average 114% of the cost of serving the same beneficiary in the traditional Medicare program
(Cavanaugh, 2016). This inequity which had been a concern of liberals throughout the life of the MA program was substantially exacerbated as a result of the MMA which raised the benchmarks in counties with low costs in the traditional Medicare program (Altman, 2011). As discussed, the ACA sought to address this payment inequity and to address concerns regarding uneven plan quality, and positive risk selection by among plans (Commission, 2009; Nicholas, 2009). To do so, the ACA modified Section 1853 of the Social Security Act (Payments to Medicare+Choice Organizations, 2010), changing the methodology used to pay MA plans and placing a substantial portion of plan compensation at risk based on plan performance under MA stars quality rating system. In 2016 MedPAC estimated that, the
benchmark or maximum amount that Medicare will pay an MA plan, including the quality bonus dollars, in 2017 will amount to 107% of traditional Medicare and that, on average, plans will actually be paid 102% of what CMS spends for each participant in the traditional Medicare program (Commission, 2016). This difference likely reflects a combination of lower bids and variable stars performance impacting both bonus and rebate eligibility among plans.
Under Section 3202 of the ACA, “. . . quality rating for a plan shall be determined according to a five-star rating system . . . .” (The Affordable Care Act, 2010). Plans that score 3.5 or more Medicare stars receive a higher premium amount. This percentage increase in premium grows as performance under the five-star system increases (3.5, 4, 4.5, and 5). The law also allows plans to “earn” as much as a 5% bonus for achieving five Medicare stars. This bonus revenue must be used for providing extra benefits or lowering premiums for enrollees. Moreover, CMS has the authority to terminate plans that fail to achieve three Medicare stars for three consecutive years (Termination of Contract by CMS, 2005), a provision temporarily suspended by Congress in December 2016 under the 21st Century Cures Act (21st Century Cures Act, 2016).
Under the law, in calendar year 2012, plans achieving four or more stars were eligible to receive a 1.5% bonus in 2012, a 3% bonus in 2013, and a 5% bonus in 2014 and subsequent years. To allow plans time to improve their quality scores prior to the imposition of the full bonus program, CMS created a transitional financing program called the Quality Bonus Demonstration program (Centers for Medicare Medicaid Services, 2010). Under this program, plans that achieved three or more Medicare stars received bonus payments. The quality bonus demonstration program ended on December 31, 2014. As a
consequence, results for the 2015 plan year (based on 2014 performance) were the first under the full force of the ACA provisions. As a consequence, the quantitative analysis included as phase 2 this study focuses on changes, if any, made between 2014 and 2015 on plan service areas and product filings.
In addition to the changes related to the MA stars program, the ACA sought to align MA and traditional Medicare rates. According to CMS, the ACA cut $68 billion by “Reducing excessive Medicare payments to private insurers who operate in Medicare Advantage” (CMS, 2012). To do so, Congress established a new methodology for calculating the MA county benchmark rates against which plans annually bid. To smooth this transition, a blended benchmark was used during a transition period from 2011 to 2017 (The Affordable Care Act, 2010).In 2017 (Commission, 2016), counties in all fifty states and the District of Columbia were assigned by CMS to benchmark quartiles, ranging from 95% to 115% of traditional Medicare in the most recent year in which the rates were rebased.
Additional changes included in the ACA, as well as subsequent legislation, have further increased the financial pressure on MA plans. For example, the ACA imposed a non-tax-deductible fee on most health plans, including MA. The actuarial firm Milliman has estimated the impact of that fee to be between 1.7% and 3% of plan revenue (Doucet & Yahnke, 2013; Swanson & Goetsch, 2015). However, the Consolidated Appropriations Act of 2016, Division Q, Title II, Section 201 suspended this fee for the 2016 calendar year which would be paid by plans in 2017 (Consolidated Appropriations Act of 2016, 2015).
CMS has also used its regulatory authority to increase the relative importance of the MA Star scores. Star scores are widely publicly reported on the Medicare plan finder (online enrollment) website and elsewhere to aid in consumer plan selection (Medicare Plan Finder, 2017). Plans deemed persistently low-performing (fewer than three stars for 3 years) are so noted on that website (receiving what is referred to as a low-performing icon) and are unable to receive online enrollment. In addition, Medicare beneficiaries are allowed to switch to plans earning five stars at any point in the calendar year, while lower performing plans are restricted to the annual open enrollment period (Medicare 2017 Part C & D Star Rating Technical Notes, 2016; Report to Congress: Social Risk Factors and Performance Under Medicare's Value-Based Purchasing Programs, 2016).
In addition to the changes made in the ACA and subsequently by CMS, the American Taxpayer Relief Act of 2012 (ATRA) ("American Taxpayer Relief Act of 2012," 2013), and subsequent CMS regulations reduced MA rates to reflect differences in risk coding between health plans and traditional Medicare (known as a coding intensity adjustment) (Centers for Medicare and Medicaid Services, 2014a). In April 2013, Congress imposed a 2% “sequestration” across the board to cut all of Medicare, including MA (2014). For the 2017 plan year CMS modified this same risk-adjustment methodology in an effort to more appropriately compensate plans serving sicker and more disabled beneficiaries. This had the effect of further reducing revenue to some MA plans (Announcement of Calendar Year (CY) 2016 for Medicare Advantage (MA) Capitation Rates and Medicare Advantage and Part D Payment Policies and Final Call Letter, 2015; Announcement of Calendar Year (CY) 2017 Medicare Advantage Capitation Rates and
Medicare Advantage and Part D Payment Policies and Final Call Letter, 2016; Centers for Medicare and Medicaid Services, 2014a). In a report created for the MA trade group The Better Medicare Alliance describing the cumulative impact of these changes, the actuarial firm Milliman estimated that while average annual premiums paid to MA plans between 2012 to 2015 increased by $18.96, the annual “benefit value” (meaning the extra benefits received by MA participants but not available to beneficiaries in traditional Medicare, such as reduced cost sharing and supplemental benefits) fell by $132.72
(Swanson & Goetsch, 2015).
The combination of reimbursement changes required by the ACA and subsequent legislation, as well as the threat of contract termination for repeated low stars performance, has created an imperative for MA plans to achieve high Medicare stars scores in order to obtain the bonus revenue necessary to ensure their products remain financially viable. For the 2015 plan year, the consulting firm McKinsey estimated that plans with fewer than four stars would forgo $3.47 billion in bonus payments (Carlton, Ladsariya, & Machado-Pereira, 2014). For the 2016 plan year, because more plans were able to achieve bonus
eligibility and more beneficiaries joined MA plans with four or more stars, that number dropped to a still substantial $2.03 billion (Hurley, Ladsariya, Machado-Pereira, & Vaskov, 2015; Medicare Payment Advisory Commission Public Meeting, 2015). Simply dividing that number by the total number of
beneficiaries participating in plans below four stars, the revenue lost by a plan failing to achieve four stars in 2016 was $362.5 per beneficiary.