Medicare Modernization Act Changes Spur Medicare Advantage Program Growth

Medicare Modernization Act Changes Spur Medicare Advantage Program Growth

If you're involved with benefit plans, you'll want to make sure you're up to date with the changes to the MMA that have set in motion rapid growth.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) contains the most significant changes to the Medicare program since its inception in 1965. MMA creates Health Savings Accounts, changes the Medicare Advantage (formerly, Medicare+Choice) program, and adds a prescription drug benefit, through subsidized private coverage, for Medicare beneficiaries. Industry response to these changes is robust and the Medicare insurance market–Medicare Advantage plans, Medicare supplement plans, new Part D plans and administrators of self-insured employer retiree plans–is shaping up to be very competitive in 2006. In this article, I'll focus on changes to the Medicare Advantage program and the market reaction to date.

Five key Medicare Advantage (MA) program changes required by the MMA, plus one decision by the present administration, have led to explosive growth in the number of organizations and number of benefit plans available, now or in the near future, to Medicare beneficiaries:

Increasing Payment Levels: Every county's published payment rate is at least as high as projected traditional Medicare costs in the county. While in many areas, this caused little or no change in payment rates, other areas realized increases of up to 20 percent.

Increasing Payment Trends: Annual payment rate increases must now be at least as great as traditional Medicare cost trends. Prior to MMA, payment rate increases often lagged behind cost trends that left MA plans with little choice but to cut benefits and/or increase member premiums. As actuaries, we understand the inherent long-term business problem of operating in an environment where costs regularly increase faster than revenue. MMA creates a more sustainable business environment where revenues and costs are likely to trend similarly (outside of other policy changes or interpretations).

Adding a New Regional PPO Option: MMA created a regional PPO benefit design where organizations must offer PPO-style benefits across an entire region for one member premium. The recently released 2006 regional PPO benchmarks indicate regional PPOs will be available in a large majority of PPO regions (CMS shows benchmarks for 21 of 26 regions). See graphs below*

Imposing a Moratorium on New or Expansions of Local PPOs in 2006 and 2007: While the local PPO moratorium was designed to aid regional PPO development, the deadline appears to have spurred a large number of organizations to offer a Medicare Advantage local PPO at or just prior to the deadline for mid-year 2005 applications.

Adding a New Special Needs Plan Option: The Special Need Plan (SNP) option allows a Medicare Advantage organization to offer benefit plans targeted to "special needs" populations and limit enrollment in those plans to only the special needs populations. Many existing Medicare Advantage organizations and Medicaid health plans have or are entering the market targeting dual (Medicare and Medicaid) eligible beneficiaries. Additionally, several organizations are targeting Medicare populations with special needs defined by the presence of particular chronic diseases.

Beyond these changes, the Bush administration interpreted budget neutrality related to risk-adjusted payments as meaning risk payments would be set such that the total Medicare Advantage industry would receive the same payment level, in aggregate, from risk-adjusted payments as from demographic payments. In 2005, this interpretation added just over 8 percent, on average, to Medicare Advantage payment levels. Although the administration announced this past spring they would phase out this adjustment, in the short term, the higher plan payment level simply added to the financial improvements noted above.

Not surprisingly, the improved financial picture, new market opportunities, urgency with respect to local PPOs, and the pre-MMA momentum from several organizations adding private fee-for-service plans in a large and fast-growing segment of the health care system has created a near frenzy of activity. In stark contrast to CMS announcements in the years prior to MMA, which tended to focus on the number of plans leaving or reducing service areas, CMS recently announced figures demonstrating tremendous growth in the number of newly approved health insurer MA applications:

  • 143 new applications approved for plans in 2005 and beyond
  • 428 total MA health plans
  • 66 new local PPOs
  • Medicare beneficiaries can receive coverage through an MA plan in 49 states

Moreover, many applications for 2006 MA plans are still pending. As a result of MA's explosive growth:

  • 74 percent of Medicare beneficiaries have access to an MA HMO
  • 52 percent will have access to an MA PPO
  • 80 percent will have access to MA private fee-for-service plans

In addition to the MMA changes that have contributed to MA's explosive growth, many other changes are in place that add analytical and operational opportunities and challenges. The highlights include:

  • Medicare's 2006 Part D prescription drug coverage
  • MA organizations prepared bids for traditional Part A/B benefits and Part D rather than using the discarded Adjusted Community Rate Proposal process
  • The transition toward fully risk-adjusted payments for A/B benefits continues
  • MA enrollment lock-in creates potential sales staff issues

Prescription Drug Coverage Added with Part D

In each service area, a Medicare Advantage organization with non-SNP benefit plans must offer at least one non-SNP benefit plan with the required prescription coverage. All SNPs must offer the required prescription drug coverage. The required coverage is:

  • Standard Part D coverage
  • An equivalent cost sharing plan where cost sharing in the initial coverage period may vary by drug tier but, on average, is equivalent to Standard Part D cost sharing
  • A basic alternative plan where typical plan benefits have an alternate plan design under the initial coverage limit that provides equivalent value (e.g., deductible may be eliminated and cost sharing increased)
  • An enhanced alternative plan design where the value of the benefit above Standard Part D is paid for with A/B rebate dollars (described below)

Moreover, MA plans cannot offer any prescription drug coverage that does not meet the Part D coverage minimums. Besides the requirements on MA plans, the introduction of Medicare Part D creates issues related to revenue, cost and competition. MA plans will receive premium subsidies from CMS (roughly, $50 to $60 per member per month (PMPM) for MA plans with typical MA enrollment mixes). In some cases, the additional revenue helps pay for drug coverage that was previously funded with Part A/B revenues. The additional revenue may offset the 25 percent of Part A/B savings (described below) that CMS will retain in 2006. At the other extreme, the revenue may only cover a portion of the cost of a new benefit. For an MA plan with a rather typical MA enrollment mix, the average cost of the Part D benefit will likely range from about $100 to $134 PMPM with $20 to $34 PMPM reimbursed through Part D's federal reinsurance provision.

The introduction of Part D in 2006 puts nearly every Medicare beneficiary in play in late 2005 or early 2006. Every Medicare eligible must decide whether to enroll in Part D, remain with employer-provided retiree drug coverage if they have such coverage, or decline enrollment in Part D. While Medicare beneficiaries are making that decision, many are likely to entertain potential changes in their Part A/B coverage. Medicare Supplement enrollees may take a good hard look at MA enrollment and MA enrollees who selected that coverage largely for the drug coverage may opt for stand-alone PDP coverage and possibly Medicare Supplement coverage.

Based on conversations with others in the industry, it appears many MA organizations will offer benefit plans with and without drugs with the same underlying Part A/B benefits. However, in zero premium markets with very rich benefits (e.g., New York and southern Florida), MA-PD plans sometimes couldn't find enough additional Part A/B benefits for a plan without drugs unless they paid part of Medicare beneficiary Part B premiums.

Bidding Replaces Adjusted Community Rate Proposals

For 2006, a bidding process replaced the Adjusted Community Rate Proposal filings required in 2005 and prior years. For Part A and B benefits, MA plans bid on traditional Medicare benefits including traditional Medicare cost sharing levels. Their projected costs for benefits, administration and profit based on their anticipated enrollment mix forms their bid. Their bid is compared to benchmark revenue that is defined as CMS' published rates adjusted to the projected population. MMA declared a plan's bid would be based on a national profile population (i.e., a 1.00 population) but that national profile bid was effectively window dressing in the Part A/B bid form. The benchmark revenue less the bid, assuming that difference is positive, equals savings. Rebates, seven-to five-percent of savings, must be spent on supplemental benefits including Part D premium buy downs. Prior to 2006, MA plans could effectively use 100 percent of that difference to fund supplemental benefits. Because supplemental medical benefits not funded by the rebates generate required member premiums, in order to have a competitive benefit package, most MA plans bid below benchmark and created savings. CMS' retained savings had the effect of offsetting at least a portion of the additional revenue an MA plan would receive due to Part D.

For Part D, the competitive bidding process is based on bids compared on a national profile population basis. If a plan bids higher than the national average bid, its member premium for Part D is increased by the difference. Similarly, if a plan bids lower than the national average bid, it will have a lower Part D member premium.

Another change is that the bidding process and forms were designed and reviewed by actuaries. Actuaries were responsible for the new bidding process and reviews seem to have been more focused on material questions, for the most part. In general, the process and reviews appear more sensible than with the prior ACRPs. Except for the unfamiliarity of some reviewers with the MA market and tight turnaround times (without much warning), the review process seemed to proceed relatively smoothly.

When I first read the law, CMS' ability to negotiate bids, in particular, concerned me. CMS kept referencing the Federal Employees Program as an example yet many plans have had a lot of difficulty (best rate, audits, etc.) with the way the Federal Government operates that program. To date (mid-August 2005), CMS seemed to be quite reasonable in negotiation. We'll see if that holds.

Risk Adjustment's Role Continues to Grow

Risk adjustment, although it's not new to MA, continues with increased emphasis on Part A/B bids. Part D revenue from CMS will be fully risk adjusted. Capturing appropriate diagnosis information will be particularly important to MA plans because of its impact on risk adjustment scores and, in turn, revenue. The industry remains vigorously at work, in spite of all the other MA changes, at gathering more complete diagnosis data.

Lock-in Creates Sales Challenges

Finally, except for newly eligible Medicare beneficiaries, enrollment will be concentrated around January 1 each year. This creates sales and sales staffing challenges for MA plans. Some MA plans are considering use of brokers as a way to avoid a full sales staff with six to nine months of down time per year.

With all the Medicare Advantage, Part D, and Medicare Supplement plan changes on the horizon for 2006, the competition for Medicare lives should be fast and furious.

Patrick J. Dunks is principal & consulting actuary for Milliman, Inc. He can be contacted at: 262.784.2250.

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