Medicare Advantage plans receive a star rating based on performance measures that are intended to help potential enrollees compare plans available in their area as well as encourage plans to compete based on quality. All plans that are part of a single Medicare Advantage contract are combined when calculating the quality rating (most contracts include several plans). The contract (and plans within the contract) are rated on a 1 to 5-star scale, with 1 star representing poor performance, 3 stars representing average performance, and 5 stars representing excellent performance.

As a result of changes made in the Affordable Care Act (ACA), plans that receive at least 4 stars and those without ratings (due to low enrollment or being too new) receive additional quality bonus payments from Medicare. The benchmark for plans that receive at least 4 stars is increased by 5 percent in most counties, and by 10 percent in double bonus counties (urban counties with low traditional Medicare spending and historically high Medicare Advantage enrollment). The benchmark for plans without ratings due to low enrollment or being too new is increased by 3.5 percent. The additional payment may be used to reduce cost sharing or cover the cost of providing supplemental benefits, but there is no requirement that plans use the portion of their payment attributed to bonus dollars for this purpose. However, plans’ ability to keep these and other payments as profit is not unlimited – Medicare Advantage plans must meet medical loss ratio (MLR) requirements of at least 85 percent, and are required to issue rebates to the federal government if their MLRs fall short of required levels.

This analysis examines trends in star ratings and Medicare bonus payments, and how these measures vary across plan types and firms. Two companion analyses present current information on Medicare Advantage enrollment and plan characteristics.

The majority of Medicare Advantage enrollees are in plans that receive high quality ratings (4 or more stars)

In 2021, most (80%) Medicare Advantage enrollees are in plans with quality ratings of 4 or more stars, an increase from 2020 (76%). An additional 5 percent of enrollees are in plans that were not rated because they were part of contracts that had too few enrollees or were too new to receive ratings. Among enrollees in employer-sponsored group plans, 98% are in plans with at least 4 or more stars (Appendix Table 1). Employer plans have consistently had higher quality ratings than plans generally available to Medicare beneficiaries.

Quality ratings are based on over 40 performance measures, including process indicators (e.g. screenings), outcome indicators (e.g. blood sugar level for diabetes), patient satisfaction (e.g. rating of health plan) and timeliness of appeals decisions. Quality ratings are assigned at the contract level, rather than for each individual plan, meaning that each plan covered under the same contract receives the same quality rating. Most contracts cover multiple plans, and can include individual plans, as well as employer-sponsored and special needs plans (SNPs).

Typically, quality ratings are calculated annually based on data from the previous year. However, due to the COVID-19 pandemic and disruptions to data collection, as well as “to avoid inadvertently creating incentives to place cost considerations above patient safety”, CMS modified the calculation of 2021 star ratings. For some measures, CMS used earlier values, which affected some plans’ ability to qualify for bonus payments in 2021 because they were not able to improve their scores on certain performance measures.

Medicare spending on bonus payments to Medicare Advantage plans totals $11.6 billion in 2021

Between 2015 and 2021, the total annual bonuses to Medicare Advantage plans have nearly quadrupled, rising from $3.0 billion to $11.6 billion. The rise in bonus payments is due to both an increase in the number of plans receiving bonuses, and an increase in the number of enrollees in these plans. Because unrated plans also receive bonus payments, a total of 85 percent of enrollees are in plans that are eligible to receive quality bonus payments, and 81 percent of enrollees are in plans that actually receive a bonus. A smaller share of enrollees are in plans that receive bonuses than are eligible due to the statutory provision (Section 1853(n)(4) of the Social Security Act) that caps benchmarks (including any quality adjustment) at the level they would have been prior to the ACA. This can result in an increase of less than 5 percent, or in some cases, no increase at all, to the benchmark, for otherwise eligible plans. Additionally, as more enrollees are in plans that are in bonus status, the average rebate per Medicare Advantage enrollee has more than doubled, rising from $184 per year in 2015 to $446 per year in 2021.

Employer-sponsored group plans account for a disproportionate share of bonuses

Employer-sponsored plans account for 38% of bonus payments, but just 19% of total Medicare Advantage enrollment in 2021. Since 2015, Medicare bonus payments to employer plans have increased steadily, despite stable enrollment; in 2015, employer plans accounted for 28% of bonus payments.

In contrast, SNPs, which are mostly comprised of people who are dually eligible for Medicare and Medicaid, account for 10% of all Medicare Advantage bonus payments, but 15% of the total Medicare Advantage population. The share of bonus payments to SNPs, has also increased slightly since 2015, when it was 6%, though enrollment has also risen slightly during that period. From 2015 to 2021, individual plans accounted for a decreasing share of bonus payments, declining from 67% to 52%. Yet, individual plans represent 67% of total Medicare Advantage enrollment in 2021.

Average bonus payments per enrollee are much higher and have increased faster for employer-sponsored group plans than for individual or special needs plans

The average bonus per enrollee in an employer plan is $886 in 2021, more than 2.5 times higher than for enrollees in either individual plans ($351) or SNPs ($309). While average bonuses in employer plans have consistently been higher than for other plans, the gap has increased substantially in recent years, driven by a rapid rise in the average bonuses for employer plans. Both the high share of enrollees in group plans that receive bonus payments (98% in 2021), as well as changes to the payment methodology for group plans implemented starting in 2017 contribute to this trend.

Total bonuses and average bonus per enrollee varies across firms

Total bonus payments by firm varies, largely tracking with the distribution of Medicare Advantage enrollment. UnitedHealthcare and Humana, which together account for 46% of Medicare Advantage enrollment, have bonus payments of $5.3 billion (46% of total bonus payments) in 2021. BCBS affiliates (including Anthem BCBS) and CVS Health each have $1.6 billion in bonus spending, followed by Kaiser Permanente ($1.1 billion), Cigna and Centene ($0.2 billion each).

The average bonus per enrollee ranges from $169 for beneficiaries in Centene plans to $660 for those in Kaiser Permanente plans. The variation across firms is in part explained by differences in the share of enrollees in plans that receive bonuses. Virtually all enrollees in a Kaiser Permanente plan (99%) are in a plan that receives bonus payments, while just 40% of Centene enrollees are in a plan receives bonus payments in 2021.

Discussion

In 2021, 81 percent of all Medicare Advantage enrollees are in plans that receive a bonus payment from Medicare based on star quality ratings (or because they are new), substantially higher than the share in 2015 (55 percent). Annual bonus payments from the federal government to Medicare Advantage insurers have increased correspondingly, quadrupling from $3 billion in 2015 to $11.6 billion in 2021.

While determining quality in Medicare Advantage is important to guide consumer decision making and encourage plans to compete based on quality, the Medicare Payment Advisory Commission (MedPAC) and others have raised questions about the methodology used to measure quality and the impact on Medicare spending. For example, in contrast to efforts to promote quality in traditional Medicare, which are either budget neutral or reduce Medicare payments for low-quality, the quality bonus program has resulted in higher (and increasing) Medicare spending. As Medicare Advantage enrollment continues to grow and fiscal pressure on the Medicare program increases, questions pertaining to the quality rating system, associated bonus payments, and related costs to Medicare and taxpayers may be on the agenda.

Jeannie Fuglesten Biniek, Meredith Freed, and Tricia Neuman are with KFF.
Anthony Damico is an independent consultant.

This work was supported in part by Arnold Ventures. We value our funders. KFF maintains full editorial control over all of its policy analysis, polling, and journalism activities.

Methods
This analysis uses data from the Centers for Medicare & Medicaid Services (CMS) Medicare Advantage Enrollment, Crosswalk and Landscape files for the respective year.

This analysis includes HMO, POS, local PPO, regional PPO, and PFFS plans. Enrollment counts in publications by firms operating in the Medicare Advantage market, such as company financial statements, might differ from KFF estimates due to inclusion or exclusion of certain plan types, such as SNPs or employer plans.

To calculate federal spending on quality bonus program payments we first obtained information on star ratings from the Part C and Part D Performance Data, Star Ratings Data Table. We then determined each plan’s benchmark using these data and information from the Medicare Advantage Rate Book, Rate Calculation Data. A plan’s bonus payment per enrollee is equal to the difference between its quality adjusted benchmark and the benchmark if the plan was not in bonus, multiplied by the relevant percentage based on its star rating and year (for example, 65% for plans with 4 stars and 70% for plans with at least 4.5 stars in 2021). The bonus per enrollee is multiplied by enrollees in March of each year to get total spending.

Appendix

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