The manuscript of Get What’s Yours for Medicare originally included an explanation of how the government supports Medicare Advantage insurers and of how the payments insurers receive for each person they cover is set. It was so brilliant that my publisher begged me to drop it from the book! I reluctantly complied but did include a note in the book about where to find this expositional gem.
Here it is!
A DIVERSION FOR TAXPAYERS AND HEALTH GEEKS
Even though the government has trimmed its subsidies to MA plans, it still forks out more than $160 billion a year to the plans. These take the form of fixed payments for each individual enrolled in an MA plan.
Together with enrollee premiums, copays and other payments to the plan, it must make do with these payments to cover all its expenses. But if there’s money left over, it can and does flow to plan profits. Plans thus have powerful incentives to find more efficient ways of providing care.
But as we’ll see, they’re also on the hook to improve the quality of the care their plan offers. And they have competitive pressures from other plans and from their own Medicare beneficiaries. If they transfer too many expenses to these beneficiaries, plan members will, over time, quit the plan and get another one.
These are powerful reasons why big insurers want to get bigger, allowing them to operate more efficiently and, yes, become even more profitable for their stockholders.
Original fee-for-service Medicare, by contrast, pays enrollees for the covered health services they use. The fixed (or, in insurance lingo, capitated) payments that MA plans receive are the result of a very complex process.
One of the goals of the Centers for Medicare & Medicaid Services (CMS) is to provide roughly the same per-person support to Medicare enrollees regardless of the kind of insurance plan they choose.
MA plans began life with much larger per-person payments than was the case with Original Medicare. This gap has been coming down steadily but MA plans still get a small financial edge.
What’s really interesting here, at least to me, is the mechanism that CMS uses to set MA payments every year. Every MA insurer has to enter a bid for each of its individual plans. There are more than 2,000 available plans sold in 2016, and they differ based on what the plan covers, how it charges for covered services, and the geographic service area of the plan.
CMS uses Original Medicare spending as the base for the relative costs of health care in every one of the more than 3,000 counties in the U.S. If an MA insurer wants to offer one or more plans for sale in a specific county (there also are broader sales regions that include multiple counties), it must provide a competitive bid to CMS that is expressed as a percentage of Original Medicare health costs in that service area.
Winning bidders are provided fixed payments for plan members that are linked to these Original Medicare costs. When a new or existing plan member applies for an MA insurance policy, this person’s exact fixed payment is determined using this benchmark payment information with an adjustment for the person’s health condition.
This health adjustment, or risk score, has been a news flash to virtually everyone outside the health industry (and to many within it) that I’ve talked to during the past 18 months. In fact, every Medicare enrollee in the country has a risk score based on their demographics and health records. More to the point, MA plans get larger fixed payments for sicker enrollees.
This fact has created strong if not irresistible incentives for plans to inflate these risk scores to make people appear sicker than they are. This is called “upcoding” and it raises the level of capitated payments that Medicare provides to the plans. Congratulations! You now can talk health geek speak!
Medicare is aware of this. It actually deflates scores by nearly 5 percent, literally taking the wind out of these inflated totals. However, there is a good-sized mountain of evidence that the resulting scores still permit the plans to rake in several billion dollars a year from Medicare (and thus from taxpayers) that they don’t really deserve.
Plans, of course, also have an incentive to submit low bids. The obvious reason is that low bidders tend to get approved by CMS. The less-obvious but nonetheless crucial reason is that plans receive rebates each year. These rebates represent the difference between CMS’ benchmark payment levels in a county or region, and the level of an individual plan’s bid.
These benchmark payment levels, you might recall, are linked to Original Medicare costs. The benchmarks are a powerful tool that CMS can use to help equalize costs of all Medicare coverage.
For example, if CMS wants MA plan expenses to be 102 percent of Original Medicare, this would be the benchmark for a county or regional plan. But if an MA plan has bid to offer these services for, say, 95 percent of benchmark costs, it gets back a rebate based on this 7 percentage-point spread. Plans use these rebates for lots of things, including reducing plan premiums to enrollees and funding coverage of additional services, such as vision and dental protection.
“Perhaps the best summary measure of plan generosity is the average rebate, which plans receive to provide additional benefits,” said a 2015 report from the Medicare Payment Advisory Commission, or MedPAC, which advises Congress on Medicare matters. In 2015, MedPAC said, the average rebates for the most common MA plans were $76 per enrollee per month. That’s more than $900 a year, which plans were free to use to make themselves more attractive to consumers, shareholders, or both.
For further reading, see “Upcoding: Evidence from Medicare on Squishy Risk Adjustment,” by Michael Geruso and Timothy Layton, May 2015, National Bureau of Economic Research, http://www.nber.org/papers/w21222.