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Reining in Overpayments to Employer Plans in Medicare Advantage

Insurers, with help from some employers and unions, have intensified their campaign against a proposed change to how Medicare reimburses certain Medicare Advantage plans that serve employer or union retirees.  The proposal from the Centers for Medicare and Medicaid Services (CMS), however, is sound.  It would reduce excessive payments to plans that receive larger average reimbursements than Medicare Advantage plans overall, even though their per-enrollee costs are substantially lower, on average.

Here’s the background:  rather than directly provide retiree health benefits that supplement Medicare, some large employers and unions enroll their retirees in Medicare Advantage plans.  These plans receive substantial overpayments from Medicare for providing Medicare-covered benefits, so the insurers can charge employers less for this supplemental coverage.   

The Medicare Payment Advisory Commission (MedPAC) estimates that even after health reform reined in Medicare Advantage overpayments, 2016 payments to these plans (known as “employer/union-only group waiver plans” or “EGWPs”) will average 106 percent of the cost of covering comparable beneficiaries in traditional Medicare.  (Medicare Advantage plans overall still receive payments that are 102 percent of traditional Medicare costs, on average, though that doesn’t account for inflated payments due to ongoing problems with Medicare Advantage’s risk adjustment system.)

Insurers typically say the overpayments are necessary because they go solely to finance additional benefits, like vision or dental care or gym memberships.  Research, however, shows that much of the overpayments actually goes to insurers’ profit and overhead. 

In addition, Medicare Advantage’s employer plans tend to offer fewer additional benefits than its other plans.  Most Medicare Advantage plans have an incentive to submit “bids,” which are part of the formula that determines payments per enrollee, below the maximum payment allowed (the “benchmark”).  That’s because Medicare pays them part of the difference, which they can use to attract beneficiaries by offering additional benefits.  But employer plans don’t need to attract individual beneficiaries.  By negotiating an agreement with an employer, they can get an entire pool of beneficiaries to enroll at once.   

As a result, bids from employer and union plans tend to be substantially higher (103 percent of the cost of traditional Medicare, on average) than those from other Medicare Advantage plans (92 percent of the cost of traditional Medicare).  As MedPAC concludes, the “employer plans have already ensured themselves of enrollment through negotiations with [employers]; their bids appear to be set to maximize revenue.” 

Employer plans also have lower costs than other Medicare Advantage plans because their enrollees tend to be healthier.  In 2016, their “risk scores,” which measure relative health status, are projected to be 9 percent lower than those in Medicare Advantage plans for individuals, according to CMS.  Employer plans have lower administrative costs as well; for example, they don’t have to spend on marketing to encourage individual Medicare beneficiaries to enroll.

CMS proposes, starting next year, to base payments to employer plans on the average bids of other Medicare Advantage plans.  This proposal, which would lower payments to employer plans, is consistent with a 2014 MedPAC recommendation as well as the approach that Medicare uses to reimburse employer plans under its Part D drug benefit.  When CMS finalizes its Medicare Advantage payment rates for 2017 early next month, it should retain this reasonable proposal.