Medicare Advantage's benefits, and cuts, vary by state

Kaiser Health NewsAugust 11, 2010 

WASHINGTON — 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 the health care overhaul legislation, Congress cut $136 billion over 10 years from the program, in which private insurers provide Medicare health plans for seniors. The private plans, which the government pays a flat fee for each enrollee, were a likely target: They cost the government much more per beneficiary, on average, than traditional Medicare does, according to Medicare's advisory commission.

Congressional Republicans and some advocates for seniors charged that the funding reductions 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 overhaul 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.

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 will vary considerably by area. The cuts — and their impact on beneficiaries — won't be uniform.

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

_ 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.

Federal funding for Medicare Advantage is computed on a complex formula that sets a benchmark — or base payment — in each county. That's 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.

However, the benchmark system also results in the government paying the plans more to care for enrollees than traditional Medicare does. It paid Medicare Advantage plans an average of 13 percent above what traditional Medicare spends per person, although that's 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 do.

Some Florida counties, for example, have among the highest health care costs in the country. 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's 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. 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 such as 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, such as 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 the funding cuts phase in starting in 2012.

However, 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, a policy research center on social and economic issues, 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, the CEO of the Gorman Health Group, a consulting firm that specializes 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 there "will be winners and losers."

Joseph Antos, a scholar at the American Enterprise Institute, a conservative policy-research center, and adviser to the nonpartisan 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 would be softened for some plans because the law authorized 5 to 10 percent bonuses to plans that rated exceptionally well in quality and satisfaction. However, Biles said his data model suggested that the quality bonuses would have little overall effect. If they were in place this year, they would have increased plans' payments by $700 million, less than 1 percent of all Advantage spending.

The idea that private firms could do what Medicare does, but better and for less money, dates 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 down costs as a result. They've never produced the anticipated savings, however.

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

The situations of two women who are across the country from each other illustrate the widely varying premiums and benefits that Medicare Advantage plans offer, and how the new funding formula might affect them.

Norma Noriega, 71, of Miami, enrolled in the Leon Cares plan. She pays no additional premium beyond the standard Medicare monthly fee of $96.40 a month, and she doesn't need a Medigap policy. Under traditional Medicare, she'd have to pay a $1,100 deductible for her first 60 days in the hospital and a 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's hardly unusual. At least 66 of the 78 Miami-area plans charge no premiums.

While Noriega generally likes her plan, she complains that she doesn't always get the types 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 premiums are $222 per month, which is more per month 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's no coverage for hearing exams and a $100 limit on eyeglasses.

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

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

That's 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. In many of the low-cost areas, however, there isn't the same flexibility in the system. Further, because these areas often have fewer doctors and hospitals competing, insurance plans are less able 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 get 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.

"It doesn't do Medicare beneficiaries much good to pay 115 percent of Medicare if their costs are 116 percent," Biles said.

(Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonpartisan health care policy-research organization that isn't affiliated with Kaiser Permanente.)

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