James R. Smith

Discussing the Medicare Advantage star rating system

March 19, 2018
by Gus Iversen, Editor in Chief
In response to the growing Medicare enrollment population and Affordable Care Act (ACA) uncertainty, many private payers are expanding or shifting their focus to Medicare Advantage (MA). HCB News spoke to James R. Smith, FACHE, managing director of Navigant, about the program, its recent growth and why MA plans have become so popular.

HCB News: To start, can you please provide us with some background on what Medicare Advantage is all about?

James R. Smith: The private version of the federal Medicare program, Medicare Advantage – also referred to as Medicare Part C – has served beneficiaries since the 1970’s. Today, it primarily offers health maintenance organization (HMO) and preferred provider organization (PPO) benefit plans.



Whereas the federal government pays for Medicare benefits under traditional Medicare coverage, MA plans are offered by private payers that contract with the Centers for Medicare & Medicaid Services (CMS) to provide MA benefit plans. Medicare pays the contracted payer to cover and administer benefits; in turn, plans negotiate with local and regional healthcare providers to deliver services to enrollees. As part of the ACA, minimum medical-loss ratios were set at 85 percent, meaning MA plans must spend at least 85 percent of plan revenue on healthcare services for members.

More recently, MA plans have been increasing in popularity, with approximately one-third of all Medicare enrollees – about 20 million Americans – choosing these plans, up from 13 percent in 2004. Analyses project MA enrollment to exceed 50 percent market penetration by the end of 2025. Why are these plans so popular? They present a win-win-win for Medicare enrollees, payers and providers (see Figure 1 here).

So, it’s no surprise that many commercial payers – including the likes of UnitedHealth Group, Aetna, Anthem, and Humana – are expanding or shifting their focus to MA.

HCB News: Considering MA plan popularity, what can plans do to differentiate their value to beneficiaries and providers, and preserve adequate enrollment?

JS: It’s important to understand that increasing a plan’s MA star ratings is a key way to attract new enrollees, expand market share and increase revenue.

Developed under the ACA, the MA star ratings scale measures how well plans perform across five categories including staying healthy through screenings, tests, and vaccines; managing chronic, long-term conditions; enhancing the member experience with the health plan; managing member complaints, problems getting services, and choosing to leave the plan and finally improving health plan customer service.

Each fall, Medicare assigns plans an overall star rating ranging from 1 to 5 stars, with five representing the highest level of performance. This rating score offers a way for enrollees to compare performance among plans. In addition, per member per month (PMPM) rates paid by Medicare vary based on certain star rating thresholds. Plans that are rated 3.5 stars or less are paid a base rate based on the county in which it enrolls beneficiaries. However, if the plan increases the rating to 4 stars or more, the plan is paid a 5 percent bonus in addition to the base rate. Plans achieving a 5-star rating can also enroll members throughout the year, while plans below 5 stars can only enroll members during the late fall annual election period.

While the bonus payment provides additional revenue to the managed care organization (MCO) that operates and administers the MA plan, the improvement in star ratings can enhance the health plan’s performance in another way. Plans receiving a bonus payment can also attain a greater level of rebate, compared with plans that receive a rating of 4 stars or less. Specifically, rebates are calculated, for each plan, as a percentage of the difference between the risk-adjusted service area benchmark and the risk-adjusted bid. This should have a snowball effect on enrollment and market share, as the rebate payments must be used to provide supplemental benefits to enrollees.

HCB News: Navigant recently released an analysis that looks at the potential impact of MA star ratings improvements on plan enrollment and revenue. Can you provide us with a summary of that analysis?

JS: Yes, we decided to test the hypothesis that increasing star ratings will lead to increased enrollment. So, we constructed a database of 500 MA contracts from CMS’ publicly available data from 2012 to 2016.

We found that a 1-star increase in rating was associated with an 8 percent to 12 percent increase in beneficiary enrollment in the year following the increase. This increase was independent of overall changes in enrollment; in other words, the change would be in addition to overall county level changes in enrollment.

Between the increased enrollment and the increased PMPM payment, MA plans will experience sizeable annual revenue growth as a result of star rating improvements. On average, in 2016, the median enrollment for a 3-star contract was approximately 9,600 beneficiaries. An improvement in rating from 3 stars to 4 stars, which would generate additional bonus payments and potentially higher rebates, would drive revenue up between 13.4 percent and 17.6 percent, resulting in an additional $12 million to $16.2 million in revenue for a plan.

Beyond the added bonus payment, a 3 to 4-star improvement can generate 134 percent more value to its members in extra benefits through more generous rebates.

HCB News: What can MA plans do to not only increase their star ratings, but also enrollment and revenue?

JS: For starters, they must consider the role of providers. Strong star ratings are partially a result of contracting with providers that invest time and resources into closing care gaps to improve care quality and satisfaction. Therefore, plans should proactively seek collaborative arrangements with providers to share the financial benefits of quality and efficiency improvements, ultimately leading to greater plan satisfaction and quality among all involved.

Recently, payers faced ambivalence from providers about joining MA networks because participation did not offer additional revenue opportunities. Moreover, value-based models were only beginning to be negotiated broadly in commercial and MA areas. Now, given the shift to value and comparatively less attractive commercial revenue streams which have flattened or eroded in recent years, providers may be more receptive to considering participating in MA networks under value-based arrangements.

MA plans rely on sufficiency of enrollment to maintain their ongoing viability. Increases in star ratings can have an immediate effect on the MA plans’ bottom line through growth in enrollment, revenue and market share. Ratings improvements can also drive increased rebates that plans can use to enhance benefits, increasing the likelihood of beneficiary re-enrollment or new beneficiaries joining the plan.