The Centers for Medicare and Medicaid Services (CMS) is proposing changes to the way it calculates payments to group Medicare Advantage plans that cover employers’ retirees. In recent communications, the agency makes clear it will expect more competitive bids, but still expects employers and their carriers to offer a comprehensive package of supplemental benefits.

Rather than provide retiree health benefits that supplement Medicare, some large employers enroll their retirees in Medicare Advantage plans. These plans typically have been receiving substantial overpayments from Medicare for providing Medicare-covered benefits and CMS is hoping to reign some of those payments in, experts say.

The Medicare Payment Advisory Commission (MedPAC) estimated 2016 payments to these plans will average 106% of the cost of covering comparable beneficiaries in traditional Medicare.

“Medicare’s formula for calculating these payouts is based on a competitive bidding process,” John Barkett, senior director of policy affairs at Willis Towers Watson says. “MedPAC has written for years that when employers submit their bids, the bids are not very competitive.”

Barkett says the bids are meant to be noncompetitive because employers do not have to compete against other plans for their customers because their customers are mainly retirees.

“MedPAC has been pointing this out for a while, and this year in their annual rule making process, it was cited that employers are not competitively bidding for their Medicare payments,” he adds.

As a result to this citing by MedPAC, CMS proposes, starting in 2017, to base payments to employer plans on the average bids of other Medicare Advantage plans.

CMS is expected to finalize Medicare Advantage payment rates for 2017 this month. Barkett says industry employers that administer the Group Medicare Advantage plans are against the new changes because it will affect both employers and retirees adversely.

“This change will lower the payments going to employers to pay for the benefits retirees receive,” Barkett says. “Retirees also pay into these plans and essentially one of the revenue streams that go into paying for these plans is going to be reduced.”

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"MedPAC has been pointing this out for a while, and this year in their annual rule making process, it was cited that employers are not competitively bidding for their Medicare payments."

According to a study done by the National Bureau of Economic Research (NBER), “Who benefits when government pays more? Pass-through in the Medicare advantage program” it is revealed that payments made to employers for these Medicare advantage plans is not all going to the benefit of the retirees but to profits and overhead margins.

NBER wrote in their findings about one-fifth of the Medicare advantage payment is passed through to consumers in the form of better coverage and a larger portion of the payment accrues to private insurers in the form of higher profits with suggestive evidence of a larger impact on advertising expenditures.

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