Payments to Medicare Advantage Plans and Plan Generosity Before and After the Affordable Care Act

Background
One third of Medicare beneficiaries are now enrolled in private plans through Medicare Advantage. After years of growth in federal payments to Medicare Advantage plans, the Affordable Care Act (ACA) slowed or cut such payments. To date, little is known about the impact of these ACA-related payment changes on plan behavior and on benefits provided to beneficiaries. We examined how plans responded to ACA payment reductions relative to their response to pre-ACA payment increases, which could help reveal whether plans are operating above their costs and inform policymakers regarding future payment policy.

Methods
We used 2006-2015 data from the Centers for Medicare and Medicaid Services (CMS) to examine the impact of changes in the maximum federal payments to plans (the “benchmark”) on plans’ asking prices (their “bids”) and on benefits received by beneficiaries (the “rebate”) before and after the ACA. This rebate, which equals a portion of the difference between the bid and the benchmark for plans that bid below the benchmark, must be passed on to beneficiaries in the form of lower premiums or additional benefits including reductions in out-of-pocket costs, reductions in drug costs, and increased coverage for vision, dental, and hearing services. We also assessed differences in plan behavior among plans facing larger benchmarks as compared with smaller benchmarks. Analyses used longitudinal models that exploit the variation in benchmark changes before and after the ACA benchmark cuts, adjusted for beneficiary risk, market concentration, fee-for-service Medicare spending, and fixed differences across counties and across years.

Results
In real terms, average monthly Medicare Advantage benchmarks grew by $35 before the ACA (2006-2009) and decreased by $81 after the ACA-related benchmark cuts (2012-2015). Before the ACA, for every $1 increase in the benchmark, plans raised their bids by $0.60 (p<0.001) and beneficiaries received $0.30 in rebates (p<0.001) on average. After the ACA, plans lowered their bids by $0.57 on average for every $1 decrease in the benchmark (p=0.03). This symmetrical bid response after the ACA lessened the resulting decline in beneficiary rebates. Moreover, declines in final plan payments and beneficiary rebates were further offset by new bonuses from quality incentives and increases in beneficiary risk scores. Within rebates, after the ACA plans reduced benefits by about twice as much on the margin as they had raised benefits before the ACA for each dollar change in the benchmark. However, plans changed premiums by similar amounts in response to benchmark changes pre- and post-ACA. Plans in more competitive markets were less responsive to benchmark changes than plans in less competitive markets, implying that plans in more competitive markets may be bidding closer to their average costs.

Conclusion
In contrast to before the ACA, Medicare Advantage benchmarks decreased after the ACA. Plans responded to these cuts by lowering their bids, suggesting that plans were operating above cost. This plan bid response, combined with additional payments due to quality bonuses and growth in risk scores, helped lessen the decrease in beneficiary rebates, which may explain the continued growth in Medicare Advantage enrollment after the ACA.