Medicare Advantage is Alive and Well

It wasn't long ago that many in the industry thought Medicare Advantage (MA) was on life support, a casualty of health reform. Today it's viewed as a strategic imperative for publicly-traded companies, enrollment continues to exceed expectations, and we're seeing unprecedented valuations for Medicare plans.

Last week WellPoint announced it was acquiring CareMore, a provider-owned MA plan in CA with about 55,000 members -- for $800M. That's about $15,000/member. For perspective, our good friend Carl McDonald at CitiGroup points out that in 2010 for $545M, HealthSpring was able to buy Bravo, a plan with almost twice as many MA members, plus 400,000 Medicare PDP lives. Further, HealthSpring is trading at only $3,500/MA member, while Universal American and WellCare are each under $5,000/MA member.

CareMore is more profitable than most given its clinic operations, and to some extent this was WellPoint's response to United's stealth campaign of buying up CA medical groups. But still. This deal alone will drive valuations skyward, and as a result, more plans will be looking for the exits.

And they'll find buyers. HealthSpring has made no secret of its empire-building inclinations. Aetna and WellPoint have each said they desire more acquisitions to further expand their Medicare footprint. And Medicare revenue comprises on average about 25% of the public companies' earnings. Consolidation will continue in Medicare. And it's clear MA is alive and very well.

Member Evaluations Don't Replace the PCP

For obvious (and very good) reasons, Medicare Advantage plans want to maximize the unique opportunity afforded by in home evaluations of their members.  There is no question that these evaluations can yield diagnostic information that is essential to risk adjustment revenue management.  The opportunity to collect clinical information and merge it with data from claims and Medicare return files makes it possible for MA plans to positively influence care in a way that fee for service Medicare cannot.  Direct member evaluations also provide a way to quantify and improve measurable standards of care such as those included in HEDIS, ADA standards of care for diabetics, ACC standards of care for cardiovascular disease, and Star ratings.

 One question that comes up repeatedly in our conversations with plans is whether we can collect even more data during these encounters. Specifically, plans are interested in having our physician evaluators collect specimens for laboratory studies that factor into HEDIS and Stars measures.  On the face of it, this seems like a natural extension of the service, but there are a couple of not so obvious drawbacks.  

First, we are very hesitant to do anything that might be seen as coming between a member and his or her treating physician.  That is a unique and valuable relationship and we want to make sure that what we do only enhances it.

Second, we are concerned about the chain of responsibility in collecting that information.  First, a physician or other licensed provider has to order the test in question.  Our physicians can certainly do that, but then someone has to take the responsibility of checking the result and providing appropriate care based on the results.  That our doctors cannot do since that would require establishing an ongoing clinical involvement that would directly conflict with our determination not to interfere with the member's relationship with their treating physician.  An alternative would be for the plan medical director to accept responsibility for ordering and following up on the lab studies, but most plan CMOs are not willing to do that.

For those reasons, we have been hesitant to collect lab specimens as part of our evaluations, although we willing to discuss alternatives with our clients who need that service.

Exchange Will Do You Good

Two interesting items have been posted in recent weeks that perfectly capture the contrary motion of health reform implementation.  The first, found in the Washington Post, addresses the laggard's pace many states are keeping in implementing provisions of health reform--- in particular the health insurance exchanges that subsidize the purchase of private insurance by low and middle income citizens.  The controversial second, which appears this month in a McKinsey newsletter describes the incredible market pressures to do just that.

 For years, Washington wonks and informed political spectators have marveled at the left's inability to tie the issue of health care coverage to the interests of small businesses, which politicians of both persuasions never miss an opportunity to refer to as "the engine of the American economy."  Money that goes to high employee premiums does not go to creating jobs--- at least, not for the small business in question.  The McKinsey article projects that 30% of employers will "definitely or probably" stop offering health insurance to employees after 2014 (the schedule date of exchange implementation) and that more than 50% of companies with a high awareness of the health care law will simply stop offering insurance and send employees to Exchanges Wowza.

There are a number of interesting things about this extraordinary (if it turns out to be true) change in coverage: first, the tremendous churn of beneficiary eligibility across subsidy levels just got more interesting, as a new class of pseudo employer-sponsored beneficiaries floods the market. Second, the risk pool changes.  Lastly, if you make your living selling small group business policies, it may be time to open that Ebay store because your job is a whole heck of a lot less secure beginning in 2014.  You'll be in good company.  Many state Governors may find themselves in the same boat if they do not implement the exchanges in a timely manner, thereby depriving small businesses of the ability to make coverage the Government's problem and find more productive uses of capital.  To do so gives the opposition party a golden talking point going into the 2012 elections.

The State of Play on Medicare ACOs

The comment period for the Medicare Accountable Care Organization (ACO) Notice of Proposed Rulemaking closed yesterday, June 6.  In the last two months CMS has taken a beating from virtually every corner on the draft regulation as being overly burdensome. 

Dozens of groups, including the American Hospital Association (AHA), American Medical Association (AMA) and America's Health Insurance Plans (AHIP), submitted their comments on the proposal. High-profile Physician Group Practices (PGPs) such as the Cleveland Clinic and Mayo Clinic have said they are unlikely to participate in the Medicare ACO initiative.

AHA fears high implementation costs and excessive quality requirements will prevent hospitals from forming ACOs. AHA believes it will cost a 200-bed hospital with 80 primary care physicians and 250 specialists $11.6M to launch a Medicare ACO; a 1,200-bed, 5-hospital system with 250 primary care physicians and 500 specialists is expected to run $26.1M.

Battle lines were drawn on antitrust issues in comments from AMA and AHIP, which offered diametrically-opposed recommendations.

We believe CMS will listen to entreaties to reduce the quality reporting burden and will help provide improved cash flow for ACOs (we hope through partial capitation and getting rid of the 25% withhold) and possibly increase the share of savings that ACOs can keep, to encourage adoption.  But given the huge volume of comments and political sensitivities in Congress on ACOs, we think it will be toward year-end before a final regulation is issued. 

The "Pioneer ACO" Demonstration is scheduled to begin this fall, with applications due to CMS July 18 and a full program launch January 1st.  We are seeing moderate interest among marquee providers — especially those with their own Medicare Advantage plans -- in participating in the Pioneer ACO Demonstration and believe chances are good that CMS will fill its 30 slots for these "ready to launch" ACOs if the agency listens to industry input on partial capitation arrangements in the coming weeks.