Favorable Selection in Medicare Advantage is Linked to Inflated Benchmarks and Billions in Overpayments to Plans

Increases in Medicare Advantage (MA) enrollment, coupled with concerns about overpayment to plans, have prompted calls for change. Benchmark setting in MA, which determines plan payment, has received relatively little attention as an avenue for reform. In this study we used national data from the period 2010-20 to examine the relationships among unobserved favorable selection, benchmark setting, and payments to plans in MA. We found that unobserved favorable selection in MA led to underpayment to counties with lower MA penetration and overpayment to counties with higher MA penetration. Because the distribution of MA beneficiaries has shifted over time toward counties that were overpaid, we estimate that plans were overpaid by an average of $9.3 billion per year between 2017 and 2020. Changes to risk adjustment in benchmark setting could likely mitigate the impact of favorable selection in MA