How Providers Can Stop Losing Money on Their Medicare Advantage Contracts

Dr. Sachin Jain and Mike Plumb detail what providers are missing and how collaborative health plans can help.

“In far too many cases, providers themselves signed up for arrangements they didn’t fully understand.” So notes Dr. Sachin Jain, President/CEO of SCAN Group and SCAN Health Plan — a $5.3B non-profit that serves over 300,000 members.

SCAN CFO Mike Plumb agrees.

"There's a lot of variability across providers in the degree of understanding that they have about Medicare Advantage revenue and how it works,” he tells HealthLeaders. “Some of the more sophisticated providers understand pretty well what the plan economics look like. They've got actuaries on their teams that understand how a Medicare Advantage bid works and how the revenue works. But not everyone does."

Jain describes the strategies some carriers use.

“Non-transparent Medicare Advantage plans sometime underpay providers through opaque reimbursement schemes, shifting costs, and hidden terms buried deep in contract appendices.”

The “hidden pitfalls” of provider contracting

Jain cites three examples as “the most common contractual design flaws that providers fail to scrutinize upfront”:

• Star ratings
• Supplemental benefits
• Risk adjustment

Each of these impacts a provider’s Percentage of Plan Premium (POP).

Under POP, the government pays a premium to the health plan, which then pays a percentage of that premium to its contracted providers. Providers want that percentage to not only be fair but on par with what other providers receive (parity).

But Plumb warns that many providers have an incomplete view of this model, and to their detriment.

“Focusing on percentage alone is a provider’s first mistake. If a provider is focused only on the first P [percentage] and not the second [premium], that’s where they can get into trouble with not being paid enough.”

The CFO provides an example of how a provider negotiating a higher POP could be offset by the premium: 90% of a $900 premium and 81% of a $1,000 premium yield the same payment: $810.

"The question is, are providers doing that math on all of their health plan contracts and figuring that out?” Plumb asks.

“With Percentage of Premium contracts, the second P matters as much as the first P. What we try to do at SCAN is promote transparency by having discussions with the providers about what the plan economics are in a way that is going to help them across Star ratings, supplemental benefits, and risk adjustment.”

Another part of that transparency is a clear definition of the premium. In MA Part B rebate plans, for example, the insurance company pays part or all of a member’s monthly Part B premium.

"A lot of providers didn't realize that plans were subtracting the Part B rebate amount before calculating the contracted POP [e.g., removing a $125 Part B rebate from the premium, the second P] and paying the capitation amount."

How Star Ratings lower provider payments

Medicare Advantage Star Ratings affect a health plan’s premium revenue from CMS. If a plan’s rating drops, their payment drops — as does what providers receive.

“The biggest variant is the Star Rating,” adds Plumb. “If you're a four-and-a-half Star plan versus a three-star plan, the revenue differences are more than $100 per member per month (PMPM) for the provider.”

“That’s a material difference.”

Plumb adds that not every contract is a good contract and that there is an alternative to partnering with every payer.

“The better option may be to contract with the plans that perform better on Stars,” says Plumb. That’s could fix a lot of the revenue problems for providers.”

How providers end up paying for member benefits

There’s a saying in healthcare: Squeeze the cost balloon in one place and it bulges in another. An example is MA plans with zero-dollar premiums and supplemental benefits (e.g., dental, vision, fitness, meals). Members may save, but someone must pay.

Jain and Plumb note that plans can recoup these supplemental benefit costs from providers in two ways:

• Excluding them from the defined premium (again, the first P)
• Recapturing their costs by hiding them in the Division of Financial Responsibility (DOFR) section of the contract, which defines which party — plan or provider — is at risk and for what.

Jain recommends that providers read the fine print

How risk adjustment takes its toll

Risk adjustment is a payment approach that helps account for differences in patient health by increasing payments for sicker individuals and reducing payments for healthier ones. There’s just one problem: Some MA plans have been accused of exaggerating member health conditions to receive higher payments. CMS reports that annual overpayments range from $17 billion to as high as $43 billion.

Plumb notes, however, that risk adjustment’s original intent was positive: to prevent adverse selection — a health plan’s strategy to only cover healthy people.

“The risk model was implemented to avoid that situation and to align revenue with cost. This is still crucial for the success of Medicare Advantage. Coding must be accurate and revenue consistent.”

"Providers and plans need to work together to ensure that MA revenue is consistent with the costs that are going to be incurred,” says Plumb.

“That's the way we view it. That assurance is crucial to the success of Medicare Advantage going forward."

Jain recommends that plans support providers with documentation and coding resources to ensure fair compensation.

The importance of partnership

The Star Rating, supplemental benefit, and risk coding examples illustrate the importance of patient volume, revenue margin and scale.

“Initially, with small member volumes, there isn’t much cause for concern. Reimbursements seem manageable,” says Jain.

Plumb agrees.

"A lot of times it is a volume game that providers are playing, not a margin game. But volume's no good if there's no margin."

He adds: "People talk about scale, but scale only exists with the presence of positive contribution. If you add more members that you're losing money on, you're not actually getting any scale."

But Jain emphasizes that “not all Medicare Advantage plans play games. There are plans that are transparent, collaborative, and committed to the long game.”

Plumb echoes this.

“We just believe that we're all better off if everybody understands what's going on. We believe in transparency, we believe in partnership, and we want to help providers understand plan economics so that we can work together toward joint success.”