Milliman Explains Why Medicare Advantage Has Not Collapsed

Milliman, the actuarial consulting firm, has published a new report on the impact of the government’s cuts to Medicare Advantage. The report was sponsored by the Better Medicare Alliance, which announced that “seniors now face soaring maximum annual out-of-pocket costs” due to the cuts.

And yet, the purported cuts have not really bitten health insurers. Medicare Advantage enrollment is at an all-time highNCPA has favored Medicare Advantage over the traditional Medicare Parts A and B, but we have noted that insurers seem to capture more of the value than beneficiaries do.

The Milliman report explains this quite well. Looking only at Medicare’s physician and hospital benefits (and ignoring the Part D drug benefit), Milliman reports that Medicare Advantage plans reduced the average beneficiary’s share of Medicare’s costs (coinsurance, deductibles, and Part B premium) by $67.65 in September 2012 (or $811.80 annually) and gave him $11.65 worth of non-Medicare benefits ($139.80 annually). The latter include enticements such as fitness-club memberships.

The total value, therefore was $79.30. For this, the average beneficiary paid a monthly premium of $24.23 ($290.76). The net “value added” (Milliman’s term) was, therefore, $55.07 ($660.72 annually).

For September 2015, the comparable figures are a total value of $69.70 ($836.40 annually), monthly premium of $21.36 ($256.32 annually), for a net value added of $48.34 ($580.08 annually).

So, the average Medicare Advantage beneficiary is worse off by $6.73 per month. I struggle to describe that as “soaring” out-of-pocket costs.

Plus, the Milliman analysis invites the question of why taxpayers are paying health insurers to buy down seniors’ Medicare coinsurance, deductibles, and Part B premium and paying for “enticements” to enroll. I have been on the record as a fan of Medicare Advantage since 2009. Nevertheless, both taxpayers and beneficiaries would benefit if the program were restructured so that beneficiaries would be rewarded for saving Medicare money, instead of just reducing their direct cost-sharing.

Comments (25)

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  1. Dennis Byron says:

    A bit of three card monte going on here Mr. Graham although I admit I can’t tell if you or Milliman is the dealer. Without getting down in the weeds of all the links in your post

    1. It is undeniable true — as whoever the Better Medicare Alliance is a front group for says – that annual OOP has increased during the period when the government has been bringing the cost per person of a beneficiary on Original Medicare plus Part C into parity with the cost per person of a beneficiary on Original Medicare without Part C (almost always the second person has private insurance and a Part D plan if he or she is not on Medicaid or in the VA system). It’s just simple math. Co-pays and deductibles have risen along with annual out of pocket spend limits (which people on Original Medicare without C do not get). More noticeably, networks have become more restricted. Again that’s all just simple math.
    2. I agree with you no one would characterize these changes as “soaring” and some effort would be needed to differentiate the extent to which some are based on the capitation fee rate cuts and some are just based on underlying inflation. (It is interesting to see in the Feb 20 CMS announcement on 2016 capitation fee formulas that the rising cost of fee for service Medicare is apparently moderating the year over year Part C cuts.)
    3. Duggan’s research that the insurers get more of the government’s Part C uplift than me, the beneficiary, is both totally flawed. Duggan simply does not seem to know how either the Part C program or United States television advertising works. But — more important — the Duggan research is also off point to your post’s conclusion (see NOTE).
    4. How could Millman ignore the drug component of my plan? There is some funny business played by the insurers and the government – which you can see when you look at Plan Finder — because often the same drug plan costs $50 if you buy it standalone through Part D but it is supposedly implicitly $25 in Part C (and sometimes the opposite happens). But it is impossible to do financial analysis of the C plan without looking at it as the integrated whole that it is (that being said, I will go read Milliman and add a note here if I am wrong).
    5. Then you really lose me with all the plusses and minuses but I guess what you and/or Milliman are saying is that the average (your mileage may vary) value of a Part C plan – compared to Original Medicare without C? — was $7 a month less in 2015 than in 2012. Yep, refer back to point 1. It’s just simple math.

    NOTE: Insurers might make a slightly better margin on their Part C plan product lines than they (or others) make administering Part A, Part B and Part B DME benefits. I have never seen any research on that and the only research I have seen says the insurers make around a 5% margin no matter what Part (A, B, B DME, C or D) they are administering. Whatever, it is not at the expense of me the Original Medicare plus C beneficiary and Duggan seems totally orthogonal to the rest of this discussion.

    • John R. Graham says:

      Thank you. Milliman did not ignore the drug component. I did so that I could keep the blog post as simple as it needed to be. As you note, the MA-PD plans are not just adding Part D to Medicare. The 2003 Medicare Modernization Act contained incentives for seniors to sign up for MA-PD plans instead of standalone plans.

  2. John Fembup says:

    My own experience with Medicare Advantage (I’m in a group-sponsored MA PPO) is that by far, the main reason my premiums have increased over the past 5 years is the health insurance tax. As Dr. Gruber eventually admitted, the Obama administration deceptively represented this as a tax on insurers. But of course insurers, including my insurer, passed it along to the people paying the premiums.

    As to the Milliman report, note this footnote at the end of Tables 6a and 6b:

    “As previously mentioned, there is no conclusive evidence based on the information contained in Table 6a and 6b that individuals have migrated to plans that have narrower networks over time. In fact, the “Average Size” based on the count of continuing plans increases every year suggesting that continuing plans are adding providers to the networks over time more so than removing providers from their networks.”

    No conclusive evidence that networks are shrinking? That’s not exactly the drumbeat we hear in the media and elsewhere. If there were a real elephant in this refrigerator, Milliman is certainly qualified to detect its footprints in the jello. So I believe Milliman on this one.

    • John R. Graham says:

      Thank you, but how do you know it is because of the premium tax? Do you see the tax explicitly in your premium notice? (I am not on Medicare yet, so have no experience.)

      • John Fembup says:

        Fair question. I know this because of my position on the board of my company’s retiree association. Each year we meet with our benefits department, who breaks out for us the components of the next year’s premiums for retiree coverage. Specifically we see changes due to utilization experience; benefits revisions,; admin costs; and impact of other factors e.g., HIT. Our then board advises our members. Thats how I know that the total impact of HIT on my premiums was to increase them by $124 per month. No other premium change over the past 5 years was near that magnitude.

        • Thank you. That seems high. If you want to mail me a copy…..

          • John Fembup says:

            Sure. Send me an email I’ll reply.

          • John Fembup says:

            John Graham, I looked at the Medicare Advantage pricing documentation I have and figured out why my HIT number looked high to you. That’s because I Included the total for my spouse and I. The individual HIT amount for either of us is only half that amount,

            My conclusion however, remains correct – the impact of HIT for each of us, and for both of us together, was the largest single factor increasing our individual premiums since we enrolled in Medicare Advantage in 2011.

            I can still send you the docs if you like,

            • Okay, if you want to. But I advise that you black out your names and all other identifying information. I am an absent-minded professor and take no responsibility for letting the documents escape from me. Mailing address is 600 Pennsylvania Ave, SE, Ste 310, Washington, DC 20003.

  3. Bart I. says:

    The quote from the Milliman report mentions “soaring *maximum* annual out-of-pocket costs,” but the commentary here talks about small differences in *average* out-of-pocket costs. Apples and oranges.

    • Bart I. says:

      Actually looking at the report, it looks like out-of-pocket maximums increased around 16% over four years, or less then 4% per year. I don’t know if I’d call that ‘soaring.’

  4. Devon Herrick says:

    Emory economist Ken Thorpe has performed analysis on several occasions that is consistent with this. Basically, Medicare Advantage plans would compete for seniors patronage by offering a richer benefit package. When the payments were cut, the plans had no choice but to reduce benefits. On average, MA plans provided $700 to $1,000 in additional benefits compared to traditional Medicare prior to the Affordable Care Act.

    • Barry Carol says:

      There is also the fact that MA plans eliminate the need to buy a supplemental plan which can easily cost $150-$300 per month depending on coverage, age, and where you live. In theory, even if MA plans offered no extra benefits and charged a modest premium of less than $50 per month, low income seniors especially might still find MA plans a good choice even at the cost of a more limited provider network.

      According to the Millman report, MA payment rates will be at parity with FFS Medicare by 2017. The two biggest companies in the MA space, UnitedHealth Group and Humana, always knew they would eventually have to compete head to head with FFS Medicare with comparable payment rates.

      Aside from the attractiveness to lower income seniors, MA plans should also be most attractive to the healthiest seniors who need the least care. They are most likely to not care that much about the more limited provider network, especially if they don’t travel extensively outside of their home region. In any given year, half of all seniors use little or no healthcare. That suggests a potential market for MA plans with plenty of growth opportunity remaining. Even modest additional benefits make the value proposition all the more compelling for this lower risk group.

      • John R. Graham says:

        Thank you. I think the plans would differ with you on your final paragraph. And recent evidence supports the conclusion that chronically ill are well treated by Medicare Advantage plans. That is, the network is not “narrow” (as we often describe it) but *value”.

  5. Dennis Byron says:


    “In theory, even if MA plans offered no extra benefits…”

    In practice, there are many MA plans that offer basically no extra benefits vs. Original Medicare except lower co-pays and deductibles (and the annual OOP spend limit required by law). These plans typically have no premium. Some even rebate part or all of the Part B premium. How/why this works is illustrated in the Song/Cutler/et al research of 2012 which concluded that in a t6tal competitive bidding situation, insurers could deliver Original Medicare for about 7% on average less than they currently deliver Original Medicare in the multi-year MAC bid arrangement. This is also illustrated every spring/summer in the Part C bid/framework/rebate process.

    “The two biggest companies in the MA space, UnitedHealth Group and Humana, always knew they would eventually have to compete head to head with FFS Medicare with comparable payment rates.”

    Both United (through AARP and under its own brand) and Humana are already total involved in FFS Medicare (and probably were before there was a Part C but I am not sure of that). Conversely at least some if not all of the insurance companies that administer FFS Medicare A and B also compete in Part C Medicare Advantage. The meme that there are such things as “Medicare Advantage insurance companies” and “FFS Medicare companies” is one of the most successful pieces of left-wing propaganda.

    • John R. Graham says:

      Thank you but I am not sure that I understand what you mean by “FFS Medicare companies”. The Medicare contractors for traditional Medicare are mostly not health insurers.

  6. ColoComment says:

    “…gave him $11.65 worth of non-Medicare benefits ($139.80 annually). The latter include enticements such as fitness-club memberships.”

    Are there any data on how much of the added “non-Medicare benefits” is actually used by participants?

    It seems to me that to justify increased premium cost by netting out unused [and unwanted] additional benefit(s) would be disingenuous at at best, and intentionally misleading at worst.

    But maybe I’m misreading the post.

    • John R. Graham says:

      Thank you and you are reading the post quite right. And I think you have hit upon something. The fitness clubs’ business model is to sign up people for a regular fee, knowing that most will drop out. I would bet that the Medicare Advantage plans can buy group memberships for a significant discount.

      • ColoComment says:

        So the health clubs receive a bit more money, the MA plans get to advertise “MORE!” to justify a bit more premium, and the participants think they’re getting a helluva deal for a bit more expense, even if they drop out or never sign up at all….

        It brings to mind: “You can fool some of the people all of the time….”

        • John Fembup says:


          On the other hand, of the retirees I know who chose MA, NONE did so because of a gym membership. Instead their reasons are better benetits, more convenience (the one-policy structure Barry mentions), and less overall premium compared with traditional Medicare plus medicare supplement.

          Most of the retirees I know are enrolled in an employer-sponsored MA plan. But I would be surprised to learn that a majority of individual MA buyers do so because of gym memberships.

  7. byrondennis says:

    Mr. Graham you are incorrect. All MACs are U.S. insurance companies. I believe that is the law but even if not, I am sure they are all insurers. Wellpoint in ME, a couple of Blues down south, WPS I believe in Midwest, etc. Etc. The

    • No it is not the law. It is more like the opposite is the law, as of 2013.

      Some contractors are subsidiaries of the same holding companies that own insurers, e.g. Anthem owns National Government Services, Inc.; Noridian is owned by BCBS of North Dakota. On the other hand, CGS and Palmetto are owned by Celerian, which is not an insurer. CMS has a website dedicated to he MAC process.

      • Dennis Byron says:

        Mr. Graham

        I think we have gone back and forth on this on previous threads. I cannot figure out why you are so incorrect about United States Medicare MACs and many other aspects of United States Medicare market dynamics relating to the difference between FFS Medicare and capitated-fee Medicare. Given that you seem to understand the overall United States health care market and healthcare insurance market overall, I would think you would run into the MAC/C/D/Obamacare/Medicaid/commercial/self-insured/other interconnections all the time.

        The original United States Medicare law required all Medicare administrators to be insurers. I will take your word for it that the law was changed somewhere along the line (I can’t find where) but that’s moot to my point: all MACs are still insurance companies. You referred to a CMS page listing the MACs. Trace them all back and you will find an insurance company.

        Celerian is a particularly good example of my overall point (which was that the insurers don’t care whether I choose FFS or capitated-fee Medicare–see below). You are correct that it is made up of Palmetto, CGS, Instil, PGBA and the now apparently defunct Part C insurer, Trailblazer, but Celerian is not a parent. Blue Cross of SC is the parent of the five of them. I don’t know the exact legal relationships but Celerian may just be a marketing strategy. BC of SC owns the trademark Celerian, and that seems to be the name’s only legal status.

        (My original comment — in a reply to Barry Carol, which you said you did not understand — was:

        “Both United (through AARP and under its own brand) and Humana are already total involved in FFS Medicare (and probably were before there was a Part C but I am not sure of that). Conversely at least some if not all of the insurance companies that administer FFS Medicare A and B also compete in Part C Medicare Advantage. The meme that there are such things as “Medicare Advantage insurance companies” and “FFS Medicare companies” is one of the most successful pieces of left-wing propaganda.”

        Follow the links and you find that almost all of the MACS are part of a company that also does Part C and/or Obamacare and/or Tricare and/or sell healthcare insurance on their own and/or service the self insured and/or sell life and fire insurance. In other words, they are insurance companies as currently defined in the United States. It is this synergy that seems to be the reason BC of SC set up Celerian. In fact, I cannot find a company anywhere that only sells Part C insurance — there may be one through a union or similar entity — so in my market dynamics and despite what the left constantly claims, there is no such thing as a “Medicare Advantage” company.)

      • Dennis Byron says:

        Addendum to “what is a United States Medicare MAC?”

        When I say the MACs are insurance companies as defined in the United States today I mean that just like ‘sister’ departments/divisions/groups/subs/affiliates that “sell” Medigap,Obamacare, Part C, fire insurance, Pard D, Tricare, etc., the MACs
        — say what medical services will be covered (consistent with broad government requirements as with almost all the other types of insurance)
        — receive claims
        — pay or deny claims
        — keep track of how much claimants spent and relate that to deductibles and co-pay rules
        — keep track of and pay providers (but I think “the check” goes through the Treasury)
        — catch (this is done very poorly) fraudulent or otherwise incorrect claims from claimants and providers
        — Etc. etc.

        There is clearly very little actual “insuring” going on but that is true of all types of United States healthcare insurance and has nothing to do with United States Medicare

        • We are going around and around on this and I don’t see what it has to do with anything. An insurance company bears risk and is regulated by states’ Insurance Commissioners. A MAC is not.

          Whether the holding company owns both insurers and non-insurers has nothing to do with health policy.

          Blue Cross of South Carolina could buy a barbershop and that would not make the barbershop an insurance company.