Legislative Watch

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March 2004

By George G. Olsen, JD

The recently enacted Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MPDIMA) contains far-reaching provisions designed to expand significantly the role of managed care in the Medicare program. The new law takes immediate steps to revitalize the existing Medicare+Choice program and establishes a sweeping new Medicare Advantage incentive that will commence in 2006. The plans will endeavor to persuade beneficiaries to eschew coverage under the traditional fee-for-service Medicare programs and to enroll in a managed care option. For this reason, Medicare providers of all types must be prepared for the much greater participation of private plans in Medicare beginning January 1, 2006.

Revitalization of Medicare + Choice

The Medicare+Choice program was created by Congress in the Balanced Budget Act of 1997 in order to provide Medicare beneficiaries with an array of health care plan options that was closer to the spectrum of plans available to persons in the private insurance marketplace. In addition, Congress believed that the Medicare+Choice program would help restrain Medicare costs by importing into Medicare techniques that had helped moderate costs in the private sector.

Medicare+Choice plans may offer a full range of integrated health benefits including prescription drug coverage. The program allows beneficiaries to receive Medicare coverage through coordinated care plans such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), provider sponsored organizations (PSOs), and medical savings accounts (MSAs). Because Medicare did not have a comprehensive drug benefit, many beneficiaries left the traditional Medicare program and enrolled in a Medicare+Choice plan that provided drug coverage.

The plans experienced modest success at the outset; but over the last several years, the number of participating plans has dropped substantially as have the number of enrollees. In 1998, there were 346 risk plans encompassing 6.2 million enrollees. By November 2003, there were only 155 plans serving 4.6 million enrollees. Two primary causes of the diminution in plans and enrollees have been identified: (1) Medicare payments to the plans were insufficient to support the benefits offered by the plans; and (2) it was costly and burdensome for the plans to comply with the extensive regulations that were promulgated to govern Medicare+Choice.

The MPDIMA makes critical revisions in the payment methodology for the plans with the intention of immediately reinvigorating the Medicare+Choice program. Under existing law, plans are paid an administered monthly payment rate for each enrollee. The per capita payment rate for a payment area is set at the highest of (1) a minimum (floor) rate; (2) a rate comprising a blend of a local rate and a national rate; and (3) a rate reflecting a minimum increase (2%) from the previous year’s rate. MPDIMA adds a fourth payment option for 2004—plans will be paid the highest of the floor, minimum percent increase, the blended rate, or a new payment amount that is equal to 100% of the fee-for-service payments made for persons enrolled in traditional Medicare. The payment amount for the plans is also improved by eliminating the budget neutrality requirement for the blended rate in 2004 and specifying that for 2004 and beyond, the minimum percentage increase will be the greater of a 2% increase over the prior year’s payment rate or the previous year’s payment increased by a new national per capita growth percentage.

Although complicated, it is anticipated that these payment reforms will breathe new life into the Medicare+Choice program. A press release issued on January 16, 2004, by AAHP-HIAA, the trade association representing nearly 1,300 insurers and health care plans, stated that “the new funding is being used to help beneficiaries by taking various steps such as lowering premiums, enhancing benefits, reducing cost-sharing, strengthening provider networks, or promoting stable coverage from 1 year to the next.” AAHP-HIAA also observed that “the effects of years of under-funding for Medicare+Choice will not be reversed overnight. But we are seeing evidence that the process of stabilizing and ultimately enhancing private sector Medicare is well under way.”

Medicare Advantage Programs

The MPDIMA creates a new Medicare Advantage program that will ultimately replace the current Medicare+Choice program. Medicare+Choice plans will become Medicare Advantage local plans that will be offered on a county-wide basis. Effective as of January 1, 2006, Medicare will offer Medicare Advantage Regional Plans (MA Regional Plans) that will provide integrated health care services to Medicare beneficiaries. The MA Regional Plans will be predicated on the PPO model.

MA Regional Plans will cover very large areas. On or before January 1, 2005, the Secretary of Health and Human Services must publish a list of Medicare Advantage regions that includes between 10 and 50 regions within the United States and the District of Columbia. A region must encompass at least one state and a state may not be divided across a region. A plan that desires to participate in the MA Regional Program must provide services in an entire region; it may not limit coverage to part of a region.

The MPDIMA creates a new bidding process for local and regional Medicare Advantage plans that will be in effect for 2006. Plans will submit bids to the HHS Secretary to provide Part A and Part B benefits to Medicare beneficiaries. The bids will be compared to benchmark rates that will be calculated separately for MA Local Plans and MA Regional Plans. A plan whose bid is above the benchmark rate will be paid the benchmark amount. Plans that bid below the benchmark amount will be paid the benchmark rate minus 25% of the difference between the bid and the benchmark. The remaining 75% must be returned to the beneficiaries in the plan as a rebate, which could take the form of supplemental benefits, reductions in cost-sharing for services covered by the plan, a decrease in the premium for supplemental benefits, or a reduction in the premium for the new comprehensive drug benefit.

Congress sought to ensure that a sufficient number of private plans participate in the Medicare Advantage Program by providing several compelling financial incentives. First, the MPDIMA created a “stabilization fund” in the amount of $12 billion to encourage new plans to enter and remain in the Medicare Advantage Regional Program. Second, a $25 million “network adequacy fund” to be used by MA Regional Plans to form adequate networks of hospitals. Third, the legislation established risk corridors that permit the government and plans to share the risk for costs that exceed or fall below certain levels. The net effect of these incentives, coupled with the payment methodologies for the plans, should encourage significant participation in the Medicare Advantage Program. Note that there is no limit to the number of successful bidders who may compete in a given region.

Comparative Cost Adjustment

One of the most controversial issues in the Congressional debate over MPDIMA was a proposal to require the traditional Medicare fee-for-service program to compete head-to-head against Medicare Advantage plans beginning in 2010. Proponents of this mechanism argued that the competition would yield enhanced benefits at lower costs for Medicare beneficiaries. Opponents contended that such competition would be the death knell for traditional Medicare because the private plans would cherry-pick the healthy seniors, leaving the sicker (and more costly) seniors in traditional Medicare. The law as enacted establishes a “comparative cost adjustment program” that will require Medicare Advantage plans to compete against the fee-for-service program in up to six Metropolitan Statistical Areas. This demonstration will run from 2010 to 2015.

Outlook

The MPDIMA establishes a framework by which private managed care plans will play a significant and perhaps dominant role in providing and paying for health care services under Medicare. Traditional fee-for-service Medicare will certainly not disappear, but Medicare Advantage plans will almost certainly prove to be powerful competitors for beneficiaries.

The Centers for Medicare and Medicaid Services has not yet issued the regulations that will govern the Medicare Advantage Program. The precise structure and operation of these plans will not be known until they are promulgated later this year. Until that time, Medicare providers would be well served to assess their roles in a “reformed” Medicare program and ensure that their interests are protected by fully participating in the rule-making process at CMS.

George G. Olsen, JD, is a partner of the firm Williams & Jensen, PC, Washington, DC. He is also legal counsel for the National Association of Rehabilitation Agencies and Providers.

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March 2004