Working on this blog, we come across an awful lot of misinformation about the effects of healthcare reform on Americans and their healthcare, everything from the idea that the federal government will be forcing parents to vaccinate their children (not true), to rationed, socialized medical care (not true), to the now-notorious “death panels” (very not true). Although we will all see some changes in our healthcare and how we pay for it, for most of us, the changes that we will be seeing over the next few years will be relatively minor for the most part.
However, while there’s been a lot of handwringing that healthcare reform would do away with Medicare (also, not true), it is true that as part of healthcare reform, the federal government will be cutting the subsidies that is has been making to Medicare Advantage plans. When healthcare reform was passed, the impact of these changes on Medicare Advantage plans was still unclear, but we’ve gotten a bit more information since then, which we thought we would share with you.
What is Medicare Advantage?
Medicare Advantage plans offer seniors their Medicare benefits through private benefits instead of through the original Medicare Part A and Medicare Part B. Although Medicare Advantage health insurance plans are required to offer health insurance benefits at least as comprehensive as traditional Medicare, the benefits they offer do not have to exactly the same. For example, a Medicare Advantage health insurance plan offer less in some benefits, such as skilled nursing facility care, but it may balance that out with lower co-payments for doctors’ visits.
In addition, in establishing the Medicare Advantage program, the federal government has provided subsidies to health insurance plans which offering Medicare Advantage. Some Medicare Advantage plans have used these federal subsidies to limit patient out-of-pocket costs, but many health insurance plans have used the supplemental funds to provide seniors with additional benefits such as dental insurance, vision care, gym memberships and other benefits not offered by Medicare. It’s estimated that these subsidies were approximately $1,100 per Medicare Advantage member last year. For many seniors, the combination of flexibility and these supplemental health benefits make Medicare Advantage plans highly attractive as a health insurance option.
How Will Healthcare Reform Change Medicare Advantage?
First of all, we want to make this clear: Healthcare Reform is not doing away with Medicare Advantage program.
However, healthcare reform does change the way that the federal government reimburses Medicare Advantage plans. Most importantly, it does away with the subsidies which the federal government first used to establish the Medicare Advantage program ten years ago and which many Medicare Advantage health insurance plans use to offer their supplemental benefits.
These subsidies (which added an additional $14 billion to the Medicare program last year alone) will gradually be reduced until they are eliminated altogether. In 2011, these Medicare Advantage subsidy payments will be frozen at 2010 levels. After that, Medicare Advantage subsidy payments will be reduced an average of 12% per year until they are brought in line with traditional Medicare payments. It’s estimated that these reductions will be the equivalent of about $200 per Medicare Advantage member per year. According to the Congressional Budget Office, by 2019, Medicare Advantage plans will receive a total of $136 billion less than they would have received without these healthcare reform changes.
How Will This Affect My Medicare Advantage Plan?
The cuts to the Medicare Advantage subsidies will not affect all Medicare Advantage plans equally, and given that the cuts will be occurring gradually, it’s still unclear what the long-term effects will be as Medicare Advantage plans continue to compete for business and other healthcare reform requirements (such as having to spend 85% of payments on actual benefits) kick in.
However, this is what we know now:
Federal funding for Medicare Advantage currently is computed on a complex formula that sets a benchmark – or base payment – in each county which is based on the cost of traditional fee-for-service Medicare in the county and other factors such as incentives for plans in rural and some urban areas.
Those Medicare Advantage benchmarks also have allowed some low-cost health care areas to have considerably higher rates of Medicare Advantage federal funding than some of the high-cost jurisdictions. For example, in an county which has relatively high medical costs like many parts of New York, the federal government will pay only slightly more to Medicare Advantage plans on a per dollar basis, (say $1.05 to each $1.00). But in a relatively low medical cost part of the country like Oregon, those payments Medicare Advantage may be much higher on a per dollar basis (say, $1.20 to $1.00).
Under the new healthcare reform cuts, higher medical cost areas will be given lower benchmarks to work with from now on, but ironically, experts say that low medical cost areas may have the hardest time under the new system. That’s because medical costs can be so much higher in an area like New York vs. Oregon, the federal government generally spends much more on average per Medicare Advantage enrollee in New York than in Oregon. So even though even though the federal government may spend 20% more on Medicare Advantage than Medicare in Oregon, on average, the federal government spends more on Medicare Advantage in high medical cost areas like New York.
The result is with more money being spent in New York, ironically, Medicare Advantage plans in New York have more areas in which they can trim their budgets to meet the new benchmarks. Conversely, plans in low-cost areas are likely to have lean budgets already and may be unable to meet the new benchmarks, forcing cuts to benefits and possible closures for some plans.
Of course, this is all still speculation at this point. Changes will phased in over time, so most Medicare Advantage enrollees are unlikely to be affected immediately, if they’re affected at all. After that….All we can say, is hold onto your hat!
Are you using a Medicare Advantage plan? Tell us about it!
- Healthcare Reform: Are We Losing the Advantage? Healthcare Reform and Medicare Advantage
- Healthcare Reform: Study Finds Healthcare Reform Will Be Extended
- Healthcare Reform: Pre-existing Conditions and the Federal Health Insurance Pool
- Healthcare Reform: The Impact of Healthcare Reform on 3 Americans
- Healthcare Reform: Health Insurance and Preventive Healthcare Services