Medicare Advantage Grows; But Not Without Government Help

When the health reform bill was passed in 2009, it looked like the end of the gravy chain for Medicare Advantage plans; the privately-run health care plans that are sold to seniors as an alternative to traditional, government fee-for-service Medicare. The Affordable Care Act cuts $136 billion over 10 years from Medicare Advantage, following years of concern over the fact that the plans cost the government about 14% more (about $12 billion a year) than traditional Medicare. These overpayments allowed MA plans to offer perks like vision, dental and prescription benefits as well as lower out-of-pocket costs for some subscribers. Now about one-quarter of all seniors are covered under these plans.

According to the Center for Medicare and Medicaid Services (CMS), the government pays Medicare Advantage insurance companies over $1,000 more per person on average than standard fee-for-service Medicare. The Obama administration targeted this as wasteful spending, and also as fundamentally unfair to the 75% of seniors who are enrolled in standard Medicare plans and have borne the cost of these overpayments in their monthly premiums. As part of the health law, overpayments to MA insurers will be gradually eliminated, and beginning in 2014, Medicare Advantage plans will also have to demonstrate to regulators that at least 85% of each dollar taken in is spent on health care, rather than administrative costs and profits.

Projections just two years ago were that without the extra premiums and facing tighter profit margins, many private insurers would leave the market, shifting seniors either back into the public-sector Medicare program, or into a smaller number of the highest quality, most efficient MA plans.

It turns out that this hasn’t really been the case. There has been some consolidation and about 13% of plans—primarily private fee-for-service (PFFS) plans—have left the MA market. But according to a recent report from the Kaiser Family Foundation, “Enrollment [in MA plans] has more than doubled since 2004, and has increased by 7 percent since 2010.”

Premium costs have also dropped over the last year, making these plans more attractive to seniors. According to the KFF report, “The average Medicare Advantage enrollee paid about $39 per month in premium for Medicare Advantage in 2011, about $5 less per month than in 2010. Half (52%) of all Medicare Advantage enrollees with prescription drug coverage (MAPDs) are in a plan that charges no premium beyond the Part B premium required of all Medicare beneficiaries.”

What’s responsible for Medicare Advantage’s surprising endurance?

The consolidation and shift to preferred provider and HMO plans is one way the private MA plans have adjusted to their new reality. There’s also been a change in demographics—a recent spike in the number of 65-year-olds means that plans can and do market heavily to and pick up healthier, cheaper-to-insure, enrollees. Another explanation for how MA plans might be adjusting to “leaner” times is the imminent decrease in cost of the four most popular drugs used by seniors—Lipitor, Zyprexa, Seroquel and Plavix, all of which are going off patent and will be largely replaced by cheaper generic versions. About half of Medicare Advantage plans include a prescription drug benefit (Part D) and would be impacted by these savings. Finally, as Maggie has pointed out, the growth in Medicare spending has slowed overall for a variety of reasons this year; including providers reining in costs as they prepare for lowered reimbursement under the Affordable Care Act.

There is still one more important reason that Medicare Advantage plans are lowering premiums and, in some cases, seemingly thriving: They have good reason to expect that any losses associated with the ACA’s phasing out of overpayments will soon be offset by a new source of government largess; rebates and bonus payments the plans could earn by meeting fairly mediocre CMS quality measures.

When the Affordable Care Act was passed, the legislation called for bonus payments to go only to insurers whose plans earned at least four out of five “stars” on a quality rating scale set up by CMS. These quality measures included the plan’s performance in keeping members healthy (prevention), treatment of chronic disease, health plan responsiveness and care, and the number of complaints and appeals lodged by members.

In 2011, only three contracts (out of a total of 523 contracts rated nationwide) received the top rating of 5 stars; each one is operated by a not‐for‐profit group, is an HMO and is part of an organization (like Kaiser Permanente) that has long experience in the market. These features are also associated with the majority of plans that were rated 4 or more stars overall, according to a February Kaiser issue brief that details the quality rating system.

Last year, CMS (perhaps in response to pressure from the all-powerful insurance lobby, perhaps to try and blunt conservative’s opposition to the ACA) proposed a three-year demonstration project, applicable to all Medicare Advantage insurers nationwide, that would extend the bonus payments to a whole lot more MA plans by reducing the quality cut-off to three stars.

In a letter sent in January to Donald Berwick, head of the CMS, members of the Medicare Payment Advisory Commission (MedPAC) voiced concern about this plan to reward what they perceived as mediocre quality performance. First of all, they point out that this demonstration project will not be “budget neutral.” Instead, it “increases program spending at a time when Medicare already faces serious problems with cost control and long-term financing.” Extending the bonus payments to 3-star MA plans will give up nearly $7 billion in Medicare savings.

The MedPAC letter continues; “As compared to the design of the bonus system in [the health law], in which the incentive was for plans to try to achieve the highest possible star ratings, and there was consequently a disincentive for poor performance, the demonstration lessens the incentive to achieve the highest level of performance.”

Specifically, “Plans with 4 or more stars enroll about 23 percent of MA enrollees” and represent just 14% of plans. Meanwhile, under the 2011 ratings “80 percent of MA enrollees are in plans with 3 or more stars…” Additionally, the MedPAC letter points out, the demonstration project—which seems incongruously named because it applies to all 500-plus private Medicare plans—amounts to a dumbing down of the quality initiative that was originally set forth by the ACA. The health law provision was designed to award MA plans that achieve the highest possible quality star ratings, and also to narrow the field enough to make the choice of an Advantage plan more manageable and more transparent for seniors. As the recent Kaiser Foundation paper on MA quality ratings puts it, “Rewarding and incentivizing plans in this manner may put plans on a trajectory towards higher ratings, but it also introduces rewards for average quality performance.”

The net result, encouraging more plans to compete in the Medicare market, is not actually in the best interest of seniors. In a study published last month in Health Affairs, researchers found that too many choices with too little guidance can be overwhelming for Medicare enrollees, especially the growing proportion that is experiencing cognitive difficulties. “Our study suggests that the Medicare Advantage program presents an overabundance of choices for many elderly beneficiaries,” the researchers write. “Medicare Advantage plans currently compete for enrollees through the benefits they offer and the premiums they charge, but elderly beneficiaries with low cognitive function were not responsive to changes in these features.” The implication, according to Health Affairs, is that these “unresponsive” seniors may buy into plans not well suited to their needs, allowing private insurers to profit “by offering less-generous coverage or reducing benefits while still attracting or retaining enrollees with limited cognitive abilities.”

Once in these plans, some seniors find themselves facing larger co-pays than they would have if they had stayed in standard Medicare. Many will want to switch out of these plans, but are at risk of being denied Medigap or other supplemental coverage they once had. Ironically, CMS dropped one very key measure from its 2011 Medicare Advantage quality ratings that had been part of past ratings: the share of members who chose each year to leave their health plan. This sign of “churning,” usually due to dissatisfaction with plan coverage, seems to me an important concern, especially for those seniors most likely to need more intensive care.

The reality of private MA coverage is that the plans still end up costing the government more than standard fee-for-service Medicare. After all, insurers are selling these plans in the interest of making money. Over the years there have been charges of favorable selection by private Medicare insurers—i.e. these plans tend to attract and enroll healthier seniors than those who choose standard fee-for-service Medicare. Insurers attract these healthier seniors by highlighting how they pay for things like gym memberships and wellness services, while downplaying the fact that their plans charge higher co-pays for cancer treatment and long-term hospitalization.

In 2004, CMS introduced more risk-adjustment calculations into the MA program—paying insurers more to cover older, sicker patients. But a recent working paper from the non-profit National Bureau of Economic Research found that risk-adjustment and other methods CMS employs to try and even out the distribution of healthy and chronically ill seniors in MA plans have resulted in “virtually no increase in enrollment in MA plans of people with one of a variety chronic or acute illnesses, nor for people in poor health.”

Data on MA beneficiaries is not easy to come by because private insurers are not required to release nearly as much information as the federal government does, but the NBER authors make a strong case that Medicare Advantage plans continue to be most attractive to healthier and younger seniors–the cream of the crop in terms of cost. The paper, still under review for publication, found that “Medicare recipients who join MA plans would have cost Medicare approximately $1,200 less per year if they had remained in FFS than the average FFS beneficiary.” Since MA plans are still paid more per enrollee than is spent on standard Medicare fee-for-service enrollees, “we estimate that a Medicare beneficiary choosing an MA plan over traditional Medicare increases total Medicare costs by $2,500.” This may be another reason the plans did so well last year.

Defenders of Medicare Advantage claim that they bring important benefits to seniors and will do a better job of slowing the growth of health care costs. In fact, there is little evidence to support that private insurance companies, with their higher administrative costs, smaller pool of beneficiaries and reduced ability to negotiate with a large group of providers can keep costs lower than FFS Medicare. They can tighten their provider networks and get rid of perks like gym memberships and eyeglass coverage—but then they would surely be less appealing to seniors.

Even as CMS beings rewarding rebates and bonus payments to mediocre plans, Medicare Advantage plans continue to contribute to the growth in health care costs. This is incongruous as we face another round of budget deficit cutting that threatens to raise out-of-pocket costs for seniors, limit the level of supplemental insurance they can purchase and cut long-term care benefits. Perhaps the government is trying to avoid “rocking the boat” too much to win over support from the powerful insurance lobby. Or maybe the three-year demonstration program is designed to buy time until changes to fee-for-service Medicare—including a fundamental shift toward paying for value vs. volume through service delivery reforms—raises the bar enough to make most for-profit MA plans unsupportable and unnecessary.

Whatever the case, if we want to wring more savings out of government programs, we need to take another hard look at the incentives that keep Medicare Advantage growing.

7 thoughts on “Medicare Advantage Grows; But Not Without Government Help

  1. This jumped out at me:
    “Once in these plans, some seniors find themselves facing larger co-pays than they would have if they had stayed in standard Medicare. Many will want to switch out of these plans, but are at risk of being denied Medigap or other supplemental coverage they once had.”
    My wife and I were fortunate to have a good salesman setting us up with supplemental coverage when we graduated to Medicare. When he pointed out that once Medigap policies are dropped for any reason (like spending an insurance year witn MA) one runs a risk of having a medical event that would enable underwriters to deny re-enrollment. That was enough to keep us with Medicare and a suitable Medigap policy.
    Your point about seniors with cognitive challenges should be put up in lights. My post-retirement work (8 years) in the world of senior living has been an eye-opener. Not only do most people avoid making important decisions til the last moment, their family members incorrectly presume that Mom and Dad are still able to decide what’s best for them, which too often results in irreversible mistakes — financial, medical, physical, social and legal.

  2. Why not just make it a Medicare system requirement that private insurance companies that wish to sell Medigap insurance must take all Medicare applications in all cases at all appropriate times?

  3. Here is why the Obama administration has decided not to kill Medicare Advantage:
    Percentage of Medicare beneficiaries enrolled in Medicare Advantage plans in 2010:
    Dade County, FL: 54%
    Pittsburgh, PA: 60%
    Philadelphia: 43%
    Rochester, NY: 60%
    Buffalo, NY: 52%
    San Bernardino, CA 48%
    Los Angeles: 38%
    These are just a few examples of areas of the country where Medicare Advantage is high.
    It’s almost as though the insurance companies targeted Democratic-leaning states and counties as they marketed Medicare Advantage (MA).
    I think the Obama administration has realized they can’t kill MA, so they’ve decided to try to make it better for seniors. Getting the plans to encourage seniors to get preventive care is a good thing. And better customer service is also good for seniors.

  4. Here is why the Obama administration has decided not to kill Medicare Advantage:
    Percentage of Medicare beneficiaries enrolled in Medicare Advantage plans in 2010:
    Dade County, FL: 54%
    Pittsburgh, PA: 60%
    Philadelphia: 43%
    Rochester, NY: 60%
    Buffalo, NY: 52%
    San Bernardino, CA 48%
    Los Angeles: 38%
    These are just a few examples of areas of the country where Medicare Advantage enrollment is very high.
    It’s almost as though the insurance companies targeted Democratic-leaning states and counties as they marketed Medicare Advantage (MA).
    I think the Obama administration has realized they can’t kill MA, so they’ve decided to try to make it better for seniors. Getting the plans to encourage seniors to get preventive care is a good thing. And better customer service is also good for seniors.

  5. You failed to mention that MA plans are especially popular among low income seniors who can’t easily afford to buy supplemental policies. Moreover, it is quite likely that MA plans lose less to fraud. They are also working to improve hospital discharge planning by using case managers in order to reduce readmission rates, especially among the sicker and more complex cases. The tradeoff seniors are willing to accept is less provider choice in exchange for more comprehensive benefits despite higher copays for lengthy hospitalizations and, perhaps, cancer treatment.
    I hear a lot of discussion about moving more of the very expensive dual eligibles into managed care because of the potential to save money without compromising care. In the Medicaid program, state after state is embracing managed care to save money. Presumably, they wouldn’t be doing that if it cost more money.
    The two largest MA insurers, United Healthcare and Humana, are steadily increasing their market shares. Humana CEO, Michael McCalister, is confident that Humana can ultimately deliver care to seniors for 15% less than standard Medicare while earning a pretax profit margin of 5%. I think Medicare Advantage enrollment will continue to grow steadily both in numbers and as a percentage of Medicare beneficiaries. That all said people who want maximum provider choice and those who travel frequently to visit friends and family or on vacation will likely prefer to stay with standard Medicare to ensure its acceptance throughout the country.