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New Medicare Profit Margin Rule Released

The evolving novel of the Affordable Care Act is preparing to add a chapter. The Centers for Medicare and Medicaid Services (CMS) whipped up a 116-page draft proposing a rule to limit profit margins on Medicare plans and prescription benefit programs. The draft was sent to the White House last Thursday, and has since been posted on the Federal Register for all to examine. Spend Limit 15

Starting today, a 60-day comment period on the proposed rule has commenced. The Office of Information and Regulatory Affairs (OIRA) has issued the proposal and made it live for discussion. Prior to finalizing the rule, CMS will regard each comment received during this time.

The rule is a further enforcement of the medical loss ratio on Medicare Advantage and Medicare Part D (prescription drug coverage). It would require both programs to spend 85 percent of their premium income on patient-related expenses rather than internal costs. The proposal stated that proper expenditures would include “clinical services, prescription drugs, quality improving activities, and direct benefits to beneficiaries.”

Of course, that leaves a limit of 15 percent for profits and business-related costs, as the health care law outlined previously. As other rules have been proposed and drafted for finalization, this particular one has been on the mind of the medical and insurance industries for quite some time. Medicare Advantage plans are a key component of the private insurance market, and with stringent limitations such as these, insurers will experience a significant impact.

The new application of the medical loss ratio to Medicare Parts A and D holds an economic impact of over $100 million, creating a substantial economic change.

Cuts in government funding for Medicare Advantage were also announced by CMS last week, in addition to the profit margin rule. The current cuts are estimated at $11 billion by an industry trade group. Presently, insurers receive a fixed rate per Medicare Advantage member from the government to reimburse providers. In fee-for-service Medicare plans, the government pays providers based on their service cost.

Karen Ignani of America’s Health Insurance Plans (AHIP) says, “these changes will disrupt coverage for Medicare Advantage beneficiaries at a time when evidence clearly demonstrates that Medicare Advantage provides higher-quality care than the fee-for-service part of Medicare.”

According to Reuters, health insurer shares dropped today as companies like Humana, Inc. stated that the proposed cuts in government funding “would affect its growth in 2014.” Humana’s shares dropped as much as 10 percent following the statement. UnitedHealth Group, Cigna, and Aetna also fell a bit on Tuesday.

Approximately 14 million Americans are insured by Medicare Advantage plans, says AHIP, and reduced funding will make a large dent in the insurance industry. This is where the medical loss ratio will be useful, however: as the government pulls their funding, the insurers are expected to pay more on their own income.

Humana is speaking out, saying these rates are much too low. They insure about 2 million Medicare Advantage members, and the proposed payment rates for 2014 suggest a mid-single-digit decline in rates for the company, they claim. However, the rate reduction should come as no surprise, as Medicare Advantage rate changes have been part of the health reform law since the beginning.

CMS also reported that Medicare Advantage rates have dropped by 10 percent since March 2010 when the ACA was passed.

Both of the proposed rules for Medicare, including cuts in funding and the medical loss ratio adjustment, will be finalized and published on April 1, according to CMS. The 60-day comment period is also open to opinions on the reduction in payment rates for Medicare Advantage.


B. Somers

B. Somers is a contributor to Health Insurance News, focusing on medical coverage, carriers, public programs and Obamacare. Writing for East Coast Health Insurance since 2012, she got started with healthcare and insurance news at its most exciting time in U.S. history.