Medicare Advantage Policy-Driven Catalysts Investors Should Pay Attention to in 2021
June 24, 2021 — We recently held a policy day exclusively for clients to discuss the outlook for Medicare Advantage. There are eight MA topics we believe investors should pay attention to for 2021–including the Medicare Trust Fund, calculating insurer medical loss ratios, dialysis carve-in, and more. See a preview below:
Inclusion of MA Cuts/Traditional Medicare Benefit Changes in Reconciliation Bill
Summary: Capstone believes there will be Congressional action near the end of 2021 that may include reforms to Medicare Advantage, notably increases to the coding intensity adjustment. The existence and scope of these reforms will depend on the need for pay-fors as Democrats seek to either expand Medicare benefits or fix the Medicaid coverage gap. Changes to the coding intensity adjustment will likely remain minimal to avoid political backlash and will be put in place for the 2024 plan year given the 2022 midterm elections. Any increase to the coding intensity adjustment, however minor, will be a headwind for MA insurers. Notably, minimal across-the-board cuts will vary in their significance geographically and may more strongly impact MA plans in geographies with lower reimbursement. Capstone previously predicted that Medicare Advantage coding intensity/risk adjustment would be a target for reform, and we continue to assign 35% odds that reform would be included in the upcoming infrastructure bill and 55% odds that reform would be accomplished by the 2022 election.
Timeline: Q4 2021
There are two major catalysts for Medicare Advantage reform: expanding Medicare benefits or fixing the Medicaid coverage gap. Expanding Medicare benefits would entail benefits expansion likely to vision, dental and hearing benefits for traditional Medicare. It could also include imposing an out-of-pocket maximum for beneficiaries in traditional Medicare. Any update to traditional Medicare will increase the competition between traditional Medicare and MA, ideally improving beneficiary care while driving down costs. That said, adding benefits to traditional Medicare would drive up the benchmark and could therefore increase MA plan reimbursement. Capstone believes that if Congress successfully expands Medicare to include benefits such as vision, hearing, and dental, it will exempt such benefits from the MA benchmark calculations. The majority of MA plans at current already provide these benefits without a benchmark bump. Another way that CMS may make the traditional Medicare more competitive with MA is by implementing voluntary or mandatory CMS Innovation Center (CMMI) models for traditional Medicare, such as direct contracting.
Fixing the Medicaid coverage gap could be done in a number of ways: federalizing the Medicaid expansion population, providing a temporary 100% FMAP for states that have not yet expanded, or extending $0 premium Affordable Care Act (ACA) exchange plans to those in the coverage gap. Any solution to the Medicaid gap will likely include MA reform as a partial pay-for.
Impact of Dialysis Carve-in on 2021 Plan Costs
Summary: The recent inclusion of dialysis services in Medicare Advantage plans presents a headwind risk for MA insurers. Network adequacy requirements and consolidation in the dialysis industry prevent MA plans from negotiating competitive rates for dialysis providers. Adding to this is the fact that CMS has decided not to update the MA benchmark to account for dialysis services, at least for now. Recent flexibilities granted to MA plans with regards to network adequacy may help mitigate headwinds, but investors should watch for revenue risks in the second half of 2021.
Timeline: Q3, Q4 2021
Beginning on January 1, 2021, enrollees with end-stage renal disease (ESRD) can enroll in Medicare Advantage plans. Prior to this, enrollees in MA plans who developed ESRD could remain in their plans but would have all ESRD services covered by traditional Medicare. CMS has estimated that an additional 83,000 Medicare beneficiaries with ESRD will enroll in Medicare Advantage by 2026.
The industry is concerned about this policy, as some estimates found that the current beneficiary out-of-pocket maximum creates a 9% underpayment for ESRD beneficiaries in MA. Further, Medicare Advantage network adequacy requirements limit the negotiating leverage that MA plans have. Consolidation in the dialysis industry—DaVita Inc. (DVA) and Fresenius Medical Care AG & Co. (FMS) have 72% of the dialysis provider market share—only exacerbates this issue. MA plans are unable to negotiate dialysis provider rates down because of the network adequacy requirements and consolidation.
In May 2020, CMS released a final rule that removed dialysis from the list of providers that MA plans must meet time and distance standards for network adequacy requirements. Instead, plans must certify to CMS that they adequately provide beneficiaries with access to dialysis providers. While this rule will provide plans with additional flexibility on the network adequacy requirements, it remains to be seen whether the flexibility will increase negotiating power to a successful degree, especially as consolidation in the dialysis industry increases. CMS has assured MA plans that if the ESRD reimbursement rates are significantly underestimated, they will revisit updating the benchmark in the future.
COVID-19 Influence on 2022 Risk Scores
Summary: Lower risk scores associated with depressed utilization of services during the pandemic may be offset by MA plans’ ability to use telehealth visits for risk adjustment but will still likely result in slight headwinds for MA insurers in 2022. Capstone believes earnings from MA insurers in the second half of 2021 will better reveal how significant an impact the pandemic had on risk scores.
Timeline: Q3, Q4 2021
Lower utilization rates in 2020 mean that plans have fewer diagnoses and claims to calculate risk scores. One study found that from June 2019 to June 2020, the number of MA claims dropped by 61%. This could artificially drive down risk scores even though beneficiary health status has not changed. Notably, CMS announced in April 2020 that MA plans could submit telehealth visit claims for risk adjustment purposes, which may help mitigate some of these concerns.
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