Why Medicare Advantage is Here to Stay
If you want to understand why Medicare Advantage is now part of the firmament of the US healthcare economy, and will now weather almost anything Congress and the Administration can throw at it, you need only comprehend what Medicare contributes to the big players' bottom lines.
Since the exodus from the program that followed the Balanced Budget Act of 1997, and its resurgence with the Medicare Modernization Act of 2003, Medicare Advantage has become a monkey on the backs of the major payers that they just can't afford to quit, no matter how austere things get in the Capital.
Medicare has driven much of the industry's earnings growth over the past few years, as commercial risk membership has fallen and margins were pressured by rising cost trends last year. So even though Medicare may not contribute a lot on an overall basis, it has been a major contributor to earnings.
Carl McDonald, our good friend and uber-analyst at CitiGroup, shows in his EBITDA analysis of the "big 12" payers that Medicare Advantage contributed almost 23% of earnings on a weighted average basis, United at 28%, and 3 -- Universal American, HealthSpring and Humana -- deriving over 60% of their earnings from Medicare.
There are several reasons why MA is here to stay -- the reliance on capitation to bring stability to Medicare and Medicaid expenditures in our new Age of Austerity; the relentless march of American demographics and the Baby Boomers being more plan-friendly than the World War II generation; the consistent value proposition the "one-stop shop" MA offers relative to traditional FFS Medicare or the Medigap/Prescription Drug Plan combination; the migration of many delivery systems to MA, fleeing declining rates and rising expectations in FFS, to name a few.
But the real reason is that Wall Street is like Nikita Khrushchev at the Battle of Stalingrad, pointing a gun at his own comrades in the face of the Nazi onslaught: "Not one step backwards." Any of the big 12 exiting from the program would be inconceivable today. And that ensures robust participation in the program for the foreseeable future.
More Good News for Medicare Advantage in 2013 Rate Announcement
CMS released the 45-Day Notice of CY 2013 Medicare Advantage (MA) rates after the market close on Friday, and while it's the usual hot mess of green-eyeshade factors that comprise payment, it brought unexpectedly positive news for the industry. If it holds up in the final rate announcement on April 2, it will represent the largest increase in payments to plans in 4 years. Here's a brief rundown of what's hot, what's not, and what to watch in the runup to the final rates.
HOT
- The weighted average rate increase for 2013 is 2.47%, net likely flat. Most Wall Street analysts expected a cut of 2-4% in 2013. Again, this represents the largest increase in payments to MA plans in 4 years.
- CMS maintained the risk adjustment coding intensity adjustment at 3.41%, for the third consecutive year. 2013 will be the last year CMS can offer this concession -- the ACA mandates that coding intensity increase to 4.71% in 2014, and then by at least 25 basis points/year 2015-2018, bringing it to at least 5.7% by 2019. There is no incremental impact on 2013 rates, and plans get an extra year to get their risk adjustment houses in order before the pain starts.
- CMS made no mention of Risk Adjustment Data Validation (RADV) audits, which have been looming large over the plans for the past 3 years and remain a prominent source of revenue recoveries in the President's last two budget proposals.
- The fee-for-service normalization factor, which adjusts for upward trend in risk scores in MA vs. FFS, was a big positive for 2013. It usually rises or falls by 1-2% a year, and in most years it increases. For 2013, CMS is dropping the FFS normalization factor by almost 5 points, boosting 2013 rates by around 150 basis points.
- CMS's general tone toward the industry was decidedly more positive, as it was last year. CMS noted that the proposed annual growth rate "will sustain a strong Medicare Advantage landscape for 2013," and highlighted that enrollment increased roughly 10% in the last year. I guess once you top 25% enrollment in Medicare the agency has to show you some love.
- Star Ratings quality bonuses and rebates remain a key source of revenue boosts for high performing plans, which helps to offset the cuts to MA in health reform. Bonuses will increase in 2014 for plans with ratings of 3.5-4.5 Stars. We estimate that Star bonuses will increase payment by more than 4% in 2012 and around 25 basis points in 2013, as MA plans' overall Star rating increased to 3.56 stars, up 0.11 Stars year-over-year.
- CMS is also rebasing MA county rates for 2013. Historically this is usually a good thing for the plans (though CMS notes it could hurt a little next year). CMS is required to undertake this exercise every 3 years, and the consensus among many Wall Street analysts is that rebasing will add approximately 60 basis points to the 2013 rates.
- The "Doc Fix": In the past, CMS has insisted on basing its trends on the law in force at the time they made the projection. The doc fix on the books for 2/17/2012, the date of this advance notice, only extends through 2/29. The new doc fix, through 12/31, hasn't been signed into law yet. So our guess is that the advance notice doesn't include a catch up correction for a doc fix for the remainder of 2012. The fact that CMS didn't hold a conference call makes us think they didn't want to discuss the matter until the bill is signed. If we're right, we'll see a higher trend and higher rates in the final notice on April 2, when an additional 10 months of higher doctors' fees is factored in.
- Sequestration: the 2% cut to Medicare from the failure of the not-so-Super-Committee is the law of the land as of today, so CMS should have included that in their trending -- and we still came out ahead.
NOT
- CMS is updating and recalibrating the HCC (risk adjustmetnt) system for Medicare Advantage for the first time since 2009. The current HCC model for Medicare Advantage has 70 HCCs, a decrease of 7 from 2011. Our best guess of the impact of the HCC changes will cut 2013 rates by 125 basis points on average. Some
diseases will pay better and some will pay worse after recalibration, which could have a significant impact on some plans. CMS is looking for a better way to calculate the coefficients, one that is not so sensitive to
plans' activities to improve coding accuracy and completeness. One thing they are looking at is the impact when plans target a specific subset of members for prospective evaluations.
WHAT TO WATCH
- Repeal of sequestration before April would, presumably, result in a higher 2013 trend -- but that ain't gonna happen in an election year. Wait for something in the lame duck session after the election, when Congress has to deal with sequestration, the expiration of the Bush tax cuts, the expiration of the payroll tax holiday and the 2012 doc fix. Should look like a cross between cage fighting and smash-mouth hockey. If sequestration is repealed, it will show up as a correction to the 2014 rates.
All in all, a very positive development for our favorite program, considering the Age of Austerity we live in.
End of an Era -- and a New Beginning -- at XLHealth
United Health Group closed the acquisition of XLHealth this week, two months ahead of schedule. XLHealth has been one of our biggest clients for the last 8 years, and I had the distinct honor of serving on their board of directors the last 4 years. It was a brilliant "get" for United -- both in terms of gaining further expertise in management of the severely chronically ill and the dually-eligible and in keeping competitors from acquiring it. But they also got one of the best management teams in the business, led by our old pals Fred Dunlap (CEO), Paul Serini (EVP) and Mete Sahin (CFO) -- and in this new era of execution risk it's their leadership that mattered most. Those 3 guys represent the best turnaround artists our industry has seen in a long time, and United was right to tie them up for the next 3-5 years.
XLHealth was deep in the financial ditch and on the verge of serious regulatory trouble in 2007 when the company was taken over by Matlin Patterson, a New York private equity firm, in their first foray into a healthcare venture (at the time Matlin was known as the guys who took Alitalia Airlines private). XLH's history had been focused on disease management, and they frankly weren't very good at it. When they called us in 2004 with the idea of running Chronic Special Needs Plans on a PPO chassis in largely Southern rural markets ("we want to manage diseases, not providers"), we told them they were nuts and did our best to change their minds. We failed, and by 2007, so had they.
But Matlin Patterson stepped up. They also acquired our risk adjustment subsidiary at the time, and folded the two together under Dunlap's leadership. What happened over the ensuing 4 years should be the stuff of industry legend as Fred wisely deployed capital, revamped the XLH product portfolio to better manage severely ill beneficiaries, dug deep into the plan's troubled operations, and innovated their way out of a clinical black hole. They launched the single-largest house call program in the nation and a call center staffed entirely by pharmacists doing nothing but outbound calls to members with polypharmacy issues. By the fall of 2011 XLHealth had emerged as the first profitable C-SNP in history and was acquired by United for an unprecedented valuation.
As XLHealth now becomes a focal point for United in how to aggressively manage the chronically ill and the dually-eligible, further adding to their pole position among major payers in this brand-new world of health reform, the industry as a whole would do well to steal a page from their playbook: the only way out of Medicare Advantage cuts in 2013-2015 is to focus intensely on your highest-cost members, to move boldly on risk adjustment, and to lead, not just from the top, but from the front.
It was my distinct honor to serve as a director of XLHealth, and we wish Fred, Paul, Mete and the team all the best in their new beginning with United.
The State of the Union in Medicare Advantage Has Never Been Stronger
At long last the January 1 enrollment numbers are in from CMS and the State of the Union in Medicare Advantage has never been stronger. Our favorite program hit almost 13 million enrollees last month. Premiums are down 7% on average for 2012 and enrollment has grown by about 10% year-over-year from last January. Hate on, haters -- all the predictions of the demise of Medicare Advantage when the ACA passed are proving false and the program is bangin'.
CMS went on to say that:
- On average, there are 26 Medicare Advantage plans to choose from in nearly every county across the country;
- Access to Medicare Advantage remains strong: 99.7 percent of Medicare beneficiaries have access to a Medicare Advantage plan; and
- Since 2010, when the Affordable Care Act was passed, Medicare Advantage premiums have fallen by 16 percent and enrollment has climbed by 17 percent.
"Not only are average premiums lower, but plans are better, with more beneficiaries enrolled in 4 and 5 star plans," said CMS Acting Administrator Marilyn Tavenner. "The Affordable Care Act has strengthened Medicare Advantage by motivating plans to improve the quality of their coverage."
"We're seeing a very competitive landscape," said Jon Blum, CMS's deputy administrator. "The
plans seem to want to compete hard for their beneficiaries." The reason? Health plans have never been more dependent on Medicare, which now represents upward of 30% of earnings on average for publicly-traded companies that dominate the program. Since the passage of the ACA, it's been a "make it work" moment, and the plans are winning for the most part. Digging into the numbers on the market leaders we see the following:
- Humana added 250,000 lives in two months, or growth of 12.9%
- UnitedHealth added 132,000 lives
- Coventry had a very strong AEP with growth of 12.2%
- Health Net looked similarly strong with growth of 10.1% -- after having been sanctioned by CMS last year.
Don't Throw Away Your Insurance Card Just Yet
I just can't resist commenting on the January 30th commentary in The New York Times by Ezekiel Emanuel and Jeffrey Liebman on the demise of the Insurance industry by 2020 at the hands of an explosion of Accountable Care Organizations.
To test that premise, let's go back to the role that insurance companies play in the health care market place. Insurance companies, otherwise known as payers, provide a financial safety net to consumers of health care services by aggregating different types of providers willing to provide health care services to consumers at a predetermined price. The insurance companies in turn contract with employers and individuals to provide that network for a cost to the employers or individuals ( usually the cost is shared). That cost, referred to as a premium, is determined by various factors that speak to how often the covered individual has used healthcare services in the past and based on that history how often the insurance company believes that the patient will access health services in the future, (usually the future is defined in annual increments) and by what the market place has priced the value of that service to be.
Said differently, the insurance company plays the role of a middleman between purchaser and supplier. In that role the insurance company also does something else, namely the aggregation of a lot of information about you and me regarding our utilization of health services and the consequent extrapolated assumptions about our lifestyle. Such data aquisition becomes a valuable commodity not easily or cheaply replicated by other organizations including self insured employers or ACOs.
What about ACOs? The Accountable Care Organization is typically either a provider sponsored or payer sponsored enterprise. In either case the ACO stakeholders include providers, patients or consumers and the payer/insurance company--in the absence of the insurance company the payer is the emloyer, the government, small business group purchasers, or the individual. The purpose of the ACO is to provide a framework for delivering the right service in the right setting, at the right time and for the most reasonable cost. The purpose is not to replace the payer, in fact the payer becomes a necessary strategic partner for ACOs with respect to information sharing, sharing of risk based on aggregation of defined populations via disease stratefication, etc.
The authors reference several benefits of an ACO which they assume will trigger the demise of insurance companies such as payment shifting from FFS to a fixed amount per patient; ACOs making money by keeping patients healthy; ACOs pooling patient acuity and consequent risk by capturing large groups of patients thus pooling risk; ACOs eliminating administrative costs such as those associated with claims billing and processing, and in general by eliminating unnecessary tests and procedures.
Those benefits can and should be realized by an ACO if everything goes according to plan. Those same benefits can also be realized by other types of health care redesign initiatives such as medical homes, or by payer sponsored networks of excellence or by Integrated delivery system service line initiatives or by any number of different approaches to providing improved coordinated care.
The bottom line is that ACOs will play a significant role in the movement to redefine how healthcare services are delivered, priced and paid for. They are a tool in the arsenal of healthcare reform. They also differ in character, scope and focus from enterprise to enterprise. Do they represent the successor to insurance companies as we know them today? I think not.
Berwick Redux? Recess Appointments Could Derail Tavenner Nomination at CMS
New CMS HSD Guidance Issued - What's New?
In case you haven't studied the recent CMS HSD Guidance memo, let me save you some time (and pain). This is the first of my blogs on the new CMS changes that will impact all MA Plans filing this year for a 2013 product launch. Here's what caught my attention:
• County Designations Changed - This change could move a county from Major Metro to Metro; or the reverse. These changes may have an immediate impact on your network requirements. You may even want to revisit the counties you pulled last season and see if they now meet CMS standards. One Plan who examined the new standards found some of their CMS "Failed" counties now "Pass".
• Providers Dropped - CMS dropped Laboratory and Intestinal Transplant from the network requirements. Let's hope this trend continues next year. I'm sure, like me, you have a couple of specialties you'd like to see dropped.
• Physician's Assistants and Nurse Practitioners — Something is going on with CMS' view of these providers. In the guidance they now call contracting with these providers a "rare" occurrence and seem to narrow their use to rural areas where they can practice independently. We'll follow-up on this change for clarification.
• Geriatrics — CMS has clarified the specialty to those providers that have special knowledge and interest. No mention of a board specialty requirement.
• Cardiac and Thoracic Surgeons — CMS now appears to acknowledge that these specialties are governed by a single board academy. However both specialties continue to be required on the HSD Provider Table. I'm hoping what CMS has separated can be reunited next year.
• Hospital Based Providers — MA Plans are now officially relieved of contracting with Radiology, Anesthesiology, Pathology and Emergency Medicine providers. Plans must now only assure that members seeing these providers pay in-network co-pays.
We at Gorman are staying on top of these changes in CMS Network requirements so that we can assist you in making strategic decisions for MA expansion. Our Network development team is keeping abreast of specific market changes to maintain our edge on our market intel and give folks who work with us the latest impact knowledge.
The Doc Fix Returns
The collapse of the Congressional Deficit "Not-So-Super-Committee" ushered in the return of the "doc fix". With only days left in the Congressional session, lawmakers will be scurrying to address several key healthcare issues, including the imminent 27% physician cut to Medicare FFS rates to physicians, and also the 2013 sequestration across the board cuts to Medicare of 2%. 2012 is an election year. The last thing the President and Members of Congress want is 600,000 members of the American Medical Association declaring war on January 2.
The most time-sensitive remains the doc-fix, as the 27% cut goes into effect on December 31, 2011, if lawmakers do not offset it. Every year since 2002, Congress has "kicked the can" a year or two down the road with temporary fixes. A permanent fix holds a price tag of almost $300 billion, and the hope was the "Supers" would get to it. They didn't, and a permanent fix is WAY out of reach now.
What seems likely is another retroactive adjustment early next year. Lawmakers are considering a 1- or 2-year fix costing $20.6 billion and $38.6 billion, respectively, with possible offsets including reductions to other providers. I'd expect another string attached will be that docs that don't hit their quality measures will take the cut, while high-performing providers will get the fix. This is an important issue way beyond physicians: if Congress doesn't get a fix done, Medicare Advantage rates will get hit in 2013 by as much as 1-2%.
While the doc fix will be addressed as soon as this week, don't expect any "holiday surprise" of a grand bargain on the sequestration cuts or deficit reduction given the political chasm between the parties and the upcoming election. Congress will do the bare minimum to avoid a "white-coat insurrection" but will punt the broader debate on austerity measures for Medicare and Medicaid to the voters next year.
Member Retention has an Exponential Effect on Revenue
The typical MA health plan, on average, loses eight percent of its members annually through voluntary disenrollment, and another four percent involuntarily. Let's assume that same health plan has a membership of 50,000 lives, and from a revenue perspective, typically realizes $1000 per member per month in premiums and Medicare payments to the health plan. That means that just a single percentage point improvement in member retention — going from an eight percent (4000 member loss) to a seven percent voluntary disenrollment rate (3500 member loss) — would result in a $6 million increase in plan revenue. Do the math. That's a 500 member difference, times $1000 PMPM… here are the results as the disenrollment rate improves by one, and even two percentage points.
| Disenrollment Rate: | 8% | 7% | 6% |
| Members lost | 4000 | 3500 | 3000 |
| Resulting Revenue Increase (improving from 8% industry average) | N/A | $6 million | $12 million |
*These figures are based on a health plan with 50,000 members, and $1000PMPM in payments to the plan
At the same time, today's sales & marketing budgets are getting smaller and smaller. If we move beyond a cursory assessment and look at the acquisition costs to replace that one percent (500 members) through sales, we can then see the additional impact that member retention can have on an organization's performance. Depending on your market, the acquisition costs to find a new member can be somewhere around $1,200, on average. This cost includes advertising & marketing costs, sales & marketing operations costs, salaries & benefits of those employees, and can even include software costs and services through other vendors. So assuming a $1,200 cost of acquisition, that one percent improvement in member retention (500 members) just saved your sales and marketing department $600,000 in what it would have cost to replace them. Furthermore, we can assume that $600,000 will still net the health plan another 500 members…and we just showed what that one percentage point was worth.
So let's look at this in perspective. Even if our hypothetical organization is able to immediately replace every single one of the 500 members - representing the difference between an eight percent and a seven percent voluntary disenrollment rate - through new sales, recouping that $6 million in would-be lost revenue, that organization still had to go out and spend $600,000 of their own sales and marketing dollars to make it happen. Thus, if you're looking at this problem objectively, to get the most "bang for your buck", it makes sense to take a hard look at your member retention strategy before moving on to sales and marketing. Remember, retention's impact is two-fold; not only will it impact the bottom line on the payment side, but it will put sales & marketing dollars to more efficient use — where they should be — adding members, not replacing them. Retention doesn't always have to be a cause & effect of benefit design. There are other dynamics in play that beneficiaries take into consideration when choosing a plan. Knowing what those factors are - and ultimately what value your beneficiaries attach to them - can help keep the initial impact of aspects such as benefit structure or premium increases from sending existing members out in search of a new plan.
The Air of Inevitability Around Romney
I can't remember the last time I had more fun watching electoral politics. Obama suffers an open-mic gaffe and is losing White House staff like he's losing his hair. Herman Cain's sexual harassment fiasco deepened in its second week. Rick Perry suffered an excruciating 45-second brain-fart in a GOP debate where he couldn't remember one of 3 Federal agencies he wants to abolish. Which was the worst primary-ending gaffe: Cain's ongoing trouble with the ladies, Perry's "oops", or Howard Dean's primal scream?
As fun as watching all this is (and it's DC's only spectator sport worth watching these days as our Redskins flush another season down the toilet) its result is an air of inevitability that Mitt Romney will emerge as the GOP nominee for President. Pawlenty, Trump, Bachmann, Christie, Perry, Cain...all surged and flamed out in the face of Romney's rock-steady support at about one-quarter of likely GOP primary voters.
Next to surge as "anyone but Romney" is former House Speaker Newt Gingrich...and he's sure to wither under media scrutiny of the many unpalatable items in his personal and professional lives. As smart as he is, his arrogance is legendary and he is just not a likeable guy. You need to be likeable or at least inspiring to win a nomination, and Gingrich is neither. My guess is he runs out of money right after the Iowa caucuses.
So it still looks like Romney v. Obama next year. The futures markets -- great predictors of uncertain outcomes -- agree, showing Romney futures spiked folllowing Perry's "oops" and Obama holding steady with about 52% of investors saying he'll win reelection. Lack of enthusiasm will likely be the defining characteristic of the 2012 campaign -- the GOP will be only "in like" with Romney and many Democrats will be feeling the same for Obama -- which lends itself to "Advantage -- Incumbent".
I am LOVING this primary season! So much great comedy fodder! I can't wait to see what Saturday Night Live does this weekend.
I still think we're looking at a narrow Obama reelection, and implementation of the ACA in 2014 right on schedule.