Guessing game on Advantage rates

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 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 fee-for-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.

Follow Paul Demko on Twitter: @MHPDemko