Statement of Center on Budget and Policy Priorities

According to the Medicare Payment Advisory Commission (MedPAC), Medicare provides excessive payments to Medicare Advantage plans.  MedPAC estimates, on average, that private plans are paid 12 percent more than traditional fee-for-service for comparable beneficiaries.[1] 

In testimony before Congress on March 1, MedPAC chairman Glenn Hackbarth stated that these overpayments are driving up Medicare payments and thereby making the task of sustaining Medicare more difficult.  Hackbarth said Medicare faces “a very clear and imminent risk from this overpayment that will put this country in an untenable position.”[2] 

In fact, the Congressional Budget Office estimates that enactment of just one of the MedPAC recommendations related to Medicare Advantage payments to private plans — a proposal to “level the playing field,” by adjusting the payment formula so that private plans essentially are paid the same amounts (rather than more than) it would cost to treat the same patients under Medicare fee-for-service — would save $65 billion over five years and $160 billion over 10 years.[3]  Other Medicare Advantage payment changes recommended by MedPAC could save tens of billions more. 

In response, the private plans argue that curbing these overpayments will harm low-income and minority Medicare beneficiaries because those beneficiaries disproportionately rely on Medicare Advantage plans for help with Medicare premiums and cost-sharing and for other supplemental benefits not covered by traditional Medicare fee-for-service.[4]  As evidence, they cite a recent analysis issued by America’s Health Insurance Plans (AHIP) analyzing 2004 data from the Medicare Current Beneficiary Survey.[5]  Some members of Congress, including the ranking minority member of the House Ways and Means Committee, have also made these arguments.[6] 

An analysis of AHIP’s own data, however, reveals the following:

1. Medicaid, not Medicare Advantage, is the primary form of supplemental coverage for low-income and minority beneficiaries. 

• Among all Medicare beneficiaries with annual incomes below $10,000, some 48 percent were covered by Medicaid.  This is nearly five times the proportion enrolled in Medicare Advantage plans.  In addition, slightly more beneficiaries with incomes below $10,000 rely on Medigap than on Medicare Advantage.[7] 
• Because minority Medicare beneficiaries are disproportionately low-income, they, too, rely heavily on Medicaid for supplemental coverage.  Some 42 percent of African-American Medicare beneficiaries, half of Hispanic beneficiaries, and 42 percent of Asian-American beneficiaries have incomes of less than $10,000 and therefore may be eligible for Medicaid.[8]  As a result, the majority of Asian-American Medicare beneficiaries (58 percent) and a plurality of African-American (30 percent) and Hispanics beneficiaries (34 percent) receive supplemental coverage through Medicaid.  In comparison, much smaller percentages of minority beneficiaries — 13 percent of African-Americans, 25 percent of Hispanics and 14 percent of Asians, respectively — are enrolled in Medicare Advantage.[9]

2. Low-income and minority beneficiaries enroll in Medicare Advantage plans to a lesser, rather than a greater, degree than other Medicare beneficiaries.

• Beneficiaries with incomes of less than $10,000 constitute 20 percent of all beneficiaries living in areas with access to a private plan but 16 percent of Medicare Advantage enrollees.  (At the same time, as one would expect, they constitute 69 percent of Medicare beneficiaries who also receive coverage through Medicaid.)[10] 
• African-Americans represent 11 percent of all Medicare beneficiaries living in areas with access to a Medicare Advantage plan but 10 percent of all Medicare Advantage enrollees.  They constitute 22 percent of Medicare enrollees who also receive Medicaid and 18 percent of those who rely on other forms of public coverage, including military or veteran’s health care.
• Similarly, Asian-Americans constitute 2 percent of all beneficiaries with access to a private plan, and 1 percent of all Medicare Advantage enrollees.  (Asian-Americans represent 9 percent of all dual eligibles.)
• Hispanics are slightly more likely to enroll in Medicare Advantage; they constitute 3 percent of Medicare beneficiaries with access to a private plan and 4 percent of Medicare Advantage enrollees.[11]
• 3. If Congress wishes to ensure that low-income, minority beneficiaries obtain assistance with paying their Medicare premiums and cost-sharing, and receive needed benefits, the best approach would be to strengthen aspects of the Medicaid program that assist low-income Medicare beneficiaries rather than to pay tens of billions of dollars in excess reimbursements to private plans so that a modest fraction of the excess payments trickle down to low-income and minority beneficiaries. 
• Overpaying private plans in the hope that some of the overpayments may accrue to low-income and minority Medicare beneficiaries is not an efficient approach.  It also is not equitable, in that it enables beneficiaries who do not have access to retiree coverage, Medigap, or Medicaid to obtain some help with their cost-sharing or benefits only if they switch from fee-for-service to Medicare Advantage and consequently may have to accept substantial restrictions on their choice of providers.
• MedPAC recommends that the overpayments to Medicare private plans be eliminated.  MedPAC supports competition between fee-for-service and private plan alternatives, but calls for a level playing field where fee-for-service and Medicare Advantage compete fairly with each other.  The overpayments skew the competitive landscape by allowing plans to use some lower cost-sharing and additional benefits to entice Medicare beneficiaries, particularly those who are healthier and thus less costly to treat.
• As MedPAC chairman Glenn Hackbarth has stated, these overpayments threaten the federal government’s ability to sustain the Medicare program over time.  As a result, these excessive overpayments are likely, if not rained in, to contribute to growing pressures to cut Medicare significantly over time.  Such cuts could entail increased out-of-pocket costs and reduced benefits for Medicare beneficiaries.  This could be particularly harmful for low-income and minority beneficiaries who can least afford to pay more of their health care costs on an out-of-pocket basis. 
• A far superior, more targeted approach would be to expand and improve the existing QMB, SLMB and QI-1 programs in Medicaid that help low-income Medicare beneficiaries pay Medicare premiums and/or cost-sharing.[12]   (The Qualified Medicare Beneficiary (QMB) program pays Medicare premiums and cost-sharing for poor Medicare beneficiaries, while the Specified Low-Income Medicare Beneficiary (SLMB) and Qualifying Individual (QI-1) programs together pay for Medicare premiums for beneficiaries with incomes up to 135 percent of the poverty line.)  Such improvements could be financed by using some of the savings from curbing the excessive overpayments to private plans.  (Congress also could encourage states to use existing flexibility in making full Medicaid more available to low-income Medicare beneficiaries.)
• Alternatively (or in addition), because low-income and minority individuals and families disproportionately lack health insurance, savings from curbing the excessive payments also could be used to expand health insurance coverage more generally.  As one immediate example, the resulting savings could be used to help offset the costs of legislation to reauthorize and expand the SCHIP program so that most or all low-income and minority children have coverage.[13]   The Leadership Conference on Civil Rights and a host of other civil rights and religious organizations support providing $60 billion over five years in additional funding for SCHIP and Medicaid as part of SCHIP reauthorization, in order to move a long way toward this goal. 

Those costs will need to be offset, however, if the SCHIP expansion is to become a reality.  Savings from curbing overpayments to private plans, as MedPAC recommends, could provide some (or even all) of the offsetting savings. 

[1] See Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” March 2007.

[2] BNA’s Health Care Daily Report, “Growth of Managed Care Plans Threatens Program’s Finances, MedPAC Chairman Says,” March 2, 2007.

[3] Specifically, MedPAC has recommended that the benchmarks used to assess the bids that private plans submit, and to determine payments to the plans, be set at 100 percent of fee-for-service costs.  See Congressional Budget Office, “Budget Options,” February 2007.

[4] See, for example, America’s Health Insurance Plans, “AHIP Raises Concerns about New MedPAC Report and its Potential Impact on Beneficiaries,” March 1, 2007.

[5] America’s Health Insurance Plans, “Low-Income and Minority Beneficiaries in Medicare Advantage Plans,” February 2007.  This report is similar in many respects to a prior analysis issued by the Blue Cross and Blue Shield Association.  See Adam Atherly and Kenneth Thorpe, “Value of Medicare Advantage to Low-Income and Minority Medicare Beneficiaries,” Blue Cross and Blue Shield Association, September 20, 2005.

[6] BNA’s Health Care Daily Report, “Medicare Advantage ‘On the Table’ for Democrats Seeking Budget Savings,” March 7, 2007.

[7] Table 3A in AHIP, “Low-Income and Minority Beneficiaries in Medicare Advantage Plans,” op cit.  Among all beneficiaries with incomes between $10,000 and $20,000, 25 percent are enrolled in Medigap plans and 22 percent are in employer-based retiree health coverage but only 16 percent are in Medicare Advantage plans.  13 percent are in Medicaid.

[8] Table 1A.

[9] Table 5A.

[10] Table 7A.  Beneficiaries with incomes between $10,000 and $20,000 constitute 27 percent of all Medicare beneficiaries living in areas with access to a Medicare Advantage plan.  While they represent 33 percent of Medicare Advantage enrollees, such beneficiaries also constitute 56 percent of individuals with other forms of public coverage (like military or veteran’s health care), 29 percent of individuals with Medigap coverage, and 28 percent of Medicaid beneficiaries.

[11] Table 8A.

[12] The Medicare Part D drug benefit includes a separate subsidy for low-income Medicare beneficiaries that pays for Part D premiums and/or Part D deductibles and cost-sharing.  This low-income Part D subsidy could also be expanded to help low-income Medicare beneficiaries to a greater degree.

[13] Edwin Park and Robert Greenstein, “Options Exist for Offsetting the Cost of Extending Health Coverage to More Low-Income Children,” Center on Budget and Policy Priorities, March 8, 2007.