Medicare Advantage Plans, on a Roll, Could See Some Cuts

In the coming years, the federal Medicare program will either need more funding or be forced to make serious spending cuts. The Medicare program is popular with voters and has support among politicians in both parties. But partly because of the expense of the response to the COVID-19 pandemic, policy makers may look to curtail Medicare spending and, more particularly, the Medicare Advantage (MA) program.

Medicare cuts may be needed because one of the two trust funds the government uses to pay for parts of the Medicare program is facing a severe shortfall, according to the Congressional Budget Office (CBO). In February, CBO predicted that the Hospital Insurance Trust Fund would be insolvent within five years.

In response, the Medicare Payment Advisory Commission (MedPAC), a nonpartisan organization established by statute to advise Congress on Medicare policies and programs, suggested eliminating the bonus payments the MA plans get as part of the Star Rating system, which rates the quality of the plans on a scale from 1 to 5.

This is not the first time the Medicare program has been on shaky financial footing; shoulders may shrug as more pressing matters dominate political and policy debates.

But it is only the second time that a projection predicted insolvency within five years, according to the Alliance for Health Policy, a nonpartisan organization that helps policy makers understand health policy. Adding to the sense of urgency is the demographic bulge of baby boomers aging into Medicare coverage at the rate of 10,000 seniors per day for the next 18 years. The past 15 years have been boom times for MA plans, and most indications are that the upswing will continue. But now there are some clouds on the horizon.

A haircut

The Medicare program is the country’s largest purchaser of healthcare by far, spending nearly $900 billion this year to provide coverage for some 62 million Medicare beneficiaries, about 38 million of whom are in traditional Medicare, and
24 million of whom are in Medicare Advantage plans.

A growing proportion of the $900 billion is flowing to MA plans. CBO projections show that by 2030, more than half of Medicare beneficiaries will be in MA plans. Twenty years ago, only 13% of Medicare beneficiaries were in MA plans. Enrollment has grown because beneficiaries often get drug, dental and vision coverage with an MA plan. The trade-off is a narrower network of providers than traditional Medicare, but surveys show that most MA enrollees are satisfied with their choices. The MA plans say they are increasingly shouldering the burden of Medicare beneficiaries with complex, chronic conditions and health problems rooted in the social determinants of health.

MA has become a major line of business for many of the country’s largest health insurers. The largest commercial health insurers in the MA market are, in order of market size, UnitedHealthcare, Humana, the Blue Cross Blue Shield plans, CVS Health, Kaiser Permanente, Centene, and Cigna, KFF reports. According to the foundation’s researchers, the gross margins — the difference between the premiums insurers collect and the claims they pay out — are larger for insurers in the MA market than in other insurance markets. In 2020, the per-member, per-month gross margin in MA was $188, compared with $143 in the individual market and $80 in the group market, according to KFF calculations.

In its annual report to Congress in June, MedPAC made recommendations for adjusting MA payments. Among them was lowering the benchmarks that the federal government uses to set the per-
beneficiary capitated payments to MA plans by about 2%, according to Gretchen Jacobson, a Commonwealth Fund vice president who focuses on Medicare issues.

The benchmarks are tied to calculations of what it costs to cover a beneficiary in traditional fee-for-service Medicare in the county or region where the MA plan has beneficiaries. Reducing the benchmark would save $10 billion over five years, MedPAC estimated.

That change would, however, have a relatively minor effect on spending compared with eliminating the Star Rating system and other bonus payments Medicare sends to health insurers when plans hit quality metrics, observes Jacobson. The targets include familiar measures such as the proportion of beneficiaries who have been screened for certain cancers, the number with controlled diabetes and hypertension, and the timeliness of insurance approvals and reviews, such as prior authorizations.

The vast majority (80%) of beneficiaries in MA plans are enrolled in plans with ratings of 4 or more stars. That’s good news from a healthcare quality perspective. If it is working as intended, the Star Rating system is supposed to be an incentive to improve care, make preventive services accessible, and encourage insurers to operate fairly and efficiently. But there are questions about how accurately the star ratings reflect quality because of how ratings are calculated. Although Medicare officials consider these questions, the amount that the federal government pays out in bonuses has grown. Over the past six years, what the Medicare program pays in Star Rating bonuses to MA insurers has nearly quadrupled, from $3 billion in 2015 to $11.6 billion this year.

In the past, MedPAC has recommended changes to the Star-Rating system, but doing so could be problematic because ending payments for quality would go against the grain of promoting value-based care, she observes.

“If implemented, that recommendation (to eliminate the StarRating system) would be a very big change,” Jacobson notes. The suggestion to drop the star ratings would follow a recommendation that MedPac made in January 2020 to drop the quality-based bonus system entirely because CMS’ use of a variety of quality-based bonus systems has become extremely complicated, she adds.

Of course, any hint that payments to health plans might decline is bound to stir up fierce opposition from health insurers who rely on the growth of MA enrollment and annual increases in payments for each enrollee to increase revenues, margin and profits. But any consideration of reining in Medicare spending is a step in the right direction, in David Muhlestein’s opinion.

“It’s important that people are willing to reassess how we think about and pay for Medicare and Medicare Advantage, and to make different proposals,” says Muhlestein, the chief strategy and research officer for the consulting firm Leavitt Partners. But CMS doesn’t need to wait to reduce what Medicare spends each year because it could do so when it issues its annual fee schedules that set payment levels for physicians, hospitals and other providers.

“Medicare has the ability to lower their rates and ratchet them down over time,” he notes. “However, there is not a lot of political capital that gives them the sufficient protection they would need to lower rates.” Physicians, hospitals and health plans all say they need a raise every year.

“If you talk to members of Congress about reducing what Medicare pays, there are so many political barriers to do that with fee-for-service Medicare, and it’s likely to be difficult to do it in Medicare Advantage, too,” Muhlestein says. UnitedHealthcare, Humana and the Blues plans have about 60% of the MA market, he notes.

“You can be assured that if there’s going to be any effort to reduce what Medicare pays, those companies will fight that idea tooth and nail — and probably be successful.”

Joseph Burns is an independent journalist in Cape Cod who writes about healthcare and managed care.