As a private offering within the larger public fee-for-service program, the Medicare Advantage Plan (Part C) program is a bit of an odd duck. Designed to give beneficiaries more insurance choices, costs have been coming down while the number of plans have been increasing.

While it's too early to say if these trends will continue, it's important to dig into how Part C plans are structured and financed to understand the recent numbers in context. These cost savings may not continue and the recent news has been highly politicized.

The Centers for Medicare and Medicaid Services (CMS) announced on Sept. 19 that since the Affordable Care Act (ACA) was passed in 2010, Part C premiums have dropped 10 percent while enrollment has risen 28 percent. Next year, enrollment is expected to climb another 11 percent with premiums remaining steady.

Medicare Advantage providers are allowed to be flexible on what they cover and how much they charge. The reasoning at the time the plan was introduced—along with the Medicare Prescription Drug Plan (Part D) coverage—was that private insurers would be more efficient in cutting costs because increased consumer choice would allow beneficiaries to choose among plans with higher-quality care and lower premiums. About one-quarter of all Medicare beneficiaries are enrolled in a Part C plan.ka

Those who have adopted that line of reasoning now have what appears to be the justification needed for their view. The average Part C premium in 2013 is projected to increase by only $1.47 from last year, rising to $32.59. But if beneficiaries choose lower-cost plans at the same rate in 2013 as they did in 2012, the average premium is expected to increase by only 57 cents, according to the CMS.

Proof of Viable Competition?

To these critics of Medicare's fee-for-service model (Traditional Medicare), this proves that private plans within Medicare can introduce viable competition and lower the cost of care. Champions of the ACA maintain that it's the health care law's impact in lowering costs overall that's driving Part C premiums down. Keep in mind that the ACA calls for reducing the subsidies to providers of Part C plans; subsidies were frozen in 2011 and are due to be reduced this year. In 2014, following an ACA mandate to all private health policies, insurers will be required to spend at least 85 percent of their premiums on medical care. All told, the ACA is expected to pare $156 billion from Part C subsidies between 2013 and 2022.

The Obama administration credits these savings as part of the success of the ACA in cutting program costs across the board. According to Health and Human Services Secretary Kathleen Sebelius:

"Thanks to the Affordable Care Act, the Medicare Advantage and Prescription Drug programs have been strengthened and continue to improve for beneficiaries. Since the law was enacted in 2010, average premiums have gone down, enrollment has gone up, and new benefits and lower drug costs continue to help millions of seniors and people with disabilities. For the third year in a row, the Centers for Medicare & Medicaid Services (CMS) used authority provided by the Affordable Care Act to protect beneficiaries from significant increases in costs or cuts in benefits. Access to supplemental benefits remains steady and beneficiaries’ average out-of-pocket spending remains constant."  

What supporters of MA and CMS aren't revealing is precisely why costs are dropping in for Part C plans. Is it because insurers can get lower payment rates from providers than from Traditional Medicare? Is it because those who sign up for these plans are younger, healthier and more likely to benefit from managed care than the fee-for-service population? Or is that the subsidies for Part C are artificially keeping premiums low?

As previously reported, Medicare has found that its total costs of care have been growing more slowly in recent years. A combination of the recession and younger enrollees from the baby boomer generation account for some of the reductions, and have nothing to do with ACA reforms. These newcomers to the program tend to be healthier, so they utilize Medicare less than older beneficiaries.

"The Medicare risk pool is becoming younger, and collectively healthier," according to the Washington Post, citing a Citigroup analysis, "making them a cheaper group to insure. Medicare doesn’t ‘age-rate’—charge its older subscribers more—because they presumably have higher medical costs."

Subsidies Questioned

There are questions of controversial quality bonus payments from the government to Medicare Advantage insurers. Has an additional $8 billion incentive enough to keep them in the program? The Medicare Payment Advisory Commission (MedPAC) recently questioned the validity of the bonuses, suggesting that the money is being wasted because it’s not providing better care or lowering health care costs.

To date, only the Government Accountability Office (GAO) has begun to explore these questions in any depth. The answer might lie in where the subsidies—by types of plan—are growing and which costs are being reduced the most. In a report issued last year, the GAO found:

“Enrollment in the (Medicare Advantage) plans the GAO analyzed increased by about 6 percent—from 7.9 million to 8.4 million beneficiaries—from April 2010 through April 2011. There was substantial variation by plan type in enrollment levels and how they changed from 2010 to 2011.”

Enrollment in health maintenance organizations (HMO), which accounted for about two-thirds of total Part C enrollment in 2011, increased by approximately 9 percent, from about 5.2 million beneficiaries to about 5.6 million beneficiaries.

Local and regional preferred provider organizations (PPO), which comprise a much smaller portion of total Part C enrollment, experienced the highest percentage growth in enrollment: local PPOs increased by 38 percent and regional PPOs increased by 58 percent.

In contrast, private fee-for-service (PFFS) plans experienced a 54 percent decline in enrollment, which was likely due to requirements that most PFFS plans establish provider networks beginning in 2011.

Does the GAO's note that there "was substantial variation by plan type" have any correlation with the kinds of savings being realized? In other words, is it cheaper to run a PPO than an HMO or PFFS? If so, where are the big savings being realized? Could it be in capping patient costs, reducing doctors' payments or limiting tests?

It would also be helpful to know if regional variations account for large cost reductions. Medicare Advantage enrollment rates tend to be higher in urban areas (25 percent) compared to rural counties (13 percent), according to a study by the Kaiser Family Foundation. As a general rule, beneficiaries in larger-population areas pay higher medical bills, so the savings could be due to a higher concentration of Part C enrollees in metropolitan zones.

The answer, not explored in the GAO report, could provide some valuable insights on how to reduce costs throughout Medicare, particularly if Medicare Advantage is expanded, or fee-for-service is eliminated or contracted to make way for more private competition.

It would also be useful to know, perhaps from a future GAO or CMS audit, how the various Part C providers use their government subsidies. Do they use it to offset operating costs, therefore making their nominal savings illusory? If they are spending the subsidies on marketing, what will happen when the ACA requirement to spend at least 85 percent on care becomes active? Will premiums rise? That seems possible if the subsidies are reduced but internal costs haven't fallen.

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