Insight

Medicare Advantage Cuts in the Affordable Care Act: March 2013 Update

The Centers for Medicare and Medicaid Services (CMS) recently announced proposed rules that would cut payments to Medicare Advantage (MA) Plans beginning in 2014.  Assuming that the announced reductions go into effect, these will increase the already-scheduled cuts legislated in the Affordable Care Act (ACA) and American Taxpayer Relief Act (ATRA) and worsen their expected impact on MA plans, benefits, and enrollment. Accounting for all currently projected cuts, an updated analysis indicates a national average MA enrollment drop of 11 percent, and an average benefit value loss of $2,235 per beneficiary.

MA Payment Changes in the ACA

The ACA cuts to Medicare total $716 billion between 2013 and 2022.  A large portion of the cuts come about through changes to the payment formulas for the MA program, in which beneficiaries use their Medicare dollars to choose a privately-run health plan that best meets their needs.

MA payments are tied to a “benchmark” monthly payment set individually for each county (or county-like jurisdiction) in the United States.  Companies or organizations seeking to run an MA plan submit a “bid” for each county.  For any particular plan, if the bid is less than the benchmark the difference is shared between the Medicare program and the beneficiaries; if the bid exceeds the benchmark, a beneficiary who selects that plan pays the difference.  For each beneficiary, Medicare pays the plan the benchmark amount, adjusted for cost risk based on the health status of the beneficiary.

The ACA made several changes to the calculation of the benchmark for each county:

  • Benchmarks are now specifically tied to average spending in the fee-for-service (FFS) program in every county, with a percentage of FFS spending based on the quartile rank of each county.
  • Changes to the FFS program will result in lower FFS payments, which will be passed through to the MA program and will result in lower MA benchmarks.
  • A bonus system is established based on a plan’s “star rating” on a five-star scale using CMS criteria; this rating system, originally developed only to assist beneficiaries in selecting a plan, is now being used to determine payment.[ii]
  • The bonus will be doubled in certain “qualifying counties” based on demographic data.

Based on the above changes, and on the CBO’s estimates of spending cuts, we produced estimates of payment reductions by state and county.[iii]   Based on the CMS Office of the Actuary’s estimates of the resulting enrollment reductions, we also estimated the reductions in enrollment by state and county, and the average reduction in available plan choices by state.[iv]  In particular, we note that these legislative changes have the effect of reducing the benchmark in every county, without exception, even after taking into account the new bonuses.

 

CMS Rule for Additional Payment Cut

In February 2013 CMS issued an “Advance Notice of Methodological Changes”[v] which includes, based on CMS regulatory authority, another factor that will reduce payments.

  • An adjustment to the calculation of health status cost risk based on each beneficiary’s diagnosis codes will reduce the positive adjustments for high-risk patients and increase the negative adjustments for low-risk patients.

This is known as the “coding intensity change.”  On average, MA enrollees have historically had more costly average health status than FFS beneficiaries; CMS argues that this is due not to MA enrollees being sicker, but rather the fact the MA providers have a greater incentive to record diagnosis codes.  They argue that this is due to the fact that MA plans are paid based on diagnosis codes, not procedures and for FFS providers, the opposite is the case. 

Giese and Carlson[vi] calculate, based on the CMS notice, that the overall average effect of the coding intensity change will be a 1.5 percent reduction in benchmarks.

Giese and Carlson also estimate the impact of another provision of the ACA that is not part of MA reform, but will undoubtedly affect MA plans as well.  The ACA imposes an “annual fee” tax on health insurance.  Unlike most excise taxes, the tax is not a set rate, but a fixed annual dollar amount that will be “allocated” to most health insurers according to a formula based on their market share of total premiums.  The fixed amount will be $8 billion and increases to $14.3 billion in 2018 and indexed for premium growth thereafter.  The tax will apply to MA plans on the same basis as other private insurers, except that non-profit organizations with at least 80 percent of their gross revenue from MA plans (or other government programs for the low-income, elderly, or disabled) are exempt from the tax.[vii] 

Giese and Carlson point out that a tax on premiums is equivalent, in the case of Medicare Advantage, to a reduction in the benchmark.  They estimate that the effect will be between 1.9 percent and 2.3 percent of average benchmarks.

Current State-by-State Analysis

We have updated our estimates of the state-by-state distribution of MA cuts, taking into account the statutory changes previously modeled, as well as the recently-announced coding intensity adjustment, and Giese and Carlson’s estimate of the impact of the premium tax (see Figure 1 and Table 1).[viii] 

 

Figure 1: ACA Medicare Advantage Cuts Per Beneficiary, 2014

 

Table 1:  State-by-State Results for 2014

State

Value of Lost Benefits per Beneficiary

Total Value of Lost Benefits

Total Impact on MA Enrollment

 

 

 

 

 

 

NATIONAL TOTALS:

$2,235

19.42%

$30,017 mil   

-1.506 mil

11%

 

 

 

 

 

 

ALABAMA

$1,918

17.28%

$421 mil   

-21,647

10%

ALASKA

$2,582

21.72%

$2 mil   

-105

12%

ARIZONA

$1,677

15.22%

$673 mil   

-34,660

9%

ARKANSAS

$1,867

17.51%

$159 mil   

-8,370

10%

CALIFORNIA

$2,377

19.47%

$4646 mil   

-219,010

11%

COLORADO

$2,044

18.24%

$491 mil   

-25,013

10%

CONNECTICUT

$2,063

18.23%

$234 mil   

-12,113

11%

DELAWARE

$1,883

17.58%

$16 mil   

-854

10%

District Of Columbia

$3,374

26.27%

$33 mil   

-1,508

15%

FLORIDA

$1,955

15.60%

$2256 mil   

-107,112

9%

GEORGIA

$2,118

19.34%

$461 mil   

-23,948

11%

HAWAII

$2,540

23.43%

$242 mil   

-12,012

13%

IDAHO

$1,742

16.38%

$130 mil   

-6,673

9%

ILLINOIS

$1,905

17.12%

$415 mil   

-21,554

10%

INDIANA

$1,995

18.50%

$358 mil   

-18,661

10%

IOWA

$1,998

19.11%

$159 mil   

-8,382

11%

KANSAS

$2,199

19.92%

$121 mil   

-6,242

11%

KENTUCKY

$1,928

17.91%

$265 mil   

-14,029

10%

LOUISIANA

$3,367

23.91%

$533 mil   

-21,925

14%

MAINE

$1,810

17.28%

$58 mil   

-3,027

9%

MARYLAND

$2,206

18.16%

$156 mil   

-7,582

11%

MASSACHUSETTS

$2,517

21.27%

$612 mil   

-29,925

12%

MICHIGAN

$1,964

17.72%

$960 mil   

-49,903

10%

MINNESOTA

$1,717

15.83%

$592 mil   

-31,350

9%

MISSISSIPPI

$2,156

18.89%

$121 mil   

-6,113

11%

MISSOURI

$1,675

16.09%

$39 mil   

-2,065

9%

MONTANA

$2,014

18.47%

$303 mil   

-15,410

10%

NORTH CAROLINA

$2,013

18.48%

$619 mil   

-31,688

10%

NORTH DAKOTA

$1,642

16.22%

$17 mil   

-923

9%

NEBRASKA

$2,128

19.25%

$298 mil   

-15,345

11%

NEVADA

$1,836

15.73%

$234 mil   

-11,922

9%

NEW HAMPSHIRE

$2,020

18.59%

$32 mil   

-1,681

11%

NEW JERSEY

$2,410

20.22%

$463 mil   

-22,793

12%

NEW MEXICO

$2,236

20.69%

$202 mil   

-10,077

11%

NEW YORK

$2,772

22.06%

$2875 mil   

-128,818

12%

OHIO

$1,952

17.74%

$1190 mil   

-61,097

10%

OKLAHOMA

$1,958

17.23%

$205 mil   

-10,539

10%

OREGON

$2,116

19.48%

$645 mil   

-32,456

11%

PENNSYLVANIA

$2,169

19.04%

$2283 mil   

-113,549

11%

RHODE ISLAND

$2,236

20.10%

$178 mil   

-8,951

11%

SOUTH CAROLINA

$2,058

18.99%

$278 mil   

-14,488

11%

SOUTH DAKOTA

$1,654

16.39%

$20 mil   

-1,095

9%

TENNESSEE

$1,934

17.64%

$549 mil   

-28,371

10%

TEXAS

$3,126

23.85%

$2033 mil   

-89,362

14%

UTAH

$1,932

17.75%

$200 mil   

-10,269

10%

VERMONT

$1,594

15.84%

$8 mil   

-450

9%

VIRGINIA

$2,157

20.01%

$404 mil   

-20,701

11%

WEST VIRGINIA

$1,842

17.24%

$198 mil   

-10,338

10%

WASHINGTON

$2,005

18.44%

$549 mil   

-27,840

10%

WISCONSIN

$1,948

18.36%

$574 mil   

-29,817

10%

WYOMING

$1,792

17.21%

$6 mil   

-353

10%

 

 

 

 

 

 

PUERTO RICO

$3,056

36.83%

$1499 mil   

-113,569

23%

VIRGIN ISLANDS

$1,484

15.10%

$1 mil   

-50

8%

 

 

 

 

 

 

  Douglas W. Elmendorf, “Estimate of H.R. 6079,” Congressional Budget Office. 24 July 2012, available at: http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf.

[ii] Doug Holtz-Eakin, Robert Book and Michael Ramlet, “Medicare Advantage Star Ratings: Detaching Pay from Performance” American Action Forum, May 2012, available at: http://americanactionforum.org/sites/default/files/Medicare%20Star%20Ratings%20Det
aching%20Pay%20from%20Performance.pdf

[iii] Robert A. Book and Michael Ramlet, “What is the Regional Impact of the Medicare Fee-for-Service and Medicare Advantage Payment Reductions?” Medical Industry Leadership Institute, University of Minnesota, September 2012. available at: http://www.carlsonschool.umn.edu/medical-industry-leadership-institute/publications/documents/BookandRamletpaperonMedicare.pdf.

[iv] Robert A. Book and Michael Ramlet, “What Changes will Health Reform Bring to Medicare Advantage Plan Benefits and Enrollment?,” Medical Industry Leadership Institute, University of Minnesota, October 2011.

[v] Center for Medicare and Medicaid Services, “Advance Notice of Methodological Changes for Calendar Year (CY) 2014 for Medicare Advantage (MA) Capitation Rates, Part C and Part D Payment Policies and 2014 Call Letter,” February 15, 2013, available at http://www.cms.gov/Medicare/Health-Plans/MedicareAdvtgSpecRateStats/downloads/Advance2014.pdf.

[vi] Glenn Giese and Chris Carlson, “Proposed Changes to 2014 Medicare Advantage Payment Methodology and the Effect on Medicare Advantage Organizations and Beneficiaries” Oliver Wyman, February 26, 2013.

[vii] For a detailed analysis of the impact of the “annual fee” tax on health premiums, see Douglas Holtz-Eakin, “Tax Policy Meets the Affordable Care Act: The Case of the Premium Tax,” May 2012, available at http://americanactionforum.org/sites/default/files/Premium_Tax_Fairness.pdf.

[viii] We used the midpoint of Giese and Carlson’s estimate of the tax impact (-2.1%).  The overall effect of these two factors is equivalent to a change in the benchmark of -3.57%.  (Percent changes combine multiplicatively, not additively.)  Note that we have applied this average to all states.  It is reasonable to assume that the impact of the premium will be, percentagewise, about the same in all states (unless there are large variations in the market share of exempt nonprofits), but the size of that impact is uncertain because it depends on all health insurance premiums, not just MA premiums.  The average coding intensity adjustment is likely to be very close to the given value because it’s based on a formula targeting that amount; however, it could vary from state to state based on geographic variations in current coding practice.

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