Medicare Advantage organizations earned $1.3 billion more than was projected in profits in 2006, according to a report from the Government Accountability Office.
MA organizations are not required to submit claims data to the Centers for Medicare & Medicaid Services, but they must report actual expenditures for the year two years prior to the upcoming contract year.
On average, MA organizations reported earning profits of 6.6 percent of total revenue in 2006 - which was higher than their projected profits of 4.1 percent. MA organizations reported spending an average of 83.3 percent of total revenue on medical expenses, but had projected spending an average of 86.9 percent of total revenue on those expenses.
More than half of Medicare beneficiaries were enrolled in health benefits plans offered by MA organizations for which profits as a percentage of revenue were greater than projected and the combined medical and non-medical expenses as a percentage of revenue were lower than projected.
Among the three types of MA health plans with the largest enrollments - HMOs, PPOs and PFFS plans - there was a consistent pattern of actual profits being higher than projected and medical expenses being lower than projected.
Projections of profits were closer to actual profits as a percentage of revenue in 2006 (2.5 percentage points difference) than they were in 2005 (3.2 percentage points difference). However, largely due to an approximate 40 percent increase in enrollment between the two years, the dollar amount of the difference between actual and projected profits increased from $1.1 billion in 2005 to $1.3 billion in 2006.
GAO officials say the accuracy of MA organizations' projections is important because, in addition to determining Medicare payments, these projections also affect the extent to which MA beneficiaries receive additional benefits not provided under the original Medicare fee-for-service program and the amounts beneficiaries pay in cost sharing and premiums.