The following is a statement from John Gorman, Executive Chairman, Gorman Health Group: 

“The last 45 days for Medicare Advantage (MA) stakeholders have been like watching an asteroid on a collision course with Earth, only to be averted at the last second.  With the proposed rates representing the deepest cuts to MA in the history of the program, this was nothing less than doom diverted, a stunning reversal from the Centers for Medicare and Medicaid Services (CMS).  It was a rare bipartisan coalition of over 160 Members of Congress whose lobbying power brought April flowers.  Tea Partiers and the Chairman of the Congressional Progressive Caucus alike came together to get this result.  Democrats, in particular, seem to have awakened to the constituency MA serves: largely lower-income minorities in greatest need of coordinated care. In response, the Department of Health and Human Services (HHS) and the White House overruled the CMS actuaries to get over 550 basis points’ improvement in the final rates.  It shows the new political juice MA has acquired, now serving almost 30% of Medicare beneficiaries, who overwhelmingly love it.

“The new trends for 2014 are POSITIVE 2.96% for MA rates calculated under the old law, and 3.53% for MA rates calculated under the Affordable Care Act (ACA).  About half of all US counties are still getting a blend of these two rates, while the remaining counties are fully on the new ACA rates.  Overall, the average increase will be around 3.3% - 3.4%, versus the 2.2% cut proposed in the advance notice.

Blending and Rebasing

 “CMS rebased the county Fee For Service (FFS) costs again.  This will move some counties from one quartile to another, giving some counties bigger increases, or actual decreases, based solely on the effect of rebasing.    Since the impact is phased in over two years, a number of in-between quartiles develop.  In theory, a county’s ACA rate can be any of 24 different blends of 2012, 2013 and 2014 quartiles.   In 2014 counties will be arrayed across nine different ‘quartiles,’ reflecting the effect of the blending due to quartile changes.

“It appears that the quartile turmoil is less this time than with the 2013 rebasing.  While 27% of all counties changed quartiles with the 2013 rebasing, only 13% are changing quartiles this time.

“Rebasing can also affect whether a county qualifies for a double bonus under the quality bonus system, since one of the criteria is a county FFS cost figure that is below the national average.  In 2013, four counties gained double bonus status, and seven lost it.  In 2014, eighteen counties will gain double bonus status, among which are three counties regaining the double bonus after losing it in 2013.  Only two counties will lose double bonus status in 2014.  Plans that qualify for quality bonus payments will see those payments increase or decrease by 5% for members who live in counties gaining or losing double bonus status.  This adds yet another unpredictable variable to revenue planning.

“In a change in methodology, CMS used current wage index and physician cost index data to recalculate the historical claims used in rebasing, to express FFS costs at current Medicare allowable amounts.  Previously they took prior year claims as paid.  This adds accuracy to the rebasing calculation, but it adds more uncertainty to rebasing for 2014.  For 2014 only, CMS is blending the new calculations with the old method of not adjusting for changes in indices.  The blend is 50/50, for 2014 only. This adds yet one more variable to the payment calculation process, and also strongly implies that CMS will rebase again in 2015, again moving counties among quartiles.  This potential for movement among quartiles, based on FFS cost patterns outside the control of MA plans, makes long range planning difficult.  Rates can vary by 5% or more from where a plan expects them to be, based  on where CMS rebasing calculations peg a plan’s counties’ FFS costs relative to all other US counties.“

Risk Adjustment Reprieve

“The MA industry dodged a bullet on risk adjustment in particular.  CMS is implementing new Hierarchical Condition Categories (HCC) risk adjustment coefficients for 2014.   CMS say that the new codes will result in lower risk scores than the old coefficients, given the same mix of diagnoses.  The impact is projected to be approximately a 2.6% reduction in scores, on average.  The actual impact on individual plans will depend on the diagnostic profile of their members.  CMS have abandoned the idea proposed in the advance notice, to hold plans harmless from the impact of the change in 2014 by adjusting the denominator used in the calculations.  Instead they are blending the old rates with the new ones, at 25% old and 75% new.  This implies that 75% of the reduction, or about 1.95%, will be felt in 2014, while the entire 2.6% will affect 2015 risk scores.  This will offset the positive impact of the rate trends, and places even more weight on plans to diligently discover, document, and report all relevant diagnoses.

“Because CMS is blending 2013 and 2014 risk scores, they have calculated two different FFS normalization scores.  The FFS normalization is necessary to shift the mid-point of the HCC score structure so that it averages out to exactly 1.00 when applied to a sample of FFS claims.  This isn’t an adjustment for MA coding, but for changes in FFS coding over time.  The two normalization factors will be blended, too.  The FFS normalization scores are:

  • Applicable to the 2013 HCCs (25%) = 1.041
  • Applicable to the 2014 HCCs (75%) = 1.026
  • “Average” = 1.0298

This compares with the single normalization factor in the advance notice, of 1.026.

“The coding intensity adjustment, which takes back money to compensate for the fact that plans keep getting better at risk coding, goes up by 1.5 percentage points in 2014, from 3.41% to 4.91%.  This is mandated by law, and is no surprise.   This will be an added reduction in revenue, based on the assumption that plans are continually improving their ability to report diagnoses, and it is incumbent on plans to live up to that expectation, or suffer erosion of income.

“CMS is putting off for a year any attempt to address how diagnoses that are documented in health risk assessments (HRAs) affect risk adjustment.  They were going to require plans to flag all diagnoses discovered in HRAs during 2013.  CMS proposed to disallow codes from HRAs in future years unless they were substantiated by another clinical encounter.  The difficulty is that they have not yet developed a concrete definition of an HRA, as distinct from a routine checkup.  This idea isn’t dead, and we expect CMS to find some way to ascertain whether data from HRAs represent actual risk.  Plans must use HRAs as a mechanism to identify and manage patients at risk, with a clear handoff of HRA data to care management programs.  Documentation of diseases that map to HCCs is a valuable by-product of HRAs, but should not overtake the significance of the clinical purpose of prospective exams. 

“CMS has relented somewhat on the total beneficiary cost (TBC) limit, compared to the advance notice, and it’s a much lesser issue with some restoration of the rates.  The TBC is the maximum amount by which CMS will allow plans to increase the combination of premiums and cost sharing, using the CMS estimate of the Per Member Per Month (PMPM) cost of any cost sharing changes.  They were proposing to reduce the maximum TBC change from $36 to $30 per member-month.  Now they are only reducing it to $34.  Also, the TBC is adjusted for the impact of benchmark reductions caused by phase-in of the new ACA rates, including changes in quartiles, and gaining or losing double-bonus status.

“While this final notice was good news across the board, we still must recognize that, all in, we’re still looking at a cut in rates in 2014 after the impact of the ACA is considered.  It’s just less severe than what was proposed.  We’ll likely see cuts like these again in 2015 and beyond.  And while the Administration has shown here that they have no interest in market disruption, their knives are still out on the basis of plan performance. 

“These are just the beginning of austerity measures, and MA will only get harder to manage profitably over time.  Forward-looking plans will use this stay of execution to drive needed change within their companies more urgently.”

If you have additional questions or would like to schedule an interview with one of Gorman Health Group’s subject matter experts, please contact Kristin Rodriguez: 510-244-7114, or .

Thank you,

Kristin Rodriguez, Director of Marketing

Gorman Health Group


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