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Berenson Proposes New Method Of Paying Medicare Advantage Plans In Health Affairs Web Exclusive

Former Top Medicare Official Rejects Local Payment Neutrality
Between Medicare Private Plans And Fee-For-Service Medicare

Bethesda, MD -- The Medicare Payment Advisory Commission’s proposal to mandate financial neutrality on a local level between Medicare Advantage (MA) plans and fee-for-service (FFS) Medicare ignores the different factors affecting costs for the private plans and the traditional program, Robert Berenson writes in a Health Affairs Web Exclusive published today. Berenson proposes a new method of setting the benchmarks against which MA plans bid in a way that reflects the different market dynamics faced by the two wings of the Medicare program. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.27.2.w156

The basic problem with MedPAC’s formulation of payment neutrality is that it “implicitly, but incorrectly, assumes that MA plans are subject to the same forces that determine traditional program spending,” says Berenson, a senior fellow at the Urban Institute who headed health plan contracting at the Centers for Medicare and Medicaid Services from 1998 to 2000. He points out that traditional Medicare “enjoys an important advantage over private plans in that as a government program, it gets to impose administered prices on providers.” On the other hand, the FFS program is barred from using “even basic managed care cost containment tools” used by managed care plans, such as selective contracting and prior authorization.

As a consequence, the importance of different cost drivers varies significantly between the two wings of the Medicare program. Relying on data generated by the Congressional Budget Office, Berenson finds that administrative costs, which do not vary much from place to place or with the volume of services provided, make up 11 percent of the cost of delivering Medicare benefits for MA plans but only 2 percent for traditional Medicare. MA plans pay substantially higher rates to providers in small metropolitan and rural areas, where their bargaining leverage is low, but only slightly higher rates in large metropolitan areas; in the areas where FFS Medicare costs are highest, such as Miami, MA plans may even pay lower rates.

Regarding service use, MA plans and FFS Medicare “largely inherit the practice patterns of the local provider community,” Berenson says. However, particularly in high-spending areas, MA plans are able to use managed care techniques to reduce utilization.

Putting all of these factors together, the end result is that MA costs, as reflected in plans’ bids, vary less county to county than traditional Medicare spending does. “Specifically, in areas with the highest traditional Medicare spending, health plans’ bids are about 10 percent below traditional Medicare spending, while in the lowest-spending traditional Medicare areas, plans’ bids are about 21 percent above traditional program spending,” Berenson writes.

A New Method Of Paying MA Plans

“The purest approach to establishing MA plan payments would be to have plans submit bids for providing a defined benefit package, without reference to preset benchmarks,” Berenson says, but he points out that this competitive bidding model is politically off the table: “For the foreseeable future, Congress will continue to be responsible for setting the method by which benchmarks against MA plan bids are set.”

Given this political reality that MA plans will continue to bid against benchmarks reflecting FFS spending, Berenson advocates setting the benchmarks in accord with the empirical evidence that MA plans’ costs vary less than FFS plans’ costs. "If it turned out that plan costs do vary in the same way that traditional program county-level spending varies but, say, half as much (for every dollar plan bids increase, traditional program costs increase two dollars), one could construct benchmarks based one-half on the national per capita spending amount and one-half on county-level spending.”

In counties that have relatively low FFS costs, Berenson says that his model would be fairer to MA plans than MedPAC’s local-neutrality model, since plans in these areas would bid against blended benchmarks only partially reflecting the low local FFS costs. On the other hand, Berenson would also dispense with MA-plan payment “floors” that the Balanced Budget Act (BBA) established in many rural areas; his model would pay plans in these “floor counties” more than MedPAC would but less than the arbitrarily high payment floors that they currently enjoy.

Berenson casts his proposal as a middle ground between the two politically driven sides of the MA payment debate:

Politically, those on the right desiring to overpay plans partly to disadvantage traditional Medicare would surely oppose any move toward financial neutrality, whether MedPAC’s approach or the one outlined here. Others, mostly on the left, argue that there is no justification for ever paying plans more than what traditional Medicare spends locally -- that private plans should be targeted to high-spending areas. This analysis assumes the desirability of providing choices for all beneficiaries, as long as the choices are based on fair competition. Setting MA benchmarks modestly above traditional Medicare spending to account for market dynamics beyond plans’ control seems reasonable in this context.

After the embargo lifts, Berenson’s article will be available online at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.27.2.w156

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Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.

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