Overpayments to Private Plans in Medicare
May 13, 2004
$4.7 Billion in 2005; $83 Billion 2004-2014
For years, private plans that serve people with Medicare have been paid more than it would cost to cover the same people under Original Medicare.1 Instead of addressing this problem and ensuring that limited Medicare dollars deliver maximum benefits for older and disabled Americans with Medicare, the legislation enacted in December 2003 gives away billions more to private plans. Overpayments to private plans enable them to make additional benefits available to their members. However, only people who live in areas served by a plan offering additional benefits and who determine the plan will best meet their needs will be helped. If the overpayments were invested in Original Medicare, which is available to all people with Medicare throughout the country, additional benefits could be provided more equitably.
- Plans will get as much as $3 billion in overpayments in 2005 from increases in the per-enrollee payment rate. According to figures released by CMS on May 10th, private plans will be paid 107 percent of what it would cost to treat the same people in Original Medicare.2 If private plans were paid the same as what it costs Medicare to cover people directly through Original Medicare, the savings to the Medicare program would be $3 billion.3
- As much as $1.7 billion in additional overpayments in 2005 reward plans for attracting healthier people with Medicare.4 Private plans attract people who are healthier, on average, than those in Original Medicare. But CMS is not requiring Medicare’s total private plan payments to reflect the lower cost of delivering care to healthier people. The CMS actuary has estimated that the government’s failure to adjust what it pays plans based on the health of their enrollees will lead to a 3.47 percent overpayment in 2005.5 While Congress passed legislation in 1997 requiring payments to plans to be adjusted (“risk adjusted”) based on the health of their enrollees,6 with a phase-in period from 2004 to 2007, for 2004 and now again for 2005, CMS is interpreting the law to allow it to redistribute plan overpayments among all private plans, rather than requiring it to reduce overall plan payments.
- Private plan overpayments may total as much as $83 billion over 10 years. CMS actuaries estimate that plans will get $46 billion in overpayments from increases in the per-enrollee payment rate and the number of people enrolled in plans from 2004-2014.7 In addition, if CMS continues to redistribute plan overpayments among private plans and not reduce overall plan payments, plans will be rewarded for attracting healthier enrollees by up to $37 billion from 2004-2014.
1 U.S. General Accounting Office, “Medicare+Choice Withdrawals Indicate Difficulty of Providing Choice While Achieving Savings,” September 2000.
2 Overpayment rate based on Medicare Rights Center analysis of payments to private plans for aged beneficiaries in 2005. Raw payment data provided by the Centers for Medicare and Medicaid Services (CMS).
3 Overpayment amount determined by multiplying overpayment rate by CMS estimate of total expected payments to private plans for 2005.
4 Medicare Rights Center analysis of CMS data.
5 CMS, “Announcement of Calendar Year 2005 Medicare Advantage Payment Rates,” May 10, 2004
6 The 1997 Balanced Budget Act.
7 The Centers for Medicare and Medicaid Services (CMS), Office of the Actuary, January 14, 2004.
8 The CMS Office of the Actuary estimates that private plans will be paid a total of $88 billion in 2004 and 2005. Of that figure, $3 billion represents an overpayment for failing to adjust for the health of plan enrollees. The CMS actuary assumes that beginning in 2006, it will not redistribute plan overpayments based on their attracting healthier members among all plans. However, if it continues to redistribute this money to the plans, plans will be overpaid by an additional $34 billion from 2006 to 2014 (3.47 percent of the $972 billion in payments to plans between 2006 and 2014). If we assume that CMS is correct about the proportion of people with Medicare who will enroll in private plans, the total cost of overpayments to the plans from failing to adjust their payments for the health of their enrollees will be $37 billion, the sum of $3 and $34 billion. These overpayment figures are approximate, because we are assuming that the mix of healthy to unhealthy enrollees in private plans will not change over the period discussed. Office of the Actuary Medicare Part A and B Tables for FY 2005 President’s Budget, January 8 and January 5, 2004
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