily, and is projected to rise to $664 billion by 2029, up from $348 billion this year. Half of the projected increase is due to growth in enrollment, while the remaining half is attributable to growth in federal payments per enrollee, after accounting for inflation. The projected growth in spending per Medicare Advantage enrollee is driven in part by the expectation that federal bonus payments that plans receive based on their quality ratings will continue to rise.

The higher payments for Medicare Advantage — $11,844 per person in Medicare Advantage vs. $11,523 in traditional Medicare in 2019 — have led to higher federal spending than would have occurred under traditional Medicare and higher Medicare Part B premiums paid by all beneficiaries, including those in traditional Medicare.

The higher spending is attributed to features of the Medicare Advantage payment system, including how benchmarks for plan payments are set, as well as the risk adjustment process, that is intended to compensate plans more for higher cost enrollees. That has attracted the attention of the Biden Administration, which in its 2022 budget expressed support for reforming payments to private plans as part of efforts to extend the solvency of the Medicare Hospital Insurance Trust Fund and improve affordability for beneficiaries. Additionally, Medicare Advantage plans have come under scrutiny over inaccurate coding practices that contribute to higher risk scores for their enrollees, and higher payments from Medicare.

The new KFF analysis finds that if spending per Medicare Advantage enrollee were 2 percent less each year than the amount projected by the Medicare actuaries – a scenario similar to a recommendation made by the federal Medicare Payment Advisory Commission (MedPAC) — then total Medicare spending would be $82 billion lower than projected between 2021 and 2029.

Under a different scenario, if the growth in per person spending on beneficiaries in Medicare Advantage were held to the same rate of growth in spending on beneficiaries in traditional Medicare, then total Medicare program spending would be $183 billion lower than projected between 2021 and 2029, the analysis finds.

Reducing Medicare Advantage payments from their projected amounts could have uncertain effects on the availability of plans that offer extra benefits for Medicare Advantage enrollees, or plan profits, unless plans are able to lower administrative costs and operate more efficiently.
The full analysis, Higher and Faster Growing Spending Per Medicare Advantage Enrollee Adds to Medicare’s Solvency and Affordability Challenges, as well as other data and analyses about Medicare Advantage, can be found at kff.org.