What Sequestration Could Mean to Medicare Advantage Claims Payment

Last Friday CMS’s Medicare Learning Network released some details on how the sequester will impact Medicare fee-for-service. By extension we see some implications for what it means to Medicare Advantage (MA). The CMS notice offered the following:

To All Health Care Professionals, Providers, and Suppliers: Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) Program — “Sequestration” The Budget Control Act of 2011 requires, among other things, mandatory across-the-board reductions in Federal spending, also known as sequestration. The American Taxpayer Relief Act of 2012 postponed sequestration for 2 months. As required by law, President Obama issued a sequestration order on March 1, 2013. The Administration continues to urge Congress to take prompt action to address the current budget uncertainty and the economic hardships imposed by sequestration.

This listserv message is directed at the Medicare FFS program (i.e., Part A and Part B). In general, Medicare FFS claims with dates-of-service or dates-of-discharge on or after April 1, 2013, will incur a 2 percent reduction in Medicare payment. Claims for durable medical equipment (DME), prosthetics, orthotics, and supplies, including claims under the DME Competitive Bidding Program, will be reduced by 2 percent based upon whether the date-of-service, or the start date for rental equipment or multi-day supplies, is on or after April 1, 2013.

The claims payment adjustment shall be applied to all claims after determining coinsurance, any applicable deductible, and any applicable Medicare Secondary Payment adjustments.

Though beneficiary payments for deductibles and coinsurance are not subject to the 2 percent payment reduction, Medicare’s payment to beneficiaries for unassigned claims is subject to the 2 percent reduction. The Centers for Medicare & Medicaid Services encourages Medicare physicians, practitioners, and suppliers who bill claims on an unassigned basis to discuss with beneficiaries the impact of sequestration on Medicare’s reimbursement.

Questions about reimbursement should be directed to your Medicare claims administration contractor. As indicated above, we are hopeful that Congress will take action to eliminate the mandatory payment reductions.

Here’s what it means for Medicare Advantage:

First, CMS is applying the 2% cut to fee-for-service claims based on dates of service on or after April 1, not dates of payment on or after April 1. Plans that pass the 2% cut on to providers on the same basis as Medicare FFS will be paying at full value for incurred claims with dates of service before April 1, even if paid after that date. However, we expect that CMS will deduct the 2% sequestration from payments to MA plans starting with the April payment. This may cause a short term cash flow issue, with April claim payments for prior months’ claims being made at full value, while the April capitation from CMS is at 98% of full value.

Second, the 2% is applied after all other calculations. For instance, assume the Medicare allowable rate for a service is $100, and the service is subject to the Part B coinsurance of 20%. Payment to the provider would normally be $80, with the beneficiary paying the other $20.  With the sequestration, it’s $78.40 to the provider. But, since the coinsurance is calculated before applying the 2% cut, the beneficiary still owes $20. The original fee schedules still apply:  the 2% comes off the payment, not the calculation of the payment.

We’re not sure yet how this will affect how MA plans pay claims. For instance, if a plan covers office visits at 100% of Medicare allowable, less a $10 copay, and if they determine that their contracts allow them to pass the sequestration through to providers, does this mean that they would pay $78.40 instead of $80 for the Part B benefit, plus $10 (the $20 coinsurance minus the $10 copay)? That’s a total of $88.40, versus $90 the plan would have paid prior to the sequestration, a reduction of 1.78%. But the plan’s capitation is being cut by 2%. So revenue gets a bigger hit than claim payments.

If this is an accurate example, calculating this is going to be a nightmare for MA plans’ claim systems. They will have to be able to calculate the Medicare Part A or B payment, net of the Part A and B deductibles and coinsurance, and subtract 2%. Then they’ll have to add back the full value of the deductibles and coinsurance, and subtract the plan’s copayments.

But it gets worse. If plans will only be able to apply the 2% against what Medicare would have paid, they will need deductible accumulators for the Part B annual deductible, and the per benefit period deductible for Part A. And they will need to calculate the different copayments for regular hospital days and lifetime reserve days. Presumably there is no way to know if someone has used up the lifetime reserve, since that would require access to claim data from periods when beneficiaries are covered by FFS Medicare or other MA plans.

It is a little simpler for capitation payments. For plans that capitate providers based on a percent of premium, the 2% cut will just flow through to the capitated provider group. Plans that pay a specified fixed capitation per member month will probably have to eat the reduction.  But either way, the capitated delegated provider group will need to follow the Medicare FFS logic if they apply the 2% reduction to their provider payments.  So the same complications remain; they just move downstream from the plan to the capitated provider entity. We think this is something that health plans need to address immediately with their capitated providers, to ensure that the capitated entities are prepared to administer the 2% sequestration accurately — and within the next month.

It’s only a matter of time before the complications of sequestration and Congressional inaction reach the point that no one in Medicare Advantage can administer it. That time may come next month if the President and Congress can’t come to agreement to avoid a government shutdown on March 27, and if CMS keeps most of its draconian 45-Day Notice proposal in place when final MA rates, and the final terms of the 2014 Call Letter, are announced on April 1.



Listen in as Gorman Health Group Senior Vice President Bill MacBain shares an update on the sequester, what GHG thinks is likely to happen next, and the potential impact on Medicare Advantage.

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Click here to review GHG’s comments in response to the Advance Rate Notice, submitted to CMS on March 1, 2013

Gorman Health Group Senior Vice President Jean LeMasurier summarizes the 2014 CMS Draft Call Letter.