Lake Wobegon has come to Medicare – and a key advisory panel doesn’t like it.

The panel, the Medicare Payment Advisory Commission (MedPac), in a Jan. 6 letter does not mention the fictional Lake Wobegon, where all the children are above average. But it hints that not every Medicare Advantage insurer deserves to be above average.

The letter, to Dr. Donald Berwick, who heads the agency overseeing Medicare, criticizes a move to extend quality bonus payments meant for top-performing health insurers to those with lower scores. In fact, the new bonus program will reward even those plans highlighted on Medicare’s own website as being poor performers over three consecutive years, according to the letter signed by MedPac Chairman Glenn Hackbarth.

The effort by the Centers for Medicare and Medicaid Services (CMS) will likely result in “far greater program costs” than the reward system called for by Congress in the health law and reduces insurers’ incentive to achieve high performance, the letter concludes.

Medicare Advantage plans are those offered by private insurers as an alternative to traditional Medicare. About 11 million people – or 24 percent of all Medicare beneficiaries – are enrolled in Medicare Advantage plans nationwide.

The comments are included in a letter concerning a separate change in Medicare and come in response to a move made by CMS officials late last year to adjust the standard that Medicare Advantage insurers must meet in order to qualify for a bonus payment. The change – made by CMS officials using their authority to create demonstration projects – “increases program spending at a time when Medicare already faces serious problems with cost control and long-term financing,” says the letter.

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.

But the law also called for bonuses starting next year for insurers who score at least four out of five “stars” on a set of quality measurements.

However, under the three-year demonstration that includes all insurers nationwide, Medicare will extend those bonus payments to plans that score at least three stars.

Based on Medicare’s 2010 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 have said that extending the quality bonuses to more plans — along with another change that speeds up some of the payments – 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, Medicare officials said in November.

CMS spokesman Peter Ashkenaz said the agency could not comment on the MedPac concerns because they came as part of public comments gathered on a separate proposal. The agency will respond to comments, including those from MedPac, in the final regulations, he says. It isn’t clear if those responses will include discussion of MedPac’s criticism of the bonus program, however, because it is a demonstration project that does not require a final regulation.

The star rating system was established a few years ago to help Medicare officials 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.

Still, the way the demonstration program is designed would allow nine plans that have been rated as poor performers over three consecutive years to quality for the quality bonuses, the MedPac letter says.

In making the move, the agency is employing an “overly broad” use of its authority to create demonstration programs, which are generally smaller pilot projects testing innovations in how health care is delivered, the letter says.

“Demonstrations should not be used as a mechanism to increase payments,” says the MedPac letter, which concludes by urging CMS to reconsider its decision.

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