2015 Medicare Advantage rates: Perspectives for payors

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On April 7, the Centers for Medicare and Medicaid Services (CMS) released the final 2015 Rate Announcement and Call Letter for Medicare Advantage (MA) and Part D programs. Although the provisions announced in the Final Notice are slightly more advantageous for payors than those proposed in the Advance Notice (February 2014), our calculations indicate that they are likely to have a 3.2- to 3.4-percent negative impact on MA capitation rates. The key differences between the proposed and final provisions are:

  • Downward revision of the MA and fee-for-service (FFS) per-capita growth rates
  • Reduced weight of the new (2014) CMS-HCC1 model (used to calculate risk scores) and adjustment of the FFS normalization factor
  • Postponement of the proposed change to exclude from payment determinations diagnoses that are made only on home visits
  • Postponement of the new Rx-HCC model for Part D plans

Our analyses also suggest that the impact of the new provisions on 2015 MA margins will be strongly influenced by a health plan’s Star rating.2 Plans with fewer than 4 Stars may experience about a 1.5-percent reduction in margins, even if they take steps to optimize revenues and control costs.3 Conversely, plans having 4 or more Stars may experience up to a 2.5-percent bonus that can be used to lower premiums, enhance benefits, expand margins, or some combination of all three.

In this Intelligence Brief, we will discuss the likely impact of the provisions contained in the Final Notice on both MA capitation rates and MA margins.

Impact of the Final Notice on MA capitation rates

The decrease in the per-capita MA growth rate included in the Final Notice (3.4 percent) is larger than the 1.9-percent decrease outlined in the Advance Notice. According to CMS, the adjustment was made to close the gap between previously estimated and actual cost trends for 2003-2013; the majority of the adjustment related to the 2011-2012 period. Similarly, the 3.4- percent decrease in FFS growth rates in the Final Notice is more than twice the size of the 1.65-percent decrease that had been given in the Advance Notice. This change may negatively affect providers’ Medicare margins.

In keeping with provisions in the Affordable Care Act, the Final Notice continued moving county benchmarks to percentages of FFS cost, which is likely to have a 2.4 percent negative impact on capitation rates. In addition, two other changes made outside of the Final Notice will negatively affect capitation rates. The health insurance tax will lower those rates by approximately 0.7 percent, and a 0.25-percent increase in the coding-intensity adjustment will bring that adjustment to a cumulative negative 5.16 percent. These changes are part of current law and were known to the market in advance.

The negative impact of these provisions will be partially offset by changes CMS made in its risk-adjustment methodology. For example, it reduced the weight of the new (2014) CMSHCC model used to calculate risk scores, the result of which is likely to be a 1.1 percent increase in 2015 rates. In addition, it altered the mechanisms through which MA risk scores are normalized to FFS risk scores; this change should result in a net increase in the risk scores and, as a result, in MA reimbursement (by about 4.3 percent). However, CMS did not extend the Star Quality Bonus Demonstration, which would have provided rate relief of about 1.9 percent.

In the Final Notice, CMS also announced several other provisions that could potentially affect MA revenues and MA cost-management programs beyond 2015. For example, it did not finalize its provision requiring that HCC codes collected through home health assessment programs – the basis for members’ risk scores – be supported by physician visits. This will likely have a positive impact on MA risk revenues in 2015.However, CMS has indicated that it will continue to assess this provision and may implement it for 2016.

CMS also postponed the application of a new Rx-HCC model for Part D plans. This was in response to multiple requests that MA plans and Part D plans need additional time to conduct impact analyses and communicate results to CMS. Plans could have their performance affected significantly if MA-Part D data are included in the Rx-HCC model because of the historical cost differences between MA-Part D and Part D plans.

Taken together, our calculations indicate that the provisions in the Final Notice should result in a decrease in MA reimbursement of between 3.2 percent and 3.4 percent (Exhibit). This decrease is less (by 0.7 to 1.1 percent) than what would have occurred had the provisions in the Advance Notice gone into effect.


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