I thought of subtitling this post, "Forget the Death Panels, this is what Grandma Really Needs to Worry about," but let's leave grandma out of this. In April 2009, the Obama administration surprised Medicare Advantage plans by cutting the 2010 revenue they give to insurance plans by around 3-5%. Previous year the revenue increased by 3-5% and medical costs certainly aren't slowing down.
Medicare gives insurance plans $800-$1000 per member per month (depending on geography and health of the the members) to provide benefits, cover administrative costs, and make a profit. If the plan can cover all of those with that money, the member pays nothing. However, most plans do not cover all their costs and charge the member a monthly premium. While these revenue cuts were announced in April, we just saw the impact on October 1st which was the first day that insurance plans could reveal their 2010 plan info and premiums. The results already very clearly showed the impact of the cuts and more are expected to come in future years.
With these revenue cuts, Medicare Advantage product managers had only a few options which were 1) lower profit, 2) pay providers and hospitals less, 3) reduce benefits by increasing what the member has to pay for a service, 4) raise the price.
With regards to 1) profit, an insurance plan is happy with a 4% margin which is about matches the revenue cut. Most non-insurance folks would say, Problem solved, no profit for you this year. However, additional cuts are expected in the future years so even if an insurance company would operate Medicare at no profit, next year, they would operate at a loss. Okay, you can stop laughing at the idea of an insurance company not making any profit on a product line.
With 2), pay providers and hospitals less, I can hear providers laughing just as hard.
For the 2010 plans, that leaves 3) and 4) where grandma pays more for less- sorry, I said that I would leave her out of it. One article reports that nationally, monthly premium increased from $32 to $39. However, it's unknown how benefits were reduced. Given the sheer math involved, seniors will absorb some of that 3%-5% revenue cut which amounts to $25-$40 per month. Insurance companies will keep at least a 2% margin which is pretty much the margin of error for ensuring that they will at least breakeven. That leaves at least $10-$20 that will either be added to the monthly premium or reduced in benefits.
The interesting part is how the results played out differently across different types of plans. HMO's, PPO's, and Private Fee for Service (PFFS) plans had very different outcomes which could be called, the good, the bad, and the ugly.
The Good: HMOs: If you played a word association game with someone and said HMO, they would probably say cockroach. HMOs made up probably 90% of the Medicare Advantage market as most of them got started under the Medicare+Choice program in the 90's. In the past 5 years, they have steadily lost membership to PPO and PFFS plans.
However, HMO plans in my state had the lowest premium increases and virtually no benefit reductions with their 2010 plans. Their ability to coordinate care and partnership with a panel of physicians have proven to deliver efficient care. Maggie Mahar blogged about the value of Medicare Advantage HMO plans and how they deliver more benefits than traditional Medicare for the same cost (Any resemblance to the Don Grunt whose comments were cited in the article and the author of this blog are purely coincidental). Just like the cockroach, it look like Medicare Advantage HMO plans will be around for a long time.
The Bad: PPOs: Most seniors had a PPO plan prior to retiring, are familiar with it, and the membership in PPO plans has been rapidly growing. However, the PPO plans in my state had $20-$140 increase in premiums for 2010 in addition to significant benefit reductions. Some went old school and added a deductible which is usually only found in traditional Medicare. It looks like PPO plans are not able to coordinate care with their more open networks. Additionally, they don't have the relationship with physicians to get patient information to improve their risk scores. Insurance plans get paid more for less healthy members (called risk adjustment) but they need to demonstrate their health status to Medicare.
It looks like PPO plans will steadily become more expensive and offer less benefits as they were heavily impacted by the revenue cuts. Younger senior prefer PPO designs but we'll see if they will be able to survive on less money from Medicare.
The Ugly: PFFS plans: PFFS plans have no networks and were used as a vehicle to bring Medicare Advantage to rural areas where insurance plans can't contract with sufficient physicians. In that regards, they have been successful as rural seniors have access to options other than traditional Medicare. The ugly part came with their launch. Since they have no contractual arrangements with providers, they had no idea what they were, and refused to accept them. PFFS plans traditionally paid agents higher commissions than other plans so they were aggressive well sleezy about selling them.
With the Medicare revenue cuts, PFFS plans are already leaving the building. Toward the end of 2008, there were 2.3 million seniors in PFFS plans. Plans with 30% of that membership (667,000) have already stopped offering their plans even though PFFS plans aren't due to sunset until 2011. In short, their business model could not survive on lower Medicare revenue.
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