The 39th edition of the Cavalcade of Risk is up!

The Thanksgiving edition of the Cavalcade of Risk is up over at Colorado Health Insurance Insider. This edition includes some of the best insurance, finance, and investing blog posts from the last couple of weeks.

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How much does guesswork figure into rate setting for private health insurance?

Sometimes a lot, especially when the Medicare Part B physician fee schedule is involved.

A few weeks ago, the Centers for Medicare & Medicaid Services (CMS) announced its final regulation for the Medicare Part B physician payment formula for 2008. This regulation finalized a payment formula proposed last July. The final regulation reduces Medicare physician payments by an average of 10.1%. Why does this matter for private health insurance? The answer is simple. Medicare supplemental health insurance, usually referred to as "Medigap" coverage, is private insurance that bases its physician payments on Medicare-established rates. This means that Medicare's physician payment schedule is critical for the calculation of Medigap premium rates. The problem, however, is that we have no idea when that schedule will be final. Thus, in order to set rates now, we have to guess what the final schedule will look like, set Medigap premium rates accordingly, and hope that the final schedule is not too different from our guess.

The 2008 Medigap filing and our guesswork in action

In Rhode Island, Blue Cross & Blue Shield submits its Medigap rates to our Office for approval in the late summer. They do this because their annual Medigap renewal cycle begins in February. They need rate approval by no later than mid-December so that they can get rate information out in time for renewals. Also, if seniors want to compare rates for traditional Medicare plus Medigap coverage to rates for Medicare Advantage, Blue Cross needs the Medigap rates even sooner—by late October. The annual coordinated election period for Medicare Advantage is November 15 through December 31.

Since CMS proposed its 2008 physician payment schedule last July and finalized that schedule recently, the physician payment schedule should not be a problem for our rate approval process, right? Wrong. For the last few years, the physician payment schedule has been set by CMS in regulation (usually in mid-fall) and then readjusted by Congress (usually early- to mid-winter). This means that a final physician payment schedule is usually not available until mid-December at the earliest. Hence the need for guesswork. But why does it work this way? Because the Medicare payment system is broken and the method Congress came up with to fix the broken system—the so-called sustainable growth rate formula (SGR)—has been broken by Congress' own meddling.

Medicare SGR and the lack of political will

The SGR is designed to annually update reimbursement for all Medicare-reimbursed physician services in order to control total physician costs. The system works like this: under the SGR, CMS estimates an expenditure target for physician services in a given year. The expenditure target is determined by medical inflation, the gross domestic product, increases in the number of beneficiaries for fee-for-service Medicare and changes in SGR law and implementing regulations. The SGR system attempts to limit spending by comparing the accumulated amount of actual physician-related spending to a specified target level. If actual cumulative spending exceeds the target cumulative spending level, then future physician payments will be reduced (on a per service basis) so that future actual expenditures will be lower and ultimately reach the target amount. Thus, if actual spending on physician services is greater than the expenditure target, physicians receive a payment reduction in the next year's payment schedule.

As you might have guessed, actual physician-related spending has exceeded the target spending levels since 2001. SGR-mandated adjustments (as set by CMS regulation) have been negative since 2003 and are expected to remain negative every year through at least 2016. However, Congress cannot seem to help itself and usually steps in at the last minute (or sometimes even later) with a one year “fix” to get rid of the decrease imposed by CMS (which CMS is obligated to make because of the SGR system put in place by Congress). Here is the catch, though. Congress does not materially change the SGR formula or process, it simply overrides the physician payment reduction for another year.

From 2003 to 2007, scheduled physician payment reductions were overridden by Congress. But from 2003 through 2006, Congress not only increased the actual physician spending, it also specified that the overall target level of spending would not be increased to match. This meant that the spread between the actual and target spending levels under the SGR methodology increased significantly during that time period—making it harder for CMS to match the target spending level to the actual spending level. The 2007 legislative change to the physician conversion factor increased both the actual and target spending levels, but required the 2008 factor be determined as if the 2007 factor had not been changed. Why? Who knows. The effect on physician payments, as expected, is large. The 2008 physician conversion factor is now -10.1%.

In a nutshell, here is what CMS proposed to take and what Congress gave back during 2003-2007:

YEAR.....CMS REDUCTION.....CONGRESSIONAL OVERRIDE
2003............-4.4%................................+1.6%
2004............-4.5%................................+1.5%
2005............-4.5%................................+1.5%
2006............-4.5%................................+0.0%
2007............-5.0%................................+0.0%
2008...........-10.1%...................................?

How does this ridiculous process mess-up Medigap ratemaking?

Since the Medicare reimbursement level for physician services is a component of the Medigap rate determination, accurately accounting for this figure is critical to a proper rate evaluation. When Blue Cross made its 2008 filing, it only had CMS’ proposed reduction (of -10%) and past history to work with when trying to guess what the actual, final 2008 physician conversion factor would be. Since Congress has stepped in and adjusted the reduction every year since 2003, Blue Cross figured that Congress would do the same again this year. Therefore Blue Cross calculated its proposed 2008 Medigap premium rates based on an anticipated 1.5% increase in physician payments. Why a 1.5% increase? This is what Congress did in 2004 and 2005. Yet, while the assumption of a 1.5% increase is not unreasonable from an actuarial perspective, Blue Cross' guess is simply that—just a guess. It did nothing to help our Office make its decision.

Blue Cross’ assumption of a 1.5% increase in physician payments accounted for about .75% of the overall 6% rate increase it sought. If we were to cut the expected physician payment increase to 0% (because this is what Congress did the last two years) the proposed rates decrease by .75%. This is what we did. After we made a few other cuts, the Office approved an overall Medigap rate increase of about 4%.

So why is this a big deal? Because if Congress leaves the physician rate reduction at -10.1%, then Blue Cross’ premium rates will be too high—the 4% rate increase we authorized should instead be a 1% rate decrease. Seniors will take it on the chin. Likewise, if Congress gives physicians a rate increase (because physicians have not had a rate increase since 2005), then Blue Cross will take it on the chin—the premium rates will be too low to cover costs. That means that Blue Cross’ surplus will have to cover the 2008 cost overruns and the 2008 rate deficiency will have to be included as a component in next year’s rate filing, making next year’s rates seem even higher to the seniors who buy Medigap insurance.

I hope that our guess was correct. The rate decision went out on October 15th. And by the way, if anyone wants to know why I waited a month to write about this, see page 10 of the decision.

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