Reductions in Medicare Advantage Payments: Impact on …media.khi.org/news/documents/2010/10/19/Heritage_Foundation_MA_impact.pdfOct 19, 2010 · changes will also significan tly

Reductions in Medicare Advantage Payments: The Impact on Seniors by Region

Robert A. Book, Ph.D., and James C. Capretta

Abstract: The Patient Protection and Affordable CareAct substantially alters Medicare Advantage and, as aconsequence, reduces the access of senior citizens andthe disabled to quality health care by restricting andworsening the health care plan options available tothem. Lower-income beneficiaries, Hispanics, and Afri-can–Americans will bear a disproportionate share of theact’s Medicare Advantage payment reductions. Thosereductions will also indirectly impose higher Medicaidcosts on state and federal governments and lead toincreased spending on prescription drugs by shiftingcosts to Medicare Part D.

The Patient Protection and Affordable Care Act(PPACA)1 will cause millions of senior citizens anddisabled Americans to lose billions of dollars inhealth care services every year by substantially reduc-ing payments to Medicare Advantage (MA) plans.2

The act will also dramatically reduce the ability ofMedicare beneficiaries to make health care choices forthemselves.

Low-income beneficiaries and minorities, espe-cially Hispanics, will bear the brunt of the MA cuts.About three-fourths of the cuts will hit those withincomes of less than $32,400 per year in today’s dol-lars. The loss of benefits will also vary widely by geog-raphy, with beneficiaries in the hardest-hit countiesfacing cuts almost five times as large as cuts for resi-dents in the least-hit counties. In every county, theaverage beneficiary will lose at least 15 percent of his

No. 2464September 14, 2010

Talking Points

This paper, in its entirety, can be found at: http://report.heritage.org/bg2464

Produced by the Center for Data Analysis

Published by The Heritage Foundation214 Massachusetts Avenue, NEWashington, DC 20002–4999(202) 546-4400 • heritage.org

Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to

aid or hinder the passage of any bill before Congress.

• If the Patient Protection and Affordable CareAct’s Medicare Advantage “reforms” takeeffect, they will restrict senior citizens and thedisabled to fewer and worse health carechoices, reducing their access to qualityhealth care.

• The PPACA will force an estimated 7.4 millionpeople (50 percent of enrollees) out of healthplans they would have chosen under priorlaw and into the fee-for-service program.

• Transferring beneficiaries to FFS will alsohave the secondary effect of increasing Med-icaid and Medicare Part D spending byalmost $2.5 billion in 2017.

• Medicare beneficiaries who would haveenrolled in the Medicare Advantage programunder prior law will lose an average of $3,714in 2017 health care services.

• The reforms will also exacerbate the prob-lems associated with fragmentation of care,disproportionately harm low-income andminority beneficiaries, increase state and fed-eral Medicaid costs, and increase spendingon prescription drugs.

No. 2464

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September 14, 2010

or her benefits. The secondary effects of thesechanges will also significantly increase spending onMedicaid and Medicare Part D.12

The PPACA cut Medicare Advantage deeply tooffset a portion of the new non-Medicare entitle-ment spending contained in the legislation.Phased in between 2012 and 2017, the MA cutswill substantially restrict the ability of Medicarebeneficiaries to choose the health plans that bestmeet their needs and will result in substantialreductions in coverage for many millions ofseniors and disabled Americans. According to theOffice of the Actuary at the Centers for Medicareand Medicaid Services (CMS), by 2017, when thechanges are fully phased in, 14.8 million seniorcitizens and disabled Americans who would havehad Medicare Advantage benefits under the previ-ous law will be denied coverage for many servicesand incur higher out-of-pocket costs. About halfwill lose Medicare Advantage coverage entirely.3

Others will stay in Medicare Advantage, but atreduced benefit levels and possibly in differentplans that do not meet their needs as well.

In this paper, we provide a brief background onthe Medicare Advantage program and a descrip-tion of the changes made by the new legislation.Most important, we provide quantitative esti-mates of the impacts of these changes on Medicarepatients.

BackgroundIn 1982, Medicare had been in operation for

less than two decades, but it was already clear thatthe program’s fee-for-service (FFS) design hadserious shortcomings. Program administratorswere holding down fees for each service provided

to Medicare patients to control costs, but it wasnot working because the volume of services pro-vided to patients was increasing so rapidly thatthe costs of extra services more than offset theprice cuts. Separate fee schedules for each type of

provider (for example, hospitals, outpatient cen-ters, physicians, and labs) encouraged fragmenta-tion of care, with stand-alone operations billingMedicare separately for different components ofthe same treatments.

Moreover, despite Medicare’s high level ofspending, most seniors and disabled beneficiariesviewed the coverage as so inadequate that theypurchased supplemental coverage at their ownexpense if they did not have access to a wrap-around plan from a former employer. In fact, theycontinue to do so; in 2006 (the latest figures avail-able), Medicare covered only 59 percent of FFSbeneficiaries’ health care expenses, and 91.3 per-cent of Medicare beneficiaries had some sort ofsupplemental coverage.4

Congress sought to address these shortcomingsby amending the law to give Medicare beneficiariesaccess to private-sector coverage options. The “riskcontracting program” allowed health maintenanceorganizations (HMOs) to provide coverage for afixed monthly “capitated” payment (5 percent

1. The Patient Protection and Affordable Care Act (Public Law 111–148) was enacted on March 23, 2010, and was amended by the Health Care and Education Reconciliation Act of 2010 (Public Law 111–152), which was enacted on March 30. For convenience, in this paper, we refer to the final legislation, as amended, as the Patient Protection and Affordable Care Act (PPACA).

2. Section 3210 of the PPACA, as amended, alters the payment formula for Medicare Advantage plans.

3. Richard S. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended,” Centers for Medicare and Medicaid Services, Office of the Actuary, April 22, 2010, at http://www.cms.gov/ActuarialStudies/Downloads/PPACA_2010-04-22.pdf (May 25, 2010).

4. Medicare Payment Advisory Commission, A Data Book: Healthcare Spending and the Medicare Program, June 2010, pp. 65–67, at http://www.medpac.gov/documents/Jun10DataBookEntireReport.pdf (September 12, 2010).

_________________________________________

Despite Medicare’s high level of spending, most seniors and disabled beneficiaries viewed the coverage as so inadequate that they purchased supplemental coverage at their own expense if they did not have access to a wraparound plan from a former employer.

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page 3

No. 2464 September 14, 2010

below estimated FFS spending in a county) inexchange for accepting the full insurance risk fortheir patients. The program evolved gradually overthe years. Non-HMO plans were permitted to par-ticipate, and the payments to private-plan alterna-tives were adjusted.

In 1997, the program was renamed Medi-care+Choice, and the payment structure wasrevised substantially. In 2003, Congress renamedthe program Medicare Advantage and furtherrevised the payment structure.

The MA Payment System Before PPACAIdeally, Medicare payments to private plans

would compete on a level playing field with thetraditional FFS option. One way to achieve thiswould be to require both private plans and FFS tobe made available to Medicare beneficiaries withtransparent pricing.

In the late 1990s, the leaders of the NationalBipartisan Commission on the Future of Medi-care recommended full competition in whichsponsors of local private plans and a reformedFFS option would submit “bids” to provide Medi-care-covered services in a defined region. Theaverage bid (weighted for enrollment) could thenbe used as the standard payment for any planselected by a Medicare enrollee. If an enrolleeopted for a plan that charged more than the stan-dard payment, the enrollee would pay the differ-ence. Enrollees who opted for a less expensiveplan would pocket the savings.5

Congress never adopted this recommendation.Opponents of competition objected to putting FFS

in direct competition with private plans and toloosening the highly regulated, administrativelydetermined payment systems for FFS that a movetoward genuine competition would require.Instead, Congress has maintained the approach inwhich all Medicare beneficiaries pay the samenational premium regardless of the actual costs intheir local areas.6

Thus, the system has evolved into a complex,opaque administered-pricing system that uses mea-sured FFS costs in a county as a starting point fordetermining private-plan payment rates. It thenapplies different rules for different circumstances ineach county.

This approach to making payments to privateplans has several serious flaws.

First, using measured FFS costs as a basis for MApayment locks in massive and, in the view of many,irrational7 regional variations in FFS spending. In2009, the expected monthly cost of an FFS enrolleein Dade County, Florida, was $1,213—more thantwice the expected FFS spending level of $589 permonth in Portland, Oregon. Many experts believethat spending in south Florida is inflated byextraordinary amounts of waste and fraud in theFFS program.8

Second, using average FFS spending to determineMA payments is problematic because FFS paymentsvary for many reasons unrelated to the factors facedby MA programs. For example, FFS payments areuniform across the country, except for certain geo-graphic adjustment factors that are imperfectly esti-mated and too imprecise to reflect local market

5. National Bipartisan Commission on the Future of Medicare, “Building a Better Medicare for Today and Tomorrow,” March 16, 1999, at http://thomas.loc.gov/medicare/bbmtt31599.html (September 1, 2010).

6. The Part B premium is defined by statute and varies only by the beneficiary’s income. Beneficiaries in low-spending areas pay the same premiums as those in high-spending areas, regardless of whether the higher spending is due to higher payments for each service, geographic variations in input costs, or higher use of the health care system (that is, more health care services delivered per beneficiary).

7. Elliott Fisher, David Goodman, Jonathan Skinner, and Kristen Bronner, “Health Care Spending, Quality, and Outcomes: More Isn’t Always Better,” Dartmouth Atlas Project Topic Brief, February 27, 2009, at http://www.dartmouthatlas.org/downloads/reports/Spending_Brief_022709.pdf (September 9, 2010).

8. For example, see U.S. Department of Health and Human Services, Office of the Inspector General, “Aberrant Claim Patterns for Inhalation Drugs in South Florida,” April 2009, at http://www.oig.hhs.gov/oei/reports/oei-03-08-00290.pdf (September 2, 2010).

No. 2464

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September 14, 2010

conditions. In many regions, this gives an inappro-priate “advantage” to FFS because FFS pays below-cost rates for services by regulatory fiat.

In addition, per-patient FFS spending dependson both the price per service and the quantity ofservices provided (utilization). MA plans areexpected to achieve savings by managing utilizationto reduce unnecessary and duplicative services. How-ever, in many low-density areas, utilization is very

low because accessing care can be difficult. For rea-sons that are poorly understood, geographic varia-tion in FFS averages reflects not only differencesin Medicare’s administratively determined priceadjustments, but also differences in utilizationacross regions.9

Finally, using FFS as a reference point for MApayments may be counterproductive and may actu-ally penalize successful cost control by MA plans.Michael Chernew of Harvard University and his col-leagues found that higher participation in MA man-aged-care plans is associated with lower per-beneficiary FFS spending at the county level.10 Theauthors speculate that this may be due to a spillovereffect from physicians who practice in a more effi-cient managed-care environment caring for theirFFS patients in the same manner. If so, this correla-tion produces a perverse incentive when MA pay-ments are tied to FFS costs: Successful cost cuttingby MA plans leads to lower FFS spending, which inturn leads to lower MA payments. In time, lowerMA payments would lead to reduced MA benefitsand enrollment, which could cause FFS spending torise, reducing or eliminating the cost benefits ofmore efficient care.

In 1997 and 2003, Congress amended the law,moving away from strict adherence to measuredFFS costs as a basis for private-plan paymenttoward a system of modified bidding by the pri-vate plans measured against county-by-countybenchmarks. The benchmarks originate in mea-sured FFS costs but undergo several substantialmodifications that are not uniform across thecountry. For instance, payment floors were addedso that beneficiaries in counties with especiallylow measured FFS costs (for example, rural areaswith low utilization) can benefit from the pres-ence of private plans with different deliveryoptions. In addition, because of how the bench-marks have been indexed, their rates of increaseare sometimes faster than rates of increase in localFFS spending.

Private plans participating in Medicare Advan-tage submit bids for a monthly capitated paymentfor a standard beneficiary. The plans are paid whatthey bid, adjusted by the health status of the enroll-ees. If a beneficiary chooses a plan that bid underthe benchmark price, the savings are dividedbetween the government (25 percent) and benefi-ciaries (75 percent). Beneficiaries receive their sav-ings in the form of additional health benefits, lowercost sharing, or a rebate on the standard Part B pre-mium. If a beneficiary chooses a plan priced higherthan the benchmark, the beneficiary pays the dif-ference. As a result, most MA plans provide anenhanced benefit package, often at a lower cost tothe beneficiary than Medicare FFS plus a supple-mental plan.

The MA Cuts in the PPACAThe Patient Protection and Affordable Care Act

calls for substantial changes in the Medicare Advan-tage payment system, primarily in the way the MAbenchmarks are calculated. Under the new formula,MA benchmarks will again be tied directly to theaverage per-beneficiary spending under the FFS

9. For a more extensive discussion of this issue, see Jason D. Fodeman and Robert A. Book, “‘Bending the Curve’: What Really Drives Health Care Spending,” Heritage Foundation Backgrounder No. 2639, February 17, 2010, at http://www.heritage.org/Research/Reports/2010/02/Bending-the-Curve-What-Really-Drives-Health-Care-Spending.

10. Michael Chernew, Philip DeCicca, and Robert Town, “Managed Care and Medical Expenditures of Medicare Beneficiaries,” Journal of Health Economics, Vol. 27, Issue 6 (December 2008), pp. 1451–1561.

_________________________________________

Most Medicare Advantage plans provide an enhanced benefit package, often at a lower cost to the beneficiary than Medicare fee-for-service plus a supplemental plan.

____________________________________________

page 5


program, as measured by the program’s actuarialstaff. All counties and similar jurisdictions11 in theU.S. will be ranked in order of their average FFSspending. The MA benchmarks for each county willbe an “applicable percentage” of that county’s aver-age FFS spending, calculated as follows:

• For counties ranked in the highest quartile (thetop 25 percent) by FFS spending, the MA bench-mark will be 95 percent of the measured FFSspending for that county.

• For counties in the second quartile, the bench-mark will be equal to the county’s measured FFSspending.

• For counties in the third quartile, the benchmarkwill be 107.5 percent of the county’s measuredFFS spending.

• For counties in the lowest quartile, the bench-mark will be 115 percent of the county’s mea-sured FFS spending.

All counties will be treated with equal weight inthese rankings, regardless of population, number ofMedicare beneficiaries, or relative availability ofMA.12 The PPACA specifies that MA benchmarksfor 2011 will be the same as those determinedunder prior law for 2010 and that the new bench-mark formulas will be phased in over the next twoto six years. Counties with bigger changes willadjust to the new rate over a longer period. The newformulas will be fully phased in by 2017.

The Impact of MA Cuts on BeneficiariesAccording to the CMS Office of the Actuary, the

new formula generally calls for a reduction inbenchmarks.13 In fact, the calculations presentedin this paper show that the new formulas willreduce every county’s benchmark in 2017 relativeto its projected benchmark for 2017 under priorlaw.14

Because MA health plans are required to rebate“excess” payments to their beneficiaries in somecombination of extra health care benefits, lower co-payments, or lower Part B premiums, the reductionin benchmarks will necessarily make MA plans lessgenerous for patients. This translates into a loss inbenefits (or money) for patients who stay in MAplans. This loss may prompt some patients to switchto FFS, which will entail a loss of value relative totheir options under prior law.

In addition, some MA insurers will have diffi-culty generating sufficient margins, or just breakingeven, in some regions of the country, thus leadingthem to shut down some or all of their plan offer-ings. This will force current or potential enrolleesto enroll in less-preferred options, such as FFS ora less-preferred MA plan if one is still available.Due to these factors, the CMS actuary projects thatenrollment in MA plans in 2017, when the MA cutsare fully phased in, will be about half (7.4 million)of what it would have been under prior law (14.8

11. Most states are divided into counties, but some states have independent cities that are not part of any county, and others have a few “consolidated” city-county jurisdictions. Louisiana calls its subdivisions parishes instead of counties. All of these jurisdictions are treated the same way under the relevant legislation. For convenience, we refer to all of them as counties regardless of their specific local designation.

12. Counties in the 50 states and the District of Columbia will be ranked and divided into quartiles. Counties in other U.S. jurisdictions (Puerto Rico, Guam, Virgin Islands) will be treated according to the quartile in which a county in one of the 50 states would fall if it had the same FFS average as the county in the non-state jurisdiction. Our calculations described later in this paper show that all counties in Puerto Rico and the Virgin Islands would fall in the lowest quartile; data for Guam were unavailable.

13. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended,” p. 11.

14. If the changes in MA are considered in isolation from the rest of the Medicare reforms in PPACA, the benchmark would decrease for 96.7 percent of counties and increase for the remaining 3.3 percent. The increases would be less than 2 percent except in two cases: one county in Puerto Rico and one in the Virgin Islands, affecting fewer than 400 would-be enrollees. However, the actuary projects that other PPACA provisions will reduce the FFS averages by 2017, making the 2017 benchmark lower than it would have been under prior law in every county in all 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. We did not calculate projected benchmarks for Guam because the necessary data were not available to us at the time of writing.

No. 2464

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September 14, 2010

million).15 In other words, half of those who wouldhave chosen MA under prior law either will beunable to enroll in MA plans at all or will no longerfind it attractive to do so.

Regardless of which outcome a particular patientexperiences, every patient who would have enrolledin an MA plan under prior law will experience a lossin the value of his or her Medicare coverage.

Transferring beneficiaries from MA to FFS willalso have the secondary effect of increasing Medic-aid and Medicare Part D spending by almost $2.5billion in 2017. This does not include higher out-of-pocket spending by patients for what will generallybe lower levels of health care services.

In other words, instead of reducing waste, theMA cuts will simply cut health care services avail-able to patients and transfer spending from Medi-care Advantage to other federal programs and otherpayers (including patients), thus increasing federaland state spending on Medicaid and patient spend-ing on Part D, supplemental care plans, and out-of-pocket costs.

Analyzing the MA ReductionsThere are two approaches to analyzing how the

PPACA will affect MA payment rates. The firstapproach isolates the impact of the change in theMA payment. This method implicitly assumes thatcounty FFS averages will remain as they would havebeen under prior law.16 This estimate accounts forboth the reduction in MA benchmarks for those

who retain MA and the difference between FFS pay-ments and MA benchmarks for those who voluntar-ily or involuntarily drop MA.

However, other provisions of the PPACA will sig-nificantly change FFS payments, indirectly loweringMA payments by substantial amounts. The secondapproach accounts for this and determines the com-bined effect of the MA payment formula change andFFS cuts on MA rates. It will more closely reflectwhat Medicare enrollees will actually experience in2017 under the new law. This paper presents resultsusing both methods.17

ResultsBy 2017, Medicare beneficiaries who would

have enrolled in Medicare Advantage under priorlaw will lose an average of $1,841 due to the MAchanges alone and $3,714 when the effects of theentire bill, including the FFS cuts, are considered.Because the effects vary by geographic area, weestimate the dollar value of the lost benefits andthe number of beneficiaries who lose MA for eachstate, county,18 and congressional district.19 Table1 shows the estimates for each state in 2017,including projected drops in enrollment andreductions in benefits.


16. Using this approach, Medicare’s chief actuary projects that the new law will reduce the annual payments for beneficiaries who would have been enrolled in MA under the prior law by $21.15 billion ($1,429 per beneficiary) in 2017. See ibid., Table 3. The estimate includes both the reduction in MA payments due to lower benchmarks and the reduction due to having fewer MA enrollees. It also accounts for the fact that those who do not enroll in MA will instead participate in FFS, thus increasing FFS spending but by less on average than the decrease in MA spending.

17. For a full description of the methodology used to calculate these results, see Appendix A.

18. For the county-level data, see Robert A. Book and James C. Capretta, “County-Level Effects of Medicare Advantage Changes in the Patient Protection and Affordable Care Act (PPACA),” The Heritage Foundation, September 2010, at http://thf_media.s3.amazonaws.com/2010/pdf/MA_County_Results_Summary.pdf (September 8, 2010).

19. For the data by congressional district, see Robert A. Book, James C. Capretta, and Jason Richwine, “The Effects of Medicare Advantage Changes in the Patient Protection and Affordable Care Act (PPACA) by Congressional District,” The Heritage Foundation, at http://thf_media.s3.amazonaws.com/2010/pdf/MA_Congressional_District_Results_Summary.pdf (forthcoming).

_________________________________________

Every patient who would have enrolled in an MA plan under prior law will experience a loss in the value of his or her Medicare coverage.

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page 7


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No. 2464

page 8

September 14, 2010

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Tabl

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• B

2464

Ta

ble

1 •

B 24

64

heri

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Sour

ces:

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page 9


The CMS Office of the Actuary estimates that thePPACA will force 7.4 million people (50 percent ofenrollees) out of the health plans they would havechosen under prior law and into the FFS program. Wefind substantial geographic diversity in this effect,ranging from 38 percent in Montana to 62 percent inLouisiana, with a 67 percent loss in the District ofColumbia and a striking 84 percent loss in Puerto Rico.(See Map 1.) These percentages do not include thosewho would lose access to their preferred MA plan butwould enroll in another MA plan instead of FFS.

Overall, 14.8 million would-be enrollees willsustain a loss in the value of their health care cover-

age. Of those, almost 7.4 million will either losetheir access to MA plans entirely or drop out of MA“voluntarily” because the reduced benefits makeMA less attractive. By 2017, the average enrolleewill lose $3,714 in health care services per year,totaling $54.97 billion for all such beneficiaries.The benefit losses will vary widely by state from alow of $2,780 in Montana to a high of $5,092 inLouisiana. (See Map 2.)

At the county level,20 the impact varieswidely. Furthermore, the pattern of disparitiesdiffers significantly depending on the unit ofmeasurement: average per-beneficiary service

20. The accuracy of county-level results is limited by the public availability of data. For further discussion of the limitations of the data, see Appendix A.

–42%

–44%

–46%

–46% –36%

–50%

–45%

–60%

–45%

–40%

–47%

–50%

–49%

–49%

–46%

–46%

–56%

–43%

–51%

–53%

–46%

–47%

–40%

–46%

–38%

–48%

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–46%–44%

–42%

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–41% –43%

–55%

–45%

Decline 30%–40%Decline 41%–45%Decline 46%–50%Decline 51%+

WY

WV

WI

WA VT

VA

UT

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SD

SC

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OR

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LA

KYKS

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ID

IA

HI

GA

FL

DE

DC

CT

COCA

AZAR

AK

AL

heritage.orgMap 1 • B 2464

Source: Authors’ calculations based on figures and projections from the Centers for Medicare and Medicaid Services and the U.S. Census Bureau. See Appendix A for details.

Projected Change in Medicare Advantage Enrollees Under PPACA

How the Health Care Law Will Affect Medicare Advantage Enrollment in 2017

No. 2464

page 10

September 14, 2010

$2,8

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herit

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e C

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page 11


cuts in dollars, average per-beneficiary servicecuts as a percentage, or the percentage of benefi-ciaries who will be transitioned entirely out ofthe MA program. Table 2 shows the countieswith the 30 largest and 30 smallest impacts interms of reduced enrollment, Table 3 shows thecounties with the 30 largest and 30 smallestimpacts in dollars of loss, and Table 4 shows thecounties with the 30 largest and 30 smallestimpacts in the percentage loss.21

Impact by Race/Ethnicity and Income. Minor-ity Medicare beneficiaries are disproportionatelyrepresented among MA enrollees today. Comparedto the average Medicare beneficiary, Hispanics aretwice as likely and African–Americans are 10 percentmore likely to enroll in MA. As Table 5 shows, theMA cuts in the PPACA are projected to cause His-panics to lose $2.3 billion in benefits and African–Americans to lose more than $6.4 billion in benefits.Almost 300,000 Hispanics and more than 800,000African–Americans will lose access to MA. These fig-ures are almost certainly underestimates because theproportion of the Medicare population in thesegroups will likely increase over time.

Impact by Income. Disproportionately highnumbers of lower-income Medicare beneficiariesselect MA. This is understandable because MAplans are usually associated with lower co-paysand deductibles than FFS, and lower-income ben-eficiaries are less likely to obtain other sources ofsupplemental coverage, such as employer-spon-sored retiree supplemental plans or Medigap,which is generally more expensive to the patientthan MA.

Compared to the average beneficiary, those withincomes (in today’s dollars) between $10,800 and$21,600 are 19 percent more likely to select MA,and those with incomes between $21,600 and$32,400 are 10 percent more likely to enroll in MA.

However, the very lowest-income group (annualincomes less than $10,800) is actually slightly (6percent) less likely to enroll in MA.22 This is proba-bly because more of them are eligible for Medicaidcoverage of Medicare co-pays and deductibles aswell as services not covered by Medicare.

As Table 6 shows, more than 10.3 million Medi-care beneficiaries with incomes under $32,400 intoday’s dollars are projected to lose a total of $38.5billion per year in health care services delivered(measured in federal spending, with the usual cave-ats). This represents 70 percent of the entire cut.More than 5 million will lose all access to MA. Fur-thermore, because the dollar value of a particularbeneficiary’s loss is related only to the county of res-idence and not to income status, those with lowerincomes will sustain losses that are much higherpercentages of their income. In effect, the MA cutsare a regressive tax that disproportionately pun-ishes low-income seniors and low-income disabledbeneficiaries.

Increased Medicaid Spending. Many low-income Medicare beneficiaries are also eligible forMedicaid. Depending on their precise income sit-uation, these “dual-eligibles” may receive assis-tance through the Medicaid program to offsettheir Part B premiums and possibly their Part Aand Part B co-pays. The dual-eligibles are also eli-gible to select an MA plan. When they do, theyoften do not see the need to pursue Medicaid cov-erage because MA plans typically charge muchlower co-pays than FFS. However, when dual-eli-gible beneficiaries lose their MA plans, many willsign up with Medicaid and thus increase both fed-eral and state Medicaid costs.

The size of this increase could be staggering. Theaverage dual-eligible beneficiary enrolled in MA in2005 cost the Medicaid program only $30 per yearbut would cost the Medicaid program an estimated

21. These tables report the 30 highest and 30 lowest counties that have populations above 100,000 and are not in Puerto Rico. The CMS reports enrollment by county and MA plan pairs. For privacy reasons, they suppress data for county and plan pairs with fewer than 10 enrollees. This can produce biased results for smaller counties. In addition, due to the extreme impact on Puerto Rico, the top 34 most-affected counties are all in Puerto Rico.

22. Incomes are in 2006 dollars. See “Low-Income and Minority Beneficiaries in Medicare Advantage Plans, 2006,” America’s Health Insurance Plans (AHIP) Center for Policy and Research, September 2008, Table 6B, at http://www.ahipresearch.org/pdfs/MALowIncomeReport2008.pdf (September 12, 2010).

No. 2464

page 12

September 14, 2010

Coun

ties

with

Hig

hest

and

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est P

erce

ntag

e Lo

ss o

f Med

icar

e Ad

vant

age

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t

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ces:

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hors

’ cal

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tions

bas

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om t

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rs fo

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and

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s Bu

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ong

non–

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ulat

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o th

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s Bu

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’s 20

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Tabl

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• B

2464

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2464

heri

tage

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naM

issou

la3,

864

2,57

233

%–2

5Te

xas

McL

enna

n8,

593

5,72

433

%–2

4O

hio

Alle

n3,

260

2,17

833

%–2

3So

uth

Car

olin

aSu

mte

r3,

336

2,23

033

%–2

2O

hio

Way

ne6,

781

4,53

633

%–2

1In

dian

aLa

Por

te1,

377

923

33%

–20

Sout

h D

akot

aPe

nnin

gton

2,49

61,

672

33%

–19

Nor

th C

arol

ina

Ons

low

1,00

467

533

%–1

8A

rizon

aC

ochi

se7,

835

5,29

932

%–1

7Ka

nsas

Dou

glas

1,15

578

132

%–1

6Illi

nois

La S

alle

2,01

01,

360

32%

–15

Texa

sW

ichita

985

667

32%

–14

Mon

tana

Yello

wst

one

6,32

64,

285

32%

–13

New

York

Ulst

er5,

521

3,76

132

%–1

2A

laba

ma

Hou

ston

2,71

21,

848

32%

–11

Cal

iforn

iaSa

n Lu

is O

bisp

o7,

498

5,12

132

%–1

0W

ashi

ngto

nC

owlit

z10

,372

7,08

632

%–9

Mai

nePe

nobs

cot

4,24

82,

903

32%

–8W

ashi

ngto

nW

hatc

om10

,992

7,54

231

%–7

Ala

bam

aC

alho

un3,

349

2,30

131

%–6

Nor

th C

arol

ina

Har

nett

1,56

31,

080

31%

–5A

rizon

aYu

ma

5,63

33,

902

31%

–4Pe

nnsy

lvan

iaBl

air

16,6

6811

,566

31%

–3M

ichig

anBe

rrie

n7,

585

5,28

630

%–2

Ala

bam

aTu

scal

oosa

6,51

94,

578

30%

–1So

uth

Car

olin

aH

orry

6,47

04,

545

30%

page 13


Coun

ties

with

Hig

hest

and

Low

est A

vera

ge D

olla

r Cut

s Pe

r Ben

efi c

iary

Sour

ces:

Aut

hors

’ cal

cula

tions

bas

ed o

n da

ta fr

om t

he C

ente

rs fo

r M

edic

are

and

Med

icai

d Se

rvic

es a

nd t

he U

.S. C

ensu

s Bu

reau

. See

App

endi

x A

for

deta

ils.

Not

e: R

anks

are

am

ong

non–

Puer

to R

ico

coun

ties

with

pop

ulat

ions

in e

xces

s of

100

,000

acc

ordi

ng t

o th

e U

.S. C

ensu

s Bu

reau

’s 20

09 e

stim

ates

.

Tabl

e 3

• B

2464

Tabl

e 3

• B

2464

heri

tage

.org

heri

tage

.org

30 C

ou

nti

es w

ith

Hig

hes

t A

vera

ge D

olla

r L

oss

per

En

rolle

e

Stat

eC

ount

y

Cut

Due

to M

A

Cha

nges

Alo

ne,

Disr

egar

ding

O

ther

Pro

visio

ns

Tota

l Cut

Due

to

PPA

CA

, C

ount

ing

Both

M

A a

nd F

FS

Cha

nges

Rank

from

Top

1Lo

uisia

naA

scen

sion

$7,0

5734

.41%

$9,3

0945

.40%

2N

ew Yo

rkN

ew Yo

rk$3

,887

21.7

9%$6

,140

34.4

1%3

Texa

sG

alve

ston

$3,6

8421

.71%

$5,8

2934

.34%

4C

alifo

rnia

Shas

ta$3

,820

23.6

0%$5

,828

36.0

0%5

Texa

sH

arris

$3,4

3619

.19%

$5,7

5332

.13%

6N

ew Yo

rkBr

onx

$3,3

6918

.53%

$5,7

3531

.55%

7Te

xas

Jeffe

rson

$3,6

8322

.52%

$5,7

3335

.06%

8Te

xas

Nue

ces

$3,8

3724

.05%

$5,6

8935

.67%

9G

eorg

iaC

owet

a$4

,285

28.7

8%$5

,661

38.0

2%10

Texa

sC

ollin

$3,5

0220

.85%

$5,6

4333

.59%

11Te

xas

John

son

$3,4

5220

.46%

$5,6

0933

.25%

12Lo

uisia

naLi

ving

ston

$3,5

5421

.47%

$5,5

4933

.52%

13M

assa

chus

etts

Suffo

lk$3

,538

22.2

6%$5

,536

34.8

3%14

Texa

sM

ontg

omer

y$3

,193

18.7

5%$5

,406

31.7

4%15

Texa

sD

alla

s$3

,233

19.2

5%$5

,406

32.1

8%16

Loui

siana

East

Bat

on R

ouge

$3,4

5821

.41%

$5,4

0633

.48%

17N

ew Yo

rkBr

oom

e$4

,386

32.8

8%$5

,394

40.4

4%18

Penn

sylv

ania

Leba

non

$4,3

2432

.42%

$5,3

5340

.13%

19C

alifo

rnia

Nap

a$3

,331

21.1

0%$5

,338

33.8

1%20

Col

orad

oM

esa

$3,2

5020

.34%

$5,2

9433

.15%

21N

ew Yo

rkRi

chm

ond

$2,9

0916

.63%

$5,2

2729

.88%

22Te

xas

Bexa

r$3

,328

21.3

2%$5

,214

33.4

0%23

Ore

gon

Mar

ion

$4,1

2030

.89%

$5,2

1339

.08%

24A

laba

ma

Shel

by$3

,275

20.6

5%$5

,209

32.8

4%25

Cal

iforn

iaC

ontr

a C

osta

$2,9

9318

.49%

$5,1

0131

.52%

26Pe

nnsy

lvan

iaPh

ilade

lphi

a$3

,054

19.1

3%$5

,043

31.5

9%27

Loui

siana

Jeffe

rson

$3,0

4919

.13%

$5,0

3431

.59%

28H

awai

iH

onol

ulu

$3,8

1728

.62%

$5,0

2137

.64%

29N

ew Yo

rkSa

rato

ga$3

,803

28.5

1%$5

,012

37.5

8%30

Dist

rict o

f Col

umbi

aW

ashi

ngto

n, D

.C.

$3,0

0119

.49%

$4,9

8832

.39%

30 C

ou

nti

es w

ith

Lo

wes

t A

vera

ge D

olla

r L

oss

per

En

rolle

e

Stat

eC

ount

y

Cut

Due

to M

A

Cha

nges

Alo

ne,

Disr

egar

ding

O

ther

Pro

visio

ns

Tota

l Cut

Due

to

PPA

CA

, C

ount

ing

Both

M

A a

nd F

FS

Cha

nges

Rank

from

Bot

tom

–30

Was

hing

ton

Wha

tcom

$35

0.29

%$2

,397

19.8

6%–2

9W

iscon

sinW

alwor

th$3

092.

56%

$2,3

9619

.85%

–28

Geo

rgia

Low

ndes

$294

2.44

%$2

,386

19.7

7%–2

7So

uth

Car

olin

aFl

oren

ce$5

714.

61%

$2,3

7719

.18%

–26

Ala

bam

aM

orga

n$5

054.

18%

$2,3

6719

.61%

–25

Flor

ida

Ala

chua

$443

3.60

%$2

,358

19.1

6%–2

4Te

xas

McL

enna

n$2

351.

95%

$2,3

4619

.44%

–23

Indi

ana

La P

orte

$197

1.61

%$2

,344

19.2

2%–2

2So

uth

Car

olin

aSu

mte

r$2

111.

74%

$2,3

3019

.31%

–21

Nor

th C

arol

ina

Way

ne$4

343.

59%

$2,3

1219

.15%

–20

Indi

ana

Vig

o$4

343.

59%

$2,3

1219

.15%

–19

Min

neso

taA

noka

$243

1.83

%$2

,310

17.3

1%–1

8Fl

orid

aO

kalo

osa

$365

2.95

%$2

,308

18.6

5%–1

7N

orth

Car

olin

aO

nslo

w$1

711.

41%

$2,3

0319

.08%

–16

Indi

ana

Tipp

ecan

oe$4

083.

38%

$2,2

9218

.99%

–15

Illino

isLa

Sal

le$1

261.

04%

$2,2

7318

.84%

–14

New

York

Ulst

er$8

00.

66%

$2,2

4318

.58%

–13

Ala

bam

aH

oust

on$7

90.

66%

$2,2

4218

.58%

–12

Cal

iforn

iaSa

n Lu

is O

bisp

o$6

20.

51%

$2,2

3018

.48%

–11

Iow

aBl

ack

Haw

k$2

431.

99%

$2,1

9017

.91%

–10

Penn

sylv

ania

Blai

r–$

21–0

.17%

$2,1

6917

.86%

–9A

rizon

aYu

ma

–$15

–0.1

3%$2

,164

17.9

3%–8

Ore

gon

Jack

son

$197

1.61

%$2

,157

17.6

1%–7

Mich

igan

Berr

ien

–$34

–0.2

8%$2

,135

17.6

9%–6

Ohi

oA

llen

$171

1.42

%$2

,107

17.4

6%–5

Sout

h C

arol

ina

Hor

ry–$

60–0

.50%

$2,0

9817

.38%

–4Te

xas

Wich

ita$1

000.

82%

$2,0

6717

.00%

–3A

laba

ma

Cal

houn

$16

0.14

%$1

,988

16.4

7%–2

Nor

th C

arol

ina

Har

nett

–$13

–0.1

0%$1

,968

16.2

6%–1

Ala

bam

aTu

scal

oosa

–$88

–0.7

3%$1

,897

15.6

8%

No. 2464

page 14

September 14, 2010

Coun

ties

with

Hig

hest

and

Low

est P

erce

ntag

e Cu

ts p

er B

enefi

cia

ry

Sour

ces:

Aut

hors

’ cal

cula

tions

bas

ed o

n da

ta fr

om t

he C

ente

rs fo

r M

edic

are

and

Med

icai

d Se

rvic

es a

nd t

he U

.S. C

ensu

s Bu

reau

. See

App

endi

x A

for

deta

ils.

Not

e: R

anks

are

am

ong

non–

Puer

to R

ico

coun

ties

with

pop

ulat

ions

in e

xces

s of

100

,000

acc

ordi

ng t

o th

e U

.S. C

ensu

s Bu

reau

’s 20

09 e

stim

ates

.

Tabl

e 4

• B

2464

Tabl

e 4

• B

2464

heri

tage

.org

heri

tage

.org

30 C

ou

nti

es w

ith

Hig

hes

t P

erce

nta

ge C

uts

per

Ben

efi c

iary

Stat

eC

ount

y

Cut

Due

to M

A

Cha

nges

Alo

ne,

Disr

egar

ding

O

ther

Pro

visio

ns

Tota

l Cut

Due

to

PPA

CA

, C

ount

ing

Both

M

A a

nd F

FS

Cha

nges

Rank

from

Top

1Lo

uisia

naA

scen

sion

$7,0

5734

.41%

$9,3

0945

.40%

2N

ew Yo

rkBr

oom

e$4

,386

32.8

8%$5

,394

40.4

4%3

Penn

sylv

ania

Leba

non

$4,3

2432

.42%

$5,3

5340

.13%

4O

rego

nM

ario

n$4

,120

30.8

9%$5

,213

39.0

8%5

Geo

rgia

Cow

eta

$4,2

8528

.78%

$5,6

6138

.02%

6H

awai

iH

onol

ulu

$3,8

1728

.62%

$5,0

2137

.64%

7N

ew Yo

rkSa

rato

ga$3

,803

28.5

1%$5

,012

37.5

8%8

Penn

sylv

ania

Lyco

min

g$3

,292

27.2

8%$4

,436

36.7

5%9

Wisc

onsin

La C

ross

e$3

,274

27.1

3%$4

,424

36.6

6%10

Haw

aii

Haw

aii

$3,2

2426

.71%

$4,3

9136

.38%

11N

ew Yo

rkA

lban

y$3

,472

26.0

3%$4

,804

36.0

2%12

Cal

iforn

iaSh

asta

$3,8

2023

.60%

$5,8

2836

.00%

13V

irgin

iaN

ewpo

rt N

ews C

ity$3

,449

25.8

6%$4

,779

35.8

3%14

Wisc

onsin

Out

agam

ie$3

,441

25.8

0%$4

,774

35.7

9%15

Texa

sN

uece

s$3

,837

24.0

5%$5

,689

35.6

7%16

Wisc

onsin

Win

neba

go$3

,415

25.6

0%$4

,757

35.6

6%17

New

York

One

ida

$3,3

8525

.38%

$4,7

3835

.52%

18O

rego

nC

lack

amas

$3,3

3925

.04%

$4,7

2235

.40%

19C

alifo

rnia

Yolo

$3,3

2824

.95%

$4,7

1535

.35%

20N

ew Yo

rkSc

hene

ctad

y$3

,327

24.9

4%$4

,714

35.3

4%21

Iow

aPo

lk$3

,326

24.9

4%$4

,700

35.2

3%22

New

Mex

icoSa

ndov

al$3

,299

24.7

3%$4

,697

35.2

1%23

Texa

sJe

ffers

on$3

,683

22.5

2%$5

,733

35.0

6%24

Iow

aJo

hnso

n$2

,957

24.5

0%$4

,219

34.9

5%25

Mas

sach

uset

tsSu

ffolk

$3,5

3822

.26%

$5,5

3634

.83%

26N

ew Yo

rkN

ew Yo

rk$3

,887

21.7

9%$6

,140

34.4

1%27

Texa

sG

alve

ston

$3,6

8421

.71%

$5,8

2934

.34%

28W

ashi

ngto

nTh

urst

on$3

,129

23.4

6%$4

,573

34.2

8%29

Nor

th C

arol

ina

Ala

man

ce$3

,089

23.1

6%$4

,547

34.0

9%30

New

York

Ont

ario

$3,0

2322

.66%

$4,5

2533

.93%

30 C

ou

nti

es w

ith

Lo

wes

t P

erce

nta

ge C

uts

per

Ben

efi c

iary

Stat

eC

ount

y

Cut

Due

to M

A

Cha

nges

Alo

ne,

Disr

egar

ding

O

ther

Pro

visio

ns

Tota

l Cut

Due

to

PPA

CA

, C

ount

ing

Both

M

A a

nd F

FS

Cha

nges

Rank

from

Bot

tom

–30

Indi

ana

La P

orte

$197

1.61

%$2

,344

19.2

2%–2

9So

uth

Car

olin

aFl

oren

ce$5

714.

61%

$2,3

7719

.18%

–28

Flor

ida

Ala

chua

$443

3.60

%$2

,358

19.1

6%–2

7N

orth

Car

olin

aW

ayne

$434

3.59

%$2

,312

19.1

5%–2

6In

dian

aV

igo

$434

3.59

%$2

,312

19.1

5%–2

5N

orth

Car

olin

aO

nslo

w$1

711.

41%

$2,3

0319

.08%

–24

Flor

ida

Bay

$581

4.50

%$2

,461

19.0

8%–2

3In

dian

aTi

ppec

anoe

$408

3.38

%$2

,292

18.9

9%–2

2Te

xas

Braz

os$5

644.

34%

$2,4

5918

.94%

–21

Illino

isLa

Sal

le$1

261.

04%

$2,2

7318

.84%

–20

Flor

ida

Oka

loos

a$3

652.

95%

$2,3

0818

.65%

–19

New

York

Ulst

er$8

00.

66%

$2,2

4318

.58%

–18

Ala

bam

aH

oust

on$7

90.

66%

$2,2

4218

.58%

–17

Cal

iforn

iaSa

n Lu

is O

bisp

o$6

20.

51%

$2,2

3018

.48%

–16

Flor

ida

Dad

e$7

263.

60%

$3,6

8318

.27%

–15

Texa

sC

amer

on$4

653.

48%

$2,4

2318

.17%

–14

Ariz

ona

Yum

a–$

15–0

.13%

$2,1

6417

.93%

–13

Flor

ida

Brow

ard

$503

3.22

%$2

,798

17.9

3%–1

2Io

wa

Blac

k H

awk

$243

1.99

%$2

,190

17.9

1%–1

1Pe

nnsy

lvan

iaBl

air

–$21

–0.1

7%$2

,169

17.8

6%–1

0Te

xas

Hid

algo

$423

3.06

%$2

,462

17.7

8%–9

Mich

igan

Berr

ien

–$34

–0.2

8%$2

,135

17.6

9%–8

Ore

gon

Jack

son

$197

1.61

%$2

,157

17.6

1%–7

Ohi

oA

llen

$171

1.42

%$2

,107

17.4

6%–6

Sout

h C

arol

ina

Hor

ry–$

60–0

.50%

$2,0

9817

.38%

–5M

inne

sota

Ano

ka$2

431.

83%

$2,3

1017

.31%

–4Te

xas

Wich

ita$1

000.

82%

$2,0

6717

.00%

–3A

laba

ma

Cal

houn

$16

0.14

%$1

,988

16.4

7%–2

Nor

th C

arol

ina

Har

nett

–$13

–0.1

0%$1

,968

16.2

6%–1

Ala

bam

aTu

scal

oosa

–$88

–0.7

3%$1

,897

15.6

8%

page 15


$1,128 annually if he or she transitioned to FFS.23

Table 7 shows this figure projected forward to 2017.An estimated 472,000 dual-eligibles will lose theirMA plans, increasing Medicaid costs by $924 mil-lion. These assumptions are generous (to thePPACA) in the sense that Medicaid spending isgrowing faster than total health spending and thePPACA substantially expands Medicaid eligibility in

addition to cutting MA. This calculation accountsonly for the changes in MA.

Increased Part D Spending. Medicare Part D cov-ers prescription drugs. As with MA, Part D benefits areoffered through private-sector companies that submitbids to provide prescription drug coverage, even forMedicare beneficiaries who receive other health careservices through the FFS system. Subsidies are also

23. Adam Atherly and Kenneth E. Thorpe, “Value of Medicare Advantage to Low-Income and Minority Medicare Beneficiaries,” Emory University, Rollins School of Public Health, September 20, 2005, p. 7, at http://www.bcbs.com/issues/medicaid/research/Value-of-Medicare-Advantage-to-Low-Income-and-Minority-Medicare-Beneficiaries.pdf (June 18, 2010).

Impact of Medicare Advantage Changes in PPACA by Race/Ethnicity

Sources: Authors’ calculations based on data from AHIP Center for Policy and Research, “Low-Income and Minority Benefi ciaries in Medicare Advantage Plans, 2006,” September 2008, at http://www.ahipresearch.org/pdfs/MALowIncomeReport2008.pdf (September 13, 2010), and data from the Centers for Medicare and Medicaid Services.

Table 5 • B 2464Table 5 • B 2464 heritage.orgheritage.org

African–American

Asian–American Hispanic White Other

All Medicare Benefi ciaries 10% 1% 2% 85% 2%

Medicare Advantage 11% 1% 4% 82% 2%

Relative Share (i.e., how many times more likely to be in MA) 1.10 1.00 2.00 0.96 1.00

Pre-PPACA Projected 2017 Enrollees 1,628,000 148,000 592,000 12,136,000 296,000

Number of Benefi ciaries Losing MA 814,000 74,000 296,000 6,068,000 148,000

Total Annual Loss of Health Care Services $6.05 billion $0.55 billion $2.2billion

$45.08 billion $1.1billion

Note: Figures may not sum to totals due to rounding.

Impact of Medicare Advantage Changes in PPACA by Income

Sources: Authors’ calculations based on data from AHIP Center for Policy and Research, “Low-Income and Minority Benefi ciaries in Medicare Advantage Plans, 2006,” September 2008, at http://www.ahipresearch.org/pdfs/MALowIncomeReport2008.pdf (September 13, 2010), data from the Centers for Medicare and Medic-aid Services, and data from the U.S. Department of Labor, Bureau of Labor Statistics.


Less than $10,800

$10,800–$21,600

$21,600–$32,400

$32,400–$43,300

$43,300–$54,100

More than $54,100

All Medicare Benefi ciaries 17% 27% 20% 17% 11% 9%

Medicare Advantage 16% 32% 22% 15% 8% 6%

Relative Share (i.e., how many times more likely to be in MA) 0.94 1.19 1.10 0.88 0.73 0.67

Pre-PPACA Projected 2017 Enrollees 2,368,000 4,736,000 3,256,000 2,220,000 1,184,000 888,000

Number of Benefi ciaries Losing MA 1,184,000 2,368,000 1,628,000 1,110,000 592,000 444,000

Total Annual Loss of Health Care Services in 2017 $8.8 billion $17.59 billion

$12.09 billion

$8.25 billion

$4.4 billion $3.3 billion

Notes: Income ranges are in 2010 dollars. Figures may not sum to totals due to rounding.

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given to retiree Medicare supplemental plans thatcover prescription drugs for FFS participants andto MA plans that cover prescription drugs.24

MA plans that cover prescriptiondrugs submit a separate MA-prescrip-tion drug (MA-PD) bid for their pre-scription drug coverage. This allowsfor a comparison of the cost of cover-ing prescription drugs inside and out-side of MA.

For the 2009 plan year, the averagestand-alone prescription drug plan(PDP) bid was $11 higher per monththan the average MA-PD bid. This dif-ference increased from $9 per monthfor 2008. According to the CMS, MA-

PD plans have lower premiums for tworeasons: They can make more extensiveuse of care coordination and drug man-agement, which reduces costs throughincreased efficiency, and they can applysavings achieved in providing hospitaland physician services to reduce theirMA-PD premiums.25

Under the PPACA, this cost advan-tage may still exist, but it will apply tofar fewer beneficiaries because fewerbeneficiaries will be in MA plans. As aresult, total spending for prescriptiondrugs on MA plans will increase. Table8 shows that if both MA-PD andstand-alone PDP premiums grow atthe rates projected by the CMS, thedifferential in 2017 will be $17.17 permonth. The impact on the beneficiarypopulation will total more than $1.5billion annually.

This is not simply a transfer of prescription drugspending from one program to another or from gov-ernment to patients. It is a net increase in spending

24. According to the CMS, “Plan Sponsors of qualified retiree prescription drug plans, including private employers that sponsor ERISA group health plans, governments, churches, and union health funds, are eligible to receive the Retiree Drug Subsidy if they provide coverage that is at least actuarially equivalent to the standard Medicare Part D drug benefit.” Centers for Medicare and Medicaid Services, “What Entities Are Eligible to Receive the Retiree Drug Subsidy?” July 25, 2005, at http://questions.cms.hhs.gov/app/answers/detail/a_id/5257/session/L3NpZC9mKnhxUnU1aw%3D%3D (July 21, 2010). See also 42 Code of Federal Regulations 423.

25. Press release, “Lower Medicare Part D Costs Than Expected in 2009,” Centers for Medicare and Medicaid Services, Office of Public Affairs, August 14, 2008, at http://www.cms.gov/apps/media/press/release.asp?Counter=3240 (June 16, 2010).

Impact of Medicare Advantage Changes in PPACA on Medicaid Spending

Sources: Authors’ calculations based on data from Adam Atherly and Kenneth E. Thorpe, “Value of Medicare Advantage to Low-Income and Minority Medicare Benefi ciaries,” Emory University, Rollins School of Public Health, September 20, 2005, p. 7, at http://www.bcbs.com/issues/medicaid/research/Value-of-Medicare-Advantage-to-Low-Income-and-Minority-Medicare-Benefi ciaries.pdf (June 18, 2010), and data from the Centers for Medicare and Medicaid Services.


Prior Law(Pre-PPACA),

2017 Projection

With FFS Instead of MA Due to PPACA

Projected number of dual-eligible benefi ciaries enrolled in MA

943,000 472,000

Medicaid program spending perdual-eligible benefi ciary

$54 $2,012

Increase in Medicaid spending per benefi ciary due to transition to FFS

$1,958

Total increase in Medicaid spendingdue to transition to FFS

$924 million

Federal share $523 millionState share $401 million

Impact of Medicare Advantage Changes in PPACA on Part D Spending

Source: Authors’ calculations based on press release, “Lower Medicare Part D Costs Than Expected in 2009,” Centers for Medicare and Medicaid Services, Of-fi ce of Public Affairs, August 14, 2008, at http://www.cms.gov/apps/media/press/release.asp?Counter=3240 (June 16, 2010).


Projected number of benefi ciaries enrolled in FFS instead of MA 7.4 million

Annual per-benefi ciary difference in Part D subsidy between MA-PD and non–MA-PD Plans

$206

Total Increase in Part D Spending Due to Transition to FFS $1.525 billion

page 17


for treating the same patients for the same diseases.In other words, it is new, wasteful Medicare spend-ing that will provide no additional benefit.

The PPACA’s Dramatic Negative EffectsThe effects of the PPACA on Medicare Advantage

enrollees will be dramatic and negative. The mostobvious effects will be:

• Reductions in health care services delivered.The PPACA will result in less generous MAbenefit packages. The average enrollee willreceive $3,714 less per year in the value of his orher coverage by 2017.

• Worse and fewer options for seniors and thedisabled. The CMS actuary estimated that therewill be 7.4 million fewer MA enrollees (a 50 per-cent reduction) in 2017 under the PPACA. Somewill lose access to the health plans that theywould have been able to join under prior law,compelling them to move into the FFS program,which they otherwise would have rejected.

• Fragmentation of care. Mass migration into FFSwould exacerbate the well-known problemsassociated with fragmentation of care and couldundermine the viability of integrated health sys-tems that serve both Medicare beneficiaries andother patients.

• Disproportionate harm to low-income andminority beneficiaries. Compared to the aver-age beneficiary, those with incomes in today'sdollars between $10,800 and $21,600 are 19percent more likely to enroll in MA, and thosewith incomes between $20,000 and $32,400are 10 percent more likely to enroll in MA. As aresult, 70 percent of the cut will be imposed onseniors and disabled with incomes less than$32,400 per year in today’s dollars. Comparedto the average Medicare beneficiary, Hispanicsare twice as likely and African–Americans are10 percent more likely to enroll in MA. Thus,the MA cuts represent a regressive tax that dis-

proportionately punishes low-income and minor-ity seniors.

• Higher state and federal Medicaid costs. Manylower-income seniors sign up for MA to obtaincomprehensive coverage. Without that option,some would obtain Medicaid support for FFSco-payments and deductibles. For each dual-eligible beneficiary who would have enrolled inMA in 2017 under prior law but is switched toFFS under the PPACA, average annual per-bene-ficiary Medicaid spending would increase from$54 to $2,012 per beneficiary. The MA cuts onlow-income dual-eligibles will cause an esti-mated 472,000 dual-eligibles to lose their MAplans, increasing costs to Medicaid programs by$924 million annually.

• Higher prescription drug spending. MA plansgenerally include prescription drug coverage,and their bids for this coverage average less thanthe premiums of stand-alone Part D prescriptiondrug plans. Beneficiaries who would have beenin MA under prior law but will be in FFS willsustain an average loss of $206 per year relativeto prior law. The impact on the estimated 7.4million affected beneficiaries will total more than$1.5 billion annually.

ConclusionIn the final analysis, if the “reforms” in Medicare

Advantage made by the Patient Protection andAffordable Care Act go into effect, they will inevita-bly and unambiguously restrict senior citizens andthe disabled to fewer and worse health care choices,reducing their access to quality health care.

—Robert A. Book, Ph.D., is Senior Research Fellowin Health Economics in the Center for Data Analysis atThe Heritage Foundation. James C. Capretta is a Fel-low at the Ethics and Public Policy Center. The authorsgratefully acknowledge the assistance of Joseph R. Antos,Ph.D., in providing valuable feedback and discussionsexploring some of the issues discussed in this paper.

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APPENDIX ADATA AND METHODOLOGY

The estimates are computed on an annual basisfor 2017, the first year in which the changes in theMA program will be fully implemented. The basicapproach is to compare projected MA benchmarksand enrollment levels for 2017 under prior law withthe projected MA benchmarks and enrollment for2017 under the PPACA. The approach considers theeffects of the MA provisions in isolation and thenthe effects of both the MA provisions and the FFScuts, which will affect future MA benchmarksaccording to the formula specified in the new law.

All data used in this analysis were obtained fromthe CMS, including average FFS spending for eachcounty26 for 2009; MA benchmarks and enrollmentfor each county under then-current law for 2009;baseline (that is, prior-law) forecasts for MedicareFFS spending growth;27 and the CMS Office of theActuary’s projections of the overall impact of thePPACA.28 All assumptions used in the calculationsare specified in the bill or are the same as those usedby the Office of the Actuary to the extent that theyhave been publicly disclosed.

Benchmark Calculations. The first objective isto calculate MA benchmarks for each county for2017, when the new formula is fully phased in.They are then compared to what the benchmarkswould have been in 2017 under prior law. For con-sistency, all forecasts of future parameters are takenfrom the CMS 2010 baseline forecast, constructedin conjunction with the release of the President’sbudget and calculated before the PPACA was

passed. The same parameters are used for bothprior-law and new-law benchmarks.

Prior-law spending figures—both the FFS aver-age spending and the MA benchmarks—were cal-culated by increasing the 2009 published figures foreach county by the growth rate derived from com-paring the overall (national baseline) projections for2017 under prior law to the 2009 figures. The base-line tables show $330.5 billion in total MedicareFFS spending in 2009 for 34.3 million FFS benefi-ciaries and a projected $552.9 billion in MedicareFFS spending under prior law for 2017 for 42.3million FFS beneficiaries. This implies an increaseof 35.8 percent in per-beneficiary spending in cur-rent dollars.

This study follows the Actuary’s assumption thatMA bids track the benchmarks on average.29 TheMedicare beneficiary population for each county, aswell as the prior-law MA enrollment in each county,was assumed to grow at the same rate as the totalpopulation of Medicare beneficiaries.30

For spending under the PPACA, average FFSspending for each county was calculated based onthe actuary’s forecast of total FFS spending growthunder the PPACA in 2017, assuming that eachcounty’s average spending grows at the same rate.The actuary projects total FFS spending of $548.5billion for 49.7 million FFS beneficiaries in 2017,an increase of 14.6 percent in per-beneficiaryspending over 2009.

26. The Indirect Medical Education component is excluded from the average, as specified in the PPACA. This is an adjustment paid to teaching hospitals at the same rate regardless of whether the patient participated in MA or not. It is disregarded in this analysis because the PPACA specified that it be disregarded when calculating benchmarks.

27. Centers for Medicare and Medicaid Services, Medicare Part A Tables for FY2010 President’s Budget, March 18, 2009; Medicare Part B Tables for FY2010 President’s Budget, March 26, 2009; and Medicare Part D Tables for FY2010 President’s Budget, March 6, 2009.

28. Foster, “Estimated Financial Effects of the ‘Patient Protection and Affordable Care Act,’ as Amended.”

29. The CMS does not publish actual MA bids, which MA providers regard as proprietary information.

30. The Office of the Actuary used more specific forecasts based on county-level demographic information and proprietary information about specific MA plan bids, but this information is not publicly available. However, the author was advised that calculations based on aggregation of counties (for example, at the state level) would be generally accurate under this assumption.

page 19


After making this calculation for each county, thecalculations mandated by Section 3201 of thePPACA were made. Counties were sorted by theirper-beneficiary FFS averages, and each county wasassigned its “applicable percentage” based on itsquartile rank.31 That percentage was used to deter-mine that county’s base benchmark for 2017 underthe PPACA.

The PPACA includes provisions for a “quality”bonus of up to 5 percent, which is doubled for cer-tain “qualifying counties.”32 The Office of the Actu-ary assumed that the enrollment-weighted bonuswould be about 4.5 percent in practice, includingthe extra amount for qualifying counties. Based onthe enrollment projections, this works out to anaverage bonus of 6.28 percent for qualifying coun-ties and 3.14 percent for other counties. Theseamounts were added to the base benchmarks todetermine the final benchmark for each county.33

Dollar Loss. Following the assumptions in theactuary’s report, the dollar loss in benefits was cal-culated for each beneficiary who would haveenrolled in MA under prior law as the differencebetween the prior-law benchmark and the newbenchmark for that county for beneficiaries whoremain enrolled in MA. For beneficiaries whowould have enrolled in MA under prior law but notunder the PPACA, the change in spending is calcu-lated as the difference between the prior-law bench-mark and the county FFS average under the PPACA.

Enrollment. The net change in MA enrollmentin each county was forecasted by first calculatingthe overall elasticity of enrollment with respect tobenchmarks based on the enrollment projections inthe actuary’s report34 and the change in the overallweighted average benchmark across all counties,assuming constant enrollment. That elasticity wasthen applied to the change in the benchmark foreach county. The actuary forecasts a 50 percentreduction in enrollment and a 25 percent reductionin the weighted average benchmark. This results inan elasticity of 2.0. In other words, for every changeof 1 percentage point in the benchmark, MA enroll-ment will change by 2 percentage points.35

This elasticity was then multiplied by the per-centage change in the benchmark in each county tocalculate the percentage change in MA enrollmentin that county. That percentage was applied to theprojected enrollment in that county under prior lawto obtain the projected enrollment in that countyunder the PPACA. County-level results were thenaggregated by state.

Effects by Race and Ethnicity. Estimates inTable 5 and Table 6 are for the total reduction inMedicare spending for health care for those in eachbeneficiary group who would have enrolled in MAunder prior law. Because of the lack of detailedcounty-by-county information on the racial andethnic makeup of Medicare beneficiaries, it was

31. We calculated estimates for the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands. We did not have the necessary data for Guam, so we did not calculate any estimates for Guam. Excluding Guam does not affect the final projections for other jurisdictions.

32. A qualifying county is defined as a jurisdiction that meets three criteria: (1) It is part of a metropolitan statistical area that has total population above 250,000; (2) at least 25 percent of eligible beneficiaries are enrolled in MA; and (3) average spending on behalf of FFS beneficiaries in that jurisdiction is less than the national average for FFS spending.

33. Without access to more detailed information, which has not yet been made publicly available, we cannot estimate the actual bonus for each county. However, we can apply the average bonus for each type of county to all counties of that type.


35. This is slightly different conceptually from the elasticities explained in elementary economics textbooks. Those elasticities are typically the “price elasticity of supply” and the “price elasticity of demand,” which measure the effect of a change in price on either supply or demand in isolation from the other. The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percentage change in the price, assuming the supply function stays the same. Likewise, the elasticity of supply assumes the demand function remains unchanged. However, this study follows the example of the CMS actuary and calculates a “benchmark elasticity of enrollment,” a combined elasticity that is the ratio of the percent change in the MA benchmark to the percent change in MA enrollment. This elasticity captures both the supply effect and the demand effect. The supply effect results from lower revenue to MA plan providers, and the demand effect results from MA plans having to provide less generous benefits.

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assumed that each group would experience thesame average impact per person as the entire bene-ficiary population. (Simply using county-level pop-ulation figures for each group would beinappropriate because of differences in the age dis-tributions and, therefore, their shares of the Medi-care population in each county.) Ideally, FFS andMA spending patterns for each group would be cal-culated by county, but this information is not pub-licly available at this time. Therefore, this should beconsidered a preliminary estimate.

Limitations of County-Level Data. Some cau-tion is warranted in interpreting the county-levelresults. The CMS Office of the Actuary used more

specific county-level demographic information,specific MA plan bids, and other data to preparecounty-level forecasts, but much of this informationis not publicly available. Furthermore, CMS sup-presses information on plan and county pairs withfewer than 10 enrollees, which affects the calcula-tions, especially for small counties. This will notaffect all small counties equally. A small county withonly a few MA plans may have accurate datareported, whereas a county with a large number ofsmall plans may have a lower or even zero reportedenrollment even if its actual enrollment is higherthan enrollment in a county with a smaller numberof plans.

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APPENDIX BECONOMIC ANALYSIS OF CUTS IN MEDICARE ADVANTAGE PAYMENTS

To characterize the effects of the MA paymentcuts in the PPACA, we must examine how Medi-care beneficiaries and MA plan providers willreact to the changes. In other words, the changeswill affect both the supply and demand compo-nents of the market.

From the MA plan providers’ perspective, thecuts reduce both net revenue and the “rebates” thatthey can or must offer to beneficiaries in the form ofadditional benefits or lower premiums. The reduc-tion in revenue makes offering MA plans less attrac-tive as a business proposition, and the reduction inavailable rebates makes it more difficult for compa-nies offering MA plans to make those plans attrac-tive to Medicare beneficiaries. Both effects lead to areduction in the number and variety of MA plansand in the generosity of the plans that survive. Inother words, the cuts reduce the quality and varietyof MA plans.

From the beneficiaries’ perspective, the cutsreduce the level of access to health care services byreducing the generosity of the MA plans that survivethe cuts and by eliminating desired MA plans,which forces some patients into the less generousFFS system that they otherwise would haverejected. This demand effect essentially mirrors thesupply effect described above. Less generous plansare not only less profitable for the companies offer-ing them, but also less attractive to the consumerswho might choose them. The size of these effectscan be measured directly as the dollar-value reduc-tion in health care services consumed.

This reduction in consumption can be higher,lower, or equal for those who remain in MA com-pared to those who switch to FFS, depending on thequartile of the beneficiary’s county. Some patientswill choose MA, and some will not. Because differ-ent people have different preferences, a beneficiary’sranking of the plans’ qualitative values may notmatch their dollar values. Faced with a menu of MAplans and the availability of FFS, some beneficiarieswill prefer FFS’s wider choice of providers. Otherswill prefer the managed-care features (for example,disease management services and integrated care) in

some MA plans. In some cases (for example, Kaiser’sintegrated health systems), some desired providersmight be available only through an MA plan.

The loss in variety of MA plans is an additionalnegative effect on beneficiaries that is just as real, ifnot more so, as the dollar value but more difficult tomeasure directly. MA plans vary substantially intheir benefit and co-pay structures, provider net-works, and additional benefits. Many MA plansoffer disease management services for people withchronic conditions, coordination of care among dif-ferent physicians, on-call nurses available by phone,and other services that are not available in the Medi-care FFS system at any price.

While one of FFS’s most touted benefits is theability to see “any doctor,” some doctors are avail-able only through MA. For example, a patient whoparticipated in a staff-model HMO program likeKaiser before becoming eligible for Medicare mightwant to continue to see the same doctors but may beable to do so only if that HMO is available as an MAplan. If the MA plan is withdrawn, the patient mightend up in the theoretically “more flexible” FFS sys-tem but be forced to change doctors. For someonewith multiple chronic conditions who is seeingmultiple specialists, the disruption in the continuityof care caused by changing doctors, not to mentionthe loss of the new specialists’ ability to coordinatewith each other, can significantly inconvenience thepatient and even adversely affect the patient’shealth.

The dollar value of the loss sustained by such apatient would be difficult to measure, and such mea-surements are impossible using the available data onper-patient spending and current and future MAbenchmarks. However, inability to measure some-thing does not mean that its value is zero. Anyonewho would have enrolled in an MA plan under priorlaw and is unable to enroll in the same MA planunder the new law has, by definition, lost their pre-ferred health care option and has therefore sustaineda loss. This holds even if the beneficiary findsanother MA plan that he or she likes more than FFS(but not as much as the previous plan) or if health

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care expenses are the same or even higher than theywould have been otherwise. (Due to the structure ofthe changes, the spending level is lower in any case.)

An estimate for changes in federal spending onbehalf of Medicare beneficiaries is not the same asthe value Medicare beneficiaries place on the ser-vices they receive; nor is it the same price theywould need to pay to obtain those services outsidethe Medicare program. In the case of medical ser-vices, the value to the patient could be higher orlower than the amount Medicare pays. BecauseMedicare generally pays less than other payers, the

beneficiary would probably need to pay more toreplace lost services. In the case of the organiza-tional structure of health care delivery preferred bya patient, a lost MA program might be irreplaceableat any price.

In short, the MA changes are structured in waysthat will make almost all beneficiaries who wouldhave chosen MA under prior law worse off. The“lucky” ones will lose only money. The rest will loseboth money and their chosen method of obtaininghealth care, and the changes may also adverselyaffect the health of some beneficiaries.

Documents

Reductions in Medicare Advantage Payments: Impact on …media.khi.org/news/documents/2010/10/19/Heritage_Foundation_MA_impact.pdfOct 19, 2010 · changes will also significan tly