Reprinted from HEALTH PLAN WEEK, the most reliable source of objective business, financial and regulatory news of the health insurance industry.
By Patrick Connole, Editor
February 25, 2013 Volume 23 Issue 7
CMS’s late Feb. 15 release of its “45-day notice” for 2014 Medicare payment rates left many stakeholders shocked at what they called a potentially crippling blow to Medicare Advantage (MA) plans across the country. The only positive part of the CMS proposal is its preliminary status, leaving stakeholders with slim hopes that heavy lobbying can bring some relief when the agency issues a final rate notice on April 1.
If left unchanged, health insurance executives say MA plans will have to re-evaluate their product offerings on a county-by-county basis, since payments vary by county. Many will likely quit selected markets after reviewing reimbursement levels, as the CEO of Universal American Corp. warned Feb. 19 (see story, p. 4).
What the rate notice proposes is staggering to MA plans. The most unexpected negative is that the MA portion of the 2014 payment rates tentatively will decline 2.3% for 2014 because of major downward revisions of that component for years 2012 and 2011 and smaller downward revisions for several other prior years. When coupled with a 2.1% reduction in the fee-for-service part of the rate structure for 2014, the result would be a base payment rate reduction of 2.2%.
This adds to revenue pressure on MA plans from other directions, notably health reform law-mandated payment reductions, a 4.91% coding intensity adjustment (up as required from 3.41% for 2013), the impact of the potential sequestration-related cuts starting on March 1 and the insurers’ fee that starts in 2014. CMS admitted to some extent that the reductions contained in the rate notice were coming at an inopportune time “and may present challenges for plans.” The agency did offer some relief by saying it would start the phase-in of its new risk-adjustment model, which it volunteered would produce lower risk scores (and thus lower pay) for MA plans, in a limited way in2014 such that the average risk score would be about the same as in 2013. However, the “normalization factor” for MA payment in 2014 is 1.026, and this also would shrink MA payments, though less than it did for 2013.
2014 Payment Rates Shock Plans
Humana Inc., considered the publicly traded insurer with the most exposure to CMS’s payment plan since it garnered 63.5% of its 2012 revenue from MA sales, said in a Feb. 19 Form 8-K filing to the U.S. Securities and Exchange Commission (SEC) that it would have to adjust its financial projections because of the CMS rate plan. In the filing, the insurer said its earlier Feb. 4 estimates for growth in Medicare membership and earnings for 2014 were “based upon management’s stated expectation that the base Medicare Advantage payment rate would be flat to slightly down.” Now, Humana “believes the preliminary base rates included in the CMS notice would result in a mid-single-digit decline in its benchmark payment rates [excluding the impact of the industry premium tax, county rebasing and risk factor recalibration, which are anticipated to be discussed in the final rate notice].” As a result, Humana said it is “closely analyzing all operational avenues available to address those preliminary rates and the related impact upon the company’s ability to grow both its Medicare membership and its earnings for 2014.” The insurer said it also will comment to CMS on the proposed rates, according to the SEC filing.
Tom Standring, vice president for Medicare operations at Molina Healthcare, Inc., which operates in the Medicare space via its Special Needs Plans for those dually eligible for Medicare and Medicaid, tells HPW that CMS is “unlikely” to change its proposed rates too much. But if the agency does, it would be in the range of 1%.
Brad Kieffer, spokesperson for another MA operator, Health Net, Inc., tells HPW that his company also expects to provide feedback to CMS during the comment period.
In a Feb. 19 investor note, Christine Arnold, a financial analyst for Cowen and Company, reflected the views of many on Wall Street. “The announcement of preliminary Medicare Advantage payment rates was surprisingly negative. While the challenges began with a 4.6% shortfall in the fee-for-service growth rate, a whole host of other issues make offsetting the rate shortfall difficult for companies. There is no doubt in our view that the announcement represents a profoundly unfavorable and unexpected deviation from history as well as Street and industry expectations,” she said.
Stifel Nicolaus analyst Thomas Carroll said in a Feb. 19 industry update that Medicare-heavy managed care operators like Humana, UnitedHealthcare, WellCare Health Plans, Inc. and Universal American should recognize the CMS plan as a “2014 headwind.” He still recommended investing in those companies’ stocks, however. “Given growth characteristics of government-sponsored business, and how the industry has proven its ability to manage adverse annual updates such as this, we recommend buying weakness related to this release.” Carroll said the MA program also is more robust these days than in previous years “and its participants are that much more sophisticated.”
Humana’s stock price took a hit on Feb. 19, the first trading session after the CMS announcement because of the Presidents’ Day holiday on Feb. 18, dropping nearly $5 or 6.4% to close at $73.01. The other major MA plans saw much smaller declines.
America’s Health Insurance Plans’ (AHIP) President and CEO Karen Ignagni on Feb. 19 called the proposed changes to MA payments a “crushing blow” to the 14 million seniors and people with disabilities who count on the program and put the cumulative price tag, along with other reductions, at $11 billion. “The combined effect of the ACA cuts and new proposed payment changes will likely result in seniors facing higher out-of-pocket costs, reduced benefits and fewer health care choices,” she said. “These cuts will compound the $200 billion in Medicare Advantage cuts and the new health insurance tax included in the health care reform law. The Congressional Budget Office projects that the reform law’s payment cuts alone will result in 3 million fewer people enrolled in Medicare Advantage.”
She said Oliver Wyman estimated that the health insurance tax would force seniors to pay an extra $220 in out-of-pocket costs and reduced benefits in 2014 and $3,500 in more costs over the next 10 years. “The cumulative impact of these changes will reduce Medicare Advantage payments next year by more than 8%, or approximately $11 billion, destabilizing the program and putting at risk the health care coverage upon which millions of beneficiaries rely,” Ignagni added.
Among other payment- and cost-related items included in the “45-day notice” are:
· CMS again would “rebase” county pay for 2014, meaning that some MA plans’ service areas will move to lower-paid quartiles while others will move to higher-paid.
· Chronic care MA Special Needs Plans would get changes in their risk-score calculations that stakeholders view as helpful for those plans’ payments in 2014.
· CMS would cut the allowable increase in Part D plans’ total beneficiary costs for 2014 to $30 per member per month (PMPM) from $36 PMPM.
Separately, CMS on Feb. 15 also released the proposed rule for MA plans’ minimum medical loss ratios (MLRs) that takes effect in 2014. The rule would meet one MA industry objective by having the MLRs calculated at the contract level rather than at the state level as is done for commercial insurers’ MLRs. But it also would reject the industry’s argument that Part D-related operations, which tend to have lower MLRs, be exempt from the coming 85% minimum MLR requirement.
View the 45-day notice at www.cms.hhs.gov/MedicareAdvtgSpecRateStats by clicking on “Announcements and Documents,” and the MA MLR rule at www.ofr.gov/inspection.aspx.
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