Compared with lower-cost plans, Medicare Advantage enrollees pay more for their plans the longer they remain enrolled.
Objectives: To compare how premiums and expected out-of-pocket medical costs (OOPC) vary with the length of time Medicare Advantage (MA) beneficiaries have been enrolled in their plans.
Study Design: Descriptive and fixed effects regression analyses.
Methods: Using linked administrative enrollment and plan data, we compared the costs of the MA plans that beneficiaries chose with the costs of other plans available to them. We show predicted values adjusted for age, gender, race/ethnicity, disability, individual health risk, presence of mental health diagnoses, health plan quality, relative size of the plan’s provider network, and the number of years continuously enrolled in the same plan. To further address the possibility of bias, we included county-level fixed effects and compared results to a beneficiary-level fixed effects model.
Results: We found average spending on premiums and OOPC in enrolled plans exceeded such costs in the lowest-cost plan by $697 in 2013. Beneficiaries who remained in their plans for 6 or more years were most at risk of spending these higher amounts, paying $786 more than they would have spent in the lowest-cost plan compared with $552 for beneficiaries in their first year of enrollment. For each year a beneficiary remained in their same plan, their additional spending in excess of the minimum cost choice increased by roughly $50.
Conclusions: MA beneficiaries could reduce their exposure to healthcare spending by switching to plans with lower premiums, although there may well be rational reasons for paying costs in excess of those of the lowest-cost plan.Takeaway Points
Our results suggest that beneficiaries may not be actively and regularly comparing plans, and thus are subject to a certain amount of inertia in their plan selections.
The option to choose a private health insurance plan has existed for Medicare beneficiaries for several decades. More than 17 million beneficiaries (31%) were enrolled in Medicare Advantage (MA) plans in 2016—up from 6.8 million a decade earlier—and beneficiaries had an average of 19 plan choices in that year.1,2 When choosing a plan, beneficiaries face a variety of tradeoffs, including premiums versus expected out-of-pocket medical costs (OOPC), which have important consequences given the lower incomes and higher average medical spending of Medicare beneficiaries compared with the broader US population. Understanding how beneficiaries choose among their plan offerings and the consequences of those choices is important for both beneficiary well-being and the competitiveness of the MA market.
We sought to address several questions related to plan choice in the MA market. Compared with other plans available to beneficiaries, how much are they currently spending on premiums and cost sharing? How do plan costs compare for beneficiaries who have been enrolled in the same plan for different periods of time? Compared with lower-cost options available to beneficiaries, what is the dollar value of the foregone savings—if any—from remaining in the same plan over time?
When choosing an MA plan, there are a variety of plan features for beneficiaries to consider: 1) the premium—if any—to enroll in the plan, including premiums for Part D (prescription drug) coverage and any reductions to the standard Part B (physician and outpatient) premium; 2) coverage of services supplementing the traditional Medicare benefit (eg, dental or vision coverage); 3) which medical providers are in-network; 4) plan quality; 5) utilization management practices; and 6) cost-sharing features and anticipated spending on OOPC. Most beneficiaries have a fairly wide choice of MA plans, including both health maintenance organization (HMO) and preferred provider organization (PPO) offerings.2
Although research shows consumers have difficulty selecting health insurance plans,3 the MA plan choice environment may be particularly confusing for consumers.4 First, Medicare beneficiaries, who are more likely to have cognitive limitations, can have difficulty assessing the various tradeoffs involved in deciding on a health plan.5,6 Second, because premiums are often used as an indication of quality and, in most counties, beneficiaries have access to multiple MA plans without an enrollee premium (aside from the Part B premium), they have to consider other attributes (eg, provider networks, cost sharing, covered benefits) that are more difficult to understand and compare.7 Third, many beneficiaries pay premiums through withholdings from their Social Security benefits, which may discourage beneficiaries from actively considering their choices even when premiums increase. Finally, as in other markets, beneficiaries who do not actively switch plans between years are automatically reenrolled in the same plan, potentially creating a bias toward their previously chosen option.8
Although several previous studies have investigated decision making in the MA market, few have looked specifically at what beneficiaries pay for coverage and how that compares with other options. For example, one recent study found that MA enrollees were more likely to choose plans that reduced cost sharing than those that kept premiums low, but it did not quantify differences in plan costs or how those values changed when beneficiaries were enrolled in their same plan for longer periods of time.9 Studies have examined the appropriateness of beneficiary choices of standalone Medicare prescription drug plans. Among other things, this research has tried to assess whether beneficiaries are subject to inertia in their plan selections with some disagreement about the extent of the problem and how it has evolved.10,11 Comparatively little attention has been paid to these concepts in the market for MA plans, and few studies have investigated the financial impact of the plans MA beneficiaries chose.
Our analysis relied on a unique link between several administrative databases that CMS collects. Our key results were derived from a 2% random sample of the Medicare Beneficiary Summary File enrollment databases for 2013, although we also used historical data on beneficiary plan selections from as early as 2006 to measure tenure in MA plans.12 Additional details about the data are provided in the eAppendix (eAppendices available at www.ajmc.com).
We excluded beneficiaries who were not enrolled in both Part A and B of Medicare in January of each year, did not choose an MA plan with Part D coverage (MA-PD plans), were enrolled in a Special Needs Plan (SNP) or an employer plan, or were enrolled in Medicaid or the Part D Low-Income Subsidy program. From each beneficiary’s set of MA plan choices, we excluded SNPs, plans that were not an MA-PD, and employer-sponsored plans. Our final sample included 93,519 beneficiaries in 2013. All comparisons in the text are significant at the 0.1% level unless otherwise noted. Nominal dollar values are adjusted to 2013 US dollars using the Bureau of Labor Statistics’ Consumer Price Index US city average.
We compared each beneficiary’s choice of an MA-PD plan on 2 observable dimensions. First, we considered the total premium to enroll in the plan, including the Part B premium, any amounts the MA plan charges, and any premiums for Part D coverage. (Because Part B premiums can vary by income, we included the most common amount for a beneficiary with <$80,000 in income. Our measure incorporates any reductions to the Part B premium offered through MA plan rebates.)
Second, we analyzed expected OOPC, which is a CMS-derived actuarial estimate of average beneficiary spending for cost sharing for health services using a standardized sample of representative beneficiaries.13 CMS calculates OOPC values for each plan by mapping its cost-sharing features to the actual utilization patterns of the sample of beneficiaries. Five values of OOPC are calculated depending on a beneficiary’s self-reported health, and we imputed an average of these 5 values based on the probability that the beneficiary is in each of those health states. (The eAppendix provides more detail on the OOPC measure. eAppendix Table 1 shows that our descriptive results lie between the extremes of assuming all individuals are either in “excellent” or “good” self-reported health. Additionally, our main results in eAppendix Tables 2 and 3 are not sensitive to alternative imputation procedures, as shown in eAppendix Tables 4 and 5.)
CMS lists OOPC on the Medicare plan finder website, providing a prospective metric of spending in a plan that is potentially salient at the time of enrollment.14 Given that MA plans often use federal payments to cover services outside the fee-for-service (FFS) benefits package, OOPC is useful for identifying both variation in the breadth of coverage and differences in cost sharing between plans.
Our descriptive findings in the Table show enrollee premiums and OOPC for the plans beneficiaries chose and compare them to other plans they could have chosen. We compared the values for each beneficiary’s chosen plan with the values for: 1) the plan with the lowest enrollee premium, 2) the plan with the lowest OOPC, and 3) the minimum expected spending plan (MESP), or the plan with the lowest combined premiums plus OOPC. We also compared values for their chosen plan with the values for alternative choices within the same type of coverage, including HMO, PPO, and private FFS plans. Finally, we compared spending for a beneficiary’s plan to spending in alternative plans of the same type (HMO, PPO, private FFS, other) offered by the beneficiary’s current insurer. Although this comparison highlights how switching can reduce spending potentially without changing one’s provider network, it implicitly assumes beneficiaries would not switch insurers or plan types to save, and thus, could be considered an underestimate of foregone savings.
We assessed whether beneficiaries who remain in the same plan for longer periods of time pay larger premiums or receive less in expected benefits compared with those who switch plans. First, we compared the payments for beneficiaries who either newly enrolled in an MA plan in 2013 (“new enrollees”) or who switched plans between 2012 and 2013 (“switchers”) against those who remained in the same plan (“stayers”). Second, we examined payments by length of continuous enrollment in the same plan. For all regression results, we reported predicted differences in expected spending between the chosen plan and the MESP.
Using ordinary least squares models, we regressed differences in the cost of the chosen plan compared with the MESP on an identifier for switchers (Figure 1) or the number of years continuously enrolled in a plan (Figure 2). We controlled for a wide variety of individual characteristics that may be related to the decision to switch plans, including age, gender, race/ethnicity, individual-level health risk (using the CMS-derived Hierarchical Condition Category [HCC] risk score), and presence of mental health diagnoses. We also included indicator variables for the chosen MA plan’s star rating and provider network size compared with both the MESP and the median plan in the beneficiary’s county. The models included county-level fixed effects to control for unobserved aspects of the local MA market, such as geographic cost variation or the types of plans offered.
We limited our regression analyses to beneficiaries enrolled in Medicare for 6 or more years because newer beneficiaries may exhibit different underlying plan choice behavior, including frequent switching, as they learn about the market. We chose 6 years to reduce the likelihood that our key independent variable (ie, tenure in an MA plan, which has a maximum of 6 years) would be polluted by unobserved differences between new enrollees and older cohorts. (Our results were not sensitive to this specification.)
Because a spurious correlation could exist between beneficiary preferences for health plans and length of time enrolled in a plan, we compared our regression results to individual-level fixed effects models. This approach removed the effects of time-invariant preferences, such as risk aversion or taste for utilization management. As shown in eAppendix Tables 6 and 7, our results were insensitive to this alternative specification.
As shown in the Table, in 2013, average spending for MA beneficiaries was $1667 for premiums and $2078 in OOPC. On average, choosing the plan with the lowest premium would have reduced spending on premiums by 38% or $635 (from $1667 to $1032), and combined spending on premiums and OOPC would have been 12%, or $448, lower because higher OOPC offset lower premiums. Combined expenditures would have been 3%, or $112, higher in the plan with the lowest OOPC because of the higher premium for that plan. By definition, the MESP had the lowest combined premium and OOPC, which was 19%, or $697, lower than the costs beneficiaries paid on average in 2013.
We also compared beneficiary payments with the lowest premium and lowest OOPC plans of the same plan type as that which the beneficiary chose. The Table shows that beneficiaries could have selected the same type of plan and reduced their premium by 33%, or $552, (from $1667 to $1115) by selecting the plan with the lowest premium. Beneficiaries could have switched to the MESP among plans of the same type in 2013 and paid 15%, or $548, less on premiums plus expected cost sharing than they actually did. Among those with more than 1 plan available from their current insurer, they could have switched plans without switching insurers or their type of plan and reduced total costs by 8%, or $287.
Figure 3 shows that in 2013, 97% of MA beneficiaries had at least 1 plan available to them that would have lowered their total expected spending and about 87% had 3 or more plans. Additionally, 92% of beneficiaries had at least 1 plan of the same type with lower expected spending and 69% had at least 3 plans. Finally, 64% could have found a cheaper plan without switching their plan type or their insurer.
Figure 1 compares spending, adjusted for observable differences, for switchers and stayers between 2012 and 2013, and for new enrollees in 2013. Switchers, on average, narrowed the difference between the premium paid and the premium of the MESP (from $526 to $342), whereas stayers saw an increase (from $523 to $600). Although stayers and switchers reduced differences in OOPC, switchers reduced the difference in total costs by $195 ($739 in 2012 and $544 in 2013) compared with an increase of $58 (from $701 to $759) for stayers. Enrollees newly choosing an MA plan for the first time in 2013 spent $130 less on premiums than stayers and $96 less overall.
Figure 2 shows that the difference between expected spending in a beneficiary’s chosen plan compared with the MESP grew with the number of years continuously enrolled in the same plan. Whereas comparable beneficiaries who have been enrolled for longer periods do not seem to have larger expected OOPC, and that amount may even fall somewhat, they pay more for premiums with increasing tenure. Beneficiaries in their first year in a plan pay $552 more than the amount they would pay in the cheapest available plan for both premiums and cost sharing, whereas comparable beneficiaries with 6 or more years pay $786 more than the minimum plan. Increases in premiums charged for Parts A and B benefits primarily caused these differences rather than changes in OOPC or Part D premiums (not shown). For each year a beneficiary remains in their same plan, their additional spending in excess of the minimum cost choice increases by roughly $50.
Our findings across a range of models show that MA beneficiaries spend substantially more for premiums and expected OOPC than the lowest-cost plan in their area and the total amount increases as enrollees stay in their plan. The average amount in excess of the MESP of $697 constitutes more than 2 percentage points of the median income for MA beneficiaries in 2014 ($26,000). (Estimates were derived from the authors’ calculations of MA beneficiaries’ income using CMS administrative databases and survey data.) Because about half of MA beneficiaries remain in their plan over a given 5-year period, these annual amounts understate the total amount most beneficiaries could save over their average duration in a plan.
As tenure increased from 1 to 6 or more years, beneficiaries paid $339 more in premiums ($699 minus $361) compared with available lower-cost plans with only a $104 reduction in OOPC ($87 instead of $191). Plan networks and covered services do not typically change much from one year to the next, so it would be reasonable to expect increases in premiums in excess of lower-cost plans to be offset roughly in parallel by lower cost sharing. This finding suggests that many beneficiaries, and particularly those who have remained in their plan for several years, would benefit financially from switching to lower-premium plans.
The average amount by which beneficiaries spend more than they would if enrolled in the lowest-cost plan in their area is largely a result of their chosen plan’s premium rather than its OOPC. This may arise because CMS limits the annual amount by which plans can increase OOPC, which may cause plans to increase premiums instead. Nevertheless, our results are consistent with research suggesting that Medicare beneficiaries are generally inattentive to increases in plan premiums after their initial enrollment decision.15
Although we controlled for a variety of demographic and health-related characteristics, we cannot draw firm conclusions regarding the appropriateness of beneficiaries’ choices because there may be unobserved components of beneficiary demand for plans. Beneficiaries who remain in the same plan may become accustomed to the features of their plan and be willing to pay to stay. Recognizing this limitation, we: 1) compared beneficiary spending within type of plan and against other plans offered by their current insurer, 2) controlled for expected healthcare utilization using the CMS-assigned HCC risk score, and 3) used an individual-level fixed effect model. Our multivariate results did not appreciably change under any of these specifications.
The absence of MA claims data prevents us from developing comparisons of what beneficiaries would have actually spent on cost sharing had they chosen differently. Healthcare needs differ greatly, and some beneficiaries may have chosen plans that reduced their own exposure to medical costs (eg, richer coverage for anticipated stays in skilled nursing facilities), even though they appeared to pay more for premiums or OOPC. Nevertheless, the CMS OOPC measure is advantageous because it provides the actual information regarding ex ante financial risk that the beneficiary had when choosing a plan.
Due to CMS regulations requiring plans to develop provider networks as of 2011, many private FFS plans exited the market around that time. Some beneficiaries in our sample may have been exposed to this policy change and chose new plans. Because individuals who switch would have shorter tenure, thus leading to lower payments on average, this would imply our estimates are lower bounds of the long-term effect of tenure on payments in excess of the MESP.
There are several implications of beneficiaries paying more for premiums rather than OOPC relative to the lowest-cost plan available to them. First, MA beneficiaries could reduce their exposure to healthcare spending by switching to plans with lower premiums, although there may well be rational reasons for paying these costs, which we cannot observe.
Second, our results are consistent with a plan choice environment where beneficiaries are passively reenrolling in their MA plans from one year to the next. In such a marketplace, it would be logical for MA insurers to attempt to either increase premiums or beneficiary cost sharing in the hopes that they could profit from inertial consumers, and we find some evidence that premiums increase the longer beneficiaries remain in their plans.
We found that the amount of money “left on the table” increases with length of enrollment in a plan, suggesting that beneficiaries may not be actively and regularly comparing plans, and thus, are subject to a certain amount of inertia in their plan selections. One potential consequence is a diminished incentive for insurers to compete for enrollees by reducing premiums and tailoring benefits to consumer preferences. Changes to the current Medicare choice environment that increase the salience of premiums or encourage beneficiaries to compare plans more actively could reduce the number who passively reenroll in their plans and stimulate a more robust competitive environment for insurers.
The authors are grateful to Lyle Nelson from the Congressional Budget Office (CBO), Linda Bilheimer (formerly at CBO), Paul Masi from the Medicare Payment Advisory Commission (formerly at CBO), Thomas Selden and Samuel Zuvekas from the Agency for Healthcare Research and Quality (AHRQ), and Rick Kronick from the University of California at San Diego (formerly at AHRQ) for their valuable contributions and comments on earlier versions of the manuscript.Author Affiliations: Agency for Healthcare Research and Quality (PDJ), Rockville, MD; Congressional Budget Office (EM), Washington, DC.
Source of Funding: None.
Author Disclosures: The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.
Authorship Information: Concept and design (PDJ, EM); acquisition of data (PDJ, EM); analysis and interpretation of data (PDJ, EM); drafting of the manuscript (PDJ); critical revision of the manuscript for important intellectual content (PDJ); statistical analysis (PDJ, EM).
Address Correspondence to: Paul D. Jacobs, PhD, Agency for Healthcare Research and Quality, 5600 Fishers Ln, Mailstop 07W41A, Rockville, MD 20857. E-mail: email@example.com. REFERENCES
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