Medicare Advantage plans will receive an estimated 0.85 percent increase in federal payments next year, and their revenue could rise about 3.05 percent after expected changes in patients’ risk scores, the Centers for Medicare & Medicaid Services announced Monday.

The final 2017 rates govern billions of dollars paid to private insurers that cover nearly one-third of Medicare beneficiaries. They also change how the government accounts for low-income and disabled patients, phase in a new method for paying employer-sponsored retiree plans and increase the use of encounter data—records of the services patients actually receive—to calculate health risk.

CMS said the package is intended to keep payments stable while directing more resources toward plans serving vulnerable beneficiaries. “Together, these changes will ensure the Medicare program remains strong and stable,” the agency said in its April 4 announcement.

The distinction between the 0.85 percent policy increase and the 3.05 percent expected revenue change is important. The first measures the estimated effect of federal payment decisions. The larger figure adds a projected 2.2 percent rise in plan risk scores, which increase when insurers document that their members have more or more serious medical conditions.

How the payment calculation works

Medicare Advantage allows beneficiaries to receive Part A and Part B coverage through private health plans rather than the traditional fee-for-service program. Insurers submit bids describing the expected cost of providing Medicare benefits. CMS compares those bids with county benchmarks, adjusts payments for the health status of members and returns part of any difference as rebates used for lower premiums or additional benefits.

The 250-page final rate announcement and call letter sets a 3.08 percent national per-capita Medicare Advantage growth percentage and a 3.12 percent fee-for-service growth percentage. Those figures feed the county benchmarks but do not translate directly into the average change for every plan.

Local costs, quality bonuses, plan bids, risk adjustment and the mix of beneficiaries all affect final revenue. The result can vary widely by insurer and market. Reuters reported Monday that the average 0.85 percent increase reflects relatively stable medical costs, while noting that insurers’ revenue is expected to rise more when risk-score trends are included.

The rates are higher than the near-flat policy change CMS proposed in February. The agency received comments from insurers, physicians, advocates, pharmacy groups and members of Congress before issuing the final version. Its February 19 advance notice opened that consultation and outlined the initial changes to risk adjustment, employer plans and prescription-drug oversight.

Risk adjustment shifts toward encounter data

Risk adjustment is meant to prevent plans from profiting by enrolling unusually healthy people and to provide adequate resources for sicker patients. CMS assigns each enrollee a score based on demographic information and documented diagnoses, then adjusts payments accordingly.

For 2017, CMS will calculate 25 percent of each risk score using encounter data and fee-for-service diagnoses, with the remaining 75 percent based on the older Risk Adjustment Processing System and fee-for-service data. That is a larger encounter-data share than in 2016 and part of a gradual transition toward records generated by individual medical encounters.

Supporters say encounter data can improve accuracy and oversight by tying diagnoses to specific services. Plans have warned that incomplete or inconsistent submissions could understate patient severity. CMS updated coefficients in the final model and retained a 5.66 percent coding-pattern adjustment intended to account for differences between diagnosis reporting in private plans and traditional Medicare.

The Medicare Payment Advisory Commission has long scrutinized the effect of coding intensity on federal spending. Its March 2016 status report examined enrollment, plan availability, bids, quality and the relationship between Medicare Advantage payments and fee-for-service costs. The challenge is to pay more for genuinely sicker populations without rewarding the accumulation of diagnoses that do not reflect greater care needs.

More weight for poverty and disability

The final policy changes the risk model to better account for beneficiaries who are dually eligible for Medicare and Medicaid, receive a low-income subsidy or are disabled. Plans and state officials have argued that social and economic disadvantages can raise costs in ways not fully captured by medical diagnoses alone.

CMS will use separate risk-model segments based on eligibility and disability status. The agency’s detailed fact sheet says the change is designed to improve payment accuracy and support plans caring for the most vulnerable enrollees.

The agency also modified the Star Ratings system, which measures performance and determines quality bonuses. An interim adjustment will account for the proportion of a plan’s members who receive low-income subsidies or are dually eligible. CMS described that step as a way to prevent plans serving disadvantaged populations from being penalized while the agency continues to study whether social factors affect quality measures.

Consumer advocates have urged caution. In March 4 comments on the proposal, the Center for Medicare Advocacy raised concerns about provider-network adequacy and the difficulty beneficiaries face when judging whether a plan includes accessible clinicians. Payment accuracy, the group argued, does not remove the need for strong oversight of networks and appeals.

Employer plans get a two-year transition

CMS is also changing payments for Employer Group Waiver Plans, which provide Medicare Advantage coverage to retirees through former employers or unions. Instead of relying on bids submitted by those group plans, the agency will use bid-to-benchmark relationships from the individual Medicare Advantage market to establish payment rates.

Insurers warned that an abrupt shift could disrupt retiree coverage. The final rule responds with a two-year transition rather than adopting the new method at once. The industry’s payment primer on the final notice emphasizes that the employer-plan methodology and risk adjustment can materially affect the headline increase for particular organizations.

For beneficiaries, payment decisions can influence premiums, supplemental benefits and the number of plans competing in a county. But the final rate notice does not itself determine what any insurer will offer. Plans will submit bids later this year, and CMS will announce premiums and benefit packages before the fall enrollment season.

Medicare Advantage has grown steadily, with more than 17 million beneficiaries—about 31 percent of the Medicare population—already enrolled, according to a Kaiser Family Foundation review of 2016 plan offerings. That scale makes even modest percentage changes consequential for federal spending and insurers’ calculations.

The American Hospital Association’s same-day summary highlighted the 0.85 percent net policy increase and 3.05 percent projected revenue growth. Those figures will anchor debate over whether the government is balancing three competing goals: stable choices for beneficiaries, adequate payment for complex patients and protection of taxpayers from inflated risk scores.

The final rules offer insurers more certainty, but not uniform gains. Their actual 2017 revenue will depend on where they operate, whom they enroll, how accurately they document illness and whether they earn quality bonuses. Monday’s announcement sets the machinery; the effects will become visible when plans translate it into premiums, networks and benefits.