Administration Did Not Reverse a Proposed New Cut to Medicare Advantage Plans

The federal government announced on April 1 its final 2014 payment rates and policies for private “Medicare Advantage” plans that serve some Medicare beneficiaries.  Because this announcement from the Centers for Medicare and Medicaid Services (CMS) may be portrayed as reversing new cuts to Medicare Advantage plans (in addition to the cuts that health reform requires) that the Administration previously proposed, we should understand what the Administration had proposed and what it later decided.

• As we previously explained, the Obama Administration (through CMS) actually didn’t propose any new Medicare Advantage payment cuts in its preliminary February 15 announcement.  It merely applied existing law, reflecting how health reform and the historical slowdown in Medicare costs would affect Medicare Advantage payment rates.  Some factors that help determine Medicare Advantage payments in a particular county for the coming year are generally based on the estimated per-beneficiary cost of furnishing Medicare-covered services.  Because spending per beneficiary grew slower than originally estimated in recent years and is now expected to grow slower in subsequent years than previously projected, the preliminary overall payment rates to Medicare Advantage plans were lower than what insurers had been forecasting.
• The final April 1 payment announcement did not change the underlying formula for calculating these factors.  It did, however, change the timing of how Medicare Advantage payment rates are adjusted to reflect Congressional action that prevents cuts in physician payments under the “Sustainable Growth Rate” (SGR) formula.  Under its longstanding practice, CMS assumes, in setting Medicare Advantage payment rates for the following year, that the SGR cuts will take effect as required under law.  If the Administration and Congress subsequently take steps to prevent the cuts from taking effect (as they have repeatedly done, including for 2013), CMS adjusts the next year’s Medicare Advantage rates to take that into account retrospectively.

The final announcement moves up the timing of these SGR adjustments.  It now assumes that no SGR cuts will occur in 2014, which means CMS will not need to make a SGR adjustment for preliminary 2015 rates when it announces them early next year.  (By moving the 2013 SGR adjustment and the 2014 SGR adjustment into a single plan year — 2014 — the final announcement now institutes a one-time, larger-than-expected increase in payment rates.  Insurers should not expect this effect in the 2015 rates.)

Despite the attention that this year’s payment announcements received, we should remember that while health reform began scaling back Medicare Advantage overpayments last year, it will continue to cost Medicare more, on average, to cover comparable beneficiaries in private plans than in traditional Medicare even when health reform’s Medicare Advantage provisions are fully implemented.

Moreover, even if Congress went further and required that Medicare Advantage plans be paid no more than what fee-for-service Medicare costs, they would still receive excessive payments.  That’s because such plans continue to enroll healthier-than-average, and hence lower-cost, beneficiaries and Medicare’s “risk adjustment” mechanism cannot fully account for these differences in health status in determining plans’ payment rates.

Nevertheless, insurers are aggressively lobbying to repeal or scale back health reform’s Medicare Advantage payment provisions.  These provisions are sound, however, and the Administration and Congress should resist efforts to undermine them.