From 2018 to 2024, the share of eligible Medicare beneficiaries enrolled in Medicare Advantage (MA) rose from 37 percent to 54 percent. Now the Medicare Payment Advisory Commission (MedPAC) is grappling with the repercussions from the fact that in 2025 Medicare will spend 20 percent more for MA enrollees than it would spend if those beneficiaries were enrolled in traditional Medicare, a difference that translates into a projected $84 billion.
The relatively higher payments to MA plans are financed by the taxpayers and beneficiaries who fund the Medicare program. “Higher MA spending increases Part B premiums for all beneficiaries, including those in FFS Medicare; the Commission estimates that Part B premium payments will be about $13 billion higher in 2025 because of higher Medicare payments to MA plans (equivalent to roughly $198 per beneficiary per year),” the MedPAC March 2025 report states.
The report makes clear that the initial idea was that Medicare Advantage was going to provide cost savings to taxpayers through enhanced efficiency and care management: “When risk-based payment for private plans was first added to Medicare in 1985, payments to private plans were set at 95 percent of FFS payments because it was expected that plans would share savings from their efficiencies relative to FFS with taxpayers. But, in total, private plans have never been paid less than FFS Medicare because of policies that increase payments to MA above FFS payments and distort the nature of plan competition in MA. For example, MA benchmarks are set above FFS spending in many markets in part to encourage more uniform plan participation across the country. Payments under the quality-bonus program further increase MA payments above FFS (without, the Commission has found, producing meaningful information on plan quality for Medicare beneficiaries or the Medicare program).”
Indeed, MedPAC’s review of private-plan payments suggests that over a 40-year history, the many iterations of full-risk contracting with private plans have never yielded aggregate savings for the Medicare program.
MedPAC’s March 2025 report contends that several reforms are needed to improve Medicare’s policies of paying and overseeing MA plans.
First, reforms are needed to reduce the level of Medicare payments to MA plans. The relatively higher levels of payment stem largely from coding intensity and favorable selection, MedPAC said.
MedPAC defines “favorable selection” into MA as occurring when beneficiaries with lower actual spending relative to their risk score tend to enroll in MA; it is the extent to which risk-standardized spending of MA enrollees would be lower than the FFS average without any intervention from MA plans. MedPAC projects that in 2025, favorable selection will increase MA payments by roughly 11 percent above what the program would have paid under FFS Medicare, or $44 billion of the $84 billion in higher total payments to MA plans.
MedPAC also projects that in 2025, MA risk scores will be about 16 percent higher than scores for similar fee-for-service beneficiaries. Mechanisms that contribute to coding differences include increased use of health risk assessments and chart reviews.
In addition, MedPAC calls the program that is used to reward plans for better quality “administratively burdensome,” and notes that it adds significantly to program costs, and yet does not meaningfully improve quality.
The report also recommends that Medicare address the challenges, burdens, and care disruptions for beneficiaries that stem from the process of choosing between plans and from changes to provider networks.
MedPAC also noted that plan-submitted data about beneficiaries’ healthcare encounters are incomplete, so that the commission lacks information about the use of many MA supplemental benefits. “Without these data, policymakers cannot fully understand enrollees’ use of services, which limits policymakers’ ability to oversee the program and assess the value that enrollees get from supplemental benefits,” the report said.
