Marissa Plescia
Medicare Advantage insurers secured a major victory this month when the Centers for Medicare and Medicaid Services (CMS) acquiesced and decided to recalculate the Star Ratings it uses to judge the quality of health plans.
The move was perhaps not unexpected given two federal courts ruled that the agency needed to recalculate Star Ratings for both SCAN Health Plan and Elevance Health. Both SCAN and Elevance had sued CMS alleging the agency improperly calculated their Star Ratings for plan year 2024.
“[CMS] took the path of least resistance. … When you lose two lawsuits on the same issue, it would likely have opened up the door for every other plan that had that issue to sue them,” said Ari Gottlieb, principal of A2 Strategy Corp., in an interview.
Medicare Advantage Star Ratings, which are calculated by CMS each year, are meant to inform beneficiaries about the quality of health plans. But ratings are also important for financial reasons, as CMS provides additional funding to plans with higher Star Ratings, which they can use to improve benefits for members. For calendar year 2024, CMS reduced payment rates by 1.24% due to a decline in average MA Star Ratings, according to a McKinsey report. In 2022, 90% of members were in plans with four or more stars, a record high. But in 2023, this number declined to 72%.
Why CMS recalculated the ratings
The ratings are on a scale of one to five stars and are based on a variety of measures, including health outcomes, chronic condition management and member experience. CMS first gives plans a raw score based on various quality measures and then converts the raw score into a star score. The Star Ratings are similar to how a teacher grades a test with the entire class on a curve, according to a description from the ruling by U.S. district judge Carl Nichols for SCAN’s case. CMS runs a statistical clustering analysis to group the data set so that the raw scores within a group are as similar as possible to each other, and as dissimilar as possible to the raw scores of any other group, according to the ruling.
CMS then identifies the dividing lines—or “cut points”—between the groups and assigns star scores accordingly. In the grading analogy, this is like a teacher’s analyzing all students’ scores on a quiz; determining that (for this particular quiz) a student needs to score at least 86% to receive an “A,” at least 78% to receive a “B,” at least 71% to receive a “C,” and so forth; and then giving students the letter grades that correspond to their raw scores. In the parlance of Star Ratings, 86%, 78% and 71% would be the “cut points” reflecting the dividing lines between the different letter grades.
U.S. district judge Carl Nichols
But CMS made two recent changes to the way it calculates Star Ratings. The first is the Guardrail Rule, which puts a 5% cap on how much cut points can change from year to year. This was first implemented in October 2022 when CMS calculated the 2023 Star Ratings. The second change is the Tukey Outlier Rule, which was implemented in 2023 for the 2024 Star Ratings and removes extreme outliers from data sets before determining cut points.
Long term, the two changes are intended to work together, the judge noted. The Tukey Outlier Rule stabilizes cut points by eliminating extreme data points that could distort the curve. The Guardrail Rule restricts how much these cut points can fluctuate annually.
However, CMS applied the 5% guardrail limit to cut points from the prior year, recalculated to exclude outliers. But CMS did not clearly specify that it would do this through its official regulation. SCAN argued that CMS had to implement the 5% guardrail limit consistent with the official regulation.
As a result of these actions, SCAN’s Star Ratings dropped a full point to 3.5 stars from 4.5 stars in 2023. SCAN sued in December 2023 and the judge ruled on June 3 that CMS had to recalculate, leading to SCAN receiving 4 stars and about $250 million in additional revenue.
In short, while the subject matter is complicated, SCAN’s argument is simple. SCAN took issue not with the way CMS calculated the Star Ratings, but with the fact that CMS didn’t follow what its official regulation said.
“CMS’ argument was that implicit in the regulations, they will use last year’s grade to set this year’s curve,” said Dr. Sachin Jain, CEO of SCAN Group and SCAN Health Plan, in an interview. “When we looked at the regulations, it’s not clear that that was articulated. For us, that actually had a very material impact. I think some plans may have looked at this issue and said it didn’t really have a material impact, but for us, with as many members as we have in our plans, it really represented a $250 million swing in our revenue.”
Gottlieb agreed, noting the issue wasn’t necessarily CMS’ calculations, but the fact that the agency “didn’t do what they said they were going to do” in official regulation.
In Elevance Health’s case, a judge ruled on June 7 that CMS had to recalculate Star Ratings for one of Elevance’s subsidiaries, Blue Cross Blue Shield of Georgia, for similar reasons. Elevance Health declined to comment on the case.
On June 13, CMS informed MA plans that it is recalculating Star Ratings more broadly. In a memo sent to MA plans, the agency said that it assigned all contracts the recalculated Star Ratings if the recalculation led to higher ratings than previously assigned, but did not reassign ratings if the recalculation led to a lower rating than previously assigned.
“The Centers for Medicare & Medicaid Services (CMS) is committed to accurately measuring the quality of care that Medicare Advantage Organizations (MAOs) and Prescription Drug Plans (PDP) provide so that people with Medicare have meaningful information about their health care choices through the Part C and D Star Ratings,” said a CMS spokesperson in an email.
The spokesperson added that CMS has not decided whether it will appeal these decisions and tried to put distance between the decision to recalculate and the potential for an appeal.
“CMS’ decision to recalculate 2024 Star Ratings as described herein has no bearing on CMS’ potential exercise of its right to appeal those decisions,” the spokesperson said.
The importance of Star Ratings
Star Ratings are “hugely important” for both financial reasons and non-financial reasons, said Mike Plumb, CFO of SCAN Health Plan. Plans that have a higher rating get additional revenue, which is used to improve benefits for members.
“SCAN is obviously a nonprofit plan, so this wasn’t a margin game for us. … It was that the more revenue we have, the richer the benefits we can offer to our members, and also the better the payments to our provider partners as well,” he said in an interview.
It also affects how MA plans are viewed by consumers, he added. Plans with higher scores are listed first in the Medicare plan finder.
Tyler Giesting, director of healthcare and life sciences at Chicago-based consulting firm West Monroe, echoed Plumb.
“[Insurers] are getting more dollars back, which allows them to think differently about how they design their plans for the coming year,” he said in an interview. “You’re likely to see some of these plans that were previously negatively impacted maybe redraw how they’re going to design those plans and almost strategically rethink their approach to MA.”
What does this mean for the future of Star Ratings?
CMS’ decision to recalculate the Star Ratings raises bigger questions.
“By doing this, they’re acknowledging that, ‘We may have made a mistake, or at least we recognize that a lot of people are unhappy with the change we made to that calculation methodology.’ That inherently leads you to asking, what are they going to do next year?” Giesting said.
Renee Delphin-Rodriguez, SCAN’s general counsel, said she doesn’t think this particular issue with the Star Rating calculations will be revisited, but CMS will be under more scrutiny.
“Broadly speaking, I think there’s more attention to the star rating system and there is more attention to how CMS implements their rules and exactly what their rules say,” she said. “There’s just going to be a little bit of a heightened lens at this whole structure and if it is really getting at what it’s intended to.”
Photo: Tero Vesalainen, Getty Images