Payments to MA Organizations

Payments to MA organizations and the additional benefits that MA  organizations offer are based in part on the relationship between the MA  organizations’ bids—their projection of the revenue required to provide  beneficiaries with services that are covered under Medicare FFS—and a  benchmark. CMS adjusts for differences in projected and actual enrollment through its  method for paying MA organizations. Specifically, MA organizations are  able to negotiate specific benefit packages and cost-sharing amounts with  employers after the MA organizations submit their bid for an employer  group plan. Changes under PPACA

PPACA changed how the benchmark is calculated beginning in 2011. This change resulted  in decreased rebate amounts starting in 2012. MA Plans with Specific Eligibility Requirements

SNPs and employer group plans have specific eligibility requirements. Employer group plans are MA plans offered by  employers or unions to their Medicare-eligible retirees and Medicare- eligible active employees, as well as to Medicare-eligible spouses and  dependants of participants in such a plan. For Plans Available to All Beneficiaries in 2011, Expenses and Profits Represented Similar Percentages of Total Revenue Compared to Projections

As a percentage of 2011 total revenue, MA organizations’ actual medical  expenses, nonmedical expenses, and profits were, on average, similar to  projected values for plans available to all beneficiaries. Also, as a  percentage of revenue, all three categories were within 0.3 percentage  points of what MA organizations had projected (see table 1). Because of the higher total revenue, medical expenses as a  percentage of revenue were 0.2 percentage points lower than projected,  despite MA organizations’ spending more dollars on medical expenses  than projected. The percentage of revenue spent on medical expenses and profits varied  substantially between MA contracts. For example, while MA organizations  spent an average of 86.3 percent of revenue on medical expenses,  approximately 39 percent of beneficiaries were covered by contracts  where less than 85 percent of revenue was spent on medical expenses,  and 13 percent of beneficiaries were covered by contracts where less  than 80 percent of revenue was spent on medical expenses (see table 2). In  addition, MA organizations with high benchmarks had higher profit  margins compared to those with low benchmarks. The accuracy of MA organizations’ projections varied on the basis of the  type of plan they offered under each contract. For Plans with Specific Eligibility Requirements in 2011, Expenses Were Lower and Profits Were Higher as a Percentage of Total Revenue Compared to Projections

SNPs’ profits were higher than projected both in terms of a percentage of  total revenue and in dollars. As a result of the  higher-than-projected revenue and spending a lower percentage of  revenue on expenses, SNPs reported an average profit per beneficiary of  $1,115, which was 44 percent higher than projected ($777) and   149 percent higher than the profit per beneficiary for plans available to all  Medicare beneficiaries ($447). In addition,  employer group plans spent 86.3 and 6.1 percent of total revenue on  medical expenses and nonmedical expenses, respectively, compared to a  projected 89.5 and 6.3 percent, and these plans also had an actual profit  margin of 7.6 percent compared to a 4.2 percent projected profit margin. The combined effects of higher revenue and a higher profit margin  translated into average profits per beneficiary of $861, which was   108 percent higher than projected ($413) and 93 percent higher than the  profit per beneficiary for plans available to all Medicare beneficiaries  ($447). Agency Comments

We requested comments from CMS, but none were provided.
Why GAO Did This Study

MA organizations are entities that contract with the Centers for Medicare & Medicaid Services (CMS) to offer one or more private plans as an alternative to the Medicare fee-for-service (FFS) program. These MA plans are generally available to all Medicare beneficiaries, although certain types of plans, such as employer group plans, have specific eligibility requirements. Payments to MA organizations are based, in part, on the projected expenses and profits that MA organizations submit to CMS. These projections also affect (1) the extent to which MA beneficiaries receive additional benefits not provided under FFS and (2) beneficiary cost-sharing and premium amounts. The Patient Protection and Affordable Care Act (PPACA) required that, starting in 2014, MA organizations have a minimum medical loss ratio of 85 percent--that is, they must spend 85 percent of revenue on medical expenses, quality-improving activities, and reduced premiums.
This report examines how MA organizations' actual expenses and profits for 2011 as a percentage of revenue and in dollars compared to projections for the same year, both for plans available to all Medicare beneficiaries and for plans with specific eligibility requirements. GAO analyzed data on MA organizations' projected and actual allocation of revenue to expenses and profits. The percentage of revenue spent on medical expenses reported in GAO's study is not directly comparable to the PPACA medical loss ratio calculation, as the final rule defining the calculation was issued after actual 2011 data were submitted.

What GAO Found

Medicare Advantage (MA) organizations' actual medical expenses, nonmedical expenses (such as marketing, sales, and administration) and profits as a percentage of total revenue were, on average, similar to projected values for plans available to all beneficiaries in 2011, the most recent year for which data were available at the time of the request for this work. MA organizations' actual medical expenses, nonmedical expenses, and profits were 86.3 percent, 9.1 percent, and 4.5 percent of total revenue, respectively. As a percentage of revenue, all three categories were within 0.3 percentage points of what MA organizations had projected. In addition, MA organizations received, on average, $9,893 in total revenue per beneficiary, slightly higher than the projected amount of $9,635.
The percentage of revenue spent on medical expenses and profits varied between MA contracts. For example, while MA organizations spent an average of 86.3 percent of revenue on medical expenses, 39 percent of beneficiaries were covered under contracts where less than 85 percent of revenue was spent on medical expenses. In addition, the accuracy of MA organizations' projections varied on the basis of the type of plans offered under the contract. For example, contracts for private fee-for-service plans--a plan type with new provider network requirements in 2011--had average profit margins that were 4 percentage points lower than projected.
In 2011, plans offered by MA organizations with specific eligibility requirements had higher-than-projected profits. Special needs plans (SNP), which serve specific populations, such as those with specific chronic conditions, had an 8.6 percent profit margin, but had projected 6.2 percent. This higher percentage, combined with higher-than-projected revenue, resulted in SNPs reporting an average profit per beneficiary of $1,115, or 44 percent higher than projected ($777). Employer group plans, which are offered by employers or unions to their employees or retirees, as well as to Medicare-eligible spouses and dependants of participants in such plans, had a 7.6 percent profit margin, but had projected 4.2 percent. The higher profit margin, combined with higher-than-projected revenue, resulted in employer plans receiving an average profit per beneficiary of $861, or 108 percent higher than projected ($413).
GAO requested comments from CMS, but none were provided.