Medicare Advantage 101

March 23, 2016 / By Clark Cameron

Over the past 10 years, Medicare Advantage (aka Medicare Part C) has become increasingly popular among beneficiaries and health plans. Seniors enjoy significant monthly cost savings over Original, fee-for-service Medicare, which is typically combined with a Medicare Supplement (aka Medigap) and Medicare Part D (prescription drug) plans. Original Medicare picks up roughly 80 percent of hospital and doctor bills, while the supplement plan pays the remaining 20 percent. The drug plans pay most (but not all) of the retail prescription costs. The supplement and Part D plans both have separate premiums, which can range from a combined $200-$300 per month.

Medicare Advantage plans, on the other hand, include hospital, doctor and drug coverage all rolled into one plan and often require no monthly premium. That’s right – zero dollars. Each service has a copayment due at the time of service, but for budget conscious or healthy seniors, MA provides an attractive alternative to Original Medicare. It’s easy to see why nearly 1/3 of all Medicare beneficiaries are attracted to this product. But why would a health plan want to be in such a business, you ask? Good question.

Under Medicare Advantage, the Feds pay private health insurers to shoulder the risk and management of Medicare members. Rather than manage your health care, this allows government regulators to do what they do best….regulate. Medicare Advantage plans are reimbursed a set amount (about $800 per member per month) by the Centers for Medicare and Medicaid Services. Because the cost of medical care is not uniform throughout the U.S., member demographics and geography can vary this monthly payment from CMS.

Hierarchical Condition Categories (HCCs) are the risk-adjustment methodology that MA plans use to report member health status to CMS for appropriate reimbursement. HCC precision and completeness are mission critical to the success of MA plans. Get the HCCs right, and your plan will have the necessary resources to manage your population and yield a profit. Get the HCCs wrong, and your CFO will pursue you like a Hunger Games contestant.

Another important element of MA plans is quality, which is defined as how well the MA plan is run, responds to its members and facilitates good health and outcomes. All of these are measured by CMS’ Star Ratings program. Stars serve a dual purpose: (1) provide MA plan “grades” for beneficiaries to make more informed plan choices, and (2) allow CMS to award potentially lucrative quality bonuses to insurers. In this context, the word “bonus” can be a misnomer, since Stars dollars can often mean the difference between red or black ink on the balance sheet.

Health plans exist to organize provider networks, negotiate substantial savings and finance the ever increasing cost of healthcare spending. In order to maintain those objectives, health plans need revenue like humans need oxygen. The average annual reimbursement for Medicaid members is $2,400. Commercial health insurance members bring roughly $4,800 per year. By contrast, Medicare Advantage members earn upwards of $10,000 per member per year; considerably more if HCCs and Star ratings are maximized. Those figures make a compelling case for any health plan to consider hanging an MA shingle.  

Clark Cameron is Manager of Payer Market Strategy and Development for 3M Health Information Systems.