Despite rate complaints, Advantage plans continue to grow

Medicare Advantage insurers received welcome news last week when the CMS said it will boost payment rates for 2016 by the highest amount since the Affordable Care Act was enacted. Insurers have complained bitterly about the yearly rate uncertainty, but Advantage enrollment has grown by about 8% annually since 2010. What gives?

It's a combination of affordable premiums and an attractive package of benefits, including vision, dental and prescription coverage, experts say. More beneficiaries are switching from traditional Medicare to save money.

The CMS said last week that the average benchmark rates paid to Advantage plans in 2016 will go up by 1.25%.

Rates will rise by 3.25% on average when factoring in how plans code health-risk scores for their members. That's compared with a 0.95% cut in benchmark rates the CMS proposed in February.

Karen Ignagni, CEO of America's Health Insurance Plans, demanded after February's proposed cuts that the CMS “protect seniors from facing higher costs and fewer benefits by not cutting Medicare Advantage payments”—hinting that insurers would pare back plan offerings, cut benefits and raise premiums.

But data suggest those threats over the past few years have been overstated. Insurers have not significantly altered plan designs. But they have raised out-of-pocket maximums.

For example, 97% of Advantage plans offered vision, dental or hearing benefits in 2014, the same percentage as 2013, according to research firm HealthPocket. More than 90% of Advantage members also have access to a plan with no monthly premium. And the average Advantage premium for 2015 across all plan types is $62.69, only 2% higher than the average premium in 2014, according to HealthPocket.

“If you're a young and healthy senior, it's a good value,” said Ipsita Smolinski, managing director of Washington-based consulting firm Capitol Street.

But out-of-pocket maximum levels are increasing. The CMS caps Advantage members' annual out-of-pocket spending at $6,700. The number of people with a maximum between $5,001 and $6,700 rose from 25% in 2013 to 41% in 2014, according to the Kaiser Family Foundation. That's still not deterring seniors from flocking to Advantage plans. About 17.3 million people have signed up, making up about one-third of all Medicare beneficiaries.

Much of the membership boom is coming from beneficiaries in their late 60s and early 70s with fewer pre-existing medical conditions, who are switching from original Medicare to Advantage, said Gretchen Jacobson, an associate director at the Kaiser Family Foundation. The belief that the growth is coming from baby boomers signing up for Advantage as soon as they turn 65 is not accurate, she said.

Seniors increasingly are willing to trade the broad choice of providers in traditional Medicare for narrower Advantage networks, lower premiums and extra benefits.

Jumping to Advantage eliminates the need to buy a Medigap policy, which provides supplemental coverage. In the final 2016 Advantage letter, the CMS said traditional Medicare deductibles and coinsurance will go up by 6.8%. That will hit the pocketbooks of Medigap policyholders, which could spur more to switch to Advantage. In addition, the Medicare physician-payment legislation moving through Congress will eliminate first-dollar Medigap coverage starting in 2020.

“This is the beginning of an assault on first-dollar coverage on Medigap,” said John Gorman, whose firm, the Gorman Health Group, consults with Advantage insurers.

So, despite insurers' protests about downward rate pressure, they are leaning heavily on their Medicare business. UnitedHealthcare covered more than 3 million Advantage members in 2014; its Medicare and retirement business represented almost 40% of its $120 billion in insurance revenue. Three-quarters of Humana's $48.5 billion in revenue last year came from Medicare. Other large insurers such as Cigna Corp. and Blue Cross and Blue Shield plans have signaled intentions to get more involved in Medicare.

“The big guys can't afford not to invest in this,” Gorman said.