Is First Medicare Advantage Cut a Fatal Blow?

No one should be surprised that the Centers for Medicare and Medicaid Services lowered Medicare Advantage reimbursements to health insurers this week.

If there is any glimmer of good news out of the announcement, it is that CMS will cut private insurer reimbursement between 4% and 4.5% for 2010 rather than the 5% that was expected.

The pay cut announcement comes a month after the Obama administration implemented stricter terms for health insurers that offer Medicare Advantage. In the new regulations, health insurers will not be able to charge sick, low-income patients more than they would pay under traditional Medicare. The administration's move was a preemptive strike to prevent Medicare Advantage insurers from transferring costs onto the most vulnerable beneficiaries once the payment cuts were put into effect.

This added attention on Medicare Advantage was expected. Think about this equation: Add a Democratic president and Congress that historically haven't supported privatization of public programs with Medicare Advantage services costing the federal government 14% more than traditional Medicare.

Medicare Advantage supporters say the program offers benefits beyond traditional Medicare, including care coordination and vision and drug coverage. However, program foes paint the private Medicare program as a Bush-era giveaway to health insurers.

The truth is—as always—somewhere in the middle.

Yes, Medicare Advantage costs are higher than traditional Medicare, but Medicare Advantage offers programs not found in the classic fee-for-service program. Medicare Advantage is also the home of special needs plans, which cover institutionalized beneficiaries who are dual eligibles and suffer from disabling chronic diseases.

SNPs face the same reimbursement cuts as other Medicare Advantage plans. If traditional Medicare was looked upon as a superior offering, I would have less of a problem with payment cuts to SNPs, but the fee-for-service program does not offer the same level of services to these needy beneficiaries. Plus, traditional Medicare has its own problems, including doctors fleeing the program because of the woeful payment levels. But there could be more bad news for insurers. Medicare Advantage insurers might not get out of 2009 without getting whacked again. Congress will need to conduct its annual search for cost-cutting alternatives in order to delay the 21% physician payment cut. Medicare Advantage could be the first stop on Congress' annual cost-cutting, program-slicing jamboree.

All of these issues show that Medicare Advantage insurers face a difficult decision. Do they ride out the cuts and hope the administration doesn't come back for another round of payment cuts this year and next? Or do they get out of the private Medicare program and devote their attention to the commercial and individual markets?

If they decide to drop Medicare Advantage, private insurers would force many of the more than 10 million seniors covered by the program into a healthcare system that faces physician shortages, is devoid of care coordination, and without the ancillary services that have improved beneficiaries' quality of life.

If this was a one-time payment cut, most Medicare Advantage insurers would probably stay in the program and look for ways to cut costs while maintaining the same level of services. But with more payment cuts expected, don't be surprised if insurers pass more costs onto beneficiaries or simply drop out of the program.