Mid-Atlantic Actuarial Club

Eric Mattelson, FSAOctober 7th, 2010

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Background on Medicare Advantage (MA)Brief HistoryDifferences From Traditional MedicareOverview of the annual MA bidding process

Healthcare Reconciliation BillOutline key provisions that relate to MA –

purpose/motivation of each oneImplications to MA beneficiaries & plan sponsorsOutlook for MA going forward – what must plans

do to survive?

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Education HistoryAmherst College – 2006FSA – 2008

Work HistoryAon Consulting (Baltimore) 2006-2008Bravo Health (Baltimore) 2008-Current

Disclaimer These are my personal opinions/interpretationsPlease do not ask me to tape any NFL games – I

do not have express written consent…

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Began in 1997 as Part of Balanced Budget ActKnown at the time as Medicare + Choice

Medicare Modernization Act of 2003Improved plan reimbursement – led to more attractive

benefit plansAdded prescription drug coverage as an option starting

1/1/2006Plans now known as Medicare Advantage (MA)Plans offering drug coverage known as Medicare

Advantage & Part D (MA-PD) plans

H.R. 4872 – Health Care & Education Affordability Reconciliation Act – 3/30/2010

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Alternative to Traditional/Fee-for-Service (FFS) Medicare

Run through private insurance companiesPaid capitated rates by the government to provide

healthcare services to Medicare beneficiariesPlan sponsor is responsible for paying claims and

administering benefits

Centers for Medicare & Medicaid Services (CMS) maintains oversight of MA plans

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Plan Sponsor reimbursementMonthly Membership Reports (MMR) – eligibilityModel Output Reports (MOR) – risk adjustment factorsPlan Payment Reports (PPR) – payment summary files

Annual Bid Process Review of each plan’s bids to ensure complianceIssues guidance & regulationsDetermines benchmark rates, coding factors, any

other changes to payment ratesNot a true “bid” (unlike Part D) – more like a projection

High level administration of MA program

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MA plans must cover everything that FFS does MA plans have option to cover additional

benefitsPart D drugsRoutine TransportationDentalRoutine Vision Exams & EyewearRoutine Hearing Exams & Hearing AidsOver the Counter drug benefitFitness/Gym MembershipEtc.Benefits can change from year to year

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FFS – Coinsurance (usually 20%) – member pays %

MA – Combination of coinsurance and fixed copaymentsGenerally must be at least actuarially equivalent to

FFS – often MA offers lower cost sharing than FFSSome benefit categories (Inpatient Hospital, Skilled

Nursing, Mental Health, Dialysis, etc.) have more specific cost sharing thresholds

Copays are generally preferable to beneficiary as costs are more predictable

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Maximum out of pocket limit (MOOP) – caps the amount a member can potentially pay in a year

FFS – no MOOP – can be very expensive when combined with coinsurance

MA – Mandatory MOOP established starting in 2011 - $6,700Prior to 2011, MOOPs were voluntaryPlans can set the limit to less than $6,700Cost sharing subsidy eligible dual members

(Medicare/Medicaid) are exempt from this mandatory MOOP requirement since they do not actually pay their cost sharing

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PremiumsFFS – members pay standard Part B premium

($110.50 per month in 2010)If members want D coverage they must get a

standalone drug plan for an additional premiumMA – standard Part B premium + additional

premium that varies by plan (some plans are $0)This can include Part D, in some plans at no extra costMA premiums for a given plan can vary year to year

NetworksFFS – members can go to any provider who accepts

MedicareMA – member may have provider network

restrictions and authorization/referral requirements

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HMO – members have network of providers, cannot voluntarily go out of network

POS – Members have network of providers, can go out of network (OON) for selected services – OON cost sharing may be higher

PPO – Members have network of providers, can go OON for any service offered in-network, OON cost sharing may be higher

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Special Needs Plans (SNPs) are designed to target a specific portion of the populationDual SNPs are for low income members who are

both Medicare & Medicaid Eligible Chronic SNPs are for members with specific

disease conditions (i.e. Diabetes)Institutional SNPs are for members who live in

institutions

These plans offer benefits/cost sharing/drug formularies specifically tailored to the target populations – FFS is one-size-fits-all

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MA Plans are required to submit annual bids for each benefit plan to CMSProjection of membership by county (Revenue)Projection of medical costProjection of administrative expense & marginDescription of all benefits, cost sharing, plan

premiumBids must be submitted by June of the preceding

year

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Benchmark (PMPM)Set by CMS for each county – updated annuallyPer Member Per Month (PMPM) amountMaximum amount that CMS will pay a plan sponsor for

a member in that county

Bid Rate (PMPM)Projected cost calculated by the plan sponsor for

Medicare-covered services

Plan Risk Score Average risk factor for projected members in the planBoth the benchmark & bid rate are multiplied by the

plan’s projected risk score

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Savings (PMPM)Difference between Benchmark and Bid Rate

Rebates (PMPM)Savings * Rebate % = Rebate PMPM –> difference goes

back to governmentCurrent Rebate % through 2011 is 75%Rebate dollars can be used for many things

Reduce cost sharing for Medicare covered servicesOffer supplemental benefits (dental, vision, etc.)Buy down the cost of Part D benefits (for MA-PD plans)Cannot be kept by the plan sponsor as profit

Plan Revenue = Risk adjusted bid rate + rebates

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Use the following numbers as an example:

Risk Score = 1.0 Benchmark = $1,000 Bid = $800 Savings = $200 Rebates = $150

Part D premium buy down = $50Buy down of Medicare-Covered benefits = $75Supplemental benefits = $25

MA-PD Plan Premium = $0 Projected Revenue = $800 + $150 = $950

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CMS Maintains projections of FFS costs by county

Current MA benchmarks are not explicitly adjusted for Medicare FFS costs

Relationship between benchmarks and FFS costs varies considerably by county11% of MA enrollees have benchmarks at or below FFS

costs78% of MA enrollees between 100% & 125% of FFS11% of MA enrollees above 125% of FFSCurrent Membership weighted FFS ratio for 2010 is

110.4%Based on CMS MA membership data as of August 2010http://www.cms.gov/MCRAdvPartDEnrolData/MMAESCC/list.asp#TopOfPage

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Health Care Reform (HCR) bill will explicitly set county benchmarks as a % of FFS costsCounties will be ranked by FFS costs and divided up

into quartilesEach quartile would have a target % of FFS costs

that the benchmark would be set atNew benchmarks begin phasing in as of 2012Duration of new benchmark phase-in varies based

on the total benchmark PMPM dollar reduction<$60 –> 2 years$60< X < $100 –> 4 years>$100 –> 6 years

Motivation – cost savings

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FFS Cost Quartile

Target Benchmark

% of FFS

Current Benchmark

% of FFS

% of Aug 2010 MA Enrollees

1 95% 105% 45%2 100% 109% 23%3 107.5% 115% 15%4 115% 135% 17%

Total 101.4% 110.4% 100%

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Quartiles are not membership weighted – skewed towards the top quartileLarger counties (urban) naturally have higher FFS costsCreates inherent winners & losers as some counties

may actually see benchmarks remain flat while others will be dramatically reduced

Could create member disruption as relative viability of markets could shift dramatically

There is a provision that prevents new benchmarks from exceeding previous benchmark rates

Holds MA plans “accountable” for how well FFS providers naturally manage costs (no control over this!)

On average, counties will see a 8% reduction in benchmarks phased in over an average of 3.7 years

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Assuming that we have a plan with an “average” mix of counties

New Benchmark = $1,000 * (101.4%/110.4%) = $918.48

Bid = $800 Savings = $118.48 Rebates = $88.86

Part D premium buy down = $30 (50)Buy down of Medicare-Covered benefits = $44 (75)Supplemental benefits = $15 (25)

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CMS currently gives every MA plan a star quality ratingProspective members can see plan overall ratingsRange from 1 to 5 stars overall ratingOverall rating is based on average scores across

all individual measuresNo impact to payment methodology as of 2011

HCR bill will make certain payment factors dependent on plans’ star ratings starting in 2012

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What factors influence star ratings?Part C has 36 ratings grouped into 5 domains

Staying healthy – seeing PCP, getting HEDIS testsHealth Plan Responsiveness & Care – ease of getting

care, overall rating of health care qualityManaging long term chronic conditionsMember complaints & disenrollment ratesHealth plan’s customer service – time on hold,

accuracy of information, non-English language support

Similar factors go into the Part D plan ratingsSome measures based on absolute thresholds,

some based on plan’s relative scores

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Plans that have 4 star or above overall rating get a quality bonus5% increase in target FFS percentage (95%

counties become 100% counties)Unclear if overall score will be based on scores for

C&D or C onlyPhases in from 2012-2014 (1.5%, 3%, 5%)Plans can also qualify if they make “meaningful

improvements” to their overall qualityPlans can gain or lose these bonuses year over

year – could create significant benefit changes/member disruption

Motivation – to align a plan’s revenue with the quality of the healthcare delivered

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Through 2011 all plans get to keep 75% of savings as rebate dollars

Starting in 2012, rebate % will be dependent on star ratings4.5 or more stars – 70% 3.5 to 4 stars – 65%3 or fewer stars – 50%Phased in from 2012-2014

All plans will experience reduction in rebates which could vary by year creating disruptionMotivation – cost savings

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Original Bid

After Provision

1

After Provision

1& 2 – <3.5 Stars

After Provision 1& 2 – 3.5

Stars

After Provision 1& 2 – 4

Stars

After Provision 1& 2 – > 4 Stars

Benchmark $1,000 $918.48 $918.48 $918.48 $964.40 $964.40

Bid $800 $800 $800 $800 $800 $800Savings $200 $118.48 $118.48 $118.48 $164.40 $164.40Rebate $150 $88.86 $59.24 $77.01 $106.86 $115.08Rebate

Reduction %

41% 61% 48% 29% 23%

Plan Revenue

$950 $888.86 $859.24 $877.01 $906.86 $915.08

Plan Revenue

Reduction %

6% 10% 8% 5% 4%

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Loss of rebate dollars will result in either reduced benefits or increased MA premiums

These provisions make getting the 4 star rating paramount – almost impossible to maintain benefits without that bonus

These numbers assume that MA plan cost trend = FFS cost trendBenchmark trends with FFS costBid rate trends with MA plan cost

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Coding factor explicitly reduces MA risk scores – direct reduction in MA paymentsFactor for 2010/2011 was 3.41%HCR mandates factor of at least 4.71% by 2014HCR mandates factor of at least 5.71% by 2019This means that risk scores will decline by at least

2.3% by 2019Benchmark & Bid are risk adjusted, but this will

decrease plan sponsor margin and reduce rebates slightly

Motivation – cost savings

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Establishes a minimum loss ratio (LR) for MA plans at 85% starting in 2014Plans that have LR below 85% must pay back to

CMS the difference between current LR and 85%If LR is below 85% for 3 consecutive years – MA

plan cannot enroll new membersIf LR is below 85% for 5 consecutive years – plan

contract will be terminatedThis LR will be enforced at the entity level, not the

plan sponsor levelThis also applies to Part D plansMotivation – cost savings?

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Creates a very narrow financial window for plan sponsorsLoss ratios are not that stable/predictableBids must be filed over a year in advance – bid LR

may not equal actual LRPotentially severe sanctions – no allowance/buffer

– 84.5% LR treated same as 75% LRCannot have cross regional/entity subsidization

unless under same legal organizationCalculated including 5% quality bonus – gaining or

losing that bonus could determine whether LR is in acceptable range

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Creates possible adverse incentivesAssume admin ratio is 10% - at 85% LR profit is 5%Plan Sponsors will still follow profit maximization

strategyWhat if a plan does a really good job at managing

cost and actual loss ratio is 80%A plan can reduce quality improvement programs

(which uses admin dollars) – maybe lose the quality bonus

New admin ratio is 8% and LR is now 85% - profit is 7%

The plan is better off financially by doing a less comprehensive job of managing the health of their members

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Current legislation incentivizes plan sponsors to manage costs as efficiently as possibleLower costs = more bid rebate dollars, better

benefits, & better competitive positionLower costs also = higher profit margins

Loss ratio floor distorts these incentivesProfit maximization <> cost minimizationPlans may try to bid more strategically – may cut

benefits further to maintain what little margin is still attainable

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Current 2010 Part D benefit design:Beneficiary pays 100% up to $310 deductibleBeneficiary pays 25% up to ICL ($2,830)Beneficiary pays 100% through donut hole ($6,440)Beneficiary pays 5% above catastrophic threshold

Proposal to reduce the cost sharing on generic drugs in the donut holdPhase in at 7% coinsurance reduction per year

starting in 2011 down to 25% in 2020Motivation – to reduce beneficiary cost sharing

liability & incentivize generic utilization

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Positive for memberReduces beneficiary liabilityIncreases incentives for increased generic

utilization

Increases the cost of offering Part DSponsors may choose to remove Part D rather

than increase premiums or reduce MA benefitsStand alone PDPs may increase premiums or

restrict drug formularies – hurts beneficiaries on Original Medicare as well

Unclear whether this will affect provider behavior – may still prescribe brand drugs

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Quick Recap of provisionsSet MA benchmarks based on FFS target %Rebate % and quality bonus based on star ratingIncreased MA coding factor – reduce risk scoresMinimum loss ratio floor at 85%Phase down of coinsurance % for generic drugs in

donut hole

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Changes to benefit offeringsMany of the ancillary benefits that attract members

to MA will be reduced or removedCost sharing will trend upwards towards FFS

equivalent levelsMember premiums will increaseSome plans/regions will be hit harder than others

Urban areas generally have lower FFS targets – will see the greatest reduction in benchmarks

Urban areas may have more sophisticated providers – may manage their FFS costs better already

Plans with sicker populations may not be able to maintain products designed for those members (SNPs)

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Changes to competitive balanceOnly plans who can manage costs well can surviveWill force many plan sponsors out of business

Good for overall efficiency/cost savings of MABad for the members – reduces optionsEven successful plans may have to pare down plan

offerings – Chronic SNPs may disappearSome regions may become unviable for MA – will

cause member disruption

MA-PD plans may not be able to afford the PD component unless it is funded through member premiums

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It will be difficult going forward but there are things a MA plan can do to improve its prognosis:

Attain & Maintain 4 star quality rating5% benchmark bonus could be the differenceRelies on good relationships with providers for

HEDIS scores, delivery of care ratings, & managing chronic conditions rating

Solid customer service & member retentionOffer the most consistent benefits that the plan

can afford to minimize year over year fluctuations

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Strong provider relationshipsHelps maintain high star ratingsManage the health of the members – improves

member satisfaction & reduces healthcare costsEnsure members are accurately coded so that risk

scores reflect the member’s health status – chronic conditions must be coded every year to maintain risk scores

Benefit design – providers are a window into the member’s needs – can use this information to help make decisions during bid process

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Membership growth & retentionLarger membership base = economies of scale ->

lower admin cost %More stable population – easier to bid & predict

costs & loss ratios to meet the LR floor requirements

Stable year over year performance means fewer benefit changes are required

If margins are reduced, the plan sponsor must make it up through volume to pay for fixed admin costs

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As plan sponsors exit the marketplace, the biggest competition will be FFS MedicareKey benefits (ancillary benefits, MOOP, Part D)

must be maintained to differentiate MA from FFSBranding/marketing will be essentialHighlight the benefits of HMO – ease of claim

payments, strong relationship with PCP, etc.Member communications & customer service key

to maintaining member satisfaction

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MA was designed with a purposeImprove efficiency of healthcare delivery through

managed careOffer a valuable alternative to Medicare FFSTo provide options that address the needs of a

disparate Medicare populationProvide members with additional benefits including

drug coverage in one integrated packageImprove the beneficiary’s health status through

strong relationships with PCPsAllow the Medicare program to reap the benefits of

capitalism without compromising the quality of care (natural competition promotes efficiency)

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HCR has presented the most significant changes to MA since 2003

It is possible to survive and still achieve the goals that MA was designed for but it won’t be easy…

Actuaries will be essential Bid DevelopmentFinancial ProjectionsModeling the impact of future changes

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Thank you for your time

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