Insights

Medicare Advantage Rates for 2016: Chanel No. 5 or Another Unicorn Fart?

This week CMS issued a surprise announcement on payment rates for Medicare Advantage in 2016.  The 2.02% increase is in line with projections we have been using for 2016, and is also consistent with other projections for Medicare FFS per capita cost growth.  But there should be no confusion: this is NOT the final rate, and this will either end up smelling like Chanel No.5 or another "unicorn farting rainbows" like 2015.

First, as CMS says in their release, they reserve the right to change this trend, both in the February advance notice, and in the April final rate notice.  So we're nowhere near done with the 2016 rate development process.  In fact, we're pretty convinced this announcement was done to avoid the market-twisting "business intelligence" mess of 2014's process and keep it more transparent.

Second, the 2016 benchmarks to be announced in April will also reflect corrections to the 2015 benchmarks.  The CMS release indicates that they may have underestimated the 2015 trend, and that 2015 benchmarks may be too low as a result.  If this calculation holds through next April, it will increase the 2016 benchmarks by another 0.7%.   However, this may change as well.  For 2015, corrections to the prior year estimate served to lower the effective trend.

Some counties will receive a blended benchmark in 2016, with the new Affordable Care Act (ACA) benchmark representing 5/6 of the total, and the old pre-ACA benchmark representing the remaining 1/6.  The pre-ACA benchmarks are corrected for cumulative forecasting errors over several years.  If the current calculations remain unchanged, this will increase the pre-ACA benchmark by another 2.2%, of which 1/6 will find its way into the blended benchmark.  This will add about 3/10 to 4/10 of a percent to the blended benchmarks in these counties.  But, again, this is subject to change between now and next April.

Presumably CMS will continue to phase in the new risk adjustment scoring system.  CMS has estimated that the average impact of the changes will reduce risk scores by 2.6% when fully phased in.  The changed scores were phased in at 1/3 for 2015.  If CMS continues this three-year phase-in, the second year's 1/3 will reduce average risk scores by 0.87%.  This is an average, and plans will see some variation on how the change affects them individually.  CMS may decide that they want to phase in the whole thing in 2016, when there is a positive trend to offset the impact.  So the net reduction in payments could easily be doubled to a negative 1.7%, on average.

Another hit to payment is the continued increase in the amount that CMS deducts from plan payments to compensate for the impact of improved diagnosis coding by plans.  These deductions increase by 0.25% per year, through 2018.  So the effective rate, whatever it turns out to be, will then be reduced by 0.25%.  There is also the "wild card" of the fee-for-service normalization factor, which adjusts risk scores for changes in the statistical database used to calculate risk scores.  This may be a positive or negative adjustment.  And we can expect CMS to revisit the matter of risk scores that are documented in home visits, as they have the last two years, and that in 2016 they may actually do something about it.  This would obviously have a negative effect on payments.

Finally, unless the new Congress makes an unexpected change, sequestration will continue to slice off 2% of the amount that plans are actually being paid.  This is current law, so it's not a change, just an ongoing challenge.  There is always the possibility that a Republican Congress may find a way to rescind the Medicare 2% sequestration and allow plans to receive their full payment, but in this environment, seems very unlikely.

It is encouraging to see that CMS is currently expecting an increase rather than a decrease in the per capita cost for fee-for-service Medicare, since this is the trend that drives the Medicare Advantage benchmarks.  However, there are many moving parts, some of which are still unknown, and all of which are subject to change until next April.

It's all very reminiscent of former Defense Secretary Donald Rumsfeld: "There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know." So keep your nose in the air.  I'm betting on a scent closer to magical horse flatulence come April.

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by GHG Advisors