The Centers for Medicare & Medicaid Services has enacted significant changes to Medicare Advantage (MA) payment methodologies that will shift payment towards MA organizations (MAOs) enrolling significant numbers of Medicaid beneficiaries and away from employer and labor union plans covering Medicare–eligible populations. In the process, the changes will affect upcoming bids, potentially creating uncertainty in the levels of funding that MAOs can anticipate for 2017.

The Centers for Medicare & Medicaid Services (CMS) recently finalized significant changes to Medicare Advantage (MA) payment methodologies, reflecting CMS’s confidence in the strength of the MA program, which now accounts for more than 30 percent of all Medicare beneficiaries, and an increasing focus on individuals who are Medicaid eligible.  The changes will also significantly change funding patterns, moving dollars away from MA plans sold to employer groups and union plans for their retirees, and towards plans that serve significant populations of Medicare beneficiaries who are also eligible for Medicaid.  The changes demonstrate CMS’ willingness this year (as with recently published rules and proposals for Medicaid and Original Medicare) to make significant changes even in the face of industry opposition. The changes may affect plan risk scores and revenue projections and add uncertainty to an already complex bid and payment framework.

Changes to Risk Adjustment Model Add Complexity

CMS made significant changes to the risk adjustment model, adding dual eligibility status as a factor affecting risk scores, and shifting funding towards MA plans with disproportionately high dual-eligible enrollment. CMS also continued the shift from calculating risk scores based on Risk Adjustment Processing System (RAPS) data to encounter data submission (EDS) data. These changes were hotly contested, with some MAOs in favor and others opposed; despite the controversy, CMS decided to proceed.

• New Model Segments — CMS separated the community model into six model segments based on whether members are eligible for Medicaid as well as Medicare (the six segments are non-dual aged, non-dual disabled, full benefit dual aged, full benefit dual disabled, partial benefit dual aged and partial benefit dual disabled). Each segment has its own relative factors, meaning that MAOs must account for differences resulting from Medicaid eligibility when predicting and calculating risk scores. CMS acknowledged that the revised model is more complex, but concluded that the changes were necessary because the current model under-predicts costs for full benefit duals, and over-predicts costs for partial benefit duals and non-duals. Although the precise effect of the changes is unknown, CMS estimated that they will reduce MA payments by 0.6 percent. Regardless of the magnitude of their impact, the changes will affect MAOs differently, varying based on the beneficiary population served.

• Risk Adjustment Data Source — CMS advanced the transition to calculating risk scores based on EDS data, rather than RAPS data. In payment year 2016, EDS data comprised 10 percent of the risk scores, and it will make up 25 percent of the risk scores in payment year 2017. In response to industry concerns about operational and technical issues with EDS data, CMS retreated from its original proposal to base 50 percent of risk scores in 2017 on EDS data. Nonetheless, CMS iterated its intent to complete the transition to EDS data by 2020.

New Payment Methodology for MA EGWPs Shifts Funding Away from EGWPs, Adds Uncertainty and Limits Control for MAOs

CMS finalized, with some minor changes that respond to a subset of industry concerns, a heavily resisted proposal to reduce payments to MA employer group waiver plans (EGWP). Under the new policy, MA EGWPs will no longer submit bids to CMS.  Rather, CMS will make payments to these plans based on the average bids submitted by individual market MA plans in the prior payment year. 

Industry stakeholders—including MAOs, employers and labor unions strongly opposed the new payment methodology, which CMS characterized as a “condition” on other EGWP waivers.  They argued that CMS’s proposal exceeded its statutory authority under Section 1857(i) of the Social Security Act.  CMS has the statutory authority to “facilitate” MA EGWPs by waiving or modifying requirements that “hinder” the offering of these plans.  MAOs argued that the prohibition on submitting bids and the corresponding payment cut for most MA EGWPs would not facilitate, and in fact would hinder, the offering of such plans.  CMS responded to these industry comments in the Final Call Letter, stating that because it has long-waived the requirements for MAOs to submit unique benefit design and bid information for each individual MA EGWP offered by an MAO, CMS does not know how many MA EGWPs are offered by each MAO, what specific benefits are provided under these plans, or the associated underlying costs.

CMS asserted that this lack of transparency impairs its ability to assess the actuarial assumptions underlying overall MA EGWP bids and to ensure proper utilization of federal funds, particularly in light of the systematically higher bids submitted by MA EGWPs than individual market MA plans.  CMS stated that it could not continue with this non-transparent payment methodology, and that it had considered reverting to the statutory requirement that MA EGWPs submit detailed financial and benefit package information to CMS on an annual basis.  Instead, CMS decided to continue to waive these requirements, but will require that payments to MA EGWPs be based on individual market MA plan bids, rather than bids submitted by the MAOs sponsoring the MA EGWPs. 

CMS’ willingness to proceed with this change—which was recommended by MedPAC and previously proposed in President Obama’s budget—in the face of significant opposition seemingly reflects the Administration’s view that the MA Program generally is strong, and that employers and unions are likely to continue to offer EGWPs despite reduced benefits funded by the federal government. The payment change may create some uncertainty about the levels of funding available to MA EGWPs over the next several years, as payments may not be sufficient to cover the full scope of benefits currently offered under these plans.  MA EGWPs are much more likely than individual market MA plans to be structured as preferred provider organizations (PPOs), which typically involve higher costs than more limited health maintenance organization (HMO) coverage.  Under a reimbursement system based on individual market HMOs, MA EGWPs may seek to control costs by reducing benefits or moving away from the PPO model.  In certain contexts, this may be difficult due to the collective bargaining agreements that govern some union-sponsored MA plans. 

In addition, it is possible that basing capitation payments on average costs from the prior year may not fully reflect changes in the market from year to year, particularly costs associated with new-to-market drugs and infectious diseases.  The Agency is phasing in the new methodology in 2017, which may mitigate the impact of the immediate funding cut for 2017.  When the methodology change is fully implemented in 2018, MA EGWPs will have to assess their ability to control costs utilizing benefit design and other levers, as they will have limited ability to impact CMS funding on a going-forward basis.

CMS’ willingness to make major changes to the MA program’s payment structure seemingly reflects its belief that the MA program is sufficiently entrenched, 10 years after congressional changes led to significant expansion of the program, to withstand significant alterations.  While the overall impact of these and other payment methodology changes remains to be seen, MAOs will need to consider the changes as they calculate and submit bids in June 2016.