Medicare Advantage: Higher Spending Relative to Medicare	 
Fee-for-Service May Not Ensure Lower Out-of-Pocket Costs for	 
Beneficiaries (28-FEB-08, GAO-08-522T). 			 
                                                                 
Although private health plans were originally envisioned in the  
1980s as a potential source of Medicare savings, such plans have 
generally increased program spending. In 2006, Medicare paid $59 
billion to Medicare Advantage (MA) plans--an estimated $7.1	 
billion more than Medicare would have spent if MA beneficiaries  
had received care in Medicare fee-for-service (FFS). MA plans	 
receive a per member per month (PMPM) payment to provide services
covered under Medicare FFS. Almost all MA plans receive an	 
additional Medicare payment, known as a rebate. Plans use rebates
and sometimes additional beneficiary premiums to fund benefits	 
not covered under Medicare fee-for-service; reduce premiums; or  
reduce beneficiary cost sharing. In 2007, MA plans received about
$8.3 billion in rebate payments. This testimony is based on GAO's
report, Medicare Advantage: Increased Spending Relative to	 
Medicare Fee-for-Service May Not Always Reduce Beneficiary	 
Out-of-Pocket Costs (GAO-08-359, February 2008). For this	 
testimony, GAO examined MA plans' (1) projected allocation of	 
rebates, (2) projected cost sharing, and (3) projected revenues  
and expenses. GAO used 2007 data on MA plans' projected revenues 
and covered benefits, accounting for 71 percent of beneficiaries 
in MA plans.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-522T					        
    ACCNO:   A81152						        
  TITLE:     Medicare Advantage: Higher Spending Relative to Medicare 
Fee-for-Service May Not Ensure Lower Out-of-Pocket Costs for	 
Beneficiaries							 
     DATE:   02/28/2008 
  SUBJECT:   Beneficiaries					 
	     Cost analysis					 
	     Cost sharing (finance)				 
	     Fee-for-service plans				 
	     Financial management				 
	     Health care cost control				 
	     Health care costs					 
	     Health care policies				 
	     Health care programs				 
	     Health care services				 
	     Managed health care				 
	     Medicare						 
	     Policy evaluation					 
	     Program evaluation 				 
	     Strategic planning 				 
	     Program goals or objectives			 
	     Medicare Advantage Program 			 
	     Medicare Fee-for-Service Program			 

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GAO-08-522T

   

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Testimony: 

Before the Subcommittee on Health, Committee on Ways and Means, House 
of Representatives: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 10:00 a.m. EST: 

Thursday, February 28, 2008: 

Medicare Advantage: 

Higher Spending Relative to Medicare Fee-for-Service May Not Ensure 
Lower Out-of-Pocket Costs for Beneficiaries: 

Statement of James Cosgrove, Acting Director: 

Health Care: 

GAO-08-522T: 

GAO Highlights: 

Highlights of GAO-08-522T, a testimony before the Subcommittee on 
Health, Committee on Ways and Means, House of Representatives. 

Why GAO Did This Study: 

Although private health plans were originally envisioned in the 1980s 
as a potential source of Medicare savings, such plans have generally 
increased program spending. In 2006, Medicare paid $59 billion to 
Medicare Advantage (MA) plansâan estimated $7.1 billion more than 
Medicare would have spent if MA beneficiaries had received care in 
Medicare fee-for-service (FFS). 

MA plans receive a per member per month (PMPM) payment to provide 
services covered under Medicare FFS. Almost all MA plans receive an 
additional Medicare payment, known as a rebate. Plans use rebates and 
sometimes additional beneficiary premiums to fund benefits not covered 
under Medicare fee-for-service; reduce premiums; or reduce beneficiary 
cost sharing. In 2007, MA plans received about $8.3 billion in rebate 
payments. 

This testimony is based on GAOâs report, Medicare Advantage: Increased 
Spending Relative to Medicare Fee-for-Service May Not Always Reduce 
Beneficiary Out-of-Pocket Costs (GAO-08-359, February 2008). For this 
testimony, GAO examined MA plansâ (1) projected allocation of rebates, 
(2) projected cost sharing, and (3) projected revenues and expenses. 
GAO used 2007 data on MA plansâ projected revenues and covered 
benefits, accounting for 71 percent of beneficiaries in MA plans. 

What GAO Found: 

GAO found that MA plans projected they would use their rebates 
primarily to reduce cost sharing, with relatively little of their 
rebates projected to be spent on additional benefits. Nearly all 
plansâ91 percent of the 2,055 plans in the studyâreceived a rebate. Of 
the average rebate payment of $87 PMPM, plans projected they would 
allocate about $78 PMPM (89 percent) to reduced cost sharing and 
reduced premiums and $10 PMPM (11 percent) to additional benefits. The 
average projected PMPM costs of specific additional benefits across all 
MA plans ranged from $0.11 PMPM for international outpatient emergency 
services to $4 PMPM for dental care. 

While MA plans projected that, on average, beneficiaries in their plans 
would have cost sharing that was 42 percent of Medicare FFS cost-
sharing estimates, some beneficiaries could have higher cost sharing 
for certain service categories. For example, some plans projected that 
their beneficiaries would have higher cost sharing, on average, for 
home health services and inpatient stays, than in Medicare FFS. If 
beneficiaries frequently used these services that required higher cost 
sharing than Medicare FFS, it was possible that their overall cost 
sharing was higher than what they would have paid under Medicare FFS. 

Out of total revenues of $783 PMPM, on average, MA plans projected that 
they would allocate about 87 percent ($683 PMPM) to medical expenses. 
MA plans projected they would allocate, on average, about 9 percent of 
total revenue ($71 PMPM) to nonmedical expenses, including 
administration and marketing expenses; and about 4 percent ($30 PMPM) 
to the plansâ profits. About 30 percent of beneficiaries were enrolled 
in plans that projected they would allocate less than 85 percent of 
their revenues to medical expenses. 

As GAO concluded in its report, whether the value that MA beneficiaries 
receive in the form of reduced cost sharing, lower premiums, and 
additional benefits is worth the additional cost to Medicare is a 
decision for policymakers. However, if the policy objective is to 
subsidize health care costs of low-income Medicare beneficiaries, it 
may be more efficient to directly target subsidies to a defined low-
income population than to subsidize premiums and cost sharing for all 
MA beneficiaries, including those who are well off. As Congress 
considers the design and cost of MA, it will be important for 
policymakers to balance the needs of beneficiaries and the necessity of 
addressing Medicareâs long-term financial health. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-522T]. For more information, contact 
James Cosgrove at (202) 512-7114 or [email protected]. 

[End of section] 

Mr. Chairman and Members of the Subcommittee, 

I am pleased to be here today to discuss the findings from our February 
2008 report, Medicare Advantage: Increased Spending Relative to 
Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of- 
Pocket Costs.[Footnote 1] Under the Medicare Advantage (MA) program, 
which represents an alternative to Medicare's traditional fee-for- 
service (FFS) program, beneficiaries may receive their covered benefits 
through private health plans that contract with Medicare. As of August 
2007, approximately 20 percent of beneficiaries--or about 8.1 million 
beneficiaries--were enrolled in private plans, up from about 11 percent 
in 2003. The growth in enrollment was largely due to provisions of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA).[Footnote 2] The MMA, among other things, increased payment rates 
for private plans to encourage their participation and enable plans to 
enhance their benefit packages to attract beneficiaries. The subsequent 
rapid growth of Medicare spending on the MA program, resulting from 
increases in both payment rates and enrollment, underscores the 
importance of today's hearing and the need to better understand how MA 
plans use the funding they receive. 

In 2006, Medicare paid $59 billion to MA plans--an estimated $7.1 
billion more than Medicare would have spent if MA plan beneficiaries 
had instead received care through the FFS program. Although adding a 
private health plan component to Medicare was envisioned in the 1980s 
as a potential source of program savings, private health plans have 
generally increased overall Medicare spending. Spending pressures 
increased as policy objectives evolved to foster private health plan 
participation and provide Medicare beneficiaries with more health plan 
choices. According to Medicare's Office of the Actuary, the additional 
spending for the MA program has hastened the exhaustion of the Federal 
Hospital Insurance Trust Fund that helps finance Medicare. It has also 
resulted in higher Medicare premiums for all beneficiaries--including 
those in the FFS program--because premiums paid by Medicare FFS 
beneficiaries are tied to the costs of both Medicare FFS and MA 
programs. The Congressional Budget Office estimated that $54 billion in 
projected Medicare spending from 2009 through 2012 is the result of 
setting MA plan payments above Medicare FFS spending.[Footnote 3] The 
continued cost escalation associated with MA plans relative to Medicare 
FFS raise further concerns about the long-term financial implications 
of the MA program on the financial health of the Medicare program. Even 
without the added costs of the MA program, Medicare faces serious long- 
term financial challenges due to factors such as the rising cost of 
care and the retirement of the baby boom generation. 

The federal government spends relatively more for beneficiaries in MA 
plans, in part, because most MA plans receive payments known as 
rebates, in addition to the payments they receive for providing 
Medicare-covered services. Beginning in 2006, MA plans were required to 
submit bids for providing Medicare-covered services. An MA plan 
qualifies for a rebate if its bid is less than a predetermined amount 
known as a benchmark.[Footnote 4] A portion, 75 percent, of the 
difference between the benchmark and the plan's bid, is returned to the 
plan in the form of a rebate.[Footnote 5] In 2007, the total amount of 
rebates paid to MA plans was about $8.3 billion.[Footnote 6] Plans must 
use rebates to provide benefits or reduce beneficiary out-of-pocket 
costs in any combination of the following ways: (1) provide additional 
benefits not covered under Medicare FFS, such as dental and hearing 
benefits; (2) reduce beneficiary cost sharing; or (3) reduce premiums. 

Proponents of the MA program note that rebates enable plans to provide 
valuable extra benefits to beneficiaries and reduce beneficiary out-of- 
pocket costs, thereby making health care more affordable. They point 
out that individuals with low incomes who do not qualify for other 
government health care coverage may receive some financial relief by 
enrolling in an MA plan. Critics question the cost of the current MA 
program and suggest that if the policy objective is to subsidize the 
health care costs of individuals with low incomes, it would be more 
efficient to directly target subsidies to a well-defined low-income 
population instead of subsidizing the cost of all MA beneficiaries. 
Further, they are concerned that the additional payments to MA plans 
are funded in part by the approximately 80 percent of beneficiaries in 
the FFS program who do not receive enhanced benefits. 

My remarks today are based on the findings of our recent 
report.[Footnote 7] Specifically, my testimony will focus on (1) how 
plans projected they would allocate their rebates to additional 
benefits, reduced cost sharing, and reduced premiums; (2) how projected 
cost sharing in MA plans compared to projected cost sharing in Medicare 
FFS; and (3) how MA plans projected they would allocate their revenue 
to medical and other expenses. 

To conduct our work for the report, we analyzed MA plans' 2007 
projected revenues, projected costs, and covered benefits from data 
that plans submitted to the Centers for Medicare & Medicaid Services 
(CMS), the agency that administers Medicare. We were limited to 
analyzing projections because MA plans are not required to submit 
detailed information on actual revenues or costs. We excluded plans 
that restricted enrollment and plans with service areas that are 
exclusively outside the 50 states and the District of 
Columbia.[Footnote 8] After all exclusions, we had 2,055 plans in our 
study that accounted for 71 percent of all MA beneficiaries. Our 
results are weighted by August 2007 plan enrollment and are 
standardized to represent a Medicare beneficiary of average health 
status. Our work for the report was conducted from April 2007 through 
February 2008 in accordance with generally accepted government auditing 
standards. 

In summary, we found that most of the MA plans we reviewed received 
rebates and allocated them primarily to beneficiary cost sharing and 
premium reductions. In 2007, 91 percent of these MA plans (1,874 of 
2,055) received an average rebate of about $87 per member per month 
(PMPM). Based on the projections submitted to CMS, MA plans allocated 
about 89 percent of their rebates to beneficiary cost sharing and 
premium reductions. Plans allocated about 11 percent of the rebates to 
provide additional benefits, such as dental services, that are not 
covered under Medicare FFS. The average dollar amounts plans projected 
they would pay for additional benefits ranged from $0.11 PMPM for 
international outpatient emergency services to $4 PMPM for dental care. 
Some plans charged an additional premium that supplements the rebate to 
pay for additional benefits, cost-sharing reductions, or a combination 
of the two. We also found that, despite the rebates paid to MA plans, 
some beneficiaries in MA plans could pay more for services than they 
would in FFS. For example, depending on the MA plan in which they were 
enrolled and their health care needs, some beneficiaries who frequently 
used home health or inpatient services could have had overall cost 
sharing that was higher than what they would have paid under Medicare 
FFS. Finally, we found that MA plans projected spending, on average, 87 
percent of total revenues ($683 of $783 PMPM) on medical expenses. They 
projected that the remainder would be allocated to a combination of 
nonmedical expenses (9 percent), such as administration and marketing 
expenses, and plans' profits (4 percent).[Footnote 9] However, the 
percentage allocated to medical expenses varied widely by plan. About 
30 percent of MA beneficiaries were enrolled in plans that projected 
spending less than 85 percent on medical expenses. 

Background: 

Medicare FFS consists of Part A, hospital insurance, which covers 
inpatient stays, care in skilled nursing facilities, hospice care, and 
some home health care; and Part B, which covers certain physician 
visits, outpatient hospital treatments, and laboratory services, among 
other services. Most persons aged 65 and older, certain individuals 
with disabilities, and most individuals with end-stage renal disease 
are eligible to receive coverage for Part A services at no premium. 
Individuals eligible for Part A can also enroll in Part B, although 
they are charged a Part B premium.[Footnote 10] MA plans are required 
to provide benefits that are covered under the Medicare FFS 
program.[Footnote 11] Most Medicare beneficiaries who are eligible for 
Medicare FFS can choose to enroll in the MA program, operated through 
Medicare Part C, instead of Medicare FFS.[Footnote 12] All Medicare 
beneficiaries, regardless of their source of coverage, can choose to 
receive outpatient prescription drug coverage through Medicare Part D. 

Beneficiaries in both Medicare FFS and MA face cost-sharing 
requirements for medical services. In Medicare FFS, cost sharing 
includes a Part A and a Part B deductible, the amount beneficiaries 
must pay for services before Medicare FFS begins to pay.[Footnote 13] 
Medicare FFS cost sharing also includes coinsurance--a percentage 
payment for a given service that a beneficiary must pay,[Footnote 14] 
and copayments--a standard amount a beneficiary must pay for a medical 
service.[Footnote 15] Medicare allows MA plans to have cost-sharing 
requirements that are different from Medicare FFS's cost-sharing 
requirements, although an MA plan cannot require overall projected 
average cost sharing that exceeds what beneficiaries would be expected 
to pay under Medicare FFS. MA plans are permitted to establish dollar 
limits on the amount a beneficiary spends on cost sharing in a year of 
coverage, although Medicare FFS has no total cost-sharing 
limit.[Footnote 16] MA plans can use both out-of-pocket maximums, 
limits that can apply to all services but can exclude certain service 
categories, and service-specific maximums, which are limits that apply 
to a single service category. These limits help provide financial 
protection to beneficiaries who might otherwise have high cost-sharing 
expenses. 

MA Plans Projected They Would Allocate Most of the Rebates to 
Beneficiaries in the Form of Reduced Cost Sharing and Reduced Premiums: 

MA plans projected that, on average, they would allocate most of the 
rebates to beneficiaries as reduced cost sharing and reduced premiums 
for Part B services, Part D services, or both. In 2007, almost all MA 
plans in our study (1,874 of the 2,055 plans, or 91 percent) received a 
rebate payment from Medicare that averaged $87 PMPM. MA plans projected 
they would allocate 69 percent of the rebate ($61 PMPM) to reduced cost 
sharing and 20 percent ($17 PMPM) to reduced premiums. MA plans 
projected they would allocate relatively little of the rebates (11 
percent or $10 PMPM) to additional benefits that are not covered under 
Medicare FFS. (See fig. 1.) On average, for plans that provided 
detailed cost estimates, the projected dollar amounts of the common 
additional benefits ranged from a low of $0.11 PMPM for international 
outpatient emergency services to $4 PMPM for dental services. 
Additional benefits commonly offered included dental services, health 
education services, and hearing services. 

Figure 1: Projected Rebate Allocation to Additional Benefits, Premium 
Reductions, and Cost-Sharing Reductions, 2007: 

This figure is a pie graph showing projected rebate allocation to 
additional benefits, premium reductions, and cost-sharing reductions, 
2007. 

Reduced cost sharing: 69%; 
Reduced premiums: 20%; 
Additional benefits: 11%. 

[See PDF for image] 

Source: GAO analysis of 2007 CMS Bid Pricing Tool data. 

Note: Percentages are weighted by August 2007 plan enrollment. This 
analysis is based on 1,874 plans. We excluded from our analysis plans 
that restricted enrollment, plans with service areas that are 
exclusively outside the 50 states and the District of Columbia, and 
plans that did not receive a rebate. 

[End of figure] 

About 41 percent of beneficiaries, or 2.3 million people, were enrolled 
in an MA plan that also charged additional premiums to pay for 
additional benefits, reduced cost sharing, or a combination of the two. 
The average additional premium charged was $58 PMPM. Based on plans' 
projections, we estimated that about 77 percent of the additional 
benefits and reduction in beneficiary cost sharing was funded by 
rebates, with the remainder being funded by additional beneficiary 
premiums. 

MA Plans Projected that MA Beneficiaries, on Average, Would Have Lower 
Cost Sharing than if They Were in Medicare FFS, but Some MA 
Beneficiaries Could Pay More: 

For 2007, MA plans projected that MA beneficiary cost sharing, funded 
by both rebates and additional premiums, would be 42 percent of 
estimated cost sharing in Medicare FFS. Plans projected that their 
beneficiaries, on average, would pay $49 PMPM in cost sharing, and they 
estimated that the Medicare FFS equivalent cost sharing for their 
beneficiaries was $116 PMPM. 

Although plans projected that beneficiaries' overall cost sharing was 
lower, on average, than Medicare FFS cost-sharing estimates, some MA 
plans projected that cost sharing for certain categories of services 
was higher than Medicare FFS cost-sharing estimates. This is because 
overall cost sharing in MA plans is required to be actuarially 
equivalent or lower compared to overall cost sharing in Medicare FFS, 
but may be higher or lower for specific categories of services. For 
example, 19 percent of MA beneficiaries were enrolled in plans that 
projected higher cost sharing for home health services, on average, 
than in Medicare FFS, which does not require any cost sharing for home 
health services. Similarly, 16 percent of MA beneficiaries were in 
plans with higher projected cost sharing for inpatient services 
relative to Medicare FFS.[Footnote 17] (See table 1.) Some MA 
beneficiaries who frequently used these services with higher cost 
sharing than Medicare FFS could have had overall cost sharing that was 
higher than what they would pay under Medicare FFS. 

Table 1: Beneficiaries in MA Plans with Higher Projected Cost Sharing 
than Medicare FFS for a Given Service Category, 2007: 

Home health services[A]; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 1,069,023; 
Percent: 19. 

Inpatient services[B]; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 937,246; 
Percent: 16. 

Skilled nursing facility services; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 499,071; 
Percent: 9. 

Durable medical equipment, prosthetics, and supplies; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 215,541; 
Percent: 4. 

Part B drugs[C]; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 101,416; 
Percent: 2. 

Professional services[B]; 
All plans Plans = 2,055 Beneficiaries = 5,764,368: Number: 47,033; 
Percent: 1. 

Outpatient facility services[D]; 
All plans Plans = 2,055 Beneficiaries 
= 5,764,368: Number: 31,497; 
Percent: 1. 

Source: GAO analysis of 2007 CMS Bid Pricing Tool data. 

Note: We excluded plans that restricted enrollment and plans with 
service areas that are exclusively outside the 50 states and the 
District of Columbia. 

[A] Home health services include skilled nursing services, home health 
aides, and certain therapy services, all provided in the home setting. 

[B] Many MA plans include cost sharing for professional services, such 
as physician visits received during an inpatient stay, in their 
inpatient cost-sharing amount. As a result, the cost sharing for 
professional services may be understated, while the inpatient cost 
sharing may be overstated. Professional services include physician 
visits, therapy, and radiology, among other services. 

[C] Part B drugs are drugs that are covered under Medicare Part B, and 
they include drugs that are typically administered by a physician. Many 
plans excluded Part B drugs from the out-of-pocket maximum if they were 
obtained from a pharmacy, but according to CMS, did not exclude Part B 
drugs administered by a physician. 

[D] Outpatient facility services include surgery, emergency, and other 
services provided in an outpatient facility. 

[End of table] 

Cost sharing for particular categories of services varied substantially 
among MA plans. For example, with regards to inpatient cost sharing, 
more than half a million beneficiaries were in MA plans that had no 
cost sharing at all. In contrast, a similar number of beneficiaries 
were in MA plans that required cost sharing that could result in $2,000 
or more for a 10-day hospital stay and $3,000 or more for three average-
length hospital stays.[Footnote 18] In Medicare FFS in 2007, 
beneficiaries paid a $992 deductible for the first hospital stay in a 
benefit period, no deductible for subsequent hospital stays in the same 
benefit period, and a 20 percent coinsurance for physician services 
that averaged $73 per day for the first 4 days of a hospital stay and 
$58 per day for subsequent days in the stay.[Footnote 19] 

Figure 2 provides an illustrative example of an MA plan that could have 
exposed a beneficiary to higher inpatient costs than under Medicare 
FFS. While the plan in this illustrative example had lower cost sharing 
than Medicare FFS for initial hospital stays of 4 days or less as well 
as initial hospital stays of 30 days or more, for stays of other 
lengths the MA plan could have cost beneficiaries more than $1,000 
above out-of-pocket costs under Medicare FFS. The disparity between out-
of-pocket costs under the MA plan and costs under Medicare FFS was 
largest when comparing additional hospital visits in the same benefit 
period, since Medicare FFS does not charge a deductible if an admission 
occurs within 60 days of a previous admission. 

Figure 2: Example of an MA Plan with Inpatient Cost Sharing Different 
from the Medicare FFS Program: 

This figure is a combination line graph showing example of an MA plan 
with inpatient cost sharing different from medicare FFS program. The X 
axis is the length of stay in days. The Y axis is the total cost to 
beneficiary (dollars). One line represents MA plan cost sharing 
consisting of a copayment for days 1-10 of a hospital stay, another 
represents medicare FFS estimated cost sharing for an initial hospital 
stay consisting of coinsurance for physician services received in the 
hospital and a deductible, and the last represents medicare FFS 
estimated cost sharing for a subsequent hospital stay consisting of 
coinsurance for physician services received in the hospital (no 
deductible). 

[See PDF for image] 

Source: GAO analysis of 2007 CMS Plan Benefit Package data and CMS 
actuarial data. 

Notes: In this example, the MA plan charged a $275 daily copayment for 
the first 10 days of the hospital stay, and charged no additional 
copayment for days 11 through 90. The plan had a $4,000 out-of-pocket 
maximum. In contrast, in 2007 Medicare FFS charged a $992 deductible 
for an initial hospital stay of a benefit period and $248 per day for 
days 61 through 90 of a hospital stay. Medicare FFS beneficiaries paid 
no deductible for an additional hospital stay if it occurred within 60 
days of the previous stay. In addition, Medicare FFS beneficiaries must 
pay coinsurance for physician services received while in the hospital. 
The charges associated with these physician services averaged $73 per 
day for the first 4 days of the hospital stay, and $58 per day for the 
remaining days of a hospital stay through 90 days. This example assumes 
that the beneficiary was charged the average coinsurance. The actual 
amount of coinsurance a beneficiary pays varies based on the amount of 
services a beneficiary receives, and charges can be above or below the 
average. 

[A] Nearly 88 percent of hospital stays under Medicare were 10 days or 
less in 2004 according to CMS data. About 1 percent of hospital stays 
were longer than 30 days. 

[End of figure] 

Some MA plans had out-of-pocket maximums, which help protect 
beneficiaries against high spending on cost sharing. As of August 2007, 
about 48 percent of beneficiaries were enrolled in plans that had an 
out-of-pocket maximum. However, some plans excluded certain services 
from the out-of-pocket maximum. Services that were typically excluded 
were Part B drugs obtained from a pharmacy,[Footnote 20] outpatient 
substance abuse and mental health services, home health services, and 
durable medical equipment. 

MA Plans Projected Approximately 87 Percent of Total Revenue Would be 
Spent on Medical Expenses: 

For 2007, MA plans projected that of their total revenues ($783 PMPM), 
they would spend approximately 87 percent ($683 PMPM) on medical 
expenses. Plans further projected they would spend approximately 9 
percent of total revenue ($71 PMPM) on nonmedical expenses, such as 
administration expenses and marketing expenses, and approximately 4 
percent ($30 PMPM) on the plans' profits, on average. There was 
variation among individual plans in the percent of revenues projected 
to be spent on medical expenses. For example, about 30 percent of 
beneficiaries--1.7 million--were enrolled in plans that projected 
spending less than 85 percent on medical expenses. While there is no 
definitive standard for the percentage of revenues that should be spent 
on medical expenses, Congress adopted the 85 percent threshold to 
require minimum thresholds for MA plans in the Children's Health and 
Medicare Protection Act of 2007.[Footnote 21] 

MA plans projected expenses separately for certain categories of 
nonmedical expenses, including marketing and sales. One type of MA 
plan--Private Fee-for-Service (PFFS)--allocated a larger percentage of 
revenue to marketing and sales than other plan types.[Footnote 22] On 
average, as a percentage of total revenue, marketing and sales expenses 
were 3.6 percent for PFFS plans compared to 2.4 percent for all MA 
plans. 

Concluding Observations: 

Medicare spends more per beneficiary in MA than it does for 
beneficiaries in Medicare FFS, at an estimated additional cost to 
Medicare of $54 billion from 2009 through 2012. In 2007, the average MA 
plan receives a Medicare rebate equal to approximately $87 PMPM, on 
average. MA plans projected they would allocate the vast majority of 
their rebates--approximately 89 percent--to beneficiaries to reduce 
premiums and to lower their cost-sharing for Medicare-covered services. 
Plans projected they would use a relatively small portion of their 
rebates--approximately 11 percent--to provide additional benefits that 
are not covered under Medicare FFS. Although the rebates generally have 
helped to make health care more affordable for many beneficiaries 
enrolled in MA plans, some beneficiaries may face higher expenses than 
they would in Medicare FFS. Further, because premiums paid by 
beneficiaries in Medicare FFS are tied to both Medicare FFS and MA 
costs, beneficiaries covered under Medicare FFS are subsidizing the 
additional benefits and lower costs that MA beneficiaries receive. 
Whether the value that MA beneficiaries receive in the form of reduced 
cost sharing, lower premiums, and extra benefits is worth the increased 
cost borne by beneficiaries in Medicare FFS is a decision for 
policymakers. However, if the policy objective is to subsidize health- 
care costs of low-income Medicare beneficiaries, it may be more 
efficient to directly target subsidies to a defined low-income 
population than to subsidize premiums and cost sharing for all MA 
beneficiaries, including those who are well off. As Congress considers 
the design and cost of the MA program, it will be important for 
policymakers to balance the needs of beneficiaries--including those in 
MA plans and those in Medicare FFS--with the necessity of addressing 
Medicare's long-term financial health. 

Mr. Chairman, this completes my prepared remarks. I would be happy to 
respond to any questions you or other Members of the Subcommittee may 
have at this time. 

For further information about this testimony, please contact James 
Cosgrove at (202) 512-7114 or [email protected]. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this statement. Christine Brudevold, Assistant 
Director; 

Jennie Apter, Alexander Dworkowitz, Gregory Giusto, Drew Long, and 
Christina C. Serna made key contributions to this statement. 

Footnotes: 

[1] Medicare Advantage: Increased Spending Relative to Medicare Fee- 
for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs, GAO-
08-359 (Washington, D.C.: February 2008). 

[2] Pub. L. No. 108-173, Â§ 201, et. seq., 117 Stat. 2066, 2176. 

[3] Congressional Budget Office, The Medicare Advantage Program: 
Enrollment Trends and Budgetary Effects (Washington, D.C.: April 2007). 

[4] Benchmarks represent the maximum amount that Medicare will pay 
plans, on a per beneficiary per month basis, for providing Medicare- 
covered services. Benchmarks always equal or exceed average per capita 
FFS spending. 

[5] If a plan's bid for providing Medicare-covered services is higher 
than the benchmark, the plan must charge beneficiaries the difference 
in the form of a premium. 

[6] Office of the Actuary, Centers for Medicare & Medicaid Services. 

[7] GAO-08-359. 

[8] We excluded plans that have restrictions on enrollment, such as 
employer plans and plans that only cover certain Medicare FFS services. 

[9] In this testimony, we use the term profits to refer to for-profit 
and nonprofit plans' remaining revenue after medical and nonmedical 
expenses are paid. 

[10] For 2007, the monthly Part B premium was set at $93.50, although 
high-income beneficiaries pay more. 

[11] MA plans do not cover hospice care, a benefit which is provided 
under Medicare FFS. 

[12] Individuals with end-stage renal disease are not eligible for most 
MA plans, unless they develop the disease while enrolled in an MA plan. 
42 U.S.C. Â§ 1395w-21(a)(3)(B)(2000). 

[13] For example, in 2007, Medicare FFS required a deductible payment 
of $992 before it began paying for an inpatient stay, and $131 before 
it began paying for any Part B services. 

[14] For example, coinsurance might require a beneficiary to pay 20 
percent of the total payment for physician visits. 

[15] For example, in 2007, the Medicare copayment for days 61 through 
90 of an inpatient stay was $248 per day. 

[16] Many Medicare FFS beneficiaries pay premiums for a type of 
supplemental insurance known as Medigap, which limits beneficiary cost 
sharing for Medicare-covered services. Medigap policies are not 
available to lower the cost sharing of MA beneficiaries. 

[17] Average cost sharing reflects expenditures for the entire 
population and includes both beneficiaries who are projected to use a 
certain category of service and beneficiaries who are not projected to 
use that service. 

[18] The average length of stay for Medicare FFS was 5.4 days in 2005 
according to a MedPAC analysis of Medicare cost report data. 

[19] Medicare FFS cost-sharing requirements also include a $248 daily 
charge for hospital stays lasting between 61 and 90 days. 

[20] According to CMS, plans that excluded Part B drugs from the out- 
of-pocket maximum excluded drugs obtained from a pharmacy and did not 
exclude drugs that were administered by a physician. 

[21] The Children's Health and Medicare Protection Act of 2007 (CHAMP 
Act), H.R. 3162, 110th Cong., Â§ 414 (2007), was passed in the House of 
Representatives on August 1, 2007. 

[22] PFFS plans allow beneficiaries to see any provider that accepts 
the plan's payment terms. Other plan types in addition to PFFS plans 
that we included in our analyses were Health Maintenance Organizations 
(HMO), Preferred Provider Organizations (PPO) and Provider-Sponsored 
Organizations (PSO). Beneficiaries in HMOs are generally restricted to 
seeing providers within a network, while beneficiaries in PPOs can see 
both in-network and out-of-network providers but must pay higher cost- 
sharing amounts if they use out-of-network services. PSOs are MA plans 
that are operated by a provider or providers. 

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