Summary

Medicare Advantage (MA) organizations offer an alternative to the original Medicare fee-for-service (FFS) program. Payments to MA organizations are, in part, based on the revenue and expenditure projections MA organizations submit to the Centers for Medicare & Medicaid Services (CMS)--the agency that administers Medicare--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. In February 2008, we reported that, on average, MA organizations projected they would spend approximately 87 percent of their 2007 revenue on medical expenses, 9 percent on non-medical expenses, and that the remaining 4 percent would go to profits. The accuracy of MA organizations' projections is important because, in addition to determining Medicare payments, these projections also affect the extent to which MA beneficiaries receive additional benefits not provided under FFS and the amounts beneficiaries pay in cost sharing and premiums. This report responds to a Congressional request for additional information on the accuracy of MA organizations' projections. Specifically, this report focuses on how organizations' 2005 actual medical expenses, non-medical expenses, and profits compare to projections for the same year. A forthcoming report will provide a similar analysis of 2006 data.

On average, MA organizations' self-reported actual medical expenditures as a percentage of revenue were lower in 2005 than they had projected. MA 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. Because organizations spent less revenue on medical expenses than projected, they earned higher average profits than projected. On average, MA organizations' self-reported actual profit margin was 5.1 percent of total revenue, which is approximately $1.14 billion more in profits in 2005 than MA organizations projected. 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. Nearly two-thirds of beneficiaries were enrolled in health benefit plans offered by MA organizations for which the percentage of revenue dedicated to profits was greater than projected and the percentage of revenue dedicated to expenditures (medical and non-medical combined) was lower than projected. CMS officials stated that projections submitted by MA organizations in 2005 may be less reliable than those submitted in 2006 and subsequent years because, among other factors, actuaries were not required to attest to the accuracy of projections until 2006. In commenting on a draft of this report, CMS stated that the report was factually accurate but that the findings were not relevant to assessing the operation of the Medicare Advantage program in 2006 and subsequent years. Among other comments, CMS stated that the report should more clearly recognize the changes to the program that have occurred since 2005, and should mention that differences between projected and actual expenses and profits did not affect Medicare payments to MA organizations or the benefits they would have provided. We generally disagree with CMS. While we state in our report that the 2005 findings may not be representative of or generalizable to subsequent contract years, it would be incorrect to suggest that there is no relationship between the payment system in 2005 and the bidding process that began in 2006. Also, although differences between projected and actual expenses and profits may not have affected Medicare payments to MA organizations, the inaccuracy of projections could have impacted the types and costs of services that MA beneficiaries received. CMS also supplied specific technical comments that we incorporated as appropriate.