Medicare Advantage: Quality Bonus Payment Demonstration Has Design Flaws and Raises Legal Concerns

Published by the Government Accountability Office on 2012-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States Government Accountability Office

GAO                         Testimony
                            Before the Committee on Oversight and
                            Government Reform, House of

                            MEDICARE ADVANTAGE
For Release on Delivery
Expected at 9:30 a.m. EDT
Wednesday, July 25, 2012

                            Quality Bonus Payment
                            Demonstration Has Design
                            Flaws and Raises Legal
                            Statement of
                            James Cosgrove
                            Director, Health Care

                            Edda Emmanuelli-Perez
                            Managing Associate General Counsel

             Chairman Issa, Ranking Member Cummings, and Members of the

             We appreciate the opportunity to participate in today’s hearing on the
             Medicare Advantage (MA) Quality Bonus Payment Demonstration, which
             the Centers for Medicare & Medicaid Services (CMS) initiated rather than
             implementing the MA quality bonus payment program established in the
             Patient Protection and Affordable Care Act (PPACA). 1 Our testimony
             today discusses our March 2012 review of the 3-year demonstration’s
             cost and design, as well as our July 2012 letter to the Secretary of Health
             and Human Services (HHS) regarding the agency’s authority to conduct
             the demonstration. 2 Our March 2012 report concluded that the
             demonstration, with an estimated cost of over $8 billion over 10 years, is
             unlikely to produce meaningful results. It recommended that the Secretary
             of HHS cancel the demonstration and allow the MA quality bonus
             payment system established by PPACA to take effect. That review also
             gave rise to concerns about the agency’s authority to conduct the
             demonstration under the Social Security Amendments of 1967. 3 In our
             July 2012 letter, we noted that the statute provides broad authority, but
             found that the agency has not established that the demonstration meets
             the criteria set forth in that statute.

             The MA program, an alternative to the original Medicare fee-for-service
Background   (FFS) program, provides health care coverage to Medicare beneficiaries
             through private health plans offered by organizations under contract with
             CMS. About a quarter of all Medicare beneficiaries are enrolled in an MA

              Patient Protection and Affordable Care Act, Pub. L. No. 111-148, §§ 3201-02, 124 Stat.
             119, 442, 454 (Mar. 23, 2010), as amended by the Health Care and Education
             Reconciliation Act of 2010, Pub. L. No. 111-152, § 1102, 124 Stat. 1029, 1040 (Mar. 30,
             2010) (hereafter, “PPACA”).
              See GAO, Medicare Advantage: Quality Bonus Payment Demonstration Undermined by
             High Estimated Costs and Design Shortcomings, GAO-12-409R (Washington, D.C.: Mar.
             21, 2012) and Medicare Advantage Quality Bonus Payment Demonstration, B-323170,
             July 11, 2012.
              CMS conducted the MA Quality Bonus Payment Demonstration under section
             402(a)(1)(A) of the Social Security Amendments of 1967, as amended. Pub. L. No. 90-
             248, § 402, 81 Stat. 821, 930-31 (Jan. 2, 1968), as amended by the Social Security
             Amendments of 1972, Pub. L. No. 92-603, § 222, 86 Stat. 1329, 1390-93 (Oct. 30, 1972)
             (both codified at 42 U.S.C. § 1395b-1) (hereafter, “section 402”).

             Page 1                                                                      GAO-12-964T
plan. MA plans may offer additional benefits not provided under Medicare
FFS, such as reduced cost sharing or vision and dental coverage.

Effective January 1, 2012, PPACA requires CMS to provide quality bonus
payments to MA plans that achieve 4, 4.5, or 5 stars on a 5-star quality
rating system developed by CMS. In November 2010, CMS announced
that it would waive the PPACA quality bonus provisions and instead
determine quality bonus payments for 2012 through 2014 under a
demonstration in which all MA plans would participate unless they
affirmatively opt out. Compared with the quality bonus program
established by PPACA, the demonstration provides larger bonuses earlier
to more plans. Specifically, it extends quality bonuses to plans with 3 or
more stars, accelerates the phase-in of the bonuses for plans with 4 or
more stars, increases the size of the bonuses for plans with 4 or more
stars in 2012 and 2013, and applies the quality bonus percentage to a
plan’s entire benchmark during the phase-in of PPACA’s new MA plan
payment methodology. 4 In announcing the demonstration, CMS stated
that the demonstration’s research goal is to test whether a scaled bonus
structure leads to larger and faster annual quality improvement for plans
at various star rating levels compared with what would have occurred
under PPACA. Under PPACA, about one-third of MA enrollees would be
covered by MA contracts eligible for a bonus in 2012 and 2013. In
contrast, under the demonstration, about 90 percent of enrollees will be
covered by MA contracts eligible for a bonus in those 2 years. The
demonstration ends on December 31, 2014, at which time CMS is
expected to implement the quality bonus payment program that PPACA

The “benchmark” is used to determine the maximum amount to pay an MA plan.

Page 2                                                                GAO-12-964T
Table 1. Comparison of PPACA Quality Bonus Payment Percentages to
Demonstration Quality Bonus Payment Percentages

                                              MA Quality Bonus Payments
                                   PPACA                              Demonstration
 Star Rating             2012         2013       2014            2012         2013           2014
 5 stars                   1.5            3          5               5            5              5
 4 or 4.5 stars            1.5            3          5               4            4              5
 3.5 stars                   0            0          0             3.5          3.5            3.5
 3 stars                     0            0          0               3            3              3
 Fewer than 3 stars          0            0          0               0            0              0
Source: GAO analysis.

Notes: Under PPACA, the bonus percentages generally would be applied only to a portion of the
benchmark. Under the demonstration, the bonus percentages will be applied to the entire benchmark.
Under both PPACA and the demonstration, MA plans in qualifying counties will be eligible for double

Section 402 of the Social Security Amendments of 1967, as amended,
provides the Secretary of HHS with broad authority to undertake
demonstration projects to test new Medicare payment methodologies. 5
Specifically, it authorizes the Secretary to conduct demonstration projects
to determine whether changes in payment methods would increase the
efficiency and economy of Medicare services through the creation of
additional incentives, without adversely affecting quality. Accordingly, a
demonstration under section 402 includes (1) changes in payment
methods that create additional incentives toward increasing the efficiency
and economy of Medicare services and (2) a determination of whether the
changes in payment methods actually increase the efficiency and
economy of such services. While a demonstration need not in fact result
in increased efficiency and economy, it must meet these criteria.

 Section 402(a)(1)(A) authorizes the Secretary to develop and engage in experiments and
demonstration projects “to determine whether, and if so which, changes in methods of
payment or reimbursement for health care and services under health programs
established by the Social Security Act … would have the effect of increasing the efficiency
and economy of health services under such programs through the creation of additional
incentives to these ends without adversely affecting the quality of such services.” 42
U.S.C. § 1395b-1(a)(1)(A). Relatedly, section 402(b) authorizes the Secretary to waive
Medicare payment requirements to carry out such demonstrations. 42 U.S.C. § 1395b-

Page 3                                                                                GAO-12-964T
                        Our March 2012 review found that the CMS Office of the Actuary’s
MA Demonstration        (OACT) estimated cost of the demonstration exceeds $8 billion over 10
Characterized by High   years. About $5.34 billion of this estimate is attributed to quality bonus
                        payments more generous than those prescribed in PPACA, specifically to
Estimated Costs and     (1) higher bonuses for 4-star and 5-star plans, (2) new bonuses for 3-star
Large Scope             and 3.5-star plans, (3) applying bonuses to plans’ entire benchmarks
                        during the phase-in of PPACA’s new payment methodology, and (4)
                        allowing plans’ benchmarks to exceed their pre-PPACA levels. Most of
                        the remaining projected demonstration spending stems from higher MA
                        enrollment because the bonuses enable MA plans to offer beneficiaries
                        more benefits or lower premiums. Taken together, the expanded bonuses
                        and higher enrollment mainly benefit average-performing plans—those
                        receiving 3 and 3.5-star ratings. Also, while a reduction in MA payments
                        was projected to occur as a result of PPACA’s payment reforms, OACT
                        estimated that the demonstration would offset more than one-third of
                        these payment reductions projected for 2012 through 2014.

                        In addition, the demonstration dwarfs all other Medicare
                        demonstrations—both mandatory and discretionary—conducted since
                        1995 in its estimated budgetary impact and is larger in size and scope
                        than many of them. 6 Specifically, our review of CMS and Office of
                        Management and Budget data shows that the estimated budgetary
                        impact of the demonstration, adjusted for inflation, is at least seven times
                        larger than that of any other Medicare demonstration conducted since
                        1995 and is greater than the combined budgetary impact of all of these
                        demonstrations. Moreover, while the demonstration is similar in size and
                        scope to some Part D demonstrations, it is unlike many Medicare pay-for-
                        performance demonstrations in that it is implemented nationwide and
                        allows all eligible plans to participate. 7

                         The estimated budgetary impact refers to the difference between the total costs of the
                        demonstration and the total costs that would occur in its absence.
                         The Medicare Part D program provides voluntary, outpatient prescription drug coverage
                        for eligible individuals.

                        Page 4                                                                        GAO-12-964T
                       Our March 2012 report identified several shortcomings of the
MA Demonstration Is    demonstration’s design that preclude a credible evaluation of its
Unlikely to Achieve    effectiveness in achieving CMS’s stated research goal—to test whether a
                       scaled bonus structure leads to larger and faster annual quality
Its Research Goal as   improvement compared with what would have occurred under PPACA.
Designed and Raises    Subsequently, in our July 2012 letter, we raised concerns about whether
Legal Concerns         the demonstration meets the requirements of section 402 and, therefore,
                       falls within the agency’s authority.

                       Notably, the bonus payments are based largely on plan performance that
                       predates the demonstration. All of the performance data used to
                       determine the 2012 bonus payments and nearly all of the data used to
                       determine the 2013 bonus payments were collected before the
                       demonstration’s final specifications were published. The demonstration’s
                       incentives to improve quality can have a full impact only in 2014.
                       Therefore, we are concerned about the demonstration’s ability to provide
                       additional incentives to increase the efficiency and economy of Medicare
                       services. In response to our inquiries on this issue, CMS acknowledged
                       that payments in 2012 and 2013 reward plans for their past performance,
                       but asserted that these payment changes are consistent with the
                       requirements of section 402.

                       In addition, our March 2012 report found that the demonstration’s design
                       is inconsistent with CMS’s stated research goal. First, the demonstration’s
                       bonus percentages are not continuously scaled. For example, in 2014,
                       plans with 4, 4.5, and 5 stars will all receive the same bonus percentage.
                       Second, the demonstration’s bonus percentages in 2014 do not offer all
                       plans better incentives than PPACA to achieve higher star ratings. In
                       2014, most plans improving from 3.5 to 4 stars would receive a larger
                       increase in their bonus payment under PPACA. These features also call
                       into question whether the demonstration includes additional incentives to
                       increase the efficiency and economy of Medicare services. Notably, for
                       highly-rated plans, CMS chose to revise the payment methodology for
                       years in which the changes are unlikely to have any impact on plan
                       quality, while making no changes from PPACA for the year in which
                       changes could induce improved quality.

                       Furthermore, characteristics of the demonstration raise concerns about
                       the agency’s ability to determine whether the payment changes result in
                       increased efficiency and economy, one of the criterion specified in the
                       law. A determination of whether a change in payment methodology
                       results in an increase in efficiency and economy involves a comparison of
                       the effect of the payment methodology adopted under the demonstration

                       Page 5                                                          GAO-12-964T
           to the effect of the payment methods in place under current law. CMS will
           evaluate the impact of the demonstration using MA plans’ 2012 and 2013
           star ratings and what would have occurred under PPACA using their 2014
           star ratings. However, because of the timing of data collection for plan
           star ratings, this evaluation approach appears far more likely to enable
           CMS to compare plan performance under the demonstration to plan
           performance under the law in effect prior to PPACA—not under current
           law. Moreover, because the demonstration lacks a direct comparison
           group, it may not be possible to isolate its effects, and any changes in
           quality observed could be attributable, at least in part, to other MA
           payment and policy modifications.

           In closing, given the findings from our program review and legal analysis
           of the demonstration’s characteristics, our recommendation to cancel the
           demonstration and allow the MA quality bonus payment system
           established by PPACA to take effect remains valid.

           Chairman Issa, Ranking Member Cummings, and Members of the
           Committee, this completes our prepared statement. We would be happy
           to respond to any questions.

           Page 6                                                         GAO-12-964T
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