Health Care Reform – Shaping the Landscape of Medicare Advantage

1. Health Care Reform – Shaping the Landscape of Medicare Advantage  Mid-Atlantic Actuarial Club Eric Mattelson, FSA October 7th, 2010

2. Outline • Background on Medicare Advantage (MA) • Brief History • Differences From Traditional Medicare • Overview of the annual MA bidding process • Healthcare Reconciliation Bill • Outline key provisions that relate to MA – purpose/motivation of each one • Implications to MA beneficiaries & plan sponsors • Outlook for MA going forward – what must plans do to survive?

3. My Background • Education History • Amherst College – 2006 • FSA – 2008 • Work History • Aon Consulting (Baltimore) 2006-2008 • Bravo Health (Baltimore) 2008-Current • Disclaimer • These are my personal opinions/interpretations • Please do not ask me to tape any NFL games – I do not have express written consent…

4. History of Medicare Advantage (MA) • Began in 1997 as Part of Balanced Budget Act • Known at the time as Medicare + Choice • Medicare Modernization Act of 2003 • Improved plan reimbursement – led to more attractive benefit plans • Added prescription drug coverage as an option starting 1/1/2006 • Plans now known as Medicare Advantage (MA) • Plans offering drug coverage known as Medicare Advantage & Part D (MA-PD) plans • H.R. 4872 – Health Care & Education Affordability Reconciliation Act – 3/30/2010

5. What is Medicare Advantage? • Alternative to Traditional/Fee-for-Service (FFS) Medicare • Run through private insurance companies • Paid capitated rates by the government to provide healthcare services to Medicare beneficiaries • Plan sponsor is responsible for paying claims and administering benefits • Centers for Medicare & Medicaid Services (CMS) maintains oversight of MA plans

6. Role of CMS in Medicare Advantage • Plan Sponsor reimbursement • Monthly Membership Reports (MMR) – eligibility • Model Output Reports (MOR) – risk adjustment factors • Plan Payment Reports (PPR) – payment summary files • Annual Bid Process • Review of each plan’s bids to ensure compliance • Issues guidance & regulations • Determines benchmark rates, coding factors, any other changes to payment rates • Not a true “bid” (unlike Part D) – more like a projection • High level administration of MA program

7. FFS vs. MA – Benefit Offerings • MA plans must cover everything that FFS does • MA plans have option to cover additional benefits • Part D drugs • Routine Transportation • Dental • Routine Vision Exams & Eyewear • Routine Hearing Exams & Hearing Aids • Over the Counter drug benefit • Fitness/Gym Membership • Etc. • Benefits can change from year to year

8. FFS vs. MA – Cost Sharing • FFS – Coinsurance (usually 20%) – member pays % • MA – Combination of coinsurance and fixed copayments • Generally must be at least actuarially equivalent to FFS – often MA offers lower cost sharing than FFS • Some benefit categories (Inpatient Hospital, Skilled Nursing, Mental Health, Dialysis, etc.) have more specific cost sharing thresholds • Copays are generally preferable to beneficiary as costs are more predictable

9. FFS vs. MA – MOOP • Maximum out of pocket limit (MOOP) – caps the amount a member can potentially pay in a year • FFS – no MOOP – can be very expensive when combined with coinsurance • MA – Mandatory MOOP established starting in 2011 - $6,700 • Prior to 2011, MOOPs were voluntary • Plans can set the limit to less than $6,700 • Cost sharing subsidy eligible dual members (Medicare/Medicaid) are exempt from this mandatory MOOP requirement since they do not actually pay their cost sharing

10. FFS vs. MA – Other Differences • Premiums • FFS – members pay standard Part B premium ($110.50 per month in 2010) • If members want D coverage they must get a standalone drug plan for an additional premium • MA – standard Part B premium + additional premium that varies by plan (some plans are $0) • This can include Part D, in some plans at no extra cost • MA premiums for a given plan can vary year to year • Networks • FFS – members can go to any provider who accepts Medicare • MA – member may have provider network restrictions and authorization/referral requirements

11. MA Plan types • HMO – members have network of providers, cannot voluntarily go out of network • POS – Members have network of providers, can go out of network (OON) for selected services – OON cost sharing may be higher • PPO – Members have network of providers, can go OON for any service offered in-network, OON cost sharing may be higher

12. MA Plan types – Special Needs Plans • Special Needs Plans (SNPs) are designed to target a specific portion of the population • Dual SNPs are for low income members who are both Medicare & Medicaid Eligible • Chronic SNPs are for members with specific disease conditions (i.e. Diabetes) • Institutional SNPs are for members who live in institutions • These plans offer benefits/cost sharing/drug formularies specifically tailored to the target populations – FFS is one-size-fits-all

13. MA Bidding Process Background • MA Plans are required to submit annual bids for each benefit plan to CMS • Projection of membership by county (Revenue) • Projection of medical cost • Projection of administrative expense & margin • Description of all benefits, cost sharing, plan premium • Bids must be submitted by June of the preceding year

14. MA Bids – Key Numbers • Benchmark (PMPM) • Set by CMS for each county – updated annually • Per Member Per Month (PMPM) amount • Maximum amount that CMS will pay a plan sponsor for a member in that county • Bid Rate (PMPM) • Projected cost calculated by the plan sponsor for Medicare-covered services • Plan Risk Score • Average risk factor for projected members in the plan • Both the benchmark & bid rate are multiplied by the plan’s projected risk score

15. MA Bids – Key Numbers (cont.) • Savings (PMPM) • Difference between Benchmark and Bid Rate • Rebates (PMPM) • Savings * Rebate % = Rebate PMPM –> difference goes back to government • Current Rebate % through 2011 is 75% • Rebate dollars can be used for many things • Reduce cost sharing for Medicare covered services • Offer supplemental benefits (dental, vision, etc.) • Buy down the cost of Part D benefits (for MA-PD plans) • Cannot be kept by the plan sponsor as profit • Plan Revenue = Risk adjusted bid rate + rebates

16. MA Bids – Sample Calculation • Use the following numbers as an example: • Risk Score = 1.0 • Benchmark = $1,000 • Bid = $800 • Savings = $200 • Rebates = $150 • Part D premium buy down = $50 • Buy down of Medicare-Covered benefits = $75 • Supplemental benefits = $25 • MA-PD Plan Premium = $0 • Projected Revenue = $800 + $150 = $950

17. MA Benchmarks vs. FFS costs • CMS Maintains projections of FFS costs by county • Current MA benchmarks are not explicitly adjusted for Medicare FFS costs • Relationship between benchmarks and FFS costs varies considerably by county • 11% of MA enrollees have benchmarks at or below FFS costs • 78% of MA enrollees between 100% & 125% of FFS • 11% of MA enrollees above 125% of FFS • Current Membership weighted FFS ratio for 2010 is 110.4% Based on CMS MA membership data as of August 2010 http://www.cms.gov/MCRAdvPartDEnrolData/MMAESCC/list.asp#TopOfPage

18. Provision #1 – New Benchmarks • Health Care Reform (HCR) bill will explicitly set county benchmarks as a % of FFS costs • Counties will be ranked by FFS costs and divided up into quartiles • Each quartile would have a target % of FFS costs that the benchmark would be set at • New benchmarks begin phasing in as of 2012 • Duration of new benchmark phase-in varies based on the total benchmark PMPM dollar reduction • <$60 –> 2 years • $60< X < $100 –> 4 years • >$100 –> 6 years • Motivation – cost savings

19. Provision #1 – Quartile Summary

20. Provision #1 – Quartile Summary • Quartiles are not membership weighted – skewed towards the top quartile • Larger counties (urban) naturally have higher FFS costs • Creates inherent winners & losers as some counties may actually see benchmarks remain flat while others will be dramatically reduced • Could create member disruption as relative viability of markets could shift dramatically • There is a provision that prevents new benchmarks from exceeding previous benchmark rates • Holds MA plans “accountable” for how well FFS providers naturally manage costs (no control over this!) • On average, counties will see a 8% reduction in benchmarks phased in over an average of 3.7 years

21. Updated Bid – Provision 1 • Assuming that we have a plan with an “average” mix of counties • New Benchmark = $1,000 * (101.4%/110.4%) = $918.48 • Bid = $800 • Savings = $118.48 • Rebates = $88.86 • Part D premium buy down = $30 (50) • Buy down of Medicare-Covered benefits = $44 (75) • Supplemental benefits = $15 (25)

22. Provision 2 - Plan Star Ratings • CMS currently gives every MA plan a star quality rating • Prospective members can see plan overall ratings • Range from 1 to 5 stars overall rating • Overall rating is based on average scores across all individual measures • No impact to payment methodology as of 2011 • HCR bill will make certain payment factors dependent on plans’ star ratings starting in 2012

23. How are Star Ratings Calculated? • What factors influence star ratings? • Part C has 36 ratings grouped into 5 domains • Staying healthy – seeing PCP, getting HEDIS tests • Health Plan Responsiveness & Care – ease of getting care, overall rating of health care quality • Managing long term chronic conditions • Member complaints & disenrollment rates • Health plan’s customer service – time on hold, accuracy of information, non-English language support • Similar factors go into the Part D plan ratings • Some measures based on absolute thresholds, some based on plan’s relative scores

24. Provision 2A - Star Rating Quality Bonus • Plans that have 4 star or above overall rating get a quality bonus • 5% increase in target FFS percentage (95% counties become 100% counties) • Unclear if overall score will be based on scores for C&D or C only • Phases in from 2012-2014 (1.5%, 3%, 5%) • Plans can also qualify if they make “meaningful improvements” to their overall quality • Plans can gain or lose these bonuses year over year – could create significant benefit changes/member disruption • Motivation – to align a plan’s revenue with the quality of the healthcare delivered

25. Provision 2B - Rebate % Adjustments • Through 2011 all plans get to keep 75% of savings as rebate dollars • Starting in 2012, rebate % will be dependent on star ratings • 4.5 or more stars – 70% • 3.5 to 4 stars – 65% • 3 or fewer stars – 50% • Phased in from 2012-2014 • All plans will experience reduction in rebates which could vary by year creating disruption • Motivation – cost savings

26. Updated Bid – Provision 2

27. Provisions 1 & 2 - Observations • Loss of rebate dollars will result in either reduced benefits or increased MA premiums • These provisions make getting the 4 star rating paramount – almost impossible to maintain benefits without that bonus • These numbers assume that MA plan cost trend = FFS cost trend • Benchmark trends with FFS cost • Bid rate trends with MA plan cost

28. Provision 3 – MA Coding Factor • Coding factor explicitly reduces MA risk scores – direct reduction in MA payments • Factor for 2010/2011 was 3.41% • HCR mandates factor of at least 4.71% by 2014 • HCR mandates factor of at least 5.71% by 2019 • This means that risk scores will decline by at least 2.3% by 2019 • Benchmark & Bid are risk adjusted, but this will decrease plan sponsor margin and reduce rebates slightly • Motivation – cost savings

29. Provision 4 – Minimum Loss Ratio • Establishes a minimum loss ratio (LR) for MA plans at 85% starting in 2014 • Plans that have LR below 85% must pay back to CMS the difference between current LR and 85% • If LR is below 85% for 3 consecutive years – MA plan cannot enroll new members • If LR is below 85% for 5 consecutive years – plan contract will be terminated • This LR will be enforced at the entity level, not the plan sponsor level • This also applies to Part D plans • Motivation – cost savings?

30. Loss Ratio Floor – Potential Issues • Creates a very narrow financial window for plan sponsors • Loss ratios are not that stable/predictable • Bids must be filed over a year in advance – bid LR may not equal actual LR • Potentially severe sanctions – no allowance/buffer – 84.5% LR treated same as 75% LR • Cannot have cross regional/entity subsidization unless under same legal organization • Calculated including 5% quality bonus – gaining or losing that bonus could determine whether LR is in acceptable range

31. Loss Ratio Floor – Potential Issues • Creates possible adverse incentives • Assume admin ratio is 10% - at 85% LR profit is 5% • Plan Sponsors will still follow profit maximization strategy • What if a plan does a really good job at managing cost and actual loss ratio is 80% • A plan can reduce quality improvement programs (which uses admin dollars) – maybe lose the quality bonus • New admin ratio is 8% and LR is now 85% - profit is 7% • The plan is better off financially by doing a less comprehensive job of managing the health of their members

32. Loss Ratio Floor – Potential Issues • Current legislation incentivizes plan sponsors to manage costs as efficiently as possible • Lower costs = more bid rebate dollars, better benefits, & better competitive position • Lower costs also = higher profit margins • Loss ratio floor distorts these incentives • Profit maximization <> cost minimization • Plans may try to bid more strategically – may cut benefits further to maintain what little margin is still attainable

33. Provision 5 – Filling in Donut Hole • Current 2010 Part D benefit design: • Beneficiary pays 100% up to $310 deductible • Beneficiary pays 25% up to ICL ($2,830) • Beneficiary pays 100% through donut hole ($6,440) • Beneficiary pays 5% above catastrophic threshold • Proposal to reduce the cost sharing on generic drugs in the donut hold • Phase in at 7% coinsurance reduction per year starting in 2011 down to 25% in 2020 • Motivation – to reduce beneficiary cost sharing liability & incentivize generic utilization

34. Provision 5 – Filling in Donut Hole • Positive for member • Reduces beneficiary liability • Increases incentives for increased generic utilization • Increases the cost of offering Part D • Sponsors may choose to remove Part D rather than increase premiums or reduce MA benefits • Stand alone PDPs may increase premiums or restrict drug formularies – hurts beneficiaries on Original Medicare as well • Unclear whether this will affect provider behavior – may still prescribe brand drugs

35. What Does HCR Mean for MA? • Quick Recap of provisions • Set MA benchmarks based on FFS target % • Rebate % and quality bonus based on star rating • Increased MA coding factor – reduce risk scores • Minimum loss ratio floor at 85% • Phase down of coinsurance % for generic drugs in donut hole

36. What does this Mean for MA? • Changes to benefit offerings • Many of the ancillary benefits that attract members to MA will be reduced or removed • Cost sharing will trend upwards towards FFS equivalent levels • Member premiums will increase • Some plans/regions will be hit harder than others • Urban areas generally have lower FFS targets – will see the greatest reduction in benchmarks • Urban areas may have more sophisticated providers – may manage their FFS costs better already • Plans with sicker populations may not be able to maintain products designed for those members (SNPs)

37. What does this Mean for MA? • Changes to competitive balance • Only plans who can manage costs well can survive • Will force many plan sponsors out of business • Good for overall efficiency/cost savings of MA • Bad for the members – reduces options • Even successful plans may have to pare down plan offerings – Chronic SNPs may disappear • Some regions may become unviable for MA – will cause member disruption • MA-PD plans may not be able to afford the PD component unless it is funded through member premiums

38. What can a MA plan do to survive? • It will be difficult going forward but there are things a MA plan can do to improve its prognosis: • Attain & Maintain 4 star quality rating • 5% benchmark bonus could be the difference • Relies on good relationships with providers for HEDIS scores, delivery of care ratings, & managing chronic conditions rating • Solid customer service & member retention • Offer the most consistent benefits that the plan can afford to minimize year over year fluctuations

39. What can a MA plan do to survive? • Strong provider relationships • Helps maintain high star ratings • Manage the health of the members – improves member satisfaction & reduces healthcare costs • Ensure members are accurately coded so that risk scores reflect the member’s health status – chronic conditions must be coded every year to maintain risk scores • Benefit design – providers are a window into the member’s needs – can use this information to help make decisions during bid process

40. What can a MA plan do to survive? • Membership growth & retention • Larger membership base = economies of scale -> lower admin cost % • More stable population – easier to bid & predict costs & loss ratios to meet the LR floor requirements • Stable year over year performance means fewer benefit changes are required • If margins are reduced, the plan sponsor must make it up through volume to pay for fixed admin costs

41. What can a MA plan do to survive? • As plan sponsors exit the marketplace, the biggest competition will be FFS Medicare • Key benefits (ancillary benefits, MOOP, Part D) must be maintained to differentiate MA from FFS • Branding/marketing will be essential • Highlight the benefits of HMO – ease of claim payments, strong relationship with PCP, etc. • Member communications & customer service key to maintaining member satisfaction

42. Summary • MA was designed with a purpose • Improve efficiency of healthcare delivery through managed care • Offer a valuable alternative to Medicare FFS • To provide options that address the needs of a disparate Medicare population • Provide members with additional benefits including drug coverage in one integrated package • Improve the beneficiary’s health status through strong relationships with PCPs • Allow the Medicare program to reap the benefits of capitalism without compromising the quality of care (natural competition promotes efficiency)

43. Summary • HCR has presented the most significant changes to MA since 2003 • It is possible to survive and still achieve the goals that MA was designed for but it won’t be easy… • Actuaries will be essential • Bid Development • Financial Projections • Modeling the impact of future changes

44. Discussion/Questions • Thank you for your time