Policymakers sometimes point to Medicare premium support programs as a possible cost-reduction solution for the federal health insurance program. In this article, Milliman’s Catherine Murphy-Barron and Pamela Pelizzari discuss some of the key financial and insurance issues involved in premium support proposals for Medicare Part A and Part B. The authors also explore the potential advantages and disadvantages of such an approach.
Here is an excerpt from the article:
A premium support model has the potential to fundamentally change the way Medicare benefits are provided to eligible individuals. Such a model would substantially influence both beneficiary and federal spending far into the future.
Financially, the possible implications of some premium support models have been scored by the Congressional Budget Office (CBO) to demonstrate the level of savings or costs to the federal government and affected beneficiaries. Under the options examined, the CBO found that net federal spending for Medicare would decrease in 2024 relative to current law by $84 billion (a 9% decrease) in the second-lowest-bid option (where the federal contribution is set at the second-lowest bid), and by $41 billion (a 4% decrease) in the average-bid option (where the federal contribution is set at the average bid). However, it is worth noting that the CBO projected an increase in spending by beneficiaries on their own premiums and care in the second-lowest-bid option.8
From a beneficiary perspective, the design of any premium support model would be under pressure to demonstrate that beneficiaries would have access to comprehensive coverage for an affordable price. Without sufficient information on the similarities and differences among various plans, beneficiaries may be at a disadvantage in terms of their ability to identify plans that best meet their needs. Financially, beneficiaries are at risk of incurring an increasing percentage of the cost of these plans if the federal contribution is less than the cost of the plans. In the second-lowest bid option that was scored by the CBO, beneficiaries’ spending was projected to increase by 18% (including both premiums and other out-of-pocket costs) in 2024 relative to the amount projected under current law, which represents a substantial increase in out-of-pocket costs for the same level of care.9
Alternate payment contracts (APCs) are being employed to shift utilization risk from payers to providers in an effort to align financial compensation with provider performance. As a result, regulators may require that healthcare providers quantify their financial exposure and maintain adequate reserves to reduce their risks of insolvency. In this paper, Milliman consultants outline items that actuaries consider when reviewing a provider’s APCs and also provide perspective on modeling appropriate levels of financial reserves.
Here is an excerpt:
…The actuary will likely build a model to estimate the appropriate level of financial reserves required for the risk exposure borne by the provider through the APCs. Taking the above points into consideration, a deterministic model can be built to estimate the expected APC’s surplus or deficit based on projected claims and budget. The larger the projected surplus, the less likely random fluctuation from adverse events will cause financial strain on the provider, which will lower the level of required reserves.
A stochastic simulation can be built on top of this model to assign probabilities that the provider’s APC produces a deficit as a result of unforeseen events. A claims probability distribution can be created either from the provider’s actual APC historical claims data or another similar source.
Two main sources of claims variation that should be modeled in the simulation include:
• Mis-pricing. It is possible (probable) that the projected claims cost will not come in as expected because of inaccurate trend setting/assumptions.
• Random fluctuation. Even if the trend assumption is correct, there is always the possibility of chance events from year to year (i.e., larger-than-expected high-cost claimants).
The final post in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series looks at the perplexing question facing American healthcare: What do we do about increasing healthcare costs?
PPACA focuses on expanding coverage and insurance reform, and in some cases it shifts costs from one party to another, but it does not directly affect the unit costs and utilization that are among the major underlying drivers of healthcare costs.
Certain aspects of PPACA have the potential to affect costs. The option to implement an accountable care organization (ACO)13 reprises the managed care movement of the ’80s and ’90s, but with better technology and information, and by transferring the financial risk onto the provider to create an incentive for efficiency. With many potential ACOs already establishing the tools required to succeed,14 this reinvigorated movement is already in motion. The nuts and bolts of an ACO are still the parts needed for a more efficient system.
Most of PPACA’s explicit ACO efforts center on Medicare, and while the Medicare Shared Savings Program (MSSP) and Pioneer Programs will continue, the potential for commercial ACOs15 may prove just as significant.
Accountable care is not a solution to everything that ails the entire healthcare system, but it offers some hope and, to the extent it can meaningfully control unit costs and utilization, it just may work.
Rob Parke and Kate Fitch discuss accountable care organizations here. For more on ACOs, consider reading “ACOs Beyond Medicare” and “Nuts and Bolts of ACO Financial and Operational Success: Calculating and Managing to Actuarial Utilization Targets.” You may also be interested in the Milliman Medical Index.
In July 2012, New York state is scheduled to roll out a mandate that individuals receiving community-based long-term care services funded by Medicaid must enroll in managed long-term care (MLTC) plans. This mandate will be implemented gradually, starting with the five boroughs of New York City.
Provider organizations need to be aware that under this mandate managed long-term care plans are funded using a capitation mechanism in which they receive a lump sum per member from which they must pay most long-term care and other ancillary expenses. The risk shifts from the Medicaid program to the plan. Running a successful managed long-term care plan therefore requires significantly more investment in risk management, financial management, and strategic planning than do fee-for-service arrangements.
Health plans and home healthcare agencies that were successful under fee-for-service reimbursement need to understand and plan for these changes, which will ultimately result in reduced utilization per long-term care patient.
This paper discusses these and other issues pertaining to MLTC plans in New York.
With accountable care organizations (ACOs) soon to serve more than a million Medicare patients, it is clear that this model of care delivery is receiving an unprecedented test of its viability, and, if it works as intended, may reshape how healthcare is paid for on a larger scale. Cigna alone plans to have more than a million people enrolled in ACOs by 2014, and says it believes that ACOs are going to be important regardless of the Supreme Court’s ruling on the Patient Protection and Affordable Care Act (PPACA).
With so much focus on the topic, it’s worth taking a look back at some of the research and analysis on ACOs published by Milliman on the topic over the past couple of years.
First, for a good summary of ACOs—what they are and how they work—start with this overview video featuring a number of Milliman experts.
For many observers, the key question about ACOs is whether they represent a financially viable model compared to fee-for-service. Effective financial management will be key to success. Milliman has produced a number of relevant papers:
With all the attention on Medicare ACOs, it’s easy to forget that they exist in the private market, as well. For more on such entities, look at “ACOs Beyond Medicare,” which describes the potential advantages for providers who partner with a private insurer rather than with CMS. A 2011 Managed Healthcare Executive roundtable featuring Milliman consultant Rob Parke also discussed ACOs in the private market.
A number of other papers have also been published discussing various aspects of ACOs such as:
Modern Healthcare looks at the financial risks facing potential accountable care organizations (ACOs). Here is an excerpt:
The highest performers may not achieve the most savings, warned actuary firm Milliman in a separate report. Providers will need to conduct risk analyses before signing on to Medicare’s shared savings program, according to Milliman. For instance, high-performing systems may not be able to produce sufficient savings. “It will be easier for the inefficient systems to beat their targets,” according to the report.
For instance, “ACOs operating with low inpatient utilization and low cost will need to work hard on non-inpatient services to achieve significant savings,” according to Milliman. In conclusion, Milliman actuaries said the proposed rule offers “much less upside to ACO ‘A’ students who operate in very efficient systems than to ACO ‘C’ students who operate in systems with a lot of inefficiencies.”