As federal lawmakers argue over a congressional plan to privatize Medicare in the long term, healthcare policy experts are focused on a more immediate concern: how upcoming payment changes will affect the future of Medicare Advantage.

Last year's Patient Protection and Affordable Care Act included some significant payment reductions for Medicare Part C—the Medicare Advantage plans offered by private companies approved by Medicare—that will take effect in 2012 and be phased in over six years. Conservatives worry that the reductions could spell the end for these private plans.

Meanwhile, a March 2010 report from the Medicare Payment Advisory Commission highlights the high cost of this program, stating that Medicare spends more on the Medicare Advantage program than under fee-for-service for similar beneficiaries at a time when the Medicare program and its beneficiaries “are under increasing financial stress.” Regardless of the arguments, changes are coming, and some experts have expressed concern about whether Medicare Advantage plans will be able to thrive under the new conditions.

Anne Hance, a partner at McDermott Will and Emery in Washington specializing in healthcare regulatory issues, says some people are expecting consolidation in the industry as plans realize they will not be able to participate completely when the new payment methodologies are phased in.

As Hance explains, the Medicare Modernization Act of 2003 changed how Medicare Advantage payments were based beginning in 2006. Since then, the federal government has paid Medicare Advantage plans through a process in which plans submit bids based on their costs per enrollee for services covered through Medicare.

According to a summary of the health reform law's changes from the Kaiser Family Foundation, the bids are then compared against benchmarks that are established by statute and vary by county. The benchmarks reflect the maximum amount Medicare will pay to plans to provide services under Medicare parts A and B.

“The construct back then was that these benchmarks were determined that reflected an adjusted community rate,” Hance says. “And MA plans would bid on that benchmark in the service area and their payment was based on that bidding construct.”

If a plan's bid is above the benchmark, then enrollees pay the difference through a monthly premium in addition to a premium for Medicare Part B. Plans with bids lower than the benchmark receive 75% of the difference—with the Medicare program retaining 25%—that is known as the “rebate” plans must use to provide supplemental benefits, which can come in the form of lower premiums or lower cost-sharing.

That methodology is about to change as a result of the Affordable Care Act, which included provisions that will reduce payments to Medicare Advantage plans over time. Winners and losers As a result of the new law, benchmarks will be set in such a way that counties with the highest fee-for-service costs—such as Miami-Dade County—will be paid 95% of fee-for-service, while benchmarks for counties with the lowest fee-for-service costs—such as Boise, Idaho, or Honolulu—will be set at 115% of fee-for-service costs.

Similarly, benchmarks will be set at 107% of fee-for-service for the third-highest quartile and 100% for the second-highest, according to Gretchen Jacobson, principal policy analyst at the Kaiser Family Foundation. The law also calls for a change in the rebate to Medicare Advantage plans.

“Under the new system in 2012, the 75-25 split is out the door,” says Hance of McDermott Will and Emery. “It's now a 50-50 split and CMS holds onto the other 50%. But if you're a high-quality program, the percentage of the difference goes up and can go as high as 70%,” she says. “The goal of this is to pump up the dollars to these high-quality plans.”

According to the Kaiser Family Foundation, those plans that receive four or more out of five stars from the CMS' star-rating system—which ranks health plans on quality—will receive bonus payments of 1.5% in 2012, 3% in 2013 and 5% in 2014 and beyond, while high-quality plans in certain areas will receive double bonuses. And while the majority of plans will be allowed to retain only 50% of the difference between the benchmark and bid, plans with 3.5 or 4 stars will retain 65% of the difference and plans with 4.5 or 5 stars can retain 70% of the difference.

“I think some of the smaller plans and lower-quality plans may completely on their own decide they're going to have a hard time competing,” Hance says, explaining that they might pull out of the market altogether if their quality level is low. “And that analysis is probably happening over the next one to three years as these payment methodologies are implemented,” she says, adding later that some of the analysis has already begun.

There were several reasons for these changes in the law, according to Kaiser's Jacobson.

“One that is often cited is that an analysis by MedPAC found that plans were paid more on average than it would cost to provide payments for beneficiaries in Medicare fee-for-service. In 2009, on average, the payments to the plans were 14% higher than it would cost under Medicare fee-for-service,” she says. “These changes were made to bring the payments closer to the payments for fee-for-service in each county.”

MedPAC's March 2010 report showed that payments to Medicare Advantage plans increased to $110 billion in 2009 from $93 billion in 2008, and that the 2009 figure represented 26% of all Medicare expenditures that year.

“In 2009, Medicare spent roughly $14 billion more for the beneficiaries enrolled in MA plans than it would have spent if they stayed in FFS Medicare,” according to the report.

Meanwhile, the nonpartisan Congressional Budget Office estimated in a December 2010 report that the health reform law will result in cuts of $136 billion to Medicare Advantage between 2010 and 2019.

Robert Zirkelbach, a spokesman for America's Health Insurance Plans, says Medicare Advantage will also be affected by the billions in cuts to regular Medicare fee-for-service, and that those cuts will result not only in reduced benefits but also higher premiums and fewer choices for beneficiaries.

“Many of them will lose their Medicare Advantage coverage altogether,” he says of those enrolled in such plans.

The CBO previously estimated that enrollment in the Medicare Advantage program in 2017 and later years will be about 60% of the enrollment that would have occurred without the Affordable Care Act. And an April 2010 report from the CMS Office of the Actuary found that the “new provisions will generally reduce MA rebates to plans and thereby result in less generous benefit packages.” That office estimates enrollment numbers will drop by 50% after the new provisions are fully implemented.

In March, analysts from the conservative American Action Forum issued a report on Medicare Advantage, saying these plans have had a history of providing expanded benefits, cost-effective care and better results.

“The recent healthcare reform—the Patient Protection and Affordable Care Act—reverses this policy by substantially tilting the policy playing field against Medicare Advantage,” analysts Douglas Holtz-Eakin and Michael Ramlet wrote. “This policy reversal will not only harm current members by reducing benefits and increasing premiums, it will disadvantage all beneficiaries by reducing their access to private-plan choices.”

But Marsha Gold, a senior fellow at public policy institution Mathematica, says there are factors that could result in the Medicare Advantage plan remaining steady or even increasing. One is that the retiree insurance group market is getting smaller, and another is interest in the dual-eligible population, or those beneficiaries that qualify for Medicare and Medicaid. “Historically, they weren't part of Medicare Advantage at all,” Gold says, “Through interest at the state level, they are trying to expand that.”

Medicare Advantage plans need to submit their bids for 2012 to CMS by June 6. In advance of that deadline, Oppenheimer Equity Research last week issued a research note with a forecast for next year, offering a “stable” outlook. It also noted that the annual enrollment period will start a month earlier—from Oct. 15 through Dec. 7—which will tighten the timeline the CMS has to approve bids.

“This bidding season could offer some challenges, but overall it should be relatively manageable,” according to the June 2 note. “We believe the outlook for Medicare Advantage should remain solid, as the slow shift toward parity should not trigger any drastic changes in the marketplace in 2012.”