Medicare Advantage is a United States health insurance program of managed health care (preferred provider organization (PPO) or health maintenance organization (HMO)) that serves as a substitute for "Original Medicare" Parts A and B Medicare benefits. 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, as well as for medically necessary outpatient hospital services (such as ER, laboratory, X-rays and diagnostic tests) and certain durable medical equipment and supplies. Original Medicare claims payments are processed through the Centers for Medicare and Medicaid Services (CMS). In contrast, Medicare Advantage is offered by commercial insurance companies, who receive compensation from the federal government, to provide all Part A and B benefits to enrollees, but do not process claims through the CMS.
Most Medicare Advantage plans (sometimes referred to as "Part C") include the Part D prescription drug benefit plan, and are known as a Medicare Advantage Prescription Drug plan (MAPD). The federal government makes separate payments to plans for providing Part D benefits.
Since the 1970s, Medicare beneficiaries have had the option to receive their Medicare benefits through private health plans, mainly HMOs, as an alternative to Original Medicare. The Balanced Budget Act of 1997 named Medicare’s managed care program Medicare+Choice and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 renamed it "Medicare Advantage."
For people who choose to enroll in a Medicare Advantage plan, Medicare pays the private health plan a set amount every month for each member ("capitation"). Medicare pays plans under a bidding process, and plans submit “bids” based on estimated costs per enrollee for services covered under Medicare Parts A and B; all bids that meet the necessary requirements are accepted. The bids are compared to benchmark amounts that are set by a formula established in statute and vary by county (or region in the case of regional PPOs). The benchmarks are the maximum amount Medicare will pay a plan in a given area. 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. 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 is known as a “rebate,” which must be used to provide supplemental benefits or reduced costs to enrollees. Medicare payments to plans are then adjusted based on enrollees’ risk profiles.
Medicare Advantage plans are required to offer a benefit “package” that is at least equal to Medicare’s and cover everything Medicare covers, but they do not have to cover every benefit in the same way. Plans that require higher out-of-pocket costs than Medicare for some benefits, like skilled nursing facility care, can balance their benefits package by offering lower copayments for doctor visits, although CMS limits the extent to which Medicare Advantage plans’ cost-sharing can vary from the cost-sharing under Original Medicare. Private 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 costs for Parts A and B to no more than $6,700 per year. Once the out of pocket maximum is reached for an individual, the plan will pay 100% of services for the remainder of the calendar year, with no lifetime maximum, so long as individuals use in-network providers. 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. This can be a problem for people who need to use specialists or who are hospitalized and are forced to use out-of-network doctors while in the hospital. Enrolling in a PPO, if available, can help solve this dilemma, because 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 that are not available or provided by any in-network facility or specialist's office, the Medicare Advantage plan must 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.
Enrollment in Medicare Advantage plans grew from 5.4 million in 2005 to 15.7 million in 2014. 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. Nearly all Medicare beneficiaries (99%) have access to at least one Medicare Advantage plan; the average beneficiary has access to 18 plans in 2015.
There is some evidence that sicker people and people with higher medical expenditures are more likely to disenroll from Medicare Advantage plans and go into Original Medicare instead, which could be due to the more restricted networks of health providers or to the benefit design of the plans. The federal government makes risk adjusted payments to private plans to avoid this, but it is unclear how effective that policy is.
Evidence is mixed on how quality and access compare between Medicare Advantage and traditional 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 Medicare Advantage plans, even when comparing plans of the same type. 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.
Effects of the health care reform
One of the rationales behind introducing Medicare Advantage had been the expectation that the introduction of competition amongst providers 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. Part of this was due to consolidation of local markets, leading to little competition within health care jurisdictions. As of 2009, the federal government spent 14 percent more on Medicare Advantage than it did for comparable care under traditional Medicare, adding an additional $14 billion to the Medicare program. As part of a broad set of reforms aimed to control the cost of Medicare, the 2010 Patient Protection and Affordable Care Act (or ACA, known informally as "Obamacare") reduced federal payments to Medicare Advantage plans over time, bringing them closer to the average costs of care under the traditional Medicare program.
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 combined previous 85 demonstration projects beginning in 1995. 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.
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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- CMS official web site at cms.hhs.gov
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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