Medicare Advantage is a type of United States health insurance program within Part C of Medicare. Medicare Advantage plans provide a managed health care plan (typically a health maintenance organization (HMO) but also often a preferred provider organization (PPO) or another type of managed care arrangement) that is paid based on a monthly capitated fee. This Part of Medicare provides beneficiaries an alternative to "Original Medicare" Parts A and B Medicare, which provides insurance for the same medical services but pays providers a fee for service (FFS) directly rather than through managed care plans. However a Medicare Advantage beneficiary must first sign up for both Parts A and B of Medicare. All three of these Parts of Medicare -- A, B and C -- are administered by private insurance companies (often the same insurance companies).
Medicare Part A provides payments for in-patient hospital, hospice and skilled nursing services, excluding those of physicians and surgeons. Part B provides payments to physicians and surgeons in hospitals and skilled nursing facilities, as well as for medically necessary outpatient hospital services such as ER, laboratory, X-rays and diagnostic tests, certain preventative medical services, and certain durable medical equipment and supplies. Part C health plans, including Medicare Advantage plans, not only cover the same medical services as Parts A and B but also typically include an annual physical exam and vision and/or dental coverage of some sort not covered under Original Medicare. Less often, hearing and wellness benefits not found in Original Medicare are included in a Medicare Advantage plan. The most important difference between a Part C health plan and FFS Original Medicare is that all Part C plans, including capitated-fee Medicare Advantage plans, include a limit on how much a beneficiary will have to spend annually out of pocket; that amount is unlimited in Original Medicare.
Most but not all Medicare Advantage plans (and many of the other public managed-care health plans within Medicare Part C) include integrated self-administered drug coverage similar to the standalone Part D prescription drug benefit plan. The federal government makes separate capitated-fee payments to Medicare Advantage plans for providing these Part-D-like benefits if applicable just as it does for anyone on Original Medicare using Part D.
Since the 1970s, Medicare beneficiaries have had the option under Medicare demonstration programs to receive their Medicare benefits through managed capitated-fee health plans, mainly HMOs, as an alternative to FFS Original Medicare. The Balanced Budget Act of 1997, which formalized the demonstration programs into Part C of Medicare, introduced the term Medicare+Choice as a pseudo-brand for this option and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 renamed +Choice "Medicare Advantage." These names are government artifacts and may or may not be visible to the beneficiary. Other managed Medicare plans include COST plans (which are not capitated), dual-eligible (Medicare/Medicaid) plans, and PACE plans (which try to keep seniors that need custodial care in their homes). However 97% of the beneficiaries in Part C are in one of the roughly one dozen types of Medicare Advantage plans (HMO, EGWP, SNP, regional PPO, etc.), primarily in classic vanilla HMOs.
For each person who chooses to enroll in a Part C Medicare Advantage plan, Medicare pays the health plan a set amount every month ("capitation"). The capitated fee associated with a Medicare Advantage plan is specific to each county in the United States and is primarily driven by a government-administered benchmark/bidding process that uses that county's average per-beneficiary FFS costs from a previous year as a starting point to determine the benchmark.
All bids that meet the necessary requirements are accepted. The bids are compared to the pre-determined benchmark amounts set, which are the maximum amount Medicare will pay a plan in a given county, by law. If a plan’s bid is higher than the benchmark, enrollees pay the difference between the benchmark and the bid in the form of a monthly premium, in addition to the Medicare Part B premium. (Because of the county-specific nature of the framework and the bidding process leading to these differences, the same insurance company might offer the same benefits under the same brandname in adjacent counties at different prices.) If the bid is lower than the benchmark, the plan and Medicare split the difference between the bid and the benchmark; the plan’s share of this split is known as a “rebate,” which must be used by the plan to provide additional benefits or reduced costs to enrollees. A rebate cannot contribute to "profit" ("profit" is in quotes because most Medicare Advantage plans are administered by non-profit insurance companies).
This benchmark/bidding/rebate process accounts for from 97% to 100% of the cost of the given Medicare Advantage plan to the Medicare Trust Funds. The individual fee for each Part C beneficiary is also uplifted or downsized slightly (approximately 1%-3% in either direction on average) from the county-specific fee based on a risk-based formula tied to the personal health characteristics of the capitated individual. The theory is that the risk-based formula will be "budget" neutral but in practice it almost always increases cost per beneficiary by a percent or two, either because the Medicare Advantage plan is very diligent in upcoding to a beneficiary's specific risks or because patients on Original FFS Medicare, where providers have no incentive to code at all, are undercoded ("budget" is in quotes because there is effectively no Medicare budget; the Medicare Trust funds will expend whatever is required to provide earned benefits for both types -- managed and FFS -- of Medicare beneficiary).
In determining a bid, Medicare Advantage plans are required to offer a benefit “package” that is at least equal to Original Medicare’s and cover everything Medicare covers, but they do not have to cover every benefit in the same way. For example, plans that require higher out-of-pocket costs than Original Medicare for some benefits, such as skilled nursing facility care, can balance their benefits package by offering lower copayments for doctor visits  but CMS limits the extent to which Medicare Advantage plans’ cost-sharing can vary from the cost-sharing under Original Medicare. Medicare Advantage plans that receive “rebates” or quality-based bonus payments are required to use the money to provide benefits not covered by Original Medicare.
All Medicare Advantage plans are required to limit out-of-pocket (OOP) spending by a beneficiary for Parts A and B to no more than $6,700 (as of 2016) per year for in-network providers. The OOP limit may be higher for out of network providers in a PPO; out of network providers are typically not permitted in an HMO. The average OOP limit in 2016 is around $5000. Note that an OOP limit is not a deductible as is often reported; it is instead a very valuable financial-protection benefit although is very rare that a Medicare Advantage beneficiary spends anywhere near the amount of his or her annual OOP limit. Original Medicare provides no similar OOP spending cap and the exposure of an Original Medicare beneficiary to a financial catastrophe is unlimited (but equally rare). Once the OOP maximum is reached for an individual, the plan will pay 100% of medical services for the remainder of the calendar year, with no lifetime maximum. This OOP limit does not apply to a Part C plan's Part-D-like self administered drug coverage (which has its own different means of addressing catastrophic costs).
As with all HMOs -- no matter whether a person is on Medicare or not -- persons who enroll in a Medicare Advantage HMO cannot use certain specialist physicians or out-of-network providers without prior authorization from the HMO, except in emergencies. In almost all Medicare Advantage plans -- HMO or otherwise -- the beneficiary must choose a primary care physician (PCP) who will provide the referrals and the beneficiary must confirm that the plan authorizes the visit to which the beneficiary was referred by the PCP. As with all HMOs, this can be a problem for people who want to use out of network specialists or who are hospitalized and are forced to use out-of-network doctors while in the hospital. Enrolling in a Medicare Advantage PPO, if available, can help solve this dilemma, because many Medicare Advantage PPO plans permit a subscriber to use any physician or hospital without prior authorization, but at a somewhat higher expense. By law, however, if a patient's in-network physician orders tests or procedures or refers a patient to a specialist that are not available or provided by any in-network facility or specialist's office, the Medicare Advantage plan will pay for the patient's procedures or services at an out-of-network location and charge in-network cost-sharing to the patient, so long as the necessary services are normally covered by the plan (the beneficiary should still make sure he or she has authorization however).
Enrollment in Medicare Advantage plans grew from 5.4 million in 2005 to 17.5 million in 2015. People can either enroll in Medicare Advantage by enrolling when they first become eligible for Medicare or by switching from Original Medicare after being on Medicare for a year or more. Between 2006 and 2011, most new Medicare Advantage enrollees were people who switched from Original Medicare, most of whom were in their late 60s. This trend is likely to be true for the 2011-2020 decade as well because the so-called Social Security full retirement age is now 66 and is increasing. Therefore it is common for people to continue to work after joining Medicare at age 65, use both Original Medicare (often just Part A) and employer sponsored insurance, and delay deciding between FFS Medicare and capitated-fee Medicare until in their late 60s.
Nearly all Medicare beneficiaries (99%) have access to at least one Medicare Advantage plan; the average beneficiary had access to 18 plans in 2015.
On the other hand, there is evidence that sicker people and people with higher medical expenditures are more likely to disenroll from Medicare Advantage plans and go back into Original Medicare  which could be due to the more restricted networks of health providers in an HMO or to other aspects of the benefit design of Medicare Advantage plans. This is particularly true of people in institutionalized custodial care because a large percentage of this group also qualifies for Medicaid and there is no need to have both a Part C plan and Medicaid, both of which are essentially supplements to Original Medicare. The Part C risk adjusted payments to Medicare Advantage plans described above are designed to limit this churn between types of Medicare (managed vs. FFS), but it is unclear how effective that policy is.
Evidence is mixed on how quality and access compare between Medicare Advantage and "traditional" Medicare. ("traditional" in quotes because it is not the same as Original Medicare; everyone in Medicare must begin by joining Original Medicare; the term "traditional" typically refers to FFS and almost always means the beneficiary has a private group or individually purchased supplement to Original Medicare). Most research suggests that enrollees in Medicare HMOs tend to receive more preventative services than beneficiaries in traditional Medicare; however, beneficiaries, especially those in poorer health, tend to rate the quality and access to care in traditional Medicare more favorably than in Medicare Advantage. It is difficult to generalize the results of studies across all plans participating in the program because performance on quality and access metrics varies widely across the types of Medicare Advantage plans and among the dozens of providers of Medicare Advantage plans.
Overall, data are old with few studies published in the past few years, providing a limited picture of beneficiary experiences since the Affordable Care Act (ACA) was passed in 2010. The current United States government seems to feel that the quality of managed care is superior because it intends to move everyone on traditional FFS Medicare into HMO-like accountable care organizations (ACOs) eventually.
Effects of the health care reform
One of the rationales behind demonstrating and later formalizing Managed Medicare into Part C of Medicare had been the expectation that the introduction of competition among the participating insurance companies would provide higher-quality care and plans that were more responsive to beneficiaries' needs than traditional Medicare, at similar or lower cost.
Over time, it became clear that this expectation was not being realized. Initially fewer insurers participated than expected leading to little competition within health care jurisdictions. Later, after the capitated-fee benchmark/bidding process was changed to increase insurer participation, costs to the Trustees increased dramatically.
In 2009, MedPAC reported that the Medicare Trustees would spend 14 percent more on Medicare Advantage beneficiaries per person that year than they did per person for "like beneficiaries" of Medicare under traditional Medicare, theoretically adding an additional 3% ($14 billion) to the cost of the overall Medicare program vs. what otherwise would have been spent if there were no Part C  This lack of parity and disconnect with the original goal of Part C was primarily caused by so-called Private Fee for Service (PFFS) plans (designed primarily for the rural and urban poor), special needs plans (SNPs), and Employer Group plans (which primarily served retired union members). A special situation relative to Puerto Rico also contributed to the imbalance at that time before the passage of the ACA. However the lack of parity also applied to a lesser degree to vanilla HMO and PPO plans nationwide.
As part of a broad set of overall reforms aimed to control the total cost of Medicare (e.g., cuts in hospital payments), the 2010 Patient Protection and Affordable Care Act (or ACA, known informally as "Obamacare") reduced federal payments to Medicare Advantage plans over time (through 2016) by adjusting the way the statutory county benchmarks that kick off the annual Part C Medicare Advantage bidding process are calculated. The intention was to bring the capitated payments closer to the average costs of care per person under Original FFS Medicare, which serve to set the benchmark for the bidding process.
The ACA also provided bonus payments to plans with ratings of 4 (out of 5) stars or more. The Obama administration launched an $8.35 billion demonstration project in 2012 that increased the size of the bonus payments and increased the number of plans receiving bonus payments, providing bonus payments to the vast majority of Medicare Advantage plans. According to the Government Accountability Office (GAO) this demonstration project will cost more than the previous 85 demonstration projects beginning in 1995 combined.
The ACA also required plans beginning in 2014 to maintain a medical loss ratio of at least 85%, restricting the share of premiums that Medicare Advantage plans can use for administrative expenses and "profits."
As a result of these changes embedded in ACA and other administrative choices by CMS authorized by the ACA and earlier and subsequent legislation (e.g., the very out of balance PFFS plan program was effectively ended except for a relatively small number of grandfathered beneficiaries and the out of balance Employer Group plan program will be severely cut back beginning in 2017), per-person Trustee expenditures for people on A/B/C and people not on A/B/C are now effectively at parity. Exact parity cannot be achieved without major changes to Medicare law but as of the March 2016 report to Congress by MedPAC, in 2016 the Medicare Trustees will spend just 2 percent more on Medicare Advantage beneficiaries per person than they will per person for "a like set of beneficiaries" under traditional Medicare, theoretically adding an additional 0.5% ($3 billion) to the cost of the overall Medicare program vs. what otherwise would have been spent if there were no Part C. As in 2009, the major plans within Medicare Advantage causing the lack of parity are the employer group plans (6 percent more) and the few grandfathered PFFS beneficiaries left (10 percent more). Vanilla HMO and PPO plans -- as well as SNPs -- cost only 1% more in comparing "a like set of beneficiaries" per person.
And on an absolute basis, based on Table II.B.1 and IV.C.1 of the 2016 Medicare Trustees report, in 2015 the Medicare Trustees spent 4% less on Medicare Advantage and other Part C beneficiaries per person than they did per person on Medicare beneficiaries under FFS Medicare. In 2014 the difference in parity on an absolute basis was 2% less per person on Part C of Medicare based on the Medicare Trustees report in 2015. It appears that after using a formula that was too restrictive in 1997 when Part C was formalized and too generous in 2006 when Medicare +Choice became Medicare Advantage, the Trustees have now found a formula that delivers on the original cost-saving promise of Managed Medicare.
What is being measured?
The Five-Star Quality Rating System for Medicare Advantage Plans rates Medicare Advantage (MA) plans on a scale of 1 - 5 stars. There are different domains for MA plans versus Prescription Drug Plans (PDPs). Health economist Uwe Reinhardt reviewed the academic literature and found very little solid information on which to compare traditional Medicare to Medicare Advantage.
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- Medicare.gov — the official website for people with Medicare
- Medicare & Medicaid Resources — Medicare information site
- Kaiser Family Foundation — Wide range of free information about the Medicare program and other U.S. health issues including state-level data on health care spending and utilization, including Medicare.
- Medicare - Alliance for Health Reform The nonpartisan, nonprofit Alliance for Health Reform offers information about health reform, in a number of formats, to elected officials and their staffs, journalists, policy analysts and advocates.
- Social Security and Disability News Resource Center
- How Stuff Works - Medicare