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Study: Medicare Advantage costs to be near traditional Medicare by 2017

A new issue brief by the Commonwealth Fund says that changes within the Affordable Care Act will lower per-beneficiary costs to nearly the same costs for traditional Medicare when fully implemented in 2017.

In 2009, Medicare Advantage plans cost $1,236 per enrollee, an average 14 percent more than for those enrolled in the regular Medicare program. That gap was closed to just under 9 percent in 2010 as a result of policy changes contained in the Medicare Improvements for Patients and Providers Act of 2008. In all, excess payments for those in MA plans compared to regular Medicare were $12.7 billion 2009 and $8.7 billion in 2010, according to the brief "Realizing Health Reform's Potential. The Impact of Health Reform on the Medicare Advantage Program: Realigning Payment with Performance."

But further changes to the program that began in 2011 and will continue through 2017, enacted in health reform, are aimed at closing that gap even further. By 2017 the per-beneficiary payment gap is forecast to be only 2 percent higher than traditional Medicare. The two major objectives of the new policy are to reduce excess MA payments to levels more in line with the spending on traditional Medicare and to provide monetary rewards for plans that achieve high performance ratings.

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In order to achieve these goals, Medicare has set out three important policy changes that determine the rates private insurers who run Medicare Advantage plans will be paid:

  • the process of setting the benchmark rates in each county will be extensively altered;
  • the proportion of the difference between the benchmark rates and the plan bids that is paid to plans as "rebates" will be significantly reduced; and
  • each plan's performance on quality measures will be used for the first time to adjust the benchmarks that determine its payment rate.

In all, the combination of these policies is expected to save Medicare more than $132 billion over ten years, according to estimates from the Congressional Budget Office.

The largest change in the rate setting policy is in how county benchmark rates are set and was the result of trying to find a method of how to account for the broad variations found across the country in local healthcare spending patterns.

The new policy created four separate cohorts of 785 counties each representing equal shares of the nation's 3140 counties, with each county ranked according to its estimated spending in traditional Medicare. Counties in the highest cost quartile would be assigned benchmark rates equal to 95 percent of the county's estimated per capita spending in traditional Medicare. The next three in decreasing order of costs would be assigned benchmark rates of 100 percent, 107.5 percent and 115 percent of per capita spending respectively.

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The brief noted that the benchmark rates and payment rates, had they been in effect in 2009, would both have been substantially lower than the benchmark rates and the payment rates in areas with high levels of spending in traditional Medicare. The new benchmark rates in the counties with the lowest per capita spending in traditional Medicare would average $8,141 and their payment rates would average $8,120, while in the counties with the highest spending the benchmarks would average $9,393 and the plan payment rates would average $9,274.

This highlights the difficulty of setting rates across the country even when trying to take into account the differences between local markets.

"These observations indicate the difficulty of setting rates across a very large nation with geographic areas with different patterns of medical practice, utilization of heath care, and total spending on health services," the brief's authors noted.

The other notable changes to how private insurers are paid for their MA plans include a reduction in plan rebate payments from 75 percent to 50 percent -- a change that would effectively create a 50-50 blend of benchmark payments and rebate payments -- and increasing rates paid to plans that earn a CMS quality rating of 3.5 stars and higher.

"Taken together, the new Medicare Advantage payment policies in the health care reform law will bring significant changes to the program and the incentives presented to private plans," the brief concluded. "The performance- based payments will focus plans' attention on quality improvement. Overall, the new incentives should make participation in Medicare attractive for plans that provide well-coordinated, responsive care for beneficiaries."

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