Medicare Advantage Payment Increase Explained

In a surprising move yesterday, the Centers for Medicare and Medicaid Services (CMS) announced a reversal in their previous plans to cut payments to Medicare Advantage (MA) plans by 2.2 percent in 2014. Instead, CMS announced MA plans will now receive a 3.3 percent increase in payments next year. So, what changed their position so dramatically?

The answer boils down to a technical interpretation of whether or not MA payments should be based on current law or current policy. Read: whether or not they expect Congress will enact another doc fix at year's end. The surprise is not that the Sustainable Growth Rate (SGR) formula is presenting yet another headache for policymakers, but rather that this is the first time CMS has changed its position of basing payments on current law to now incorporate the assumption that Congress will override the 25 percent provider cut the SGR calls for. This action results in an interesting discussion on the budgetary impact and the need to reform the SGR.

For background, payments to MA plans,which cover nearly one in four Medicare beneficiaries, are based on a comparison of each health plan's bid (or projected cost of covering Medicare services) and the local benchmark which represents the maximum amount CMS will pay plans in that service area. If they are below the benchmark, plans get paid their bid amount plus a share of the difference, but if they’re higher than the benchmark then they have to charge the excess to their beneficiaries. Most recently, the ACA changed the way benchmarks are calculated by making benchmarks lower in higher Medicare spending areas and higher in lower Medicare spending areas and adjusting them based on quality. In calculating these benchmarks, CMS must assume spending levels which would greatly change if the 25 percent physician fee cut from the SGR went into effect on January 1, 2014 as it is scheduled to under current law.

That brings us to yesterday’s announcement. The Secretary has until April 1 to review and set these MA rates for the following year. In the past, CMS based their formula on current law, assuming cuts from the SGR, and made modifications once Congress enacted a doc fix. This time, CMS was pressured by insurers and lawmakers from both parties to take into account a doc fix when calculating the benchmark for MA payments. Even the Medicare Payment Advisory Commission (MedPAC) weighed in, citing uncertainty and confusion to beneficiaries and providers.

Just last week, the Congressional Research Service (CRS) released a legal memo that said the Secretary could have the authority to base benchmarks on current policy instead of current law, and could change her past position on a "reasonable basis" considering the SGR’s 11-year history of being overridden by Congress.

Here's the tricky part. If for whatever reason Congress doesn’t pass a doc fix, then it may become a bigger legal and budgetary issue.  According to the CRS memo:

The Antideficiency Act, prohibits federal payments from being made in excess of available appropriations. The Act may be implicated if funds are expended for unauthorized purposes, which would arguably be the case if the Secretary’s assumption concerning future legislation ended up being incorrect. On the other hand, if the Secretary’s interpretation that she has the authority to incorporate assumptions concerning future congressional actions were found by the courts to be reasonable, and not arbitrary or capricious, or contrary to the statute, then the Antideficiency Act may not be implicated.

Many argue the Secretary would probably have a strong case considering Congress’s track record. Prior to changing their position, CMS also sought public comment about the challenges of using current law. Additionally, CMS accounts for the possibility of a doc fix in their actuarial assumptions when determining Medicare Part B premiums and advising MA plans on bid submissions.

Overall, we won’t really know what impact CMS’s decision will have until Congress considers legislation for a doc fix. More importantly, this reminds us of the real world impact of the broken SGR formula and the dire need to reform it. We've discussed the need for reform many times before, and included a list of potential reforms in our Health Care and Revenue Savings Options report. As MedPAC said in their letter to CMS:

The effect on [MA] may be an unintended consequence of the timing of Congressional action and CMS administrative actions, but it is another very real effect of the delay in action to repeal the SGR and replace it with a more rational system.