Modeling the impact of Medicare Advantage payment cuts on ambulatory care sensitive and elective hospitalizations.

The Patient Protection and Affordable Care Act of 2010 (PPACA) is projected to achieve $145 billion in savings through reduced payments to Medicare Advantage plans over the coming decade (Foster, 2010). Medicare Advantage (MA) is a voluntary managed care alternative to Fee-for-Service (FFS) Medicare that provides additional benefits beyond the basic Medicare benefit package to enrollees who join managed care networks. Though managed care plans were initially introduced as a cost-saving mechanism, the Medicare Payment Advisory Commission estimates that payments to MA plans total 114 percent of Fee-for-Service (FFS) spending for otherwise similar beneficiaries (MedPAC, 2009). However, Medicare Advantage plans are required to use payments exceeding expected costs on additional benefits or reduced cost sharing for enrollees. These benefits may have positive health effects, for example by improving access to care for lower-income seniors who disproportionately enroll (Atherly and Thorpe, 2005). The planned cuts in MA payments have raised concerns about the health implications of benefit reductions for the 23 percent of Medicare beneficiaries currently enrolled in an MA plan (Herszenhorn, 2009). Limited empirical evidence about the relationship between payments to MA plans and the care provided to Medicare beneficiaries has led to speculation about the value of additional payments to MA plans. President Obama articulates one view, that the additional payments to MA plans are “unwarranted subsidies in Medicare that go to insurance companies—subsidies that do everything to pad their profits but don’t improve the care of seniors” (Wall Street Journal, 2009). Health insurers argue that payment cuts would reduce benefits and increase costs to patients, which could affect utilization and health outcomes. As payment rates become more generous, plans can invest in additional benefits such as disease management or reduced cost sharing for preventive service use; strategies which may reduce hospitalization use. Payment reductions introduced by the 1997 Balanced Budget Act (BBA) were associated with plan withdrawals from many markets and declines in supplemental benefits (Berenson and Dowd, 2009; Gold et al, 2004). Changes in Medicare Advantage payment rates may also affect the quality of care provided to Fee-for-Service (FFS) participants. Higher plan payments have been shown to increase managed care enrollment (Cawley et al., 2005). Earlier studies have also found significant spillover effects from Medicare managed care influencing treatment patterns of all Medicare beneficiaries (Baker, 1997; Bundorf et al., 2004; Gaskin and Hadley, 1997; Chernew et al., 2008). Chernew et al. (2008) find that higher MA penetration reduces FFS spending and suggest that optimal MMC payment strategy should account for spillovers to FFS with higher payments to MA plans to further encourage enrollment rather than payment cuts. Since spillover effects are more likely under higher levels of managed care penetration, changes in MA payment rates can affect quality of care for all Medicare beneficiaries by altering the nature and magnitude of spillovers as well by changing the composition of program participants. Improved understanding of the potential consequences of changing Medicare Advantage payment policy is necessary to evaluate the impact of health reform proposals on seniors. If there are adverse health and utilization consequences of payment reductions, policymakers may overstate the potential savings. I used the variation in payments across counties and over time established by federal plan payment policy resulting from a series of Congressional policy changes to study the relationship between payments to MA plans and hospitalization rates amongst Medicare beneficiaries from 1999 to 2005. I examined rates of acute and chronic ambulatory care sensitive (ACS) admissions, which may be influenced by the additional benefits provided by MA plans, and elective hospitalizations, which may become more tightly rationed in response to lower payments. Results from this analysis are used to simulate changes in hospitalization rates which might occur in response to the PPACA payment cuts.