News & Analysis

Medicare (Dis)Advantage: Hospitals Count the Cost

Portrait of Dawn Carter

Dawn Carter

A group of doctors and nurses in blue scrubs walking away from the camera. Photo by Luis Melendez on Unsplaush.|A blue wave chart from KFF showing Medicare Advantage enrollment trends and projections|A bar chart comparing benchmarks, bids, and actual payments under Medicare Advantage

It’s finally happened. As of 2023, Medicare Advantage now covers more eligible seniors than traditional Medicare – with enormous implications for the entire healthcare industry.

KFF made it official in a study published Aug. 9, but we've been watching the trend for a number of years, and it doesn’t show signs of stopping. In another 10 years, according to the Congressional Budget Office, Medicare Advantage (MA) will control 62% of the market, while traditional Medicare (TM) will control just 38%.

The MA “takeover” should matter to healthcare leaders all across the care continuum because it introduces a host of new uncertainties for a system that’s already wrestling with an uncertain future.

A blue wave chart from KFF showing Medicare Advantage enrollment trends and projections
Straining the System

For starters, MA is more expensive than FFS, which adds to solvency concerns for the Medicare Trust Fund. When KFF analyzed 2019 Medicare data, it found that spending per enrollee was $321 higher under MA plans – roughly $9.9 billion in aggregate, using today’s figure of 31 million enrollees.

That figure may come as a shock because MA plans like to claim that they can serve their members at a lower cost than traditional Medicare. There is some statistical merit to the claim: Using historic spending patterns under fee-for-service Medicare, CMS sets a reimbursement benchmark for every county in the U.S. – essentially the expected cost of providing Part A and Part B services to beneficiaries with average health risks. Insurers then compete to offer those services at a capitated rate below the benchmark.

The difference often gets reported as a “savings,” but that’s only part of the story. According to the Urban Institute, aggregate bids for 2022 were 12% lower than traditional Medicare would pay, yet the overall cost to CMS was 4% higher.

In other words, MA plans are bidding 88 cents on the dollar to care for each beneficiary, but then collecting $1.04 at the end of the day. MedPAC, the congressional oversight agency, says there are at least two major causes for this overpayment.

A bar chart comparing benchmarks, bids, and actual payments under Medicare Advantage

First, capitation is based on historic spending patterns for seniors under TM, but studies show that MA plans tend to attract seniors with below-average healthcare expenditures. This phenomenon, known as “favorable selection,” means that benchmarks are inflated by about 11%, so MA plans are paid more than they actually need to care for their members. According to MedPAC, these overpayments drive up Part B premiums for seniors with traditional Medicare and put additional strain on the Hospital Trust Fund.

Second, as regulators tweak risk models to account for favorable selection, some MA plans have responded by upping their “coding intensity” to make members look sicker than they really are. MedPAC estimates that coding adjustments increase risk scores by about 4.9%, driving up MA payments by an estimated $23 billion this year.

The combination of favorable selection and coding intensity means that CMS is overpaying MA plans by about 20% a year, or $75 billion, according to a 2023 study from USC’s Schaeffer Center for Health Policy and Economics. Instead of reducing costs, as Congress envisioned, Medicare Advantage has pushed the entire system closer to insolvency, leading to policy fixes such as sequestration that are devastating to hospitals.

Squeezing Rural

Another big uncertainty involves rural healthcare. As I’ve written elsewhere, every major law aiming to strengthen rural healthcare is predicated on favorable Medicare reimbursement rates. For instance, Medicare pays Critical Access Hospitals based on their reasonable costs, while Rural Emergency Hospitals get a 5% boost over Medicare’s standard rates for outpatient procedures.

But those well-meaning policies only apply to traditional Medicare, while the private companies offering MA plans can continue to negotiate any kind of rates they choose. As MA continues to grow, fewer and fewer patients will be covered by Medicare’s favorable reimbursement rates, and eventually the rural hospital models created by Congress will have no real meaning.

How much do rural hospitals actually get paid by Medicare Advantage providers? At the national level, no one knows because the answer is buried in thousands of contracts negotiated in secret. But every now and then, a local provider will pull back the curtain just a little. For instance, Ozarks Community Hospital, a 25-bed CAH in Gravette, Arkansas, recently conducted a two-year study and found that MA plans had paid $4.5 million less than traditional Medicare for the same services.

As Medicare Advantage grows at the expense of traditional Medicare – MA has doubled its share of total revenue at Ozarks Community Hospital – the financial crunch can only get worse. “We’re a system with a proud history of taking all patients, insured or not,” CEO Paul Taylor told NBC News. “But this makes it really difficult for us to continue to care for at-risk patients. We can’t pay our bills.”

Skewing Utilization

It’s never been easy for providers to negotiate rates with payers, but Medicare Advantage represents a challenge all its own.

Nearly 3 out of 4 MA enrollees are covered by United Healthcare, Humana, BCBS, or CVS Health, giving those companies overwhelming pricing power in negotiating with individual providers. A few big health systems may have the clout to push back – Mayo Clinic, for instance, recently sent letters to its patients urging them to choose traditional Medicare rather than an MA plan – but even that becomes harder as the scales tip ever more toward the insurers.

Beyond reimbursement rates, the MA oligopoly is wielding its clout to change the way hospitals provide care. Under the banner of “utilization management,” MA plans are using delays, denials, and downgrades to raise hospital costs and reduce payments in ways that traditional Medicare would never dream of.

We’ll examine each of those tactics in future blog posts, but for now, suffice it to say that providers are finding ways to push back.

Becker’s recently published a story entitled, “Hospitals Are Dropping Medicare Advantage Left and Right,” and a study from FTI shows that 37 health systems have publicly challenged their MA contracts thus far in 2023. (In Q3 alone, such disputes were up 115% year over year.) In San Diego, Scripps Health is pulling its integrated physician practices out of MA contracts after losing $75 million, while Baptist Health in Louisville, Ky., has announced it will exit Humana and UnitedHealthcare MA contracts by the end of the year.

That’s the kind of decision no health system wants to make – and a clear sign of just how critical the Medicare (dis)Advantage has become.

This is the introductory post in our series on Medicare (Dis)Advantage. For additional installments in the series, please click below: