NCPA - National Center for Policy Analysis

Medicare Advantage Star Ratings: Detaching Pay from Performance

May 22, 2012

In 2008, the Centers for Medicare and Medicaid Services (CMS) established a rating system for Medicare Advantage (MA) plans on a one to five star scale to assist beneficiaries in the selection of an MA plan.  Beneficiaries may, if they wish, use these ratings in conjunction with information about benefits, copays and available providers, to select the MA plan that best meets their needs, say Douglas Holtz-Eakin, Robert A. Book and Michael Ramlet of the American Action Forum.

Enter the Patient Protection and Affordable Care Act (PPACA): the PPACA included a provision to use the star rating system as a crude "pay for performance" system.  Plans that manage a higher rating through the CMS-determined criteria will receive bonus payments from the government.  However, despite its admirable goals, this policy can actually undermine MA plans and patient treatment.

First, the timetable under which MA plans will be evaluated will inhibit their ability to achieve CMS standards of performance.

  • The criteria for evaluation are announced after the period for which they are applied, meaning that plans are graded based on standards that don't exist yet.
  • Furthermore, payments are made based on enrollment in a future time period.
  • Thus, the beneficiaries who experience the performance are not necessarily those whose payments will be affected by the ratings.

Second, because of the rebate structure, instead of giving higher ratings to plans with more benefits, benefits will be increased for higher‐rated plans.

  • The government-provided financial incentive to high-rated plans is split into two components: a direct bonus payment to the plan operator and an increased rebate paid to plan subscribers.
  • In this case, the reward for operating a quality MA plan would go not to the operator of the plan, but to those who enroll in the plan.
  • The financial reward, then, simply becomes a bonus for patients who happen to enroll in a plan that the CMS believes is above average.

Third, the conformity that CMS standards will encourage undermines the very purpose for which MA plans were created.  Meant to supplement standard Medicare with niche services for customers with unique needs, MA plans would be coerced into seeking financial bonuses by adopting uniformity.

Source: Douglas Holtz-Eakin, Robert A. Book and Michael Ramlet, "Medicare Advantage Star Ratings: Detaching Pay from Performance," American Action Forum, May 2012.

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