Spending on Medicare Advantage Quality Bonus Payments Will Reach at Least $12.8 Billion in 2023

To encourage Medicare Advantage plans to compete for enrollees based on quality, the Affordable Care Act (ACA) established a quality bonus program that increases payments to plans based on a five-star rating system. Plans may, but are not required to, use the additional payments to cover the cost of supplemental benefits, including reduced cost sharing, services not covered by traditional Medicare (e.g., vision, hearing and dental), and rebates against the Part B and/or Part D premiums. This analysis examines trends in bonus payments to Medicare Advantage plans, enrollment in plans in bonus status, and how these measures vary across plan types and firms, using publicly available information on Medicare Advantage enrollment, payment rates, and quality ratings.

Key takeaways:

  • Federal spending on Medicare Advantage bonus payments has increased every year since 2015 and will reach at least $12.8 billion in 2023, an increase of nearly 30% ($2.8 billion) since 2022.
  • Most Medicare Advantage enrollees (85%) are in plans that are receiving bonus payments in 2023.
  • The average bonus payment per enrollee is highest for employer- or union-sponsored Medicare Advantage plans ($460) and lowest for special needs plans ($374).
  • Bonus payments vary substantially across firms, with UnitedHealthcare receiving the largest total payments ($3.9 billion) and Kaiser Permanente receiving the highest payment per enrollee ($523).

Background on the Medicare Advantage Quality Bonus Program

A key feature of the quality bonus program is the star rating system. Star ratings are used to determine two parts of a Medicare Advantage plan’s payment: (1) whether the plan is eligible for a bonus, and (2) the portion of the difference between the benchmark and the plan’s bid that is paid to the plan. The benchmark is the maximum amount the federal government will pay for a Medicare Advantage enrollee and is a percentage of estimated spending in traditional Medicare in the same county, ranging from 95 percent in high-cost counties to 115 percent is low-cost counties. The bid is the plan’s estimated cost for providing services covered under Medicare Parts A and B.

Since 2015, plans that receive at least four (out of five) stars have their benchmark increased. For most plans in bonus status, the benchmark is increased by five percentage points. Plans in “double bonus” counties – defined as urban counties with low traditional Medicare spending and historically high Medicare Advantage enrollment—have their benchmark increased by 10 percentage points. In addition, the benchmarks for plans without ratings due to low enrollment or being too new are increased by 3.5 percentage points. The benchmarks are capped and cannot be higher than they would have been prior to the ACA. This can result in plans that are eligible under the quality bonus program receiving a smaller increase to their benchmark, or in some cases, no increase at all.

The Quality Bonus Program in 2023

Medicare Advantage plans will receive at least $12.8 billion in bonus payments in 2023.

Estimated bonus payments to Medicare Advantage plans have increased sharply, more than quadrupling from $3.0 billion in 2015 to $12.8 billion in 2023 (Figure 1). Since 2022, payments have risen $2.8 billion, or 28%, growing faster than enrollment over the same period, which rose 8%. These estimates are a lower bound because bonus payments are risk adjusted, which we expect to increase bonus payments. Additionally, the estimates do not include additional spending that results if plans increase their bids when their benchmark is higher because of being in bonus status. For example, a plan might increase its bid to increase payments to providers, add more expensive providers to its network, or retain a larger amount as profit, provided they meet medical loss ratio requirements.

The distribution of bonus spending across plan types is similar to the distribution of enrollment in 2023. Individual plans account for 64% ($8.2 billion), employer plans account for 19% ($2.5 billion), and special needs plans account for 17% ($2.1 billion) of bonus spending in 2023 (Appendix Table 1). (Employers contract with Medicare Advantage plans to provide health coverage to their retirees.)

Most Medicare Advantage enrollees (85%) are in plans that receive bonus payments.

In 2023, 26 million people, or 85% of Medicare Advantage enrollees, are in plans that receive bonuses. That compares to just under 9 million people (55%) in 2015 (Figure 2). The share of enrollees in plans that receive bonus payments in 2023 is larger than the previous year (75%), and the highest since the current iteration of the program has been in place. Since the impact of star ratings on payment lags a year (i.e., 2023 payments are based on 2022 star ratings), the expiration of several policies in place during the COVID-19 Public Health Emergency, which reduced 2023 star ratings relative to 2022, will likely lead to a smaller share of enrollees in plans that receive bonuses in the 2024 plan year.

Average annual bonus payments are highest for enrollees in employer- and union-sponsored plans.

The average annual bonus per Medicare Advantage enrollee has also increased over time, rising from $184 in 2015 to $417 in 2023 (Appendix Table 2). Average bonuses in group employer- and union- sponsored plans have consistently been higher than for other plans due to higher average star ratings. The average bonus per enrollee in a group employer- or union-sponsored Medicare Advantage plan is $460 in 2023, compared to $417 for individual plans and $374 for special needs plans (SNPs) (Figure 3).

Bonus payments by firm largely tracks the distribution of Medicare Advantage enrollment.

UnitedHealthcare and Humana, which together account for 47% of Medicare Advantage enrollment, are expected to receive 49% of total bonus payments in 2023, or $3.9 billion dollars for UnitedHealth and $2.3 billion dollars for Humana. (Figure 4). BCBS affiliates (including Anthem BCBS) and CVS Health will receive $1.7 and $1.3 billion in bonus payments, respectively, followed by Kaiser Permanente ($966.8 million), Centene ($321.6 million) and Cigna ($247.3 million).

The average bonus per enrollee ranges from $251 for people in Centene plans to $523 for those in Kaiser Permanente plans. The variation in total bonus payments across firms corresponds to 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 because it has a quality rating of at least four stars, while just 55% of Centene enrollees are in a plan that receives bonus payments in 2023.

Discussion

Annual bonus payments from the federal government to Medicare Advantage insurers have increased every year since 2015 and will reach at least $12.8 billion in 2023. Spending on bonus payments has grown faster than enrollment in Medicare Advantage plans. The growth is driven by an increasing share of Medicare Advantage enrollment in plans with at least a 4-star quality rating, explained in part by a larger number of plans receiving ratings at or above this threshold. This spending comes at a time when the Medicare program is facing growing fiscal pressures, which are exacerbated by growth in quality bonus program spending. Growth in the quality bonus program is projected to lead to faster growth in Medicare Advantage benchmarks (and corresponding spending) compared to traditional Medicare spending in upcoming years.

The average bonus per enrollee varies across types of plans and has historically been lowest for special needs plans and highest for group employer- and union- sponsored plans. Relatively low bonus payments for special needs plans, which enroll higher need and more vulnerable beneficiaries, and higher bonus payments for employer plans that tend to provide retiree health benefits to higher income beneficiaries, raise potential concerns about the implications of the quality bonus program for equity.

Quality indicators for Medicare Advantage were established to help consumers make informed decisions when choosing among Medicare Advantage plans and encourage plans to compete based on quality. However, the Medicare Payment Advisory Commission (MedPAC) and others have argued that the star ratings  incorporate too many measures, do not adequately account for social risk factors, and may not be a useful indicator of quality because star ratings are reported at the contract rather than the plan level.

As of 2023, more than half of eligible Medicare beneficiaries are enrolled in a Medicare Advantage plan and enrollment is projected to continue to grow throughout the next decade. Understanding the effects of the quality rating system and associated bonus payments, including the implications for Medicare spending and beneficiary premiums, will be increasingly important as Medicare Advantage enrollment continues to climb.

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

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

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 for the previous plan year. These are the ratings on which a plan’s benchmark is based. We then determined each plan’s benchmark using these data and information from the Medicare Advantage Rate Book, Rate Calculation Data, which provides the benchmark by county for plans with a 5%, 3.5% and 0% bonus. A plan’s bonus payment per enrollee is equal to the difference between its quality adjusted benchmark (either the 5% or 3.5% bonus rate) and the benchmark if the plan was not in bonus (0% bonus rate), 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 2023). The bonus per enrollee is multiplied by enrollees in March of each year to get total spending. Actual bonus payments will depend on the risk scores of Medicare Advantage enrollees. According to the plan payment data release by CMS, the average risk score of MA enrollees was above 1 for every year from 2015 through 2021 (the most recent year for which data are available), meaning our estimates likely understate actual spending.

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