Do Medicare Advantage Plans Minimize Costs? Investigating the Relationship Between Benchmarks, Costs, and Rebates

Medicare Advantage (MA), the program that allows people to receive their Medicare benefits through private health plans, uses a benchmark-and-bidding system to induce plans to provide benefits at lower costs. However, prior research suggests medical costs, profits, and other plan costs are not as low under this system as they might otherwise be.

To examine how well the current system encourages MA plans to bid their lowest cost by examining the relationship between costs and bonuses (rebates) and the benchmarks Medicare uses in determining plan payments.

Regression analysis using 2015 data for HMO and local PPO plans.

Costs and rebates are higher for MA plans in areas with higher benchmarks, and plan costs vary less than benchmarks do. A one-dollar increase in benchmarks is associated with 32-cent-higher plan costs and a 52-cent-higher rebate, even when controlling for market and plan factors that can affect costs. This suggests the current benchmark-and-bidding system allows plans to bid higher than local input prices and other market conditions would seem to warrant.

To incentivize MA plans to maximize efficiency and minimize costs, Medicare could change the way benchmarks are set or used.