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Managing Medicare's Costs

As their quality improves, Advantage plans have fewer doubters

Five years ago Medicare Advantage plans were playing defense. President Bush had just signed legislation that would trim the plans’ subsidies by almost $50 billion over the next few years. The Congressional Budget Office said that those cutbacks meant that Advantage plans would have 2.3 million fewer enrollees in 2013 than the CBO had earlier projected.

Three months after that, in October of 2008, during a presidential campaign debate, Barack Obama promised that if he were elected he would further cut the government’s $15 billion annual giveaway to the plans. Then after the election he said again at a press conference in December that Advantage plans weren’t giving good bang for the buck.

That same day the Government Accountability Office issued the first of two largely negative reports about Advantage plans, with the second coming 10 days later. And then in March the Medicare Payment Advisory Commission (MedPAC), which Congress looks to for policy recommendations, reported that “the concept of [Advantage] plan efficiency linked to innovation has been lost.”

Soon after, the Health Reform debate started. With Democrats, who are traditionally skeptical about Advantage plans, enjoying super majorities in both the House and Senate, further cutbacks appeared imminent.

But that was way back then. Now, as this month’s Medicare enrollment report shows, more than 14.8 million people are in Advantage plans, which is 50% more than in 2008. Within the next year Advantage plans will overtake employer plans as the most prevalent kind of Medicare supplemental coverage.

One sign of what’s becoming a land rush is that 48 insurance companies have applied to offer Advantage plans next year, as Forbes magazine recently reported, which is a 55% increase compared to the 31 companies that applied last year.

Once-risky Advantage plans are now viable options for seniors. Insurance companies have responded to new laws and regulations by greatly strengthening the plans’ coverage. And the 2008 legislation signed by President Bush has virtually eliminated Advantage private-fee-for service plans, which were poorly understood, had large coverage gaps, and were roundly criticized. This year, only 3 percent of Advantage enrollees belong to a private-fee-for-service plan.

In addition, the Health Reform law required that beginning in 2011 Advantage plans had to have out-of-pocket limits of $6,700 or less. Also as of 2011, plans can no longer have higher cost-sharing than original Medicare for expensive treatments like chemotherapy, dialysis, and durable medical equipment.

Perhaps the most important change occurred in 2012. For the first time an Advantage plan’s quality rating determined whether it would receive a bonus and if so, how much (the improvements had begun the year before when plans earned the score that was used in 2012).

Medicare rates a plan’s quality on a scale of 1 to 5 stars, and for a large plan a one-star higher rating can mean millions of extra dollars. Although plans’ quality ratings had been published since 2007, they weren’t taken seriously by insurance companies before the bonuses kicked in. A low rating was not a cause for concern because seniors typically ignored the ratings when they selected a plan, as a 2011 Kaiser Permanente survey showed. This lack of attention to a plan’s quality ratings allowed the insurance companies, unlike other kinds of businesses, to focus on cost control without worrying much about quality.

The bonuses altered that. Some of the bonus money a plan receives must go to enhancing benefits or giving rebates to plan members. But the remainder flows to the bottom line. There are also penalties for poor quality plans – a plan that rates lower than 3 stars for 3 straight years is placed on probation (indicated by a warning sign on Medicare’s web site) and its members can switch to a higher-rated plan at any time during the year. In 2013 there are 26 plans in this probationary category, listed here, and they have fewer than 4 percent of all Advantage plan enrollees. On the flip side, 5-star plans can attract people from other plans throughout the year.

In 2013 there are 11 Advantage plans with 5-star ratings for their combined medical and Rx drug coverage (4 plans without prescription drug coverage also received the top rating). With insurance companies paying attention to the bonuses, the numbers and percentages of highly rated plans are advancing. This year, for example, there are 127 Advantage plans rated four stars or higher compared to 106 plans last year.

Can Medicare’s star ratings improve people’s health while reducing medical costs? It’s too soon to know for sure, but there are encouraging signs. A Health Affairs blog post last year documented year-over-year improvements in the percentage of Advantage plan members who were given certain recommended tests and treatments.

Another analysis, conducted by Daniel Gorlin and Jon Kaplan of the Boston Consulting Group, examined claims data for more than 3 million Medicare beneficiaries. The findings were that Advantage plan members had lower single-year mortality rates and shorter hospital stays on a risk-adjusted basis than did people in fee-for-service Medicare.

It seems logical that managed care plans can provide higher quality at lower costs than can fee-for-service medicine. The goal of managed care is by definition to coordinate and integrate services in ways both efficient and effective. In contrast, fee-for-service gives doctors are greater independence, which makes coordination among providers difficult. That same logic applies to HMO’s, which can exercise tighter controls over doctors and services than PPO’s where people can go to any provider.

In 2013 every 5-star Advantage plan is an HMO. An analysis published this month examines Medicare claims data for 2003-2009 and finds that patients in Advantage HMO’s are more likely to receive appropriate care and monitoring of their health than are people in fee-for-service Medicare. The study also finds that Advantage HMO’s owned by non-profit organizations score much better on key measures than do for-profit HMO’s. In 2013 the only 5-star Advantage plan owned by a for-profit company is the Humana Gold Plus HMO plan in Wisconsin.

Seniors do not have many opportunities to acquire services of higher quality at lower costs. If they live in an area with access to a highly rated Advantage HMO plan, they will almost surely save money and have better catastrophic protection in that plan than in a Medigap policy. This year 37% of seniors live in areas with at least one Advantage plan rated four stars or higher, which is an improvement over last year’s 29%. As the highly rated plans become more widespread, savvy shoppers may increasingly consider them as solid choices. Even if they have to change one or two of their physicians, it could be worth their effort over the long term.

Unlike a few years ago, the evidence now is that the star ratings are an important selection criterion for many seniors. Earlier this year a study in the Journal of the American Medical Association found that a higher rating increased the likelihood that a new enrollee would choose a plan by 9.5% for each additional star. Researchers also found that someone switching Advantage plans is more likely to choose a highly rated plan. The study based its findings on an analysis of 1.3 million enrollees who were either new to Medicare or were changing plans. ◊◊

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