Updated at 2:17 p.m. on Nov. 24 to reflect continuing legislation.
Medicare Advantage allows seniors to receive their Medicare benefits through a private health insurance plan like an HMO, PPO or private fee-for-service plan. But it overpays in relation to traditional Medicare plans. Under Democrats' proposals, the benchmarks for payments would be reduced either to the same levels as fee-for-service or an average of the providers' proposals.
Addressing the AARP in July, President Obama left little room for doubt about his position on one of Medicare's more controversial programs, calling Medicare Advantage "wasteful" and saying it amounted to "giveaways that boost insurance company profits but don't make you any healthier."
Congress created Medicare+Choice in 1997 to allow people to receive their Medicare benefits through a private health insurance plan as opposed to the traditional fee-for-service program. In 2003, Part D drug coverage was added to the program and it was renamed Medicare Advantage. Since then, it has grown to include 10.2 million recipients, about one-fifth of all Medicare enrollees. Thanks to a bidding system and rate minimums that ensure benefits don't fall below traditional Medicare levels, Medicare Advantage enrollees often see lower out-of-pocket costs while also receiving more benefits.
A 2009 study from America's Health Insurance Plans showed that enrollees in Medicare Advantage receive 33 percent more primary care but visit the emergency room 27 percent less of the time and have 42 percent fewer readmissions than traditional Medicare. Additionally, a 2008 AHIP survey showed that 88 percent of seniors in Medicare Advantage were either somewhat or very satisfied with the plan, about on par with the 89 percent of seniors satisfied with Medicare.
According to a June 2009 MedPAC analysis, however, Medicare Advantage plans cost taxpayers on average 14 percent more than a traditional Medicare plan. Much of this is due to a process of bidding in each county receiving coverage. Insurance companies submit their plans for the payment per patient they would receive. The government pays those proposals according to a benchmark established by the Centers for Medicare and Medicaid Services based on last year's spending and the expected economic growth. Plans where bids come in under the benchmark get back 75 percent of the difference to pay out in benefits, while bids exceeding the benchmark have to pay 75 percent of the difference.
Medicare Advantage was designed to bring private plans into the mix and allow rural areas of the country to get managed care. But critics say the plan now unfairly pays more to insurance companies, and they want to level the playing field with traditional Medicare. Gail Wilensky, an economist and senior fellow at the international health foundation Project HOPE, said that the current bidding process doesn't work as it was designed.
"They have talked about competitive bidding, but they have very little experience doing it," Wilensky said. "Traditionally it has just been private plans competing and leaving Medicare off on its own."
Proponents of Medicare Advantage say that's just why the plan works.
"The competition among plans results in more benefits for seniors," said John Goodman, president of the right-leaning National Center for Policy Analysis. "The more you pay, the more benefits they'll create. That means drug coverage, more primary care and more additional things that basic Medicare doesn't cover."
To cut down on the discrepancy in payments between Medicare Advantage and fee-for-service Medicare, some are proposing a change in the benchmark system. In one plan, the benchmark for each county would be set to the projected per-capita spending under traditional fee-for-service Medicare. Another would set the benchmark to the average of the plans received.
However, analysts say that cutting the payment rates means cutting benefits.
"Health insurance is like anything else," said Joseph Antos, a health care scholar at the conservative American Enterprise Institute. "If you pay less, things will be pared back. You'll see consolidation under Obama's plan. You're just not going to see private plans in the parts of this country where they can't operate."
The Congressional Budget Office estimated in December that setting benchmarks for Medicare Advantage private plans to match local fee-for-service levels would save $55 billion by 2014 and $157 billion by 2019. Using a competitive bidding process to set Medicare Advantage benchmarks would save $35 billion by 2014 and $158 billion by 2019.
Both the House and Senate bills cut from Medicare Advantage, though to different degrees. The Senate bill establishes a system based on competitive bids, while the House bill ties Medicare Advantage plans to fee-for-service rates.
December 2008 CBO report on health care options (setting benchmarks equal to fee-for-service spending is Option 63; the bidding process is Option 65)