By Paul Keckley

Late last Friday after the financial markets closed, the Centers for Medicare and Medicaid Services (CMS) issued its annual notice of 2015 payments to private insurers who sell Medicare Advantage plans to seniors. Its determination that a 3.55% cut is in order was spelled out in a complicated 148-page explanation of its methodology.

The net impact of changes to “coding intensity” adjusted for geographic variation essentially means insurance companies would see a 1.9% cut in their payments per Avalere’s calculations.

But there’s more to the story than the Medicare Advantage payment adjustment. The difference between last year’s Round One rate negotiation and this year’s Round Two is significant.

Background

Medicare Advantage (MA) plans enroll 28% of seniors. It is popular: enrollment increased from 5.3 million in 20104 to 16 million today—a 9% increase last year alone.  MA plans are required to offer a benefit “package” at least equal to Medicare’s covering everything Medicare allows, but not necessarily in the same way.

Most insurance companies do more by bundling supplemental services attractive to seniors like skilled nursing, dental care, wellness programs and others.  And perhaps most important: the plans provide call centers and other services to assist seniors in navigating their Medicare coverage.

The origins of the Medicare Advantage program trace to four pieces of legislation:

• The Balanced Budget Act of 1997 created the Medicare Choice program as a managed care alternative to traditional fee for service Medicare.
• The Medicare Modernization Act of 2003 changed the program to Medicare Advantage and introduced tighter coverage requirements while also paying insurers 112% of fee –for-service Medicare rates  (MedPAC) to accelerate savings resulting from improved care coordination.
• The Patient Protection and Affordable Care Act of 2010 introduced a 5 star rating system to help seniors compare plans linked to an $8.35 billion bonus program for highly rated plans, a new requirement that 85% of MA premiums be spent on medical care, and a scale-back of the differential between MA and Medicare FFS payments.
• The Budget Control Act of 2011 locked in sequester cuts over 10 years including 2% cuts to Medicare that include payments to Medicare Advantage plans.

In 2014, Medicare will pay $154 billion to Medicare Advantage plans. Last year, CMS proposed 2.2% in cuts to Medicare Advantage plans but ultimately changed it to a 3.3% increase by changing the underlying formula. Insurers said the net effect was a 6.5% cut when all the requirements of the law were factored. That was Round One.

In Round Two, the story is more complicated due to a cascade of issues facing the insurance industry.

Short term, what to expect…

Fierce lobbying: 40 Senators including 6 Democrats attempted to pre-empt Friday’s announcement in a Feb. 14 letter, calling on the administration to essentially hold Medicare Advantage rates steady. Final rates will be released April 7, so lobbying by America’s Health Insurance Plans will be fierce.

Concession by CMS: Just as in the past, the likely outcome will be a change in the formula that results in a less severe cut. The reasons are 3: the actual formula is subject to change because its assumptions merit challenge, the MA program is popular with seniors and it’s election year. Incumbents on both sides don’t want to tangle with the problem.

But while plans and the government are negotiating in Round Two, some important policy questions will surface:

What’s the future of Medicare? How can it be fixed? Every politician expresses concern and some outrage at government spending, but reducing costs of Medicare is too delicate for most to handle. Medicare and Social Security are the two biggest expenses items in the federal budget.

It’s one thing to campaign against government spending; it’s another to vote against cuts unless an alternative cost reduction is proposed.

In the 2012 Presidential Campaign, Congressman Ryan brought the Romney ticket a solution: voucherize Medicare.

The public rejected it, and discussion of a voucher has been mute since. Proposals to save Medicare by raising its age eligibility, means-testing premiums, creating a pre-Medicare program and other proposals spark partisan rancor. So with 8000 new enrollees daily and medical inflation accelerating, Medicare costs will likely soar as total annual health spending returns to pre-downturn rates of 6% for the foreseeable future (CBO).

Though it’s campaign season, the need to discuss the sustainability of the Medicare program is urgent. That discussion must include how premiums are set, how care is delivered and paid for that’s not necessary and how end of life matters are best handled.

Round Two is likely to spark renewed attention to Medicare reforms that can reduce its costs long-term. Plans will encourage expansion of Medicare Advantage enrollment and fight against deeper cuts that would discourage enrollment.

What’s the role of insurance? How will the insurance industry’s co-dependence with the government play out long-term? The insurance industry and federal regulators are co-dependents. The initial rollout of health exchanges has been disappointing: insurers were counting on 7 million new enrollees signing on by March 31, including 38% who are young and healthy.

That number will be closer to 5 million who enroll and actually pay their premium, and only 25% of these will be young invincibles. Add the new $8 billion sales tax on health insurance in 2014 that increases to $14.3 billion in 2018, delays in the employer mandate for companies, and the potential that the individual mandate might be delayed or modified—cumulative bad news for plans!

The only good new for plans—that Medicaid expansion in states that provides a strong market opportunity—hardly offsets this cascade of issues. Their windfall of the past three years (Morningstar said investor owned plans increased profits 47% last year) is a cushion that will evaporate for many as they restructure their operating models away from employers to individuals and the government as their primary targets.

As premiums increase, coverage decreases, so the long-term outlook for the insurance industry is uncertain. So an adjustment to the MA rate might keep the MA program afloat, but it will fall far short of providing stability to the health insurance industry going forward. Consolidation among plans will accelerate; diversification and globalization will separate winners and losers, and like cable TV, airlines and financial services, the fittest and biggest will survive.

In the Round Two debate, policymakers and a host of health experts will be discussing the long-term role of private insurance in our system of care. And new policies might fundamentally alter a mainstay of the U.S. system for the past 80 years.

What’s the trickle down impact of insurance-government deals on the rest of the health system? The resolution of MA payment rates impacts every sector in our system of care. Likewise with managed Medicaid, employer-sponsored insurance and the individual market.

Historically, the insurance industry has navigated the challenges of its state and federal oversight opportunistically, often securing ‘favored nation’ protections that reinforce their role at the top end in the health care food chain. They place bets on the future via their premiums and plan design.

They calculate their medical and administrative costs and reserve requirements to comply with state and federal law, and get the financial results they need by raising premiums and lowering payments to doctors, hospitals, labs and everyone else.

Until now, each sector has fended for itself, but the impact of Medicare cuts including MA rates might precipitate strong reactions from other sectors and intensify harsh feelings between providers and plans. So the impact of Friday’s proposed ruling, and others to follow, could fuel providers to go on the offensive if they’re odd man out in the negotiations.

For many, Medicare rates do not cover actual costs now. Their red ink will increase. MA negotiations between government officials and the insurance industry that result in deeper cuts to providers will be an important part of the story to follow.

Medicare Advantage is a popular program with seniors and profitable program for health insurers. But the Round Two negotiation is about more than payment adjustments to Medicare Advantage plans. This time, it’s about the co-dependence between the federal government and private insurance industry, and its net impact on the rest of the system.

Stay tuned in Round Two. It matters to everyone.

Paul Keckley, PhD is an independent health care industry analyst, policy expert and entrepreneur. Keckley most recently served as Executive Director of the Deloitte Center for Health Solutions and currently serves on the boards of the Ohio State University Medical Center, Healthcare Financial Management Leadership Council, and Lipscomb University College of Pharmacy. He is member of the Health Executive Network and advisor to the Bipartisan Policy Center in Washington DC.  Keckley writes a weekly health reform newsletter, The Keckley Report, where this post originally appeared.