Medicare HMOs: Whose Advantage?

Andy Calman, MD, PhD

Last fall, Congress passed the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the most significant health care legislation since the creation of Medicare in 1965. In the March issue of San Francisco Medicine, I outlined the new Medicare prescription drug plan. This month, we'll discuss the new Medicare HMO and PPO plans known as Medicare Advantage.

A great deal has been written about Medicare Advantage (a lot of it highly opinionated), but few articles have explored the structure and funding of these new HMOs in sufficient detail to explain some of their controversial features. Readers who find their eyes glazing over may wish to skip ahead to the "opinion" section at the end; those seeking even more detail are encouraged to read the 415-page bill (go to http://thomas.loc.gov and search for bill #HR 1). A good executive summary is also available at http://www.chausa.org/publicpo/ 031130medicare_exec_summ.pdf.

Medicare Advantage replaces Medicare Plus Choice, the current HMO plan for seniors. Medicare Plus Choice has had a difficult history. Created by Congress in 1997 to replace the Medicare risk contract program, these plans have suffered from declining enrollment, diminished benefits and numerous plan withdrawals. In the last five years, enrollment has fallen by 26 percent, and more than half of the plans existing in 1998 have abandoned the market. Although many of these plans had a generous prescription drug benefit during the mid-1990s, most plans currently provide either a minimal generic drug benefit or none at all.

Medicare Advantage seeks to entice HMOs (and PPOs) back into the Medicare managed care market by offering increased payment rates (to plans, not to physicians), the ability to include rural areas in regional plans, and a stabilization fund to subsidize failing plans. The increased rates, pegged to spending for fee-for-service (FFS) Medicare beneficiaries in the same area, go into effect immediately. Rates will then increase annually at a percentage linked to the increase in FFS payments, but not less than 2 percent per year. Risk corridors will protect private entities against unanticipated cost overruns.

Regional plans, designed to encourage managed care in rural areas, will begin in 2006, and will be incentivized to develop PPOs as well as HMOs. These plans will be subsidized by a network adequacy fund to help recruit rural physicians. Each entity must offer at least one plan with a prescription drug benefit in any area where it operates. All plans will need to have their benefits package and patient payment structure, as well as any drug formularies, approved by CMS.

The stabilization fund establishes a subsidy of at least $10 billion to provide additional payments to HMOs and PPOs in order to encourage them to enter and remain in the market. Private companies can elect to receive either a one-time nationwide subsidy, or a multiyear subsidy in specific regions. The Secretary of HHS has broad discretion to award these subsidies, which generally will not exceed 3 percent of total payments.

In 2006, plans will begin to bid competitively against a complicated blended benchmark that incorporates regional average costs and a weighted average of local plan bids. The Secretary of HHS will have the right to negotiate and approve plan bids and benefit structure. If the bid is above the benchmark, beneficiary premiums will increase. If the bid is below the benchmark, the savings are shared between the federal government (in part, to increase the stabilization fund) and the beneficiaries (in the form of increased benefits or reduced premiums).

Payment rates to plans are to be actuarially adjusted to minimize adverse selection; the details of this are not spelled out. Low-income beneficiaries who are enrolled in a Medicare Advantage plan with prescription drug coverage will have reduced premiums and copays (see the March 2004 SFM article), and CMS will reimburse Medicare Advantage entities for these subsidies. There is also a provision for Specialized Medicare Advantage plans to be designed for patients with special needs, defined as those who are institutionalized, Medi-Cal dual-eligible, or with severe and disabling conditions.

Now comes the unfavorable fine print: CMS cannot mandate any particular payment rates to physicians or other providers, and physician incentives to reduce services (which are currently illegal) will be permitted. CMS cannot require that any provider or hospital be part of a provider network. "Any willing provider" laws are prohibited, and providers who have been excluded from participation in Medicare Advantage panels will have no appeal rights. States will have no authority to regulate Medicare Advantage plans.

CMS will have broad authority to issue waivers to employer-sponsored and union-sponsored plans, to permit deviations from standard plan design. Many of the specific remedies for HMO misconduct (discriminating against enrollees or providers, lying to CMS, or withholding care), which currently apply to Medicare Plus Choice, are repealed in the new bill. Quality Improvement Organizations (formerly PROs) will not have the right to review Medicare Part C (Medicare Advantage) or Part D (prescription drug plans). The HMO industry, which worked closely with the House Republican leadership in designing this bill, will undoubtedly be pleased with these provisions.

Indeed, the bill is notable not only for what it contains, but for what it leaves out. The Senate conferees pushed for many of the protections noted above, in addition to other provisions to protect against adverse selection of beneficiaries. These protections were edited out by the House Republican conferees who controlled the process. In addition, the Senate wanted a bipartisan commission to study Medicare; this was also axed by the House Republicans. The House Democrats were not admitted to the conference discussions at all, and only two moderate Senate Democrats were allowed to participate.

The long-term goal of the House Republican leadership is to encourage (and perhaps eventually require) seniors to receive their Medicare benefits through private, for-profit plans with mechanisms to limit the cost to the federal government. In other words, their aim is to change Medicare from a defined-benefit plan to a defined-contribution plan. The Senate conferees were able to scale this scheme back to a demonstration project, the Comparative Cost Adjustment (CCA) program, which begins in 2010. Six areas with high managed-care penetration will be selected for CCA. The total costs expended for Medicare FFS beneficiaries in these regions will be compared with those for patients enrolled in Medicare Advantage. Using a complex formula, patients' premiums (in both FFS and managed care plans) will be adjusted up or down to equalize the cost to the federal government. The goal is to minimize federal expenses and encourage patients to migrate to low-cost plans.

In theory, it makes sense to reward beneficiaries who choose efficient health care plans. Unfortunately, the playing field is not level. Although there is supposed to be some attempt to actuarially adjust rates for health status, in reality there will always be some adverse selection, because patients who are high utilizers (either because of their disease status or their personalities) will prefer FFS systems with fewer barriers to obtaining care. Additionally, the managed care plans will benefit from billions of dollars from the stabilization fund, while FFS Medicare has no such fund.

Choice is a desirable goal. Some patients do prefer an HMO or PPO model and are willing to accept gatekeeping and a limited choice of providers in exchange for lower co-pays and deductibles. Others prefer the freedom to choose their own physicians and to see them when they believe they need care. Certainly it is reasonable to accommodate a variety of delivery systems and to attempt to minimize the cost to taxpayers. However, the new Medicare bill eliminates many protections to patients and physicians under managed care, stacks the deck in favor of HMOs by subsidizing failing plans, and accepts as a foregone conclusion that FFS Medicare must be less efficient than private plans, in spite of real-world evidence to the contrary.

Sadly, physicians had little input into the final form of the bill. It is a measure of how much political clout we have lost that a 1.5 percent fee increase was seen as a victory. HMOs and drug companies fared far better. Medicare Advantage clearly is a step forward for the managed care industry. Whether it offers any advantages for patients or physicians remains to be seen.

Andy Calman practices ophthalmology in the Mission District of San Francisco and is a member of SFMS. He has served for many years on California's Medicare Carrier Advisory Committee and helps to coordinate Medicare policy for the American Academy of Ophthalmology. Having read all 415 pages of the Medicare bill and watched the entire three-hour House vote on C-SPAN, he is in serious danger of becoming a policy wonk.