Medicare Advantage Rebates Are Too Large To Be Financed By Reductions In Plans' Medical Spending Alone

Medicare Advantage (MA) rebates are financed by plans' reductions in medical spending, program features such as quality bonuses, and unintended aspects of program operation such as coding and selection. We used the statutory rebate formula and 2024 Centers for Medicare and Medicaid Services administrative data to simulate implied rebates when assuming plan spending reductions of the magnitude suggested by the literature. With no unintended financing from MA coding intensity or selection in MA, we found that implied rebates were well below observed levels. For example, implied rebates ranged from $74 per member per month (assuming that MA has 15 percent lower medical spending and 15 percent administrative costs) to $152 per member per month (assuming 20 percent lower spending and 10 percent administrative costs) compared with an observed average rebate of about $211 per member per month in 2024. When we incorporated coding and selection effects of the magnitude estimated by the Medicare Payment Advisory Commission, implied rebates increased substantially and aligned with observed 2024 rebates. These findings suggest that current MA rebates are difficult to explain with lower MA spending alone and likely reflect unintended aspects of program operation.