Benchmark Reform in Medicare Advantage

• Health Care

• Answering Challenges to Advanced Economies

Medicare Advantage was built to let private plans compete with traditional Medicare without costing taxpayers more. Decades of corrections have made the payment system complex and may have increased costs over traditional fee-for-service Medicare. This brief proposes three simplifying reforms to remove distortions, restore market discipline, and save taxpayers money.

Key Takeaways

• The Medicare Advantage (MA) payment formula is a patchwork of policies and mechanisms. Each layer added since 1997 answered a real problem, but together they push benchmarks above traditional Medicare costs and blunt the competitive pressure the program was meant to create.
• One solution is to end the Quality Bonus Program, which gives financial rewards to MA plans that achieve high performance ratings. The star ratings measure administrative compliance rather than actual patient health outcomes and do not improve quality. Consumer choice already rates plans. Savings could reach $170 billion over 10 years.
• Next, flatten the benchmark quartiles, which set payments based on where a patient lives. Rather than offsetting one another, these geographic adjustments inflate nationwide spending by 4.75% and create sharp cliffs in payment rates. Removing the quartiles saves about $203 billion over 10 years, while narrowing them saves $119 billion.
• Finally, trim rebates-the cash bonuses paid to private insurance companies when they operate below the plan's maximum budget, and which are then used to fund supplemental benefits. A cut of about $23 per member per month would save $100 billion over 10 years with a negligible effect on benefits and enrollment.
• This proposed simpler, lower-cost system beats adding more layers of complexity and economic engineering. The reforms reduce administrative complexity while upholding the MA program's premise that competing private plans can beat a government-designed benefit on value.

Cite this essay:

Jeremy Nighohossian, "Benchmark Reform in Medicare Advantage," Healthcare Policy Working Group, Hoover Institution, October 2026.