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Government Funding; Medicare


The Medicare Modernization Act of 2003 (MMA) and the Deficit Reduction Act (DRA) of 2005 include provision intended to increase the role of private health plans in Medicare. These provisions set Medicare Advantage plan payment rates at levels higher than average costs would be in tradition free-for-service Medicare in every county in the nation. The total amount of extra payments to Medicare Advantage plans resulting from these provisions is projected at $5.7 billion in 2007 and nearly $30 billion over the five year period, 2007 to 2011.

This briefing paper outlines the specific MMA and DRA provisions that generate these extra payments and presents opportunities for revised policies that can reduce Medicare spending in excess of fee-for-service costs. The options explored here address the four bases for Medicare Advantage play extra payments: MMA statutory provisions, including county benchmark extra payment rates and Indirect Medical Education payments that increase the county benchmark rates; budget neutral risk adjustment payments; and payments from a regional PPA stabilization fund. In view of concerns about the Federal budget deficit of over $250 billion a year and other more short-term concerns facing Medicare, such as the cost savings needed to pay for a modification of the Sustainable Growth Rate (SGR) policies so that Medicare payments to physicians do not decline by 5 percent in 2007, reductions in extra payments to Medicare Advantage plans could provide substantial Medicare savings. Furthermore, reductions in extra payments to Medicare Advantage plans may be seen as appropriate, as these extra payments clearly run contrary to the oft-stated purpose of increasing the enrollment of beneficiaries in private plans: to lower total Medicare costs.


Funder: The Commonwealth Fund.

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