Medicare Advantage Plans Aren't Feeling the Pain From Healthcare Reform -- Yet

Last Updated Apr 7, 2010 9:30 AM EDT

The huge cuts predicted in the Medicare Advantage program during the healthcare reform debate have not materialized. In fact, the Centers for Medicare and Medicaid (CMS) will merely freeze the amount that it pays private plans to take care of the elderly in 2011. This is less than the 1.28 percent increase that CMS had proposed before the reform law was passed, but it's also a lot less than the 4 percent cut that had been expected. As a result, share prices of big insurers like UnitedHealth Group and Humana rose. Stocks of other carriers with Medicare business, including Healthspring and Coventry, also increased.

In the long run, the amount paid to Advantage plans will decline from about 114 percent to around 100 percent of the amount that fee-for-service Medicare costs on a per-beneficiary basis. When that process is completed, Medicare Advantage will no longer be able to provide some benefits that it now offers seniors, including vision care and wellness programs. But it's likely that the diminution of benefits will be gradual. Meanwhile, the plans are expected to raise premiums to remain profitable.

Overall, government payments to the Advantage plans will fall about $130 billion over 10 years. The $13 billion a year reduction isn't so much if you compare it to the insurers' total revenues or consider all of the new business they'll get as baby boomers start signing up for Medicare. The shortfall will also be covered by increased business from people under 65 who will have to buy insurance under the reform legislation. That windfall will start in 2014, right around the time that the decrease in Medicare Advantage payments starts to bite.

The big question is whether Advantage plans will pull out of many of the markets they're in, as they did 10 years ago after the passage of the Balanced Budget Act. The answer to that is the sound of silence. If these companies were really concerned about the impending cuts, they'd be heading for the exits right now. Of course, their private-employer enrollment is down overall right now, so maybe they're holding onto one of the few solid pieces of business in their portfolios.

In any case, the insurers' decision to stick with Medicare Advantage undermines Republicans' assertion during the reform debate that the Medicare cuts would hurt seniors. Of course, the amount to be stripped away from the Advantage plans is only a fraction of the nearly $500 billion in reduced Medicare spending over the next 10 years. But observers agree that there's a lot of waste to be cut out of Medicare. If the quality of care is improved, seniors should get more, not less, out of reform.

Meanwhile, the persistence of Medicare Advantage plans might offer another advantage in the long run: As the government starts requiring providers to assume more accountability and financial risk, it will need the managed-care expertise of the private plans. So Medicare Advantage will probably be around for a long time.

Image supplied courtesy of the U.S. National Archives at Flickr.

  • Ken Terry

    Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.