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What Medicare Advantage’s Success in Delivering Post-Acute Care Means for Medicare Reform

A recent study found Medicare Fee-for-Service and Medicare Advantage patients have hospitalization and post-hospitalization costs and outcomes that are generally different. How do these outcomes translate to policy recommendations?


Editor’s Note: This analysis is part of The Leonard D. Schaeffer Initiative for Innovation in Health Policy, which is a partnership between the Center for Health Policy at Brookings and the USC Schaeffer Center for Health Policy & Economics. The Initiative aims to inform the national health care debate with rigorous, evidence-based analysis leading to practical recommendations using the collaborative strengths of USC and Brookings.

By Neeraj Sood, Loren Adler, Paul Ginsburg, and Margaret Darling

When two patients with similar characteristics are admitted to the same hospital for the same health condition, but one has Medicare Fee-for-Service (FFS) coverage (where services are paid for à la carte) and the other is in a Medicare Advantage (MA) plan (private insurers who are paid a fixed amount per enrollee), it turns out that their hospitalization and post-hospitalization costs and outcomes are generally different. That’s what a recent study published in Health Affairs by Neeraj Sood and coauthors found.

Why and how do Medicare Advantage plans save money and achieve better patient outcomes?

The authors find that patients in MA plans have lower acute and post-acute care use; these differences in use of health care services translate to a 16 percent potential savings in costs. The savings primarily accrued from the use of lower intensity post-acute care settings.

Better still, MA patients had reductions in readmissions and improved rates of return to the community compared to FFS ones. These findings are important because this is one of the first studies to go inside the “black box” of MA plans. It contradicts the popular notion that MA plans have lower costs largely because they enroll healthy seniors. It shows that savings arise from better management of post-acute care.

Why did MA plans spend less and achieve better outcomes? The simple answer is because they made more money doing so. MA plans receive a capitated payment per enrollee for total care in a year, and thus have the incentive to manage care, with most of the savings in health care costs enabling them to add benefits and/or lower premiums for enrollees. Therefore, it is in the MA plan’s interest to steer patients toward less intensive post-acute care settings when appropriate and coordinate a patient’s care. In contrast, in the current Medicare FFS system, hospitals and each type of post-acute care provider have different payment systems, and there is no incentive for care management and care coordination. The results, in this instance, are higher costs for taxpayers and poorer outcomes for patients.

These findings naturally raise the question: how do MA plans manage post-acute care to achieve lower costs and better outcomes. First, MA plans contract with only a select number of post-acute care providers. In order to win these MA contracts, post-acute care providers need to stand out. They need to convince MA plans that they have lower costs and good patient outcomes. Second, MA plans have contracts with post-acute care providers that typically pay less than Medicare FFS rates, pay differently (e.g., per stay rather than per day), or require post-acute care providers to take on some financial risks. Such arrangements provide incentives to post-acute providers to discharge patients early to their homes or to a lower cost post-acute care setting. Third, MA plans use other managed care tools such as prior authorization to limit use of higher cost post-acute care providers. Plans also might impose higher cost-sharing for post-acute care services to incentivize patients to limit their use. Last but not the least, MA plans use data-driven insights combined with better patient and provider engagement to manage care transitions from acute to post-acute care and to coordinate care across settings. A variety of organizations and consultants help MA plans achieve these goals.

Lessons for traditional Medicare

The findings of the study have policy implications for reforming traditional Medicare. They suggest that new payment models that create financial incentives for care coordination and management of care transitions might be more effective than traditional approaches such as reimbursement rate cuts. Without financial incentives, providers are unlikely to change behavior. In addition, the change in financial incentives needs to be combined with expanded authority for providers to be able to use the same tools used by MA plans to manage post-acute care.

The ACA began to implement these models with some promising results, most recently finding that bundled payment incentives saved 20.8 percent for lower-extremity joint replacement. Bundled payments involve making one payment for a set episode of care, rather than individual payments for each provider, hospitalization, and readmission.

Bundled payments incentivize providers to steer patients to more appropriate and less intensive facilities for post-acute care by allowing providers to share in the savings if the costs of care are lowered without harming quality—which this study shows to be feasible. Some bundled payment proposals also bake in a small payment cut below the existing full cost of an episode of care in order to guarantee federal savings. In turn, using bundled payments can help lower federal costs (and to a degree, beneficiary premiums because they are set as a percentage of Medicare Part B costs), and bring traditional Medicare costs down closer to those of MA plans.

Other alternative payment models, such as Accountable Care Organizations, can also provide similar incentives within traditional Medicare to save money by using more efficient settings for post-acute care. Such models provide a group of providers a single payment per member per month for the total spectrum of covered care, allowing the group to share in savings if they can lower beneficiary costs without harming quality. ACOs, therefore, have similar incentives as MA plans to lower the costs of acute and post-acute care; opportunities for savings might be particularly large for post-acute care.

Moving forward, policymakers can heed the insights from this research by continuing existing bundled payment and ACO models in Medicare and by developing new ones. The enactment of the IMPACT Act in 2014 will also help in the development of such new payment models. It provides a platform for collecting data on care quality and patient outcomes so that policymakers can compare quality and outcomes across post-acute care settings. Such data is the first step in developing new “site neutral” payment models that link payment to quality and encourage use of post-acute settings based on the value provided to patients.

Benefiting from Medicare Advantage’s savings

In 2016, Medicare Advantage plans delivered the Medicare benefit for 94 percent of the cost of traditional Medicare, on average, yet MA plans were still paid slightly more than the cost of traditional Medicare per beneficiary. That’s because MA plans are paid administratively based on a multiple of FFS Medicare costs in their county, rather than based on their actual costs.

One alternative would be to pay MA plans based on their “bids” to provide the Medicare benefit package.  Under a competitive bidding system, plans could be paid based on either a weighted average of those bids in each region or according to a point on the distribution of bids (e.g., the median or second-lowest bid). The costs of traditional Medicare would remain the same as today for beneficiaries, but this would allow the government to reap some savings from the MA system. Competitive bidding for MA has been proposed previously by the Obama administration and by the Bipartisan Policy Center.

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