Rule would establish minimum health care spending requirements for some Medicare plans.
The Centers for Medicare and Medicaid Services (CMS) recently proposed a rule to implement a key provision of the Affordable Care Act (ACA) intended to protect Medicare beneficiaries. Under the rule, insurers that provide Medicare benefits under contracts with CMS would be required to demonstrate that they spent a specified portion of their revenues on activities directly benefiting policyholders or face penalties. According to CMS, the rule will “help ensure that taxpayers, the federal government, and enrolled beneficiaries receive value from Medicare health plans.”
Private insurers contract with CMS to provide Medicare Advantage and Medicare Prescription Drug plans as alternatives and supplements, respectively, to standard Medicare. Under Prescription Drug plan contracts, private insurers supplement Medicare by providing stand-alone coverage for prescription drugs.
Medicare Advantage plans, on the other hand, provide policyholders with an alternative to standard Medicare. Whereas under standard Medicare, the federal government reimburses Medicare-participating medical professionals on a fee-for-service basis, under the Medicare Advantage program, private insurers directly pay for and manage policyholders’ Medicare benefits.
Medicare pays the private insurers a capitated rate each month to provide these services. According to the Kaiser Family Foundation, Medicare Advantage plans covered roughly one quarter of the Medicare population in 2012.
Under Medicare Advantage programs, insurers may offer a variety of different plan types, such as managed care plans, in addition to supplemental benefits, such as vision and prescription drug coverage. Both Medicare Advantage companies and Prescription Drug plan sponsors can engage in multiple and simultaneous contracts with CMS, each of which may offer several plans.
Under the proposed rule, health insurers engaging in Medicare Advantage and Medicare Prescription Drug contracts would be required to show CMS that revenue spent on medical care, prescriptions medications, quality enhancing initiatives, and other direct benefits to policyholders represents at least 85 percent of total revenue from each contract.
CMS would use a ratio of medical claims the insurer paid as a fraction of total contract revenue, known as a medical loss ratio (MLR), to evaluate Medicare Advantage and Medicare Prescription Drug contracts. Generally, a plan with a higher MLR provides greater value to policyholders because it spends a larger portion of collected insurance premiums on clinical care than on marketing, administration, and insurer profits.
Health insurers who fail to establish a MLR of .85 may have to pay CMS a “remittance” fee under the proposed rule. The remittance fee would be based on the difference between 85 percent of the total revenue and the contract’s actual ratio spent on direct benefits, multiplied by the contract’s annual revenue. If a contract fails to meet the .85 MLR requirement for three years in a row, CMS will stop permitting Medicare beneficiaries to enroll in any plan covered under the contract for a year. CMS will terminate a contract if it continues to miss the requirement for five consecutive years.
CMS estimates that, based on 2013 contract bid data, insurers holding 14 percent of Medicare Advantage-Prescription Drug and Prescription Drug contracts would have to pay a “remittance” in 2014 under the proposed rule.
The proposed rule also requires insurers engaging in Medicare Advantage and Medicare Prescription Drug contracts to report annually to CMS with detailed information about each contract’s costs, revenue, and MLR. CMS estimates that complying with its proposed rule will cost insurers roughly $5,000 per annual report, after an initial $16,000 in start-up costs.
When evaluating contracts with low enrollment, CMS will permit a “credibility adjustment” in evaluating MLR. Because low-enrollment contracts typically experience relatively large variation in claims from year-to-year, this policy is intended to provide those contracts with some flexibility and avoid penalizing contracts due to chance variations rather than plan design.
CMS’s proposed rule would impose requirements on insurers providing Medicare Advantage and Medicare Prescription Drug plans that are similar to those already imposed on insurers in the private insurance market under the ACA. According to some observers, in their first year of operation, these requirements reduced administrative costs nationwide by $785 million in the private large-group insurance market.
CMS will be accepting public comments on its proposed rule through April 16, 2013.