Medicare Advantage (MA), also known as Medicare Part C, is an alternative to Original Medicare — also called Medicare Part A and Medicare Part B. Private insurance companies that are approved by the Centers for Medicare & Medicaid Services (CMS) can offer Medicare Advantage, but the way it works and how much it costs slightly differs from its original counterpart.
Here, we're breaking down the costs of Medicare Advantage, how its plans compare to traditional Medicare, and strategies for effectively managing these programs.
What is Medicare Advantage and How Is It Different from Traditional Medicare?
The main differences between traditional Medicare and Medicare Advantage lie in the offerings' structure, coverage and flexibility. But before diving into those three components, let's have a look at these options more broadly.
Traditional Medicare
Regular Medicare is a fee-for-service system, meaning the government pays doctors and hospitals directly. It's broken down into two parts: Part A covers hospital stays, skilled nursing and hospice care, while Medicare Part B covers doctor visits, outpatient care and preventive services. In some cases, enrollees will require a separate Medicare Part D plan to cover prescription drugs.
Medicare Advantage
Medicare Advantage (Medicare Part C) is an alternative system offered by private insurance companies approved by Medicare. These plans bundle Parts A and B, and in most cases Part D as well, into a single plan. They typically have lower out-of-pocket costs than traditional Medicare and may offer additional benefits like vision or dental coverage.
Key differences between regular Medicare and Part C include:
- Provider flexibility: Traditional Medicare offers more flexibility in choosing healthcare providers and doesn't require referrals, whereas Medicare Advantage plans typically have network restrictions and may require referrals.
- Coverage: Medicare Advantage plans often include additional benefits and integrated prescription drug coverage, while traditional Medicare usually requires separate plans for these.
- Costs: Medicare Advantage plans may have different cost structures, including out-of-pocket limits and potentially lower premiums, but might also come with network restrictions and additional rules. Traditional Medicare beneficiaries often purchase Medigap policies to help cover out-of-pocket costs.
The Growing Popularity of Medicare Advantage
Since 1988, the number of employers that offer retiree health benefits to employees has shrunk substantially — from 66% in 1988 to 21% in 2023, according to a recent KFF Employer Health Benefits Survey. But among those that still offer these benefits, Medicare Advantage has become a popular option. The same survey revealed that more than half (52%) of firms with 200 or more employees that offer retiree health benefits do so through a Medicare Advantage plan, which is up double from 2017.
KFF also reveals that employers shifting to Medicare Advantage may be doing so to maintain attractive benefits and reduce costs instead of scaling back or terminating coverage.
Medicare spending per enrollee is expected to rise, too, MedPAC estimates. In 2024, the Medicare program is expected to spend 22% more per MA enrollee compared to similar traditional Medicare beneficiaries — including employer plans — which is equal to approximately $83 billion.
A Cost Breakdown of Medicare Advantage Plans
From an insurance company's perspective, the costs associated with Medicare Advantage plans can be broken down into two main categories: costs to acquire and manage enrollees and costs to deliver healthcare services.
Costs to Acquire and Manage Enrollees
Administrative costs that come with Medicare Advantage include:
- Marketing and sales: Insurance companies spend money on marketing and outreach to attract potential enrollees to their Medicare Advantage plans. This can include advertising, educational seminars and agent commissions.
- Member administration: There are ongoing costs associated with enrolling members, managing their accounts and providing customer service.
Costs to Deliver Healthcare Services
More substantially, costs to actually deliver healthcare services encompass most of the expenses, including:
Risk Payments
The primary way Medicare Advantage plans generate revenue is through risk payments from the Centers for Medicare & Medicaid Services (CMS). These payments are based on the health status of enrollees, with sicker members resulting in higher payments. This incentivizes plans to manage enrollees' health proactively.
Medical Claims
The insurance company pays for covered medical services provided to its enrollees. This includes inpatient and outpatient care, prescription drug coverage (for plans with Medicare Part D) and other covered benefits. The goal here is to keep these costs as low as possible while still providing quality care.
Network Management
Insurers negotiate rates with healthcare providers in their networks to secure lower rates to control costs.
Quality Improvement
Medicare Advantage plans are required to invest in programs to improve the quality of care for their enrollees. This can include disease management programs, preventive care initiatives and patient education.
The key to profitability for a Medicare Advantage plan is to manage the balance between these costs. Ideally, the risk payments received from CMS should be enough to cover the costs of delivering healthcare services and administrative costs while leaving enough room for profit.
There are a handful of other important factors that affect the cost of these programs, including:
- Plan design or type of plan.
- Health status of enrollees.
- Plan popularity and market competition.
- Drug coverage.
- Star ratings.
Reducing the Cost Plans for Your Enrollees
There are a few effective ways insurers can help to reduce overall Medicare costs — both for themselves and enrollees:
- Focus on preventative care: Preventative screenings, wellness programs and chronic disease management can help identify and address health issues early on. This can prevent more expensive interventions down the line, like hospitalizations or emergency room visits.
- Reduce administrative expenses: Streamlining administrative processes by investing in technology and automation can help reduce overhead costs.
- Negotiate better rates with providers: Actuaries can play a role here by analyzing data to identify areas for negotiation with hospitals, doctors and other healthcare providers, which can lead to more favorable rates.
It's important to remember that cost reduction shouldn't come at the expense of quality care. Here are some additional considerations:
- Maintaining star ratings: Medicare Advantage plans are rated on a 1-5 star system based on member satisfaction, quality of care and health outcomes. Lower star ratings can lead to lower enrollment and revenue for insurers.
- Balance cost and benefits: Finding the right balance between cost reduction and offering attractive benefits is crucial for attracting and retaining enrollees in a competitive market.
Get Expert Medicare Advantage Consulting
The Medicare landscape is in constant flux. To stay competitive and compliant, you need strategic consulting so you can optimize your MA plans for now and the future.
Actuaries are uniquely positioned to help your MA plans succeed in today's competitive market. Here are just a few of the ways experts at Lewis & Ellis LLC set you up for triumph:
Developing Competitive Bids
Actuaries are instrumental in crafting bids that are competitive in the market. Our experts will analyze data on competitor offerings, including premiums, benefits and target populations, to help you design a plan that is attractive to each Medicare Advantage enrollee.
Risk Assessment and Mitigation Strategies
We'll assess the potential risks associated with proposed MA plans, considering factors like the health status of the target population, the potential for fraud or abuse and unexpected changes in healthcare costs. From there, our experts will help you develop strategies to effectively mitigate these risks and ensure the plan's long-term sustainability.
Regulatory Compliance
When it's time to bid, we'll ensure your thoughtfully crafted proposals comply with all relevant regulations set by the Centers for Medicare & Medicaid Services (CMS). This includes meeting capital adequacy requirements, risk adjustment methodologies and enrollee benefit standards.
Learn more about how Lewis & Ellis LLC can equip your insurance company with the knowledge and strategy to attract more Medicare Advantage enrollees while maintaining compliance and optimizing costs, with services that include:
- Strategic consultation.
- Bid prep and submission.
- Compliance.
- MA risk adjustment and star ratings.
- MA encounter data submission.
- And more.
Your best Medicare Advantage plans are just a click away. Contact Lewis & Ellis LLC today.