Medicare Advantage organizations had lower spending, higher profits than initial projections

July 11, 2008

Medicare Advantage (MA) organizations saw profits of $1.14 billion above their initial projections in 2005 while, on average, spending less on medical expenses (85 percent of total revenue) than they anticipated (90.2 percent), the Government Accountability Office (GAO) found in a recent report.

This material originally appeared in the June 27, 2008, issue of Health Lawyers Weekly, a publication of the American Health Lawyers Association.

Medicare Advantage (MA) organizations saw profits of $1.14 billion above their initial projections in 2005 while, on average, spending less on medical expenses (85 percent of total revenue) than they anticipated (90.2 percent), the Government Accountability Office (GAO) found in a recent report.

The letter report, “Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005 (GAO-08-827R),” was requested by House Ways and Means Subcommittee on Health Chairman Pete Stark (D-CA).

“Private plans in Medicare spend even less on medical care than they report to (Centers for Medicare and Medicaid Services) -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,” Stark said in a statement.

But the CMS in commenting on the report said the 2005 figures should not be viewed as representative of the program due to notable changes in subsequent years, including a requirement that actuaries attest to the accuracy of projections and differences in the Adjusted Community Rate Proposal process.

“The report does not fully recognize that the 2005 base year was vastly different from the current competitive bidding process mandated by the [Medicare Modernization Act of 2003]," CMS Acting Administrator Kerry Weems said.

CMS also emphasized that the differences between projected and actual expenses and profits did not affect Medicare payments to MA organizations or the benefits they would have provided and that one outlier MA organization was responsible for nearly half the aggregate difference.

GAO said, however, 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.”

According to GAO, nearly two-thirds of beneficiaries were enrolled in MA plans for which the percentage of revenue dedicated to profits was greater than projected, while expenditures fell below initial forecasts.

“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,” Stark said.

Read the GAO report.