Analysis: What Medicare Advantage Plans Need to Know About Proposed Changes to Part C

Medicare Advantage Organizations (MAOs) provide medical coverage for more than 19 million beneficiaries, or 33 percent of all Medicare-eligible beneficiaries. The Centers for Medicare and Medicaid Services (CMS) define the maximum amount they will pay MAOs for fee-for-service (FFS) benefits in each county as the “county benchmark.”

The county benchmark is calculated as a percentage of FFS costs and ranges from 95 percent to 115 percent. It is capped at the pre-ACA benchmark for each county. Currently, CMS bases the FFS cost projections on claims for all members with Part A or Part B coverage. However, MedPAC has proposed revising the FFS cost projects to include only those members with Part A and Part B coverage. New analysis by Oliver Wyman Actuarial finds that many MAOs would see revenue increase if CMS moves ahead with this change.

Here, Randall Fitzpatrick, FSA, MAAA, and Josh Sober, FSA, MAAA, of Oliver Wyman Actuarial explain the proposed change and what it means for MAOs’ bottom line.

Background

In March 2016, the Medicare Payment Advisory Commission (MedPAC) recommended that CMS investigate the FFS costs used to calculate the Part C benchmarks. The existing formula is based on FFS costs for enrollees with Part A or Part B coverage. However, in order to enroll in Part C, an enrollee must be covered under both Part A and Part B. Historically, enrollees who are covered by only Part A or Part B have lower per capita costs than those covered by both.

According to MedPAC’s review, 9 percent of Part A enrollees do not have Part B coverage, and these enrollees’ Part A costs are 80 percent lower than those with Part A and Part B coverage. (The lower Part A costs may be driven by the presence of other health insurance coverage for Part A-only enrollees that are not accounted for in the FFS projections.)

In response to this finding, MedPAC recently voted to support a change in the Part C benchmark formula. “The Secretary should calculate MA benchmarks using fee-for-service spending data only for beneficiaries enrolled in both Part A and Part B,” the commission concluded. (You can read the entire recommendation here.)

The impact of the new formula

Using publicly available data, the Actuarial Practice of Oliver Wyman estimated what this recommended change would mean for MAOs. Our analysis projects that the average 2017 county benchmark would increase 3 percent for zero-quality bonus plans and 2.3 percent for five-percent quality bonus plans. And as a result, most MAOs would see a corresponding increase in revenue.

It is important to understand that Part C payments are made up of two components: a risk-adjusted bid and rebate. The bid is the MAO’s estimated cost to provide coverage for Part A and Part B services. The rebate is calculated as percentage of the difference between the plan bid and the benchmark. For example, if a plan bid in County A was $600 and the county benchmark was $700, the rebate would be calculated as a percentage of $100. The rebate percentage varies from 50 percent to 70 percent, depending on the MAO’s star rating, and it is either used to fund additional benefits not covered under Part A or Part B, or reduce each member’s premium.

Assuming that the increase in benchmark would not have an impact on the plan bid, we project that the proposed change would increase revenue for 3-star plans roughly 1.5 percent (3 percent benchmark increase x 50 percent rebate percentage) or $12.60 PMPM across all counties. The actual increase in revenue would vary considerably between counties.

The map below highlights the estimated effect that the methodology change would have on the 2017 benchmarks at a county level across the country.

Although much of the benchmark increase would fall to rural areas in the plains states, our analysis shows likely improvement in counties with high MA enrollment, including Los Angeles, Miami-Dade, and Maricopa.

In implementing MedPAC’s recommended change, CMS would finally align the FFS costs and the eligibility requirements implied under the ACA. This change would address a methodological inconsistency that has been present since 2011. 

Note: The formula for the county benchmark is also impacted by the county’s quartile percentage and double-bonus status. The county quartile percentage is the maximum percent of FFS costs CMS will pay plans in each county, with the highest FFS cost counties having a quartile percentage of 95 percent and the lowest FFS cost counties having a quartile percentage of 115 percent. In addition, a small number of counties are double-bonus, eligible as long as their FFS costs are less than the national average FFS costs. Within our analysis we have assumed no changes in the counties’ quartile percentage or double-bonus status. Implementation of these changes and their impact on the county benchmark would need to be considered if CMS were to move forward with MedPAC’s recommendation.

Also, the Oliver Wyman revenue change estimates may be higher than MedPAC’s expectations. We believe the difference arises because MedPAC is over-estimating a corresponding change in risk scores. Because the risk scores are developed from enrollees with Part A and Part B coverage, we believe there will not be a corresponding risk-score change under this revised FFS calculation.