Yesterday, the Centers for Medicare and Medicaid Services (CMS) released the 2015 government payment levels for the Medicare Advantage private insurance plans that are offered to seniors as an alternative to traditional Fee-for-Service (FFS) Medicare. In a bit of a surprise, CMS projects that total payments will increase by about 0.4 percent despite earlier CMS guidance suggesting payments would be cut by 1.9 percent.
The change follows months of lobbying by the private insurance industry -- fearful of lost profits -- along with members of Congress from both parties who are fearful of being attacked for cutting benefits to seniors.
Medicare Advantage plans have seen annual cuts to their payments from the government through a process set in motion by the Affordable Care Act (ACA), and cuts are scheduled to continue (despite the slight increase for next year). The payment reductions were intended to fix a fundamental financing disparity between FFS Medicare and the Medicare Advantage program; insurers are paid more per beneficiary than it would cost the government if the beneficiaries remained in FFS.
The negative reaction from politicians and interest groups to these continual cuts has been swift and loud, but also gallingly hypocritical.
Republicans have been vocal champions for Medicare Advantage plans at least since voting for their expansion in the 2003 legislation, signed by President Bush, that created Medicare’s prescription drug benefit. They have been focused on fighting cuts to Medicare Advantage since the debate over passage of the ACA.
Republicans’ original support for Advantage plans was based on the theory that, all other things being equal, private insurance plans would be more efficient and reduce Medicare costs relative to FFS. Yet by supporting a system in which those plans get paid more than FFS, Republicans have fostered a program that has been more costly to the government than traditional Medicare would have been.
Furthermore, some experts suggest that Advantage plans use this extra government funding to add benefits like gym memberships that allow them to attract the youngest and healthiest seniors. This games the system, and has allowed the private plans to make profit gains while only passing a portion of those gains on to beneficiaries in the form of lower cost-sharing. It also increases costs to traditional FFS, which has to now serve a older and sicker population.
Yet, from the beneficiaries’ perspective, these added benefits and lower out-of-pocket costs make Medicare Advantage plans very attractive. Beneficiaries have flocked to the plans, which have grown from serving 10.6 million beneficiaries in 2009 to over 15 million and nearly 30 percent of all Medicare beneficiaries in 2014.
This popularity -- and who wouldn’t want more benefits at seemingly lower costs? -- makes attempts to reduce the excess payments a political vulnerability.
Thus, Republicans, who wanted a fair fight between private insurance and FFS, are now defending an unbalanced system and targeting Democrats for supporting benefit cuts. But at the same time Republicans have depended on the cuts to Medicare Advantage -- embedded in the ACA -- to achieve balanced budgets in their last two House Budget Resolutions, and have used the reduced spending to lower deficits in their last four budgets.
Some Democrats have recently, and in increasing numbers, also protested the Medicare Advantage reductions despite championing the cuts during the debate over the ACA. Projected at the time to lower Medicare spending by $136 billion over ten years, the cuts were used to offset new health care spending; without them, the ACA would have been projected to increase deficits.
The disingenuousness of these Democrats’ protest against Advantage cuts stems from their touting the fiscal responsibility of the ACA, the slowing of health care cost growth, and their belief in the importance of fair competition among insurance plans. Yet they are now quickly abandoning one of the most logical cost reductions from the ACA -- one that was a centerpiece of their argument for passage of the law -- because they have political concerns.
The Obama administration doesn’t have clean hands on this either. Even if you don’t count the slight increase in payments for 2015, CMS has reduced payments more gradually than initially contemplated by the ACA. The most famous example of leniency has been in a demonstration project designed to reward high-quality insurance plans.
The ACA established a five-star system for determining plan quality, offering bonus payments for plans attaining ratings of four stars or higher. Yet for the three years from 2012 to 2014, CMS undertook a demonstration project that widened bonus eligibility to plans with three stars. The result is that nearly all plans became eligible for bonuses. (See table below from MedPAC’s 2014 report to Congress.)
With nearly every plan eligible for quality bonuses, the demonstration project appears to be a back-door method for limiting scheduled cuts -- and its wastefulness has been highlighted in analyses by the GAO, MedPAC and others. Yesterday, CMS confirmed it would not continue the wide-eligibility program in 2015.
Nevertheless, Medicare Advantage payments are slowly becoming more aligned with FFS, dropping from 114 percent of FFS in 2009 to 106 percent in 2014 (see here). It is likely that even with the slight reported increase in payments for 2015, the disparity between Medicare Advantage and FFS will continue to get smaller. Considering the steady increase of enrollees through the ACA implementation period of reduced payments, enrollment is unlikely to dramatically decrease.
It is very important fiscally that CMS gets back to reducing payments on the ACA’s schedule. It should also be important for those who want to test the benefits of private insurance flexibility and innovation, as well as those who support more centrally administered health insurance, to have the two programs exist side-by-side with equal financing. Without that, we cannot truly learn best practices that can help us lower the growth in the nation’s health care costs.
The constant attacks on the trajectory for Medicare Advantage are not much different than what we see whenever an attempt is made to control health care costs, or for that matter to reduce deficits in general. The aggrieved have an easy time lobbying for specific benefits, while those trying to reduce costs have a difficult time pointing out the need for general sacrifice. Yet, dealing with that conundrum in this case might allow us to attack the country’s long-term fiscal challenges while learning how to make everyone insured in Medicare better off.
Charts and Tables from Chapter 13 of MedPAC's March 2014 Report to Congress.
 The CLASS Act within the ACA, which initially scored as deficit reduction, has since been repealed. Without the CLASS Act and the Medicare Advantage cuts, the CBO score for the ACA would have been deficit-increasing.