Medicare Advantage Will Be Overpaid by $1.2 Trillion

The Medicare Payment Advisory Commission (MedPAC) released their latest status report on the Medicare Advantage (MA) program last week. Based on this information, we estimate that MA will be overpaid by $1.2 trillion between 2025-2034. As MA enrollment continues to grow, policymakers should right-size payments to improve Medicare’s Hospital Insurance (HI) Trust Fund and the programs overall fiscal outlook.

As we have discussed in the past, two main drivers explain most of the overpayments to private health plans that make up the MA program: coding intensity and favorable selection. Coding intensity refers to plans’ practice of coding more disease diagnoses for MA patients to make patients appear sicker, or higher risk. Because the Centers for Medicare & Medicaid Services (CMS) pays MA plans more for patients who are higher risk, having more diagnoses per patient increases payments. In contrast, traditional Medicare, also known as fee-for-service (FFS), only pays for the services that are provided, not according to risk. MA enrollees appear more high risk than enrollees in FFS, even when studies show that they are not. Recognizing these different incentives, the law requires CMS to reduce MA plans’ payments by 5.9 percent to adjust for coding intensity. However, MedPAC calculated that MA plans will still see an increase in payment of 10 percent in 2025 due to coding intensity compared to FFS.

The second mechanism that contributes to overpaying MA plans is favorable selection. MA plans’ enrollees are generally healthier than FFS, despite similar risk scores. As a result, plans spend less per beneficiary than predicted. MedPAC attributes the gap in favorable selection between MA and FFS to drivers like prior authorization and plan networks that discourage some enrollees from receiving care. MedPAC estimates that favorable selection will increase MA costs by 11 percent in 2025 compared to payments for FFS.

The overpayments not only affect the federal budget, but they also affect the premiums paid by Medicare beneficiaries and the solvency of a key funding source. Based on MedPAC’s latest projections, we estimate that coding intensity and favorable selection will result in Medicare overpaying MA plans by $600 billion and $580 billion respectively, for a total of $1.2 trillion. Of this amount, $520 billion will come from the Medicare Hospital Insurance trust fund, which funds Medicare Part A. In addition, beneficiaries will pay an extra $220 billion in premiums as a result.

Estimated Medicare Advantage Overpayments, 2025-2034 

Source: CRFB estimates based on MedPAC analysis. Numbers rounded to the nearest $10 billion and may not add due to rounding. Overpayment estimates are projections generated using the MedPAC analysis of MA payments using 2024 and 2025 as starting points. 
*Medicare overpayments are net of premiums.

There are several options available to policymakers to reduce MA overpayments and incur budgetary savings as a result. For example, the Congressional Budget Office (CBO) recently estimated that reducing benchmarks—the amount plans pays for the average beneficiary—could save up to $489 billion. CBO also estimated that increasing the minimum adjustment from 5.9 percent to 20 percent could reduce deficits by over $1 trillion, which would help account for MA plans’ upcoding.

With Congress and the Administration both focused on eliminating waste, fraud, and abuse, as well as paying for the extension of the 2017 Tax Cuts and Jobs Act (TCJA), now would be an ideal time to consider MA overpayments. Overpayments are a significant form of waste and abuse, as well as an excellent way to offset priorities for lawmakers.

With Medicare costs projected to rise over the next decade and beyond as well as the Medicare Hospital Insurance trust fund’s projected insolvency in 2036, this MedPAC report should be a red flag to policymakers. Reducing these overpayments would improve the trust fund’s solvency and reduce overall waste and abuse in the program.