Is the Biden Administration Proposing Cuts to Medicare Advantage?

Once again, Medicare is getting political attention.

Medicare is the main source of health insurance coverage for 65 million people, and a major source of revenue for hospitals, other health care providers, and health insurers that offer Medicare Advantage plans. Over the years, policymakers have debated major changes to Medicare driven by concerns about solvency, sustainability, and affordability, propelled by an aging population and systemwide increases in health care spending, as well as the program’s contributions to federal budget deficits and debt. While the possibility of reducing Medicare spending emerged recently in the context of the debt limit debate – and some members of Congress continue to talk about changes to the program — President Biden and now House Speaker McCarthy have both declared that Medicare will not be part of those negotiations.

Nevertheless, discussion about Medicare cuts is heating up, partly based on two announcements by the Centers for Medicare and Medicaid Services (CMS) related to Medicare Advantage. Medicare Advantage is the private plan alternative to traditional Medicare that now provides Medicare coverage to approximately half of Medicare beneficiaries. The federal government pays private insurers a capitated payment to provide Medicare-covered services to enrollees based on a formula set by statute and implemented by CMS. Last week, CMS finalized a rule making changes to how Medicare Advantage risk adjustment data validation (RADV) audits are conducted and released the annual notice of proposed changes to Medicare Advantage plan payments for the forthcoming year.

What’s the issue? To improve program integrity, the RADV rule modifies how CMS calculates the amount a plan is required to pay back to the federal government when diagnoses codes submitted for risk adjustment are not supported by information in the medical records. Risk adjustment is a process where payments to plans are adjusted based on the health status of their enrollees. Under the finalized rule, CMS will extrapolate error rates in the audit sample to the full contract – a practice common to other audits, but not previously included in the RADV program. CMS estimates that it will collect $4.5 billion over the next decade by applying this and other changes to audits starting with plan year 2018 (though no new collections will come in until 2025). These are recouped payments that should not have been made in the first place, based on an extrapolation of audited records.

In addition, the Administration is proposing to modify Medicare Advantage payments for the upcoming plan year, as it does every year when it publishes the annual notice of proposed changes to Medicare Advantage payments. The proposed changes are largely technical adjustments that update the payment formula to account for changes in the economy, as well as Medicare spending trends. In addition, the Administration proposes to make revisions in how risk scores are calculated.

CMS estimates that Medicare Advantage plan payments per enrollee will be 1% higher in 2024 than they are this year. Changes in star ratings (which lead to higher payments for plans with higher ratings) and revisions to the risk model (that would by themselves reduce per enrollee payments) are more than offset by an increase in Medicare Advantage benchmarks (driven by growth in traditional Medicare spending, including inflation) and expected growth in Medicare Advantage risk scores (that are expected to increase per enrollee payments). The proposed payment changes for 2024, taken together, are unlikely to have a meaningful impact on the trajectory of Medicare Advantage spending, which CBO estimates will exceed $7 trillion (cumulative) through the decade that ends in 2032.

Despite the expected net increase in Medicare Advantage payments in 2024, overall and per enrollee, some industry stakeholders are focusing specifically on changes to the risk adjustment model, rather than the total change in payments for 2024. The proposed changes to the risk adjustment model address higher “coding intensity” (incentives for Medicare Advantage plans to code more intensely than traditional Medicare) that will result in $23 billion in excess payments in 2023, according to MedPAC. Specifically, CMS proposes updating the conditions used to predict expenditures, similar to revisions made in previous years, as well as transition to ICD-10 diagnoses codes, consistent with the system currently used in clinical settings. CMS estimates that the changes made to the risk adjustment model will result in payments to Medicare Advantage plans that are $11 billion lower in 2024 compared to the status quo, before taking into account other proposed changes and underlying trends that are expected to result in a net increase in per enrollee and total payments.

Some in the industry say the payment changes will lead to premium increases or cuts in benefits for Medicare beneficiaries, though there is no clear evidence to suggest that. Plans use payments from the federal government in excess of the cost of providing Medicare benefits to provide extra benefits or lower premiums to beneficiaries. In theory, lower payments from the federal government could reduce the surplus available for extra benefits. However, plans also compete aggressively for enrollees with zero premiums and those extra benefits.

During the debate over the Affordable Care Act, when Congress made significant reductions in Medicare Advantage payments, there were similar warnings that plans would respond by pulling out of the market and dropping extra benefits, when in fact, the opposite happened. The Medicare Advantage market has proven to be robust and relatively profitable. Plans may very well continue to offer extra benefits, and zero-premium offerings, to attract and retain enrollees, and grow market share. Medicare Advantage plans have responded to payment changes in the past by reducing their profits or lowering administrative costs. And plans have more money than ever to pay for extra benefits. Since 2018, the portion of Medicare Advantage payments that is used to fund extra benefits, called rebates, has doubled from $1,140 per enrollee in 2018 to $2,352 per enrollee in 2023.

At some point, lawmakers will likely engage in a debate about how best to sustain Medicare for the future, including how to shore up the Medicare Hospital Insurance Trust Fund that is projected to be depleted in 2028. That debate could involve difficult decisions about various ways to reduce spending and/or increase revenues, and could impact health care providers, plans and beneficiaries. However, current efforts to improve the accuracy of payments made by the federal government, and improve program integrity, are unlikely to have a major impact on the program, the insurance industry or beneficiaries, given relatively generous payments to plans and the robustness of the Medicare Advantage market.