Medicare Advantage plans underpay rural providers. Is that a problem?

By Susannah Luthi  | February 10, 2018

After converting to a critical-access hospital in July 2010, Holy Cross Hospital needed to change its billing setup with all the insurers in its network. Medicare makes up 40% of the Taos, N.M., hospital's patient base.

But one of its contracted carriers balked. UnitedHealthcare demanded that Holy Cross sign a new, different contract for Medicare Advantage enrollees. Under this new contract, UnitedHealthcare would no longer pay for its beneficiaries to stay in Holy Cross beyond four days.

If Holy Cross rejected this change, UnitedHealthcare would simply drop the hospital.

Hospital officials pushed back without luck.

"They wouldn't listen," says Bill Patten, CEO of Holy Cross. "They were inflexible on the variable of length of stay."

Ultimately, UnitedHealthcare had leverage with the Medicare-dependent hospital, and so the insurer won.

"Given our cash situation and our desire to get our past claims processed, we felt forced, that we had to accept those terms," Patten said.

Patten's story echoes a narrative of low reimbursements and uneven leverage between carrier and hospital from rural hospitals across the country.

The Congressional Budget Office last month found that not only do Medicare Advantage plans generally pay 3% less than traditional Medicare—mirroring findings from a September 2017 JAMA study—but they often negotiate reimbursement rates even lower for rural hospitals.

Medicare law limits the payments hospitals can collect out-of-network, giving Medicare Advantage plans the upper hand with rural hospitals as they negotiate reimbursement rates. In effect, "Medicare Advantage insurers can exclude hospitals from their networks and pay them Medicare FFS prices," the CBO analysis said, referring to fee-for-service rates.

On the flip side, the scarcity of providers in rural communities also makes those markets less appealing for Medicare Advantage plans based on their overall financial targets.

Policy analysts say those underpayments from Medicare Advantage plans don't really affect larger hospitals.

Robert Berenson of the Urban Institute pointed to a December analysis from the Medicare Payment Advisory Commission that shows overall hospital margins continue to trend high despite the sagging Medicare margins, which have fallen to an all-time low.

This trend line shows the bargaining that goes on between insurers and hospitals, he added. Hospitals get lower reimbursements through Medicare Advantage, but they more than make up for it on the commercial insurance side. This skewing, he noted, brings up the costs for everyone else and ultimately makes the government floor of Medicare rates an inaccurate barometer for actual healthcare costs.

For the big consolidated hospitals and big insurers it's like a sumo-wrestling match, Berenson added.

"It's two gigantic people who are putting on a show," he says. "They pretend they are taking each other on, but when prices go up it means more money on the float."

But it's different in rural regions and states where patients are mostly on Medicare and Medicaid. Medicare Advantage plans safeguard their profits by bargaining down the reimbursements.

"Ultimately, provider payments are going to depend on the contract between the health plan and the provider," said a spokesperson for America's Health Insurance Plans.

A coverage map from AHIP shows that Medicare Advantage plans have their smallest market share in rural America—from northern Plains states like North Dakota through the Midwest and the South. Alaska, which has the highest medical costs, doesn't have any Medicare Advantage plans.

This is all due to market forces. Medicare Advantage is the most problematic in areas where the individual market exchanges are also challenging, said Molly Smith of the American Hospital Association. It's all a matter of network adequacy.

"That's why you don't see large MA penetration of competition in rural areas," Smith said. "The principle of where commercial insurance is viable applies in the MA market as well. Insurers, when they are making a decision about entering the MA market, will take network adequacy into account when they ask: Can we create a product we can price competitively?"

The plans exist. AHIP noted that 99% of Medicare-eligible beneficiaries have access to a Medicare Advantage plan, but in many rural areas that doesn't mean much.

"You have access to the plans, but people in the area don't sign up," said Richard Fromme, chief financial officer of 20-bed Cavalier County (N.D.) Memorial Hospital.

Fromme counted as few as three Medicare Advantage enrollees in his service area, though about 50% of his hospital's patients are on Medicare.

For hospitals like his, this low Medicare Advantage penetration isn't a huge problem, for either provider or carrier. With so few Medicare Advantage plans in rural areas, insurers aren't likely to have to pay claims in high-cost rural areas and hospitals there don't have to deal with the low reimbursements.

Darrold Bertsch, CEO of North Dakota's Sakakawea Medical Center, said this is a good thing for him as well. His center—with 85% of inpatients on Medicare—has a hard enough time with the 2% cut imposed by the long-standing and here-to-stay Medicare sequester.

On the few occasions his clinic has needed to process Medicare Advantage claims, the reimbursements took a long time and insurers demanded repeated resubmissions of patient records.

"It gets frustrating sometimes," Bertsch added. "The few experiences we have had have not necessarily been positive. Maybe it's not the Medicare Advantage plan's fault; maybe it's our fault. But I'm just glad we don't have Medicare Advantage."

But for hospitals like Holy Cross, whose volume of Medicare Advantage patients is high enough to hit its margins, low reimbursements and other issues, like claims processing, do matter.

Patten said that at year-end, Medicare Advantage plans don't follow up with providers with a cost report that shows whether plans over- or under-paid the hospital.

"We are confident we are consistently underpaid," Patten said.

Susannah Luthi covers health policy and politics in Congress for Modern Healthcare. Most recently, Luthi covered health reform and the Affordable Care Act exchanges for Inside Health Policy. She returned to journalism from a stint abroad exporting vanilla in Polynesia. She has a bachelor’s degree in Classics and journalism from Hillsdale College in Michigan and a master’s in professional writing from the University of Southern California.

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