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.

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