CMS Starts Tightening Screws on Medicare Plans

In a prelude to what could be draconian cuts in payments to Medicare Advantage plans, the Centers for Medicare and Medicaid Services (CMS) has announced several changes in how it review bids for contract renewals.

CMS will scrutinize Medicare Advantage companies that don’t cap out of pocket expenses at $3,400 or less to see if they’re discriminating against sicker enrollees. And insurers can’t charge sicker, poorer patients more than they would pay if they were enrolled in traditional Medicare.

To reduce confusion in the enrollment process, the government will also eliminate nearly 1,400 Medicare Advantage plans that have very few members. This will still leave about 5,600 plans for seniors to choose among, and only about 1 percent of enrollees will have to change plans, according to CMS.

While these changes symbolize the Obama Administration’s determination to protect beneficiaries from private insurance companies, they should not have much effect on the major insurers in the Medicare Advantage field, such as United and Humana. The real crunch on these companies will arrive when CMS cuts its payments to them. The Administration’s budget proposal includes $176.6 billion in savings over 10 years from expected changes in payments to Medicare Advantage plans, which the President has said are excessive.

The question is whether any insurance companies will remain in the Medicare Advantage game if their payments are lowered by as much the government wants. Humana, which derives about 70 percent of its revenue from government contracts, hit a bump in the road last year when its medical loss ratio jumped to 83 percent, mainly because of its Medicare Advantage business. It responded by hiking premiums and trimming benefits, and it was expected to charge premiums to all Medicare Advantage enrollees across the country, starting this year.

What Humana—and the rest of the industry—does will be affected by Medicare’s payment changes for 2010, which will be announced April 6. Humana last month said that it viewed the preliminary rates as “unusual and inconsistent with decades of experience and with past CMS practice.” It said that these rates “would have a significant adverse impact on 2010 premiums and benefits for Medicare Advantage members if [they] become final.” A “formal industry comment” from the “health benefits community” is forthcoming, Humana said.

If insurers like Humana have difficulty making a profit on these plans, which cost the government 14 percent more than traditional Medicare, it will be even harder for them to be profitable after the cuts come down. Of course, there will be political pressure not to simply dump the 10 million seniors enrolled in these plans—many of whom would have to pay more for Medigap insurance if they went back to traditional Medicare. But this happened once before, after the Balanced Budget Amendment of 1998, and millions of seniors were cut adrift. Back then, the insurance companies made up the loss of this business on the commercial side. It won’t be so easy to do that now. Perhaps that’s why they’ve suddenly become born-again converts to health care reform.