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Managing Medicare's Costs

Medicare is raising the quality bar for Advantage plans

There’s a fairly long list of things to consider before you enroll in a Medicare Advantage plan. The Medicare Rights Center, for instance, suggests that you know the answers to 24 questions before enrolling in an Advantage plan. And while going through so many questions takes time, it also reduces the chances of an unpleasant surprise later.

One question that’s not on the Medicare Rights Center’s list is, “What is the quality rating of the plan that you are considering?”

Medicare rates each Advantage plan’s quality on a scale between one and five stars, with five being best. When an Advantage plan earns a rating of four stars or higher, it receives a sizable bonus that by law must be used for additional benefits. And those extras, which may include lower premiums as well as some routine dental and vision care, attract new members.

This year more than two-thirds of the 18 million Advantage plan members are in plans that have at least a four-star rating. Many of those people are doubtless attracted to these “bonus plans” because of the additional benefits.

Another reason to select a bonus plan is that it’s likely to have better medical care. Plans that have a minimum four-star rating have shown to Medicare’s satisfaction that a high percentage of their patients are getting recommended preventive tests and that pre-existing conditions are being well-managed.

Bonuses are relatively recent

Medicare began rating plans on their quality in 2007, but the practice of giving bonuses, a provision in the Affordable Care Act, didn’t begin until 2012. In the early days of the the bonus program, Medicare’s approach was to grade the plans leniently, giving them leeway as they learned the ins-and-outs of the bonus program. That initial leniency included a three-year demonstration project that awarded bonuses to plans that had only average ratings.

All along, though, the idea was gradually to tighten the grading standards. Now, six years into the bonus program, it’s becoming more difficult for Advantage plans to score well. This year’s average rating is lower than it was last year, the first time there’s been a year-over-year decline. And in 2017 there are 1.2 million fewer people in bonus plans than there were last year.

Medicare’s heightened scrutiny is good news for most retirees, particularly over the longer term. Still, there will be many people whose benefits will be trimmed because their plans will no longer receive bonuses. All told, Advantage plans will receive about $500 million less in bonuses this year than they did last year, leaving some plans with no choice but to raise premiums and deductibles.

With so much money at stake and the tougher grading standards in play, Advantage plans have a renewed focus on the quality of care they are providing their members. With an average bonus payment of $400 a year for each plan member, plans that have several hundred thousand members and that qualify for bonuses can be richly rewarded. This year Medicare will hand out more than $3 billion in bonuses.

An indication of Medicare’s tougher grading standards was last fall’s downgrades of more than one-half of Humana’s four-star Advantage plans. In its comments following the downgrades, Humana said that the lower ratings were partly the result of Medicare’s raising its thresholds for measuring quality.

Because of the lag between the date that Medicare releases the quality ratings and the time they go into effect, Humana won’t feel the impact until next year. But unless it is successful in its request for Medicare to reconsider the downgrades, the insurer will see its bonuses reduced by hundreds of millions of dollars in 2018.

Humana’s reduced ratings were noteworthy because they will affect so many people, with some 20% of all Advantage plan enrollees belonging to a Humana plan. And based on current enrollment, the percentage of Humana’s Advantage plan membership in bonus plans will drop from an estimated 78% this year to 37% next year.

Ratings methodology

Medicare’s quality ratings are based on specific measures, e.g., the percentage of a plan’s members who received their annual flu vaccinations. This year there are 44 measures for Advantage plans that include prescription drug coverage. Measures are weighted, with outcome measures being three times as important as process measures.

The measures that Medicare uses are developed by the National Committee on Quality Assurance, the accreditation agency. NCQA’s metrics are used to track performance for 90% of the country’s insurance plans..

Some measures relate to customer satisfaction, and the overall rating indicates not only how well a plan performs its clinical care but how a plan’s members feel about the plan. Is it responsive to members’ complaints? What percentage of members leave the plan each year?

Bonuses give plans something besides costs to focus on

Like other types of managed care plans, Advantage plans receive a monthly payment – a capitation payment — for each of their members. The payments are adjusted for the plan member’s age and health. A plan might receive $875 a month for a healthy 65-year-old and $1,100 a month for an 85-year-old who has a chronic disease.

Quality bonuses run counter to managed care plans’ usual tendency to restrict care. Without the bonuses, many plans would concentrate solely on keeping their costs low since their revenue is largely predetermined.

Moreover, if controlling costs is their only aim, plans can do it by reducing their responsiveness and quality of care.
They can make it difficult for patients to get certain treatments, particularly if they are expensive ones. They can require referrals for routine visits to specialists and refuse to cover second opinions.

But because the quality bonuses are generous, insurance companies understand that they can do more to enhance their profits by providing top-notch care than by restricting care.

In managed care plans such as Advantage plans, it will always be important to control costs, of course. But in their quest for high ratings and bonuses, Advantage plans will necessarily focus on ways to reduce spending without lowering their quality of care. Ideally, they will seek out innovative approaches and more closely coordinate medical care, both of which will improve quality and reduce spending.

Even with the dip in their average quality rating in 2017, Advantage plans’ overall progress has been impressive. Just over 68% of Advantage plan enrollees are in bonus plans this year compared to only 51% three years ago. Plans’ average quality rating this year is 4 stars (last year it was slightly higher at 4.03 stars). Despite this year’s slightly lower scores, they compare favorably with the 3.55 average star rating for prescription drug plans, which do not receive bonuses and do not have a financial incentive to get high scores.

Despite the bonus program’s apparent success, it’s not without flaws. Under the current rules, an insurance company can close a non-bonus plan and transfer its members to a bonus plan in order to get higher payments. In an example cited by the Medicare Payment Advisory Commission, a large insurance company closed two regional contracts in the South, both rated below four stars, and transferred their 300,000 members to a bonus plan in the Northeast that had only 20,000 enrollees. The result was that the insurance company received bonuses based on 320,000 plan members, even though only 20,000 of them were legitimately in a bonus plan.

In this type of situation, people have no way to know whether a plan they are considering is a bonus plan because it provides superior medical care or because the insurance company has merged a lower-rated plan with a higher-rated one. The Commission has recommended that Medicare adjust its quality ratings to reflect the local plan’s performance.

But regardless of the few loopholes that insurers exploit, retirees should consider a plan’s quality rating before they enroll. By choosing a higher rated plan, they will likely get a more complete set of benefits and will probably be more satisfied than if they were in a plan rated lower than four stars. ◊◊

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