Guess­ing game on Ad­van­tage rates

Modern Healthcare - - NEWS - By Paul Demko

In­vestors were first bullish then bear­ish on health in­sur­ers last week as they sifted through the com­pli­cated cal­cu­lus of the CMS’ pro­posed Medi­care Ad­van­tage rates for 2015.

A con­sen­sus emerged on the Feb. 21 CMS pro­posal that Ad­van­tage plans will see a rate cut of be­tween 3.5% and 5%— sig­nif­i­cantly less than the 6% to 7% cut that had been widely fore­cast. That seem­ingly good news ini­tially made in­vestors en­thu­si­as­tic about in­sur­ers with a large book of Ad­van­tage busi­ness. Last Mon­day, Hu­mana’s share price jumped by more than 10%; Aetna and Unit­edHealth Group saw smaller spikes. Those three com­pa­nies com­bined have more than 40% of the Ad­van­tage mar­ket na­tion­ally. But by last Wed­nes­day, the lus­ter had dimmed. Citi Re­search’s Carl McDon­ald down­graded Hu­mana’s stock from neu­tral to sell. And on Thurs­day, Moody’s In­vestors Ser­vice is­sued a re­port stat­ing that the pro­posed rates would be a “credit neg­a­tive” for in­sur­ers in the Ad­van­tage mar­ket­place.

The ver­dict on the 2015 rates, and what it will mean for both large commercial in­sur­ers and health sys­tems that op­er­ate Ad­van­tage plans, re­mains murky.

The fi­nal rate guide­lines will be is­sued on April 7 for the Ad­van­tage pro­gram, which now serves ap­prox­i­mately 30% of all Medi­care ben­e­fi­cia­ries. In­sur­ers are heav­ily lob­by­ing the Obama ad­min­is­tra­tion to bump up the rates.

There is con­fu­sion about the CMS pro­posal be­cause Ad­van­tage rates hinge on a com­plex ar­ray of fac­tors that aren’t eas­ily dis­tilled down to a sin­gle num­ber. The most ba­sic el­e­ment is the re­duc­tion in bench­mark

“This is now open sea­son on in­fe­rior species in Medi­care Ad­van­tage.” —John Gor­man, Wash­ing­ton-based in­sur­ance con­sul­tant

rates for Ad­van­tage plans, but even that is not sim­ple.

Un­der the Pa­tient Pro­tec­tion and Af­ford­able Care Act, the CMS has been tran­si­tion­ing to a new sys­tem for cal­cu­lat­ing Ad­van­tage rates. Un­der the old method­ol­ogy, the rate re­duc­tion would have been 3.6%. But un­der the new sys­tem, based on the cost of tra­di­tional feefor-ser­vice Medi­care, the re­duc­tion would have been 1.7%. When the two are blended to­gether, it pro­duces a drop in the bench­mark of 1.9% for 2015.

Fur­ther de­press­ing rates is the end of a three-year pro­gram that pro­vided qual­ity bonuses to plans that re­ceived at least three stars on a five-star scale. Un­der that pro­gram, 58% of plans were el­i­gi­ble for bonuses. But start­ing in 2015, only plans that re­ceive at least four stars will be el­i­gi­ble for additional pay­ments. That’s ex­pected to cut about 1.7% from over­all pay­ment rates.

“This is now open sea­son on in­fe­rior species in Medi­care Ad­van­tage,” said Wash­ing­ton-based in­sur­ance con­sul­tant John Gor­man.

An­other drag on rates is the im­ple­men­ta­tion of cuts un­der the ACA, which help fund the law’s in­sur­ance pre­mium sub­si­dies. Most an­a­lysts fig­ure that those re­duc­tions will re­sult in plans get­ting paid about 2% less in 2015.

“We be­lieve smaller and weaker health plans will likely exit the mar­ket or seek buy­ers, whereas larger play­ers will re­duce ben­e­fits, cut providers and elim­i­nate mem­ber­ship in weak-mar­gin ge­ogra­phies to com­pen­sate for these rates,” Wells Fargo an­a­lysts wrote.

But the CMS’ pro­posal wasn’t all bad news for in­sur­ers. They could see a sig­nif­i­cant spike in rates from a re-cal­cu­la­tion of the risk ad­just­ment scores that the CMS uses to de­ter­mine pay­ments. It’s an­tic­i­pated to give an aver­age boost of 3% in rates.

De­spite rate cuts in re­cent years, Ad­van­tage rolls have con­tin­ued to swell. In 2014, the num­ber of en­rollees grew by 8.9%, to­tal­ing nearly 16 mil­lion.

Tra­di­tion­ally, Medi­care has spent sig­nif­i­cantly more per capita on Ad­van­tage en­rollees than on ben­e­fi­cia­ries in its tra­di­tional pro­gram. In 2013, that dis­crep­ancy was 4%, ac­cord­ing to the Medi­care Pay­ment Ad­vi­sory Com­mis­sion. Un­der the new CMS pro­posal, Ad­van­tage plans still would re­ceive about 3% more in 2015.

Last year, the CMS ini­tially pro­posed a cut in the bench­mark rate of 2.2%. But af­ter a lob­by­ing cam­paign, the Obama ad­min­is­tra­tion in­creased the rate by 3.3%. Health plans say those stated rates are mis­lead­ing, ar­gu­ing that Ad­van­tage plans ac­tu­ally saw a cut of more than 6%.

Last year, the CMS was able to roll back the higher pro­posed cuts for 2014 by as­sum­ing that Congress would come up with a fix to the Medi­care sus­tain­able growth-rate for­mula for pay­ing physi­cians. This time around, the agency al­ready has in­cor­po­rated that as­sump­tion into its ini­tial rate pro­posal. That means there will be less wig­gle room to soften the cuts.

Amer­ica’s Health In­sur­ance Plans is ex­pected to step up its al­ready-fierce ad­ver­tis­ing cam­paign, warn­ing that se­niors will face ben­e­fit cuts and higher out-of-pocket costs if the CMS pro­posal goes through, which it es­ti­mates would cut rates by 5.9%. “This is go­ing to be one of the most fu­ri­ous 45 days of lob­by­ing this in­dus­try’s ever seen,” Gor­man said.

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