Health Care Reform

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Health Care Reform Shaping the Landscape of
Medicare Advantage 

• Mid-Atlantic Actuarial Club

Eric Mattelson, FSA October 7th, 2010
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Outline

• Background on Medicare Advantage (MA)
• Brief History
• Differences From Traditional Medicare
• Overview of the annual MA bidding process
• Healthcare Reconciliation Bill
• Outline key provisions that relate to MA
  purpose/motivation of each one
• Implications to MA beneficiaries plan sponsors
• Outlook for MA going forward what must plans do
  to survive?

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My Background

• Education History
• Amherst College 2006
• FSA 2008
• Work History
• Aon Consulting (Baltimore) 2006-2008
• Bravo Health (Baltimore) 2008-Current
• Disclaimer
• These are my personal opinions/interpretations
• Please do not ask me to tape any NFL games I do
  not have express written consent

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History of Medicare Advantage (MA)

• Began in 1997 as Part of Balanced Budget Act
• Known at the time as Medicare Choice
• Medicare Modernization Act of 2003
• Improved plan reimbursement led to more
  attractive benefit plans
• Added prescription drug coverage as an option
  starting 1/1/2006
• Plans 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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What is Medicare Advantage?

• Alternative to Traditional/Fee-for-Service (FFS)
  Medicare
• Run through private insurance companies
• Paid capitated rates by the government to provide
  healthcare services to Medicare beneficiaries
• Plan sponsor is responsible for paying claims and
  administering benefits
• Centers for Medicare Medicaid Services (CMS)
  maintains oversight of MA plans

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Role of CMS in Medicare Advantage

• Plan Sponsor reimbursement
• Monthly Membership Reports (MMR) eligibility
• Model Output Reports (MOR) risk adjustment
  factors
• Plan Payment Reports (PPR) payment summary
  files
• Annual Bid Process
• Review of each plans bids to ensure compliance
• Issues guidance regulations
• Determines benchmark rates, coding factors, any
  other changes to payment rates
• Not a true bid (unlike Part D) more like a
  projection
• High level administration of MA program

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FFS vs. MA Benefit Offerings

• MA plans must cover everything that FFS does
• MA plans have option to cover additional benefits
• Part D drugs
• Routine Transportation
• Dental
• Routine Vision Exams Eyewear
• Routine Hearing Exams Hearing Aids
• Over the Counter drug benefit
• Fitness/Gym Membership
• Etc.
• Benefits can change from year to year

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FFS vs. MA Cost Sharing

• FFS Coinsurance (usually 20) member pays
• MA Combination of coinsurance and fixed
  copayments
• Generally must be at least actuarially equivalent
  to FFS often MA offers lower cost sharing than
  FFS
• Some 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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FFS vs. MA MOOP

• 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
  - 6,700
• Prior to 2011, MOOPs were voluntary
• Plans can set the limit to less than 6,700
• Cost 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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FFS vs. MA Other Differences

• Premiums
• FFS 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 premium
• MA 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 cost
• MA premiums for a given plan can vary year to
  year
• Networks
• FFS members can go to any provider who accepts
  Medicare
• MA member may have provider network
  restrictions and authorization/referral
  requirements

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MA Plan types

• 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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MA Plan types Special Needs Plans

• Special Needs Plans (SNPs) are designed to target
  a specific portion of the population
• Dual 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 Bidding Process Background

• MA Plans are required to submit annual bids for
  each benefit plan to CMS
• Projection of membership by county (Revenue)
• Projection of medical cost
• Projection of administrative expense margin
• Description of all benefits, cost sharing, plan
  premium
• Bids must be submitted by June of the preceding
  year

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MA Bids Key Numbers

• Benchmark (PMPM)
• Set by CMS for each county updated annually
• Per Member Per Month (PMPM) amount
• Maximum 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
  plan
• Both the benchmark bid rate are multiplied by
  the plans projected risk score

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MA Bids Key Numbers (cont.)

• Savings (PMPM)
• Difference between Benchmark and Bid Rate
• Rebates (PMPM)
• Savings Rebate Rebate PMPM gt difference
  goes back to government
• Current Rebate through 2011 is 75
• Rebate dollars can be used for many things
• Reduce cost sharing for Medicare covered services
• Offer 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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MA Bids Sample Calculation

• 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 50
• Buy down of Medicare-Covered benefits 75
• Supplemental benefits 25
• MA-PD Plan Premium 0
• Projected Revenue 800 150 950

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MA Benchmarks vs. FFS costs

• 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 county
• 11 of MA enrollees have benchmarks at or below
  FFS costs
• 78 of MA enrollees between 100 125 of FFS
• 11 of MA enrollees above 125 of FFS
• Current Membership weighted FFS ratio for 2010 is
  110.4
• Based on CMS MA membership data as of August 2010
• http//www.cms.gov/MCRAdvPartDEnrolData/MMAESCC/li
  st.aspTopOfPage

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Provision 1 New Benchmarks

• Health Care Reform (HCR) bill will explicitly set
  county benchmarks as a of FFS costs
• Counties will be ranked by FFS costs and divided
  up into quartiles
• Each quartile would have a target of FFS costs
  that the benchmark would be set at
• New benchmarks begin phasing in as of 2012
• Duration of new benchmark phase-in varies based
  on the total benchmark PMPM dollar reduction
• lt60 gt 2 years
• 60lt X lt 100 gt 4 years
• gt100 gt 6 years
• Motivation cost savings

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Provision 1 Quartile Summary
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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Provision 1 Quartile Summary

• Quartiles are not membership weighted skewed
  towards the top quartile
• Larger counties (urban) naturally have higher FFS
  costs
• Creates 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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Updated Bid Provision 1

• 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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Provision 2 - Plan Star Ratings

• CMS currently gives every MA plan a star quality
  rating
• Prospective members can see plan overall ratings
• Range from 1 to 5 stars overall rating
• Overall rating is based on average scores across
  all individual measures
• No 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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How are Star Ratings Calculated?

• What factors influence star ratings?
• Part C has 36 ratings grouped into 5 domains
• Staying healthy seeing PCP, getting HEDIS tests
• Health Plan Responsiveness Care ease of
  getting care, overall rating of health care
  quality
• Managing long term chronic conditions
• Member complaints disenrollment rates
• Health plans customer service time on hold,
  accuracy of information, non-English language
  support
• Similar factors go into the Part D plan ratings
• Some measures based on absolute thresholds, some
  based on plans relative scores

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Provision 2A - Star Rating Quality Bonus

• Plans that have 4 star or above overall rating
  get a quality bonus
• 5 increase in target FFS percentage (95
  counties become 100 counties)
• Unclear if overall score will be based on scores
  for CD or C only
• Phases in from 2012-2014 (1.5, 3, 5)
• Plans can also qualify if they make meaningful
  improvements to their overall quality
• Plans can gain or lose these bonuses year over
  year could create significant benefit
  changes/member disruption
• Motivation to align a plans revenue with the
  quality of the healthcare delivered

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Provision 2B - Rebate Adjustments

• Through 2011 all plans get to keep 75 of savings
  as rebate dollars
• Starting in 2012, rebate will be dependent on
  star ratings
• 4.5 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 disruption
• Motivation cost savings

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Updated Bid Provision 2
Original Bid After Provision 1 After Provision 1 2 lt3.5 Stars After Provision 1 2 3.5 Stars After Provision 1 2 4 Stars After Provision 1 2 gt 4 Stars
Benchmark 1,000 918.48 918.48 918.48 964.40 964.40
Bid 800 800 800 800 800 800
Savings 200 118.48 118.48 118.48 164.40 164.40
Rebate 150 88.86 59.24 77.01 106.86 115.08
Rebate 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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Provisions 1 2 - Observations

• 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 trend
• Benchmark trends with FFS cost
• Bid rate trends with MA plan cost

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Provision 3 MA Coding Factor

• Coding factor explicitly reduces MA risk scores
  direct reduction in MA payments
• Factor for 2010/2011 was 3.41
• HCR mandates factor of at least 4.71 by 2014
• HCR mandates factor of at least 5.71 by 2019
• This means that risk scores will decline by at
  least 2.3 by 2019
• Benchmark Bid are risk adjusted, but this will
  decrease plan sponsor margin and reduce rebates
  slightly
• Motivation cost savings

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Provision 4 Minimum Loss Ratio

• Establishes a minimum loss ratio (LR) for MA
  plans at 85 starting in 2014
• Plans 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 members
• If LR is below 85 for 5 consecutive years plan
  contract will be terminated
• This LR will be enforced at the entity level, not
  the plan sponsor level
• This also applies to Part D plans
• Motivation cost savings?

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Loss Ratio Floor Potential Issues

• Creates a very narrow financial window for plan
  sponsors
• Loss ratios are not that stable/predictable
• Bids must be filed over a year in advance bid
  LR may not equal actual LR
• Potentially severe sanctions no
  allowance/buffer 84.5 LR treated same as 75
  LR
• Cannot have cross regional/entity subsidization
  unless under same legal organization
• Calculated including 5 quality bonus gaining
  or losing that bonus could determine whether LR
  is in acceptable range

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Loss Ratio Floor Potential Issues

• Creates possible adverse incentives
• Assume admin ratio is 10 - at 85 LR profit is
  5
• Plan Sponsors will still follow profit
  maximization strategy
• What 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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Loss Ratio Floor Potential Issues

• Current legislation incentivizes plan sponsors to
  manage costs as efficiently as possible
• Lower costs more bid rebate dollars, better
  benefits, better competitive position
• Lower costs also higher profit margins
• Loss ratio floor distorts these incentives
• Profit maximization ltgt cost minimization
• Plans may try to bid more strategically may cut
  benefits further to maintain what little margin
  is still attainable

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Provision 5 Filling in Donut Hole

• Current 2010 Part D benefit design
• Beneficiary pays 100 up to 310 deductible
• Beneficiary 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 hold
• Phase in at 7 coinsurance reduction per year
  starting in 2011 down to 25 in 2020
• Motivation to reduce beneficiary cost sharing
  liability incentivize generic utilization

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Provision 5 Filling in Donut Hole

• Positive for member
• Reduces beneficiary liability
• Increases incentives for increased generic
  utilization
• Increases the cost of offering Part D
• Sponsors may choose to remove Part D rather than
  increase premiums or reduce MA benefits
• Stand 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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What Does HCR Mean for MA?

• Quick Recap of provisions
• Set MA benchmarks based on FFS target
• Rebate and quality bonus based on star rating
• Increased MA coding factor reduce risk scores
• Minimum loss ratio floor at 85
• Phase down of coinsurance for generic drugs in
  donut hole

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What does this Mean for MA?

• Changes to benefit offerings
• Many of the ancillary benefits that attract
  members to MA will be reduced or removed
• Cost sharing will trend upwards towards FFS
  equivalent levels
• Member premiums will increase
• Some 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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What does this Mean for MA?

• Changes to competitive balance
• Only plans who can manage costs well can survive
• Will force many plan sponsors out of business
• Good for overall efficiency/cost savings of MA
• Bad for the members reduces options
• Even successful plans may have to pare down plan
  offerings Chronic SNPs may disappear
• Some 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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What can a MA plan do to survive?

• It will be difficult going forward but there are
  things a MA plan can do to improve its prognosis
• Attain Maintain 4 star quality rating
• 5 benchmark bonus could be the difference
• Relies on good relationships with providers for
  HEDIS scores, delivery of care ratings,
  managing chronic conditions rating
• Solid customer service member retention
• Offer the most consistent benefits that the plan
  can afford to minimize year over year
  fluctuations

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What can a MA plan do to survive?

• Strong provider relationships
• Helps maintain high star ratings
• Manage the health of the members improves
  member satisfaction reduces healthcare costs
• Ensure members are accurately coded so that risk
  scores reflect the members health status
  chronic conditions must be coded every year to
  maintain risk scores
• Benefit design providers are a window into the
  members needs can use this information to help
  make decisions during bid process

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What can a MA plan do to survive?

• Membership growth retention
• Larger membership base economies of scale -gt
  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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What can a MA plan do to survive?

• As plan sponsors exit the marketplace, the
  biggest competition will be FFS Medicare
• Key benefits (ancillary benefits, MOOP, Part D)
  must be maintained to differentiate MA from FFS
• Branding/marketing will be essential
• Highlight 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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Summary

• MA was designed with a purpose
• Improve efficiency of healthcare delivery through
  managed care
• Offer a valuable alternative to Medicare FFS
• To provide options that address the needs of a
  disparate Medicare population
• Provide members with additional benefits
  including drug coverage in one integrated package
• Improve the beneficiarys health status through
  strong relationships with PCPs
• Allow the Medicare program to reap the benefits
  of capitalism without compromising the quality of
  care (natural competition promotes efficiency)

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Summary

• 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 wont be
  easy
• Actuaries will be essential
• Bid Development
• Financial Projections
• Modeling the impact of future changes

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Discussion/Questions

• Thank you for your time