Mandatory Spending

Function 570 - Medicare

Reduce Quality Bonus Payments to Medicare Advantage Plans

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2019-
Change in Outlays  
  Eliminate Medicare Advantage benchmark increases that are tied to quality scores 0 0 -6.7 -10.4 -10.5 -10.3 -12.2 -13.1 -14.2 -16.7 -27.6 -94.2
  Eliminate double bonuses from Medicare Advantage benchmarks 0 0 -1.3 -2.0 -2.0 -2.0 -2.4 -2.5 -2.7 -3.2 -5.3 -18.2

This option would take effect in January 2021.


Roughly one-third of all Medicare beneficiaries are enrolled in the Medicare Advantage program under which private health insurers assume the responsibility for, and the financial risk of, providing Medicare benefits. Almost all other Medicare beneficiaries receive care in the traditional fee-for-service (FFS) program, which pays providers a separate amount for each service or related set of services covered by Part A (Hospital Insurance) or Part B (Medical Insurance). Payments to Medicare Advantage plans depend in part on bids that the plans submit—indicating the per capita payment they will accept for providing the benefits covered by Parts A and B—and in part on how those bids compare with predetermined benchmarks. Plans that bid below the benchmark receive a portion of the difference between the benchmark and their bid in the form of a rebate, which must be primarily devoted to the following: decreasing premiums for Medicare Part B or Part D (prescription drug coverage); reducing beneficiary cost sharing; or providing additional covered benefits, such as vision or dental coverage. Those additional benefits and reduced cost sharing can make Medicare Advantage plans more attractive to beneficiaries than FFS Medicare. Plans that bid above the benchmark must collect an additional premium from enrollees that reflects the difference between the bid and the benchmark. Payments are further adjusted to reflect differences in expected health care spending that are associated with beneficiaries' health conditions and other characteristics.

Plans also receive additional payments—referred to as quality bonuses—that are tied to their average quality score. Those quality scores are determined on the basis of a weighted average of ratings that reflect consumer satisfaction and the performance of plans' providers on a range of measures related to clinical processes and health outcomes. The Centers for Medicare & Medicaid Services (CMS) pays higher-rated plans more in two ways. First, plans that have composite quality scores with at least 4 out of 5 stars are paid on the basis of a benchmark that is 5 percent higher than the standard benchmark. (New plans or plans with low enrollment lack sufficient data for quality scores to be accurately calculated, so they are paid on the basis of a benchmark that is 3.5 percent higher.) Certain urban counties with both low FFS spending and historically high Medicare Advantage enrollment are designated as "double-bonus counties." The quality bonuses applied to benchmarks in those counties are twice as high as in other counties.

The second way that quality scores impact plan payments is through the size of the rebate that a plan receives when it bids below the benchmark. Plans with 4.5 stars or more retain 70 percent of the difference between the bid and the quality-adjusted benchmark, plans with 3.5 to 4.0 stars retain 65 percent of that difference, and plans with 3 stars or less retain 50 percent of that difference. Recent evidence suggests that quality bonuses have increased Medicare's payments to plans by 3 percent (Medicare Payment Advisory Commission 2018).

In addition to encouraging plans to improve their quality directly through increased payments, the quality program also encourages consumers to enroll in plans with higher ratings. That is accomplished in two ways: First, CMS publishes plans' quality scores to assist consumers in identifying higher-quality plans. Second, because higher-rated plans receive higher rebates, those plans can offer enhanced benefits, which further increase the attractiveness of those plans relative to plans with lower quality ratings. Therefore, the quality-bonus program encourages plans to improve their quality scores both to garner higher payments and to increase their market share.

Quality bonuses in Medicare Advantage have been criticized for several reasons. The bonus structure may exacerbate geographic inequities across plans, both because quality bonuses are tied to benchmarks—which vary by county—and because of double-bonus designations. Differences in benchmarks and double-bonus designations may not reflect variations in the costs that plans incur for providing better quality. Additionally, because Medicare Part B premiums fund about 25 percent of all spending for Medicare Part B services, quality bonuses increase Part B premiums for all Medicare enrollees (including beneficiaries in Medicare FFS) despite enhancing benefits only for enrollees in higher-quality plans.

Quality scores may also be an imperfect indicator of a plan's overall quality. For example, some plans may be better able to record their processes and patient outcomes because they have more comprehensive electronic health records or closer relationships with providers. In addition, quality scores may be correlated with beneficiaries' characteristics, such as geographic location and income, leading to worse quality scores for plans that operate in poorer or more rural areas. Quality scores may also emphasize investment in areas of quality that are measured at the expense of components of quality that are not captured by the composite scores. Finally, there is evidence that plans have engaged in activities that increase quality scores without increasing underlying quality. Before the Bipartisan Budget Act of 2018 (Public Law 115-123) was enacted, some insurers consolidated plans in different counties into the same contract so that average quality scores increased. Because quality scores are calculated at the contract level, lower-quality plans in those consolidated contracts received higher payments, and enrollees in those lower-quality plans were shown quality scores that were inflated relative to local plans' performance. As a result of the new legislation, quality scores will reflect an enrollment-weighted average of quality in consolidated plans, which should reduce insurers' incentives to consolidate plans to increase quality scores. However, insurers will still have an incentive to engage in other activities that increase quality scores without necessarily increasing quality.


This option consists of two different alternatives. The first alternative would eliminate benchmark increases that are tied to quality scores starting in 2021. The second alternative would eliminate double bonuses from Medicare Advantage benchmarks. Higher-quality plans in those counties would still be paid bonuses under the second alternative, but the maximum increase to the benchmark would be 5 percent rather than 10 percent. (Five percent is the increase to benchmarks under current law for plans with 4 or more stars that are not operating in double-bonus counties.) Under both alternatives, the effect of a plan's quality score on rebates would continue as under current law, and CMS would continue to publish quality information for the benefit of consumers.

Effects on the Budget

Implementing either of the two alternatives would reduce mandatory spending between 2021 and 2028, according to estimates by the Congressional Budget Office. CBO projects that the first alternative—eliminating benchmark increases on the basis of quality bonuses—would reduce mandatory spending by $94 billion between 2021 and 2028. That reduction would come primarily from direct reductions in benchmarks. In addition, on the basis of prior research, CBO anticipates that, for every additional dollar in reduced benchmarks, plans would reduce their bids by 50 cents to partially shield beneficiaries from cuts to benefits (Song, Landrum, and Chernew 2012).

Reductions to the quality bonuses of different magnitudes would not result in proportional savings. For instance, if increases to benchmarks that are based on quality bonuses were cut in half rather than being eliminated, CBO projects that those savings would be slightly less than half of the savings from eliminating those bonuses. The percentage reduction in savings would not be equal to the percentage reduction in bonuses because, under the Affordable Care Act, benchmarks are not allowed to exceed their local FFS per capita spending or their 2010 benchmark levels, after adjusting for growth. As a result of those caps on benchmarks, some plans that would otherwise receive a bonus of 5 percent or 3.5 percent receive a smaller bonus under current law. Thus, for those plans, a proposal that reduced the statutory bonus percentage by half would reduce the bonuses they receive by less than half.

Under the second alternative—eliminating double bonuses—CBO estimates that mandatory spending would be reduced by $18 billion over the same time frame. CBO anticipates that, if the second alternative was implemented, individual plans in affected counties would reduce bids in response to those reductions in bonuses.

Under both alternatives, CBO estimates that changes in enrollment in Medicare Advantage would have minimal budgetary effects. Recent evidence suggests that plans have largely shielded beneficiaries from reductions in benefits by reducing their bids in response to cuts in benchmarks. Additionally, enrollment in Medicare Advantage has grown across all counties at similar rates, suggesting that factors external to Medicare Advantage may drive increases in the program's share of Medicare enrollment.

CBO also anticipates that the budgetary effects of plans' exiting the market would be minimal. Medicare Advantage insurers have canceled plans in some markets in response to past policy changes. However, the majority of enrollees in canceled plans have been able to enroll in another Medicare Advantage plan.

The largest sources of uncertainty in the estimates are whether plans would change the amount of effort they invest in maintaining or improving quality and whether plans would further change the generosity of supplemental benefits in response to changes in quality-related payments. If plans reduced investment in quality or benefits by more than CBO anticipates, those effects could result in lower enrollment in the Medicare Advantage program than the agency projects. In general, enrolling a beneficiary in Medicare Advantage costs the Medicare program slightly more than enrolling the same beneficiary in Medicare FFS; thus, if reductions in enrollment were larger than anticipated, budgetary savings could be larger than projected.

Another source of uncertainty in the estimates is whether the savings would change over the budget window. CBO projects that the savings under both alternatives would grow at the same rate that spending on the Medicare Advantage program would grow under current law. (Projected savings would change minimally from 2022 through 2024 and would increase in 2028 because of shifts in the timing of payments between fiscal years.) That projection depends on how quality bonuses would grow under current law. If quality scores were to grow more quickly than expected under current law, then the spending reductions associated with the two alternatives would also grow over time. Likewise, if quality scores were to grow more slowly than expected, then the spending reductions would fall. Quality scores under current law could grow more quickly than expected if insurers became more adept at improving their quality scores or at encouraging providers to meet certain quality targets. On the other hand, quality scores could grow more slowly under current law because many quality measures are defined relative to other plans, and as plans invested more in quality improvements, the threshold for a plan's being designated as "high quality" might become harder to attain.

Other Effects

An advantage of the first alternative is that it would address some of the criticisms of quality bonuses that are highlighted above. Specifically, reducing Medicare's spending on payments to plans would reduce the degree to which Part B premiums paid by Medicare FFS beneficiaries financed supplemental benefits for Medicare Advantage enrollees. A second advantage of the alternative is that it would substantially reduce the financial incentives for insurers to invest in activities that improve quality scores without improving quality. For instance, insurers would have less incentive to increase lower-quality plans' scores by consolidating lower- and higher-quality plans, which would improve the transparency of quality scores for consumers and reduce unnecessary payments to plans. A third advantage of the alternative is that it would reduce disparities in payments that might stem from differences in beneficiaries' characteristics, geographic characteristics, or plan characteristics—such as the ability of insurers to document improvements in patient outcomes or the percentage of beneficiaries who live in a rural area. Finally, eliminating the benchmark bonuses for specific quality measures would reduce the incentive for insurers to devote more resources to improving those dimensions of quality, relative to other aspects of quality that are not included in quality scores.

A disadvantage of the first alternative is that it would reduce the financial incentives for insurers to devote resources to improving quality. Insurers might also devote less energy to documenting quality if financial incentives to do so were reduced—which might reduce the accuracy of information provided to consumers when choosing a plan.

The primary argument for the second alternative is that it would reduce geographic differences in plan payments that might be unrelated to the costs of improving the quality of plans. A disadvantage of the second alternative is that, as in the first alternative, it would not entirely address some of the criticisms of quality scores that are highlighted above. For example, plans might still have an incentive to focus on improving dimensions of quality that are included in quality-bonus scores at the expense of dimensions of quality that are not included in those scores. This alternative also would maintain the incentive for plans to engage in activities that increase quality scores without necessarily improving the underlying quality of care.