May 18 (Bloomberg) -- Insurers led by UnitedHealth Group Inc. and Humana Inc. may share in an estimated $2.5 billion in yearly bonuses if their U.S-backed Medicare plans rate four or five stars under a system created to improve quality of care.
The U.S. has ranked Medicare Advantage insurance plans that serve the elderly on a one- to five-star basis since 2007, weighing clinical outcomes, access to tests, preventive care and consumer satisfaction, among 33 criteria. Under the health law signed in March, those scores will be used to award bonuses that can boost U.S. subsidies for the plans by five percent.
The money may help offset an estimated $136 billion, 10-year scheduled cut in U.S. payments for the plans. UnitedHealth has begun an improvement push because most of their customers are in plans now ranked from three to three-and-a-half stars, said spokesman Matthew Burns. At the same time, America’s Health Insurance Plans, the industry’s lobbyist, is urging changes in the system that may allow more plans to get higher ratings.
It’s “health-care Darwinism,” said Nathan Goldstein, senior vice president of strategic development with Gorman Health Group, a Washington consulting firm that works with Medicare Advantage plans, in an interview.
The program begins with a 1.5 percent bonus in 2012, then 3 percent in 2013 and 5 percent in 2014.
Payments will be worth at least $700 million a year by 2014, said Brian Biles, a professor at George Washington University’s Department of Health Policy who wrote a study on the program. If all the three-star plans improved to four, the total bonus payments would be worth about $2.5 billion, according to a separate analysis by Biles.
‘Taking the Edge Off’
The bonuses “could be significant in taking the edge off cuts to Medicare Advantage,” said Ana Gupte, a Sanford C. Bernstein & Co. analyst in New York, in an e-mail.
UnitedHealth, based in Minnetonka, Minnesota, lost 26 cents to $30.18 at 4 p.m. in New York Stock Exchange trading. Humana, of Louisville, Kentucky, increased 31 cents to $46.20. The Standard & Poor’s 500 Managed-Care Index has fallen 12 percent since President Barack Obama signed the health-care law on March 30, compared with a 4.5 percent decline in the S&P 500.
Advantage plans compete with traditional Medicare by offering expanded benefits and different premiums. About 10.2 million of the 45 million Medicare recipients were Advantage members in 2009, according to the Kaiser Family Foundation, a Menlo Park, California, health-care research group.
UnitedHealth covered 2 million people in Advantage plans as of March 31 and Humana had 1.74 million, according to statements released last month. The Advantage program accounted for one-fifth of UnitedHealth’s $3.82 billion in earnings last year, said Matthew Borsch, a Goldman Sachs Group Inc. analyst in New York, in a May 3 note.
In 2009, he U.S. paid insurers an estimated $110 billion to run the plans, according to Kaiser. The payments were about 14 percent higher per-patient than the cost of traditional Medicare, the U.S. government’s basic health program for those 65 and older, the Medicare Payment Advisory Commission said.
In an effort to raise its ratings by 2014, UnitedHealth will encourage patients to use chronic and preventive care services more often, and the company plans to put resources into added call centers and customer support, said Rhonda Medows, the insurer’s chief medical officer for public and senior markets.
“We believe we’ll achieve four or better in time,” Medows said in a telephone interview.
The insurance industry has been lobbying to influence many parts of the health-care overhaul that will affect how companies do business, including rules about the proportion of premium dollars to be used for administrative costs and profits. The rating system is also at issue, said Robert Zirkelbach, the group’s spokesman.
The star system grades insurers against one another on some of the 33 measures. America’s Health Insurance Plans is challenging the objectivity of having the criteria rated on a curve, Zirkelbach said in a telephone interview.
“We have raised concerns that some of the measures in the current star systems are not based on objective criteria, which could prevent some plans from moving up,” he said.
That means companies will find it harder to improve their ratings unless the metrics grading them against one another are changed to allow measurements against universal standards, said Biles, who wrote the study about the bonus program.
“For somebody as big as UnitedHealth, that all their plans could be four stars under the current system is impossible,” Biles said in a phone interview.
No Decision on Changes
Medicare hasn’t decided whether to change the criteria, said Peter Ashkenaz, a spokesman for the Centers for Medicare and Medicaid Services, in an e-mail.
Biles said ending the grading curve might make the star rating system less meaningful.
“They’ll set absolute values, but they’ll set them so low that everybody lives in the world of Lake Wobegon, where all the children and all the plans are above average,” he said, referring to radio show host Garrison Keillor’s fictional town in Minnesota.
Nonprofit Medicare Advantage plans tend to have higher ratings than for-profit companies. The average nonprofit plan has 3.87 stars, compared with 3.02 stars for the for-profit insurers, according to the Kaiser foundation.
Martin’s Point Health Care in Portland, Maine, a nonprofit insurer, is one of four plans in the U.S. with a five-star rating. The insurer had 2,652 Advantage patients that brought in $16.4 million in 2009. Martin’s Point competes locally against Humana among about 10 rivals, Chief Executive Officer David Howes said in a phone interview.
9 Percent Cut
All the local Maine plans are facing about a 9 percent cut to their government payment rates next year. “But they’re not all going to be getting the quality bonuses. I think the quality bonuses may be critical for success going forward,” Howes said.
Howes said Martin’s Point expects to double the number of Advantage customers in the next year. The plan relies on its existing relationships with doctors and hospitals to make sure they’re providing preventive care, one of Medicare’s metrics.
“We’ve spent a lot of time thinking about, ‘Who do we want to have in that network?’” Howes said. “Who gives nice access? Who gives us the ability to touch our members and patients in a way that is positive?”
Martin’s Point’s five-star ratings will help it win more customers from its competitors and perhaps eventually drive them from the market, said Goldstein, of Gorman Health Group, who has consulted with the Maine nonprofit.
“To the victor goes the members,” Goldstein said. “Mr. CEO, what I’m here to tell you is that your payment rate is getting cut down, and you have two levers you can pull to increase it -- your risk adjustment, and your star system.”
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