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Managing Medicare's Costs

Raising the bar for Medicare Advantage plans

Three weeks ago the government released the 2012 quality ratings for Medicare Advantage plans. Last year a similar release was greeted with yawns and sighs, but this year’s announcement was eagerly anticipated by Advantage plan sponsors. The reason is that in January the higher-rated plans will begin receiving bonuses that will total about $4 billion in 2012.

In addition, plans with the highest rating – five stars – will be allowed to have continuing enrollment, enabling them to attract people from other Advantage plans at any time during the year. The ratings are based on 51 measures that address the quality of preventive care, clinical outcomes, and client satisfaction.

“Now the stars equate to dollars,” one plan executive was quoted as saying. “We have definitely heard that from the finance department – how can you get to five stars?” And in the same article, an insurance analyst remarked, “Everyone is taking this seriously.”

As it turns out, nine plans earned five-star ratings for 2012. Although that’s an improvement from three plans in 2011, it represents less than two percent of next year’s 569 Medicare Advantage plans. Another 46 plans have ratings of 4.5 stars and 50 others have 4 stars. This year about one-fourth of Advantage plan enrollees are in plans rated four stars or higher.

Bonuses that plans receive are tied to their ratings – five-star plans get 5% bonuses, 4.5 star plans will receive 4.5% bonuses, and so on. In a few cases, five-star plans can even receive 10% if they operate in “double-bonus” counties. For mid-size plans, these percentages equate to several million dollars of additional revenue.

Four of the nine plans that secured the top ratings are sponsored by Kaiser Permanente. The other five plans include the tiny Health New England Advantage plan with just 5,349 enrollees, two Wisconsin-based plans, a plan in Maine and another in Washington state. That leaves the vast majority of retirees without access to a five-star plan.

Retirees should benefit from the bonus payments, which plans must use to improve coverage and reduce premiums. The payments also are pushing Advantage plans to compete more on quality and less on marketing. Higher-rated plans will over time have richer benefits and will gain favorable publicity as they advertise their ratings in television commercials and brochures. The Medicare web site already does this to a limited extent, displaying gold stars for five-star plans and putting warning signs next to plans that have rated lower than three stars for three years in a row.

In the past, many retirees have not wisely chosen the Advantage plans they enroll in. Probably the chief reason is that it has been difficult to assess the overall quality of the plans. Nor is this inefficient market unique to Advantage plans. Some retirees remain for years in Medigap plans whose premiums are several hundred dollars a year more expensive than identical plans sold by other insurance companies. And most retirees do not seek out the lowest-cost stand-alone plans for their drugs.

A recent Health Affairs article described the difficulty that retirees have in choosing a good Advantage plan, mainly because of the large number of choices they have and the difficulty in comparing plans. The five-star rating system should make it simpler to choose a good plan by giving them a quick way to judge a plan’s overall effectiveness.

Ideally, retirees should compare plans using several criteria and then make reasoned judgments. But many prefer simply to enroll in large well-known plans that have low premiums. Yet these large plans have not always delivered quality care, and the ratings system may force them to improve.

UnitedHealthcare, for example, has more Advantage plan enrollees than any other insurance company, but the average quality rating for its plans was only 3.18 stars in 2011. In 2012, however, these plans have an average rating of 3.67 stars, a 15% improvement over last year. And a UnitedHealthcare spokesperson has said the company’s goal is to have all of its plans rated four stars or better by 2014, which will likely increase the company’s annual revenue by tens of millions of dollars.

Medicare’s current bonus system is part of a three-year demonstration project that is an adaptation of an earlier and a stricter approach that would have given bonuses only to plans with four or more stars. In the demonstration project, of course, more plans will qualify for bonuses. Some policy analysts have criticized the more lenient standards as rewarding plans that are merely average.

But perhaps the relaxation of standards will create shorter-term incentives for plans that would not be able to reach the four-star level for a few years – since very high quality ratings are difficult to attain and then sustain without longer-term cultural changes within the organization. That’s why fewer than two percent of the 2012 plans have five-star ratings and fewer than 20 percent have four stars or higher. Medicare’s reason for loosening the bonus rules was probably not to allow plans more time to adapt to the quality requirements, but even so it may help some plans gradually change their emphasis so that marketing and sales are no more important than is providing excellent care.

The bonus payments will to some extent be offset by the reduced government subsidies. By some estimates, Advantage plans will lose about $140 million in subsidies over the next ten years, but the better plans may be able to offset those losses with bonus revenues, and the best plans will likely come out ahead.

Here is Medicare’s two-page description of the 5-star rating program.

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