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The costs of providing benefits to enrollees in private Medicare Advantage (MA) plans are slightly less, on average, than what traditional Medicare spends per beneficiary in the same county. However, MA plans that are able to keep their costs comparatively low are concen­trated in a fairly small number of U.S. counties. In the 25 counties where the cost differences between MA plans and traditional Medicare are largest, MA plans spent a total of $5.2 billion less than what traditional Medicare would have been expected to spend on the same benefi­ciaries, with health maintenance organizations (HMOs) accounting for all of that difference. In the rest of the country, MA plans spent $4.8 billion above the expected costs under tradi­tional Medicare. Broad determinations about the relative efficiency of MA plans and traditional Medicare can therefore be misleading, as they fail to take into account local conditions and individual plans' performance.

Concern about the future growth of Medicare spending has led some in Congress and elsewhere to promote converting Medicare to a "premium support" system. Under premium support, Medicare would provide a "defined contribution" to each Medicare beneficiary to purchase either a Medicare Advantage (MA)-type private health plan or the traditional Medicare public plan. To better understand the implications of such a shift, we compared the average costs per beneficiary of providing Medicare benefits at the county level for traditional Medicare and four types of MA plans. We found that the relative costs of Medicare Advantage and traditional Medicare varied greatly by MA plan type and by geographic location. The costs of health maintenance organization-type plans averaged 7 percent less than those of traditional Medicare, but the costs of the more loosely structured preferred provider organization and private fee-for-service plans averaged 12-18 percent more than those of traditional Medicare. In some counties MA plan costs averaged 28 percent less than costs in traditional Medicare, while in other counties MA plan costs averaged 26 percent more than traditional Medicare costs. Enactment of a Medicare premium-support proposal could trigger cost increases for beneficiaries participating in Medicare Advantage as well as those in traditional Medicare., (Project HOPE—The People-to-People Health Foundation, Inc.)

Private health plans that enroll Medicare beneficiaries--known as Medicare Advantage (MA) plans--are being paid $11 billion more in 2009 than it would cost to cover these beneficiaries in regular fee-for-service Medicare. To generate Medicare savings for offsetting the costs of health reform, the Obama Administration has proposed eliminating these extra payments to private insurers and instituting a competitive bidding system that pays MA plans based on the bids they submit. This study examines the concentration of enrollment among MA plans and the degree to which firms offering MA plans actually face competition. The results show that in the large majority of U.S. counties, MA plan enrollment is highly concentrated in a small number of firms. Given the relative lack of competition in many markets as well as the potential impact on traditional Medicare, the authors call for careful consideration of a new system for setting MA plan payments.

The Medicare Modernization Act of 2003 explicitly increased Medicare payments to private Medicare Advantage (MA) plans. As a result, MA plans have, for the past six years, been paid more for their enrollees than they would be expected to cost in traditional fee-for-service Medicare. Payments to MA plans in 2009 are projected to be 13 percent greater than the corresponding costs in traditional Medicare--an average of $1,138 per MA plan enrollee, for a total of $11.4 billion. Although the extra payments are used to provide enrollees additional benefits, those benefits are not available to all beneficiaries-- but they are financed by general program funds. If payments to MA plans were instead equal to the spending level under traditional Medicare, the more than $150 billion in savings over 10 years could be used to finance improved benefits for the low-income elderly and disabled, or for expanding health-insurance coverage.

Like the private managed care plans offered under Medicare Advantage, private fee-for-service (PFFS) plans are paid more per beneficiary than those individuals would be expected to cost if they were enrolled in traditional fee-for-service Medicare. However, PFFS plans are not required to provide the same type of coordinated care required of Medicare Advantage plans. Payments to PFFS plans in 2008 average 16.6 percent more than costs in traditional Medicare, or $1,248 for each of the 2 million enrollees in PFFS plans-a total of nearly $2.5 billion in extra payments. Recently, Congress has made significant revisions to policies that will affect how PFFS plans will operate in 2011 and thereafter, as well as their prospects for continued growth. This issue brief examines the development of PFFS plans, the policies underlying the rapid increase in the plans and their enrollment, the payments they receive, and the potential impact of the new legislation.

The Medicare Modernization Act of 2003 explicitly increased Medicare payments to private Medicare Advantage (MA) plans. As a result, every MA plan in the nation is paid more for its enrollees than they would have been expected to cost in traditional fee-for-service Medicare. The authors calculate that payments to MA plans in 2008 will be 12.4 percent greater than the corresponding costs in traditional Medicare-an average increase of $986 per MA plan enrollee, for a total of more than $8.5 billion. Over the five-year period 2004-2008, extra payments to MA plans are estimated to have totaled nearly $33 billion. Although Congress recently enacted modest reductions in MA plan payments, these changes will not take effect until 2010. Moreover, while the new legislation removes a few factors contributing to the extra payments, a number of other factors remain unaffected.

The Medicare Modernization Act of 2003 sharply increased payments to private Medicare Advantage plans. As a result, every plan in every county in the nation was paid more in 2005 than its enrollees would have been expected to cost if they had been enrolled in traditional fee-for-service Medicare. The authors calculate that payments to Medicare Advantage plans averaged 12.4 percent more than costs in traditional Medicare during 2005: a total of more than $5.2 billion, or $922 for each of the 5.6 million Medicare enrollees in managed care. This issue brief updates an earlier analysis of Medicare Advantage payments in 2005 previously published by The Commonwealth Fund; the updated estimates in this report are based on final 2005 enrollment figures that were not available at the time the previous estimates were developed, and they include the effect of policy decisions that were not reflected in the previous estimates.

The creators of the Medicare Advantage (MA) program envisioned that seniors would opt out of fee-for-service Medicare to take advantage of the lower premiums, lower cost-sharing, and additional benefits available in private plans. Earlier research, however, indicates that out-of-pocket costs for MA enrollees vary widely by health status and plan benefit package. This issue brief examines out-of-pocket costs for beneficiaries in good, fair, and poor health throughout the country. In 2005, annual out-of-pocket costs for plan members ranged from under $100 for beneficiaries in good health to over $6,000 for those in poor health. Costs for beneficiaries in poor health would actually have been higher than fee-for-service in 19 of the 88 MA plans examined. Despite the high payments, relative to fee-for-service costs, that MA plans receive from Medicare to enrich enrollee benefits, these plans may not always be a good deal for sicker beneficiaries who use more health services.