Budget Neutrality Factor 101

Background on Payments for Medicare Advantage Plans

Medicare advantage plans are private managed care plans that offer typically offer benefits beyond traditional fee for service Medicare. Plan bids outline the benefit packages offered to an area and the beneficiary contributions, if any.

By law, CMS is required to publish the Medicare Advantage payment rates for each county, which are used to compute the benchmarks, in April of the preceding year. The Medicare Advantage payment rates are based on a formula that reflects costs in the fee-for-service program and other adjustments.. Actual payments to each plan are further adjusted based on the reported health status of plan enrollees – “risk adjustment” – so that plans who enroll beneficiaries with chronic illnesses receive increased payments reflecting their higher expected costs.

Figure 1: Risk Adjustment Calculations

The payments to Medicare Advantage plans are also adjusted by a “budget neutrality” factor that was implemented to prevent health plan payments from being reduced overall while, at the same time, directing higher, risk adjusted payments to those plans whose enrollees had more chronic diseases. Congress intended to move to a clinically based risk adjustment model but not reduce the overall payments to Medicare Advantage plans. Knowing that the transition would require stakeholders in the current system to make adjustments in how information is captured and reported they implemented a budget neutrality factor that would give back the “saving” that the government would have realized because of the inefficiencies in the current system of capturing and reporting diagnosis information.

Smaller Expected Costs of Medicare Advantage Payment Adjustments for Budget Neutrality

There has always been a phase-out of the budget neutrality adjustment. The phase-out will begin in 2007 and will be completed by 2011, when plans will receive no budget neutrality payment adjustment. The reason why the Medicare Actuaries now expect the budget neutrality adjustments to be less costly over the 5-year phase-out period is because newer data shows a much smaller difference in the reported health status between enrollees in Medicare Advantage and those in traditional Medicare. The adjusted phase out has accelerated the step down in the budget neutrality adjustment as indicated in the chart below:

In Summary

The basis for accelerating the phase out of the budget neutrality factor is a result of higher reported diagnosis scores for beneficiaries than originally expected. Those organizations who have implemented a risk adjustment program that identifies missing or mis-coded diagnosis scores stand to survive and thrive in the new Medicare market. Those who are not maximizing risk scores and are not reimbursed the dollars thay deserve will struggle and likely not survive.