Medicare Advantage appears to be thriving: Three takeaways from our latest research

Health Care Current | March 20, 2018

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory, and legislative changes.

My Take

Medicare Advantage appears to be thriving: Three takeaways from our latest research

By Sarah Thomas, Managing Director, Deloitte Center for Health Solutions, Deloitte Services LP

On March 23, the Affordable Care Act (ACA) will be eight years old. Many industry observers (myself included) expected the ACA would create a challenging future for the Medicare Advantage (MA) program. Here’s why: The Medicare Payment Advisory Commission (MedPAC) annually made the case that Medicare was overpaying health plans that participated in the MA program. In response, lawmakers used the ACA to revamp the program’s payment structure, gradually reducing payments to health plans over several years. The savings generated by reducing MA rates helped finance part of the ACA’s coverage expansion. The law also established a system that would reward MA plans that achieved high-quality ratings. Despite these significant hurdles, MA has emerged successful overall, both in terms of enrollment and financial performance.

Deloitte’s Center for Health Solutions recently conducted an analysis of health plan financial performance in both Medicare and Medicaid between 2011 and 2016, covering the years since the ACA payment changes. Our research is based primarily on information health plans are required to file with the National Association of Insurance Commissioners (NAIC). There are lots of interesting facts in this report, but here are my three main takeaways on the performance of Medicare. (Stay tuned for next week’s issue where I’ll discuss some takeaways from the Medicaid managed care findings).

  1. Medicare has become important to the overall health insurance sector: Medicare revenues now make up about 20 percent of total revenue and 35 percent of total underwriting gains for fully insured health products. Underwriting gains for our analysis are the profits that an insurance company makes after paying all claims, and incurring general and administrative expenses.
  2. Big companies have done well: The two biggest players in MA, Humana Inc. and UnitedHealth Group, had the strongest performance. In 2016, the most recent year for which we have data, the top two health plans generated 80 percent of aggregate underwriting gains and 46 percent of aggregate revenue. While these two companies earned solid profit margins, the remaining MA participants, on average, saw much lower underwriting gains in 2014 and 2015.1
  3. Many smaller plans and new entrants faced challenges: Among all MA health plans, median underwriting levels were below the breakeven point between 2014 and 2016. More than 50 percent of plans reported losses during this period. Health plans entering the MA business typically faced large losses during the first few years. However, many of these new entrants almost doubled their revenue each year they participated in MA, which helped reduce underwriting loss margins over time.

What might explain some of these results?

In looking at our findings, I had two main questions. How is the MA program able to succeed despite payment cuts? And, is size the key to success in the MA space? I don’t have the answers, but here are a few thoughts:

  • MA is popular among many Medicare beneficiaries. MedPAC’s latest data book shows enrollment has grown from 11.7 million beneficiaries in 2011, to 18.5 million in 2017—an increase of 58 percent. The program typically offers lower cost sharing—and low (or zero) premiums—relative to Medicare supplemental plans. Once beneficiaries enroll, their health care and experience tends to be good. MA outperformed fee-for-service (FFS) Medicare on all 16 clinical quality measures, according to a recent study of MA enrollees in California, Florida, and New York—the three states with the largest MA populations. The study also found that MA enrollees reported better experiences overall.2
  • Outside of the changes called for by the ACA, MA has remained quite stable in terms of regulatory requirements. Changes to the source of data used for the risk-adjustment system will affect payment, but those changes were announced well ahead of time and phased in gradually. Moreover, in 2011, the US Centers for Medicare and Medicaid Services (CMS) launched a demonstration to accelerate quality bonus payments for MA plans that achieved four- and five-star ratings.3 That boosted payments to some health plans and helped offset expected losses.

Why are the largest health plans so dominant in MA?

With insurance, a deeper risk pool is typically associated with an ability to more accurately predict and mitigate against unanticipated risk. Of course, greater market presence also helps when negotiating payments with health systems and clinicians. Moreover, large health plans have better scale for marketing and advertising, and a dedicated and sophisticated team to navigate Medicare’s many participation requirements.

I also suspect that the bigger players, and their years of experience with the Medicare enrollee population, have figured out some of the “holy grail” elements of managed care. This includes the ability to accurately predict which patients are most likely to be hospitalized, understanding how to target care coordination services, and knowing which providers and clinicians are the best at providing care. These plans also might have figured out the best way to encourage substitution toward less expensive care, such as outpatient rather than inpatient surgery.4

What is next for Medicare Advantage?

Republicans—both those in the Congress and within the administration—are typically great supporters of the MA program, and I do not anticipate any major disruption to the program in the near term.

MA plans have the opportunity to innovate and experiment in a couple of areas. One is around the Medicare Advantage Value-Based Insurance Design (VBID) model. This program gives MA plans the option to offer supplemental benefits or reduced cost sharing to enrollees who have certain chronic conditions. The idea is to lower out-of-pocket costs for the services that are of highest clinical value. The model tests whether reducing expenses for these beneficiaries can lead to better health outcomes. CMS continues to expand this program both in terms of geography and the chronic conditions covered. I look forward to seeing some of the results.

It also will be interesting to see how health plans align with the delivery system reforms outlined in the Medicare Access and CHIP Reauthorization Act (MACRA). As with the VBID initiative, this is a voluntary option, but one that could stimulate some interesting innovations in MA. Beginning in 2021, health care professionals can qualify for Alternative Payment Model incentive payments through Other Payer Advanced APM thresholds. For 2021 and 2022, qualifying APM participants (QPs) must receive at least 50 percent of the sum of payments by Medicare and other payers through Advanced APMs and Other Payer Advanced APMs. As part of this option, CMS will evaluate MA contracts and determine if they meet the electronic health record (EHR), quality measure, and nominal risk requirements to qualify as Advanced APMs.

CMS’s emphasis on including other payer options means that health plans—both in MA and commercial lines of business—could see pressure to align payment arrangements with MACRA requirements to help clinicians meet qualifying thresholds for incentive payments.

Medicare Advantage has provided great care to Medicare beneficiaries over the years, and I look forward to watching the program continue to grow and innovate.

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1 Our data sources do not include MA underwriting gain information from California. Approximately 15 percent of national MA revenue in our data comes from California.
2 National Center for Biotechnical Information:
3 CMS:


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In the news

Senate gets mix of perspectives on 340B

The Senate Committee on Health, Education, Labor, and Pensions (HELP) held a hearing on March 15 to discuss what changes, if any, should be made to the 340B Drug Discount Program.

The four witnesses represented America’s Essential Hospitals, Pharmaceutical Research and Manufacturers of America (PhRMA), Carolina Health Centers, Inc., and the American Society of Health System Pharmacists. The three hospital-affiliated witnesses expressed support for 340B as it exists, and the PhRMA witness pushed for changes to the program. The two sides did not agree about how much money the program saves.

Democratic members of the committee—including newcomers Tina Smith (Minn.) and Doug Jones (Ala.), as well as familiar faces like Elizabeth Warren (Mass.)—suspected pharmaceutical companies have a profit motive for opposing 340B. Republicans, on the other hand, including Bill Cassidy (La.) and Todd Young (Ind.), questioned how hospitals use the money they save through the program.

HELP Committee Chairman Lamar Alexander (R-Tenn.) concluded the hearing by asking all the witnesses to provide additional and specific financial information. He said the committee will hold at least one more hearing on this topic.

Related: According to a recent report by L&M Policy Research, a membership organization that represents non-profit hospitals, 340B hospitals provide 27.4 percent more uncompensated and unreimbursed care than other hospitals. Only 38 percent of the hospitals in the study participated in the 340B program, but those hospitals provided 60 percent of uncompensated care.

FDA looks to regulate nicotine levels in cigarettes

The Food and Drug Administration (FDA) is considering regulations that would require cigarette manufacturers to reduce nicotine to minimally addictive or non-addictive levels. In an advance notice of proposed rule making, the agency said the move is part of a regulatory framework to reduce tobacco-related deaths. The notice was published in the Federal Register March 16.

Tobacco, primarily cigarette smoking, is responsible for the deaths of more than 480,000 Americans each year, FDA Commissioner Scott Gottlieb, M.D., said in a prepared statement. Moreover, the use of tobacco costs nearly $300 billion a year in direct health expenses and lost productivity, he added. Research funded by the FDA predicted that a reduction in nicotine levels could lead to fewer smokers and 8 million fewer tobacco deaths through the end of the century.

The agency is seeking comments on where maximum nicotine levels should be set to protect public health, and how new requirements should be implemented.

Gottlieb said that when he took over the agency last May, he expected tobacco use, particularly cigarette smoking, would be one of the top issues the FDA would need to address to advance public health. He called the decision “a pivotal step” in eliminating the addiction component of combustible cigarettes.

Star-ratings methodology appears to favor specialty hospitals, study finds

Specialty hospitals tend to outperform major teaching hospitals under CMS’s recently revamped quality ratings methodology, according to an analysis from the trade publication Modern Healthcare. An analysis conducted by the Deloitte Center for Health Solutions noted the number of top-rated teaching facilities, while still low, increased under the new formula.

CMS developed its Hospital Quality Star Rating system in 2016 to help consumers more effectively evaluate overall hospital quality, as described in a report from the Deloitte Center for Health Solutions. Last December, the agency revised the formula to improve the accuracy and fairness of the ratings. The Modern Healthcare analysis determined that a majority of specialty hospitals received CMS’s highest score of five stars, while a small number of major teaching hospitals earned the same score.

According to a Deloitte analysis, the formula change resulted in four times as many five-star hospitals and twice as many hospitals on the low end of the ratings spectrum. While major teaching hospitals represent a minority of five-star hospitals, their numbers are higher under the revised formula. The percentage of 5-star-rated major teaching hospitals increased from 2 percent (under the former methodology) to 10 percent, under the revised system, Deloitte researchers determined.

Under the Stars Program, more than 4,000 hospitals are evaluated on a variety of measures within seven broad quality categories (mortality, safety of care, readmissions, patient experience, effectiveness of care, timeliness of care, and efficient use of imaging).

Health sector added 19,000 jobs in February

The health care sector added 19,000 jobs in February, which is fewer than the 23,700 that were added in January, according to the latest figures from the Bureau of Labor Statistics. Over the past 12 months, the health care sector added 290,000 jobs. The US job market grew by 313,000 jobs in February, and the national unemployment rate remained stable at 4.1 percent.

Note: Physician office jobs are categorized under ambulatory care jobs. Home health services also increased in February.

Related: More than 30 percent of hospitals have difficulty recruiting clinicians and administrators, according to a study published by the hospital staffing firm Leaders for Today. Two out of three respondents rated their hospital’s quality and speed-of-hiring process as “not good” or “poor.” Hospitals cited a lack of qualified candidates as part of the issue (see the Hospital CEO Survey: Chapter 4: How do health systems invest in talent? from the Deloitte Center for Health Solutions).

Federal policy changes could cause steep premium hikes by 2021

Recent federal decisions could continue to cause instability in state health insurance markets, according to a national analysis from Covered California, the state-run public insurance exchange. Between 2019 and 2021, premiums could rise an average of anywhere from 35 to 90 percent. While the extent of this projected increase varies by state, the analysis expects as many as 17 states to see increases of more than 90 percent.

The authors attribute this potential trend to the elimination of the ACA’s individual mandate penalty, the expansion of short-term plans, and the absence of federal efforts to stabilize the individual market. They recommended several policies that state lawmakers could institute to help contain rate increases. These include the creation of reinsurance programs, funding of cost-sharing reduction subsidies, and establishment of state-specific coverage mandates.

The Covered California analysis considered CMS risk scores, marketplace enrollment trends, number of available insurers, and 2017 premiums and tax credits. It uses reports from several groups, including AHIP, Harvard Medical School, and The Urban Institute. Some detractors have called the method into question.

Related: A recently revised Senate bill could reduce premiums by 10 percent in 2019 and by 20 percent the following year, according to preliminary estimates from the Congressional Budget Office. The legislation, introduced last year by Sens. Lamar Alexander (R-Tenn.) and Patty Murray (D-Wash.) to help stabilize the individual insurance market, was revised recently by Alexander and Senator Susan Collins (R-Maine).

NAIC comments on DOL’s association health plan proposal

States must retain the authority to oversee and regulate Multiple Employer Welfare Arrangements (MEWAs), the National Association of Insurance Commissioners (NAIC) said in a letter to the US Department of Labor (DOL) this month.

A MEWA forms when two or more employers join together to provide health insurance to their employees. Early this year, DOL proposed a rule that would expand the definition of “employer” to include Association Health Plans (AHPs), including MEWAs (see the January 9, 2018 Health Care Current). The NAIC letter cited MEWAs’ troubled history, which is marked by inefficiency, fraud, and abuse, and strongly cautioned DOL against instituting the proposal as written. To avoid corruption, waste, and fraud going forward, NAIC suggested that DOL should consider:

  • Not exempting from state law certain MEWAs that are not fully insured,
  • Defining “region” and “metropolitan area,” 
  • Using the Internal Revenue Code definition of “working owner,” and 
  • Including language that prohibits discrimination based on benefit design, membership requirements, or dues structures.

To ensure the final rule goes into effect smoothly, NAIC also asked DOL to coordinate with states to provide notice requirements for employers, and to postpone the effective date until 2020.

Actuaries outline drivers of rising prescription drug costs

The American Academy of Actuaries released an issue brief that examines what it sees as the lead drivers of rising prescription drug costs. The brief, which was developed by the Academy’s Prescription Drug Work Group, outlines primary cost drivers, the effect of prices on health care stakeholders, and it suggests approaches to combat the rising costs.
According to the report, primary drug-cost drivers include:

  • Utilization changes 
  • Unit cost or per-dosage cost increases 
  • Delays in the introduction of generic drugs
  • Higher cost inflation in the US for pharmaceuticals compared to other countries
  • The need to compensate multiple stakeholders throughout the supply chain

The brief goes on to outline actions health care organizations and the federal government could take to address spending. The Academy’s mentioned strategies include outcome-based reimbursement, pricing transparency, reference pricing, and benefit plan modifications.

(Source: American Academy of Actuaries, “Prescription drug spending in the US health care system”, March 2018)

MACPAC submits annual March report to Congress

Congress should streamline managed care authorities and investigate possibilities within telehealth, the Medicaid and CHIP Payment Advisory Commission (MACPAC) said in its March report.

More than 80 percent of Medicaid beneficiaries are enrolled in managed care. Streamlining the Medicaid managed care authorities would reduce administrative burdens without compromising protections for members, according to the commission. MACPAC recommended that Congress amend section 1932 to allow states to enroll all beneficiaries in managed care, and amend section 1915 to allow states to waive freedom of choice and selective contracting provisions. In addition, they said Congress should extend the section 1915 waiver renewal period from two years to five years.

MACPAC also recommended that Congress research state experiences with telehealth in Medicaid. Presumably, telehealth provides high-priority services to beneficiaries in areas with limited access to different types of providers. Most state Medicaid programs cover telehealth services to some extent. But because every state has unique needs, commission members said states would benefit from research on outcomes, opportunities, barriers, and limitations of telehealth in Medicaid.

The report also provided MACPAC’s mandatory annual analysis of Disproportionate Share Hospital (DSH) payments. As seen in prior reports, the commission found little evidence of a relationship between DSH allotments and uncompensated care costs. Due to the Medicaid expansion, costs associated with charity care have continued to decrease, while the Medicaid shortfall has increased.

Breaking Boundaries

Some barber shops are on the ‘cutting edge’ of heart-disease prevention

Access to health care has long been a challenge in the US, especially when it comes to prevention. People face many barriers to getting preventive services, including not having insurance, trouble taking time from work, and no transportation to visit a clinic. The Smidt Heart Institute, part of Cedars-Sinai, recently partnered with barbershops in the Los Angeles area to address some of these barriers among black men.

Uncontrolled hypertension is a leading cause of premature death among black men. Bringing blood-pressure testing to the barbershops has enabled men (who might have no idea they had high blood pressure) to get a diagnosis and receive critical information about controlling it. People can go for years without realizing they have hypertension and have an increased risk for heart attack and stroke. The Smidt Heart Institute’s program includes a pharmacist in the barbershop who can work patients and with their physicians to prescribe blood-pressure medication and suggest lifestyle changes.

The New England Journal of Medicine recently published the program’s findings. Results showed that 64 percent of participants (who worked with their barber and a pharmacist at the barbershop) were able to lower blood-pressure levels to the normal range.

The Centers for Disease Control and Prevention (CDC) funded a separate barbershop initiative called Brothers (Barbers Reaching Out to Help Educate Routine Screenings) in 2014-2015, throughout the Mississippi Delta. The Mississippi Department of Health recruited and trained barbershop workers to read blood pressure screenings and discuss risk factors with customers. During appointments, barbers talked to their clients about heart health, took their blood pressure, and referred them to a physician if they needed follow up.

The 14 barbershops involved in that program collectively screened 686 men, according to the published findings. Only 35 percent of the men said they had a doctor, and 57 percent did not have health insurance. Among the men who received blood-pressure readings, half were diagnosed with prehypertension, and more than one-third had high blood pressure. The findings, published in the journal Preventing Chronic Disease, demonstrated that the program provided needed care and gave public health care workers a better idea of how prevalent heart disease in the region.

Some public health teams have launched innovative prevention programs in churches. Based on this growing body of research, the CDC is considering expanding programs that help community health workers reach minority populations that have a disproportionate risk of disease and death, but have barriers to accessing regular health care.

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