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.