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The Future of Medicare in a Reformed Marketplace

The Future of Medicare in a Reformed Marketplace
healthcare on January 23, 2014 - 3:19 pm in News & Insights

Sweeping change to this country’s health care system and $940 billion in new expenditures translates into a disruptive event and massive opportunities – but as always, luck will favor the prepared and the nimble. With 32 million uninsured individuals set to gain access to health insurance coverage, and transformational changes to the country’s Medicare program, forward thinking health plans need to swiftly execute an action plan.

Medicare cuts make up approximately half of the financing for health care reform. But let’s be clear, health care reform does NOT mean the end of Medicare Advantage! The reimbursement phase-down to relative parity with Medicare fee-for-service for Medicare Advantage, while not lethal to the industry, will have a significant impact—remember, Medicare plans were paid at 95 percent of fee-for-service in the 1990s and plenty were profitable. Expect to see an acceleration of Medicare plan (MA and PDP) consolidation, with the bulk of exits coming from low membership plans, especially Special Needs Plans, where the lack of economies of scale can’t sustain margins, and plans with less-than-rock-solid executive commitment to the senior market.

Plans staying in the MA and PDP market for the long-haul need to confirm that the core “blocking and tackling” value chain components that have made them successful, remain current, compliant, and are thriving: revenue and enrollment management, member services, chronic care management, provider network engagement, and senior-focused marketing and sales. Three areas of focus command particular attention: 1) adapting to changes in reimbursement, 2) pay-for-performance, and 3) integrated medical management.

Adapting to Reimbursement Changes

Under the health care reform legislation, payment to Medicare Advantage plans is linked to a beneficiary’s experience and quality of care. For the first time, high-performing plans will be paid more than lower performing plans. This changes the terms of market competition and turns incentives in Medicare Advantage towards improving quality. By focusing on quality plans can realize substantial payment increases that in many cases are close to offsetting reductions they will face as a result of reimbursement cuts in these new laws.

Plans in counties where Medicare fee for service (FFS) payment levels are highest will have their benchmark payments phased down to 95 percent of FFS, while plans in counties with the lowest FFS rates will receive 115 percent of FFS.  Middle quartiles will receive proportional ratios to FFS (see Chart One).

Quartiles are not exactly 25% due to treatment of territories, added after quartiles are determined

MA plans in more than half of US counties will see their payment phased-down over two years beginning in 2012.  In counties where the cuts exceed $30, the phase in period is stretched out to four or six years, depending on how deep the cuts. The bottom-line is that MA plans will see revenue decrease, on average, by an estimated 12 percent by 2017. (see Chart Two)


The legislation provides significant bonus payments to high-performing plans. The approach adopted in the law is the current 5-star rating system used by Centers for Medicare & Medicaid Services (CMS) to assist beneficiaries in making the “best choice” when selecting a plan during the annual election period.  The star ratings are determined from plan data including Medicare Healthcare Effectiveness Data and Information Set (HEDIS) scores, Consumer Assessment of Healthcare Providers and Systems (CAHPS) survey scores, data from the Health of Seniors (HOS) survey, and plan performance data (e.g. complaints submitted to CMS).

Starting in 2012, plans with a minimum 4-star rating can achieve a 1.5 percent bonus.  The bonus increases to 3 percent in 2013 and thereafter to 5 percent.  And plans in “qualifying counties” have an opportunity to receive a double bonus.  These “qualifying counties” have 25 percent or more MA penetration, received the urban floor payment in 2004 and have a FFS rate lower than the national FFS per capita rate (e.g., Albany, NY or Albuquerque, NM).   High performing plans in these markets in 2014 can receive a quality bonus as high as 10 percent if they score 4-stars or better.

Plans that receive the bonus will have a substantial competitive advantage in their marketplace, not only in bragging rights but in real dollars: in addition to bonuses, high performers also get favorable treatment in the rebates from CMS that are used to provide additional benefits or reduced costs under the competitive bidding process.  Under the new approach, a plan with a 4.5-star rating will get a 70 percent rebate while a plan with a 3-star rating will only receive a 50 percent rebate.  This doubles-down on rewards to high-performing plans, making them more competitive, while also rewarding beneficiaries who choose plans with the highest star rating.

While quality bonuses are good news, the bad news is that most plans today would not qualify.  The average plan rating today is 3.27-stars, which would not meet the 4-star legislative standard to receive the higher payments. The four plans in the country that have the highest score of 5-stars have shown some of the steps plans can take to improve performance.  These include excellent provider relationships, a focus on the beneficiary with responsive, high-touch customer service, and placing a priority on medical management.

Integrated Medical Management

Health care reform’s overriding vision is to “bend the cost curve”. To get there, legislative components such as mandated Medical Loss Ratios and promotion of patient-centered medical homes make one change very clear – a health plan’s ability to leverage the power of local physician and hospital relationships to build collaborative payer-provider care delivery models will be game changers. New medical management partnerships can dramatically enhance care management, reduce hospital readmissions, integrate pharmacy into medical management, and break new ground by applying information technology to identify and track the small cohort of members with multiple chronic conditions who require aggressive intervention.

For Medicare, eighty percent of seniors have at least one chronic condition. And, for the 3.8 million boomers aging-in to Medicare every year starting in 2011, sixty percent have a chronic condition. A health plan’s members with chronic conditions have a tremendous impact, accounting for over 75% of hospital admissions, over 80% of prescriptions and over 70% of visits to physicians. These costs will paralyze health plans unless they become aggressive in identifying and managing these patients using a laser-focused approach to medical management.

The old “mother may I?” approach to medical management–like preauthorizations and referrals – has been a demonstrated failure in both member and provider satisfaction and as a cost containment strategy. Successful chronic care medical management will be grounded in evidence-based clinical practices, predictive outcomes modeling, member engagement, and multidisciplinary professional collaboration. These health plans will be able to identify, treat and improve outcomes of costly chronic conditions, in an accountable, patient-centered approach—comprehensive care, structured around a primary care physician that is accessible, continuous, and family-centric.  Patient centeredness has given rise to two hot trends that will quickly gain traction: Patient-Centered Medical Homes and Accountable Care Organizations.

Patient-Centered Medical Home (PCMH) is a “whole person” orientation to healthcare delivery. A personal physician is responsible for coordinating all the patient’s healthcare needs. Care is coordinated by a multidisciplinary team that extends the reach of the PCP across the patient’s healthcare continuum – hospitals, specialty physicians, pharmacists, social services, home health, nursing homes, and ancillary providers. PCMH provides a vision of care for all stages of life, acute and chronic, wellness and prevention, and end-of-life.

Accountable Care Organization (ACO) is a provider organization loosely affiliated by referral patterns, which would be responsible for the cost and quality of care received by a specific group of patients. Payment incentives (and disincentives) are built-in so physician groups and hospitals become financially “at-risk” to meet quality and cost targets. ACOs provide a controlled, coordinated care outlet that fosters management of an entire episode of care in an integrated, patient-centered structure.

Without question, integrated medical management is a vastly different mind-set for many health plans. Over the years, most health plans have embraced an approach to medical management focused on “setting of care” rather than the “individual receiving the care”. Patient-centered programs place the health plan in the role of facilitating, not limiting, providers. Winning plans will support clinicians with reliable, complete information, giving front-line professionals the data and tools to “connect the dots” of the patient care continuum.

Bending the cost curve depends on integrated medical management that is patient centered, led by primary care providers and driven by accountability: member engagement, provider quality and health plan collaboration. However, caution must be exercised. The success of health care reform is dependent on balancing access to health care and the capacity to effectively manage costly health care conditions.

There’s a lot of unmet demand among the 32-million uninsured. Under reform, these consumers will be entering the market seeking health care services, not just insurance. Millions of new policyholders with uncontrolled chronic conditions, combined with care demands of the nation’s seniors (whose numbers are rapidly approaching 20% of the population) will present unprecedented challenges. Experience has shown that when you open the flood gates, you can quickly exceed capacity of the existing clinical infrastructure. This is especially alarming knowing there’s a growing shortage of primary care physicians.

Time For Action

In this new “reform-driven” regulatory climate, now is the time to for Medicare plans to ask tough, introspective questions and make informed decisions about how to reform-proof their strategic business plans. Falling behind competitors and playing catch-up in such a complex, fast-moving environment is not easy. Winners must anticipate change and react quickly in a reformed marketplace.

Medicare Advantage plans have the added pressure of reimbursement adjustments scheduled to start within a compressed timeline, matched-up with a new, competitive bonus program. This ups the ante on cost management, both operationally such as enrollment reconciliation and risk adjustment, as well as high-impact MLR actions, especially chronic care management. It would be a serious mistake to overlook investments in a plan’s value chain, especially at a time when the expectation is that health plans will be accountable for results, paid accordingly for performance, and that the highest quality plans will be the survivors.

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John Gorman is CEO, Gorman Health Group and can be reached at 202.364.8283×171 or jgorman@gormanhealthgroup.com

Gorman Health Group (GHG), a national health care, insurance and government programs consultancy staffed by subject-matter experts, former health plan executives and seasoned regulators. For 15-years, hundreds of clients serving millions of consumers have leveraged GHG’s strategic counsel and technology solutions to achieve growth objectives, maintain compliant operations, improve market position, and advance growth and profitability objective. For more information visit Gorman Health Group’s website at


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