Healthcare Business News

Uncertainty envelops 2015 Medicare Advantage rate cuts

By Paul Demko
Posted: February 24, 2014 - 3:45 pm ET

The CMS set off a flurry of speculation Friday about what the cuts for 2015 Medicare Advantage rates would be.

Published reports after Friday's CMS guidance ranged from 1.9% to 3.6%. Now that analysts have had time to study details of the 148-page announcement, they're agreeing on only one thing: No one is certain as yet exactly what the 2015 cuts will be. Estimates now range from 3% to 6%, according to financial analysts and insurance experts that have scrutinized the CMS guidance.

The lingering uncertainty, fueled by CMS not announcing an actual rate, reflect the difficulty of fully gauging the complex array of factors that combine to make up the Advantage rates.

All a CMS spokesman would say Monday in response to a request for comment was: “The proposed changes for 2015 for Medicare Advantage are smaller than those implemented in 2014. As we've seen over the past few years, efforts to reduce overpayments for medical services have corresponded with falling premiums for consumers. Since the ACA became law, enrollment in Medicare Advantage has increased nearly 33% while premiums have fallen by 10%, and premiums for Part B have remained flat.”

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“No matter how much preparation one does ahead of time, it's still virtually impossible, even after the call letter is released, to accurately predict how Medicare rates will change the following year,” Citi Research analyst Carl McDonald said in a note to investors. “The point here is that anyone (other than a Medicare actuary) claiming to have high conviction at this point on how much 2015 rates are falling probably isn't being entirely truthful.”

Among the initial projections:

  • Humana, one of the largest players in the Advantage market, expects rates to drop by 3.5% to 4% in 2015, according to a filing with the Securities and Exchange Commission. Previously the Louisville, Ky.-based firm had predicted a 6% to 7% drop. Humana's stock price soared by more than 10% Monday, likely on investor relief the cuts weren't as large as Humana had anticipated.

  • Gorman Health Group, a consulting firm that works closely with Medicare Advantage plans, predicts a rate reduction of 6.2%. Even with that cut, the firm still estimates that private Medicare plans will be paid 3.4% more per enrollee than the cost for traditional fee-for-service Medicare.
  • Citi Research projects a decrease in rates of 4.5%. That includes a hit of 2.3% from the continued implementation of cuts that were included in the federal healthcare reform law.
  • J.P. Morgan analysts calculate a 4.1% cut in rates for 2015. That's actually more than 2% better than the firm had anticipated.
  • Barclays offered the sunniest prediction: a reduction of just 2.9%. And without the effect of ACA cuts, that would have been a 1.4% increase.

Of course, these estimates are based on preliminary guidance from the CMS. Industry officials and other interested parties will now have two weeks to provide feedback to the agency. Final rates are due to be issued on April 7. The plans must submit Advantage bids by June 2.

Despite cuts in recent years, enrollment in the private Medicare program has continued to soar. In 2014, enrollment increased by 8.9%, according to an analysis by the research and consulting firm Avalere Health. Nearly 16 million Medicare beneficiaries are now in private plans, roughly 30% of the entire Medicare population. Traditionally, the federal government has paid substantially more for Advantage enrollees. In 2009, private Medicare beneficiaries cost 9% more than enrollees in the traditional fee-for-service program, according to the Medicare Payment Advisory Commission. That disparity was reduced to 4%, on average, in 2013.

For 2014, the CMS scaled back cuts after an outcry from insurers. It accomplished that primarily by assuming, in a change from previous years, that Congress would repeal the Medicare sustainable-growth rate physician pay formula. This year's initial guidance also makes that assumption, meaning the federal agency is expected to have less flexibility to make adjustments.

“The agency has less discretion this year to bend to political calls to change their initial read,” said Dr. Robert Berenson, a fellow at the Urban Institute and former MedPAC commissioner. “For 10 years, health plans have had special advantages and now it's being phased out.”

While the proposed cuts do not appear as steep as many anticipated, industry officials didn't back off of warnings that further reductions would result in fewer benefits for seniors. “Another round of payment cuts would be devastating to the more than 15 million seniors and people with disabilities that have chosen to enroll in Medicare Advantage for the better benefits and higher quality coverage these plans provide,” said Karen Ignagni, president and CEO of America's Health Insurance Plans, in a statement.

Since passage of the ACA, the CMS has been transitioning to a new rate-setting methodology. Under the old scheme, the benchmarks would have been reduced by 3.6%. But under the new methodology, which is more directly tied to fee-for-service Medicare costs, the benchmarks are reduced by only 1.7%. As the new methodology is phased in, the actual rates are a blend of the old and new benchmarks. Across all plans, the combined effect of these two methods is a benchmark reduction of 1.9% for 2015.

But beyond that, the CMS is phasing out the three-year quality demonstration project that buffeted many plans in recent years. Under that program, Advantage plans that received at least three stars, on a five-star system, were eligible for bonus payments of at least 3%. But starting in 2015, only products that receive at least four stars will be eligible for bonus payments. In addition, plans that have fallen below three stars for three consecutive years will no longer be allowed to participate in the Advantage program.

Insurance consultant John Gorman compares the process to the CMS continuously speeding up a treadmill that the plans are on. “The plans that are in shape stay ahead of it and continue to profit, and plans that are bad at this stuff run out of gas and fall off the treadmill,” Gorman said.

But those negative financial factors were mediated significantly by what's billed as “fee for service normalization.” This is basically an adjustment in the risk formula that will result in significantly higher payments for Advantage plans. Most analysts stress that it's too early to know what the exact impact will be. But Citi Research estimates that it will result in a 3% increase in rates, while J.P. Morgan calculates it as a 3.3% boost.

“Plans are still trying to wrap their arms around it,” said Jennifer Kowalski, a vice president of Avalere Health. “There's going to be variability on a plan by plan basis.”

Political pressure is expected to build leading up to the final rate announcement on April 7. Last week, a bipartisan group of Senators sent a letter to the CMS administrator Marilyn Tavenner warning against cuts to the private Medicare program. On Monday, Florida's Republican Gov. Rick Scott joined criticism of cuts to Advantage plans.

'Red meat for K Street'

“We have a significant Medicare population in our state. You saw the cuts in Medicare last week. Those are devastating to our state—devastating to our seniors,” Scott said after a meeting at the White House with President Barack Obama and the nation's other governors. “As I travel the state, seniors are telling me they cannot get a doctor now,” he said, adding later that the Obama administration is “raiding Medicare to pay for Obamacare. That's wrong.”

In addition, AHIP has mounted a vigorous marketing campaign in recent months warning that “Seniors are Watching.” Legislators will undoubtedly be loath to anger that vital constituency group in a congressional election year. In addition, the Obama administration continues to be dependent on the goodwill of insurers in order to allow for successful implementation of the president's signature legislative accomplishment.

“This is red meat for K Street,” Gorman said of the proposed rates. “This is going to be one of the most furious 45 days of lobbying this industry's ever seen.”

Follow Paul Demko on Twitter: @MHpdemko

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