Why a Successful Population Health Strategy Must Include Medicare Advantage

Health Care Advisory Board Why a Successful Population Health Strategy Must Include Medicare Advantage Assessing the Attractiveness of Medicare Advantage Contracts 2445 M Street NW Washington DC 20037 P 202.266.5600 F 202.266.5700 advisory.com 2014 The Advisory Board Company 29980 1 advisory.com

Health Care Advisory Board Sarah Gabriel Senior Analyst 202-568-7021 gabriels@advisory.com Hamza Hasan Senior Consultant 202-266-6540 hasanh@advisory.com LEGAL CAVEAT The Advisory Board Company has made efforts to verify the accuracy of the information it provides to members. This report relies on data obtained from many sources, however, and The Advisory Board Company cannot guarantee the accuracy of the information provided or any analysis based thereon. In addition, The Advisory Board Company is not in the business of giving legal, medical, accounting, or other professional advice, and its reports should not be construed as professional advice. In particular, members should not rely on any legal commentary in this report as a basis for action, or assume that any tactics described herein would be permitted by applicable law or appropriate for a given member s situation. Members are advised to consult with appropriate professionals concerning legal, medical, tax, or accounting issues, before implementing any of these tactics. Neither The Advisory Board Company nor its officers, directors, trustees, employees and agents shall be liable for any claims, liabilities, or expenses relating to (a) any errors or omissions in this report, whether caused by The Advisory Board Company or any of its employees or agents, or sources or other third parties, (b) any recommendation or graded ranking by The Advisory Board Company, or (c) failure of member and its employees and agents to abide by the terms set forth herein. The Advisory Board is a registered trademark of The Advisory Board Company in the United States and other countries. Members are not permitted to use this trademark, or any other Advisory Board trademark, product name, service name, trade name, and logo, without the prior written consent of The Advisory Board Company. All other trademarks, product names, service names, trade names, and logos used within these pages are the property of their respective holders. Use of other company trademarks, product names, service names, trade names and logos or images of the same does not necessarily constitute (a) an endorsement by such company of The Advisory Board Company and its products and services, or (b) an endorsement of the company or its products or services by The Advisory Board Company. The Advisory Board Company is not affiliated with any such company. IMPORTANT: Please read the following. The Advisory Board Company has prepared this report for the exclusive use of its members. Each member acknowledges and agrees that this report and the information contained herein (collectively, the Report ) are confidential and proprietary to The Advisory Board Company. By accepting delivery of this Report, each member agrees to abide by the terms as stated herein, including the following: 1. The Advisory Board Company owns all right, title and interest in and to this Report. Except as stated herein, no right, license, permission or interest of any kind in this Report is intended to be given, transferred to or acquired by a member. Each member is authorized to use this Report only to the extent expressly authorized herein. 2. Each member shall not sell, license, or republish this Report. Each member shall not disseminate or permit the use of, and shall take reasonable precautions to prevent such dissemination or use of, this Report by (a) any of its employees and agents (except as stated below), or (b) any third party. 3. Each member may make this Report available solely to those of its employees and agents who (a) are registered for the workshop or membership program of which this Report is a part, (b) require access to this Report in order to learn from the information described herein, and (c) agree not to disclose this Report to other employees or agents or any third party. Each member shall use, and shall ensure that its employees and agents use, this Report for its internal use only. Each member may make a limited number of copies, solely as adequate for use by its employees and agents in accordance with the terms herein. 4. Each member shall not remove from this Report any confidential markings, copyright notices, and other similar indicia herein. 5. Each member is responsible for any breach of its obligations as stated herein by any of its employees or agents. 6. If a member is unwilling to abide by any of the foregoing obligations, then such member shall promptly return this Report and all copies thereof to The Advisory Board Company. 2014 The Advisory Board Company 29980 2 advisory.com

Table of Contents The Role of Medicare Advantage in Population Health... 4 The Population Health Mandate for Medicare... 4 Medicare Shared Savings Program Yielding Mixed Financial Results... 4 A More Appealing Option: Medicare Advantage... 5 Four Attractive Elements of Medicare Advantage Contracts... 6 1. Medicare Advantage offers greater control over the network.... 6 2. Medicare Advantage minimizes patient identification challenges.... 7 3. Medicare Advantage enhances the potential for contract customization.... 8 4. Medicare Advantage simplifies customized cost target development.... 8 Future Outlook for Medicare Advantage... 10 Incorporating MA Contracts into a Broader Population Health Strategy... 11 2014 The Advisory Board Company 29980 3 advisory.com

The Role of Medicare Advantage in Population Health The Population Health Mandate for Medicare Many providers have recognized the necessity of having a Medicare-based population health strategy. Demographics and increasingly stringent mandatory penalty programs require that providers have a plan for improving the quality and reducing the cost of care for Medicare beneficiaries. First, the number of Medicare beneficiaries is projected to increase from 54 million today to more than 64 million in 2020. Medicare beneficiaries will also make up a larger proportion of the patients providers see across the next few years. By 2022, Medicare beneficiaries are expected to compose 58% of provider volumes, up from 42% of volumes in 2012. 1 Second, CMS is already holding providers accountable for the cost and quality of care provided to Medicare patients, through the Value-Based Purchasing, Readmissions, Meaningful Use, 2 and Hospital-Acquired Conditions programs. The total amount of Medicare fee-for-service revenue at risk under these mandatory pay-for-performance programs will increase to about 9% by 2017. 3 Since the first cohort of 114 Medicare Shared Savings Program (MSSP) accountable care organizations (ACOs) started in 2012, more than 200 other organizations have joined the program. As of October 2014, there are 375 Medicare ACOs. Many of these organizations see Medicare ACOs as a means of gaining experience with value-based payment and population health management without significant financial risks. Medicare Shared Savings Program Yielding Mixed Financial Results MSSP has not been particularly financially rewarding for most program participants. In the first-year performance results for MSSP ACOs, only about half of the participants generated any savings for Medicare, and of those, only half kept spending low enough to receive any money back through a shared savings payment. Medicare Shared Savings Program ACO Performance First Performance Year 24% Held spending below benchmark, earned shared savings payment Did not hold spending below benchmark 52% 24% Held spending below benchmark, did not earn shared savings payment 1) Centers for Medicare and Medicaid Services, 2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, May 31, 2013, http://downloads.cms.gov/files/tr2013.pdf. 2) Meaningful Use incentivizes providers to use information technology capabilities to improve the quality of care. Providers are required to use electronic health records to collect and share patients clinical data for improved care coordination and clinical outcomes. 3) Wilson L, Pursuing Value: Providers Aim for Rewards by Emphasizing Quality Metrics Used in the CMS New Purchasing System, Modern Healthcare, September 12, 2011, http://www.modernhealthcare.com/article/20110912/supplement/309129999. 2014 The Advisory Board Company 29980 4 advisory.com

A primary reason for this mixed financial success is the design of the program. The contractual terms specifically the financial benchmark methodology, patient attribution methodology, sharing rate, and inability to define a network are not beneficial to most participants. In early December 2014, CMS released a proposed rule that details the next phase of the MSSP, which begins in 2016. The proposed rule demonstrates CMS s interest in providing a more financially rewarding program option. CMS proposes a new Track 3 option, which would give participants a greater sharing opportunity (with prospective beneficiary attribution), in exchange for greater financial risk. The proposed rule also offers alterations to the attribution methodology used for all of the participation tracks (applies to both retrospective and prospective attribution) and seeks to improve data sharing. Although the proposed rule addresses some of the concerns of current MSSP ACOs, it does still leave significant open questions, such as: Will the cost benchmarks be calculated differently and be customized to individual providers? Will ACOs be allowed to take steps to prevent network leakage? A More Appealing Option: Medicare Advantage While participating in MSSP is an important entry point to Medicare risk, providers seeking a higher-risk, higher-reward opportunity to manage Medicare populations should consider negotiating risk-based contracts with Medicare Advantage (MA) health plans. MA is a private health insurance option for Medicare beneficiaries. Commercial health plans contract with CMS to offer various types of insurance products to enrollees. The majority 95% in 2014 of MA enrollees choose HMO or PPO plans. 4 2014 Medicare Advantage Enrollment Other 5% PPO Insurance Product 31% 64% HMO Insurance Product Plans receive a capitated payment from CMS for the enrollees (determined by county benchmarks and enrollees risk scores). Health plans then contract with providers to care for MA plan enrollees. The MA program structure creates an unambiguous incentive for health plans to negotiate risk-based contracts with providers. Health plans are incentivized to keep the total cost of care for MA enrollees below the capitated amount and are also accountable 4) Other non-ppo and HMO plans include private fee-for-service MA plans, MSAs, cost plans, and demonstration plans. Source: Gold M, et al.,. Medicare Advantage 2014 Spotlight: Enrollment Market Update, Kaiser Family Foundation, April 2014, http://kaiserfamilyfoundation.files.wordpress.com/2014/04/8588-medicare-advantage-2014-spotlight-enrollment-market-update.pdf. 2014 The Advisory Board Company 29980 5 advisory.com

for providers quality. As a result, health plans seek contracts that will hold providers to the same standards. Health plans offering MA options are evaluated using quality ratings, called Star Ratings. Performance is assessed across five dimensions: outcomes, intermediate outcomes, patient experience, access, and process. Plans with higher ratings receive a higher capitated payment for enrollees, larger quality bonus payments, and, for the top plans, the ability to enroll beneficiaries year-round rather than just during the open enrollment period. Starting in 2015, plans that earn three stars or less on these ratings will not be eligible for quality bonus payments. The link between these Star Ratings and financial performance provides incentives for plans to closely monitor the quality of associated provider networks and their performance on these measures. 5 In comparison to MSSP, under which providers have to share a portion of savings generated with CMS, MA contracts generally offer enhanced reward opportunities. At the same time, MA contracts are typically riskier for providers. In preparation for MA risk contracts, organizations need to examine their care management infrastructure and ability to effectively manage care for their patient population. Beyond care management capabilities, providers will need to elevate both administrative and financial operations across the care continuum. For example, accurate and comprehensive coding is vitally important to MA plans as payment rates are adjusted by beneficiaries risk scores. These risk scores, in turn, are determined by coded diagnoses. High-performing coding functions at the provider level ensure that plans receive the correct payment for the risk level of their enrollees. Four Attractive Elements of Medicare Advantage Contracts MA contracts are an attractive alternative to MSSP. These contracts offer providers more control over the contract elements and over how to operationalize the contracts. 1. Medicare Advantage offers greater control over the network. Patient leakage significantly impacts the financial sustainability of a risk-based contract. Care delivered outside the ACO is potentially higher cost and lower quality. Leakage also complicates care coordination efforts within the ACO. In MSSP, patients are free to seek care anywhere that accepts Medicare fee-for-service; there is no incentive to stay within the ACO. The MSSP ACOs are also not permitted to limit patient choice. This leads to significant levels of patient leakage within these ACOs. For example, an analysis published in JAMA Internal Medicine found that 67% of specialty visits in MSSP took place outside of the ACOs. 6 Under MA arrangements, providers have more control over network integrity and are better able to steer patients to the lowest cost and highest quality physicians and facilities. In 2014, the majority 64% of MA beneficiaries were enrolled in HMOs, which offer providers the greatest control over the network and utilization of care. PPO plans are the second-most popular for MA enrollees (31% 7 ). Although PPO plans offer less network control than HMOs, patients enrolled in PPO products do receive financial incentives to stay in-network for care such as paying less for care received within the network. Providers can also offer additional services that are not typically covered by 5) Cheney C, 16 Medicare Advantage Plans Earn 5-Star Ratings, HealthLeaders Media, October 14, 2014, http://www.healthleadersmedia.com/page-2/hep-309308/16-medicare-advantage-plans-earn-5star-ratings. 6) McWilliams JM et al., Outpatient Care Patterns and Organizational Accountability in Medicare, JAMA Internal Medicine. 174 (6); 938-945, June 2014, https://archinte.jamanetwork.com/article.aspx?articleid=1861039. 7) Gold M, Medicare Advantage 2014 Spotlight: Enrollment Market Update, Kaiser Family Foundation, April 2014, http://kaiserfamilyfoundation.files.wordpress.com/2014/04/8588-medicare-advantage-2014-spotlight-enrollment-market-update.pdf. 2014 The Advisory Board Company 29980 6 advisory.com

traditional Medicare, such as vision and hearing screenings, and dental care. These added benefits build patient loyalty to the network and patient engagement with the provider. Parcell Physician Group (a pseudonym) is participating in the Pioneer ACO program (a CMS ACO program structured similarly to MSSP) and also has risk-based contracts with MA plans. The group has found that while the leakage rate for care delivered locally under its MA contracts is about 5%, the leakage rate is about 40% for its Pioneer ACO contract. Parcell attributes the widely varying patient leakage rates to the active choice patients make to enroll in an MA plan. 2. Medicare Advantage minimizes patient identification challenges. The foundation of any risk-based contract is holding providers accountable for the cost and quality of care provided to a population of patients. To be successful, providers must know exactly which patients are attributed to them. Two challenges complicate providers ability to identify those patients: imprecise patient attribution methodologies and patient churn. Attribution Under many risk-based contracts, including the MSSP, patient attribution is determined by where the patient received the most care over the past 12 months. Under MSSP, CMS gives providers a tentative list of prospectively assigned beneficiaries based on the plurality of care delivered by a primary care physician. 8 The list of attributed beneficiaries is updated quarterly and changes over the course of the year. The list is finalized at the end of the performance period with the patients for whom that provider will actually be responsible. Based on this methodology, organizations are held accountable only for patients actually treated by their clinicians over the course of the year. MA arrangements generally remove patient attribution issues. Based on patient enrollment, providers know at the start of the performance period which patients to manage and can then proactively target those patients for additional care management, allowing them to hit the targets for cost and quality. Patient churn In the ACO context, patient churn refers to patients being attributed to different providers as a result of patients changing where they receive the plurality of care. This turnover can take place during the contract s performance period, as in the case of the changes to the attributed beneficiary lists in the MSSP mentioned above, and across multiple performance periods. 8) Or by a specialist or Federally Qualified Health Center in the absence of a primary care physician. 2014 The Advisory Board Company 29980 7 advisory.com

Patient churn is a particularly challenging issue under MSSP. A recent analysis in JAMA Internal Medicine found that 33% of beneficiaries were not included in the same ACO s patient panel in back-to-back years. 9 MA contracts typically have less patient churn because patients are only allowed to enroll in or change MA plans at certain times of the year. Patients make an active choice to enroll in a particular plan for the entire contract year. 3. Medicare Advantage enhances the potential for contract customization. Unlike the MSSP, with MA plans providers have more flexibility in customizing riskbased contracts. A key advantage is the ability to negotiate contracts with customized incentive and payment structures, which means providers can make the contracts more beneficial based on their own unique circumstances. Most MA contracts include some degree of risk, with either a shared savings or capitated payment structure because of the incentives to keep total costs below the capitated payment amount and to maintain high quality ratings. The program is flexible enough to allow for different risk-based payment structures. For example, under one contract, a provider could start with 50/50 shared savings and stay at that sharing rate across the duration of the contract. Another structure could be starting the provider at 50/50 shared savings in the first year, and then increasing the sharing rate to 75/25 in the second year, and ultimately going up to 90/10 in the third year. Under this contract, the provider gradually takes on more risk and earns a larger percentage of any savings generated. Additionally, many health plans choose to incentivize providers based on the MA Star Ratings. These ratings include screening and vaccination rates, chronic disease management, and member experience with the health plan. Plans can also include physician incentives for accurate and comprehensive coding and documentation in contracts. Because the risk score of the MA plan s enrollees directly impacts the payment amount the plan receives from CMS, it is in the health plan s interest to ensure its provider partners are coding and documenting as fully and appropriately as possible. 4. Medicare Advantage simplifies customized cost target development. Under most risk-based contracts, the purchaser defines a total cost of care target that the contracted provider must not exceed to have the opportunity to share in savings and avoid a cost overage penalty. In many instances, defining this cost target is a complex exercise. For example, under the MSSP, the cost benchmarks are developed using expenditures for historically aligned beneficiaries and the baseline is trended using absolute growth in national per capita expenditures for Part A and Part B services under fee-for-service Medicare. The program benchmark is not customized to individual institutions unique circumstances; for instance, the MSSP program design does not take IME 10 and DSH 11 payments into account when calculating targets. Additionally, to earn shared savings, participating providers have to generate more than 2% of savings and there are savings limits and maximum sharing rates that cap providers potential returns. Under MA, providers can negotiate the cost target as part of negotiations with the plan. MA plans are paid a capitated amount for enrollees (some also receive premium payments from beneficiaries), which makes it easier to define cost targets regardless of the contract s payment structure. One straightforward methodology for calculating the cost target is using the Medical Loss Ratio (MLR). The MLR requires MA plans to spend at least 85% of total contract revenue on incurred claims and quality improvement. 9) McWilliams JM, et al., Outpatient Care Patterns and Organizational Accountability in Medicare, JAMA Internal Medicine, 174 (6); 938-945, June 2014, https://archinte.jamanetwork.com/article.aspx?articleid=1861039. 10) Indirect medical education. 11) Disproportionate share hospital. 2014 The Advisory Board Company 29980 8 advisory.com

Lawson Health System (a pseudonym) is currently negotiating a risk-based contract with a local MA plan and is using the MLR as a cost target. If the organization s actual expenditures are below 85% of total contract revenues, it is able to share in a percentage of the savings. As the organization decreases expenditures further, it will be able to share in a larger percentage of savings. Conversely, if actual expenditures exceed 85% of total contract revenues, the organization must absorb part of the cost overage. 2014 The Advisory Board Company 29980 9 advisory.com

Future Outlook for Medicare Advantage Two trends will have the largest impact on the success and sustainability of the MA program: pricing and enrollment growth. Pricing The MA program has historically cost CMS more than traditional Medicare. In 2014, the estimated payments for the MA program are about 106% of the estimated payments for traditional Medicare. As a result, MA plans are facing increasing pressure to defend their higher reimbursement from CMS by providing higher quality care. Recent studies have found that MA HMO enrollees are more likely to receive mammography screenings, as well as flu and pneumonia vaccinations. And patients with diabetes who are enrolled in MA plans are more likely to receive blood sugar testing and retinal exams 12. MA plans continue to be popular with seniors 13, making policy makers reluctant to advance significant payment cuts that could potentially weaken the attractiveness of the program. For instance, the payment reductions originally expected as part of the ACA have largely not materialized. For example, CMS initially planned a 1.9% overall payment rate cut for 2015, but a 0.4% overall payment rate increase was ultimately announced 14. MA payment rates, however, are not completely immune to congressional budgetary concerns. As a result, there are two key initiatives underway to bring MA payments down to traditional fee-for-service Medicare levels: coding intensity adjustments and changes to baseline payment benchmarks. The first initiative focuses on coding patterns for MA patients. MA patient risk scores have grown at a faster rate than the risk scores for traditional Medicare patients. As plans receive higher payments for riskier MA populations, both providers and their plan partners are strongly incented to ensure all diagnoses for MA patients are coded comprehensively. The coding intensity adjustments reduce overall MA risk scores by a certain percentage annually, dampening payment growth. The second initiative shifts baseline payment benchmarks. In essence, the county-based benchmarks that determine baseline payment levels are being rebased to reflect the Medicare fee-for-service spending level in each county. By 2017, each county s benchmark will fall between 95% and 115% of fee-for-service Medicare spending in the county. 15 This change in the benchmark calculation methodology will reduce overall MA payments. 12) Frakt A, Medicare Advantage Is More Expensive, but It May Be Worth It, The New York Times, August 18, 2014, http://www.nytimes.com/2014/08/19/upshot/medicare-advantage-is-more-expensive-but-it-may-be-worth it.html?rref=upshot&abt=0002&abg=1&_r=0. 13) Hancock J, Decoding the High-Stakes Debate Over Medicare Advantage Cuts, Kaiser Health News, April 7, 2014, http://kaiserhealthnews.org/news/decoding-the-high-stakes-debate-over-medicare-advantage-cuts/. 14) Hollander C, CMS to Increase Medicare Advantage Pay Rate By 0.4%, ModernHealthcare, April 7, 2014, www.modernhealthcare.com. 15) The highest cost counties will have MA benchmarks set at 95% of fee-for-service spending, and the lowest cost counties will have benchmarks set at 115% of fee-for-service spending. 2014 The Advisory Board Company 29980 10 advisory.com

Enrollment Growth Several analyses, including one from the Congressional Budget Office, indicate that the outlook for growth in Medicare Advantage enrollment is strong. 16 Over the next few years, as Medicare beneficiaries are set to become a larger portion of hospitals volumes, MA enrollment is also expected to rise significantly. According to one analysis, between 2010 and 2013, 70% of new Medicare beneficiaries enrolled in an MA plan. 17 Projected Number of Medicare Advantage Enrollees 18 20 19.0M 15 Millions of Enrollees 10 10.4M 29.5% of Medicare beneficiaries 5 0 2009 2020 There are a few drivers beyond demographics for MA enrollment growth trends. Many newly eligible Medicare beneficiaries have more experience with commercial managed care than past Medicare populations. They are more comfortable with managed care. The components of MA plans are also attractive to seniors. These plans are often lower cost and include prescription drug coverage and other types of health benefits (e.g., vision screenings, dental care, and wellness programs). Overall, the interest from providers in moving closer to full risk through options other than the MSSP and the dramatic growth in Medicare beneficiaries are likely to combine to create a favorable environment in which MA plans will flourish. Incorporating MA Contracts into a Broader Population Health Strategy Moving forward, providers will need to define a sustainable population health strategy for Medicare patients. Given the projected growth in Medicare beneficiaries over the next few years, providers need to establish a strategy for Medicare in a risk-based reimbursement model. In determining their population health strategy, providers with effective care management abilities should strongly consider MA as it offers significant benefits over MSSP. At the same time, providers will need to ensure that their Medicare population health strategies fit into a broader sustainable transition to value-based care and payment. MA risk contracts, while generally attractive, should lay the foundation for future value-based contracts and enhance an overall competitive position. 16) Congressional Budget Office s April 2014 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2014- 04-Medicare.pdf. 17) Ladsariya A, et al., Medicare Advantage: Dispelling Market Misconceptions, McKinsey, January 2014, http://healthcare.mckinsey.com/sites/default/files/mck_payorbook_89-99_medicare_r7.pdf. 18) Jacobson G, et al., Projecting Medicare Advantage Enrollment: Expect the Unexpected? Kaiser Family Foundation, June 12, 2013, http://kff.org/medicare/perspective/projecting-medicare-advantage-enrollment-expect-the-unexpected/; Hollander C, CMS to Increase Medicare Advantage Pay Rate By 0.4%, ModernHealthcare, April 7, 2014, http://www.modernhealthcare.com/article/20140407/news/304079938. 2014 The Advisory Board Company 29980 11 advisory.com

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