Insurers still see Medicare Advantage cuts on horizon

Insurers and Wall Street analysts still see cuts ahead for Medicare Advantage plans even though the Obama administration says that tweaks to its draft policy mean the rates will rise.

“It's not as clear-cut a win for the industry as some are making it out to be,” John Gorman, executive chairman of Gorman Health Group, a consulting firm, said Tuesday. “There's still a lot of blood on the floor.”

Late Monday, the CMS announced (PDF) that it would raise overall Medicare Advantage payment rates by 0.4% in 2015, reversing course from a February proposal that the administration said would have led to a 1.9% rate cut. Analysts had pegged the impact of that policy to be a cut of 3%-5%.

But while the move may give the Democrats who urged the CMS not to cut the rates some political cover in the looming mid-term elections, insurers and industry analysts said they still expected to payments to decline in 2015, albeit not as much as they had feared.

The industry notched at least one significant victory after an intense lobbying against the proposed policy: The administration's decision to hold off on a plan to exclude diagnosis codes derived from home-risk assessments, which J.P. Morgan analysts estimated would have cut rates by an additional 2%.

Ana Gupte, an analyst at Leerink Partners, called the revised policy “an improvement relative to the preliminary rate,” but said that she still believed overall payment rates would fall by roughly 3% next year. UBS analysts similarly said in a Monday client note that they expected 2015 rates to fall by 3%.

The impact of the CMS' decision on the plans, which are administered by private companies that contract with Medicare, will vary depending on the plan itself, and where it's located. But overall, insurers said they will see a decline.

“The changes CMS included in the final rate notice will help mitigate the impact on seniors, but the Medicare Advantage program is still facing a reduction in payment rates next year on top of the 6% cut to payments in 2014,” America's Health Insurance Plans President Karen Ignagni said in a statement. The trade group did not provide a specific estimate of how large they believed the overall cuts would be.

Humana, one of the major players in Medicare Advantage, estimated rates will drop roughly 3% for 2015, based on a preliminary review of Monday's notice, according to a filing with the Securities and Exchange Commission. That's slightly better than a previous estimate of 3.5% to 4%, the company said.

Cigna is expecting the same. “While Cigna continues to review and assess the full impact of CMS' 2015 rate changes, it's clear that the full 2015 impact will include a reduction in payments,” the insurer said in a statement. The company assessed the impact to be about 3% “when factoring in CMS changes with ACA and other industry fees set to take effect in 2015.”

A spokesman for UnitedHealth Group declined to comment.

Analysts cautioned that teasing out precisely how the government calculates its numbers is a difficult task but offered some possible explanations.

“The administration is starting off at a lower baseline that no one seems to be able to come up with,” said Leerink's Gupte.

The impact of the policy changes the administration made between February and the announcement this week—about 2.5 percentage points—seems to be in line with Wall Street estimates, Gupte said. It's just that the administration is starting from a much higher place.

In other words, if you add the 2.5 percentage points to -5.5% that some analysts believed was the baseline in the policy proposed in February, you still end up in negative territory. If you add the same changes to a -1.9 percent baseline, you end up in the black, like the administration did.

Another analyst pointed to the way the administration is calculating risk adjustments as the source of the discrepancy. The CMS is calculating an additional benefit of 3.9% attributed to “other risk adjustment updates” that Wall Street doesn't recognize, said Chris Rigg, a healthcare services analyst at Susquehanna Financial Group.

Part of that update is the agency's calculation of reimbursement based on a static population—one that doesn't add new members, but continues to grow older and incur more costs. “That's not normally considered beneficial to reimbursement,” Rigg said.

A spokesman for the CMS declined to comment on the insurer and Wall Street rate calculations.

There are over 15 million seniors enrolled in Medicare Advantage plans, or roughly 30% of the total Medicare population. Insurance companies must submit bids for next year's plans to the CMS by June 2.

—Catherine Hollander is a San Francisco-based freelance writer.