Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry.
By Steve Davis, Managing Editor
August 15, 2011Volume 21Issue 28
As part of the Aug. 2 agreement to boost the federal debt ceiling, a bipartisan “super committee” of 12 members of Congress has until the end of November to trim an additional $1.2 trillion from the federal budget over the next decade. While reductions in Medicare spending could impact Medicare Advantage (MA) carriers, cuts to entitlement programs could make managed care models more attractive, which would bode well for health insurers.
The committee is likely to eye cuts to Medicare and Medicaid, as well as subsidies called for by the reform law, industry observers tell HPW. If the committee is unable to reach an agreement — or if Congress fails to approve its recommendations — “triggers” called for in the debt-ceiling agreement would automatically cut Medicare up to 2% beginning in 2013.
Starting in 2014, the reform law calls for federal subsidies, on a sliding scale, up to 400% of the Federal Poverty Level (FPL). A portion of the subsidy will be transmitted to the eligible member’s health insurer each month and the enrollee will be responsible for the remainder of the premium. The committee might, for example, recommend reducing the subsidies from 400% of FPL to 300%, suggests Uwe Reinhardt, Ph.D., a health care economist and economics professor at Princeton University. Such a cut would mean higher out-of-pocket costs for consumers and potentially fewer enrollees for health plans if people decide to pay a penalty rather than buy coverage.
It’s still unclear how the committee might target Medicaid and/or Medicare, if at all. A voucher program for Medicare recipients, as proposed by Rep. Paul Ryan (R-Wis.) last spring, or block grants for Medicaid, could be beneficial for health insurers, says Steve Zaharuk, senior vice president at ratings firm Moody’s Investor Service.
While Medicaid is shielded from the automatic triggers, the committee could look for ways to reduce the program’s costs. Block grants, depending on the size of the grant and how they are distributed, could be financially beneficial for some Medicaid managed care firms. While poorer southern states receive higher Federal Medical Assistance Percentages (FMAP), they typically receive lower federal subsidies (in dollars) because they have stricter eligibility criteria, Reinhardt tells HPW. FMAP is used to determine federal matching funds allocated to states for social programs such as Medicaid.
“I could see Congress arguing that block grants to generous states (e.g., N.Y., Mass., N.J., Calif.) should be lower than traditional federal Medicaid dollars sent there, and vice versa for the poorer states,” he said in an email to HPW. “It would have to be done gradually over time. But I could imagine that the redistribution would go toward states in which private insurers are more heavily present. It’s a complicated picture.”
However, former CMS Administrator Tom Scully, now with law firm Alston & Bird, says it’s highly unlikely Democratic members of the committee will agree to any sort of Medicaid block grant. “I don’t think there’s any way Medicaid will be block granted,” he says.
‘Trigger’ Would Boost MA Rates
For health insurers, Medicare cuts triggered by the committee’s inability to forge a deal could be more attractive than cuts elsewhere. Under that scenario, Medicare reimbursement to MA carriers would be reduced by up to 2% each year for the next 10 years. For the most part, insurers will either raise premiums or cut expenditures when they prepare their bids for the 2013 plan year, Scully explains. “It’s not going to be catastrophic for [insurers], but it won’t be good either. At least they’ll have enough notice to plan for it.” The 2% cut would be adjusted each year and would not be part of the base reimbursement rate.
Across-the-board reductions in Medicare payment could translate to more cost shifting by providers, which could lead to higher premiums charged by commercial plans and/or increased cost shifting onto employee-based coverage, says Jason Lee, senior partner and director of the Global Institute for Emerging Healthcare Practices at Computer Sciences Corp. (CSC).
Ana Gupte, Ph.D, an equities analyst with BernsteinResearch, says a 2% cut to Medicare for health plans and providers, for example, would impact earnings by 2% or less, because health plans are “pass-through intermediaries” that will be able to “offset the reduction in payments through lower contracted costs to hospital, doctors, nursing home and other suppliers, while also modestly adjusting the cost sharing with seniors to keep margins stable.”
“Potential entitlement spending cuts are one [if not more] step removed from [managed care plans], and may actually increase the use of managed care models,” Stifel, Nicolaus & Company, Inc. analyst Thomas Carroll wrote in an Aug. 9 note to investors.
Agreement Is Seen as Likely
Goldman Sachs analyst Matthew Borsch said in an Aug. 9 note that some MA carriers could thrive. “We think fiscal pressures will drive a bigger role for [MA] and ultimately a phasing-out of unmanaged ‘traditional’ Medicare. Even without policy changes, MA is becoming the product choice for seniors as employer retiree coverage becomes increasingly rare.”
Lee says this committee could succeed where others have failed. “I think the political will is increasingly likely to be there as the consequences of not acting become clear.” The committee is likely to look at previous cost-cutting ideas as well as new ones. Those might include adjusting the eligibility age for Medicare recipients, “means testing” premiums, coming up with a “premium support” voucher for young Medicare enrollees, or expanding payment arrangements tied to the value of a health system’s performance, he says.
The super committee must submit its ideas by Nov. 23, and Congress then has until Dec. 23 to vote on its proposal, with no amendments. In a telephone interview with HPW before committee members were announced, Scully said he was pessimistic that a bipartisan group could reach a consensus, particularly with the 2013 election year on the horizon.
“The idea that Republicans are going to agree to raise taxes before an election is unlikely. And the idea that Democrats are going to agree to big entitlement cuts is also unlikely,” he says. “While I hope rational heads prevail, it’s more likely that the automatic triggers will kick in.”
The 12-person committee was finalized Aug. 11. On the Senate side, Democrats will be represented by Sens. Patty Murray of Washington state, Max Baucus of Montana and John Kerry of Massachusetts, while Republicans will include Jon Kyl of Arizona, Rob Portman of Oregon and Pat Toomey of Pennsylvania. House Republicans will include Reps. Dave Camp of Michigan, Jeb Hensarling of Texas and Fred Upton of Michigan. Democratic House members will be James Clyburn of South Carolina, Xavier Becerra of California and Chris Van Hollen of Maryland.
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