Mid-Atlantic Actuarial Club
Eric Mattelson, FSA
October 7th, 2010
1

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?
2

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…
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
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
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

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
5

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
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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
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

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
8

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
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
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
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


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 innetwork, OON cost sharing may be higher
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
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
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
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
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
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
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
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
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
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

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
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
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
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
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FFS Cost
Quartile
Target
Benchmark %
of FFS
Current
Benchmark %
of FFS
% of Aug 2010
MA Enrollees
1
95%
105%
45%
2
100%
109%
23%
3
107.5%
115%
15%
4
115%
135%
17%
Total
101.4%
110.4%
100%
19

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
20

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)
21

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
22

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
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
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
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
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
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Original
Bid
After
Provision 1
After
Provision
1& 2 –
<3.5 Stars
After
Provision
1& 2 – 3.5
Stars
After
Provision
1& 2 – 4
Stars
After
Provision
1& 2 – > 4
Stars
Benchmark
$1,000
$918.48
$918.48
$918.48
$964.40
$964.40
Bid
$800
$800
$800
$800
$800
$800
Savings
$200
$118.48
$118.48
$118.48
$164.40
$164.40
Rebate
$150
$88.86
$59.24
$77.01
$106.86
$115.08
41%
61%
48%
29%
23%
$888.86
$859.24
$877.01
$906.86
$915.08
6%
10%
8%
5%
4%
Rebate
Reduction %
Plan
Revenue
Plan
Revenue
Reduction %
$950
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


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
27

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
28

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?
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
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
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
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
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
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
32

Current 2010 Part D benefit design:
Beneficiary
Beneficiary
Beneficiary
Beneficiary

pays
pays
pays
pays
100% up to $310 deductible
25% up to ICL ($2,830)
100% through donut hole ($6,440)
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
33

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
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
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
35

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)
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
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
37


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
38

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
39

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
40

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
41

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)
42



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
43

Thank you for your time
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