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Guy
Is Medicare Advantage in big trouble?
The Media stated it was because the Centers for Medicare and Medicaid Services (CMS) drastically cut the prospective reimbursement rates to the private Medicare Advantage (MA) plans insurers for the calendar year 2025. However, this is not the case at all.
What are the prospective MA reimbursement rates?
In 2025, the Medicare Advantage (MA) insurers will receive a 3.70%
increase in expected change in revenue per patient. This 3.70% rate is
equal to the sum of seven different factors and their respective rates
shown below.
Source: CMS
Within the table above, three factors (highlighted in yellow) dominate the overall outcome. They include:
- the Effective Growth Rate. This is the national average of the expected change in the original Medicare fee for service per patient costs.
- Fee For Service (FFS) normalization & MA risk score trend. These two factors are more meaningful when considered together. The FFS normalization factor is an adjustment applied to MA risk scores to account for the underlying trend in the average FFS risk scores over time. The MA risk score trend captures the increase in MA risk scores specific to the MA population. The combination of the two factors ensures that MA risk scores are well calibrated relative to original Medicare FFS risk scores given that the two populations are associated with different health risk profiles (the MA one has a higher risk due to a lower socioeconomic status).
When you sum up these three dominant factors you get:
2.33% — 2.45% + 3.86% = 3.74%
The 3.74% is very close to the overall 3.70% when including all seven factors. The sum of the three factors does not always add up so closely to the overall sum of all factors.
The recent history of CMS MA reimbursement rates
Going back to 2018, such MA reimbursement rates (Expected change in
revenue per patient) are dominated by the Effective Growth Rate.
Source: CMS
Notice on the table above that the disaggregation of the Expected change in revenue per patient into several underlying factors is not consistent. This explains the gray areas when a factor was not used in a specific year but used in other years.
We can streamline the above table into just two line items to derive the Expected change in revenue per patient:
- Effective Growth Rate
- Other (this includes the sum of all the other underlying factors to arrive at the Expected change in revenue per patient.
When we do that, we get the following streamlined table:
Source: CMS
Thanks to data from the Common Wealth Fund, we can extend the history of
such MA Expected change in revenue per patient rates back to 2015.
Source: CMS, Common Wealth Fund
As shown, the prospective rate of 3.70% for 2025 is higher than the average (2.95%) and the median (3.25%) since 2015.
So, what is the fuzz all about?
The MA industry had requested an underlying Effective Growth Rate of 4% to 6% based on a study that they funded. CMS generates its own data and independent analysis and came up with a more reasonable 2.33% Effective Growth Rate and 3.70% Expected change in revenue per patient. The Media and the MA industry called that a drastic cut. It is clearly not a cut. Instead, it is a Government agency not caving into private industry lobbyists.
Does CMS underestimate Effective Growth Rates?
There is a lag of a few months in reporting these Effective Growth Rates
(EGR) for outpatient hospital and physician vs inpatient hospital.
These cause the mentioned EGRs to carry into the next year.
Source: CMS
For both inpatient and outpatient hospital EGR, the CMS estimated or forecast rates are very much on the money. For physicians, these EGRs appear occasionally understated. This is the case in 2021 and 2023 due to after the fact data restatements associated with dislocations due to the COVID pandemic. Except for these two years associated with physician EGRs, the CMS does not appear to underestimate such EGRs.
In view of the above, the prospective Effective Growth Rate of 2.33% and an overall Expected change in revenue per patient of 3.70% are probably a reasonable forecast.
Are Medicare Advantage plans likely to eliminate your peripheral benefits in 2025?
Based on our review so far, it appears unlikely. Medicare Advantage plans offer many benefits in addition to health coverage, including drug coverage, dental & vision coverage, and often flexible spending account funds, etc.
Many perceive that these peripheral benefits are marketing loss leaders to attract patients to their plans. They are not.
An excellent slide from the Common Wealth Fund explains how the MA plans not only can afford to offer such benefits but are even mandated by CMS to do so.
Source: Common Wealth Fund
Let’s take an example. An MA plan bids for a contract with CMS to service the health care needs of a county with 1,000 seniors. CMS has set a benchmark rate of $15,000 per individual within this specific county. So, the CMS benchmark contract level for this county would be:
1,000 x $15,000 = $15 million
Because the MA plan operates through negotiated rates dictated by healthcare networks, it can save money and it submits a $13 million bid or $2 million under the $15 million benchmark. CMS will rebate to the MA plan at least 50% of this $2 million or $1 million (or more). But, CMS mandates that the plan passes on this $1 million rebate to its beneficiaries. And, that is how the MA insurers fund the peripheral benefits.
The Medicare Advantage bidding process is intricate
CMS contracts with MA plans to outsource its health care insurance coverage and administration to the MA insurers. In turn, the MA insurers outsource the actual health care & administration to the health care network.
Such healthcare networks as Brown & Toland in San Francisco and the South Bay, or Meritage in San Francisco’s North Bay have much control over the overall bidding processes. These networks have the ready power to actually kick an MA insurer out of their network. Meritage kicked out Aetna in 2022. As a result, Aetna has been locked out of the North Bay Medicare Advantage market ever since.
The healthcare network pretty much controls everything
You need a referral, you need approval for a specific drug therapy, you want to check if such a service or a drug is covered by your MA plan… most of those issues are not controlled by the MA insurer, but instead by the health care network that the MA insurer has contracted with.
If you have a Medicare Advantage plan, establish communication with the healthcare network. They are more important to the managing of your health than your Medicare Advantage insurer.
The prospect of Medicare Advantage
The graph below shows the rapid growth of Medicare Advantage enrollees
from 19% of Medicare beneficiaries in 2007 to 51% in 2023. Over the next
10 years, Medicare Advantage enrollment may well reach 65% or more of
total Medicare beneficiaries.
Why Medicare Advantage is growing so fast?
It is because Medi Gap (the alternative) is very expensive. The table
and graph below show the range in annual premiums for a supplemental
Medi Gap policy — Plan G (in addition to the original Medicare premium
of $174.70 a month). Medi Gap Plan G is the most popular Medi Gap policy
and the most similar in coverage of hospital and doctor’s office visits
to a Medicare Advantage policy.
THE END