Do Medicare Advantage plans pay providers different rates than traditional Medicare?–ctd.

I broached this subject before. Yesterday, in Health Affairs, Robert Berenson and colleagues offered some additional data. Long story short: Medicare Advantage (MA) plans appear to pay hospitals at or slightly above traditional Medicare (TM) rates.

The finding comes from the authors’ interviews in 2014 with (mostly) CFOs of ten hospitals or hospital systems and (mostly) the heads of provider contracting or network management of eleven health plans. Though the investigators were careful to select hospitals and plans that varied in many important dimensions (like geography, size, profit status, vertical integration, etc.), not all findings may generalize to all of MA and the hospitals with which MA plans contract.

My highlights follow.

  • “[W]e found that respondents from MA plans reported that they were currently paying at or slightly more than 100 percent of the traditional Medicare payment for hospital services. […] Currently, 110 percent of traditional Medicare seems to be the rate
    ceiling in markets with powerful hospitals that use ‘more of their muscle’ to get the higher payments, while 100 percent of traditional Medicare is generally the floor, with the majority reporting in the 100–105 percent range.”
  • “Commercial insurance rates for hospitals are much above those of MA. With one exception of a hospital reporting being paid commercial rates of 105–112 percent of traditional Medicare, commercial rates were reported to be at least 130 percent those of Medicare Advantage. Commercial rates averaging 175 percent, 250 percent, 300 percent, and even 350 percent of the MA rate are cited.”
  • What keeps MA rates down to about 100% of TM?
    • “Most prominently mentioned was section 1866 of the Social Security Act and CMS’s implementing regulation (42
      CFR 422.214) that stipulate that providers must accept payment for out-of-network hospital care for MA plan members at the rate applicable under traditional Medicare. Thus, […] most respondents thought that hospitals have little bargaining power to obtain negotiated rates above 100 percent of traditional Medicare.”
    • “MA plans effectively operate with fixed budgets constrained [by Medicare payments].” In other words, they simply cannot pay much more.
  • What keeps MA rates up to about 100% of TM?
    • “MA network adequacy requirements, which specify criteria, such as a minimum number of providers and maximum travel time and distance for beneficiaries, that MA plans’ networks must meet. These requirements provide a counter source of leverage for hospitals.”
    • I did not see it mentioned in the paper that, except in the few markets where MA both predominates overall and enrollment in it is highly concentrated in one carrier, hospitals could refuse MA payments and focus on TM patients, which obviously come with 100% of the TM price. Where there are multiple competitive carriers (in the sense of all having large market share), hospitals can more easily negotiate for higher payments. Both factors would tend to keep MA payments up to at least 100% of TM. Finally, in any market a hospital could refuse participation in an MA plan’s network and when its enrollees visit it, they come with a 100% TM out-of-network price.
  • Is it really 100% anyway? Hospitals argue that MA payment is effectively below 100% because of the additional costs MA plans impose. It makes it sound like hospitals would prefer to be rid of MA.
    • “Medicare Advantage more frequently than traditional Medicare rejects payment for stays on the grounds that the stays are
      not medically necessary; […] downgrades stays to ‘observational’ status, with payment at lower outpatient hospital rates; […] requires hospitals to incur increased administrative expenses because of the separate information requirements of each
      separate MA plan, compared to the unitary requirements of traditional Medicare; […] do better prehospital screening and prior authorization than traditional Medicare to limit hospitalizations—thus, within any DRG category, MA inpatients are sicker than traditional Medicare patients and require more resources; the costs of collection from patient cost-sharing
      obligations are higher in Medicare Advantage; often there is no ‘back end’ reconciliation such as traditional Medicare conducts, providing additional payments for bad debt, graduate medical education, and disproportionate-share hospital
      payments; and traditional Medicare typically pays more promptly than MA plans.”
    • On the other hand, “Since both star-rating and risk-adjustment calculations depend on data from providers, contracts can include incentives for more complete data submissions, resulting in payment of slightly more than 100 percent of traditional Medicare.” You can smell the upcoding vector here.  (More from me about upcoding is forthcoming.)
  • The “it’s all a big bucket of money” theory: “[H]ospitals are able to trade off the lower-than-desired payments in Medicare Advantage for substantially higher rates on commercial insurance.” This is closely related to the cost shifting theory, which is mentioned in the paper. Don’t get me started. Anyway, MA/commercial market plan payment trade-offs are plausible, given how negotiations tend to be conducted. (There’s a research study to be done here.)
    • “Negotiations between hospitals and health plans over MA contracts most often take place as part of negotiations
      over the full range of health insurance products, including commercial insurance.”
    • “Hospital systems predominantly negotiate as a system on behalf of all the system’s constituent hospitals at once, instead of hospital by hospital.”
    • “For health plans with a broad geographic scope, including national insurers, MA negotiations typically are conducted regionally or locally, with central office oversight. Most MA contracts extend two to three years. But a few run up to ten years or are ‘evergreen’ (automatically renewed) with annual inflators and ‘material impact’ language to open them up for renegotiation.”
  • Pay-for-volume still predominates. “By far the most common payment method used in MA plans is traditional Medicare’s diagnosis-related group (DRG) system, or MS-DRGs, for inpatients and traditional Medicare’s ambulatory payment classification for hospital outpatients.”

The bottom line is that MA prices to hospitals basically follow TM’s. Hence, in contrast to the commercial market, MA network contracting is more focused on quality than price, where I speculate that “quality” also includes the willingness and ability of providers to work with MA to maximize government payments and minimize cost (e.g., upcoding and utilization management).

I further speculate that the small deviations from 100% TM price (i.e., to 105%) are to incentivize or select for hospitals that do more of this non-TM stuff. In other words, MA plans are not just paying for care, the way TM does, but also for some degree of cooperation in their ambition to maximize revenue and minimize costs. If I’m right, and it could be teased apart, maybe MA plans don’t even pay 100% TM prices for the “care” portion. (More fodder for research, if feasible.)


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