Making Sense of the Change in How Medicare Advantage Plans are Paid

The Affordable Care Act has altered payment policy for private Medicare Advantage (MA) plans, with the goal of lowering costs closer to the level in traditional Medicare. Using newly available information on 2009 MA plan costs, this analysis compares plans’ estimates of per capita costs for providing Parts A and B benefits to their enrollees, on a risk-adjusted basis, against what government data show to be the same costs for traditional Medicare program beneficiaries residing in the same county. It finds that on average, risk-adjusted MA plan costs were 4 percent higher than traditional Medicare costs (104%). Among plan types, only HMOs had lower average costs than traditional Medicare. Among local PPOs and private fee-for service plans, over 75 percent had costs exceeding those in traditional Medicare. The wide variation seen in MA plan costs relative to traditional Medicare suggests there is room for greater efficiency in care delivery.