Medicare Delays a Full Crackdown on Private Health Plans

The Biden administration on Friday finalized new rules meant to cut down on widespread overbilling by private Medicare Advantage insurance plans, but softened the approach after intense lobbying by the industry.

Regulators are still moving forward with rules that will lower payments to insurers by billions of dollars a year. But they will phase in the changes over three years, rather than all at once, and that will lessen the immediate effects.

In the short term, private health plans will still be able to receive payments that Medicare officials do not consider appropriate. The system will eventually eliminate extra funds the insurers receive for covering patients under 2,000 diagnoses, including 75 that appear to be the subject of widespread manipulation.

But the extended timetable could also mitigate concerns raised by health plans, doctors and others that the broad policy change might result in unintended consequences, such as increases in premiums or reductions in benefits for Medicare Advantage beneficiaries.

In the two months since the proposal became public, insurers and their allies had mounted an expensive, loud lobbying campaign, employing television commercials, pressuring lawmakers on Capitol Hill and enlisting thousands to file comments in opposition.

The nation’s top Medicare official acknowledged on Friday that the industry’s outcry influenced the shape of the new rules.

“We were really comfortable in our policies, but we always want to hear what stakeholders have to say,” said Chiquita Brooks-LaSure, the administrator of the Centers for Medicare and Medicaid Services. She said desire for a slower policy shift was “something that we really heard come through from our comments, and we wanted to be responsive.”

The new payment formula is a reaction to mounting evidence over more than a decade that private insurers have been exploiting a formula to extract overpayments from the federal government. Plans are eligible for extra payments for patients whose illnesses could be costlier to cover, which has encouraged many to go to great lengths to diagnose their customers with as many health conditions as possible. Insurers are collecting tens of billions of dollars in extra payments a year, according to various estimates.

Nearly every large insurer in the program has settled or is facing a federal fraud lawsuit for such conduct. Evidence of the overpayments has been documented by academic studies, government watchdog reports and plan audits.

Despite the excesses and concerns that Medicare Advantage too often denies needed care, about half of all Medicare beneficiaries are now enrolled in the private plans, which receive government outlays of more than $400 billion a year. It remains popular with consumers, who often enjoy lower premiums and benefits — like vision and dental services — that the basic government Medicare plan doesn’t offer.

The program has also become profitable for the largest insurance companies. Recent research from the Kaiser Family Foundation found that insurers make about double the gross margins with Medicare plans that they make with their other lines of business. Humana recently announced that it would stop offering commercial insurance to focus on Medicare, which serves older and disabled Americans, and Medicaid, which mostly serves low-income populations.

The new rule will eventually eliminate the extra payments for many diagnoses that Medicare Advantage plans were commonly reporting but that Medicare data did not show were associated with more medical care. Those diagnosis codes included a few that private plans had specifically targeted, like diabetes “with complications” and a form of severe malnutrition that is typically seen in countries experiencing famine.

With the three-year phase-in, insurers will receive payments that are based on one-third of the new formula in the first year, and two-thirds on the old one. Altogether, Medicare estimates that Medicare Advantage plans will be paid 3.32 percent more next year than this year. Under the original limits proposed by the administration, that increase would have been around 1 percent. Previous changes in the payment model have also taken three years.

The policy’s opponents have argued that the change could erode benefits for the plans’ customers, and might have a disproportionate effect on poor and minority populations. The slower rollout did not mollify them.

“While we appreciate that C.M.S. moved to a phased-in approach, the underlying policy is fundamentally unchanged,” said Mary Beth Donahue, the president of the Better Medicare Alliance, an industry group that spent eight figures on television ads fighting the policy. “We remain concerned about the unintended consequences for seniors of this risk-adjustment policy.”

But the Alliance of Community Health Plans, a group representing nonprofit insurers, said in a statement that it approved of the new approach: “We support the risk-adjustment model changes to focus on delivering results for consumers and address underlying incentives to aggressively document.”

Insurers have often challenged the agency’s Medicare actions in court, but it is unclear whether any insurers will contest this policy.

Some advocates and experts said they found the new formula too timid. The Medicare Payment Advisory Commission (MedPAC), which recommends policies to Congress, wrote in a comment letter that the proposed changes, while “directionally correct, are insufficient to address the magnitude of excess Medicare spending.”

Mark Miller, a former executive director at MedPAC, had urged Medicare to go even further than its initial proposal. He is now an executive vice president at Arnold Ventures, a policy and advocacy organization closely affiliated with a group that funded television ads defending the change. He described the final approach as a disappointment. “They are essentially bowing to the plans,” he said in an email.

In February, a few weeks after issuing their proposal, top health officials in the Biden administration vigorously defended the change. In a series of tweets, Secretary Xavier Becerra of Health and Human Services characterized criticisms of the policy as “disinformation being pushed out by high-paid industry hacks and their allies.” In an interview with The New York Times, Dr. Meena Seshamani, Medicare’s top official, said she was committed to “holding the industry accountable for gaming the system.”

Ms. Brooks-LaSure’s comments Friday were more measured, emphasizing the perspectives of “stakeholders” in the Medicare program. She said she did not feel that Medicare was folding to industry pressure.

The payment change is one of a series of tough rules for the program recently proposed or completed by the administration. Another proposal would place tighter controls on industry marketing and make it harder for plans to deny care to patients. And a rule finalized in January requires the plans to repay the government for a greater share of overpayments uncovered through audits.

Though the Medicare Advantage program has long enjoyed strong bipartisan support on Capitol Hill, few leading lawmakers have stepped forward in this round to defend the plans, despite all the lobbying. Republicans on committees that oversee the programs wrote letters to Medicare officials asking technical questions about the change, but avoided strong criticism of the policy. On Tuesday, 17 House Democrats sent Medicare officials a letter asking them to delay implementation, but not cancel it.

Bill Cassidy of Louisiana, a physician who is the top Republican on the Senate Health, Education, Labor and Pensions Committee, and Senator Jeff Merkley, a Democrat from Oregon, introduced legislation on Tuesday that would take further steps to prevent “unreasonable payments, coding or diagnoses.”