GAO Faults Medicare Advantage Bonuses

Today’s Managing Health Care Costs Indicator is $8.35 billion

Yesterday the Government Accountability Office (GAO) issued a stinging report on the CMS demonstration project that awards much higher quality bonuses to Medicare Advantage (MA) plans than were outlined in the Affordable Care Act.    The total incremental cost of these bonuses will be $8.35 billion over 10 years.  Most of the increased dollars will go to health plans with “average”  three star ratings (in the five star system).    The remainder of the dollars are spent because these bonuses will prevent loss of membership by MA plans.   The GAO reports that the population covered by bonuses will increase from about 1/3 of beneficiaries to about 90%. This analysis is based on a Kaiser Family Foundation analysis,which notes that 60% of MA beneficiaries were in 3 and 3.5 star plans in 2011.

These quality bonuses will be based on past performance ,  in many instances performance that predated the announcement of the demonstration project. This means that it will be almost impossible to assess the quality impact.  The demonstration project is not budget neutral, and wipes out about 1/3 of the savings that the Affordable Care Act obtained from cutting health plan payments. The total dollar amount exceeds all other CMS demonstration projects combined.

It’s a scathing report –but the stock market reacted not at all.   Humana, United Health Care, Aetna Cigna and Wellpoint all had just small changes in their stock price – not in a consistently downward direction.  It’s possible that Wall Street already knew this information – since the KFF report came out last year.  It’s likely that analysts believe that the Department of Health and Human Services will not follow the GAO recommendations, and this poorly-designed demonstration project with these extra payments will continue.

The Market Works (when properly structured)

Today's Managing Heath Care Costs Indicator is $42 Billion

Durable medical equipment has been a conundrum for Medicare for decades; cable tv ads for scooters give us a sense of the profit margin in this space.   In many states, including Florida and Louisiana, fraud in home care and medical devices is a substantial underlying cause of high costs.

The New York Times and others report today that a pilot program requiring durable medical equipment vendors to bid to provide services to Medicare beneficiaries has been a big success.   This is a bold move -- restricting Medicare beneficiaries to a small number of suppliers who guarantee service levels and price.   No surprise that there has been robust opposition, including a congressional ban on this bidding that was reversed by the Affordable Care Act.  It's a bit distressing to see those promoting market forces opposing this program.  Small, local, high-cost providers will advocate to maintain their business and their profit margins.

The program in nine cities shaved costs by 42%.  CMS projects that nationwide savings from expansion of this program could reach $42 billion, including over $17 billion in decreased out of pocket costs for Medicare beneficiaries.   (Initial pilots probably focused on geographies with high costs, so savings rates from expansion will be lower than from the initial pilots).

Competitive bidding could be applied to pharmaceuticals and other purchasing.   Medicare is a large, high leverage purchaser, and we need CMS to vigorously use its leverage to increase value.  Pharmaceuticals next?  No one will go quietly!