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Medicare Advantage Hospital Payments

By September 6, 2016Commentary

Medicare Advantage now covers about 30% of beneficiaries, a ratio that is likely to continue to grow.  While beneficiaries in the MA plans are generally happy, opponents continue to claim that the program is more expensive than traditional Medicare and that plans cherrypick healthy beneficiaries for enrollment.  Both claims now have little support in the research.  Since CMS has only recently been requiring plans to submit encounter data, it has been hard to ascertain actual utilization and service costs for MA plans.  A study carried in Health Affairs examined relative payments by MA plans to hospitals.   (HA Article)   Medicare Advantage plans would generally say that they make money because they manage care better than traditional Medicare (which really doesn’t try at all), resulting in lower use of services.  They would also say that they pay more in unit prices.  The researchers used data from the Health Care Cost Institute and from CMS to analyze prices paid by commercial health plans, Medicare Advantage plans and Medicare’s fee-for-service arm for the same hospital services in 2009, 2011 and 2012.  While prices are set in contracts between health plans and hospitals, the researchers used claims data to see what was actually paid for a service.  The contract price can be subject to many adjustments in actual claims processing.  Previous research has indicated that commercial plans pay more, often much more, for hospital services than does fee-for-service Medicare, but difficulty accessing data has limited comparison research regarding MA plans.

The results are somewhat surprising.  Across all DRGs, and without accounting for mix and geographic differences, MA plans appeared to pay hospitals about 88.3% of what Medicare FFS did per admission in 2009 and 88.5% in 2012.  When adjusted for geography and mix, that rose to 92% in 2009 and 92.4% in 2012.  In all cases, this represented about a $1000 difference in payment per admission.  The results were similar when just the top 25 or top 100 DRGs were used for analysis.  The research also confirmed that commercial plans pay significantly more per admission than either MA or traditional Medicare, and that the gap grew between 2009 and 2012.  In 2009 commercial plans paid 146% of what Medicare FFS did and in 2012 the figure was 165%.  Why do the MA plans pay less?  One reason appears to be selection of hospitals, which accounted for about one-third of the difference.  MA plans apparently avoid more expensive hospitals.  Another factor may be that MA plans paid less relative to Medicare FFS in areas with the highest per beneficiary FFS spending.  It is not clear why that would affect hospital prices.  Medicare Advantage plans paid the least relative to Medicare FFS in areas with high MA penetration, which does make sense, given greater leverage.  It also appears that MA plans ensure that they pay less for DRGs with relatively short stays, which FFS Medicare does not apparently adjust as well for.  It is interesting that at least in MA, health insurers have been able to offset hospital’s market power.  You would have to suspect that the hospitals are still making money, indicating that at least for some DRGs, FFS Medicare may be “overpaying” them, at least in comparison to what a market price might be.   Given that MA plans probably manage more carefully who ends up in the hospital, however, you would think those cases might be more expensive for the hospital to handle.  It may be that most hospitals and MA plans lack adequate data to fully analyze the cost implications of MA stays.   A very interesting and useful study.

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