Medicare Advantage (Part C) providers receive payments from the Centers for Medicare & Medicaid Services (CMS) to provide health coverage for beneficiaries who choose to participate in these private insurance plans. Insurers operating MA plans submit a bid each year to the CMS for the payment they would require to provide coverage to their Medicare enrollees. This bid includes administrative costs and profit.
The bids insurers submit are based on the amount Medicare spends in the Traditional Medicare program (Parts A and B) on a county-specific basis. Bids are almost always lower than the benchmark payment rate that the CMS is willing to pay for Medicare beneficiaries in these counties. MA insurers retain 75 percent of the difference between the bid and the benchmark amount (known as the rebate) and uses these funds to provide additional benefits, reduce the cost-sharing responsibilities of their members or reduce the plan premiums. Plans that cover older, sicker patients or that operate in rural areas receive extra funds from the CMS.
A MA plan's quality also figures into the amount of money it receives from the CMS. Beginning in 2012, MA plans began receiving bonus payments if they received 4 of more stars (on a 1 to 5). The star ratings are based on 53 performance measures. CMS also launched a 3-year demonstration in 2012 that increased the size of bonuses for these plans, and began awarding bonuses to plans with 3 or 3.5 stars.