The Role of Medicare Advantage in Provider Payment Innovation


Medicare Advantage (MA) is an important source of health insurance coverage for Medicare beneficiaries; the number of enrolled beneficiaries has grown steadily since the early 2000s, with over one-third of Medicare beneficiaries (19 million individuals) enrolled in an MA plan in 2017. An MA organization is a private insurer that has contracted with the Centers for Medicare and Medicaid Services (CMS) to enroll Medicare beneficiaries in return for a fixed monthly payment per beneficiary from CMS. The MA organization then negotiates payment contracts with health care providers to serve its members.

Since both MA organizations and original Medicare serve substantial shares of Medicare beneficiaries, both are active innovators in alternative payment models (i.e., models other than traditional fee-for-service) used to compensate providers. The goal of alternative payment models is to encourage providers to deliver higher quality care at a lower cost. Over 40 percent of payments from MA plans to providers in 2016 were made under some type of alternative payment model[1] compared to 29 percent of payments from CMS to providers in the original Medicare program.[2]

MA organizations’ leading role in advancing provider payment reform offers a number of key advantages:

  • Financial Incentives to Decrease Costs and Increase Quality

Like any insurer, MA organizations have lower costs (and thus higher profits) when their members use fewer or less expensive services. MA plans also receive a higher payment from Medicare (and thus higher profits) when quality of care, as measured by Medicare’s Star Rating system, is higher. Thus, MA plans have financial incentives that align with the goals of alternative payment models (i.e., higher quality care at a lower cost).

  • Flexibility to Negotiate Directly with Providers

CMS does not negotiate payments with individual provider organizations. Instead, CMS defines payment arrangements, and it is up to individual provider organizations to decide whether accept those terms. MA plans, like commercial insurance plans, have flexibility to negotiate the adoption of new payment models with individual provider organizations, which may be one reason why MA organizations are making more payments to providers under alternative payment models than CMS is making under original Medicare. Further, MA-led innovation can complement and enhance CMS-led demonstrations. Under a new demonstration beginning in 2019, CMS will allow participation in qualifying MA-sponsored alternative payment models to substitute for original Medicare’s alternative payment models.

  • Networks to Steer Members to Efficient Care

Almost two-thirds of members enrolled in an MA plan are in a Health Maintenance Organization (HMO), organizations which cover services within a network of providers. By encouraging members to seek care within their provider network, HMOs may increase coordination between health care providers and the patients whose health they are responsible for managing. This differs from CMS, which covers services from all providers who qualify for and accept Medicare rates.

Accountable Care Organizations (ACOs), which aim to achieve better coordination of care among original Medicare (i.e., non-MA) beneficiaries, provide an interesting contrast to MA organizations. While ACOs coordinate care, beneficiaries may still receive services from any Medicare provider. As a result, the ACO is held responsible for patient outcomes and spending even when care is provided outside of the ACO. A high volume of ACO-aligned beneficiaries seek care outside of ACOs, particularly for visits to specialists, and ACO efforts to control this “leakage” have had little impact.[3] MA organizations thus have an advantage over ACOs in that they can more directly steer patients to relatively efficient providers and can better manage overall care because care is generally contained to plan-affiliated providers. 

While these advantages leave MA plans poised to take advantage of alternative payment models, there’s one key outstanding question: What value do MA plans add to payment innovations?

According to a recent Kaiser Health News article, roughly 10 percent of MA members receive their care under a global risk contract payment model. Under a global risk contract, the provider assumes all financial risk for a patient’s care.  

Sound familiar? The terms of a global risk contract parallel how MA organizations are paid by CMS. An MA plan that has global risk contracts with all of the providers in its network receives a fixed revenue per beneficiary from Medicare and pays a fixed cost per member to providers. There is no financial risk for the insurer; instead, providers absorb all the risk.

So if providers are willing to accept significant or full financial risk for Medicare beneficiaries’ care, what value do MA plans add to payment innovations?

Under a global risk contract, the MA plan passes along revenue from Medicare, after taking a percentage for themselves, to the provider organizations. The MA plan adds value via developing the network of providers, measuring and rewarding quality, performing administrative functions, and even re-insurance – much like the role of third-party administrators that support self-insured employers. However, under global risk contracts, MA plans do not serve the traditionally primary insurers’ role of absorbing financial risks.

Provider organizations may respond to absorbing the primary risk-bearing role of insurance by demanding higher rates from MA plans or attempting to cut out the middle-man. Cutting out the middle-man could take various forms. For example, the provider organization could transition to an MA provider-sponsored organization with its own MA contract or it could take on a joint venture with an existing health insurer. Or, as the Medicare Payment Advisory Commission (MEDPAC) has noted,[4] the provider organization might start by becoming an ACO.

There are notable short-term advantages to MA organizations leading provider payment innovation: they have financial incentives aligned with the goals of provider payment innovation and have tools  that can accelerate implementation of new payment models. However, innovations that shift financial risk to provider organizations leave little or no insurance responsibility for MA organizations, which is likely to impact the longer-term financial outlook for MA organizations. It is unclear if or how these longer-term considerations influence the innovation strategies used by MA organizations. To date, MA organizations seem to be embracing provider payment innovation that aligns with CMS objectives. If this continues, MA organizations may prove to be a key catalyst for provider payment reform.