Medicare Advantage Pays Hospitals Less than Medicare

Researchers at Stanford University conducted a study of hospital payments by Medicare Advantage (MA) plans, Fee-for-Service (FFS) Medicare, and commercial insurers in 2009 and 2012 and found MA plans pay lower prices than FFS for most (but not all) types of admissions and in most (but not all) geographic areas. The study found:

• MA plans paid 8 percent less than FFS after adjusting for diagnostic-related group (DRG) and geographic area differences between MA and FFS.
• If differences in hospital networks are also taken into account, MA plans paid 5.6 percent less than traditional Medicare. Thus, about one-third of the 8 percent difference in MA and FFS prices is attributable to narrower MA networks.
• MA plans in areas with the highest FFS spending paid lower hospital prices than MA plans in areas with the lowest FFS spending.
• MA plans with the highest enrollment penetration rates paid lower hospital prices compared with MA plans in areas with lower MA penetration rates.
• MA plans pay less for admissions with short lengths of stay.

Commercial insurer rates were much higher than either MA or Medicare FFS rates. Commercial plans pay higher prices than FFS for almost all types of admissions in almost all geographic areas. Higher FFS spending was associated with lower commercial prices.

The researchers (Laurence C. Baker, M. Kate Bundorf, M. Devlin, and Daniel P. Kessler) undertook the study because the literature provides no systematic analysis of the unit prices MA plans pay relative to FFS payments and whether lower MA costs are due to lower quantities of services per patient, lower prices per treatment, or both. According to the researchers, the conventional wisdom is MA plans save costs by lowering the quantity of services, and MA plans pay more to providers because they lack the FFS monopsony purchasing power. The study concludes at least part of the cost advantage of MA plans is due to lower prices and not lower quantities than FFS.

The researchers recommended Medicare consider the market environment more broadly than the level of FFS spending when setting MA payments. The researchers also recommended FFS payments to hospitals be adjusted across geographic differences and DRGs to better reflect the market.

The study used the Centers for Medicare & Medicaid Services (CMS) FFS data on all hospital payments and claims data for patients from the Health Care Cost Institute (HCCI), which represents 27 percent of the non-elderly population and 31 percent of the elderly MA population. The actual hospital prices negotiated with plans were not available since they are considered proprietary.

The study methodology used the average price per admission across metropolitan areas adjusted for differences in hospital networks, geographic areas, and case mix. To account for case mix, the researchers used only the DRG pairs that were common to MA and FFS. The researchers noted several limitations to their study findings, for example, HCCI claims data are not identical to the national distribution of MA and commercial enrollees and do not capture unobserved differences in patient severity across insurers, e.g., MA and commercial hospital admissions may be more severe than FFS admissions due to prior admission and prescreening.

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