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Medicare Advantage and Medicare Direct Contracting Considerations for Health Systems and Medical Groups

It’s the time of year when Joe Namath and other personalities are taking to the airwaves to tell seniors about the benefits of Medicare Advantage (MA) plans. For seniors, choosing between traditional Medicare and MA plans during the annual enrollment period can have a significant financial impact.

The same holds true for health care providers currently in or considering contracting through value-based Medicare payment models. MA plans certainly may offer lucrative value-based payment options to providers. However, the Medicare Direct Contracting (MDC) model can provide enticing opportunities as well.

What’s the best way, then, to allocate precious resources to maximize performance improvement and financial success? As the Centers for Medicare & Medicaid Services (CMS) considers opening a new MDC application window in 2022, the time to start developing a strategy and planning for success is now.

Here are some key considerations for health systems and medical groups as they look to expand their value-based footprint in the Medicare-eligible population through MA or MDC or both.


1. Evaluate current and future payer mix

The Medicare-eligible population grew 2.3% annually from 2016 to 2021 while the number of people selecting a MA plan grew 8.5% a year over the same time period1. As MA membership heads toward half of the Medicare-eligible population, it becomes increasingly important for providers to track MA enrollment trends in their target geographies as they will impact the scale of value-based payment opportunities through MA and MDC.

To start, providers should measure the distribution of their Medicare patients among traditional fee-for-service and MA programs as well as those current or potential “attributed member” populations. Understanding your organization’s current population and future trends in payer mix helps to align your value-based strategy and evaluate the financial impact of the various value-based options.


2. Understand total per member per month (pmpm) financial opportunity

Value-based payment (VBP) mechanics and the overall net financial opportunity for particular attributed populations can vary significantly between MA plans and MDC. Clarifying these differences and determining which option is most beneficial to your organization is key in engaging with any alternative payment models.

MDC allows for various levels of capitated payments based on the Direct Contracted Entity’s program of choice (Standard, High Needs or New Entrant) and selected risk model (Global Primary Care Capitation, Global Total Care Capitation or Professional Primary Care Capitation).  Capitation rates are determined based on historical expenditures, regional comparisons to historic expenditures, risk adjustment and quality withholds.

  • Risk adjustment increases are capped at 3% of the baseline year’s risk adjustment factor, which limits the ability to improve financial opportunity through more accurate documentation of patient health needs.
  • 5% of MDC capitated revenue is withheld pending performance in quality initiatives, although performance is determined by the DCE.

MA plans typically offer value-based payment options to providers as a total cost of care program based on a percentage of premium that the attributed members generate. Some plans may offer capitation while most offer various flavors of global budget risk through shared savings arrangements. Plans receive premiums through CMS based on each member’s risk adjustment factors, the plan Star Rating and any premium paid by the individual member.

  • MA plans’ risk adjustment factors are based on the diagnosis codes submitted for the specific members in the previous year and not capped, which allows for more significant increases as the health needs of attributed members change.
  • MA quality bonus, based on Star ratings, can generate a 5% increase in premium but Star ratings are determined on the plan level and utilize metrics that are outside the control of any participating provider organization.
  • Quality incentives or withholds can be negotiated between payers and providers in MA arrangements.
  • MA percent of premium value-based arrangements are negotiated between the payer and provider. Providers should determine what services payers are supplying with the percent of premium payers retain, such as network management, utilization management and claims processing, and the value of those services through a division of financial responsibilities (DOFR).


3. Assess required investment and ongoing operational costs

Providers need to evaluate the need for any new or reconfigured risk-bearing organization legal structure, population health management infrastructure, and network requirements, including upfront investment and ongoing operational costs. Both MDC and capitated MA agreements, for example, allow for the development of preferred provider networks and the opportunity for creative value-based arrangements with downstream providers and facilities.

Some of the required network management, contracting, medical management, claims processing and other managed services organization (MSO) costs needed for success in global budget or capitation risk arrangements might be new expenses for providers. Providers may want to build new care management programs, for instance, to help Medicare members with complex medical needs efficiently navigate the healthcare system.

It’s not just medical care either. With MDC allowing for voluntary alignment and highly competitive MA markets, providers will need to invest in patient engagement technologies and partner with community-based organizations addressing social determinants of health to create competitive differentiation in patient experience.

Just as determining what services payers provide and what percentage of the premium they are “charging” for those services, it is important to calculate the costs associated with building and maintaining those capabilities in-house.


Moving to greater risk

As MA rapidly expands and CMS continues to implement and update programs that push more financial risk and flexibility to providers, providers need a deep understanding of the mix and trends of MA and traditional Medicare within their service areas. This foundation is essential for developing a value-based payment strategy, infrastructure, networks and member engagement strategies that maximize revenue opportunities.

The knowledge on patient population trends and provider network performance helps to inform scalability and future growth. Similarly, understanding revenue corridors and necessary expenses to manage the various degrees of risk improves the likelihood of prospering with either or both MA and MDC. Bringing those aspects together will help to guide providers to the value-based programs best suited to serve their patients and drive financial success.


For more information, please contact info@copehealthsolutions.com.



1Author’s calculation based on CMS data files – https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MCRAdvPartDEnrolData/MA-State-County-Penetration

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