Understanding Medicare Advantage: Spending and Payment Structures

Policy Analysis and DevelopmentUnderstanding Medicare Advantage
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In the first blog of the Understanding Medicare Advantage series, we examined trends in enrollment and growth in the Medicare Advantage (MA) program, which administers Medicare benefits through private insurance plans. We discussed the current federal administration’s interest in increasing MA enrollment to reduce spending. However, complete privatization of Medicare without other policy changes may not realize the Trump administration’s anticipated cost saving. Policymakers need to better understand how effective MA plans are in driving improved health outcomes for members to assess the cost-effectiveness of the program. This blog will examine trends in MA spending, the payment structure for MA plans, and concerns about the program payment structure.

Federal Spending on Medicare and Medicare Advantage

In 2024, Medicare spending totaled approximately $838.8 billion, representing 12% of the federal government’s annual expenditures. That year, MA spending accounted for just over half of total Medicare spending (54%). Kaiser Family Foundation (KFF) estimates that spending for MA will increase to $943 billion (or 58%) of total Medicare spending by 2031 with enrollment rates for MA climbing in tandem. Notably, the rate of growth in MA spending has far outpaced that in traditional Medicare, increasing by 320% (from $124 to $521 billion) between 2011 and 2024, compared to a 33% increase in traditional Medicare spending during the same time, signaling an outpacing of MA enrollment increases.

How the Centers for Medicare & Medicare Services (CMS) Establishes Medicare Advantage Payments Rates

CMS conducts an annual bidding process to select MA plans and determine payment rates based on plan bids and quality program incentives using regional benchmarks, which represent the maximum rate an MA plan may be paid.

Exhibit 2. Medicare Advantage Payment Structure

Step One
Benchmark
CMS calculates each region’s MA benchmark, or pricing point of comparison, using the average county fee-for-service (FFS) spending per beneficiary.
Step Two
Bid
Based on these regional benchmarks, plans create bids weighted by the projected number of enrollees using calculations of the cost of providing Part A and B benefits for beneficiaries, including overhead and profits.
Step Three
Rebate
If a plan’s bid is under the benchmark, the plan keeps the difference between the bid and the benchmark as a rebate.
Step Four
Quality Bonus Payment
The MA quality bonus program adjusts payments to MA plans based on their placement on a five-star rating system (higher ratings equal increased bonus payments).

Regional Benchmarks

CMS calculates each region’s benchmark using the average county fee-for-service (FFS) spending per beneficiary. Counties are divided into quartiles with benchmarks ranging from 95% of traditional Medicare spending in highest-spending counties to 115% in lowest-spending counties. The level of spending is usually higher in urban counties and lower in rural counties. Benchmarks are updated annually.

Bids and Rebates

Based on regional benchmarks, plans create bids weighted by the projected number of enrollees using calculations of the cost of providing Part A and B benefits for beneficiaries, including overhead and profits. If a plan’s bid is under the benchmark, the plan keeps the difference between the bid and the benchmark as a rebate. Rebates are adjusted for beneficiaries’ health status (e.g., plans with beneficiaries with poorer health, who can have higher health costs, receive higher rebates). Plans must use rebates to lower member cost sharing, decrease premiums, or provide coverage for benefits not included in traditional Medicare (e.g., dental services). Plans can also use rebate dollars to reduce administrative costs related to providing additional benefits.

Quality Incentives

MA spending has grown faster than traditional Medicare spending in part due to increases in bonus payments. The Affordable Care Act introduced a quality bonus program that adjusts payments to MA plans based on their placement on a five-star rating system. Between 2015 to 2023, average star ratings and quality bonus payments increased by over $9.8 billion. Plans with higher ratings have higher bonus payments added to their benchmarks. Although the program does not penalize low performance, plans with lower ratings may face lower revenues, which may affect the additional benefits offered to beneficiaries. In addition, plans with consistently low performance (ratings <3 stars) may face termination.

Data show that the distribution of bonus payments varies by plan type. For example, in 2024, the average bonus payment per enrollee was highest for employer- and union-sponsored MA plans, which tend to provide retiree health benefits to healthier beneficiaries who tend to have higher incomes, and lowest for Special Needs Plans, which tend to enroll higher-need beneficiaries as well as a larger share of Black and Hispanic beneficiaries. While bonuses are higher in employer plans because they have higher average star ratings, this difference raises concerns about the quality of plans available to enrollees across different populations and the implications for access to care. Star ratings may also be less indicative of overall plan quality than intended: one star rating is assigned to each MA contract, which may cover several states and regions, meaning the rating may not reflect the experiences of members in different areas. Star ratings also place less emphasis on the quality of a plan’s care coordination and more on health outcomes of members, which may affect ratings for Special Needs Plans (SNPs) whose members tend to experience poorer health outcomes. Entities such as MedPAC have urged CMS to adopt a value-based quality rating system that emphasizes access to quality care as opposed to solely clinical outcomes to help alleviate this difference.

Concerns about Medicare Advantage Overpayments

Advocates have long raised concerns about MA benchmarking and bonus payment policy leading to high payments for MA plans that typically enroll healthier enrollees and lower payments for plans with a high penetration of enrollees with complex health care needs.  Between 2017 and 2020, MA plans received an average of $9.3 billion in overpayments per year raising questions about whether these payments have contributed to improved quality and outcomes for beneficiaries. Future research could help to inform the development of more meaningful and balanced payment rates to support high quality and efficient care.

Want to Learn More?

In the next blog as part of the Understanding Medicare Advantage series, Aurrera Health will examine how health and health care outcomes compare between MA and traditional Medicare beneficiaries. Understanding MA trends is important for beneficiaries and their families/caregivers, policymakers, providers, health plans, advocates, and community partners. To learn more about how Aurrera Health can help your organization understand and navigate evolving Medicare Advantage trends, please contact Kristal Vardaman or Megan Thomas.

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