Medicare Advantage Profits Far Exceed Projections

Medicare Advantage plans spent less on medical services for beneficiaries and reaped greater profits than projected, according to a report by the Government Accountability Office (GAO).

Medicare Advantage organizations, on average, reported spending 85 percent of total revenue on medical expenses in 2005, but had projected medical expenditures of 90.2 percent of total revenue for that year. On average, Medicare Advantage organizations' self-reported profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profit in 2005 than they had projected, according to the GAO report, “Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005.”

The report was produced in response to a request by Rep. Pete Stark (D-Calif.), chair of the House Ways and Means Subcommittee on Health. A forthcoming report will provide a similar analysis of 2006 data.

(The newly passed Medicare Improvements for Patients and Providers Act [HR 6331] cuts payments to Medicare Advantage plans, while averting a planned cut in payments to physicians; see Congress Ends Medicare's Mental Health Copay Bias and Threatened Medicare Cut Turns Into Slight Boost.)

The finding of substantial differences between projections and actual costs and profits is important because payments to Medicare Advantage organizations are, in part, based on the revenue and expenditure projections that they submit to the Centers for Medicare and Medicaid Services (CMS) prior to the start of each contract year. Once Medicare payments are determined, they are not modified based on differences between actual and projected expenses.

For instance, this year Medicare Advantage organizations projected they would spend approximately 87 percent of their 2007 revenue on medical expenses and 9 percent on nonmedical expenses; the remaining 4 percent would go to profits, according to the GAO.

The projections also affect the extent to which Medicare Advantage beneficiaries receive additional benefits not provided under fee-for-service Medicare and the amounts beneficiaries pay in cost sharing and premiums.

“There were several outlier contracts whose relatively large differences between actual and projected profits made up more than half of the $1.14 billion difference,” according to the report. “Nearly two-thirds of beneficiaries were enrolled in health benefit plans offered by Medicare Advantage organizations for which the percentage of revenue dedicated to profits was greater than projected, and the percentage of revenue dedicated to expenditures (medical and nonmedical combined) was lower than projected.”

Stark, in a statement on his Web site, had strong words in response to the GAO findings.

“This report confirms that the 'deal' offered to Medicare beneficiaries and American taxpayers by these private plans is even worse than we thought,” he said. “Private plans in Medicare spend even less on medical care than they report to CMS—to the tune of over a billion dollars in one year alone. These funds go directly into the pockets of big insurance companies—not toward medical care for beneficiaries.”

“I should not have had to ask GAO for a report on the actual medical loss ratios of Medicare Advantage plans. CMS is required by law to conduct audits of these plans. They aren't doing their job because the Bush administration is perfectly happy to have billions of dollars going to insurance companies instead of Medicare beneficiaries. That's why [the administration continues] to battle any reasonable changes to the Medicare Advantage program,” he said.

“This GAO report is more evidence of the waste and abuse in the Medicare Advantage program,” Stark said.

“Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005” is posted at<www.gao.gov/new.items/d08827r.pdf>.▪