reductions in medicare advantage payments

8/8/2019 Reductions in Medicare Advantage Payments

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program, as measured by the programs actuarialstaff. All counties and similar jurisdictions 11 in theU.S. will be ranked in order of their average FFSspending. The MA benchmarks for each county willbe an applicable percentage of that countys aver-age FFS spending, calculated as follows:

For counties ranked in the highest quartile (thetop 25 percent) by FFS spending, the MA bench-mark will be 95 percent of the measured FFSspending for that county.

For counties in the second quartile, the bench-mark will be equal to the countys measured FFSspending.

For counties in the third quartile, the benchmarkwill be 107.5 percent of the countys measuredFFS spending.

For counties in the lowest quartile, the bench-mark will be 115 percent of the countys mea-sured FFS spending.

All counties will be treated with equal weight inthese rankings, regardless of population, number of Medicare beneficiaries, or relative availability of MA.12 The PPACA specifies that MA benchmarksfor 2011 will be the same as those determinedunder prior law for 2010 and that the new bench-mark formulas will be phased in over the next twoto six years. Counties with bigger changes will

adjust to the new rate over a longer period. The newformulas will be fully phased in by 2017.

The Impact of MA Cuts on Beneficiaries According to the CMS Office of the Actuary, the

new formula generally calls for a reduction inbenchmarks. 13 In fact, the calculations presentedin this paper show that the new formulas willreduce every countys benchmark in 2017 relativeto its projected benchmark for 2017 under priorlaw.14

Because MA health plans are required to rebateexcess payments to their beneficiaries in somecombination of extra health care benefits, lower co-payments, or lower Part B premiums, the reductionin benchmarks will necessarily make MA plans lessgenerous for patients. This translates into a loss inbenefits (or money) for patients who stay in MAplans. This loss may prompt some patients to switchto FFS, which will entail a loss of value relative totheir options under prior law.

In addition, some MA insurers will have diffi-culty generating sufficient margins, or just breakingeven, in some regions of the country, thus leadingthem to shut down some or all of their plan offer-ings. This will force current or potential enrolleesto enroll in less-preferred options, such as FFS ora less-preferred MA plan if one is still available.Due to these factors, the CMS actuary projects thatenrollment in MA plans in 2017, when the MA cutsare fully phased in, will be about half (7.4 million)

of what it would have been under prior law (14.8

11. Most states are divided into counties, but some states have independent cities that are not part of any county, and othershave a few consolidated city-county jurisdictions. Louisiana calls its subdivisions parishes instead of counties. All of these jurisdictions are treated the same way under the relevant legislation. For convenience, we refer to all of them ascounties regardless of their specific local designation.

12. Counties in the 50 states and the District of Columbia will be ranked and divided into quartiles. Counties in other U.S. jurisdictions (Puerto Rico, Guam, Virgin Islands) will be treated according to the quartile in which a county in one of the50 states would fall if it had the same FFS average as the county in the non-state jurisdiction. Our calculations describedlater in this paper show that all counties in Puerto Rico and the Virgin Islands would fall in the lowest quartile; data forGuam were unavailable.

13. Foster, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as Amended, p. 11.14. If the changes in MA are considered in isolation from the rest of the Medicare reforms in PPACA, the benchmark woulddecrease for 96.7 percent of counties and increase for the remaining 3.3 percent. The increases would be less than 2percent except in two cases: one county in Puerto Rico and one in the Virgin Islands, affecting fewer than 400 would-beenrollees. However, the actuary projects that other PPACA provisions will reduce the FFS averages by 2017, making the2017 benchmark lower than it would have been under prior law in every county in all 50 states, the District of Columbia,Puerto Rico, and the Virgin Islands. We did not calculate projected benchmarks for Guam because the necessary data werenot available to us at the time of writing.


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million). 15 In other words, half of those who wouldhave chosen MA under prior law either will beunable to enroll in MA plans at all or will no longerfind it attractive to do so.

Regardless of which outcome a particular patient

experiences, every patient who would have enrolledin an MA plan under prior law will experience a lossin the value of his or her Medicare coverage.

Transferring beneficiaries from MA to FFS willalso have the secondary effect of increasing Medic-aid and Medicare Part D spending by almost $2.5billion in 2017. This does not include higher out-of-pocket spending by patients for what will generallybe lower levels of health care services.

In other words, instead of reducing waste, theMA cuts will simply cut health care services avail-

able to patients and transfer spending from Medi-care Advantage to other federal programs and otherpayers (including patients), thus increasing federaland state spending on Medicaid and patient spend-ing on Part D, supplemental care plans, and out-of-pocket costs.

Analyzing the MA ReductionsThere are two approaches to analyzing how the

PPACA will affect MA payment rates. The firstapproach isolates the impact of the change in theMA payment. This method implicitly assumes that

county FFS averages will remain as they would havebeen under prior law. 16 This estimate accounts forboth the reduction in MA benchmarks for those

who retain MA and the difference between FFS pay-ments and MA benchmarks for those who voluntar-ily or involuntarily drop MA.

However, other provisions of the PPACA will sig-nificantly change FFS payments, indirectly loweringMA payments by substantial amounts. The secondapproach accounts for this and determines the com-bined effect of the MA payment formula change andFFS cuts on MA rates. It will more closely reflectwhat Medicare enrollees will actually experience in2017 under the new law. This paper presents results

using both methods. 17

ResultsBy 2017, Medicare beneficiaries who would

have enrolled in Medicare Advantage under priorlaw will lose an average of $1,841 due to the MAchanges alone and $3,714 when the effects of theentire bill, including the FFS cuts, are considered.Because the effects vary by geographic area, weestimate the dollar value of the lost benefits andthe number of beneficiaries who lose MA for eachstate, county, 18 and congressional district. 19 Table1 shows the estimates for each state in 2017,including projected drops in enrollment andreductions in benefits.

15. Foster, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as Amended, p. 11.16. Using this approach, Medicares chief actuary projects that the new law will reduce the annual payments for beneficiaries

who would have been enrolled in MA under the prior law by $21.15 billion ($1,429 per beneficiary) in 2017. See ibid.,Table 3. The estimate includes both the reduction in MA payments due to lower benchmarks and the reduction due tohaving fewer MA enrollees. It also accounts for the fact that those who do not enroll in MA will instead participate in FFS,thus increasing FFS spending but by less on average than the decrease in MA spending.

17. For a full description of the methodology used to calculate these results, see Appendix A.

18. For the county-level data, see Robert A. Book and James C. Capretta, County-Level Effects of Medicare AdvantageChanges in the Patient Protection and Affordable Care Act (PPACA), The Heritage Foundation, September 2010,at http://thf_media.s3.amazonaws.com/2010/pdf/MA_County_Results_Summary.pdf (September 8, 2010).

19. For the data by congressional district, see Robert A. Book, James C. Capretta, and Jason Richwine, The Effects of Medicare Advantage Changes in the Patient Protection and Affordable Care Act (PPACA) by Congressional District,The Heritage Foundation, at http://thf_media.s3.amazonaws.com/2010/pdf/MA_Congressional_District_Results_Summary.pdf (forthcoming).

_________________________________________

Every patient who would have enrolled in anMA plan under prior law will experience a lossin the value of his or her Medicare coverage.

____________________________________________


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The CMS Office of the Actuary estimates that thePPACA will force 7.4 million people (50 percent of enrollees) out of the health plans they would havechosen under prior law and into the FFS program. Wefind substantial geographic diversity in this effect,ranging from 38 percent in Montana to 62 percent inLouisiana, with a 67 percent loss in the District of Columbia and a striking 84 percent loss in Puerto Rico.(See Map 1.) These percentages do not include those

who would lose access to their preferred MA plan butwould enroll in another MA plan instead of FFS.Overall, 14.8 million would-be enrollees will

sustain a loss in the value of their health care cover-

age. Of those, almost 7.4 million will either losetheir access to MA plans entirely or drop out of MAvoluntarily because the reduced benefits makeMA less attractive. By 2017, the average enrolleewill lose $3,714 in health care services per year,totaling $54.97 billion for all such beneficiaries.The benefit losses will vary widely by state from alow of $2,780 in Montana to a high of $5,092 inLouisiana. (See Map 2.)

At the county level,20 the impact varieswidely. Furthermore, the pattern of disparitiesdiffers significantly depending on the unit of measurement: average per-beneficiary service

20. The accuracy of county-level results is limited by the public availability of data. For further discussion of the limitations of the data, see Appendix A.

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Projected Change inMedicare AdvantageEnrollees UnderPPACA

How the Health Care Law Will Affect Medicare Advantage Enrollmentin 2017


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cuts in dollars, average per-beneficiary servicecuts as a percentage, or the percentage of benefi-ciaries who will be transitioned entirely out of the MA program. Table 2 shows the countieswith the 30 largest and 30 smallest impacts interms of reduced enrollment, Table 3 shows thecounties with the 30 largest and 30 smallestimpacts in dollars of loss, and Table 4 shows thecounties with the 30 largest and 30 smallestimpacts in the percentage loss. 21

Impact by Race/Ethnicity and Income. Minor-ity Medicare beneficiaries are disproportionatelyrepresented among MA enrollees today. Comparedto the average Medicare beneficiary, Hispanics aretwice as likely and AfricanAmericans are 10 percentmore likely to enroll in MA. As Table 5 shows, theMA cuts in the PPACA are projected to cause His-

panics to lose $2.3 billion in benefits and African Americans to lose more than $6.4 billion in benefits. Almost 300,000 Hispanics and more than 800,000 AfricanAmericans will lose access to MA. These fig-ures are almost certainly underestimates because theproportion of the Medicare population in thesegroups will likely increase over time.

Impact by Income. Disproportionately highnumbers of lower-income Medicare beneficiariesselect MA. This is understandable because MAplans are usually associated with lower co-pays

and deductibles than FFS, and lower-income ben-eficiaries are less likely to obtain other sources of supplemental coverage, such as employer-spon-sored retiree supplemental plans or Medigap,which is generally more expensive to the patientthan MA.

Compared to the average beneficiary, those withincomes (in todays dollars) between $10,800 and$21,600 are 19 percent more likely to select MA,and those with incomes between $21,600 and$32,400 are 10 percent more likely to enroll in MA.

However, the very lowest-income group (annualincomes less than $10,800) is actually slightly (6percent) less likely to enroll in MA. 22 This is proba-bly because more of them are eligible for Medicaidcoverage of Medicare co-pays and deductibles aswell as services not covered by Medicare.

As Table 6 shows, more than 10.3 million Medi-care beneficiaries with incomes under $32,400 intodays dollars are projected to lose a total of $38.5billion per year in health care services delivered(measured in federal spending, with the usual cave-ats). This represents 70 percent of the entire cut.More than 5 million will lose all access to MA. Fur-thermore, because the dollar value of a particularbeneficiarys loss is related only to the county of res-idence and not to income status, those with lowerincomes will sustain losses that are much higher

percentages of their income. In effect, the MA cutsare a regressive tax that disproportionately pun-ishes low-income seniors and low-income disabledbeneficiaries.

Increased Medicaid Spending. Many low-income Medicare beneficiaries are also eligible forMedicaid. Depending on their precise income sit-uation, these dual-eligibles may receive assis-tance through the Medicaid program to offsettheir Part B premiums and possibly their Part Aand Part B co-pays. The dual-eligibles are also eli-

gible to select an MA plan. When they do, theyoften do not see the need to pursue Medicaid cov-erage because MA plans typically charge muchlower co-pays than FFS. However, when dual-eli-gible beneficiaries lose their MA plans, many willsign up with Medicaid and thus increase both fed-eral and state Medicaid costs.

The size of this increase could be staggering. Theaverage dual-eligible beneficiary enrolled in MA in2005 cost the Medicaid program only $30 per yearbut would cost the Medicaid program an estimated

21. These tables report the 30 highest and 30 lowest counties that have populations above 100,000 and are not in PuertoRico. The CMS reports enrollment by county and MA plan pairs. For privacy reasons, they suppress data for county andplan pairs with fewer than 10 enrollees. This can produce biased results for smaller counties. In addition, due to theextreme impact on Puerto Rico, the top 34 most-affected counties are all in Puerto Rico.

22. Incomes are in 2006 dollars. See Low-Income and Minority Beneficiaries in Medicare Advantage Plans, 2006, AmericasHealth Insurance Plans (AHIP) Center for Policy and Research, September 2008, Table 6B, at http://www.ahipresearch.org/ pdfs/MALowIncomeReport2008.pdf (September 12, 2010).


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$1,128 annually if he or she transitioned to FFS. 23Table 7 shows this figure projected forward to 2017.

An estimated 472,000 dual-eligibles will lose theirMA plans, increasing Medicaid costs by $924 mil-lion. These assumptions are generous (to thePPACA) in the sense that Medicaid spending isgrowing faster than total health spending and thePPACA substantially expands Medicaid eligibility in

addition to cutting MA. This calculation accountsonly for the changes in MA.

Increased Part D Spending. Medicare Part D cov-ers prescription drugs. As with MA, Part D benefits areoffered through private-sector companies that submitbids to provide prescription drug coverage, even forMedicare beneficiaries who receive other health careservices through the FFS system. Subsidies are also

23. Adam Atherly and Kenneth E. Thorpe, Value of Medicare Advantage to Low-Income and Minority MedicareBeneficiaries, Emory University, Rollins School of Public Health, September 20, 2005, p. 7, at http://www.bcbs.com/issues/ medicaid/research/Value-of-Medicare-Advantage-to-Low-Income-and-Minority-Medicare-Beneficiaries.pdf (June 18, 2010).

Impact of Medicare Advantage Changes in PPACA by Race/Ethnicity

Sources: Authors calculations based on data from AHIP Center for Policy and Research, Low-Income and Minority Beneciaries in Medicare Advantage Plans,2006, September 2008, at http://www.ahipresearch.org/pdfs/MALowIncomeReport2008.pdf (September 13, 2010), and data from the Centers for Medicare andMedicaid Services.

Table 5 B 2464Table 5 B 2464 heritage.orgheritage.org

African American

Asian American Hispanic White Other

All Medicare Beneciaries 10% 1% 2% 85% 2%

Medicare Advantage 11% 1% 4% 82% 2%

Relative Share (i.e., how many times more likely to be in MA) 1.10 1.00 2.00 0.96 1.00Pre-PPACA Projected 2017 Enrollees 1,628,000 148,000 592,000 12,136,000 296,000

Number of Beneciaries Losing MA 814,000 74,000 296,000 6,068,000 148,000

Total Annual Loss of Health Care Services $6.05 billion $0.55 billion $2.2billion

$45.08 billion $1.1billion

Note: Figures may not sum to totals due to rounding.

Impact of Medicare Advantage Changes in PPACA by Income

Sources: Authors calculations based on data from AHIP Center for Policy and Research, Low-Income and Minority Beneciaries in Medicare Advantage Plans,

2006, September 2008, at http://www.ahipresearch.org/pdfs/MALowIncomeReport2008.pdf (September 13, 2010), data from the Centers for Medicare and Medic-aid Services, and data from the U.S. Department of Labor, Bureau of Labor Statistics.


Less than$10,800

$10,800 $21,600

$21,600 $32,400

$32,400 $43,300

$43,300 $54,100

More than$54,100

All Medicare Beneciaries 17% 27% 20% 17% 11% 9%

Medicare Advantage 16% 32% 22% 15% 8% 6%

Relative Share (i.e., how many times more likely to be in MA) 0.94 1.19 1.10 0.88 0.73 0.67

Pre-PPACA Projected 2017 Enrollees 2,368,000 4,736,000 3,256,000 2,220,000 1,184,000 888,000

Number of Beneciaries Losing MA 1,184,000 2,368,000 1,628,000 1,110,000 592,000 444,000

Total Annual Loss of Health Care Services in 2017 $8.8 billion $17.59billion

$12.09billion

$8.25billion

$4.4 billion $3.3 billion

Notes: Income ranges are in 2010 dollars. Figures may not sum to totals due to rounding.


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given to retiree Medicare supplemental plans thatcover prescription drugs for FFS participants andto MA plans that cover prescription drugs. 24

MA plans that cover prescriptiondrugs submit a separate MA-prescrip-tion drug (MA-PD) bid for their pre-scription drug coverage. This allowsfor a comparison of the cost of cover-ing prescription drugs inside and out-side of MA.

For the 2009 plan year, the averagestand-alone prescription drug plan(PDP) bid was $11 higher per monththan the average MA-PD bid. This dif-ference increased from $9 per monthfor 2008. According to the CMS, MA-

PD plans have lower premiums for tworeasons: They can make more extensiveuse of care coordination and drug man-agement, which reduces costs throughincreased efficiency, and they can applysavings achieved in providing hospitaland physician services to reduce theirMA-PD premiums.25

Under the PPACA, this cost advan-tage may still exist, but it will apply tofar fewer beneficiaries because fewerbeneficiaries will be in MA plans. As aresult, total spending for prescriptiondrugs on MA plans will increase. Table8 shows that if both MA-PD andstand-alone PDP premiums grow atthe rates projected by the CMS, the

differential in 2017 will be $17.17 permonth. The impact on the beneficiarypopulation will total more than $1.5billion annually.

This is not simply a transfer of prescription drugspending from one program to another or from gov-ernment to patients. It is a net increase in spending

24. According to the CMS, Plan Sponsors of qualified retiree prescription drug plans, including private employers thatsponsor ERISA group health plans, governments, churches, and union health funds, are eligible to receive the RetireeDrug Subsidy if they provide coverage that is at least actuarially equivalent to the standard Medicare Part D drug benefit.Centers for Medicare and Medicaid Services, What Entities Are Eligible to Receive the Retiree Drug Subsidy? July 25,2005, at http://questions.cms.hhs.gov/app/answers/detail/a_id/5257/session/L3NpZC9mKnhxUnU1aw%3D%3D(July 21, 2010).See also 42 Code of Federal Regulations 423.

25. Press release, Lower Medicare Part D Costs Than Expected in 2009, Centers for Medicare and Medicaid Services, Officeof Public Affairs, August 14, 2008, at http://www.cms.gov/apps/media/press/release.asp?Counter=3240(June 16, 2010).

Impact of Medicare Advantage Changes in PPACAon Medicaid Spending

Sources: Authors calculations based on data from Adam Atherly and Kenneth E. Thorpe,Value of Medicare Advantage to Low-Income and Minority Medicare Beneciaries, Emory University, Rollins School of Public Health, September 20, 2005, p. 7, at http://www.bcbs.com/ issues/medicaid/research/Value-of-Medicare-Advantage-to-Low-Income-and-Minority-Medicare-Beneciaries.pdf (June 18, 2010), and data from the Centers for Medicare and MedicaidServices.


Prior Law(Pre-PPACA),

2017 Projection

With FFSInstead of MADue to PPACA

Projected number of dual-eligiblebeneciaries enrolled in MA

943,000 472,000

Medicaid program spending per dual-eligible beneciary

$54 $2,012

Increase in Medicaid spending per beneciary due to transition to FFS

$1,958

Total increase in Medicaid spendingdue to transition to FFS

$924 million

Federal share $523 millionState share $401 million

Impact of Medicare Advantage Changes in PPACAon Part D Spending

Source: Authors calculations based on press release, Lower Medicare PartD Costs Than Expected in 2009, Centers for Medicare and Medicaid Services, Of-ce of Public Affairs, August 14, 2008, at http://www.cms.gov/apps/media/press/release.asp?Counter=3240 (June 16, 2010).


Projected number of beneciaries enrolled in FFS instead of MA 7.4 million

Annual per-beneciary difference in Part D subsidy between MA-PDand nonMA-PD Plans

$206

Total Increase in Part D Spending Due to Transition to FFS $1.525 billion


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for treating the same patients for the same diseases.In other words, it is new, wasteful Medicare spend-ing that will provide no additional benefit.

The PPACAs Dramatic Negative EffectsThe effects of the PPACA on Medicare Advantage

enrollees will be dramatic and negative. The mostobvious effects will be: Reductions in health care services delivered.

The PPACA will result in less generous MAbenefit packages. The average enrollee willreceive $3,714 less per year in the value of his orher coverage by 2017.

Worse and fewer options for seniors and thedisabled. The CMS actuary estimated that therewill be 7.4 million fewer MA enrollees (a 50 per-cent reduction) in 2017 under the PPACA. Somewill lose access to the health plans that theywould have been able to join under prior law,compelling them to move into the FFS program,which they otherwise would have rejected.

Fragmentation of care. Mass migration into FFSwould exacerbate the well-known problemsassociated with fragmentation of care and couldundermine the viability of integrated health sys-tems that serve both Medicare beneficiaries andother patients.

Disproportionate harm to low-income andminority beneficiaries. Compared to the aver-age beneficiary, those with incomes in today'sdollars between $10,800 and $21,600 are 19percent more likely to enroll in MA, and thosewith incomes between $20,000 and $32,400are 10 percent more likely to enroll in MA. As aresult, 70 percent of the cut will be imposed onseniors and disabled with incomes less than$32,400 per year in todays dollars. Comparedto the average Medicare beneficiary, Hispanicsare twice as likely and AfricanAmericans are

10 percent more likely to enroll in MA. Thus,the MA cuts represent a regressive tax that dis-

proportionately punishes low-income and minor-ity seniors.

Higher state and federal Medicaid costs. Manylower-income seniors sign up for MA to obtaincomprehensive coverage. Without that option,

some would obtain Medicaid support for FFSco-payments and deductibles. For each dual-eligible beneficiary who would have enrolled inMA in 2017 under prior law but is switched toFFS under the PPACA, average annual per-bene-ficiary Medicaid spending would increase from$54 to $2,012 per beneficiary. The MA cuts onlow-income dual-eligibles will cause an esti-mated 472,000 dual-eligibles to lose their MAplans, increasing costs to Medicaid programs by$924 million annually.

Higher prescription drug spending. MA plansgenerally include prescription drug coverage,and their bids for this coverage average less thanthe premiums of stand-alone Part D prescriptiondrug plans. Beneficiaries who would have beenin MA under prior law but will be in FFS willsustain an average loss of $206 per year relativeto prior law. The impact on the estimated 7.4million affected beneficiaries will total more than$1.5 billion annually.

Conclusion

In the final analysis, if the reforms in Medicare Advantage made by the Patient Protection and Affordable Care Act go into effect, they will inevita-bly and unambiguously restrict senior citizens andthe disabled to fewer and worse health care choices,reducing their access to quality health care.

Robert A. Book, Ph.D., is Senior Research Fellowin Health Economics in the Center for Data Analysis atThe Heritage Foundation.James C. Capretta is a Fel-low at the Ethics and Public Policy Center. The authors gratefully acknowledge the assistance of Joseph R. AntosPh.D., in providing valuable feedback and discussionsexploring some of the issues discussed in this paper.


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APPENDIX ADATA AND METHODOLOGY

The estimates are computed on an annual basisfor 2017, the first year in which the changes in theMA program will be fully implemented. The basicapproach is to compare projected MA benchmarksand enrollment levels for 2017 under prior law withthe projected MA benchmarks and enrollment for2017 under the PPACA. The approach considers theeffects of the MA provisions in isolation and thenthe effects of both the MA provisions and the FFScuts, which will affect future MA benchmarksaccording to the formula specified in the new law.

All data used in this analysis were obtained fromthe CMS, including average FFS spending for eachcounty 26 for 2009; MA benchmarks and enrollment

for each county under then-current law for 2009;baseline (that is, prior-law) forecasts for MedicareFFS spending growth; 27 and the CMS Office of the

Actuarys projections of the overall impact of thePPACA.28 All assumptions used in the calculationsare specified in the bill or are the same as those usedby the Office of the Actuary to the extent that theyhave been publicly disclosed.

Benchmark Calculations. The first objective isto calculate MA benchmarks for each county for2017, when the new formula is fully phased in.They are then compared to what the benchmarkswould have been in 2017 under prior law. For con-sistency, all forecasts of future parameters are takenfrom the CMS 2010 baseline forecast, constructedin conjunction with the release of the Presidentsbudget and calculated before the PPACA was

passed. The same parameters are used for bothprior-law and new-law benchmarks.

Prior-law spending figuresboth the FFS aver-age spending and the MA benchmarkswere cal-culated by increasing the 2009 published figures foreach county by the growth rate derived from com-paring the overall (national baseline) projections for2017 under prior law to the 2009 figures. The base-line tables show $330.5 billion in total MedicareFFS spending in 2009 for 34.3 million FFS benefi-ciaries and a projected $552.9 billion in MedicareFFS spending under prior law for 2017 for 42.3million FFS beneficiaries. This implies an increaseof 35.8 percent in per-beneficiary spending in cur-

rent dollars.This study follows the Actuarys assumption that

MA bids track the benchmarks on average. 29 TheMedicare beneficiary population for each county, aswell as the prior-law MA enrollment in each county,was assumed to grow at the same rate as the totalpopulation of Medicare beneficiaries. 30

For spending under the PPACA, average FFSspending for each county was calculated based onthe actuarys forecast of total FFS spending growthunder the PPACA in 2017, assuming that each

countys average spending grows at the same rate.The actuary projects total FFS spending of $548.5billion for 49.7 million FFS beneficiaries in 2017,an increase of 14.6 percent in per-beneficiaryspending over 2009.

26. The Indirect Medical Education component is excluded from the average, as specified in the PPACA. This is an adjustmentpaid to teaching hospitals at the same rate regardless of whether the patient participated in MA or not. It is disregarded inthis analysis because the PPACA specified that it be disregarded when calculating benchmarks.

27. Centers for Medicare and Medicaid Services, Medicare Part A Tables for FY2010 Presidents Budget, March 18, 2009;Medicare Part B Tables for FY2010 Presidents Budget, March 26, 2009; and Medicare Part D Tables for FY2010 PresidentsBudget, March 6, 2009.

28. Foster, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as Amended.29. The CMS does not publish actual MA bids, which MA providers regard as proprietary information.30. The Office of the Actuary used more specific forecasts based on county-level demographic information and proprietary

information about specific MA plan bids, but this information is not publicly available. However, the author was advisedthat calculations based on aggregation of counties (for example, at the state level) would be generally accurate under thisassumption.


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After making this calculation for each county, thecalculations mandated by Section 3201 of thePPACA were made. Counties were sorted by theirper-beneficiary FFS averages, and each county wasassigned its applicable percentage based on itsquartile rank. 31 That percentage was used to deter-mine that countys base benchmark for 2017 underthe PPACA.

The PPACA includes provisions for a qualitybonus of up to 5 percent, which is doubled for cer-tain qualifying counties. 32 The Office of the Actu-ary assumed that the enrollment-weighted bonuswould be about 4.5 percent in practice, includingthe extra amount for qualifying counties. Based onthe enrollment projections, this works out to anaverage bonus of 6.28 percent for qualifying coun-ties and 3.14 percent for other counties. These

amounts were added to the base benchmarks todetermine the final benchmark for each county. 33

Dollar Loss. Following the assumptions in theactuarys report, the dollar loss in benefits was cal-culated for each beneficiary who would haveenrolled in MA under prior law as the differencebetween the prior-law benchmark and the newbenchmark for that county for beneficiaries whoremain enrolled in MA. For beneficiaries whowould have enrolled in MA under prior law but notunder the PPACA, the change in spending is calcu-lated as the difference between the prior-law bench-mark and the county FFS average under the PPACA.

Enrollment. The net change in MA enrollmentin each county was forecasted by first calculatingthe overall elasticity of enrollment with respect tobenchmarks based on the enrollment projections inthe actuarys report 34 and the change in the overallweighted average benchmark across all counties,assuming constant enrollment. That elasticity wasthen applied to the change in the benchmark foreach county. The actuary forecasts a 50 percentreduction in enrollment and a 25 percent reductionin the weighted average benchmark. This results inan elasticity of 2.0. In other words, for every changeof 1 percentage point in the benchmark, MA enroll-ment will change by 2 percentage points. 35

This elasticity was then multiplied by the per-centage change in the benchmark in each county tocalculate the percentage change in MA enrollment

in that county. That percentage was applied to theprojected enrollment in that county under prior lawto obtain the projected enrollment in that countyunder the PPACA. County-level results were thenaggregated by state.

Effects by Race and Ethnicity. Estimates inTable 5 and Table 6 are for the total reduction inMedicare spending for health care for those in eachbeneficiary group who would have enrolled in MAunder prior law. Because of the lack of detailedcounty-by-county information on the racial and

ethnic makeup of Medicare beneficiaries, it was

31. We calculated estimates for the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. We did not havethe necessary data for Guam, so we did not calculate any estimates for Guam. Excluding Guam does not affect the finalprojections for other jurisdictions.

32. A qualifying county is defined as a jurisdiction that meets three criteria: (1) It is part of a metropolitan statistical area thathas total population above 250,000; (2) at least 25 percent of eligible beneficiaries are enrolled in MA; and (3) averagespending on behalf of FFS beneficiaries in that jurisdiction is less than the national average for FFS spending.

33. Without access to more detailed information, which has not yet been made publicly available, we cannot estimate the actualbonus for each county. However, we can apply the average bonus for each type of county to all counties of that type.

34. Foster, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as Amended, p. 11.

35. This is slightly different conceptually from the elasticities explained in elementary economics textbooks. Those elasticitiesare typically the price elasticity of supply and the price elasticity of demand, which measure the effect of a change inprice on either supply or demand in isolation from the other. The price elasticity of demand is the ratio of the percentchange in the quantity demanded to the percentage change in the price, assuming the supply function stays the same.Likewise, the elasticity of supply assumes the demand function remains unchanged. However, this study follows theexample of the CMS actuary and calculates a benchmark elasticity of enrollment, a combined elasticity that is the ratio of the percent change in the MA benchmark to the percent change in MA enrollment. This elasticity captures both the supplyeffect and the demand effect. The supply effect results from lower revenue to MA plan providers, and the demand effectresults from MA plans having to provide less generous benefits.


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assumed that each group would experience thesame average impact per person as the entire bene-ficiary population. (Simply using county-level pop-ulation figures for each group would beinappropriate because of differences in the age dis-tributions and, therefore, their shares of the Medi-care population in each county.) Ideally, FFS andMA spending patterns for each group would be cal-culated by county, but this information is not pub-licly available at this time. Therefore, this should beconsidered a preliminary estimate.

Limitations of County-Level Data. Some cau-tion is warranted in interpreting the county-levelresults. The CMS Office of the Actuary used more

specific county-level demographic information,specific MA plan bids, and other data to preparecounty-level forecasts, but much of this informationis not publicly available. Furthermore, CMS sup-presses information on plan and county pairs withfewer than 10 enrollees, which affects the calcula-tions, especially for small counties. This will notaffect all small counties equally. A small county withonly a few MA plans may have accurate datareported, whereas a county with a large number of small plans may have a lower or even zero reportedenrollment even if its actual enrollment is higherthan enrollment in a county with a smaller numberof plans.


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APPENDIX BECONOMIC ANALYSIS OF CUTS IN MEDICARE ADVANTAGE PAYMENTS

To characterize the effects of the MA paymentcuts in the PPACA, we must examine how Medi-care beneficiaries and MA plan providers willreact to the changes. In other words, the changeswill affect both the supply and demand compo-nents of the market.

From the MA plan providers perspective, thecuts reduce both net revenue and the rebates thatthey can or must offer to beneficiaries in the form of additional benefits or lower premiums. The reduc-tion in revenue makes offering MA plans less attrac-tive as a business proposition, and the reduction inavailable rebates makes it more difficult for compa-nies offering MA plans to make those plans attrac-

tive to Medicare beneficiaries. Both effects lead to areduction in the number and variety of MA plansand in the generosity of the plans that survive. Inother words, the cuts reduce the quality and varietyof MA plans.

From the beneficiaries perspective, the cutsreduce the level of access to health care services byreducing the generosity of the MA plans that survivethe cuts and by eliminating desired MA plans,which forces some patients into the less generousFFS system that they otherwise would haverejected. This demand effect essentially mirrors thesupply effect described above. Less generous plansare not only less profitable for the companies offer-ing them, but also less attractive to the consumerswho might choose them. The size of these effectscan be measured directly as the dollar-value reduc-tion in health care services consumed.

This reduction in consumption can be higher,lower, or equal for those who remain in MA com-pared to those who switch to FFS, depending on thequartile of the beneficiarys county. Some patientswill choose MA, and some will not. Because differ-ent people have different preferences, a beneficiarysranking of the plans qualitative values may notmatch their dollar values. Faced with a menu of MAplans and the availability of FFS, some beneficiarieswill prefer FFSs wider choice of providers. Otherswill prefer the managed-care features (for example,disease management services and integrated care) in

some MA plans. In some cases (for example, Kaisersintegrated health systems), some desired providersmight be available only through an MA plan.

The loss in variety of MA plans is an additionalnegative effect on beneficiaries that is just as real, if not more so, as the dollar value but more difficult tomeasure directly. MA plans vary substantially intheir benefit and co-pay structures, provider net-works, and additional benefits. Many MA plansoffer disease management services for people withchronic conditions, coordination of care among dif-ferent physicians, on-call nurses available by phone,and other services that are not available in the Medi-care FFS system at any price.

While one of FFSs most touted benefits is theability to see any doctor, some doctors are avail-able only through MA. For example, a patient whoparticipated in a staff-model HMO program likeKaiser before becoming eligible for Medicare mightwant to continue to see the same doctors but may beable to do so only if that HMO is available as an MAplan. If the MA plan is withdrawn, the patient mightend up in the theoretically more flexible FFS sys-tem but be forced to change doctors. For someonewith multiple chronic conditions who is seeingmultiple specialists, the disruption in the continuityof care caused by changing doctors, not to mentionthe loss of the new specialists ability to coordinatewith each other, can significantly inconvenience thepatient and even adversely affect the patientshealth.

The dollar value of the loss sustained by such apatient would be difficult to measure, and such mea-surements are impossible using the available data onper-patient spending and current and future MAbenchmarks. However, inability to measure some-thing does not mean that its value is zero. Anyonewho would have enrolled in an MA plan under priorlaw and is unable to enroll in the same MA planunder the new law has, by definition, lost their pre-ferred health care option and has therefore sustaineda loss. This holds even if the beneficiary findsanother MA plan that he or she likes more than FFS(but not as much as the previous plan) or if health


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care expenses are the same or even higher than theywould have been otherwise. (Due to the structure of the changes, the spending level is lower in any case.)

An estimate for changes in federal spending onbehalf of Medicare beneficiaries is not the same as

the value Medicare beneficiaries place on the ser-vices they receive; nor is it the same price theywould need to pay to obtain those services outsidethe Medicare program. In the case of medical ser-vices, the value to the patient could be higher orlower than the amount Medicare pays. BecauseMedicare generally pays less than other payers, the

beneficiary would probably need to pay more toreplace lost services. In the case of the organiza-tional structure of health care delivery preferred bya patient, a lost MA program might be irreplaceableat any price.

In short, the MA changes are structured in waysthat will make almost all beneficiaries who wouldhave chosen MA under prior law worse off. Thelucky ones will lose only money. The rest will loseboth money and their chosen method of obtaininghealth care, and the changes may also adverselyaffect the health of some beneficiaries.

reductions in medicare advantage payments

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