Medicare's privately run health plans got long-awaited news Friday on how much the federal government wants to cut their funding next year, and it wasn't good.
The rate changes affect nearly 16 million Medicare Advantage members and the insurers that provide them with coverage.
In a preliminary decision or "advance notice," the Centers for Medicare and Medicaid Services said funding to Medicare Advantage on a per-capita basis would be reduced 3.55% next year vs. this year. But that's just a starting point.
Counting other cuts, such as risk adjustment, coding intensity, taxes, ObamaCare-mandated rate cuts and expiration of the Star ratings demonstration, insurers could face funding reductions of 8%-10%, insurers and analysts say.
One analyst said, "It's really bad.
Insurers and analysts had expected cuts of 6% to 7%. CMS may make changes when final rates are released April 7.
UnitedHealth (UNH), the largest Medicare Advantage insurer, fell 2% in after-hours trading. The No. 2 Advantage provider, Humana (HUM), fell nearly 5%. No. 3 Aetna (AET) was little changed.
Seniors in Medicare Advantage plans "can ill afford yet another round of severe rate cuts," said UnitedHealth spokesman Matt Stearns. "Practical and predictable MA payment rates are essential to ensure the continued access to this successful program. We are reviewing the Advance Notice and will offer our comments to CMS at the appropriate time.
Medicare Advantage plans are popular with seniors for offering extra benefits such as dental and vision coverage and even gym membership.
Various studies say MA's coordinated care model has resulted in better outcomes and fewer hospitals readmissions vs. traditional Medicare fee-for-service.
Advantage plans have been reimbursed more per enrollee than those in the traditional Medicare fee-for-service program.
But the 2010 Affordable Care Act, or ObamaCare, aimed to level the funding playing field over time by reducing federal payments to Medicare Advantage, starting with a 2011 freeze.
MA funding was cut 4%-6% in 2014 depending on the plan and location. Improvements in plans' quality star ratings could partially offset 2015 reductions, according to an Oliver Wyman report.
Despite funding cuts that led some insurers to withdraw from markets, trim benefits and raise premiums, MA enrollment rose 8.9% in 2014 to 15.9 million, said a Avalere Health study — 30% of all Medicare beneficiaries.
Saving Medicare Advantage has become a bipartisan cause. Several health care and related groups have lobbied to limit cuts. Forty senators from both parties recently signed a letter urging the CMS to "minimize disruption" by maintaining payment levels for 2015.
Several Democrats facing re-election fights this year signed, including Mary Landrieu of Louisiana, Kay Hagan of North Carolina and Mark Pryor of Arkansas.
"MA has been a great success and should remain a competitive choice for our constituents," the letter to the CMS said.
Oliver Wyman estimated in its study for health insurance trade group AHIP that a 6% cut to MA payments in 2015 would cause benefit cuts and premium hikes of $35-$75 per month on top of this year's $30-$70.
Cuts would especially affect beneficiaries with low incomes, the report said, noting that 41% of Advantage enrollees have annual incomes below $20,000.
UnitedHealth CEO Stephen Hemsley has said that 2014 rate actions "significantly underfunded the program." The insurer has narrowed provider networks and taken other steps to cut costs, including ceding share in some weaker markets.
Humana has said it would seek to minimize disruption to beneficiaries via clinical management programs, operating efficiencies, benefit changes and market exits.
MA enrollment grew in all regions of the country this year despite declining plan participation, Avalere said in its report.
"If current trends continue, plans choosing to compete in areas with growing enrollment and fewer plan options stand to gain market share," stated Matt Eyles, Avalere's executive VP.
The private Medicare option morphed into Medicare Advantage in 2003 with passage of the Medicare Modernization Act, which added prescription drug coverage. MA enrollees tripled from 2004 to 2013.