Yesterday, the Centers for Medicare and Medicaid Services (CMS) announced that it would be reversing some of the cuts to Medicare Advantage scheduled to be implemented in 2014 — specifically, instead of cutting per-person reimbursement rates by 2 percent next year as they’d proposed in February, CMS will increase them by about 3 percent. This doesn’t, however, have any effect on the health-care reform law’s long-term plans for the private program, which will slowly cut Medicare Advantage’s funding to the levels of traditional Medicare, pushing customers into the latter program. This week’s reversal means that some of the more dire immediate predictions for Medicare Advantage beneficiaries aren’t going to come true, but doesn’t change the program’s long-term fate, which includes about $150 billion in cuts to the expected rate of growth over the next ten years — and more.
Medicare Advantage (technically “Medicare Part C,” I’ll refer to it as MA) works by providing payments to private insurance companies — either HMOs or similar organizations, or private insurers that work on a fee-for-service model, like traditional Medicare — on behalf of seniors to provide at least the same coverage as Medicare. Roughly a quarter of seniors pick the plans, which tend to be more attractive to beneficiaries who don’t mind being limited to a certain network of providers, or who would benefit from having additional services, such dental, vision, or prescription drugs, covered under their single Medicare insurance plan (it replaces Parts A and B).
Why did CMS propose such a significant cut in its payment rates for MA insurers in the first place? President Obama’s acting CMS administrator gave two answers to the Washington Post’s Sarah Kliff when the cut was announced in February: “Part of it is a direct effect of the slowdown in spending, and part of it is open to comment and feedback and for us to take a look at it.” Since the announcement, obviously, the former hasn’t changed, but there has been plenty of “comment and feedback.” Especially of the sort that matters: From lobbyists, to politicians and bureaucrats. Today’s change has been hailed as a colossal victory for health-insurance lobbyists, who worked extremely hard to reverse these potentially devastating cuts (including lots of advertising –in addition to TV buys, to take one example, for two weeks, March 3 to March 14, the subject line of Politico’s main morning news e-mail read “presented by the Coalition for Medicare Choices”).
So, when the announcement happened at the end of the day yesterday, here’s what happened to the publicly traded insurers that do the most business with Medicare Advantage (according to Avik Roy):
The same stocks had also fallen dramatically on the preliminary announcement of the now-eliminated rate cut in February. In fact, it was believed that such cuts could be catastrophic for the industry: A widely quoted research note from a Citi health-care analyst, Carl McDonald, calls it “Armageddon averted” for MA insurers. The originally proposed 2.3 percent cut, when added to a number of other factors squeezing the insurers, would have meant a drop in revenues of about 7 to 8 percent — since most insurers shoot for a 5 percent profit margin, a majority could easily have ceased being profitable if the cut had gone through, devastating the program.
But as I said at the beginning, this is hardly the end of the trials of Medicare Advantage. In fact, while MA insurers aren’t going to see payments cut by 7–8 percent, ceteris paribus, with the five-percentage-point reversal, we should see their income still cut by 2 percent or so overall. This is due to a few other things, according to Citi’s McDonald; I’ll list just the slings and arrows resultant from Obamacare: A 2 percent excise tax (“fee”) imposed on insurance companies; a change, implemented over a few years, in what’s called “coding intensity” that the CMS says will measure MA patients more like traditional Medicare ones, making the group look less sick than they do now and therefore lowering reimbursement rates (amounting to about a 1.5 percent cut this year); and a mandated shift toward traditional Medicare’s lower reimbursement rates.
McDonald tells investors that today’s announcement “sends a pretty clear message that CMS has no interest in seeing major disruption in the Medicare Advantage program right now, quieting concerns about a post election desire to rein in enrollment and margins.” Well, no immediate major disruption, no. But we’re still on the road to major long-term alterations in Medicare Advantage, because government reimbursement rates for the program will still be cut slowly but surely over the next decade, to the tune of about $150 billion, reducing MA’s enrollment substantially and probably driving providers out of business. The CBO projected after the president’s health-care law was enacted, in 2011, that the number of enrollees, previously rapidly growing, will now shrink from 11.7 million in 2012 to just 8.7 million in 2021, while Medicare’s overall rolls grow significantly (standard Medicare would go from 37.7 million enrollees in 2012 to 55 million in 2012). Robert Book and Jim Capretta authored a study in 2010 for Heritage about how Obamacare will affect MA costs and enrollment.
The president’s health-care law cuts Medicare overall, but it especially goes after Medicare Advantage, even after CMS flinched — why? Obamacare, in order to restrain spending overall, expand coverage, and increase services, aims to restrain the growth of costs in Medicare, and one easy way to do that is by pushing people from more expensive government programs to less expensive ones. In theory they still have a choice, but the law’s payment shifts will cause millions of Americans to turn down or move out of Medicare Advantage programs that tend to be slightly more expensive, in favor of standard Medicare fee-for-service programs that are slightly cheaper. MA is only about 10 or 15 percent more expensive for the government than normal Medicare, but if you can move a few million people this way, it makes a difference. Further, as a general rule, liberals just don’t like the privately run Medicare Advantage and consider it (wrongly) evidence that privatizing Medicare can’t produce savings, so they’ve taken this chance to try to marginalize the program and push people into publicly run (fraud-ridden) Medicare.
On a vaguely related note, when examining what groups Obamacare will affect more than others, Medicare Advantage, because it requires an established network of providers, is more popular in urban and suburban areas than rural ones (even though almost all Americans, including those in rural areas, do now have access to MA HMO plans, etc.), and therefore more popular among Hispanics and African Americans than the population overall. Coincidentally, it’s also especially popular in swing states, which is why the Obama administration used an $8 billion “demonstration project” to postpone Obamacare’s statutory Medicare Advantage cuts (not the proposed ones just reversed) until after the election, as Avik Roy explained in this space at the time.