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Medicare Advantage Remains a Good Strategic Option

The Centers for Medicare & Medicaid (CMS) released its 2014 Medicare rates and regulations this week in what is informally known as the “call” letter. Recently, there has been a great deal of attention focused on the 2014 Medicare Advantage regulations—and reimbursement rates specifically. The final regulations and rate increases released Monday, April 1, 2013 were positive for Medicare Advantage, alleviating a great deal of the industry angst generated over the last two months.


CMS conducts a two-step process every year in which it releases a “pre call” letter 45-days before final regulations. The “pre call” letter serves as CMS’ “Advance Notice” outlining its proposed regulatory and rate changes. CMS requests and gathers comment from industry stakeholders, which it considers prior to finalizing its rate and regulation decisions.

This year’s “pre call” letter indicated that CMS’ actuarial calculations for the national annual per capita Medicare Advantage growth percentage would result in a reduction in Medicare Advantage reimbursement rates of 2.2%1. These original actuarial calculations reflected falling Medicare costs and utilization plus the negative impact of the Physician Fee Schedule reduction—also known as the Sustainable Growth Rate, or in the vernacular as “the Doc Fix”. These two factors translated into a projected overall reduction in Medicare Advantage reimbursement rates.

An outpouring of industry and Congressional reaction expressed concern that the rate reduction, coupled with the ACA-based phased Medicare Advantage reimbursement reductions, would destabilize the program. The strong reaction to the proposed rate reduction reflected the growing influence of Medicare Advantage enrollment, which has increased 25% since the adoption of ACA and is likely to continue on this growth trajectory with the aging of the Baby Boomers.2 As a result of the industry response to the Advance Notice, CMS decided to include a revised calculation of the “Doc Fix.” The final CMS regulation includes a new algorithm for maintaining the Physician Fee Schedule, improving the projected annual Medicare Advantage rate change from a cut of 2.3% to an increase of 3.3%.

We view the inclusion of a new method for calculating the “Doc Fix” as a positive, long-term result for Medicare Advantage. This new methodology will support the long-term financial sustainability of the program and avoid the annual “eleventh hour” legislative correction that has occurred in recent years.

Our position remains that Medicare Advantage is a good strategic option in the face of ACA-based reductions in Medicare Fee-for-Service reimbursement, the expansion of Medicaid and the introduction of the Commercial Insurance Exchanges. Medicare Advantage continues to offer providers more control over financial performance through the ability to affect both the revenue and the cost side of the reimbursement model.

As the industry evolves toward population health and value-based contracting, and away from fee-for-service reimbursement, Medicare Advantage along with Employee Health Plans and Commercial Exchanges are products that offer an opportunity to leverage health system assets and to move up the revenue stream and deliver sustainable margins.

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