That's according to a report from the Office of Inspector General, which says that Medicare Advantage plans are not legally prohibited from taking that prepaid money and earning interest on it, funds that are more appropriately retained by the Centers for Medicare and Medicaid Services.
For this report, the OIG reviewed $69 billion in prepayments made to 457 Medicare Advantage organizations in 2007. It found that the plans hold Medicare funds for approximately 46 days before paying for medical services.
The OIG recommended a change in payment policy for Medicare Advantage plans in the year 2000, but CMS rejected the idea saying that the plans would just raise rates to compensate for the loss of income.
"Medicare Advantage organizations and CMS officials have stated that if either of our previous legislative or regulatory recommendations were to be implemented, some Medicare Advantage organizations would increase their bid proposals to recoup investment income that they would lose," the OIG report says.
If the plans did increase their bid proposals, this "could result in a possible decrease in our estimated cost savings. However, this could provide greater transparency for program officials," the OIG report said.
The OIG's renewed recommendations say that CMS should "consider the impact of the investment income earned on Medicare funds, and review our conclusions and recommendations to improve the economy and efficiency of the Medicare Advantage program."
The OIG recommended that CMS:
• Pursue legislation to adjust the timing of Medicare's prepayments to Medicare advantage organizations to account for the time that these organizations invest Medicare funds before paying providers for medical services, or
• Develop and implement regulations that require Medicare Advantage organizations to reduce their revenue requirements in their bid proposals to account for anticipated investment income.
In a 2000 report, the OIG found more than $100 million in investment income that Medicare+Choice organizations earned on payments of approximately $20 billion in calendar year 1996.
It has recommended that Medicare Advantage plans should be treated the same in terms of payment timing as the Federal Employees Health Benefits Program. Not only do FEHB carriers have more limited opportunities to generate investment income than do Medicare Advantage plans, federal regulations require that those funds be set aside in reserves "for use in the operation of the FEHB program."
The OIG report says it disagrees with CMS' contention that Medicare Advantage plans would simply raise rates to compensate for loss of investment income for the following reasons:
• Medicare Advantage payments are being decreased under the Health Care and Education Reconciliation Act of 2010. "This modification, coupled with the provision to restrict the total amount of administrative costs reimbursed by CMS to Medicare Advantage organizations...may discourage Medicare Advantage organizations from increasing future bid proposals to recoup investment income that they would lose."
• Market competition would create a disincentive for these plans to raise their bids.
• The Medicare trust funds, through long-term investments, yield higher returns than what Medicare Advantage organizations earn with short-term investments. "Thus, any decrease in the estimated cost savings caused by increases in Medicare Advantage organizations' bid proposals would be reduced because of the difference between the higher interest earned by the Medicare trust fund and the lower interest earned by the Medicare Advantage organizations."