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Published November 28, 2018

How Medicare Advantage Works and What to Watch

Medicare Open Enrollment season is here, and through December 7, 2018, Medicare beneficiaries have the opportunity to switch from original Medicare to Medicare Advantage (MA) (or vice versa) or to change MA plans.  Beneficiaries have more options now than ever.  According to CMS, the number of MA plans is up about 20% for 2019.

For hospitals, health systems, physician groups, and provider networks, now is a good time to review how MA works and consider its impact on operations.

Since 2006, the number of MA enrollees has increased every year.  In 2017, MA enrollees represented 33% of all Medicare beneficiaries.  The Centers for Medicare & Medicaid Services (CMS) now estimates that 22.6 million Medicare beneficiaries—representing 36.7% of all Medicare beneficiaries—will select MA plans in 2019.

Medicare beneficiaries tend to like their MA plans, too, at a reported 90% plan satisfaction.

Politically, Medicare Advantage has strong bipartisan support, largely due to the high quality of care plans offered and the cost effectiveness of the program.  In short, MA has all the momentum it needs to continue to grow.

How Medicare Advantage Works

Medicare Advantage offers Medicare beneficiaries the option to receive their benefits through private health plans, rather than directly from the federal government.  The following table identifies key differences between MA and Traditional Medicare:

  Traditional Medicare Medicare Advantage
Who Medicare Pays Provider organizations (hospitals, physicians, etc.) for medical services Health plans for each of its enrollees
What Medicare Pays Amount specified for healthcare service (typically based on fee schedules or special program payment arrangements) Capitated amount per health plan enrollee
Beneficiary Costs Part B premium plus 20% coinsurance Part B premium plus variable health plan premiums and enrollee cost-sharing
Provider Network No restrictions if provider accepts Medicare Varies by plan; most health plans have some network restrictions


CMS sets monthly capitation rates for MA plans based on location and enrollee health risk factors.  CMS first calculates a base rate for each U.S. county to account for geographic variations in costs.  CMS then adjusts county base rates for each plan, using beneficiary-specific risk-adjustment factors.  This step ensures that variations in beneficiary health status and demographic factors are also accounted for in the rates paid to the MA plans for their enrolled beneficiaries.

Another factor in determining a plan’s capitation rate is its quality (star) rating.  Plans with higher ratings receive higher capitated payments from Medicare as compared to similar plans with lower ratings.

As a result, MA plans make significant investments in their quality programs, directly impacting contracted providers.  For example, a plan may establish a narrow network of high-performing providers to enhance its star ratings or may offer financial incentives to providers that meet specified performance standards tied to the plan’s star rating.

Beneficiary access to MA plans is nearly universal; CMS states that 99% of beneficiaries have at least one health plan in their area.  Many beneficiaries can choose between multiple MA plans.  During the Open Enrollment period, potential enrollees can shop MA plans in their location and compare qualities like premiums, supplemental benefits, drug plans, and others.

What to Watch

Given the MA program’s popularity and the healthcare industry’s push to implement alternative payment models (APMs), hospitals and physicians should pay close attention to specific aspects of MA.

  • Payer contracts that include MA products. The way in which MA plans reimburse providers for medical services varies widely.  Some make standard fee-for-service (FFS) payments, some have value-based payment incentives, and others may share some financial risk with providers.  It is very important for providers to understand these contracts and monitor them closely.

Also, MA plans do not follow the same requirements as Traditional Medicare.  For example, MA plans may not follow CMS’ “inpatient only” list and only reimburse for certain services on an outpatient basis.  In addition, some MA plans do not reimburse providers for chronic care management services because the plan offers that benefit to enrollees directly.  Make sure you know how the MA plan will reimburse for certain services and what services are covered.

  • Distribution of MA members by payer in provider’s service area.  Your service area may be dominated by a major MA plan or may have enrollees widely distributed across several different plans.  This distribution of enrollees may impact the plans’ contracting demands.
  • Local provider-sponsored plans.  Some MA plans are provider-sponsored, meaning a provider organization acts as the risk-bearing entity (the MA plan) and the primary provider network for its members.  If there is a provider-sponsored MA plan in your market, this may also impact the manner in which MA patients choose plans, and how other MA plans will contract with providers in your market.
  • Rate updates from CMS.  Although annual Medicare Advantage rate changes do not directly impact provider organizations, it is good to keep track of them.  Such changes can be among several factors that influence how MA plans will pay provider organizations.
  • How MA payers reimburse providers.  A recent study shows that many MA plans still reimburse providers on an FFS basis, but industry trends suggest that will not last forever.  Look for increased incorporation of pay-for-performance, shared savings, or risk-based elements in provider contracts.
  • Open enrollment for beneficiaries.  It is happening right now; it is also wise to monitor on an ongoing basis.  You’ll probably notice plenty of local plans, both existing and new, advertising to Medicare beneficiaries.  Plus, CMS releases its enrollment projections prior to open enrollment, which gives providers an idea of MA program uptake heading into the next year.
  • Overlap between MA and other APMs.  Many provider organizations have engaged in APMs, led either by Medicare or other private payers.  Provider organizations should consider how working with local MA plans can help meet their APM and value-based payment goals.
  • Potential competition.  More MA plans are providing services, including primary care services, directly to beneficiaries.  Through vertical integration, MA plans look to exercise more direct control over healthcare spending, thus increasing their influence on other beneficiary consumer characteristics and the plans’ profitability.

Taking the Next Step

With this background in mind, the second article in this Medicare Advantage series will highlight specific ways in which provider organizations can work more closely with MA plans.

PYA assists providers in developing and implementing Medicare Advantage strategies.  For more information, contact one of our PYA executives below at (800) 270-9629.

Read the next article in this series here.

© 2018 PYA
No portion of this article may be used or duplicated by any person or entity for any purpose without the express written permission of PYA

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