HEALTH STATUS OF BENEFICIARIES ENROLLED IN MEDICARE ADVANTAGE PLANS APPEARS MORE SIMILAR TO BENEFICIARIES IN FEE-FOR-SERVICE

New data from the Centers for Medicare & Medicaid Services (CMS) show that people with Medicare who are enrolling in Medicare Advantage plans have significantly smaller differences in reported health status compared to beneficiaries in traditional, fee-for-service Medicare. In addition, CMS has made a technical correction in the health risk data used to determine the 2006 payment rates for Medicare Advantage plans, which were set in April. To correct the payment impact of this problem, CMS will reduce future budget neutrality payment adjustments.   As a result, the estimated “budget neutrality” payment adjustments for Medicare Advantage plans will be around $4 billion less over the next five years than had been estimated in the President’s budget earlier this year. 

Background on Payments for Medicare Advantage Plans

Medicare Advantage plans are coordinated care plans that generally offer people with Medicare additional benefits and coordinated care beyond the standard Medicare coverage, usually through networks of doctors and hospitals.  These plans bid competitively to provide coverage. The plan bid is compared against a benchmark to determine how much the plan will be paid by CMS for an average beneficiary, how much (if anything) enrollees in each plan will pay for Part A and B benefits, and how much enrollees will receive in rebates or benefits in addition to Part A and B benefits.

By law, CMS is required to publish the Medicare Advantage payment rates for each county, which are used to compute the benchmarks, in April of the preceding year. The Medicare Advantage payment rates are based on a statutory formula that reflects costs in the fee-for-service program and other adjustments. These rates are determined by independent actuarial analysis based on the most current data available at the time. Actual payments to each plan are further adjusted based on the reported health status of plan enrollees – “risk adjustment” – so that plans who enroll beneficiaries with chronic illnesses receive increased payments reflecting their higher expected costs. 

The payments to Medicare Advantage plans are also adjusted by a “budget neutrality” factor that was implemented to prevent health plan payments from being reduced overall while, at the same time, directing higher, risk adjusted payments to those plans whose enrollees had more chronic diseases. As the Congressional conferees noted in the Conference Report for the Balanced Budget Reconciliation Act of 1999 (when the forerunner of the Medicare Advantage program was known as Medicare + Choice), “The Congress envisioned a risk adjuster that would be more clinically-based than the old method of adjusting payments” and that would be implemented “without reducing overall Medicare + Choice payments.” The payment adjustments for budget neutrality were first developed in 2002 and began to be used with the 2003 payments.

Enhanced Availability and Improved Benefits in Medicare Advantage for Chronically Ill Medicare Beneficiaries

With the passage of the Medicare Modernization Act, and following the implementation of budget neutrality adjustments, the Medicare Advantage program has stabilized and flourished and is now available to beneficiaries in most states.  For 2006, Medicare beneficiaries across the U.S., including those living in rural areas, will see a wide range of health plan options with enhanced benefits and lower premiums. The Medicare Advantage program provides many new benefits and features attractive to chronically ill Medicare beneficiaries.  Medicare Advantage plans often have additional benefits such as vision and dental coverage and care management programs, as well as lower cost sharing and deductibles compared to the traditional Medicare program. As a result, beneficiaries enrolled in these plans are already saving about $100 a month on average in their out-of-pocket health care costs, compared to traditional Medicare alone or with an individual Medigap plan. Beneficiaries in fair or poor health save even more. With the new Medicare prescription drug benefit next year, Medicare Advantage plans will generally offer extra drug coverage and lower Part D premiums than “stand alone” prescription drug plans, so the financial benefits for chronically ill seniors will continue in 2006.

An example of the wider availability of Medicare Advantage plans offering drug coverage and other benefits that are attractive to people with Medicare who have chronic illnesses include a choice of a new type of coordinated care plan for Medicare beneficiaries called “Special Needs Plans.” These plans focus on individuals with special needs, such as institutionalized beneficiaries, those entitled to Medical Assistance, or individuals with chronic conditions.  For 2006, CMS has seen interest in chronic disease management special needs plans for cardiovascular disease, Chronic Obstructive Pulmonary Disease, cancer, diabetes, congestive heart failure, osteoarthritis, mental disorders, ESRD, and HIV/AIDS.  The vast majority of states will have a special needs plan choice, including a number of rural states, such as Iowa, South Dakota, Oklahoma, Maine and Mississippi.  In addition to special needs plans, Medicare Advantage plans offering expanded drug coverage, disease management benefits, and other services will be much more widely available in virtually every state.

Smaller Expected Costs of Medicare Advantage Payment Adjustments for Budget Neutrality

With the wide availability of Medicare Advantage plans offering additional benefits at a lower cost, the President’s Budget issued in February 2005 assumed a phase-out of the budget neutrality adjustment.   The phase-out will begin in 2007 and will be completed by 2011, when plans will receive no budget neutrality payment adjustment.  The President’s Budget estimated the total budget neutrality payments to be around $9.2 billion over 5 years.  This estimated cost reflected a budget neutrality adjustment rate for 2006, announced as required in April 2005, of approximately 13 percent.  This adjustment was based on the best available information at the time: an analysis of the health status of Medicare beneficiaries enrolled in Medicare Advantage plans in July, 2004, using reported diagnosis data from calendar year 2003. 

There are two reasons why the Medicare Actuaries now expect the budget neutrality adjustments to be less costly over the 5-year phase-out period.   First, analysis of newer data shows a much smaller difference in the reported health status between enrollees in Medicare Advantage and those in traditional Medicare. The new analysis, developed this summer using diagnosis data from 2004, shows a much smaller difference in average risk, compared to the earlier data.  Given these new data, CMS now estimates that the budget neutrality adjustment rate in future years will be approximately 5 percent.  

Second, in reviewing the new health status data, CMS determined that when the earlier risk scores were tabulated in April, they did not fully account for chronic diseases for some Medicare Advantage enrollees.  The resulting too-low risk score for Medicare Advantage plans will result in an increased budget neutrality adjustment to Medicare Advantage organizations estimated to be approximately $750 million in 2006.  To reconcile these additional estimated payments, CMS will reduce the budget neutrality adjustments to Medicare Advantage organizations by an estimated $750 million over the next four years, by accelerating the phase-out of risk adjustment.  The acceleration of the budget neutrality phase-out is summarized in the table below.   This action is expected to offset the effect on budget neutrality payments of a too-low risk score in 2006.

To help avoid similar reconciliations in the future, CMS has done a thorough inventory of its current data analysis procedures and methods for computing payment rates and put in place new analysis and review processes to help ensure timely and accurate risk score analysis.

The following table summarizes the changes in the actuarial estimates of the costs associated with the budget neutrality phase-out, reflecting both the newer data (which were incorporated in the MSR budget update) and the reconciliation of the budget neutrality adjustment payments in 2006, as well as other factors that have changed in the estimates.  The principal source of the changes in estimates is the new data on risk scores plus the estimated $750 million reconciliation of the budget neutrality adjustments after 2006.

This table and this fact sheet focus on the projected cost of budget neutrality adjustments. As the average risk score of Medicare Advantage enrollees increases and becomes closer to that for fee-for-service Medicare beneficiaries, then the cost of the budget neutrality adjustment decreases.   Total Medicare payments to Medicare Advantage plans do not decrease correspondingly, however, since these payments are increased as a result of the higher risk scores.  

Summary

CMS’s Office of the Actuary uses the best available data at the time of its statutorily mandated determination of plan payments. Based on updated data and a technical adjustment to a projected overpayment to Medicare plans in 2006, the payment adjustments related to budget neutrality will be reduced in the following 4 years.   This revision means that the estimated budget neutrality payment adjustments for Medicare Advantage plans will be approximately $5.3 billion or about $4.0 billion less over the next 5 years than had been estimated in the President’s budget earlier this year.  This does not mean, however, that aggregate payments to Medicare plans will drop by $4 billion over this period.  As plans enroll less healthy beneficiaries, the need for a budget neutrality adjustment will decline, but the underlying Medicare rates paid to plans will rise to account for their enrollees’ greater health care needs.