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Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2006
Jennifer R. Luong (au)
The fed. govt.'s spending on the Medicare Advantage (MA) program has grown substantially in recent years, from approx. $60 billion in 2006 and $77 billion in 2007 to an estimated $91 billion in 2008. MA organizations provide health care coverage to Medicare beneficiaries through private health plans, thus offering an alternative to the original Medicare fee-for-service (FFS) program. Payments to MA organizations are, in part, based on the projected expenditures organizations submit in their bids for providing Medicare-covered services, as well as actual enrollment and beneficiary health status. Once Medicare payments are determined, they are not modified based on differences between actual and projected expenses. MA organizations are not required to submit claims data, but they must report actual expenditures for the year 2 years prior to the upcoming contract year. In June 2008, GAO reported that for 2005, MA organizations generally spent less on medical expenses and earned more profits than projected. MA organizations' self-reported actual profit margin was approx. 5% of total revenue, on average, which was approximately $1.1 billion more in 2005 than MA organizations had projected. On average, MA organizations reported earning profits of 6.6% of total revenue in 2006--which was higher than their projected profits of 4.1%. MA organizations reported spending an average of 83.3% of total revenue on medical expenses, but had projected spending an average of 86.9% of total revenue on those expenses. More than half of beneficiaries were enrolled in health benefits plans offered by MA organizations for which profits as a percentage of revenue were greater than projected and the combined medical and non-medical expenses as a percentage of revenue were lower than projected. Among the three types of MA health plans with the largest enrollments--HMOs, PPOs, and PFFS plans--there was a consistent pattern of actual profits being higher than projected and medical expenses being lower than projected. Projections of profits were closer to actual profits as a percentage of revenue in 2006 (2.5 percentage points difference) than they were in 2005 (3.2 percentage points difference). However, largely due to an approx. 40% increase in enrollment between the 2 years, the actual dollar amount of the difference between actual and projected profits increased from $1.1 billion in 2005 to $1.3 billion in 2006. Illus.
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