Insurers predict Medicare Advantage cuts even as CMS touts rate increase

Insurers and Wall Street analysts foresee 2015 payment cuts for Medicare Advantage plans even as the Obama administration, under intense industry lobbying, said last week that it planned to slightly boost rates.

On April 7, the CMS announced it would raise overall Advantage rates by 0.4% in 2015, reversing course from a February proposal the administration said would have led to a 1.9% rate cut. Analysts had calculated that the preliminary policy would cut payments between 3% and 5%. Last week's rate announcement came as a surprise to most analysts, who had forecast a larger cut.

The positive change is the result of “various policy changes” and “new estimates,” said Jonathan Blum, CMS' principal deputy administrator. These include the administration's approach to phasing in a new risk model and a decision to walk away from a proposal to require that home-risk assessments be confirmed by in-office assessments.

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

The move may give congressional Democrats some political cover with senior voters against GOP attacks in the November elections. America's Health Insurance Plans has led a major lobbying and advertising drive to keep the administration from cutting the rates. The industry notched at least one significant victory with the administration's decision to delay 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%.

The American Hospital Association and other provider organizations also lobbied hard against the home-risk assessment methodology, said Sheryl Skolnick, managing director and senior healthcare analyst at CRT Capital Group.

Some analysts saw politics in the CMS' rate announcement. “I'm very suspicious about how you get from their estimate of down 1.9 to plus (0.4%), when it just so happens to be exactly the kind of overall rate change that the Democrats need to support their election hopes,” Skolnick said.

The impact of CMS' decision on Medicare Advantage plans will vary depending on the plan and where it's located. But overall, insurers, who depend on Advantage plans for a growing share of their revenue and profits, 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,” AHIP President and CEO Karen Ignagni said in a written statement.

Humana, one of the major players in Medicare Advantage, estimated that rates will drop roughly 3% for 2015, based on a preliminary review of last week's notice, according to its filing with the U.S. Securities and Exchange Commission. Cigna estimated a 3% cut “when factoring in CMS changes with the Affordable Care Act and other industry fees set to take effect in 2015,” it said in a written statement.

A CMS spokesman declined to comment on the calculations from insurers and Wall Street.

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 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 figure.

In other words, if you add the 2.5 percentage points to the -5.5% that some analysts believed was the baseline in the CMS policy proposed in February, you still end up in negative territory. But if you add the same changes to a -1.9% baseline, you end up with a rate increase, which is how the CMS presented its calculations last week.

Another analyst noted 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 analyst at Susquehanna Financial Group.

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

The Patient Protection and Affordable Care Act sought to bring the cost of Advantage plans more closely in line with traditional Medicare. But Medicare currently spends significantly more on Advantage enrollees than on traditional Medicare beneficiaries.

“The changes underway revise payments to Medicare Advantage plans to be more consistent with costs in traditional Medicare, while incentivizing quality improvements by basing part of Advantage payment on plan quality performance,” the CMS said in a fact sheet.

—Catherine Hollander is a San Francisco-based freelance writer