How Medicare Advantage Plans Get Paid

To understand how the money flows in Medicare Managed Care, one must understand how the plan is funded. in the 1990s, Medicare + Choice plans were underfunded to such a degree that no attempt at negotiation would ever yield enough money for hospitals to sustain interest because the money simply wasn't available to pay them. It is concievable that the same could happen to a Medicare Advantage plan because there are so many plans available that one might find themselves contracted with a plan that does not have enough enrollment of helathy non-utilizers to receive adequate funding to cover expenses incurred by those with heavier utilization. If the reinsurance is inadequate, the plan could find itself in financial distress. This is one reason that I stress due diligence prior to contracting with new plans of any type.

The Medicare Advantage (MA) program allows Medicare beneficiaries to receive their Medicare benefits from private plans rather than from the traditional fee-for-service (FFS) program. Under some MA plans, beneficiaries may receive additional benefits beyond those offered under traditional Medicare and may pay additional premiums for them. Medicare pays plans a capitated rate for the 17 percent of beneficiaries enrolled in MA plans in 2006. These payments amounted to $55 billion in 2005, 17 percent of total Medicare spending.

Available MA plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), private fee-for-service (PFFS) plans, and special needs plans (SNPs). For payment purposes, there are two different categories of MA plans: local plans and regional plans. Local plans may be any of the available plan types and may serve one or more counties. Medicare pays them based on their enrollees’counties of residence. Regional plans, however, must be PPOs and must serve all of one of the 26 regions established by the Centers for Medicare & Medicaid Services (CMS). Each region comprises one or more entire states.

Medicare payments are also based on enrolled beneficiaries’ demographics and health risk characteristics. Medicare uses beneficiaries’ characteristics, such as age and prior health conditions, and a risk-adjustment model—the CMS–hierarchical condition category (CMS–HCC)—to develop a measure of their expected relative risk for covered Medicare spending. The payment rate for an enrollee is the base rate for the enrollee’s county of residence, multiplied by the enrollee’s risk measure, also referred to as the CMS–HCC weight.

Additional Resources
Medicare Advantage Program Payment Basics White Paper

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