Medicare Advantage made extra profit<br> in 2006, GAO finds

WASHINGTON – Insurers offering Medicare Advantage plans made $1.3 billion more in profits in 2006 than their own bids projected, a new report from the U.S. Government Accountability Office shows, a finding likely to bolster Congressional Democrats’ efforts to rein in the program.
Medicare Advantage plans are offered as an alternative to traditional fee-for-service Medicare, with insurers providing benefit packages that are generally richer and include a greater degree of care coordination.
Insurers submit bids to the U.S. Centers for Medicare & Medicaid services based on their projected expenditures, with a profit margin built in, and the payments they get are based on those bids, regardless of how actual spending matched up with the projections.
However, insurers are still required to report their actual expenditures about a year later, as they prepare to bid on a new contract, and that’s what the GAO report, commissioned by House Ways and Means Health Subcommittee Chair Pete Stark, D-Calif., is based on.
As the GAO report noted, government spending on Advantage plans “has grown substantially in recent years,” from about $60 billion in 2006 and $77 billion in 2007 to an estimated $91 billion in 2008, and a study of 2005 data showed that insurers’ profit margin was about $1.1 billion more than anticipated, while the share spent on medical expenses was lower.
In 2006, the GAO found, insurers reported earning profits averaging 6.6 percent of total revenue, versus the 4.1 percent they had projected. In addition, the share they spent on medical expenses averaged 83.3 percent of total revenue, versus the projected 86.9 percent.
Along with the impact on the government, the GAO noted, this discrepancy is important because beneficiaries could have received additional benefits or reduced cost-sharing and still left insurers with the projected profit margins.