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A bonus program designed to reward Medicare Advantage insurers for good performance, and to save taxpayer money, has served instead to reward ineffective insurers and deliver overpayments, a recent Urban Institute study found.

The plan, the Medicare Advantage Quality Bonus Program, was started under the Affordable Care Act. It was expected to cut payments to Medicare Advantage insurers, but instead has raised them, according to the study, “The Medicare Advantage Quality Bonus Program: High Cost for Uncertain Gain,” by Laura Skopec and Robert A. Berenson.

“Taken together, these reforms were expected to reduce payments to M.A. organizations. However, the expected cost savings from the reforms have not materialized, partly because well over half of M.A. plans are now receiving bonuses for ‘high performance’ on the star ratings measures that underlie the Q.B.P.,” the study’s authors wrote. “Unlike other Medicare pay-for-performance programs, the Q.B.P. is upside-only, meaning it does not assess penalties on low-performing M.A. contracts.”

Nearly half of all Medicare enrollees are in Medicare Advantage programs, the privatized version of the government’s Medicare program for older and disabled Americans. The gains in enrollment in Medicare Advantage programs continue, despite frequent reports that Medicare Advantage gives more expensive care and frequent denials and common reports of fraud and overcharging among Medicare Advantage insurers.

Many criticisms of Medicare Advantage have focused on using the “capitation” model, under which the insurers get paid a fixed sum for a number of patients in varying stages of health. Insurers will make a bid for a patient group in a given area; that bid, after it is awarded, will be adjusted upward to account for pre-existing conditions in the patient population, which supposedly require more spending. Insurers have been caught gaming the system by exaggerating the number of pre-existing conditions in a given patient population — hypertension, diabetes, obesity, chronic obstructive pulmonary disease (C.O.P.D.) and so on.

Score inflation, inadequate data

But in addition to that, the report says, the star rating system from the Q.B.P. suffers from a number of problems, including score inflation, which results in overly generous bonuses. The underlying data is also inadequate, the report says.

The star system also relies on measurements of beneficiary experience, which “do not permit meaningful distinctions across M.A. contracts.”

Similarly, the attempts to measure via administrative effectiveness are not helpful, the report says: “Administrative effectiveness measures do not target important deficiencies regulators have identified within M.A. organizations.”

Also, the report says, “performance is not measured at the plan or local level, limiting the usefulness of star ratings for beneficiaries.”

“The M.A. star rating system and the Q.B.P. do not appear to be achieving their goals of informing beneficiaries or encouraging M.A. insurers to improve quality,” the report says. “Instead, the QBP is a significant source of overpayment in the M.A. system. More than half of contracts receive bonuses for ‘high quality,’ and these contracts represented over 75 percent of M.A. enrollment in 2023. The Q.B.P. has not identified persistently low-performing plans, despite continued concern about access to postacute care and high disenrollment among high-need populations in M.A.

“In short, the Q.B.P. is a windfall for insurers that does not provide valuable information to beneficiaries or protect them from poor performance,” the report says.

In response to concerns, the report said, the Centers for Medicare and Medicaid Services adjusted the plan, “but the adjustments only increased the share of M.A. contracts considered high performing, exacerbating the overpayment issue.”

The report says that “because the average enrollment weighted star rating across M.A. plans lands at 4.15 stars out of a possible five stars, the program overpays M.A. plans billions of dollars.”

Regulatory changes

This report comes as the Medicare program is facing some major regulatory changes over the next several years, including a rate decline for 2024.

“The 1.12 percent effective M.A. rate decrease — the change in the amount paid per enrollee per year to payers by C.M.S. — marks the first decline since 2015,” McKinsey reported in a study released recently. “This translates to a loss to payers of an average of $150 per member per year.”

C.M.S. is also changing the risk adjustment formula — the formula by which the insurers claim that they are taking on risk because of patients with various illnesses and conditions. With more illnesses and conditions, the insurers can claim more money (though they have been found to exaggerate).

“C.M.S. announced changes to M.A. risk adjustment following careful analysis, including observed higher-than-expected risk scores compared with fee-for-service (F.F.S.),” McKinsey reported. “C.M.S. has refreshed the risk adjustment model to bring it more in line with F.F.S., driving M.A. rates down by 2.16 percent, on average.”

Finally, on the topic of grade inflation, those star ratings will change, McKinsey said: “For calendar year 2024, C.M.S. reduced payment rates by 1.24 percent in response to a decline in average M.A. Star ratings, which resulted largely from expiring Covid-19 provisions and scheduled measure adjustments. Star ratings reached a record high in rating year 2022, with 90 percent of members in plans rated with four or more Stars; that number has fallen to 72 percent in 2023.”

The startling rise

Payments under the plan have risen sharply, the Kaiser Family Foundation said in a report.

“Estimated bonus payments to Medicare Advantage plans have increased sharply, more than quadrupling from $3.0 billion in 2015 to $12.8 billion in 2023 (Figure 1). Since 2022, payments have risen $2.8 billion, or 28%, growing faster than enrollment over the same period, which rose 8%. These estimates are a lower bound because bonus payments are risk adjusted, which we expect to increase bonus payments.”

Most Medicare Advantage enrollees (85%) are in plans getting bonus payments in 2023, the report said.

“The average bonus payment per enrollee is highest for employer- or union-sponsored Medicare Advantage plans ($460) and lowest for special needs plans ($374).

“Bonus payments vary substantially across firms, with UnitedHealthcare receiving the largest total payments ($3.9 billion) and Kaiser Permanente receiving the highest payment per enrollee ($523).”

Jeanne Pinder  is the founder and CEO of ClearHealthCosts. She worked at The New York Times for almost 25 years as a reporter, editor and human resources executive, then volunteered for a buyout and founded...