Medicare Advantage: Quality Bonus Payment Demonstration Undermined by High Estimated Costs and Design Shortcomings

In summary, we found the following:

• OACT has estimated that the MA Quality Bonus Payment Demonstration will cost $8.35 billion over 10 years, most of which will be paid to 3-star and 3.5-star plans. About $5.34 billion of OACT’s cost estimate is attributed to quality bonus payments more generous than those prescribed in PPACA, specifically to (1) higher bonuses for 4-star and 5-star plans, (2) new bonuses for 3-star and 3.5-star plans, (3) applying bonuses to plans’ entire blended benchmarks, and (4) allowing plans’ benchmarks to exceed their pre-PPACA levels. Most of the remaining projected demonstration spending stems from higher MA enrollment because the bonuses enable MA plans to offer beneficiaries more benefits or lower premiums. Taken together, the expanded bonuses and higher MA enrollment mainly benefit average performing plans—those receiving 3-star and 3.5-star ratings. In addition, OACT estimated that the demonstration will offset more than one-third of the reduction in MA payments projected to occur under PPACA during the demonstration years. The largest annual offset will occur in 2012—71 percent—followed by 32 percent in 2013 and 16 percent in 2014.

• The MA Quality Bonus Payment Demonstration does not—and is not required by law to—conform to the principles of budget neutrality. OMB officials told us that they considered the costs of the demonstration in the context of other administrative actions in the Medicare program that are expected to generate savings. However, they did not confirm whether specific offsets were identified to account for the total costs of the demonstration.

• The MA Quality Bonus Payment Demonstration dwarfs all other Medicare demonstrations—both mandatory and discretionary—conducted since 1995 in its estimated budgetary impact and is larger in size and scope than many of them. Our review of CMS and OMB data shows that the estimated budgetary impact of the demonstration, adjusted for inflation, is at least seven times larger than that of any other Medicare demonstration conducted since 1995 and is greater than the combined budgetary impact of all of those demonstrations. While the demonstration is similar in size and scope to some Part D demonstrations, it is unlike many Medicare pay-for-performance demonstrations in that it is implemented nationwide and allows all eligible plans or providers to participate.

• The design of the demonstration precludes a credible evaluation of its effectiveness in achieving CMS’s stated research goal—to test whether a scaled bonus structure leads to larger and faster annual quality improvement compared with what would have occurred under PPACA. Because of the timing of data collection—all of the performance data used to determine the 2012 bonus payments and nearly all of the data used to determine the 2013 bonus payments were collected before the demonstration’s final specifications were published—the demonstration’s incentives to improve quality can have a full impact only in 2014. In addition, the demonstration’s bonus percentages are not continuously scaled—in 2014, plans with 4, 4.5, and 5 stars will all receive the same 5 percent bonus—and its bonus payments do not consistently offer better incentives than PPACA to achieve high star ratings in 2013 and 2014. Moreover, because the demonstration lacks a direct comparison group, it may not be possible to isolate its effects, and any effects that are observed could be attributable, at least in part, to other MA payment and policy changes.

Why GAO Did This Study

The Medicare Advantage (MA) program, an alternative to the original Medicare fee-for-service (FFS) program, provides health care coverage to Medicare beneficiaries through private health plans offered by organizations under contract with the Centers for Medicare & Medicaid Services (CMS). In 2011, about a quarter of all Medicare beneficiaries were enrolled in approximately 3,300 MA plans sponsored by 175 MA organizations. These organizations generally offer beneficiaries one or more plans to choose from—with different coverage, premiums, and cost sharing features—in the areas they serve. Also, MA plans may provide additional benefits not offered under Medicare FFS, such as reduced cost sharing or vision and dental care coverage. In 2010, Medicare payments to MA plans totaled about $115 billion, or roughly 25 percent of all Medicare spending for Part A and Part B.

CMS determines the amount to pay an MA plan by comparing its bid—the MA plan’s projected revenue requirements for providing the traditional Medicare benefit package to an average beneficiary—to a benchmark derived from the average amount of Medicare FFS spending in the plan’s service area. Most plans receive their bid amount plus a rebate based on the difference between their bid and their benchmark. The rebate must be used to reduce premiums, reduce cost sharing, or offer additional benefits. To help Medicare beneficiaries select an MA plan in their area, CMS rates MA contractors on a 5-star scale, with 5 stars indicating the highest quality. Plans’ overall star ratings indicate their performance relative to that of all other plans on about 50 measures of clinical quality, patient experience, and contractor performance.

The 2010 Patient Protection and Affordable Care Act as amended (PPACA) aligned benchmarks more closely with Medicare FFS spending and provided incentives for plans to achieve high star ratings. PPACA tied the new benchmarks to a percentage of average FFS spending in each county and caps them at the pre-PPACA level. The new benchmarks would be phased in from 2012 to 2017 by blending them with the old benchmarks. PPACA also tied MA payments to plans’ star ratings in two ways. First, PPACA introduced differential rebates—varying from 50 to 70 percent—based on plans’ star ratings. Second, PPACA provided that plans with 4 or more stars receive a bonus that adds 1.5 percent to the PPACA portion of their blended benchmark in 2012, 3 percent in 2013, and 5 percent in 2014 and beyond. CMS’s Office of the Actuary (OACT) estimated that PPACA’s payment reforms would reduce Medicare payments to MA plans by $145 billion over 9 years and would cause plans to offer less generous benefit packages. OACT also projected that MA enrollment in 2017 would be half as much as it would have been in PPACA’s absence.

Rather than implement PPACA’s bonus structure, CMS announced in November 2010 that it would conduct a nationwide demonstration from 2012 through 2014 to test an alternative method for calculating and awarding bonuses. Compared with PPACA, the MA Quality Bonus Payment Demonstration extends the bonuses to plans with 3 or more stars, accelerates the phase-in of the bonuses for plans with 4 or more stars, and increases the size of the bonuses in 2012 and 2013. According to CMS, the goal of the demonstration is to test whether a scaled bonus structure would lead to larger and faster annual quality improvement for plans at various star rating levels compared with what would have occurred under PPACA.

Congress asked us to review the cost and design of the MA Quality Bonus Payment Demonstration. In this report, we examined (1) cost estimates that have been developed for the demonstration; (2) the extent to which the demonstration conforms to the principles of budget neutrality; (3) how the demonstration compares in budgetary impact, size, and scope with other Medicare demonstrations; and (4) the extent to which the design of the demonstration will allow CMS to achieve its stated research goal. On November 18, 2011, we presented information on these objectives to committee staff. This report contains the results of our review and a recommendation that the Secretary of the Department of Health and Human Services (HHS) cancel the demonstration and allow the quality bonus payment system established by PPACA to take effect.