Medicare Advantage Premiums

In 2010, one quarter of Medicare beneficiaries chose capitated plans through the Medicare Advantage (MA) program. According to MedPAC, “[MA] coverage must include all Medicare Part A and Part B benefits except hospice.  All plans, except PFFS [private fee-for-service] plans, must also offer an option that includes the Part D drug benefit.”

How do private health plans set premiums for their Medicare Advantage plans?  Can they charge any price they wish or are they regulated by the government?  How will Health Reform affect MA plans?

Today, the Healthcare Economist provides the answers.

Medicare Advantage Today

In fact, the answer is that although Medicare Advantage plans can charge any price they wish, the amount the beneficiary pays is somewhat regulated.  In each county, the Centers for Medicare and Medicaid Services (CMS) sets a benchmark premium based on are based on the county-level payment rates used to pay MA plans before 2006.

If a plan’s sets its bid (i.e., premium) above the CMS benchmark, then the plan receives the base rate and the enrollees have to pay the difference between the bid and the benchmark in their annual premium.  If the bid is below the benchmark, then the plan’s base rate is it’s standard bid and gets a rebate.  The rebate is 75% of the difference between the plan’s actual bid and its case mix-adjusted benchmark.  The plan must then return the rebate to its enrollees in the form of supplemental benefits, reduced cost sharing, or lower premiums.

Medicare uses beneficiary age, sex, Medicaid eligibility and prior health conditions to create a hierarchical condition category (HCC) score which is used to risk adjust base rate payments according to beneficiary case mix.

Post Health Reform

After Health Reform, however, these rules are changing. Benchmarks will be affected by MA quality. Here’s the breakdown:

• First Quartile: 95%
• Second Quartile: 100%
• Third Quartile: 107.5%
• Fourth Quartile: 115%

This makes sense since high cost MA plans may also be high quality ones.  High quality plans will also get additional bonuses.

• 2012: Bonus equals 1.5% of local FFS costs
• 2013: Bonus equals 3% of local FFS costs
• 2014: Bonus equals 5% of local FFS costs

MA plans will also receive bonuses based on quality.

• 4.5+ stars: 70% of difference between bid and benchmark
• 3.5 -4.4 stars: 65% of difference between bid and benchmark
• <3.5 stars: 50%of difference between bid and benchmark

To judge the quality of care, utilization patterns, and also improve improve risk-adjustment, MA plans will begin submitting encounter (i.e. utilization) data in January 2012.