Medicare Advantage Plans Could Soften Payment Cuts With Rating Program

Private Medicare Advantage health plans could soften major payment cuts from the federal government that start in 2012 under U.S. health care reform with a new star ratings program by the U.S. Centers for Medicare & Medicaid Services.

The star ratings for 2011 Medicare Advantage and drug plans for seniors will serve as the basis for a quality bonus payment in a three-year demonstration for MA plans that starts in 2012.

CMS said it uses the five-star rating system to monitor plans to ensure they meet Medicare quality standards. It also allows beneficiaries to compare plans based on quality of care and customer service.

Plans have been working under this system for several years but starting in 2012, the rating is tied to payment, as was specified in the Patient Protection and Affordable Care Act, said John Gorman, chief executive officer of Gorman Health Group, a managed care consulting firm. This program will be fully implemented in 2014, he said.

The system considers more than 50 measures, such as success in providing preventive health services and managing chronic illnesses, CMS said. Plans earning the highest performance rating -- five stars -- could receive the largest bonuses equal to 5%. Plans that score three stars and higher will qualify for a bonus in 2012.

The profitability of most MA plans will be based on the star quality ratings, said Dan Mendelson, chief executive officer of Avalere Health, a health care advisory firm. "Plans that have been taking quality metrics seriously are at a significant advantage going into 2012."

Health reform contains $202 billion in cuts in payments to Medicare Advantage, according to America's Health Insurance Plans. Payments to MA plans in 2011 are frozen at 2010 levels, with major cuts starting in 2012 and continuing through 2017.

Overall, MA plans are facing a 17% cut, on average, over the next seven years, Gorman said. When other adjustments are factored in, a 5% bonus isn't really 5% "but it does represent one of the few levers a plan can pull to soften the blow of the payment decrease."

Carl McDonald, an equity analyst with Citigroup Investment Research, wrote in a research note the star ratings demo is "a big positive for 2012 rates, as it will offset much of the expected cuts, while plans are also likely to benefit from a catch-up adjustment in 2012."

About 11 million seniors are enrolled in MA plans, which provide coverage for physician care, hospital services and prescription drugs, and often offer additional benefits for dental, vision and hearing.

Humana appears eligible for a bonus payment of 2.2% in 2012, McDonald wrote. "The star ratings demo should, therefore, offset much of the negative impact from the reform mandated rate cuts."

Eight plans, including Aetna, Coventry, Health Net, HealthSpring, Universal American, United, WellCare and WellPoint, had at least 90% of their Medicare membership in plans with three stars or more, and the average publicly traded Medicare plan will see rates increase by 2.7% in 2012 because of star ratings, McDonald wrote.

Earlier this year, Donald Berwick, the new administrator of CMS, issued an invitation to health insurance representatives, saying he hopes insurers will work with regulators trying to rebuild health care. "All of us have to change the way we do business," Berwick said to a Washington, D.C. conference hosted by AHIP (BestWire, Sept. 13. 2010).

Over the past five years, 70% of the net earnings of the large, publicly traded health plans came from Medicare so it's "much harder for these companies to walk away" from the program, Gorman said.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)