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Managing Medicare's Costs

Improving quality of Medicare Advantage plans may justify their generous payments

It’s no secret that the reason people tolerate the rules and restrictions of Medicare Advantage plans is to save money. A study published earlier this year estimated that the average annual out-of-pocket cost for someone in an Advantage plan was only $386, not including plan premiums and prescription drugs. That’s $1,300 less than a 65-year-old senior typically pays for a comprehensive Medigap policy.

Those kinds of savings have drawn millions of new enrollees. And if current trends continue, before long one-third of the Medicare population will belong to Advantage plans. Today 29% do, while five years ago only 22% did.

Despite their popularity, Advantage plans are not for everyone, and many seniors are unable to find plans that meet their needs. Perhaps their longtime physicians are not in any Advantage plan network. Possibly the only plan that has all their doctors in network has a scary $6,700 out-of-pocket limit. And what to do about the 8 million seniors who live away from the the metropolitan areas where the strongest plans are clustered?

Now there’s another consideration, which is that Advantage plans appear to provide better health care than traditional Medicare. In the last two years more than a dozen studies have looked at the plans’ quality. Most of the studies have dealt with specific diseases like diabetes. Also, most of them have focused on the quality of HMO’s, whose closed networks make it easier for them to control quality.

One recent analysis found that, during a seven-year period, people in Advantage HMO plans were consistently more likely to receive appropriate breast cancer screening, diabetes care, and cholesterol testing for cardiovascular disease than were people in traditional (or fee-for-service) Medicare.

Another study analyzed the clinical records of more than 4,200 patients who had experienced heart failure. Of those patients, some 1,200 belonged to Advantage plans. After adjusting for patients’ risk, the study’s authors found that Advantage plans provided more consistent care and had better medical results than did traditional Medicare. Their conclusion was that Advantage plans do a better job of managing care. Still other research has shown that Medicare Advantage HMO plans are more effective in enrolling terminally ill patients in hospice care.

Using approximately 50 clinical measures, Medicare rates each Advantage plan’s quality on a scale from one to five stars. If a plan can raise its rating from one year to the next by a half-star — from 3 to 3.5 stars, for example — then it will receive about $50 extra per patient per month. In this way large plans can easily earn millions of additional dollars a year by improving their ratings. The Kaiser Family Foundation reported that the average bonus payment per enrollee in 2012 was $286 and that more than 90% of plans qualified for bonuses.

In theory it’s possible for every plan to have a five-star rating because plans are not graded on a curve. That makes it easier for a plan to get a high score since it does not have to edge out the other plans that are also intent on improving quality. The last two years have seen successively higher ratings, with Avalere Health reporting that 43% of Advantage plans are rated 4 stars or higher in 2014 compared to 27% in 2013.

Seniors are paying attention to the ratings. One large study found that a one-star higher rating equated to an almost 10% greater likelihood that a new Medicare beneficiary would choose that plan. But these successes notwithstanding, the current quality bonus program will conclude at the end of 2014. It will be replaced by a more modest, less expensive approach. To illustrate the difference, only four percent of Advantage plans won’t receive a bonus this year, but more than one-half won’t receive a bonus in 2015 if quality ratings remain the same.

Two studies published this year raise questions about whether Advantage plans are being adequately compensated for their higher quality. One of these compared the performance of Advantage plans that receive higher federal payments to those that don’t. Payment amounts are indexed for each county, so plans in heavily populated counties generally receive more dollars per patient, which they use to improve their benefits. And because of their enhanced benefits, these better paid plans tend to attract more people. The study’s authors found that these well-paid plans had lower rates of hospitalization and mortality than the lower paid plans.

In a different study, three Harvard researchers sought to determine whether the higher quality shown by Advantage plans has any effect on the quality of traditional Medicare. Their reasoning was that most doctors have some patients in traditional Medicare and others in Advantage plans. Also that physicians are prone to follow Advantage plans’ very specific rules when they treat patients in traditional Medicare. The authors said that many of the techniques employed by managed-care plans — pre-authorization, utilization review, referral requirements, restricted networks and so forth – likely change the way doctors treat all of their patients.

This spillover effect was first identified more than a decade ago and, although it was not quantified, it was thought to be substantial. It has probably increased since then as the percentage of beneficiaries in Advantage plans has grown. The authors’ thesis is that if Medicare’s payment policy doesn’t factor in these spillover benefits, it will be inefficient from the perspective of social welfare.

The authors also cite other studies – one found that hospitals in areas with high HMO penetration had a 25% slower growth rate in their costs than did hospitals in areas with low HMO penetration. Another indicated that greater managed- care penetration was linked to greater use of beta blockers and aspirin among heart attack patients and a reduced reliance on surgery.

As a result of its analysis of medical records from four large states, this Harvard team of researchers found that there were lower hospital costs per traditional Medicare patient in the counties with high Medicare Advantage penetration. They argued that these spillover effects should be considered in determining optimal payment rates to Advantage plans, concluding that Medicare’s current payments may be too low (this study’s data was collected before Medicare’s quality bonuses were first paid).

The government’s long-stated goal has been to pay Advantage plans the same amounts as it would cost traditional Medicare to treat the same patients. Just a few years ago the government paid Advantage plans 18% more per patient, on average, than it paid for traditional Medicare. Gradually, though, Congress and Medicare have trimmed the subsidies to the point that they are only to 4% more in 2013, according to the Medicare Payment Advisory Commission.

Marsha Gold, a healthcare expert who has evaluated Advantage plans and their predecessors for more than 20 years, said in her testimony last month before a House subcommittee that “it is difficult to see the rationale on a national basis for paying (Advantage) plans more than Medicare now spends on the traditional program.” She also pointed out that in the past when Congress has aggressively cut payments, insurance companies have closed down some plans, leaving people in some areas with few good Advantage plan choices.

The trick then is to find the balance point at which insurance companies are paid fairly for the value they provide. This could become less of a concern as a result of a requirement that becomes effective this year, i.e., that plans spend 85% of their revenue for medical care. That requirement reduces their chances for any outsized profits.

In determining the value provided by Advantage plans, researchers need to look at any cost-saving effect they have on traditional Medicare, probably over a several-year period. If a high quality plan provides excellent care today, does that reduce health care costs three or four years from now? And if so, should the plans be compensated for that?

For the moment, Advantage plans enjoy a sweet spot in the Medicare market. The majority of them have low costs and improving quality. Seniors who live in areas where there are solid plans to choose among can get better care while cutting their health care costs.

Finally, the signs are that Advantage plans have become so popular that substantial cuts won’t occur anytime soon. The Obama Administration has twice backed away from planned reductions to Advantage plans – the first time when it launched the three-year bonus experiment that helped the plans offset certain scheduled reductions, and the second time last spring when it more than restored payment cuts scheduled to take place this year.◊◊

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