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Letter to the Honorable John M. Spratt Jr. 1 (August 2007)

handle is hein.congrec/cbo9309 and id is 1 raw text is: CONGRESSIONAL BUDGT OFFICE Peter R. Orszag, C U .S. Congress ashington, DC 20515 August 17, 2007 Honorable John M. Spratt Jr. Chairman Committee on the Budget U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: As you requested, CBO has completed an analysis of how low bids by Medicare Advantage (MA) plans would have to be for the MA program to cost less than the fee-for-service (FFS) component of Medicare. As CBO has reported previously, the federal government spends about 12 percent more on beneficiaries in MA plans than it does on beneficiaries in FFS.1 The government's payments to Medicare Advantage plans are derived according to a statutory formula. Plans submit bids indicating the amount for which they are willing to provide the Medicare benefit package. Those bids are compared to benchmarks determined by law: for bids below the benchmarks, 75 percent of any difference is paid to the plan to provide extra benefits to its enrollees; for bids above the benchmarks (which are rare), the entire difference is charged to the plan's enrollees.2 Thus, for example, if the benchmark for a particular area is 110 percent of average FFS costs in that area, and a plan's bid is equal to 90 percent of FFS costs, the plan would receive its bid (90 percent of FFS) plus 75 percent of the difference between its bid and the benchmark-for a total payment equal to 105 percent of FFS costs. The government would pay less than the benchmark, but still more than average FFS costs. 1. See Statement of Peter R. Orszag, Director, Congressional Budget Office, before the House Budget Committee (June 28, 2007), p 4. 2. In addition to the calculations described in the text, payments to MA plans are also adjusted for the health status of enrollees and other factors. Those adjustments do not materially affect the conclusions presented in this letter.

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