How To Win As A Medicare Advantage Plan Under The 2014 Medical Loss Ratio Rule
Medicare Advantage (MA) plans have an important part to play in the reform of health care in the U.S. While only a small part of the overall health insurance market, MA plans focus on delivering care to the elderly and the disabled. As MA plans develop better and more cost-effective care delivery for their relatively high-risk populations—something they appear to be doing well already—it is likely they will become models for the health insurance industry and the evolving federal health care programs.
With the advent of the Affordable Care Act, there are numerous changes taking place across the health insurance industry. MA plans, like many other health insurance plans, will be restricted to a 15% ceiling on profit and administrative expenses. This “medical loss ratio”—the percentage of premiums that can be used for overhead as opposed to medical expenses—will take effect in 2014 for MA plans, and has already taken effect for most other health insurance plans. With this constraint on overhead, how do MA plans “win” economically in order to maximize profits, provide outstanding care, and avoid the troubles of catastrophic loss while running on tight margins?
Understanding What MA Plans Are And How They Work
At the outset, it’s important to understand what an MA plan is. The Medicare Advantage program was started in 1997 under the Balanced Budget Act (BBA) with the initial moniker of Medicare+Choice. It was renamed and revamped as Medicare Advantage in 2003 as part of the amendments that brought in Medicare prescription drug coverage. MA plans are an option for the elderly and disabled who receive their health benefits through the federal Medicare Program. Under original Medicare, beneficiaries receive hospital services (called Medicare Part A) and physician services (called Medicare Part B) for which the government pays the providers on a fee-for-service basis at a rate approved within a geographic area. If the provider charges more than the approved rate, the patient pays the difference. Based on dissatisfaction with the rates and Medicare in general, some physicians decline to provide services to Medicare patients.
MA plans are alternatives to original Medicare, with beneficiaries having the annual right to opt into an MA plan covering their locality or region. MA plans come in many shapes and sizes, but in general, the mainstream of MA consists of coordinated care plans that work as health maintenance organizations (HMO) or preferred provider organizations (PPO). The result is that the beneficiary gets the same services provided by original Medicare, usually also with prescription drug coverage, in a more familiar insurance structure that (in theory) is incentivized to provide better coordinated care, and without some of the disadvantages of original Medicare. While the same benefits are provided, the MA program allows that benefits can be provided in different ways, such as with different co-pay levels for different services, and different in- and out-of-network benefit levels. In recent years, all MA plans have been required to adopt an out-of-pocket maximum of just under $7,000, and have been regulated to ensure that they do not price certain critical services, like chemotherapy, out of reach of needy beneficiaries.
In considering how to be profitable under a 15% cap, it is important to understand how MA plans are paid. MA plans receive payments from two sources: the federal government (technically, the Centers for Medicare & Medicaid Services, known as CMS) and the beneficiaries. Medicare pays MA plans a certain amount per beneficiary on a capitated basis, and it is up to the MA plan to provide care to that beneficiary (and to do so at a profitable level, if the MA plan wants to stay in business). Traditional Medicare beneficiaries pay premiums to Medicare for Part B and Part D (prescription benefit) coverage, and they continue to pay those premiums even if they are part of an MA plan, with the premiums now being paid to the MA plan. MA plans must put in a bid every year to Medicare setting out the benefits they will provide and how they will provide them; if the bid is approved and the cost exceeds the Medicare benchmark rates for the geographic area, then beneficiaries pay an additional amount to the MA plan. If the bid approved is less than the benchmark rates, then the MA plan and CMS share the “rebate,” with the MA provider required to use it to provide additional benefits to its members.
The simple idea behind MA plans, and other “market-driven” government health care programs, is that information plus choice equals greater efficiency, and greater patient satisfaction to go with it.
How To Win As An MA Plan Under The Cap
So, what strategies must MA plans employ in order to be profitable in light of the 15% cap? The primary strategies for MA plans to drive success within the constraints of the medical loss ratio rule are:
(A) Increasing the number of beneficiaries. If a company’s overhead and profit is limited to 15% of its revenues, then the higher the number against which that 15% is multiplied, the more dollars the company has to keep. More revenue dollars also means that the 15% overhead is more cushion against downside events that may wipe out a company’s profits altogether.
What is the practical effect of this? MA plans will need to expand into new markets and attract additional beneficiaries to be successful. Anticipate acquisitions and significant growth, both for existing plans and for insurance plan providers who will add additional plans. Growth also provides economies of scale for administrative expenses, and creates market power to negotiate expenses, leaving more room in the 15% for profit.
But growth will not require just expansion—it will also require quality of care and high level customer service. Beneficiaries have the ability to choose an MA plan, so reputation and service are critical, as the next point demonstrates.
(B) Achieving milestones in order to receive bonus awards and year-long enrollment periods. When it comes to reputation and service, these hallmarks are critical not only for enrolling new beneficiaries but also for obtaining bonus awards that increase a company’s profits and create competitive advantages in the MA pool.
MA plans can make up for the cap on overhead through annual bonus payments of up to 5% of the total amount of government payments they receive (and again, a bigger pie means more actual dollars). Bonus payments are based on a five-star rating system put in place by CMS to help beneficiaries choose high quality plans. More stars equals more bonus dollars. The rating system for stars is important to understand, because it is based not just on plan offerings, but also on customer satisfaction surveys and the like. There are five major criteria that are measured, which consist of: (1) staying healthy: screenings, tests, and vaccines, (2) managing chronic (long-term) conditions, (3) member experience with the health plan, (4) member complaints, problems getting services, and improvement in the health plan’s performance, and (5) health plan customer service. It is no secret that the health care system is often thought of as the last customer service business that fails to understand customer service. MA plans will need to prove this untrue in order to achieve bonuses and financial success.
Plans with higher ratings also get to keep a greater portion of the rebate (up to 70%, instead of 50%), meaning that they have more money to offer supplemental benefits to beneficiaries, making the plan more attractive. Further, plans with a five-star rating have a year-round open enrollment period, rather than being restricted to the October to early December deadlines of other plans, making them more accessible to (and therefore likely to attract more) beneficiaries. The result is that the five-star system essentially creates a snowball effect for high-rated plans, a significant competitive advantage.
Early indications are that poorer service MA plans have been unable to manage profit margins under the star-rating system and are getting driven out of the business. So, instead of all things moving toward mediocrity as can occur in some government programs, the system appears to be allowing the best to rise to the top. In addition, plans with three stars or less have more difficulty getting new bids approved in the annual bidding process, and look-alike plans, which are hard to differentiate from other plans that are already offered, are generally discouraged.
(C) Structuring the plan to coordinate care, reduce costs, and protect against catastrophic loss. Each year when a plan submits its bid to Medicare, the plan sets out the benefits it will provide, the co-pays that it will require, and the costs at which it will provide benefits. Plan structure is important in determining how much the plan will have to spend in providing the care it proposes, and how the plan will provide high quality service to its beneficiaries without spending itself out of existence to insolvency. The bid also sets out (within parameters determined by Medicare) what is allocated as health care expenses, and what is allocated as overhead. Anticipate the need for some expenses to be (appropriately) characterized as medical costs or quality improvement expenses in the future rather than overhead, and anticipate significant CMS scrutiny of items on the fringe.
Plan structure is also critical in creating incentives for healthy behavior to control costs, and by coordinating care early instead of late. Serving populations like the elderly and the disabled who have high level needs for health care, MA plans are on the front line of trying to change what some describe as the two greatest inefficiencies in the U.S. health care system: self-destructive behaviors and expensive unnecessary procedures.
Capitated payments ensure that MA plans are incentivized to control costs, while the star-rating system is designed to ensure that they do so for the benefit of, and not at the expense of, the patient’s health. To be successful, MA plans need to encourage early intervention. Rather than being seen as restricting access to procedures (like the HMOs of old were often viewed), MA plans need to incentivize patients to make active use of preventative procedures, and need to invest in helping patients engage in healthy lifestyle choices. Expensive unnecessary procedures on the front end can be avoided by coordinated care among generalist and specialist doctors. Coordinated care through an MA plan is in contravention to the usual balkanized system of specialists and generalists who do not communicate, the services of whom must be coordinated by a compromised patient without help (and often unsuccessfully, leading to unnecessary medical complications and expenses). Assuming that no patient wants to be sick, having a single doctor take ownership of coordinating the patient’s health care on the front end is crucial to seamless care. Expensive unnecessary procedures on the back-end of illnesses are also reduced substantially simply as a result of the early investment in patients within the MA plan.
MA plans will also need to carefully structure their payment arrangements with doctors, facilities, and other providers and suppliers. MA plans will want to ensure that as much of what they pay as possible is related to medical care, and not somehow construed as overhead of the provider in a way that might be attributed to the MA’s own medical loss ratio if there is an affiliation. MA plans will also want to negotiate favorable payment rates with providers, to decrease cost and increase the potential for profit; at the same time, favorable cost structures need to encourage, and not discourage, extensive preventative procedures for beneficiaries to prevent high back-end medical costs.
If MA plans are limited to 15% in profit and administrative costs—a relatively tight margin—their greatest risk of not reaching their profit ceiling is through catastrophic losses that run much higher than the capitated payments and premiums the plan receives. MA plans may find it necessary to begin shifting risk to providers, entering into downstream capitation agreements with them.
With catastrophic loss as the major threat, the plan’s bid, its benefit structure, the number of lives it covers (creating a greater number of dollars of cushion), the way it structures its relationships with physicians, and the way the plan invests in early care to prevent catastrophic losses, are central to the success and future growth of MA plans.
(D) Managing the medical loss ratio carefully. MA plans that fail to meet the 85% medical loss ratio—i.e., plans that have more than 15% of revenues allocated to overhead and profit—have to pay back the difference to CMS. This in itself is not problematic, and if there were no penalties, it would appear wise for MA plans to try to exceed the cap slightly each year in order to provide extra cushion against losses (with the plan simply repaying the overage to CMS following each plan year).
The problem for MA plans is that exceeding the cap for three consecutive years results in CMS restricting enrollment for the MA plan, thus undercutting the plan’s likely strategy to expand and to achieve full year enrollment periods through high star ratings. This can have a dramatic effect on profitability of the plan. Further, an MA plan that exceeds the cap for five consecutive years will be terminated by CMS.
The result is that MA plans need to manage carefully to the 15% cap, attempting to achieve the cap of 15% in order to maximize profit, but not exceeding it in consecutive years in order to avoid penalties.
Like Accountable Care Organizations and many other innovations of the last few years, the MA program is intended to be a miniature laboratory experiment providing a window into new ways to provide better and more affordable care. It is oft-said that state governments are the laboratories of democracy; in the same way, MA plans and other market-driven health care programs are to be the laboratories of affordable care. By developing ways to achieve better outcomes, to coordinate care, and at the same time to reduce costs, MA plans will be a major influence on the health care insurance and provider markets in the coming years.
 Total enrollment was approximately 13 million in September 2012, comprising approximately 27% of the Medicare eligible population. See Marsha Gold et al., “Medicare Advantage 2013 Spotlight: Plan Availability and Premiums,” Kaiser Family Foundation Medicare Policy Data Spotlight (Dec. 2012), available at http://www.kff.org/medicare/upload/8388.pdf (hereafter, “Medicare Advantage 2013 Spotlight”).
 “AHIP Says Seniors In Medicare Advantage Spend Less Time In Hospital, Have Fewer Re-Admissions Than Those In FFS, But Stark Disputes Findings,” Health Lawyers Weekly, vol. VII, No. 37 (Sept. 18, 2009).
 Suzanne M. Kirschoff and Janemarie Mulvey, “Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act (ACA): Issues for Congress,” Congressional Research Serv. Report (Sept. 18, 2012) (hereafter, “2012 CRS Report”), available at http://www.fas.org/sgp/crs/misc/R42735.pdf.
 “Medicare Advantage,” Kaiser Family Foundation Fact Sheet (Dec. 2012), available at http://www.brighamandwomens.org/Research/labs/CenterforSurgeryandPublicHealth/Documents/HSRForum_Kaiser2012%20Medicare%20At%20A%20Glance.pdf. MA plans are provided under what is known as Medicare Part C, and prescription drugs under Part D.
 “Medicare Advantage,” Kaiser Family Foundation Fact Sheet (June 2007) available at https://www.nimbroker.com/pics/ContentPics/KaiserFoundationMAFactSheet2007-06.pdf.
 42 C.F.R. § 422.50.
 Medicare Advantage 2013 Spotlight at 1.
 Id. at 7.
 42 C.F.R. §§ 422.254, 422.262, 422.306.
 42 C.F.R. § 422.266.
 Charles Fiegl, “White House exceeded authority with Medicare Advantage project, GAO says,” AMedNews.com (American Medical News) (June 20, 2012), available at http://www.ama-assn.org/amednews/2012/07/16/gvse0720.htm.
 “Choose Higher Quality for Better Care” CMS (Prod. No. 11226, Oct. 2012), available at https://www.medicaid.ms.gov/wp-content/uploads/2014/04/11226.pdf.
 42 C.F.R. § 422.266.
 “Medicare Advantage Bonus Payment System Is Effective, Reports Find,” California Healthline (Oct. 17, 2012), available at http://www.californiahealthline.org/articles/2012/10/17/medicare-advantage-bonus-payment-system-is-effective-reports-find.aspx.
 “One of the biggest failings of modern health-care systems is that they so seldom provide integrated medical care. . . [H]ealth-care organizations, hospitals, and physicians typically operate as separate ‘silos,’ acting without the benefit of complete information . . ., medical history, services . . . , or medications prescribed by other clinicians.” “Wasting Disease: A tale of poor quality and inefficiency,” A Survey of Health-Care Finance at 13, The Economist (July 17-23, 2004).
 See Sec. 1103, Health Care Reconciliation Act (P.L. 111-152); 2012 CRS Report at 4.
 2012 CRS Report at 4 (noting that regulations still to be promulgated consistent with Affordable Care Act on exceeding medical loss ratio for MA plans).