Rate battle peaks as Advantage plans grow

Paula Ercolini is one of about 1.8 million seniors who are part of a Medicare Advantage advocacy group that is blitzing the airwaves and putting pressure on the Obama administration and Congress.

“I like to be able to control what's going on in my life. I like to make the choices,” Ercolini says in an ad that has been running this month. “Medicare Advantage helps me make those choices on my own.”

That ad comes from the Coalition for Medicare Choices, an ostensible consumer group that is supported by America's Health Insurance Plans.

Health insurers and their army of lobbyists will spend the next six weeks in a familiar dance with the administration over Medicare Advantage rates for 2016, the final year of reductions to benchmark rates mandated by the Affordable Care Act.

Despite insurers' protests that ACA payment reductions will force them to curtail plan offerings and benefits that will lessen the consumer appeal of Advantage plans, statistics show beneficiaries are flocking to plans in record numbers. Insurers repeatedly have said Medicare is one of their largest growth areas despite the annual threat of lower pay.

A Modern Healthcare analysis of the latest CMS data shows Advantage plan enrollment has climbed 8.5% from February 2014 to February 2015, totaling almost 17.3 million beneficiaries. For-profit insurers Aetna, Humana and UnitedHealth Group dominate the Advantage market and have grabbed an even greater percentage of the market in the past year. Humana and UnitedHealth both have more than 3 million Advantage members, while Aetna has 1.25 million.

Not-for-profit insurers similarly see the value in a program that offers steady revenue and a growing base of customers. Kaiser Foundation Health Plan is the third-largest Advantage insurer in the country, increasing its membership more than 7% year over year, to 1.29 million. On a smaller scale, Health Care Service Corp., the Blue Cross and Blue Shield plan for five states, almost quintupled its Advantage population to 97,000 for this year, the analysis shows.

The CMS last week released the preliminary 2016 payment rates for Advantage plans and will issue final rates April 6. If history is any guide, the CMS likely will issue a more favorable final capitation rate to appease the insurance industry and limit political damage among seniors. John Gorman, whose Gorman Health Group consults with Advantage plans, calls the process the “Potomac two-step.”

Setting capitated payment rates involves a complex combination of several formulas. The primary figure is the benchmark rate. Under the ACA, actuaries tie the benchmark payment level to the projected cost of traditional fee-for-service Medicare spending in each county. Before the ACA, the government paid Advantage plans an average of 14% more per beneficiary than traditional Medicare, prompting widespread calls to equalize spending between the two programs.

The ACA spread county-level benchmark rate cuts over two-, four- and six-year periods. Payment reductions, which officially will be complete by 2017, have been adopted in a vast majority of counties.

“It really depends on what part of the country you're looking at,” said Gretchen Jacobson, associate director at the Kaiser Family Foundation.

Advantage payment rates then are adjusted by enrollees' health-risk scores and by each plan's star rating, which scores the quality of care provided on a 1 to 5 scale. Additional nuances include home-risk assessments, through which Advantage plans determine members' health-risk scores.

These assessments have prompted allegations that plans use upcoding to increase members' severity of illness to receive higher payments, Jacobson said.

Insurers can't succeed in the Advantage business if they don't focus on risk assessment and improving their star ratings, said Tim Courtney, a healthcare actuarial consultant. Gorman agreed, saying the star-rating bonus payments could make or break Advantage plans. Those with at least four stars out of five are receiving an extra 0.5% boost this year.

Advantage plans received an average 0.4% pay bump for 2015. But many analysts said that's misleading because several plans received a net reduction, depending on what county they are in. J.P. Morgan Securities calculated the 2015 rates as a 3.2% reduction.

But insurers still have earned profits on their Advantage plans despite the pressured rate environment of the past several years. On the other hand, some observers say the combination of past cuts and future risk-coding adjustments could lead to a tipping point that would reduce availability and consumer appeal of Advantage plans.

“No program can sustain year-over-year funding cuts,” said Krista Drobac, interim executive director of the Better Medicare Alliance, an insurer-funded advocacy group.

—Michael Sandler contributed to this article.

Follow Bob Herman on Twitter: @MHbherman