The new Medicare Advantage a disadvantage for providers?

Healthcare Financial Management, March, 2004 by Patrick K. O'Hare

For providers, the most significant effect of the hotly debated Medicare reform legislation may well come from the reinvigorated Medicare risk program called Medicare Advantage.

In a nutshell, if the Medicare Advantage program increases beneficiary enrollment, providers could be forced to negotiate with HMOs that have newly increased bargaining power and, as a result, may be forced to accept reduced payment or adopt other competitive strategies.

Background

Applying "at risk" principles to Medicare payments has long been thought a solution for the growth in Medicare spending. Under the previous version of this risk program, Medicare Choice, HMOs were paid a fixed monthly sum by the Medicare program for each enrollee. The participating HMO, in turn, contracted with providers to furnish Medicare-covered services to the plan's Medicare enrollees. As part of the process, participating HMOs had to reconcile their costs, including administrative expenses, with the amount of Medicare payments (including Part B premiums) received. If premiums exceeded costs, the HMO was required to provide extra benefits to the enrollees or make some type of refund of their Part B premiums.

HMOs initially found the program attractive because their administrative costs (which can include profits) were paid, and they were able to spread fixed costs from both their commercial and Medicare operations over a greater number of lives. However, as provider payments escalated and payments from HHS did not keep pace, many HMOs withdrew from Medicare Choice, forcing many beneficiaries back into the traditional Medicare program.

Medicare Advantage

To stem this exodus, Congress retooled the Medicare risk program and rechristened it Medicare Advantage. The Medicare Advantage program has three basic components: a short-term infusion of cash to immediately boost HMO participation, a major overhaul of the program in 2006 to increase beneficiary enrollment, and a controversial demonstration program to commence in 2010.

A Jump Start for the Program

The new legislation contains an enhanced payment methodology to guarantee that risk plans are paid 100 percent of traditional Medicare costs (with some adjustments). Subsequent years' payment inflation factors are also increased. As of this writing, HHS has announced new rates that reflect an average increase of over 10 percent.

Plans that have requested to withdraw from the old Medicare Choice program are allowed to rescind their withdrawals to take advantage of the new payment rates. New rates for 2004 will be paid as of March 1, 2004, with payments retroactive to January 1, 2004.

2006 and Beyond

Effective in 2006, there will be a revision of the current process whereby risk plans that operate in a defined geographic region submit an application to participate in Medicare Choice. Under the new legislation, HHS will establish a regional plan program composed of between 10 and 50 regions to be announced by January 1, 2005. The legislation specifies parameters as to what will constitute a "region"--i.e., it should be at least statewide and should not split states or metropolitan statistical areas (MSAs).

Medicare Advantage regional plan applicants must serve the entire region (to ensure coverage of rural areas) and must construct a network of providers with contractually agreed-upon payment terms. Both in-network and out-of-network coverage must be offered. The legislation also contemplates that a contractor might offer a national plan serving all regions and that current Medicare Choice contractors could continue their existing plans as "local" plans.

A critical feature of the new design will be a competition program. Under the new program, local and regional plans will submit bids to provide services to enrolled Medicare beneficiaries. Regional plans must also offer prescription drug coverage. The bid must describe the amount of Medicare payment requested (including administrative costs, profit, and, for regional plans, the cost of the prescription drug benefit), allocate the payment amounts between Medicare-required and supplemental benefits, be actuarially supported, and describe the beneficiary's liability for copayments. HHS is empowered to negotiate the bid amounts, using a process much like that for the Federal Employee Health Benefits Program.

Bids are compared with formulaic benchmarks (which include, for regional plans, some component derived from other plan bids). Bidders below the benchmark are required to make up 75 percent of the difference in additional benefits or reduced beneficiary payments. HHS retains 25 percent of the difference. Plans that bid above the benchmark will be allowed to charge an additional premium to the beneficiaries.

The legislation contains numerous incentives to get plans to enter the program, including enhanced payments, improved benefit design, and state preemption provisions.

One of the incentives offered to regional Medicare Advantage plans to encourage their participation in the first two years of the Medicare Advantage competition program (2006 and 2007) is the use of "risk corridors" (i.e., a mechanism for Medicare to share a portion of a plan's cost overruns). In essence, it the Medicare Advantage plan's "costs" (defined similarly to a medical loss ratio) exceed the plan's payments (including Part B premiums) by certain percentages, Medicare will share part of the excess cost with the plan through the payment of certain additional formula amounts. Conversely, if "costs" do not exceed the payments by certain percentages, the savings will be shared between the plan and the Medicare Advantage program.