Health Meeting June 10-12, 2013 Baltimore, MD. Session 7 PD, Changes Coming to Medicare Supplement and Medicare Advantage

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1 Health Meeting June 10-12, 2013 Baltimore, MD Session 7 PD, Changes Coming to Medicare Supplement and Medicare Advantage Moderator: Ivy Dong, FSA, MAAA Presenters: T Scott Bentley FSA,MAAA Mark J Cary ASA,MAAA

2 Session 7 - SOA Annual Spring Meeting Changes Coming to Medicare Supplement and Medicare Advantage Presented by: T. Scott Bentley, FSA, MAAA Principal & Consulting Actuary June 10, 2013 Discussion Overview Overview of Medicare Supplement Marketplace Membership Historical and Projected Proposed Changes to Medicare Supplement Pricing Methodology and Practical Considerations Medicare Supplement vs Medicare Advantage Medicare Supplement / Medicare Advantage Opportunities and Threats Questions 2 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

3 Overview of Medicare Supplement Marketplace Medicare Supplement began in 1967 Standardized di d Plans Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) Effective June 1, 2010 As name implies, provides benefits that supplement Medicare FFS benefits In other words, covers much of the Medicare beneficiary obligation that would otherwise result in out-of-pocket expenses Not a replacement to Medicare FFS benefits Also referred to as MediGap 3 June 10, 2013 Overview of Medicare Supplement Marketplace Provided through a private insurance contract independent of Medicare Coverage and benefit terms do, however, coordinate with Medicare benefits as well as reimbursement rates Extra protection for gaps in coverage No network restrictions paid at Medicare FFS levels Standardized/ Simple Product to understand Essentially a commodity product (i.e. a Plan F is a Plan F) Focus is on rates and future increases 4 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

4 Medicare Enrollment Summary (in thousands) 70,000 60,000 50,000 40,000 30,000 Total Medicare Medicare Supplement Medicare Advantage 20,000 10,000 0 SOURCE: CMS and NAIC 5 June 10, 2013 Proposed Changes to Medicare Supplement Section 3210 of ACA Review and revise the benefit package for Plans C & F to include nominal cost sharing Per ACA, modify Plans C and F to incorporate nominal cost sharing Intent is to encourage appropriate utilization of Part B services Effective 2015 Medigap PPACA subgroup has made recommendation not to change benefits to Plans C & F at this time 6 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

5 Medicare Supplement - Pricing Methodology and Practical Considerations Medicare Supplement Market is very price sensitive Product standardization makes it difficult to differentiate other than price Easy for others to compare you to competitors Review of Competition is an important part of pricing process Industry loss ratios have increased over the years due to competitive pressures Keys to profitability Balance of competitive yet adequate rate levels Expense efficiencies Business retention Rate increases and accurate analysis of emerging experience key to reaching lifetime profit targets 7 June 10, 2013 Medicare Supplement vs Medicare Advantage Comparison Medicare Supplement Plan F Benefits Covers all Part A and Part B deductible / coinsurance PDP premium separate Premiums vary by age $1,800 / yr at age 65 $3,600 / yr at age 80 No out-of-pocket Medicare Advantage Benefits IP admit or per day copays and physician copays Includes Part D Premiums don t vary by age $500 / yr, ranges from $0 - $1,800 / yr $3,400 max out-of-pocket 8 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

6 Illustrative Example of How Medicare Supplement Rates Compare to Medicare Advantage Rates Over Time 9 June 10, 2013 MEDICARE SUPPLEMENT VS MEDICARE ADVANTAGE - OPPORTUNITIES AND THREATS 10 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

7 Medicare Supplement Opportunities Cost pressures on MA will improve the relative attractiveness of Medicare Supplement and Medicare Select products No provider network restrictions freedom of choice More flexibility with respect to filing requirements Threats Unmanaged care (lacks medical management controls) Rx coverage must be provided by a separate PDP Plan Carrier is not provided any risk-adjusted revenue Removal of full coverage possible (Plans C and F) Possible MLR requirements 11 June 10, 2013 Medicare Advantage Opportunities Annual benefit election Flexibility Risk adjusted Managed Care Threats Payment reform MLR requirement Filing and oversight 12 June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

8 DISCUSSION / QUESTIONS? 13 June 10, 2013 Thank You! T. Scott Bentley, FSA, MAAA Principal & Consulting Actuary scott.bentley@milliman.com Milliman, Inc June 10, 2013 A Medicare Supplement Opportunity? Medicare Advantage & Part D Changes October 12, 2010

9 Changes Coming to Medicare Supplement & Medicare Advantage Society of Actuaries Health Meeting, June 2013 Mark J Cary, ASA, MAAA VP & Chief Actuary, InnovaCare Health Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA The Mechanics of the ACA Provisions MA Payment Sensitivities Quality Stars Program Implications Meeting the Challenges of the ACA

10 Changes Coming to Medicare Advantage With the phase-in of the Affordable Care Act (ACA), how have the Medicare Advantage plans been impacted? How are CMS payments to plans changing? What are the implications of the Stars rating programs? What are Medicare Advantage plans doing strategically to meet the challenges and opportunities brought forward by the ACA? Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA The Mechanics of the ACA Provisions MA Payment Sensitivities Quality Stars Program Implications Meeting the Challenges of the ACA

11 Key ACA Provisions Regarding MA MA Revenue Component Blended County Rates ACA Provisions Weighted average of Applicable Amount and Specified Amount Applicable Amount Same calculation as pre-aca MA county payment rates, or county benchmarks FFS County Rates USPCC cost adjusted by growth rate, with periodic rebasing Ranked in quartiles, and adjusted to flatten the slope Applicable Percentage highest to lowest quartiles get adjustments of 95%, 100%, 107.5% & 115%, respectively Quality Bonus Percentage increase applied to Specified Amount based on quality ratings, measured in stars, in half star increments up to 5.0 Specified Amount FFS County Rates * (Applicable Percentage + Quality Bonus Percentage) Blended Benchmark Amount Weighted average of applicable and specified amounts A 2, 4 or 6 multi-year transition; Duration tied to difference between pre-aca benchmarks and FFS, determined in 2012 and does not change Larger difference = slower phase in Key ACA Provisions Regarding MA (Cont d) MA Revenue Component Risk Score ACA Provisions Legislated reductions to MA plan risk scores Specified minimum increase in coding intensity adjustment Bid Rebate Percentage Reduced over 3 years from 75% pre-aca to 50%, 65% or 70% over 3 years, depending on Star rating Other ACA Provisions MLR requirement of 85% effective 2014 Health insurance premium tax Double bonuses for counties meeting certain enrollment thresholds Sequestration reduction is independent of the ACA and is applied after all other MA CMS revenue calculations

12 Key ACA Provisions Regarding MA Timeline Benchmarks set equal 2010, no trend increase begin phase-in to FFS based rates 2, 4 or 6 years depending on county Begin 3-year phase in of rebates; rebate % tied to stars; Begin 3-year quality demonstration program Plan star ratings updated Rebate phase-in further lowers rebate %s 1.5% point increase to coding intensity risk score reduction First year of premium tax phase in Last year of quality demonstration Rebate %s phasein complete Minimum of 0.25% point increase to coding intensity risk score reduction annually through 2017 Plans below 4 stars do not get any quality bonus Plans with 4 or more stars get 5% quality bonus Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA The Mechanics of the ACA Provisions MA Payment Sensitivities Quality Stars Program Implications Meeting the Challenges of the ACA

13 The Mechanics of the ACA - Schuyler County, New York Region: SCHUYLER, NEW YORK Quality Star Rating NA 3.0 Pre-ACA "Applicable Amount" $740 $730 FFS Rate NA $555 FFS Quartile Percentage NA 115.0% Quality Bonus Percentage NA 3.0% "Applicable Percentage" NA 118.0% ACA "Specified Amount" (Adjusted FFS) NA $655 Transition Period / ACA Blending Weight NA 17% Blended Benchmark (Applicable & Specified) $740 $736 Bid Risk Score Risk Adjusted Blended Benchmark $777 $765 What s different? Quality ratings matter Transition toward FFS levels FFS adjustment to level the field Bonuses for high quality scores 2, 4 or 6 year transition to full ACA rates Basic Bid $607 $600 Surplus (Benchmark - Basic Bid) $133 $136 Rebate Percentage 75.0% 66.7% Rebates (Surplus x Rebate Percentage) $100 $90 CMS is leaving less money for benefits Total CMS Revenue $707 $690 The Mechanics of the ACA Benchmark Schuyler County, New York Step 1: Determine CMS Applicable Amount and FFS rate for the county. Region: SCHUYLER, NEW YORK Pre-ACA "Applicable Amount" $740 $730 $750 $775 $800 $825 $850 FFS Rate NA $555 $580 $610 $630 $650 $670 Step 2: Quartile Percentage + Quality Bonus Percentage Region: SCHUYLER, NEW YORK Quality Star Rating NA FFS Quartile Percentage NA 115.0% 115.0% 115.0% 115.0% 115.0% 115.0% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" NA 118.0% 118.0% 118.0% 115.0% 115.0% 115.0%

14 The Mechanics of the ACA Benchmark Schuyler County, New York Step 3a: Adjust Applicable Amount by quality bonus percentage for quality demonstration period only Step 3b: FFS Rate x Applicable Percentage = Specified Amount Region: SCHUYLER, NEW YORK Pre-ACA "Applicable Amount" $740 $730 $750 $775 $800 $825 $850 Quality Bonus Percentage NA 3.0% 3.0% 3.0% NA NA NA Adjusted Applicable Amount $740 $752 $773 $798 $800 $825 $850 FFS Rate NA $555 $580 $610 $630 $650 $670 FFS Quartile Percentage NA 115.0% 115.0% 115.0% 115.0% 115.0% 115.0% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" NA 118.0% 118.0% 118.0% 115.0% 115.0% 115.0% ACA "Specified Amount" (Adjusted FFS) NA $655 $684 $720 $725 $748 $771 The Mechanics of the ACA Benchmark Schuyler County, New York Step 4: Determine appropriate county transition period and calculated blended benchmark amount. Blended Benchmark Amount = Applicable Amount x (1-transition percentage), plus Specified amount x Transition Percentage Region: SCHUYLER, NEW YORK Adjusted Applicable Amount $740 $752 $773 $798 $800 $825 $850 6 Year Transition Period / Applicable Weight NA 83% 67% 50% 33% 17% 0% ACA "Specified Amount" (Adjusted FFS) NA $655 $684 $720 $725 $748 $771 6 Year Transition Period / Specified Weight NA 17% 33% 50% 67% 83% 100% Blended Benchmark (Applicable & Specified) $740 $736 $743 $759 $750 $760 $771

15 The Mechanics of the ACA Benchmark Schuyler County, New York Step 5: Apply Risk Score Region: SCHUYLER, NEW YORK Blended Benchmark (Applicable & Specified) $740 $736 $743 $759 $750 $760 $771 Bid Risk Score Risk Adjusted Blended Benchmark $814 $809 $817 $835 $825 $836 $848 The Mechanics of the ACA Benchmark Schuyler County, New York Complete Blended Benchmark Calculation Region: SCHUYLER, NEW YORK Quality Star Rating NA Pre-ACA "Applicable Amount" $740 $730 $750 $775 $800 $825 $850 FFS Rate NA $555 $580 $610 $630 $650 $670 FFS Quartile Percentage NA 115.0% 115.0% 115.0% 115.0% 115.0% 115.0% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" NA 118.0% 118.0% 118.0% 115.0% 115.0% 115.0% ACA "Specified Amount" (Adjusted FFS) NA $655 $684 $720 $725 $748 $771 6 Year Transition Period / ACA Blending Weight NA 17% 33% 50% 67% 83% 100% Blended Benchmark (Applicable & Specified) $740 $736 $743 $759 $750 $760 $771 Bid Risk Score Risk Adjusted Blended Benchmark $814 $809 $817 $835 $825 $836 $848

16 The Mechanics of the ACA Rebates Schuyler County, New York Rebates are reduced by the ACA and are phased in from 2012 to 2014 Pre-ACA rebates = 75% of difference between Bid amount and Benchmark ACA Rebate levels are tiered based on quality rating: <3.5 stars: 50% rebate stars: 65% rebate 4.5+ stars: 70% rebate Region: SCHUYLER, NEW YORK Risk Adjusted Blended Benchmark $814 $809 $817 $835 $825 $836 $848 Basic Bid (Risk-Adjusted) $607 $600 $620 $645 $665 $685 $705 Surplus $133 $136 $123 $114 $85 $75 $65 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $90 $72 $57 $42 $38 $33 Total CMS Revenue $707 $690 $692 $702 $707 $723 $738 Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA The Mechanics of the ACA Provisions MA Payment Sensitivities Quality Stars Program Implications Meeting the Challenges of the ACA

17 MA Payment Sensitivities Payment Rates Average FFS Rate vs. Pre-ACA Benchmark Significant geographic differences 5 Largest Reductions (2014) Percent PMPM Quartile % PUERTO RICO 67% $ % HAWAII 41% $ % NEW MEXICO 31% $ % OREGON 28% $ % LOUISIANA 26% $ % 5 Smallest Reductions (2014) NEVADA 3% $ % MARYLAND 3% $ % CONNECTICUT 5% $ % ARIZONA 6% $ % ILLINOIS 6% $ % US Average 15% $ % MA Payment Sensitivities Payment Rates US Average Payment Rates thru 2017 Approximately 4 year average transition for all US counties Average Quartile Percentage close to 100% Minimal net change from 2011 (pre-aca) to 2017 Region: US Average Quality Star Rating NA Pre-ACA "Applicable Amount" $840 $835 $860 $885 $905 $925 $945 FFS Rate NA $725 $745 $770 $785 $800 $815 FFS Quartile Percentage NA 101.0% 101.3% 101.8% 101.8% 101.8% 101.8% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" 104.0% 104.3% 104.8% 101.8% 101.8% 101.8% ACA "Specified Amount" (Adjusted d FFS) NA $754 $777 $807 $799 $814 $ Year Transition Period / ACA Blending Weight NA 24% 48% 67% 87% 100% 100% Blended Benchmark (Applicable & Specified) $840 $835 $834 $841 $813 $814 $830 Bid Risk Score Risk Adjusted Blended Benchmark $840 $835 $834 $841 $813 $814 $830-1% 0% 1% -3% 0% 2% Full Phased In Reduction -1%

18 MA Payment Sensitivities Payment Rates Puerto Rico Average Payment Rates thru 2017 Approximately a 6 year transition across all counties Quartile Percentage 115% Significant net reduction from 2011 (pre-aca) to 2017 Region: Puerto Rico Quality Star Rating NA Pre-ACA "Applicable Amount" $610 $605 $625 $640 $655 $670 $685 FFS Rate NA $340 $345 $385 $395 $405 $415 FFS Quartile Percentage NA 115.0% 115.0% 115.0% 115.0% 115.0% 115.0% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" 118.0% 118.0% 118.0% 115.0% 115.0% 115.0% ACA "Specified Amount" (Adjusted FFS) NA $401 $407 $454 $454 $466 $ Year Transition Period / ACA Blending Weight NA 17% 34% 50% 67% 83% 100% Blended Benchmark (Applicable & Specified) $610 $586 $564 $556 $521 $500 $477 Bid Risk Score Risk Adjusted Blended Benchmark $610 $586 $564 $556 $521 $500 $477-4% -4% -1% -6% -4% -4% Full Phased In Reduction -22% MA Payment Sensitivities Payment Rates Nevada Average Payment Rates thru 2017 Approximately 2.5 year transition Quartile Percentage approximately 97% Significant net increase from 2011 (pre-aca) to 2017 Region: Nevada Quality Star Rating NA Pre-ACA "Applicable Amount" $855 $850 $880 $920 $950 $985 $1,020 FFS Rate NA $825 $855 $900 $930 $965 $1,000 FFS Quartile Percentage NA 95.9% 96.6% 97.3% 97.3% 97.3% 97.3% Quality Bonus Percentage NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% "Applicable Percentage" 98.9% 9% 99.6% 100.3% 97.3% 97.3% 97.3% ACA "Specified Amount" (Adjusted FFS) NA $816 $852 $902 $905 $939 $ Year Transition Period / ACA Blending Weight NA 40% 84% 97% 100% 100% 100% Blended Benchmark (Applicable & Specified) $855 $852 $860 $904 $905 $939 $973 Bid Risk Score Risk Adjusted Blended Benchmark $855 $852 $860 $904 $905 $939 $973 0% 1% 5% 0% 4% 4% Full Phased In Reduction 14%

19 MA Payment Sensitivities - Rebates US Average Rebates thru 2017 Approximately 75% reduction to rebates despite relatively stable payment rates Primarily driven by rebate percentage reduction fro 75% to 50% Region: US Average Quality Star Rating NA Risk Adjusted Blended Benchmark $840 $835 $834 $841 $813 $814 $830 Basic Bid $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $101 $58 $44 $45 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $90 $67 $51 $29 $22 $22 MA Payment Sensitivities - Rebates Puerto Rico s large drop doesn t keep up with bid trend Region: Puerto Rico Quality Star Rating NA Risk Adjusted Blended Benchmark $610 $586 $564 $556 $521 $500 $477 Basic Bid $477 $475 $490 $520 $535 $550 $565 Surplus $133 $111 $74 $36 -$14 -$50 -$88 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $74 $43 $18 $0 $0 $0 Nevada s shallow drop leaves room for lower rebates to plateau Region: Nevada Quality Star Rating NA Risk Adjusted Blended Benchmark $855 $852 $860 $904 $905 $939 $973 Basic Bid $722 $715 $740 $775 $800 $830 $860 Surplus $133 $137 $120 $129 $105 $109 $113 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $91 $70 $64 $52 $54 $56

20 MA Payment Sensitivities - Trend Impact If Nevada s bid (medical cost) trend out paces CMS trend, rebates can quickly be eliminated Region: Nevada Quality Star Rating NA Risk Adjusted Blended Benchmark $855 $852 $860 $904 $905 $939 $973 Basic Bid (Risk-Adjusted, Trend Equal to CMS) $722 $715 $740 $775 $800 $830 $860 Surplus $133 $137 $120 $129 $105 $109 $113 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $91 $70 $64 $52 $54 $56 Region: Nevada Quality Star Rating NA Risk Adjusted Blended Benchmark $855 $852 $860 $904 $905 $939 $973 Basic Bid (Risk-Adjusted, Trend 2.0% Above CMS) $722 $730 $770 $825 $870 $920 $970 Surplus $133 $122 $90 $79 $35 $19 $3 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $81 $53 $39 $17 $9 $1 MA Payment Sensitivities Risk Score Impact Region: US Average Bid Risk Score Risk Adjusted Blended Benchmark $840 $835 $834 $841 $813 $814 $830 Basic Bid $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $101 $58 $44 $45 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 0% 50.0% 0% 50.0% 0% 50.0% 0% Rebates $100 $90 $67 $51 $29 $22 $22 Total CMS Revenue $807 $790 $787 $791 $784 $792 $807 Risk scores affect the amount of rebates that are available to a plan, and can be influenced by: CMS periodic risk model recalibration and model changes Other changes to CMS adjustments such as FFS normalizatoin and coding intensity Changes in MA plan coding practices, accuracy and completeness legislated changes such as the ACA changes to coding intensity

21 MA Payment Sensitivities Risk Score Impact Region: US Average Bid Risk Score Risk Adjusted Blended Benchmark $798 $793 $792 $799 $772 $774 $788 Basic Bid $707 $700 $720 $740 $755 $770 $785 Surplus $91 $93 $72 $59 $17 $4 $3 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $69 $62 $42 $29 $9 $2 $2 -$32 -$28 -$24 -$21 -$20 -$20 -$21 Total CMS Revenue $775 $762 $762 $769 $764 $772 $787-4% -4% -3% -3% -3% -3% -3% Region: US Average Bid Risk Score Risk Adjusted Blended Benchmark $882 $877 $876 $883 $854 $855 $871 Basic Bid $707 $700 $720 $740 $755 $770 $785 Surplus $175 $177 $156 $143 $99 $85 $86 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $132 $118 $91 $72 $49 $43 $43 $32 $28 $24 $21 $20 $20 $21 Total CMS Revenue $838 $818 $811 $812 $804 $813 $828 4% 4% 3% 3% 3% 3% 3% Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA The Mechanics of the ACA Provisions MA Payment Sensitivities Quality Stars Program Implications Meeting the Challenges of the ACA

22 Implications of the Stars (Quality) Ratings Affects bid rebate percentage and awards a bonus percentage increase to payment rates Demonstration 2015 & Later (ACA) Stars Bonus (Payment Rate) Rebate Percentage Bonus Rebate <= % 0.0% 0.0% 66.7% 58.3% 50.0% 0.0% 50.0% % 3.0% 3.0% 66.7% 58.3% 50.0% 0.0% 50.0% % 3.5% 3.5% 71.7% 68.3% 65.0% 0.0% 65.0% % 4.0% 5.0% 71.7% 68.3% 65.0% 5.0% 65.0% % 4.0% 5.0% 73.3% 71.7% 70.0% 5.0% 70.0% % 5.0% 5.0% 73.3% 71.7% 70.0% 5.0% 70.0% ACA mandates no bonus for <4.0 stars demonstration allowed for bonus payments for 3.0 and 3.5 star ratings Enrollment restrictions for consistently poor-performing plans Plan termination in worst case scenarios Implications of the Stars (Quality) Ratings Operational challenges Long time lag between measurement and payment Measurements affecting calendar year n, are finalized in the fall of year n-2 No time to correct before year n bids are submitted in June of year n-1 Measures have been shifting from process oriented to outcomes oriented Some changes are being implemented for payment years after plans can actually all affect them

23 Implications of the Stars (Quality) Ratings Projected US Average Payments Under 3 Stars; no quality bonus beyond 2014 Region: US Average Quality Star Rating NA Quality Bonus NA 3.0% 3.0% 3.0% 0.0% 0.0% 0.0% Risk Adjusted Payment Rate $840 $835 $834 $841 $799 $814 $830 Basic Bid (Risk-Adjusted, Trend Equal to CMS) $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $101 $44 $44 $45 Rebate Percentage 75.0% 66.7% 58.3% 50.0% 50.0% 50.0% 50.0% Rebates $100 $90 $67 $51 $22 $22 $22 Total CMS Revenue $807 $790 $787 $791 $777 $792 $807 A 0.5 star increase to 3.5 stars drives up total CMS revenue, no quality bonus beyond 2014 Region: US Average Quality Star Rating NA Quality Bonus NA 3.0% 3.0% 3.5% 0.0% 0.0% 0.0% Risk Adjusted Payment Rate $840 $835 $834 $845 $799 $814 $830 Basic Bid (Risk-Adjusted, Trend Equal to CMS) $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $105 $44 $44 $45 Rebate Percentage 75.0% 66.7% 58.3% 65.0% 65.0% 65.0% 65.0% Rebates $100 $90 $67 $68 $29 $29 $29 Total CMS Revenue $807 $790 $787 $808 $784 $799 $814 Implications of the Stars (Quality) Ratings Substantial revenue increase under 4 stars with quality bonus and higher rebates Region: US Average Quality Star Rating NA Quality Bonus NA 3.0% 3.0% 5.0% 5.0% 5.0% 5.0% Risk Adjusted Payment Rate $840 $835 $834 $857 $838 $854 $870 Basic Bid (Risk-Adjusted, Trend Equal to CMS) $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $117 $83 $84 $85 Rebate Percentage 75.0% 66.7% 58.3% 65.0% 65.0% 65.0% 65.0% Rebates $100 $90 $67 $76 $54 $55 $55 Total CMS Revenue $807 $790 $787 $816 $809 $825 $840 Higher rebates but same quality bonus for 4.5 stars Region: US Average Quality Star Rating NA Quality Bonus NA 3.0% 3.0% 5.0% 5.0% 5.0% 5.0% Risk Adjusted Payment Rate $840 $835 $834 $857 $838 $854 $870 Basic Bid (Risk-Adjusted, Trend Equal to CMS) $707 $700 $720 $740 $755 $770 $785 Surplus $133 $135 $114 $117 $83 $84 $85 Rebate Percentage 75.0% 66.7% 58.3% 70.0% 70.0% 70.0% 70.0% Rebates $100 $90 $67 $82 $58 $59 $60 Total CMS Revenue $807 $790 $787 $822 $813 $829 $845

24 Discussion Topics Changes Coming to Medicare Advantage Key ACA Provisions Regarding MA Specific Impacts to MA Plan Financials MA Payment Sensitivity Study Quality Stars Program Implications Meeting the Challenges of the ACA Meeting the Challenges of the ACA The challenge restated: MA revenue is decreasing The cost of benefits and of compliance is increasing The impact has to be absorbed through a combination of Quality improvements sufficient to earn new rewards Cost control Supplemental benefit reductions and/or premium increases Margin reductions Margin reductions Improvements in the completeness and accuracy of diagnosis coding

25 Meeting the Challenges of the ACA MA Plan Response Advantages Disadvantages Quality/Stars Improvement Quality bonus for 4 stars and above for Higher rebate %s Marketing advantages Cost Control Directly contributes to bottom line with effective cost control Plans have direct influence on medical expenses and/or admin Benefit Reductions / Premium Increases Most direct and immediate way to absorb impact of revenue cuts to plans Margin Reduction Preserves member benefits High member satisfaction Maintains market share Requires material investment now for (possible) returns in 2 years Some quality improvement activities can deter membership Poor ratings can lead to CMS marketing warnings to members about a plan US average revenue trends could be roughly flat through flat cost trends without benefit cuts will be very challenging Cost of compliance is rising as well Less value for member may lead to member churn and reduced market share Too much or too little over the next few years could permanently weaken or eliminate a plan from the market May upset shareholders and investors Threatens plan s long-term sustainability Coding Improvement Lead to more accurate and complete diagnoses coding Higher revenue from more accurate risk scores RADV audits with tighter criteria Not enough room for growth for plans with best practice coding already Meeting the Challenges of the ACA The best solution for many plans will be a combination of these options There is no right solution Each plan must weigh the risks given their own unique situation Plan competencies to leverage Relative position and strength in the market Plan demographic & geographic mix Overall company goals and risk tolerance Level of diversification Post-ACA MA Strategy

26 Meeting the Challenges of the ACA Decisions and decisions now will impact the long-term status of plans when the market has stabilized, e.g. Investment in Quality Improvement Aim is to increase revenue through quality bonus and higher rebates Plan could invest and still not achieve necessary ratings Plan could emerge with stronger financials and CMS endorsement MA Plan Maximize Profitability Need to trim benefits and control costs Plan might lose too much market share Or, plan could emerge with strongest financial position to restore benefits and win back membership Maximize Membership Keep or enhance benefits Plan might not have the financial resources to last Or, plan could emerge with market share advantage Meeting the Challenges of the ACA The ACA will very likely lead to fewer MA plans overall, with the impact varying significantly by market Changing landscape of MA vs. Med Supp Wide range of revenue cuts Potential ACA Impact Wide range of supplemental benefit & premium levels MA only plans vs. plans offering commercial, Medicaid Local vs. regional or national presence Number of players in each market

27 Meeting the challenges of the ACA The Good News: The flip side of these many changes and uncertainties is that there ARE opportunities for MA plans as a result of the ACA The plans who will realize them will: Know the new rules and risks Successful Plan Emerging from the ACA Know their own strengths and weaknesses (and those of their competition) Have a clear goal and a clear plan Be ready to make changes to the plan Changes Coming to Medicare Advantage Thank you!