Medicare Advantage Organizations

The federal government's spending on the Medicare Advantage (MA) program has grown substantially in recent years, from approximately $60 billion in 2006 and $77 billion in 2007 to an estimated $91 billion in 2008. MA organizations provide health care coverage to Medicare beneficiaries through private health plans, thus offering an alternative to the original Medicare fee-for-service (FFS) program. Payments to MA organizations are, in part, based on the projected expenditures organizations submit in their bids for providing Medicare-covered services, as well as actual enrollment and beneficiary health status. Once Medicare payments are determined, they are not modified based on differences between actual and projected expenses. MA organizations are not required to submit claims data to the Centers for Medicare & Medicaid Services (CMS)--the agency that administers Medicare--but they must report actual expenditures for the year 2 years prior to the upcoming contract year. For example, MA organizations reported their actual 2006 expenditures in their bid submission for contract year 2008. When MA organizations submit their bids, the actual expenditures reported in their bid submissions reflect the MA organizations' most recent full calendar year of actual expenditure data. In June 2008, we reported that for 2005, MA organizations generally spent less on medical expenses and earned more profits than projected. MA organizations' self-reported actual profit margin was approximately 5 percent of total revenue, on average, which was approximately $1.1 billion more in 2005 than MA organizations had projected. The accuracy of MA organizations' projections is important because, in addition to determining Medicare payments, these projections also affect the extent to which MA beneficiaries receive additional benefits not provided under FFS and the amounts beneficiaries pay in cost sharing and premiums. For example, if MA organizations had more accurately projected their revenues and expenses in 2005, they would have been able to provide beneficiaries with additional benefits or cost-sharing reductions, and still maintain the level of profits projected. This report responds to your request for updated information on the accuracy of MA organizations' projections. Specifically, this report compares MA organizations' 2006 actual medical expenses, non-medical expenses, and profits to projections for the same year, and compares 2006 results to 2005 results.

On average, MA organizations reported earning profits of 6.6 percent of total revenue in 2006--which was higher than their projected profits of 4.1 percent. MA organizations reported spending an average of 83.3 percent of total revenue on medical expenses, but had projected spending an average of 86.9 percent of total revenue on those expenses. More than half of beneficiaries were enrolled in health benefits plans offered by MA organizations for which profits as a percentage of revenue were greater than projected and the combined medical and non-medical expenses as a percentage of revenue were lower than projected. Among the three types of MA health plans with the largest enrollments--HMOs, PPOs, and PFFS plans--there was a consistent pattern of actual profits being higher than projected and medical expenses being lower than projected. Projections of profits were closer to actual profits as a percentage of revenue in 2006 (2.5 percentage points difference) than they were in 2005 (3.2 percentage points difference). However, largely due to an approximate 40 percent increase in enrollment between the 2 years, the actual dollar amount of the difference between actual and projected profits increased from $1.1 billion in 2005 to $1.3 billion in 2006.