Late News: Temporary reprieve

Insurers and their stockholders howled with delight after last week's decision by the CMS to reverse Medicare Advantage cuts. But they may be in for a rude awakening. Medicare Advantage is still facing a 10-year, $156 billion reduction mandated by the Patient Protection and Affordable Care Act, which is designed to bring the program in line with traditional fee-for-service Medicare. Moreover, Advantage still faces cuts from sequestration.

“If you take (the Medicare Advantage impact) the ACA is laying out, there's going to be reductions in what (CMS) is going to pay out in longer term,” said Vishnu Lekraj, a senior healthcare analyst for Morningstar, who adds those reductions are in effect through 2022.

The CMS surprised stakeholders with its April 1 announcement increasing the 2014 reimbursement rate by 3.3% instead of the previously announced cut of 2.3%. The agency said for the first time that it would calculate rates assuming Congress would prevent the automatic 25% cut to the Medicare physician pay formula, better known as the “doc-fix,” as it has for the past decade. While the CMS' own actuaries advised against making the assumption, an agency spokesman defended the move. “This is a specific, unique circumstance, and we expect that current law will continue to be used in other instances,” he said.

Payers and providers, however, won't have much time to celebrate. Medicare cost growth has slowed to the same pace as the rest of the economy in recent years, and some analysts are now saying that may be the new normal.

The Kaiser Family Foundation projects Medicare spending will grow by only 3.5% annually from 2014-2023, down from an average 5% annual increase in the past decade. That means Medicare Advantage rate increases in the future won't be as high as in the recent past.

“The biggest reason for the projected slowdown is the fact that Part D was implemented in the last decade, and projections assume that no such benefit expansion occurs in the next decade,” wrote report author Chapin White of the Center for Studying Health System Change. “The other reason for the projected slowdown is the ACA, which significantly reduced payments.”

In a note to investors last week, CitiGroup Global Markets healthcare analyst Carl McDonald projected that Medicare Advantage plans will still see a 2% rate reduction in 2014, though he added that that's much better than the 7% to 8% revenue reduction that some analysts had been predicting prior to the CMS change.

In the short term, insurance carriers should see enhanced profitability from the small increase since the CMS' new benchmark will be more closely aligned with insurer's Advantage bids for 2014, said Anne Hance, a partner at McDermott, Will & Emery in Washington.

“They are anticipating a higher growth rate,” she said, referencing the doc-fix. That “gives them a little more room in the bid submissions.”