New findings call for transparency and rigorous oversight of the U.S. Medicare Advantage (MA) program, the United States’ largest health care capitation program.

The research, published in the journal Manufacturing & Service Operations Management, finds evidence that some MA health plans conduct strategic cross-subsidization, offering extra benefits in some areas to attract healthier, less costly patients, while providing fewer benefits to sicker patients. Through such strategic cross-subsidization, health plans can unfairly increase their profits, resulting in reduced care quality for sicker patients and obvious inequity in care.

“Our findings open the black box of Medicare Advantage operations, revealing a previously unknown resource misallocation problem,” says Turgay Ayer of Georgia Institute of Technology, one of the study’s authors.

“Our work underscores the urgent need for enhanced transparency in Medicare Advantage. The practice of strategic cross-subsidization we’ve uncovered could exacerbate socioeconomic inequalities in health care access and outcomes, highlighting the critical importance of rigorous oversight in capitation payment models.”

Strategic cross-subsidization is explicitly prohibited by law in the United States because of its heightened effect on the undesired risk selection within capitation programs, in which health plans cherry-pick profitable enrollees through strategic benefit designs.

The study, conducted by Ayer, alongside fellow authors Zhaowei She of Singapore Management University, Bilal Gokpinar of University College London and Danny Hughes of Arizona State University, utilized a large commercial insurance database with claims from more than 2 million MA enrollees.

“For each one-point increase in a patient’s risk score, their annual ‘spending-cost difference’ (the gap between what MA plans spend on a patient vs. what they receive in payments) decreases by over $9,000,” said She.

These findings should alert policymakers to revisit the design and implementation of Medicare Advantage Plans to end this unfair process and enable the Centers for Medicare & Medicaid Services to more effectively administer the MA program.

The paper, “Strategic Cross-Subsidization in Health care Capitation Programs: Evidence from Medicare Advantage,” provides recommendations for policymakers. This starts with stricter oversight of MA plans, justifying recent federal initiatives for increased transparency and ensuring taxpayer dollars are used appropriately and efficiently. Secondly, it is essential to enforce regulations against cross-subsidization to prevent risk selection.

“This work not only showcases the problem, but also provides large-scale empirical evidence that this issue is widespread, potentially affecting millions of beneficiaries across the entire MA system,” said Ayer.