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From Florida To Oregon, Medicare Advantage's Benefits – And Cuts – Vary

Aug 06, 2010

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For the 11 million people signed up for Medicare Advantage plans, their future with the popular program may depend on where they live.

To help finance health reform, Congress cut $136 billion over 10 years from the program, in which private insurers provide Medicare health plans for seniors. The private plans, which are paid a flat fee from the government for each enrollee were a likely target: They cost the government much more per beneficiary, on average, than does traditional Medicare, according to Medicare’s advisory commission.

But congressional Republicans and some advocates for seniors charged that the funding cuts would force insurers to slash benefits or close plans. Medicare’s chief actuary said the reduced benefits would cause Advantage plans’ enrollment to fall to 7.4 million seniors.

The reform law’s architects, including the Obama administration, say it will level the playing field between traditional Medicare and the Advantage program, while rewarding plans that operate efficiently. 

Yet some leading Medicare experts suggest that the effect of the new funding formula used to make reductions may surprise lawmakers and consumers. Among their predictions:

--The fallout from the new funding formula will vary considerably by area. The cuts -- and the impact on beneficiaries -- will not be uniform.

--Although Congress set the highest funding rate for those counties where the government spends the least on traditional Medicare in which doctors and hospitals charge specific fees for individual services, the trims in the new payment system could still cause plans in those areas to reduce benefits or shut down.

--At the same time, plans in higher-cost markets where the government spends the most on traditional Medicare, which will get the lowest rate of federal funding, might continue to operate as they do today.

Complicated Funding System

Federal funding for Medicare Advantage currently is computed on a complex formula that sets a benchmark – or base payment – in each county. That is based on the cost of traditional fee-for-service Medicare in the county and other provisions established in laws such as incentives for plans in rural and some urban areas. 

The benchmark system can allow Advantage plans to offer enrollees extra benefits, such as free eyeglasses or gym memberships. Enrollees generally are limited to using the plan's network of doctors and health care facilities.

But the current benchmark system also results in the government paying the plans more to care for enrollees than does traditional Medicare. It paid Medicare Advantage plans an average of 13 percent above what traditional Medicare spends per person, although that is expected to fall to 9 percent this year, according to the Medicare Payment Advisory Commission

Those benchmarks also have allowed some low-cost health care areas to have considerably higher rates of Medicare Advantage federal funding than some of the high-cost jurisdictions.

Some Florida counties, for example, have among the highest health care costs in the country. Yet in that state, the federal government on average paid $1.03 to Advantage plans for every $1 paid for traditional Medicare, according to 2009 data analyzed by Dr. Brian Biles, a George Washington University professor who has studied how the new health law will affect Medicare Advantage plans.

Yet in Oregon, where health care costs are considerably lower, the ratio is $1.24 for each dollar spent on traditional Medicare, Biles found. But because health care costs are so much higher in Florida, the federal government is still paying a higher yearly average to the Medicare Advantage plans in Florida for each enrollee, $10,641, than in Oregon, $9,212.

Under the health overhaul, the funding reductions also will be determined on a county-by-county basis. Counties like Florida’s Miami-Dade, which has among the nation's highest fee-for-service costs, will have a federal benchmark of 95 percent of what traditional Medicare pays, per person, on average. The lowest-cost counties, like Oregon’s, would get a 115 percent benchmark. Others closer to average costs would have rates set at 100 or 107.5 percent of fee-for-service spending.

The Medicare Advantage changes begin with a payment freeze in 2011 and then the funding cuts phase in starting in 2012.

But even the lowest tier of payments can allow plans to thrive in some areas, experts say.

Robert A. Berenson, a researcher at the Urban Institute, said that “paying (Medicare Advantage plans) 95 percent leaves plenty of room for benefit and profits.” That’s because insurers can use their clout to negotiate better deals from doctors and hospitals, and direct patients to the least expensive care, he said.

John Gorman, CEO of the Gorman Health Group, a consulting firm specializing in government health programs, recalled that in the 1990s federal funding was set at 95 percent of fee-for-service spending. "Lots of plans made money," he said.

Those plans focused on medical management to keep down costs, he said, and under the new funding formula, plans will need to do that again.

He called the new funding formula "congressionally-imposed Darwinism."  Its intent is to "see which plans can lose pounds from the … subsidies the fastest," he said. Still, he said, the new funding formula appears to be fair -- but that there "will be winners and losers."

Joseph Antos, a scholar at the American Enterprise Institute and adviser to the Congressional Budget Office, agrees that some plans will suffer. "Slowly, but surely," he said, "plans are going to be pulling back out of the marginal markets."

Gorman said the funding cuts’ effect will be softened for some plans, because the law authorizes 5 to 10 percent bonuses to plans that rate exceptionally well in quality and satisfaction. (See related KHN story on Medicare Advantage ratings system.)

But Biles said his data model suggests the quality bonuses will have little overall effect. If the bonuses were in place this year, they would have increased plans’ payments by $700 million, less than 1 percent of all Advantage spending.

Designed To Cut Costs

To understand the situation, you have to go back to the beginning. The idea that private firms could do what Medicare does, but better and for less money, dates back to the 1970s. These managed care plans generally limited enrollees to physicians and hospitals within the plan's network, which is supposed to keep people healthier and coordinate care more efficiently, holding costs down as a result. But they have never produced the anticipated savings.

“What we’ve discovered is that the view that managed care is always more efficient than fee-for-service Medicare is simply not true,” said Biles.

Look at the case of two women enrolled in plans across the country from each other. Norma Noriega, 71, of Miami, enrolled in the Leon Cares plan, pays no additional premium beyond the standard Medicare monthly fee of $96.40 a month.  She doesn't need a Medigap policy. Under traditional Medicare, she would have to pay a $1,100 deductible for her first 60 days in the hospital and 20 percent co-payment for a doctor visit or outpatient care. With her Advantage plan, she pays nothing.

She also gets free dental care, routine hearing or vision tests and two pairs of glasses a year.

That is hardly unusual. At least 66 of the 78 Miami-area plans charge no premium.

While Noriega generally likes her plan, she complains that she doesn't always get the type of services she wants – such as when she wanted a stress test for a heart problem but her doctor ordered an electrocardiogram instead – because the plan is rigid about what it will pay for. 

Nancy Leyson, 68, who lives near Eugene, Ore., has a choice of 35 Medicare Advantage plans, and only two have no additional premiums.

She opted for a plan from MedAdvantage Enhanced from BlueCross BlueShield of Oregon. Her premium costs are $222 per month, which is more per month up front than traditional Medicare, but she says she saves money in the long term because it covers a treatment for spinal stenosis that she needs a few times a year. 

Unlike Noriega, Leyson has a yearly deductible and co-payments for hospital care, physician appointments and outpatient surgery. There is no coverage for hearing exams and a $100 limit on eyeglasses.

Still, she said she is "really pleased with our plan."

Because Leyson contributes to her plan, it would seem to be more profitable to the insurer than Noriega’s. And yet, experts say, in the complex world of how Medicare Advantage operates, Miami plans are in better position to survive under the new health law’s upcoming cuts.

That is because in a market where traditional Medicare spending and the number of customers is high, such as the Miami area, an insurer has more opportunity to squeeze out savings. But in many of the low-cost areas, there is not the same flexibility in the system and because these areas often have fewer doctors and hospitals competing, insurance plans have less ability to bring down costs. 

Biles’ analysis, and one from the Congressional Budget Office, found that Medicare Advantage plans in expensive markets such as Miami will be getting more money relative to their expenses.

Conversely, the higher 115 percent benchmark in Oregon and other markets may be insufficient to keep the plans afloat. 

So the reduction may put the plans in the red. “It doesn’t do Medicare beneficiaries much good to pay 115 percent of Medicare if their costs are 116 percent,” he said.

This story was corrected from its original version to reflect the fact that Norma Noriega pays a monthly premium to Medicare.

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