More than 25 percent of Medicare beneficiaries currently receive benefits through a Medicare Advantage plan, the private plan alternative to traditional, fee-for-service Medicare (FFS).  Although private plans were introduced to Medicare as a way of reducing program costs, payments to Medicare Advantage plans have exceeded average spending in traditional Medicare in recent years.  Designing a payment system that attracts managed care plans and fairly reimburses their participation has been a long-standing challenge in the Medicare program.  In 2006, Medicare implemented a competitive bidding system for Medicare Advantage (MA) plans in a new attempt to rein in spending on plans and offer additional benefits to Medicare beneficiaries. Plans bid to provide a standard benefit package relative to a county benchmark.  If a bid exceeds the benchmark, plans must make up the difference through beneficiary premiums. Plans bidding below the benchmark are rebated 75 percent of the difference between the benchmark and their risk-adjusted bid. Rebates must be used to provide additional benefits or reduced premiums to enrollees.  It is unknown whether rebates to plans, and consequently more generous benefit packages, attracted sicker patients to Medicare Advantage plans. 

The bid system yields several testable predictions about plan behavior with important implications for beneficiary well-being.  In markets where benchmarks are high relative to plan costs, plans can use rebates to offer more generous benefit packages.  Thus, enrollment should be higher in these markets and average risk scores (indicating patient illness burden), should be higher as plans become attractive to sicker Medicare beneficiaries. I use county-level enrollment and payment data from the Centers for Medicare and Medicaid Services from 2006 - 2010 to estimate first difference regressions assessing the impact of MA plan bids and rebates on managed care enrollment. 

Average MA penetration ranged from 19% in 2006 to 26% in 2010.  Plan rebates ranged from an average $72.80 per enrollee per month in 2009 to $58.21 in 2010, though there was considerable variation across counties and over time.  On average, Medicare Advantage enrollees were healthier than the average Medicare beneficiary, with a risk score of 0.95 (relative to average risk 1). 

More generous managed care benefit packages encourage sicker beneficiaries to enroll in Medicare Advantage plans, though MA enrollees remained healthier than average Medicare beneficiaries.  I find that increases in average rebate amount paid to plans (three-quarters of the difference between the benchmark and their bid) increases both total enrollment in Medicare Advantage plans and enrollment by higher cost (and presumably sicker) Medicare beneficiaries.  A $10 increase in the monthly, per-enrollee rebate amount used to support supplemental benefits is associated with a 0.3 percentage point increase in county MA penetration and a 0.08 increases in average MA enrollee risk score.  On average, MA plans were able to provide a standard benefit package for significantly less than the county benchmark, suggesting that lower payments to MA plans may be a source for future Medicare savings.  Higher payments to MA plans do not appear to target the sickest Medicare beneficiaries.