In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings.

The three-year plan goes beyond what the health law called for in creating the bonuses. The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements.

Instead, a “demonstration project” authorized by Medicare officials will extend bonus payments to plans that score at least three stars. Based on this year’s star ratings, the change means 62 percent of all Medicare Advantage insurers — representing 84 percent of enrollees — will qualify for the quality bonuses, compared with only 14 percent of plans under the health law provisions.

Medicare officials said extending the quality bonuses to more plans – and accelerating the top amounts that the highest performing plans can earn – is meant to spur managed-care plans to move more quickly to improve quality. The total cost over the three years is $1.3 billion. Wall Street likes it: Barclays Capital analyst Joshua Raskin, in a report, called the decision a “clear and unexpected positive” for managed care stocks. But some consumer advocates expressed skepticism, wryly noting that lowering the bar for bonuses reminded them of the fictional Lake Wobegon, where all the children are above average.

“Three stars is average,” says Vicki Gottlich, senior policy attorney for the Center for Medicare Advocacy. “Do we reward average plans? I’m not a person who pays children to get A’s. So it’s not an argument that resonates with me. I’m not sure it will provide them an incentive (to improve).”

About 11 million people are enrolled in Medicare Advantage plans nationwide, about 24 percent of all Medicare beneficiaries.

The health care law cut $136 billion over 10 years from the Medicare Advantage program, following years of concern that the private sector plans cost the government more than traditional Medicare.

Republicans hammered Democrats on those cuts during the recent mid-term campaign, arguing that plans would leave the program and seniors would lose benefits they had enjoyed. But the Obama administration countered that the higher costs of the Advantage program was unfair to those in traditional Medicare.

The star rating system was established a few years ago to help Medicare monitor plans and to guide consumers in choosing coverage, although some advocates say the measurements don’t go far enough. Insurers are rated based on dozens of measures, including the percentage of members who get certain vaccinations, how well they monitor diabetics and the percentage of complaints filed by members.

“We’re providing much stronger financial incentives for plans” to move from being three- or four-star plans to being five-star insurers, says Jonathan Blum, deputy administrator at the Centers for Medicare & Medicaid Services.

The extended bonus payments are included in a 250-page regulation released on the Veterans Day holiday last week. Some Medicare groups noted the obvious low-key announcement, pointing out that they received only short notice about a conference call with advocates to explain the change.

To make the change, Medicare officials used their authority to create a demonstration project, which does not need congressional approval.

Unlike most demonstration projects, the bonus payment plan is nationwide with all Medicare Advantage insurers automatically enrolled. Blum said Medicare will evaluate the success of the effort partly by comparing the number of plans that reach the top levels to the number that advanced in the first few years of the star ratings system, which did not include bonuses.

Of 560 Medicare Advantage contracts, there are currently only three that have five stars and 74 with four stars, according to CMS data. About 164 contracts are either too new or too small to rate.

In addition to extending bonuses to three-star plans, the demonstration also enhances the rewards for four and five star plans. Instead of seeing their bonuses ratchet up from 1.5 percent in 2012 to 3 percent in 2013 and 5 percent in 2014, five-star plans will immediately get the 5 percent, starting in 2012. Four-star plans will also see a first-year bump to 4 percent bonuses. 

The program initially was aimed at using the private sector to lower Medicare’s costs, but numerous studies have shown that it costs the government more to cover an enrollee in such plans than in traditional Medicare. This year, government data show the plans cost about 9 percent more than traditional Medicare.

A decade ago, trims to Medicare Advantage payments resulted in many insurers’ dropping out of less profitable markets, forcing enrollees to switch insurers or join traditional Medicare. While the bonus payments can’t be used to directly improve insurers’ profit margins, the bonuses could shore up insurers in markets where they might otherwise pull out – or allow them to increase benefits and attract more customers, analyst Raskin says.

“It’s only been eight days since the election,” Raskin wrote in his report, “but the rollback of Medicare Advantage cuts got its first step forward.”

Gottlich agrees that Medicare may have considered those earlier upheavals when considering the bonus project.

“This may be a political decision,” says Gottlich. “Because it might encourage a plan to become a 3.5-star plan and stay in the market.”