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Managing Medicare's Costs

The Essential Medicare Advantage plan

Medicare Advantage plans have their own economic cycles. First, their enrollments surge, as they have since 2004, and then they plateau or decline for several years. Congress and Medicare determine the lengths of these cycles when they increase or reduce subsidies to Advantage plans.

Business is booming at the moment. A record 27% of Medicare beneficiaries are in Advantage plans. Enrollment, now 13.2 million, has more than doubled in the last few years (in 2004 it was 5.3 million). But those numbers could level off and then start to drop if the government goes through with scheduled subsidy cuts.

By and large, Advantage plans are solid choices for cost-conscious retirees. Coverage has improved in recent years, and plans can no longer have higher cost-sharing than Medicare does. Also, plans must have out-of-pocket limits, and one-half of enrollees are in plans that have OOP limits of $3,400 or lower. Even with these improvements, though, some Advantage plans are at best average, and virtually all of them have sizable gaps in their coverage of expensive treatments like dialysis and chemotherapy.

For seniors, Advantage plans’ most attractive feature is their low cost. According to the Kaiser Family Foundation’s 2012 Data Spotlight, 56% of Advantage plan enrollees pay no premiums for either health or prescription drug coverage. And most of the plans provide some dental and vision care, which are not covered by Medicare, with a few even throwing in free health club memberships or Part B premium rebates.

These extra benefits are paid for by the government subsidies. In the past when subsidies have been trimmed too much, insurance companies have raised premiums and also shuttered some plans. The most recent example occurred in the 1998-2004 period. In 1997 Congress passed legislation that slashed future increases in subsidies to Advantage plans (then called Medicare+Choice plans). Enrollment dropped by almost 25% over the next six years as insurance companies terminated plans in less populated areas.

As a result, many people were left without supplemental coverage. Enrollment started to decline in 1998 and pressure eventually mounted for the government to expand the subsidies. In 2003 Congress complied. After the prescription drug law went into effect in December of that year, Advantage plans began receiving larger-than-ever subsidies. The number of plans rose and and enrollment started to climb. At the end of 2011, enrollment had grown at a 12% average annual rate since 2004.

Advantage plans are essential options for retirees who want inexpensive health insurance. In their absence, millions of people would be left without supplemental coverage because they cannot pay the outsized premiums of most Medigap policies. So it seems inevitable that if enrollment starts to decline noticeably, Congress will intervene to restore some or all of the subsidies or else see many seniors lose the only type of coverage they can afford.

Medicare has already sidestepped cutbacks that were to go into effect in 2012. It did so by launching a demonstration project which gives additional quality bonuses to most Advantage plans — bonuses that will more than offset the planned subsidy phaseouts. Political opponents of the Obama Administration denounced the three-year demonstration, saying it was a ploy to postpone the cuts until after the 2012 elections (the demonstration will last through 2014).

Circumstantial evidence supports the charge that the demonstration was politically motivated. In April the Government Accountability Office reported that the Advantage plan demonstration was poorly designed and will give more than $5 billion in bonuses to plans with average quality ratings of 3 and 3.5 stars. If you assume the demonstration was politically calculated, it shows how difficult it will be for any Administration, including one philosophically opposed to Advantage plan subsidies, to make substantial cuts that result in higher premiums, fewer benefits, and plan closures in rural areas.

In theory there’s a solution that would satisfy almost all parties – retired people, the government, and insurance companies. That is to increase enrollment in Advantage plans while requiring them to cut costs by closely coordinating their medical care. The government has already bought into the idea that the path to healthcare savings is through coordinated (or accountable) care.

Two-thirds of Advantage plans are HMO’s and have the organization structures, procedures, and compensation rules needed in coordinated-care plans. The top-notch Advantage plans, in fact, are often cited as being among the models of accountable care organizations that reduce costs by integrating care.

People could be drawn to the high-quality Advantage plans in a number of ways (one approach was described last year in a post in The Health Care Blog). More retirees would be in coordinated care plans, Medicare would likely see its costs decline, and insurance companies would attract additional plan enrollees. If the payments that plans receive from Medicare could be tied more to their quality and actual costs and less to the artificially high fee-for-service rates in their areas, then almost everyone except providers would come out ahead.

Currently Advantage plans are a good deal for retirees and insurers, but not for Medicare. The reason is that Advantage plans siphon away many of the healthiest, least-cost beneficiaries. That leaves fee-for-service Medicare with greater percentages of sick people, who further push up the fee-for-service costs that serve as the floor for Advantage plan reimbursements. As younger and healthier seniors increasingly migrate to Advantage plans, that spiral is perpetuated.

Advantage plans will likely come under increasing cost pressure, particularly after the current Medicare demonstration project is over. Yet with enrollment now on its way to 14 million within a year or so, plans with large enrollments can do well without the subsidies. But some smaller plans, likely those away from urban centers, would not survive.

Moreover, beginning in 2014 Advantage plans will be required to have medical loss ratios of 85%, the highest of any type of retiree coverage. And in two years more stringent rules for the plans’ annual competitive bids go into effect. The larger plans won’t be much affected, because most of them already have MLR’s that are 85% or higher. But some small-enrollment plans may not survive.

Congress occasionally seems overzealous in focusing its gaze on Advantage plans, which represent less than one-fourth of Medicare’s costs. The larger challenge is fee-for-service, where the majority of the government’s healthcare funds are spent, many of them wasted dollars.

If plans do start to close in some areas, the only option for many seniors will to buy Medigap policies, which are often sold by the same insurance companies that sponsored the abandoned Advantage plans. When that happens, retirees will be leaving plans that will have an 85% medical loss requirement in 2014 to buy Medigap policies that have minimum 65% loss ratios for individual plans and 75% for group plans. In that case, Congress could be inadvertently increasing profits for insurers at the expense of retirees and Medicare, since Medigap plans encourage the overuse of medical services. ◊◊

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