Favorable Selection in Medicare Advantage? What the Evidence Tells Us

Favorable selection in Medicare Advantage (MA) contributes to MA plans being overpaid. Reducing excessive payments to MA plans is one way to address the Medicare program's financial pressures. In this brief, we review evidence of favorable selection in MA to clarify what the various types of studies tell us about selection in MA and how the findings relate to the appropriateness of payments to MA plans. Overall, consistent and convincing evidence shows that favorable selection, after accounting for risk adjustment, is a key contributor to MA overpayment.

Key takeaways from this brief include the following:

• Studies may estimate overall (gross) selection into MA or net selection into MA that remains after adjustment for risk. Studies often provide evidence on both types of selection.
• Gross selection refers to how the composition of the MA and traditional Medicare (TM) populations differ, particularly for factors associated with expected health care spending. Evidence on gross selection can help interpret differences in risk scores across groups because of differences in diagnostic coding and their implication for payment.
• Net selection refers to differences between MA and TM populations that remain after adjusting for risk, where risk is measured in a manner considered comparable for the two groups. Studies of net selection tell us by how much a group of enrollees has costs or other outcomes that are higher or lower than expected based on observed enrollee characteristics. Estimates of net selection are necessary for evaluating whether risk-adjusted payments are too high or too low, on average, for a group of enrollees because of selection effects.
• Studies based on data up to 2014 generally found favorable gross selection into MA, but that pattern has shifted in recent years. Evidence from 2015 and after shows MA enrollment to be demographically similar to TM enrollment (by age and sex), and rates of dual Medicare/Medicaid eligibility (associated with higher expected spending) are now higher in MA than in TM, consistent with growth in enrollment in special needs plans.
• Studies of selection into MA net of applicable risk adjustment have generally found evidence of selection favorable to MA. The magnitude of favorable net selection varies somewhat across studies and time periods.
• Recent studies of net selection in MA that addressed limitations of earlier work found substantial degrees of net favorable selection into MA and estimated its sizable contribution to overpayment of MA plans.
• Many ideas have been proposed to reform risk adjustment in MA and reduce overpayment to MA plans.