Making the leap

Since 2017, an increasing number of nursing homes and assisted living facilities (ALFs) have started Medicare Advantage organizations (MAOs) and created institutional special needs plans (I-SNPs) in an effort to enhance revenue and enable better management of their residents’ healthcare needs. The number of MAOs offering I-SNPs¹ more than doubled over the last five years: from 101 I-SNPs offered by at least 19 different MAOs in 2017² to 227 I-SNPs offered by at least 40 different MAOs in 2022.³ For nursing homes and ALFs considering starting an MAO and creating an I-SNP, this paper highlights opportunities and challenges new I-SNP MAOs may face and identifies characteristics of successful MAOs serving institutional populations. This paper identifies key advantages of starting an MAO and characteristics of successful organizations, as well as some challenges and risks new MAOs should be prepared to address.

What is a Medicare Advantage organization?

An MAO is a legal entity licensed to sell health insurance and contracted with the Centers for Medicare and Medicaid Services (CMS) to offer Medicare Advantage (MA) products to Medicare beneficiaries. A nursing home or ALF interested in starting an MAO must first establish a new legal entity and apply for an insurance license with the appropriate state regulatory agency. Once licensed, that entity may apply for an MA contract with CMS.

MAOs receive revenue through payments from the federal government, and in some cases those payments are supplemented by member premiums paid by members. In return for these payments, MAOs are required to provide traditional (Part A and Part B) Medicare benefits and may opt to provide additional coverage, such as reduced cost sharing and additional benefits. Provider organizations setting up their own MAOs to contract with CMS receive all of the Medicare revenue for their members rather than just the portion associated with the services they are directly providing their patients. Additionally, MA revenue is intended to provide allowance for administrative expenses and a reasonable gain/loss margin in addition to expected claims costs.

What is an I-SNP?

A Medicare special needs plan (SNP) is a special type of MA product or “plan” that restricts membership to people with specific diseases or characteristics. Medicare SNPs tailor their benefits, provider networks, and drug formularies to best meet the specific needs of the populations they serve.⁴ An institutional special needs plan (I-SNP) offers MA coverage solely to individuals who, for 90 days or longer, have had or are expected to need the level of services provided in a long-term care (LTC) skilled nursing facility (SNF), a LTC nursing facility (NF), a SNF/NF, an intermediate care facility for individuals with intellectual disabilities (ICF/IDD), or an inpatient psychiatric facility.⁵

Additionally, MA coverage may also be offered to members requiring an institutional level of care and residing in the community, including in an ALF, through an institutional-equivalent special needs plan (IE-SNP). In order to enroll community-based members in this type of Medicare SNP, the MAO must arrange for an institutional level of care (LOC) assessment using a state assessment tool and administered by an independent, impartial party with the requisite professional knowledge to accurately identify the institutional LOC needs of the individuals enrolled.⁶

How could a nursing home or ALF benefit by starting an MAO?

Nursing homes and ALFs can realize a few key advantages by starting an MAO and creating an I-SNP or IE-SNP to cover their residents, including:

• Access to a much larger pool of revenue, for multiple reasons:
• MA revenue covers all services, not just revenue for those services provided directly by the nursing home
• The MAO benefits directly from the degree to which diagnosis coding completion is improved over time
• Greater control over the services covered for facility residents, providing tailored benefits designed to improve medical outcomes, and quality of life for members
• Greater ability to manage and coordinate care for facility residents, by contracting with an external network of specialists and other providers best suited to meet the needs of the enrolled population

Would a nursing home or ALF be well positioned to operate an MAO?

Nursing homes and ALFs often have a number of distinct qualities, which may result in a greater potential for success in the MA market. While we cannot say with certainty that all nursing homes and ALFs embody all of these characteristics, we find them generally present across the industry. These qualities include:

• Active medical professional (e.g., nurse practitioner, medical director) engagement, resulting in more effective care management, improved quality outcomes, and greater accuracy in diagnosis coding
• Streamlined path to marketing to the facility’s residents (in compliance with CMS marketing rules and restrictions)
• Commitment to high-quality care and member satisfaction
• Insight into the benefit designs having the greatest impact on patient needs

What are some challenges in getting off the ground?

While nursing homes and ALFs may be generally successful in managing their current businesses and patient populations, starting an MAO may require different skill sets, operational functions, and capital needs, including but not limited to:

• A new MAO must first submit health maintenance organization (HMO) and/or preferred provider organization (PPO) license applications to the states in which they intend to operate, and then must submit an MA contract application to CMS
• The MAO must contract with providers to ensure its provider network meets CMS adequacy requirements, including for services provided outside of the MAO’s facilities
• A new MAO typically executes a contract with a pharmacy benefits manager (PBM) to access improved pharmacy pricing and rebate terms and to delegate some administrative functions associated with pharmacy claims, with consideration for any pharmacies within the resident facilities
• The MAO must establish an operational framework by building, delegating, or contracting a number of critical administrative functions, such as:
• Sales and marketing
• Eligibility, enrollment, and disenrollment
• Claims processing
• Provider network management
• Financial reporting
• Actuarial
• Member service
• Risk adjustment
• Medical management
• Quality improvement
• Appeals / grievances
• Compliance
• The capital investment required for a successful MAO launch is substantial:
  • An initial investment is needed to meet state risk-based capital (RBC) requirements prior to enrolling any members
  • Significant capital is required to establish the operational framework noted above
  • The MAO must be further capitalized to prepare for financial losses in the first few years of operation, as MAOs are often unprofitable until three to five years from inception due to the time required to grow enrollment to reduce fixed administrative expenses on a per member basis

What are potential risks going forward?

Nursing homes and ALFs successfully navigating the start-up challenges discussed above may face subsequent risks, including:

• If membership in the new I-SNP or IE-SNP grows more slowly than expected, fixed administrative costs are spread across a smaller enrollment base and positive profitability becomes more difficult to achieve
• A new MAO focused on I-SNPs may have relatively small membership compared to other larger MAOs offering general enrollment plans, and in some cases this can make it more difficult to negotiate competitive rates for contracted services (e.g., PBM services, administrative functions, etc.)
• An MAO must be aware of its competition in its chosen market(s) and ensure the benefit plan(s) offered to its residents are attractive
• Staying competitive also means keeping pace with the MA market on risk score coding accuracy and medical management, both of which are essential components of a successful MAO, particularly for members identified as needing an institutional level of care
• Reacting quickly and effectively to any regulatory changes is critical to success in the heavily regulated MA market.
• An MAO and its parent organization must ensure its capital position is sufficient to sustain financial losses, in particular for services and benefits over which the nursing homes and ALFs may not have direct control (such as pharmacy benefits and services provided outside the facilities)

Final thoughts

Given the recent growth in the number of I-SNPs and IE-SNPs offered nationwide, there are already a number of examples of nursing homes and ALFs that established MAOs to take advantage of the increased revenue and opportunities for better managing and delivering care to their residents. That said, the MA market is not for the faint of heart. Potential MA market entrants must be mindful of the risks and investments required for a successful launch and ongoing operations. Nursing homes and ALFs considering entry into the MA market often begin by engaging a Medicare expert to assist in developing a high-level financial feasibility analysis and operational gap assessment. This preliminary step can provide clarity on potential risks and challenges specific to the products and markets under consideration, as well as an understanding of potential financial outcomes under various future scenarios.

After completing this preliminary financial analysis, and with proper understanding of required investments and operational gaps to address, I-SNPs and IE-SNPs can drive significant value to nursing home and ALF organizations and their residents.

Qualifications and caveats

Please note the opinions stated in this article are those of the authors and do not represent the viewpoint of Milliman.

Guidelines issued by the American Academy of Actuaries require actuaries to include their professional qualifications in all actuarial communications. Kelly S. Backes and Matt Kranovich are members of the American Academy of Actuaries and meet the qualification standards for sharing the information in this paper. To the best of their knowledge and belief, this information is complete and accurate.

This information is intended to provide a very brief overview of nursing home and ALF considerations for taking direct insurance risk within the MA market. The considerations discussed in this paper are not exhaustive and careful consideration should be given to when to enter the MA market, as not every nursing home organization will be a good fit for becoming an MAO. This information may not be appropriate, and should not be used, for other purposes. Milliman does not intend to benefit and assumes no duty of liability to parties that receive this information. Any recipient of this information should engage qualified professionals for advice appropriate to its own specific needs.

¹ These counts include both I-SNPs and IE-SNPs. It is possible MAOs offering I-SNPs with fewer than 11 members were excluded from these counts, due to CMS reporting rules.

² CMS. SNP Comprehensive Report 2017 02. Retrieved September 8, 2022, from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MCRAdvPartDEnrolData/Special-Needs-Plan-SNP-Data-Items/SNP-Comprehensive-Report-2017-02.

³ CMS. SNP Comprehensive Report 2022 02. Retrieved September 8, 2022, from https://www.cms.gov/research-statistics-data-and-systemsstatistics-trends-and-reportsmcradvpartdenroldataspecial-needs/snp-comprehensive-report-2022-02.

⁴ Medicare. Special Needs Plans (SNP). Retrieved September 8, 2022, from https://www.medicare.gov/sign-up-change-plans/types-of-medicare-health-plans/special-needs-plans-snp.

⁵ CMS. Institutional Special Needs Plans (I-SNPs). Retrieved September 8, 2022, from https://www.cms.gov/Medicare/Health-Plans/SpecialNeedsPlans/I-SNPs.

⁶ Ibid.