Who Pays for Medicare Advantage Plans

Who pays for Medicare Advantage plans? The answer involves both the federal government and enrollees.

Medicare Advantage plans are funded through payments from the Centers for Medicare & Medicaid Services to private insurers, who in turn set the cost-sharing for beneficiaries. Enrollees also contribute by paying their Part B premiums and any additional plan-specific charges.

Our detailed guide explains how these payments work and the impact on your healthcare expenses.


Key Takeaways


  • The funding for Medicare Advantage plans comes primarily from the government, which pays private insurers a predetermined monthly amount per enrollee; these funds help insurers determine costs, premiums, and additional benefits within the plans.


  • Medicare Advantage plans often have complex cost-sharing structures and out-of-network limits, which can affect overall healthcare expenses for enrollees; quality ratings play a crucial role in plan performance with high-rated plans receiving bonus payments from CMS.

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The Basics of Medicare Advantage Plans


Who Pays for Medicare Advantage Plans, The Basics of Medicare Advantage Plans


Medicare Advantage plans serve as an alternative to traditional Medicare. They provide Medicare-covered benefits through private health insurance plans, often adding supplemental benefits like vision, dental, and hearing care.

A significant number of Medicare Advantage plans even offer prescription drug coverage. Notably, 73% of Medicare Advantage enrollees choose plans that do not charge a premium, establishing them as an economical option for many beneficiaries.

As an alternative to traditional Medicare, individual Medicare Advantage plans have their unique cost structure and set of benefits. Grasping these differences can assist beneficiaries in making enlightened choices regarding their healthcare coverage.


What is Medicare Advantage?

Medicare Advantage is a private health insurance plan funded by the government that offers Medicare-covered benefits.

To be eligible for Medicare Advantage, individuals need to:

  • Be 65 years of age (in most cases)


  • Be a U.S. citizen or a legal permanent resident for five consecutive years


  • Enroll in Original Medicare (Part A and Part B) as these are required Medicare Advantage plan components.


Enrollment can be initiated by contacting the plan directly or by calling 1-800-MEDICARE.


Traditional Medicare vs. Medicare Advantage

Though both traditional Medicare and Medicare Advantage offer healthcare coverage, significant differences in provider networks and cost-sharing exist. Some key differences between the two include:

  • Medicare Advantage plans often have unique requirements and limitations, such as the necessity for prior authorization and restrictions on out-of-network services.


  • Traditional Medicare allows you to see any doctor or specialist who accepts Medicare, while Medicare Advantage plans typically have a network of providers that you must use.


  • The connection between extensive provider networks and care quality in Medicare Advantage plans remains uncertain.


It’s important to carefully consider your options and choose the plan that best meets your healthcare needs.


Types of Medicare Advantage Plans


Who Pays for Medicare Advantage Plans, Types of Medicare Advantage Plans


There are several types of Medicare Advantage plans, with Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs) being the most prevalent. These plans differ primarily in their cost structure and network restrictions.

Special Needs Plans are another type of Medicare Advantage plan, specifically catering to individuals with extensive healthcare needs, including skilled nursing facility care.

These plans often provide enhanced benefits such as transportation and meal services, distinguishing them from other Medicare Advantage offerings.

Funding Medicare Advantage: Government Payments and Private Insurers


Who Pays for Medicare Advantage Plans, Funding Medicare Advantage: Government Payments and Private Insurers


The primary source of funding for Medicare Advantage plans comes from the Centers for Medicare & Medicaid Services. The agency provides predetermined monthly payments to private insurance companies based on the anticipated healthcare expenses of each enrollee.

These payments are then used by the private insurers to manage the plans and determine costs.

The insurers participate in an annual bidding process to enroll Medicare beneficiaries in their Medicare Advantage plans, based on their assessment of the costs associated with providing Part A and Part B services, including and part b benefits, to the average beneficiary.


How the Federal Government Pays for Medicare Advantage

The federal government allocates funds to support Medicare Advantage plans through predetermined monthly payments to private insurance companies.

The rate at which these payments are made is influenced by various factors such as the effective growth rate and risk adjustment, among other policy changes announced by CMS.

Plans that attain a rating of 4, 4.5, or 5 stars are eligible to receive a 5 percent bonus to their benchmark level, incentivizing the provision of high-quality care.


The Role of Private Insurers in Medicare Advantage

Private insurers hold a significant role in Medicare Advantage, offering health insurance plans that deliver Medicare-covered benefits. They are responsible for establishing provider networks to negotiate healthcare prices and ensure adherence to applicable regulations.

The insurers calculate the expenses of Medicare Advantage plans based on the set payment they receive from Medicare, which is a specific amount per enrollee per month. This amount varies by county, impacting how they establish premiums, deductibles, and other related costs for plan enrollees.


Rebate Dollars and Their Impact on Plan Costs

Rebate dollars, derived from Medicare payments, are used by insurers to reduce plan expenses, including Part D premiums. The average rebate per enrollee is $2,350 above the estimated costs of providing Medicare-covered services.

Insurers can use these funds to cover premiums for supplemental benefits for all enrollees or for administrative expenses and profits associated with offering these extra benefits.

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Medicare Part B Premiums and Medicare Advantage Plans

Who Pays for Medicare Advantage Plans, Medicare Part B Premiums and Medicare Advantage Plans

Medicare Part B premiums play a significant role in the cost structure of Medicare Advantage plans, including the Medicare Part B premium itself. These premiums are determined by applying a percentage, ranging from 35% to 85%, to the total cost.

The premium amount is subject to annual variation and is currently established at $164.90 per month for 2023, with a projected increase to $174.70 in 2024. Beneficiaries with incomes above $103,000 for individuals and $206,000 for married couples are required to pay higher premiums.


The Importance of Medicare Part B Premiums

Comprehending the importance of Medicare Part B premiums is key to understanding Medicare Advantage plan costs. Individuals enrolled in Medicare Advantage plans are obligated to continue paying their Part B premium in addition to any plan-specific premiums.

Fulfilling this requirement is important for maintaining consistent coverage within the Medicare Advantage plan, with the premium amounts subjected to annual changes.


How Medicare Part B Premiums Affect Medicare Advantage Plan Costs

Part B premiums can greatly influence the total cost of Medicare Advantage plans. An increase in Part B premiums can lead to an escalation in Medicare spending, potentially requiring higher expenses for individuals enrolled in Medicare Advantage plans to cover the added expenditure.


Average Monthly Premiums for Medicare Advantage Plans

The average monthly premium for Medicare Advantage plans with prescription drug coverage in 2023 is $15. However, the typical premium for Medicare Advantage plans with a MA-PD premium in 2023 amounts to $57.

The average MA-PD premiums have seen a decrease over the years, dropping from $36 per month in 2015 to $15 per month in 2023. This decline represents a significant change in the cost for Medicare Advantage and Prescription Drug plans.

This reduction can be attributed in part to the increased rebate portion of plan payments, which some plans have chosen to allocate to lower the part D portion of the MA-PD premium.

Additional Benefits and Cost-Sharing in Medicare Advantage Plans


Who Pays for Medicare Advantage Plans, Additional Benefits and Cost-Sharing in Medicare Advantage Plans


Medicare Advantage plans often offer additional benefits and unique cost-sharing structures, setting them apart from traditional Medicare.

These plans provide supplementary benefits including:

  • Vision care


  • Hearing care


  • Fitness programs


  • Dental care


  • Prescription drug coverage


  • Routine vision and hearing care


These benefits are not encompassed by Original Medicare. Moreover, the cost-sharing in Medicare Advantage plans is not uniform and can vary depending on the specific plan.


Supplemental Benefits Not Covered by Traditional Medicare

Medicare Advantage plans, also known as Medicare benefits, commonly offer supplementary benefits such as services covered:

  • Vision


  • Dental


  • Hearing


  • Fitness services


These benefits are not offered by Original Medicare. Moreover, some Medicare Advantage plans even provide telehealth coverage, a benefit not typically covered under traditional Medicare.

This expanded coverage, along with other Medicare Advantage plan benefits, makes Medicare Advantage plans an attractive option to many beneficiaries.


Cost-Sharing in Medicare Advantage Plans


Who Pays for Medicare Advantage Plans, Cost-Sharing in Medicare Advantage Plans


The cost-sharing in Medicare Advantage plans includes the patient’s financial responsibility for healthcare service expenses covered by their health insurance plan, including deductibles, premiums, and coinsurance.

The specific cost-sharing models may differ among various plans, offering flexibility to beneficiaries.

In some cases, Medicare Advantage plans can offer lower cost sharing compared to traditional Medicare.


Out-of-Network Services and Providers

The use of out-of-network services and providers in Medicare Advantage plans can result in increased expenses for beneficiaries.

Here are the average out-of-pocket limits:

  • $4,835 for in-network services


  • $8,659 for both in-network and out-of-network services


  • In certain instances, the limit can be as high as $11,300 for combined in-network and out-of-network services.


Comprehending these costs can assist beneficiaries in managing their healthcare decisions more efficiently.

Quality Ratings and Bonus Payments in Medicare Advantage Plans

Quality ratings and bonus payments are significant elements in Medicare Advantage plan performance and costs. The quality ratings of Medicare Advantage plans are determined based on up to 40 unique quality and performance measures.

Plans that achieve a rating of 4, 4.5, or 5 stars are eligible to receive a 5 percent bonus to their benchmark level, incentivizing the provision of high-quality care.


Understanding Medicare Advantage Plan Quality Ratings

The quality rating system for Medicare Advantage plans evaluates the plans using a 5-star scale, with 1 representing the lowest score and 5 representing the highest score. The evaluation encompasses up to 40 distinct quality and performance measures.

Elevating quality ratings is a key focus for plans looking to attract enrollees, as higher star ratings are associated with increased enrollment.


How Bonus Payments Affect Plan Performance and Costs

Bonus payments for Medicare Advantage plans serve as additional payments that insurance companies receive for offering high-quality plans. These payments serve as a reward for plans that deliver improved quality of care and service to Medicare beneficiaries.

Despite substantial spending and a 10-year commitment to paying bonuses for quality improvement, research indicates that the impact on quality is varied, with at least $47.5 billion paid out in additional plan payments since 2015.


The Relationship Between Quality Ratings and Enrollment

Quality ratings hold a considerable weight in the choice of Medicare Advantage plans. In 2023, 71% of Medicare Advantage enrollees are in plans with a rating of 4 or more stars, indicating a strong preference for higher-rated plans among individuals.

Quality ratings act as a guide for consumers, aiding them in making enlightened choices about their healthcare coverage.

Challenges and Future Outlook for Medicare Advantage Plans

Though Medicare Advantage plans offer numerous benefits, they also present challenges. These plans typically cost more compared to traditional Medicare on a per beneficiary basis, and potential changes to payment systems could impact their future.

Assessment of the quality and performance of these plans continues to pose a challenge, with lingering questions on the efficiency of broader or narrower provider networks and the effect of prior authorization requirements.


Higher Costs Compared to Traditional Medicare

Medicare Advantage plans generally result in higher Medicare advantage plans cost for the government and taxpayers compared to traditional Medicare on a per beneficiary basis.

In 2019, Medicare spending for Medicare Advantage enrollees was $321 higher per person, and in counties with lower traditional Medicare costs, average Medicare Advantage plan costs were also higher.


Potential Changes to Payment Systems

Changes to payment systems, such as adjustments to benchmarks, could impact the future of Medicare Advantage plans. The Centers for Medicare & Medicaid Services (CMS) is projecting a 3.32% payment increase for Medicare Advantage plans from 2023 to 2024.

Furthermore, there are proposed adjustments aimed at minimizing cost shifting to Medicaid, boosting payments to safety net providers, and enhancing accessibility for dually eligible enrollees.


Evaluating Plan Quality and Performance

Assessing the quality and performance of Medicare Advantage plans remains a challenge. With gaps in data restricting the ability to make comparisons and assess outcomes, and limitations in the data itself, the task of evaluating plan quality and performance is complex.

Despite these challenges, the future of Medicare Advantage plans looks promising, with anticipated developments such as sustained enrollment expansion and the incorporation of new benefits.


Medicare Advantage plans, with their flexibility and array of benefits, offer a unique alternative to traditional Medicare. While they present their own set of challenges, including higher costs and complex payment structures, their popularity among Medicare beneficiaries is undeniable.

As the landscape of healthcare continues to evolve, Medicare Advantage plans will remain a key player, adapting to changes and striving to deliver high-quality, cost-effective care.


Frequently Asked Questions


→  Where does the money come from for Medicare Advantage plans?

Medicare Advantage plans are funded from two sources – part of the funding comes from the monthly premiums of beneficiaries, while the main source is the federal agency Centers for Medicare & Medicaid Services.

Additionally, Medicare pays a fixed monthly amount to the company offering the plan, and participants also incur out-of-pocket costs for care.


→  Do I still pay Medicare premiums with an Advantage plan?

Yes, even with a Medicare Advantage plan, you still need to enroll in Medicare parts A and B and pay the monthly premiums, in addition to any premium for the Advantage plan itself.

It’s important to compare plan costs and benefits before enrolling.


  What is the biggest disadvantage of Medicare Advantage?

The biggest disadvantage of Medicare Advantage is the limited choice of doctors and medical offices compared to Original Medicare.

It can also be more costly overall for individuals with complex medical needs.


  Medicare part C is?

Medicare Part C, also known as Medicare Advantage, is offered by private companies and includes coverage for Part A, Part B, and usually Part D. It may also offer additional benefits not covered by Original Medicare.


 What additional benefits do Medicare Advantage plans offer?

Medicare Advantage plans offer additional benefits like vision, dental, hearing, fitness services, and prescription drug coverage, which are not included in Original Medicare.

These added benefits can provide comprehensive coverage for your healthcare needs.

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Russell Noga
( Medicare Expert )

Russell Noga is the CEO of ZRN Health & Financial Services, and head content editor of several Medicare insurance online publications. He has over 15 years of experience as a licensed Medicare insurance broker helping Medicare beneficiaries learn about Medicare, Medicare Advantage Plans, Medigap insurance, and Medicare Part D prescription drug plans.