November 6th, 2014
of the Affordable Care Act (ACA) in
2010, much of the attention in the policy community has been on modernizing
Medicare’s traditional fee-for-service (FFS) program. Through Accountable
Care Organizations (ACOs), larger “bundles” of payments to fee-for-service
providers for episodes of care, and tests of pay-for-performance models, the
hope is that the traditional Medicare model can be remade through sheer force
of bureaucratic will. The stated intent is to find a way to pay for
value, not volume.
These efforts may or may not bear
much fruit, but, over the longer term, it’s not likely to matter much.
That’s because a more important transformation of Medicare is already well
underway and is occurring despite more resistance than assistance from the
program’s bureaucracy. According to the 2014 Medicare Trustees’ report,
enrollment in Medicare Advantage – the private plan option in Medicare — has
been surging for a decade. In 2005 there were 5.8 million Medicare
beneficiaries enrolled in MA plans — 13.6 percent of total enrollment in the
program. Today, there are 16.2 million beneficiaries in MA plans, or 30
percent of program enrollment. (See Table IV.C1) In addition,
the Medicare drug benefit, which constitutes about 12 percent of total program
spending, is delivered entirely through private plans. (See Table II.B1)
As MA enrollment has surged, so has
recognition of its improved value. A recent, comprehensive review of the
evidence conducted by Joseph Newhouse and Thomas McGuire of Harvard University
makes a compelling case that MA plans are providing higher value services at
less societal cost than the traditional FFS program. Based on their
findings, Newhouse and McGuire argue for policies that would provide incentives
for even more beneficiaries to enroll in MA plans in the future.
The Newhouse-McGuire study is part
of a notable transformation in views on the MA program. For many years,
private plans were heavily criticized for costing too much while providing
little additional value to beneficiaries. But those criticisms are now
beginning to recede as the evidence mounts that MA plans can deliver more
efficient and higher quality care than FFS. And as valid criticisms fade
in relevance so too do the arguments against using MA as a foundation for a
larger reform of the Medicare program.
The Relative Efficiency of MA Plans
There has been a long-running debate
about the relative costs of MA plans compared to traditional FFS. That
debate has often confused what Medicare pays MA plans with whether or
not MA plans can deliver the same level of Medicare benefits less expensively
than traditional FFS. A growing number of studies confirm that, in
general, MA plans can operate more efficiently than FFS (and sometimes much
more efficiently), even if the government’s payments to MA plans on behalf of
the beneficiaries often exceed what would be spent if the beneficiaries were
enrolled in FFS.
Recent data compiled by the Medicare
Payment Advisory Commission (MedPAC) confirms the relative efficiency of MA
plans compared to FFS. In 2014, MA plans of all types submitted premium
bids to the Centers for Medicare and Medicaid Services (CMS) that came in at 98
percent of FFS costs. In other words, MA plans are able to provide the
Medicare benefit package, as defined in the statute, for two percent less than
what it costs FFS. When only MA HMOs are examined, the cost savings is 5 percent. (See Chart
9-6 and Table 1 below)
Of course, Medicare pays the MA
plans based on benchmarks, which are set at levels that are generally above the
MA bids. Since 2004, MA plans have been paid what they bid, plus 75
percent of the difference between what they bid and the benchmarks – if their
bid is below the applicable benchmark. If a plan bids above its benchmark
amount, the beneficiaries are required to pay the additional premium to make up
the difference. More recently, this split in the share of the difference received by lower-bidding
plans has been adjusted in the ACA based on quality ratings assigned to MA
plans (See page 329); beginning in 2014, the rebated
amount will be between 50 percent and 70 percent of this difference, with the
highest rated plans receiving a 70 percent rebate. MA plans are also
required to return the added payment above the bids to the beneficiaries,
either in the form of benefits that go beyond what is required in Medicare law
or through lower cost-sharing requirements, such as reduced premiums,
deductibles, or copayments.
The relative efficiency of MA plans
is highlighted in several recent assessments of the Medicare premium support
model that find it would reduce program costs, and could reduce most
beneficiaries’ premiums as well. (Various premium support reform
proposals would create direct competition between MA plans and FFS by setting
the government’s contribution toward coverage based on their respective bids
and requiring the beneficiaries to pay higher premiums for more expensive coverage.)
For example, the Congressional Budget Office (CBO) estimates that MA plans,
even without a change in law, will be able to outperform FFS in 2020, with
average bids that are 6 percent lower than average FFS spending.
The growing differential between MA
plan costs and FFS would result in program-wide cost reductions that could be
shared with Medicare’s beneficiaries. CBO expects that a premium support
plan which specifies that the government’s contribution will be tied to the
weighted average bid in a region, would cut Medicare spending by about 4
percent and beneficiary spending on health expenses by about 6 percent.
CBO’s findings are echoed in other
assessments of the premium support model, including assessments by those
generally critical of the concept. Zirui Song, David Cutler, and Michael Chernew wrote an assessment of a
similar Medicare reform plan in 2012 that argued that premium
support would result in higher premiums in FFS, and thus would be harmful to
beneficiaries. That assessment, though critical, was also based on the
assumption that MA plans would, in many parts of the country, provide the
Medicare benefit package at costs well below FFS. Specifically, the
authors of this study estimated that the second-lowest MA plan bid in a region
would, on average, be about 9 percent below FFS costs. Consequently,
beneficiaries who elected to stay in the more expensive FFS option would pay
more.
The study presumed that many
millions of beneficiaries would be resistant to switching out of FFS, even if
staying in FFS costs them much more each month in premiums, but that appears to
stretch the limits of plausibility. More importantly, this study supports the
conclusion that, in many parts of the country, MA plans will be able to bid far
below projected FFS costs.
The Spillover Benefits of MA
Enrollment
The positive impact of private plans
is not limited just to what is delivered to MA plan enrollees. Several
studies continue to show that higher MA enrollment in a community is beneficial
for all Medicare beneficiaries, including the non-MA participants.
A 2008 study by Michael Chernew, Philip DeCicca, and Robert Town found that,
for every 1 percent increase in MA enrollment in a community, there was a
corresponding 0.9 percent reduction in FFS spending per enrollee. Another study in
2013 by Katherine Baicker, Michael Chernew, and Jacob Robbins found
that when MA penetration rates rose in a county, costs per hospital admission
and average lengths of stay fell system-wide, including a spillover reduction
in FFS hospital costs and treatment intensity.
The implication of these studies is
that higher MA plan penetration has a positive effect on the practice patterns
among the physicians participating in the MA plan, as well as the hospitals
with which they work, and that these physicians carry these improved practice
patterns over into their care for FFS enrollees as well.
Minimizing Risk Selection
Newhouse and McGuire devote
significant attention to the question of risk adjustment. For many years,
critics of private-plan risk contracting in Medicare have argued, with some
evidence, that the private plans benefitted from favorable selection and a
rudimentary risk adjustment methodology. Until 2000, payments to the
private plans were only adjusted based on the age, sex, and the eligibility
categories of the beneficiaries, not their underlying health conditions.
Beginning that year, however, CMS
administrators started to phase in additional payment adjustments to MA plans
based on inpatient diagnoses discernible from FFS claims data and MA plans’
“encounter” data. In 2004, CMS introduced a more comprehensive
risk-adjustment model based on physician and outpatient claims data from the
FFS population as well. Since 2007, risk scores for MA plans have been
based entirely on this model. These scores are used to adjust the
government’s capitated “benchmark” payments to MA plans to reflect the risk
scores of their enrollees.
In addition, legislative amendments
enacted in 2003 have phased in a “lock in” feature for MA plans that limits the
ability of beneficiaries to disenroll between annual open enrollment seasons.
(Previously, beneficiaries could disenroll from MA plans on a monthly
basis, and move back and forth between FFS and MA as often as they
wished.) Having reviewed the most recent data, Newhouse and McGuire
conclude that these two features of current MA policy have greatly reduced
favorable risk selection for the participating private plans, to the point
where accusations of skewed selection are no longer a strong argument against
the efficacy of the program.
A 2011 study by Jason Brown,
Mark Duggan, Ilyana Kuziemko, and William Woolston challenges this
conclusion by contending that risk selection has now moved from avoiding those
with expensive health conditions to finding the least costly patients within a
risk adjustment category. In other words, their study suggests that the
private plans have ways of finding the least costly diabetic among those who get
coded with diabetes in the new risk adjustment system. Those enrollees would
appear to be cheaper to care for than their official risk scores predict.
The authors estimate that the amount
by which MA private plans were paid above the cost of covering them directly
through FFS — so-called “differential payments” — increased after risk
adjustment and totaled $30 billion (almost eight percent of total Medicare
expenditures) in 2006.
Newhouse and McGuire (See pages 373-375) make a couple of
points to refute this argument. First, they conducted their own analysis
and found that the distribution of high-cost and low-cost cases within a risk
adjustment code had not changed substantially from the years preceding
introduction of the new inpatient-and-outpatient-diagnosis-based risk
adjustment method. In fact, the amount of risk bias favoring the plans
had fallen, rather than risen. Therefore, whatever is happening is not
the result of adjustments in plan behavior since introduction of the new
method.
In addition, they note that there is
no evidence of favorable selection at all across the risk adjustment coding
system, such as from Medicare beneficiaries with cancer to those with
diabetes. They point out that it would be far more profitable for an
insurance plan to employ methods to skew their enrollment in this way than to
try and find the least costly patients within a diagnosis code. And yet there
is no evidence this is happening.
There are also more benign
explanations for within-diagnosis risk selection. Some beneficiaries in
MA plans may disenroll temporarily in order to get a procedure done out of
their MA plan network. It is also possible, and perhaps likely, that the
MA plans are more aggressively and efficiently managing the care of their more
expensive cases, and that is showing up as “risk selection” in after-the-fact
analyses that assume FFS and MA are no different in this regard. The Brown et
al. model assumes away the possibility that MA plans might be better at
controlling costs than FFS; nor does it account for the effects of insurers
identifying the enrollees for whom their managed care practices would be
particularly effective at reducing costs below FFS.
In its assessment of the “premium
support” reform model, CBO notes that MA plans would be able to bid well below
FFS costs in many counties around the country, and that improved efficiency
among MA plans in a more intensively competitive environment would be one of
the reasons for the lower private plan bids. The agency states that the
lower bids would also be due to some additional selection bias – that is, the
risk adjustment methodology would not fully correct for the healthier enrollees
that MA plans would attract in a direct competition with FFS. But CBO
does not provide a precise estimate of what it expects the additional selection
bias to be, so it is possible that the estimated effect is small.
Moreover, under premium support, MA
enrollment would increase to an even larger percentage of total program
participation, thus making it more difficult for MA plans to serve a
beneficiary population that is atypical of the Medicare population in
general. In addition, there is no reason to believe that the substantial
progress that has been made in recent years in reducing selection bias in the
MA program, through policy changes as well as better data, would halt if the
program moved toward the premium support model.
Higher Value Services in MA Plans
In the past, MA plans and their
predecessors were often dismissed for not providing any added value for the
beneficiaries. This was always more of an assertion than a proven fact,
given the paucity of clear quality comparisons between MA and FFS.
Indeed, one of the great ironies of the MA-FFS debate is that it is far easier
to secure measures of quality for plans with organized networks of providers
than it is from the unaffiliated and disorganized providers receiving FFS
payments. Moreover, given the documented benefits of well-organized and
integrated systems, there was never a very good empirical basis to assume that
the beneficiaries were better off in FFS than MA.
In fact, more evidence has begun to
emerge in recent years indicating that MA plans can and do provide higher
quality care than FFS in many instances. A 2013 study in Health Affairs found that MA HMOs
outperformed FFS on breast cancer screening, diabetic care, and cholesterol
testing for heart disease. A separate study, in the American Journal of Managed Care,
found that MA plans have hospital readmission rates that are 13 to 20 percent
below those of FFS.
Several recent studies have
attempted to debunk the value of MA plans to beneficiaries by arguing that the
plans have failed to pass through to the beneficiaries a sufficient amount of
the payments that are made to them above their bid amounts. For example,
a 2014 study by Mark Duggan,
Amanda Starc, and Boris Vabson claims that only about one-fifth of
the additional payments provided to MA plans find their way to the enrollees in
the form of “better coverage.” The implication is that a larger share
accrues to private insurers in the form of higher profits and possibly a large
increase in advertising expenditures to attract MA enrollees.
The study relies on a 2001 Medicare
payment policy change that raised the minimum payment floor in larger urban
counties. It focuses on the effects of those payment hikes during the 2007-2011
period. The study uses a process of elimination (little evidence of much lower
premiums, substantial additional medical benefits, higher MA plan ratings,
greater utilization of services, better health outcomes, changes in beneficiary
selection) to imply that only a small share of the increased payment levels
were passed on to consumers.
This study draws a broad policy
conclusion — that MA plans are not providing substantial additional services to
their enrollees for the higher payments they are receiving — based on an
inexact methodology and questionable assumptions. More importantly, the
premise is flawed. Even if accurate, the study is only a critique of
payment adjustments that were made for certain counties (low-cost urban areas)
for political reasons. There is no basis to connect this with the dynamics
of a genuine premium support approach based on competitive bidding among all
Medicare options, including MA plans and FFS.
Another 2012 study by Zirui Song, Mary
Beth Landrum, and Michael Chernew similarly purports to demonstrate
the limited benefits to consumers from competitive bidding and competition in
Medicare. It finds that a $1 increase in Medicare’s payment to private
HMO plans led to a 49 cent increase in plan bids, with 34 cents going to
beneficiaries in the form of extra benefits or lower cost sharing. It
adopts the rather unrealistic assumption that MA plans in a “simple” model of
competition should not raise their bids when Medicare raises its payments to
those plans, but instead should transfer the bulk of those extra payment
amounts into expanded benefits for the plans’ enrollees.
The study uses a rebasing of MA
benchmark payments in 2007 and 2009 as an experiment in changes in levels of
benchmark reimbursement for plans that were largely uncorrelated with changes
in their underlying costs in any specific county. Its analysis is limited
to MA local plans, does not include employer plans or special needs plans,
involved data from 2006 to 2010, and does not observe actual plan costs. It
could not observe the impact of more recent Medicare payment changes.
While claiming to show the limited
value of MA plans to consumers, what the unremarkable study actually shows is
that competition in the Medicare market is not perfectly competitive under
current rules and that bidding systems in which administratively determined
benchmarks are known in advance are less effective than competitively
determined benchmarks at revealing true costs.
Administratively-determined benchmarks may even lead to higher provider
fees. The authors acknowledge that administratively set prices have their own
flaws, including political manipulation that may lead either to excessive
spending or less access to care. This study, like the earlier one by Duggan et al.,
failed to address how a Medicare premium support reform based on competitive
bidding across a level playing field for all Medicare options would actually
perform.
A third study in 2009 by Steven Pizer, Austin Frakt, and Roger Feldman confirms this
point. It is sometimes cited for the proposition that MA plans return
little value to consumers when they receive higher payments from the Medicare
program. But, among other things, the study found that the Medicare drug
benefit structure for paying private plans was far more effective than the MA
program in terms of delivering value to customers. The authors estimate
that the drug benefit produced nine times as much value per government dollar
for the beneficiaries compared to an increase in payments to MA HMOs.
Why? Because the authors conclude that the solution is to more closely
tie MA payments to “competitive bids,” rather than to administratively
determined benchmark rates.
Improving Competition Between MA and
FFS
The Newhouse and McGuire assessment
of the state of MA policy is particularly interesting in its look at the
playing field for MA-FFS competition.
For starters, they make it clear
that default options matter. Under current policy, if beneficiaries make
no overt choices, then they are presumed to select FFS. Further, like
many other markets, Medicare displays “status quo” selection bias. That
is, once a beneficiary is in a plan, he or she tends to stay there, even when
switching would make sense. So the current system, with FFS as default
coverage, is biased toward more FFS enrollment.
A possible remedy would be to change
Medicare’s default rules. For newly eligible beneficiaries who do not
make an overt selection of coverage, the Medicare program could provide random
assignment among MA plan options instead of automatically placing them in
FFS. To minimize undue financial hardship and unexpected surprises, those
default options might be limited to the two low-cost Medicare plan options
(under one version of competitive bidding) or to those plans with bids equal to
or less than the average enrollment-weighted bid in a particular county (under
another version of competitive bidding). This change would not apply to
current enrollees in FFS.
Newhouse and McGuire also make it
clear that the current bidding system is flawed and needs improvement. All
beneficiaries, including those in MA plans, must pay the Medicare part B
premium, which is generally withheld from the amounts otherwise due to the
beneficiaries in their Social Security checks. MA plans are permitted to
provide premium rebates to the beneficiaries as a way of attracting enrollment,
but current policy requires those rebates to come in the form of adjusting the
part B premium withheld from Social Security checks. This is a very
non-transparent way of encouraging direct price competition between FFS and MA
because a beneficiary choosing a plan offering a rebate would not see the
change in any bill they owe to the MA plan. The adjustment would come in
form of an adjustment to their net Social Security benefit, which is indirect
and less visible. The result is that very few MA plans compete with FFS
in this way; instead, they charge no premium above the part B premium and then
give away whatever else they can in the form of expanded benefits, including
adjustments in deductibles and other copayments.
This limitation of the current,
flawed price competition between MA and FFS can also be seen from the
perspective of what the beneficiaries must pay to remain in FFS. Under
current law, the premium for FFS is always the uniform, national part B
premium, regardless of the relative cost of FFS to the available MA plans in
the region.
The solution is to ensure clear,
transparent price competition between MA and FFS that is visible and tangible
for the beneficiaries during annual open enrollment seasons. The most
straightforward approach would be to base the government’s contribution toward
coverage on the average, enrollment-weighted bid in a region, with measured FFS
costs included in the calculation. Under this approach, the government’s
contribution toward coverage in a region would be the total, weighted-average
bid less the part B premium that beneficiaries would pay under current rules
for their FFS coverage. Beneficiaries would pay the entire additional
premium for plans that cost more than the weighted-average bid, and they would
get to keep 100 percent of the savings for enrolling in plans with below
average premiums.
The government’s benchmark could
also be set based on a lower-cost option, such as the second-lowest bid in a
region. Setting the government’s contribution in this way would likely
put even more downward pressure on bids from MA plans, and thus reduce total
costs even more than a reform based on weighted-average bids. The
downside of this approach is that it could be more volatile because one or two
plan bids could substantially alter the benchmark, even if the plans making the
bids had low enrollment. Basing the government’s contribution on the
weighted-average bid in an area (at least during the initial years of
implementing a premium support reform) ensures payments are closely tied to the
actual cost experiences of the most popular plans.
Importantly, in any reform plan
based on competitive bidding, the premium owed by the beneficiaries should be
paid separate and apart from their Social Security checks. Under this
approach, if FFS was an above-average cost plan, the beneficiary would owe the
additional premium, and it would be visible. MA plans should also be
required to offer to the beneficiaries a plan with an actuarial value
equivalent to the statutory benefit. Added benefits would be offered in
supplemental coverage, for an added premium. (Separating bids and
premiums for standard Medicare benefits from supplemental coverage was
originally recommended by the National
Bipartisan Commission on the Future of Medicare.)
Other concerns about the impact of
such Medicare payment reforms on more vulnerable beneficiaries can be addressed
by additional premium support subsidies for low-income individuals and enhanced
navigational support services for those who may have difficulty making plan
choices without assistance.
Conclusion
The success of Medicare Advantage in
recent years is changing the conversation on Medicare reform. It is now
possible to envision genuine bipartisan support for fair competition between MA
plans and FFS. The “premium support” concept still engenders highly
politicized opposition in some quarters. But support for the idea has
also begun to cross ideological divides. At various points, Senator Ron
Wyden (D-Oregon), former Clinton administration budget director Alice Rivlin,
and Austin Frakt of Boston University (and prolific defender of the ACA) have
all embraced the idea. Unlike others, they support the idea that a truly
level playing field for MA-FFS competition requires full FFS participation in
the bidding process and transparent beneficiary choices based on the resulting
premiums that must be charged for coverage.
Serious Medicare reformers on both
sides of the political aisle also increasingly recognize that private plans are
far more flexible than FFS, and that is a major advantage. They can adapt
and improve their networks, their care management protocols, their customer
support systems, and other features of their plans far more rapidly than can
FFS. Moreover, in premium support, Medicare’s beneficiaries get to choose
the kind of coverage that suits their needs. This is in stark contrast to
other reforms, like ACOs, which attempt to place beneficiaries in new delivery
models without their full consent.
Premium support is of course a
complex reform. It requires risk adjustment of payments and regulation of
plans to ensure fair competition. But the risk adjustment system and the
regulation need not be perfect for the reform to work; indeed, the system
already in place today for MA plans should provide sufficient confidence that a
competitive reform model would be beneficial for the program’s participants.
The main obstacle to more intensive
competition in Medicare has been distrust. MA advocates believe the
bureaucracy will tilt the playing field toward FFS; and FFS defenders believe
private plans will find new ways to risk select and game the system or to
influence policymakers to provide them with overly generous terms on their
payment rates. Only a more transparent competitive bidding system
between MA and FFS has a chance of overcoming this mutual distrust and ensuring
that both beneficiaries and taxpayers receive the most value for each Medicare
dollar.
http://healthaffairs.org/blog/2014/11/06/an-emerging-consensus-medicare-advantage-is-working-and-can-deliver-meaningful-reform/
