GAO 

United States Government Accountability Office

Report to Congressional Committees

MEDICARE 

MANAGED CARE 

Observations about 

Medicare Cost Plans 

December 2009 

GAO-10-185 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

December 2009

MEDICARE MANAGED CARE 

Observations about Medicare Cost Plans

Highlights of GAO-10-185, a report to 

congressional committees 

Medicare cost plans—managed 

care plans paid based on the 

reasonable costs of delivering 

Medicare-covered services—enroll 

a small number of beneficiaries 

compared to Medicare Advantage 

(MA), Medicare’s managed care 

program in which the plans accept 

financial risk if their costs exceed 

fixed payments received for each 

enrolled beneficiary. Despite the 

small enrollment, industry 

representatives stated that cost 

plans provide a managed care 

option in areas that traditionally 

had few or no MA plans. Current 

law allows existing cost plans to 

continue operating unless specific 

MA plans of sufficient enrollment 

serve the same area. In such cases, 

the cost plan must discontinue 

serving that area beginning in 2011. 

The Medicare Improvements for 

Patients and Providers Act of 2008 

(MIPPA) required GAO to examine 

issues related to the conversion of 

Medicare cost plans to MA plans. 

In response, GAO (1) determined 

the MA options available to 

beneficiaries in cost plans, 

(2) described key differences for 

beneficiaries between cost plans, 

MA plans, and Medicare fee-forservice (FFS); (3) determined the 

extent to which organizations 

offering cost plans also offer MA 

plans; and (4) described concerns 

cost plans have about converting to 

MA plans. GAO analyzed data from 

the Centers for Medicare & 

Medicaid Services (CMS), the 

agency that administers Medicare. 

GAO also reviewed requirements 

for Medicare managed care plans 

and interviewed officials from all 

Medicare cost plans and CMS. 

All Medicare beneficiaries enrolled in the 22 cost plans had multiple MA 

options available to them. Nearly all beneficiaries enrolled in cost plans had at 

least 5 MA plans serving their county in June 2009, and more than 57 percent 

had a choice of 15 or more MA plans. 

Some of the differences between cost plans and MA plans that affect 

beneficiaries are out-of-network coverage, enrollment periods, and 

prescription drug coverage. Cost plans’ quality scores, on average, were 

higher than the average of competing MA plans’ scores in the county with the 

cost plan’s highest enrollment. Estimated out-of-pocket costs varied between 

cost plans and other options depending on the self-reported health status of 

the beneficiary. In general, beneficiaries reporting poor health had lower 

estimated average out-of-pocket costs in most cost plans compared to 

competitor MA plans and FFS, while beneficiaries reporting good or excellent 

health had relatively higher estimated costs in most cost plans compared to 

MA plans and FFS. 

Half of the 18 organizations offering cost plans also offered at least one MA 

plan in some or all of their cost plans’ service area. These 9 organizations 

operated a total of 12 cost plans. In general, organizations that offer cost plans 

and MA plans in the same service area must close their cost plan to 

enrollment. 

Officials from organizations that offered cost plans cited potential future 

changes to MA payments and difficulty assuming financial risk as concerns 

about converting cost plans to MA plans. Unlike cost plans, MA plans assume 

financial risk if payments from CMS do not cover their costs. Officials from 13 

of the 18 organizations offering cost plans identified past and the potential for 

future payment changes in the MA program as reasons the decision to convert 

was difficult, though 6 of these organizations offered an MA plan in some or 

all of their cost plan’s service area in 2009. Additionally, officials from 5 

organizations said that their enrollment was insufficient to manage the 

financial risk plans would need to accept in the MA program. Officials from 

more than half of the organizations that offered cost plans also expressed 

concerns about the potential disruption to beneficiaries caused by 

transferring beneficiaries from cost plans to MA plans. 

GAO provided a draft of this report to CMS. CMS provided GAO with technical 

comments, which were incorporated as appropriate. 

View GAO-10-185 or key components.

For more information, contact James C. 

Cosgrove at (202) 512-7114 and 

cosgrovej@gao.gov. 
Page i GAO-10-185 

Contents 

Letter 1

Background 4 

Beneficiaries in Cost Plans Had Multiple MA Options 11 

Cost Plan Quality Scores Higher Than MA Plans While Estimated 

Out-of-Pocket Costs Vary by Health Status 12 

Half of Organizations Offering Cost Plans Also Offered MA Plans 19 

Financial and Beneficiary Transition Issues Cited as Concerns 

Regarding Conversion to MA Plans 20 

Agency and Other External Comments 23 

Appendix I Organizations That Offer Medicare Cost Plans 25 

Appendix II Organizations That Would Likely Be Affected by 

Medicare Improvements for Patients and Providers 

Act of 2008 Provision 26 

Appendix III Structural Differences among Cost Plans, MA Plans, 

and Medicare FFS for Beneficiaries 27 

Appendix IV GAO Contact and Staff Acknowledgments 29 

Tables 

Table 1: Percentage of Beneficiaries Enrolled in Cost Plans Who 

Have Access to Medicare Advantage (MA) Plans, by MA 

Plan Type, June 2009 12 

Table 2: Organizations That Offered Cost Plans and MA Plans, June 

2009 19 

Table 3: Types of MA Plans Offered by Organizations That Offer 

Cost Plans and MA Plans, June 2009 20 

Table 4: Organizations That Offer Medicare Cost Plans 25 

Table 5: Preliminary Centers for Medicare & Medicaid Services 

(CMS) Estimates of the Cost Plans and Percentage of Cost 

Plan Enrollment Likely Affected by MIPPA Provision 26 

 Medicare Cost Plans 
Figures 

Figure 1: Counties Served by Medicare Cost Plans, 2009 8 

Figure 2: Time Line of Legislation Related to Medicare Cost Plans 10 

Figure 3: Number of MA Plans Available to Beneficiaries Enrolled 

in Cost Plans, as of June 2009 11 

Figure 4: 2007 Plan Summary Scores for Cost Plans Compared with 

Those for MA Competitors 14 

Figure 5: Number of Cost Plans with Quality Scores Higher, the 

Same, or Lower than Competitors 15 

Figure 6: Number of Cost Plans with Higher or Lower Estimated 

Out-of-Pocket Costs for 80- to 84-Year-Old Beneficiaries 

Reporting Poor Health, Compared with Competing MA 

Plans and Medicare FFS, 2009 17 

Figure 7: Number of Cost Plans with Higher or Lower Estimated 

Out-of-Pocket Costs for 80- to 84-Year-Old Beneficiaries 

Reporting Good and Excellent Health, Compared with 

Competing MA Plans and Medicare FFS, 2009 18 

Page ii GAO-10-185 Medicare Cost Plans
Abbreviations 

AEP annual election period 

BBA Balanced Budget Act of 1997 

CAHPS Consumer Assessment of Healthcare Providers and 

 Systems 

CCP coordinated care plan 

CMS Centers for Medicare & Medicaid Services 

FFS fee-for-service 

HEDIS Health Effectiveness Data and Information Set 

HMO health maintenance organization 

MA Medicare Advantage 

M+C Medicare+Choice 

MIPPA Medicare Improvements for Patients and Providers Act of 

 2008 

MMA Medicare Prescription Drug, Improvement, and 

 Modernization Act of 2003 

MSA metropolitan statistical area 

NAIC National Association of Insurance Commissioners 

OEP open enrollment period 

PDP prescription drug plan 

PFFS private fee-for-service 

PPO preferred provider organization 

PSO provider sponsored organization 

RBC risk-based capital 

SEP special enrollment period 

TEFRA Tax Equity and Fiscal Responsibility Act of 1982 

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Page iii GAO-10-185 Medicare Cost Plans
Page 1 GAO-10-185 

 

United States Government Accountability Office

Washington, DC 20548 

 

December 28, 2009 

The Honorable Max Baucus 

Chairman 

The Honorable Chuck Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Honorable Henry A. Waxman 

Chairman 

The Honorable Joe Barton 

Ranking Member 

Committee on Energy and Commerce 

House of Representatives 

The Honorable Charles B. Rangel 

Chairman 

The Honorable Dave Camp 

Ranking Member 

Committee on Ways and Means 

House of Representatives 

Medicare cost plans—managed care plans paid based on their reasonable 

costs incurred delivering Medicare-covered services—enroll a small 

number of Medicare beneficiaries compared with the number enrolled in 

Medicare Advantage (MA), Medicare’s managed care program that pays 

health plans on a risk basis.1

 Risk-based plans are paid a fixed monthly 

payment per beneficiary enrolled in the plan to furnish Medicare-covered 

services, and the health plans bear financial risk if their costs exceed 

Medicare payments.2

1

We use the term Medicare cost plans to refer to Section 1876 Medicare cost contracts. 

Section 1876 refers to the section of the Social Security Act that authorizes the operation of 

cost plans. 

2

Medicare Parts A and B are known as original Medicare or Medicare fee-for-service (FFS). 

Medicare Part A covers hospital and other inpatient stays. Medicare Part B is optional 

insurance, and covers hospital outpatient, physician, and other services. MA plans must 

cover services covered under Parts A and B, except for hospice care. 

 Medicare Cost Plans 
 

As of June 2009, 22 Medicare cost plans enrolled approximately 288,000 

Medicare beneficiaries, compared to 633 MA plans that served 

approximately 10.7 million Medicare beneficiaries. Despite their relatively 

small enrollment, industry representatives stated that cost plans fill a 

unique niche by providing a Medicare managed care option in rural and 

other areas that traditionally had few or no MA plans. Congress acted to 

curtail the expansion of cost plans multiple times. In 1997 Congress passed 

legislation prohibiting new cost plans from entering the Medicare market 

and prohibiting existing cost plans from being renewed or extended 

beyond 2002. Subsequent legislation extended the authorization of existing 

cost plans and, most recently, the Medicare Improvements for Patients and 

Providers Act of 2008 (MIPPA) allowed existing Medicare cost plans to 

continue to operate except where MA plans of sufficient enrollment 

served a cost plan’s service area for the previous year.3

 In such cases, the 

cost plan must discontinue serving that area beginning January 1, 2011. 

MIPPA also required GAO to report, by December 31, 2009, on issues 

related to the conversion of Medicare cost plans to MA plans. To respond 

to the mandate, we (1) determined the MA options available to 

beneficiaries enrolled in Medicare cost plans; (2) described the key 

differences for beneficiaries between cost plans, MA plans, and Medicare 

fee-for-service (FFS); (3) determined the extent to which organizations 

offering cost plans also offer MA plans; and (4) described concerns cost 

plans have about converting to MA plans. 

To determine the MA options available to beneficiaries enrolled in 

Medicare cost plans, we analyzed June 2009 MA and cost plan service area 

and enrollment data at the contract level from the Centers for Medicare & 

Medicaid Services (CMS), the agency that administers the Medicare 

program.4

To describe the key differences for beneficiaries between cost plans, MA 

plans, and Medicare FFS, we reviewed CMS requirements for Medicare 

cost plans, MA plans, and Medicare FFS. We examined quality data for 

 

3

A cost plan’s service area generally comprises one or more counties. 

4

Agreements between CMS and an organization to provide one or more benefit packages of 

the same type in a specified geographic region are referred to as contracts. Benefit 

packages can have different monthly premiums or beneficiary cost-sharing requirements. 

For this report, we use the term plan to refer to the agreement at the contract level. 

Organizations may have more than one contract with CMS. 

Page 2 GAO-10-185 Medicare Cost Plans
 

cost plans and MA plans.5 We limited our quality analysis to the county in 

each cost plan’s service area with the highest cost plan enrollment 

because the MA competitor plans for a cost plan may differ depending on 

the county within the service area. If a cost plan was missing a quality 

score, we did not report a comparison.6

 We also analyzed CMS data that 

estimate total monthly out-of-pocket costs for beneficiaries in different 

managed care benefit packages and Medicare FFS. CMS reports the 

estimated out-of-pocket costs according to self-reported health status 

within a range of age groups, for example, among 80 to 84 year olds 

reporting good health.7

 For our analysis, we compared enrollmentweighted averages of estimated out-of-pocket costs for each cost plan 

benefit package to enrollment-weighted estimates for MA benefit packages 

in the same service area. We separated the analysis according to whether 

the benefit package included Part D, Medicare’s prescription drug benefit.8

Similarly, because the FFS-only estimate does not include Part D coverage, 

we compared the estimated out-of-pocket costs for beneficiaries enrolled 

in non-Part D cost plan benefit packages to the out-of-pocket costs for 

beneficiaries in Medicare FFS. We presented the results for beneficiaries 

 

5

CMS quality scores are based on information from the Health Effectiveness Data and 

Information Set (HEDIS), a tool developed and maintained by the National Committee for 

Quality Assurance that is used by health plans to measure performance on dimensions of 

care; the Consumer Assessment of Healthcare Providers and Systems (CAHPS), a group of 

surveys that asks consumers and patients to report on and evaluate their experiences with 

healthcare; and appeals data. CMS reports the data using a rating system, where 1 is the 

lowest possible score and 5 is the highest possible score. We present information on the 

five quality dimensions that CMS reports and the plan summary score. CMS calculates the 

dimension scores by averaging individual quality measures in a given topic area. For 

example, the quality dimension for “Managing Chronic Conditions” uses individual 

measures of osteoporosis management, diabetes care, and rheumatoid arthritis 

management. CMS then calculates the plan summary score by averaging the individual 

quality measures and the dimension scores, as well as applying an integration factor that 

rewards plans for consistent high scores. 

6

CMS reports quality scores for managed care plans that have been operational for a full 

year and meet minimum enrollment criteria. 

7

The estimates of out-of-pocket costs are based on the reported utilization patterns of 

Medicare FFS beneficiaries who participated in the Medicare Current Beneficiary Survey, 

which is a CMS-sponsored, continuing survey of a nationally representative sample of aged, 

disabled, and institutionalized Medicare beneficiaries. These utilization patterns are 

combined with price data and benefit package information to estimate beneficiary out-ofpocket costs for beneficiaries in six age ranges (under 65, 65-69, 70-74, 75-79, 80-84, and 85 

and above) and five self-reported health statuses (excellent, very good, good, fair, and 

poor). 

8

We excluded from the cost-sharing analysis 8 of 22 cost plans because they did not have 

estimated out-of-pocket cost data. 

Page 3 GAO-10-185 Medicare Cost Plans
 

that reported themselves as 80 to 84 years old and in poor, good, and 

excellent health; we used results for this age group because officials from 

the industry and CMS told us that beneficiaries in cost plans are generally 

older than the average MA beneficiary. 

To determine the extent to which organizations that offer cost plans also 

offer MA plans, we analyzed CMS service area and enrollment data to 

identify organizations offering both. We interviewed officials from each 

organization that offers a cost plan to verify the CMS data. We then 

compared the service areas of the MA plans with those of the cost plans 

offered by the same organizations. 

To describe the concerns that cost plans have about converting to MA 

plans, we interviewed officials from each organization that offers a cost 

plan, the CMS office responsible for oversight of Medicare’s managed care 

programs, the Medicare Cost Contractors Alliance, which is an alliance of 

cost plans that advocates for cost plans in Congress and with CMS, and the 

National Association of Insurance Commissioners (NAIC), which is the 

organization of state insurance regulators. 

To determine the reliability of the data, we reviewed documentation for all 

the data sets we used. We conducted tests to look for obvious errors in the 

data and compared results to other published sources for CMS data on 

cost plan and MA plan service areas and enrollment. We interviewed CMS 

officials regarding the reliability of the out-of-pocket cost data and the 

quality ratings data. We determined that all data were sufficiently reliable 

for our purposes. 

We conducted our work from February 2009 to November 2009 in 

accordance with all sections of GAO’s Quality Assurance Framework that 

are relevant to our objectives. The framework requires that we plan and 

perform the engagement to obtain sufficient and appropriate evidence to 

meet our stated objectives and to discuss any limitations in our work. We 

believe that the information and data obtained, and the analysis 

conducted, provide a reasonable basis for any findings and conclusions in 

this product. 

Medicare began contracting with managed care plans on a costreimbursement basis in the 1970s. In 1982, Congress passed the Tax Equity 

and Fiscal Responsibility Act (TEFRA), which created the first Medicare 

risk contracting program for managed care plans beginning in 1985. The 

Medicare risk program evolved into today’s MA program. TEFRA also 

Background 

Page 4 GAO-10-185 Medicare Cost Plans
 

retained and authorized Medicare cost plans as an option if an 

organization did not have the capacity to bear the risk of potential losses, 

had an insufficient number of members to be eligible for a risk-sharing 

contract, or the organization elected to offer a cost plan rather than a risk 

plan. 

Evolution of Medicare 

Advantage 

Enrollment in the Medicare risk program grew from nearly 498,000 in 1985 

to about 5.2 million beneficiaries by 1997, primarily concentrated in urban 

counties. The Balanced Budget Act of 1997 (BBA) phased out the existing 

risk program and created a new risk program called Medicare+Choice 

(M+C). Under the M+C program, the method used to pay participating 

plans was revised significantly, and, due in part to these payment changes, 

by 2000 many health plans began to withdraw from the program. 

Enrollment fell from 6.3 million in 1999 to 4.6 million by 2003. The 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

(MMA) renamed the M+C program Medicare Advantage and provided 

increases to MA plan payment rates and other program changes. MA 

enrollment increased steadily from 2003 to 2009. 

The MA program includes several types of plans: 

• Local coordinated care plans (CCP) consist of: 

• Health maintenance organizations (HMO), which have defined 

provider networks and primary care gatekeepers. Beneficiaries 

enrolled in HMOs generally are required to obtain services from 

hospitals and doctors in the plan’s network, but some HMOs offer a 

point-of-service option under which a beneficiary may elect to obtain 

services from a non-network provider, though at a higher out-of-pocket 

cost. 

• Preferred provider organizations (PPO), which have defined provider 

networks and no requirement that beneficiaries obtain referrals for 

care. Beneficiaries enrolled in PPOs can use non-network providers, 

but at a higher out-of-pocket cost than in-network providers. 

• Provider sponsored organizations (PSO), which doctors, hospitals, or 

other Medicare providers operate rather than a health insurance 

company. The providers that operate the PSO furnish the majority of 

the health care and share in the financial risk of providing the health 

care to the beneficiaries enrolled in the plan. 

Page 5 GAO-10-185 Medicare Cost Plans
 

• Regional PPOs, which have a service area comprising 1 or more of 26 

state-level or multistate-level CMS-defined regions. Regional PPOs are also 

CCPs. 

• Special needs plans exclusively or disproportionately enroll special needs 

individuals. Special needs individuals are beneficiaries who are 

institutionalized, eligible for both Medicare and Medicaid, or have a 

disability or chronic condition.9

 Special needs plans can be any type of 

CCP. 

• Private fee-for-service (PFFS) plans, which are local plans that are not 

required to have a contracted provider network as long as they pay willing 

providers at least the Medicare FFS rate.10

MA benefit packages may include Medicare Part D coverage; however, all 

CCPs must offer at least one benefit package with Part D coverage. 

 

9

Medicaid is a joint federal-state program that finances health care for certain categories of 

low-income individuals, including children, families, persons with disabilities, and persons 

who are elderly. 

10Beginning in 2011, PFFS plans will be required to form contracted networks of providers 

in areas that have at least two available network-based plans (such as an HMO or PPO). In 

areas with fewer than two network-based plans, PFFS plans not sponsored by employers 

or union groups will continue to have the option of operating without networks if they pay 

providers at Medicare FFS rates or higher. A network-based plan is defined as (1) an MA 

plan that is a CCP, (2) a cost plan, or (3) a network-based Medical Savings Account plan. 

Beneficiaries in a Medical Savings Account plan receive annual deposits from CMS into an 

interest-bearing account to help them cover their health care costs until they have reached 

their plan’s deductible, after which the plan is responsible for all Medicare-covered costs. A 

network-based plan does not include regional PPOs that do not meet provider access 

standards through written contracts. 

Page 6 GAO-10-185 Medicare Cost Plans
 

CMS pays cost plans the reasonable cost of the Medicare-covered services 

they furnish directly to, or arrange for, Medicare beneficiaries enrolled in 

their plan, less the value of the deductible and coinsurance.11 In addition to 

the costs directly related to the provision of health services, CMS also pays 

reasonable costs associated with operating a health plan, such as 

marketing, enrollment, and membership expenses. Cost plans receive an 

advance interim payment per member per month based on the cost plan’s 

estimated reimbursable costs. CMS and the cost plans make adjustments 

after the contract period to align the payments with the actual costs 

incurred following the plan’s submission of an independently certified cost 

report that details cost, utilization, and enrollment data for the entire 

contract period. 

Medicare Cost Plans 

As of December 2009, 18 organizations operated 22 cost plans, with 

enrollments ranging from 50 to 74,190. Of the 22 cost plans, 15 were open 

to enrollment. Nonprofit organizations operated 17 of the 22 cost plans. 

(See app. I for a list of the organizations that offer cost plans.) Eight cost 

plans offered Part D coverage in 2009.12 Cost plans served at least one 

county in 16 states and the District of Columbia in 2009.13 Cost plans were 

most prevalent in Minnesota, where 3 cost plans operated across most of 

the state.14 (See fig. 1.) 

 

11The cost plan may charge Medicare enrollees for these costs in the form of premiums, 

copayments, or similar charges. 

12Cost plans may, but are not required to, offer Part D coverage. 

13Throughout the rest of this report, we will use the term states as inclusive of the District 

of Columbia. 

14Minnesota cost plan enrollment in June 2009 accounted for about 36 percent of cost plan 

enrollment nationwide. 

Page 7 GAO-10-185 Medicare Cost Plans
 

Figure 1: Counties Served by Medicare Cost Plans, 2009 

Source: GAO analysis of CMS data.

No cost plans

One cost plan

Two cost plans

Three cost plans

Congress acted to curtail the expansion of cost plans multiple times. The 

BBA provided that upon enactment, with few exceptions, the Secretary of 

Health and Human Services could not enter into any new cost plan 

contracts and could not extend or renew a cost plan contract beyond 

Page 8 GAO-10-185 Medicare Cost Plans
 

December 31, 2002.15 Subsequent laws modified the circumstances under 

which existing cost plans could continue to operate. The MMA, for 

example, allowed existing cost plans to be extended indefinitely, with the 

exception that, beginning January 1, 2008, the Secretary could no longer 

renew or extend contracts for cost plans serving an area that for the 

previous year was also served by two or more regional CCPs or two or 

more local CCPs and that also met specified enrollment thresholds.16 A 

cost plan would only be required to leave the counties within its service 

area that were also served by the CCPs. Most recently, MIPPA extended 

the exception provision to January 1, 2010, meaning cost plans affected by 

this provision would close at the beginning of calendar year 2011. MIPPA 

also requires that the qualifying CCPs used to determine whether the cost 

plan must close must be offered by more than one organization (see fig. 2). 

Separately, CMS requires organizations operating cost plans to close their 

cost plans to new enrollment if they open an MA plan in the same service 

area. 

 

15Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4002(b), 111 Stat. 251, 328-329. 

Section 1833 health care prepayment plans, which are employer- or union-sponsored 

Medicare managed care plans that provide or arrange for some or all Medicare Part B 

benefits on a prepayment basis, were allowed to convert to a Medicare cost plan. 

16To be considered a CCP with sufficient enrollment, the CCP must, with respect to any 

portion of the area involved that is within a MSA with a population of more than 250,000 

and counties contiguous to such MSA, enroll at least 5,000 individuals. MIPPA further 

provides that if the service area includes a portion in more than one MSA with a population 

of more than 250,000, the minimum enrollment determination shall be made with respect to 

each MSA. With respect to any other portion of such service area, the CCP must enroll at 

least 1,500 individuals. PFFS plans are not CCPs. 

Page 9 GAO-10-185 Medicare Cost Plans
 

Figure 2: Time Line of Legislation Related to Medicare Cost Plans 

0

50

100

150

200

250

300

350

400

1994199319921991199019891988198719861985 200920082007200620052004200320022001200019991998199719961995

Cost plan enrollment (in thousands)

Year

Source: GAO analysis.

Cost plan program 

begins, as authorized 

by the Tax Equity and 

Fiscal Responsibility 

Act of 1982 (TEFRA).

Balanced Budget Act of 1997:

With few exceptions, no new cost 

contracts are allowed. Existing cost 

plans cannot be extended or renewed 

beyond December 31, 2002.

Medicare, Medicaid, and SCHIP Benefits

Improvement and Protection Act of 2000:

Existing cost plans not allowed to expand their 

service area after September 1, 2003.

Medicare, Medicaid, and State Children’s

Health Insurance Program Balanced 

Budget Refinement Act of 1999:

Existing cost plans are provided an 

extension to December 31, 2004.

Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003: Authorized extensions and 

renewals of cost plans indefinitely, but, beginning January 1, 

2008, cost plans cannot be extended or renewed if two or 

more regional or local MA plans of sufficient size served that 

service area.

Medicare, Medicaid, and SCHIP 

Extension Act of 2007: Cost plans

can not be extended or renewed on or 

after January 1, 2009, if sufficient MA 

competition exists in the service area.

Medicare Improvements for 

Patients and Providers Act of 

2008: Cost plans can not be 

extended or renewed after 

January 1, 2010, if sufficient MA 

competition exists in the service 

area. 

Note: TEFRA authorized Section 1876 cost plans, which we refer to as cost plans. Medicare began 

contracting with health plans on a cost-reimbursement basis in the 1970s. 

Based on 2009 enrollment information through December, CMS’s 

preliminary estimates were that 7 of the 22 cost plans would need to 

withdraw from some or all of their 2009 service area in 2011.17 Three of the 

7 cost plans would need to withdraw from their entire service area. All 3 of 

these plans already were closed to new enrollment in 2009. In total, CMS 

estimated that approximately 8,000 beneficiaries enrolled in cost plans, or 

about 3 percent of total cost plan enrollment, are in counties where their 

 

17CMS excluded special needs plans and employer group health plans that are not open to 

enrollment by non-employer group members from the CCPs considered to be available MA 

plans for the purposes of its analysis. CMS analyzed MA competitor enrollment at the 

benefit package level to determine which cost plans would need to discontinue serving 

portions of their service area in 2011. 

Page 10 GAO-10-185 Medicare Cost Plans
 

cost plan must discontinue service in 2011. (See app. II for a list of the cost 

plans that would likely be affected by the MIPPA provision.) 

All beneficiaries enrolled in cost plans had multiple MA options available 

to them. Nearly 100 percent of beneficiaries enrolled in cost plans had 

at least 5 MA plans serving their county in June 2009, and more than 

57 percent had a choice of 15 or more MA plans (see fig. 3). About 

10 percent of beneficiaries enrolled in cost plans had no local CCPs in 

their county, which is the MA plan type with the highest enrollment. Two 

cost plans, located in Colorado and Texas, enrolled about 90 percent of 

the beneficiaries without a local CCP plan option. 

Beneficiaries in Cost 

Plans Had Multiple 

MA Options 

Figure 3: Number of MA Plans Available to Beneficiaries Enrolled in Cost Plans, as 

of June 2009 

Note: We conducted this analysis at the contract level. Within each contract, an organization may 

offer one or more benefit packages. The number of options would be greater if we conducted the 

analysis at the benefit package level. 

Source: GAO analysis of CMS data.

15+ plans

10.5%

32.1%

57.3%

0.1 %

1−4 plans

5−9 plans

10−14 plans

About 10 percent of beneficiaries in cost plans were in counties without 

an HMO, about 62 percent were in counties without a local PPO, and about 

8 percent were in counties without a regional PPO. Approximately 

42 percent of beneficiaries enrolled in a cost plan were in counties with 

five or more MA HMOs. All beneficiaries enrolled in a cost plan could 

enroll in a PFFS plan in June 2009. (See table 1.) 

Page 11 GAO-10-185 Medicare Cost Plans
 

Table 1: Percentage of Beneficiaries Enrolled in Cost Plans Who Have Access to 

Medicare Advantage (MA) Plans, by MA Plan Type, June 2009 

Percentage of beneficiaries enrolled in cost plans 

Number of MA 

options within 

plan type 

HMOs 

available

PPOs 

available

PSOs 

available 

Regional 

PPOs 

available

PFFS 

plans 

available

0 10.2 62.3 100.0 7.9 0.0

1-4 47.5 31.3 0.0 92.2 4.4

5-9 17.5 6.4 0.0 0.0 87.9

10-14 24.1 0.0 0.0 0.0 7.7

15+ 0.7 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0 100.0

Source: GAO analysis of CMS data. 

Note: Some percentages may not add to 100 because of rounding. We conducted this analysis at the 

contract level. Within each contract, an organization may offer one or more benefit packages. The 

number of options would be greater if we conducted the analysis at the benefit package level. 

Some of the differences between cost plans and MA plans that affect 

beneficiaries involve out-of-network coverage, enrollment periods, and 

prescription drug coverage. Cost plans generally scored higher than 

competing MA plans on the quality scores CMS reports, and their 

estimated out-of-pocket costs compared to competing MA plans and FFS 

varied by health status. 

Cost Plan Quality 

Scores Higher Than 

MA Plans While 

Estimated Out-ofPocket Costs Vary by 

Health Status 

Cost Plan Structure Differs 

from MA Plans and 

Medicare FFS 

Cost plans differ structurally from MA plans and Medicare FFS in several 

ways, including enrollment periods, out-of-network coverage, and 

prescription drug coverage. For example, cost plans that are open to 

enrollment must have an open enrollment period of at least 30 consecutive 

days annually, and some cost plans choose to allow new enrollment all 

year. Beneficiaries enrolled in cost plans may disenroll at any time. In 

contrast, beneficiaries enrolled in an MA plan can join, switch, or drop 

plans, or join FFS, only during certain specified enrollment periods. 

Beneficiaries enrolled in cost plans who receive Medicare-covered 

services out of network are covered by Medicare FFS. These services are 

therefore subject to Medicare FFS coinsurance and deductibles. Out-ofnetwork coverage varies among MA plans according to plan type, but if 

offered, it is covered by the MA plan, not Medicare FFS. Medicare FFS 

Page 12 GAO-10-185 Medicare Cost Plans
 

beneficiaries can receive services from any provider that accepts 

Medicare. 

Beneficiaries enrolled in cost plans may obtain Medicare prescription drug 

coverage by enrolling in any stand-alone Part D plan or a Part D plan 

offered by the cost plan sponsor. Beneficiaries enrolled in MA plans must 

choose a Part D plan offered by the MA plan sponsor. Beneficiaries 

enrolled in PFFS plans also must choose a Part D plan offered by the PFFS 

sponsor, unless the sponsor does not offer one, in which case beneficiaries 

can choose any Part D Plan. Beneficiaries enrolled in FFS may choose any 

Part D plan. For additional information about structural differences 

between cost plans, MA plans, and Medicare FFS, see appendix III. 

Cost Plan Quality Scores 

Generally Higher Than 

Competitor MA Plans 

Our analysis of CMS quality scores found that cost plans’ quality scores, on 

average, were higher than the average of competing MA plans. All 12 of the 

cost plans with plan summary scores, based on a scale of 1 (poor quality) 

to 5 (excellent quality), were rated higher than or the same as their MA 

competitors in the county with the cost plan’s highest enrollment.18 These 

12 cost plans enrolled about 202,500 beneficiaries, or about 70 percent of 

the total cost plan enrollment nationwide. (See fig. 4.) 

 

18CMS only reports data for managed care plans that have operated for a full year and meet 

minimum enrollment criteria. Therefore, not all cost plans and competitor plans have a 

plan summary score. We did not report comparisons for cost plans without a plan summary 

score, and we excluded competitor plans without plan summary scores from our analysis. 

Page 13 GAO-10-185 Medicare Cost Plans
 

Figure 4: 2007 Plan Summary Scores for Cost Plans Compared with Those for MA Competitors 

Plan summary score

Contract

Source: GAO analysis of CMS data.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Enrollment-weighted MA competitor’s average score

Cost plan score

Plan 1 Plan 2 Plan 3 Plan 4 Plan 5 Plan 6 Plan 7 Plan 8 Plan 9 Plan 10 Plan 11 Plan 12

Cost plan score

Enrollment-weighted MA competitor’s average score

4.5

4.0

3.5

4.0 4.0 4.0 4.0

4.5 4.5

3.5 3.5 3.5

2.4 2.3 2.4

2.9

3.6 3.6

2.2

3.2

2.3

2.5

3.5

2.2

Note: Cost plan and competitor scores are based on the counties with the cost plan’s highest 

enrollment. CMS computes these scores at the contract level based on reported information from the 

Health Effectiveness Data and Information Set (HEDIS), a tool that is used by health plans to 

measure performance on dimensions of care; the Consumer Assessment of Healthcare Providers 

and Systems (CAHPS), which is a group of surveys that asks consumers and patients to report on 

and evaluate their experiences with healthcare; and appeals data. Ratings for competitors are an 

enrollment-weighted average. CMS only reports data for managed care plans that have been 

operational for a full year and meet minimum enrollment criteria. Therefore, not all cost plans and 

competitor plans have a plan summary score. Plans without plan summary scores were excluded 

from the analysis. Data for 2007 were the most recent available. 

The majority of cost plans had higher scores than their MA competitors in 

each of the five quality dimensions that make up the plan summary score. 

For example, 15 of the 18 cost plans with a score for the dimension 

“Ratings of Health Plans Responsiveness and Care,” which includes ratings 

of beneficiary satisfaction with the plan, were rated higher than their MA 

competitors. Similarly, 17 of the 20 cost plans with a score for the 

dimension “Staying Healthy,” which includes how often beneficiaries got 

various screening tests, vaccines, and other check-ups, were rated higher 

than their competitors. The majority of cost plans also rated higher than 

their competitors in the other three quality dimensions reported by CMS. 

(See fig. 5.) 

Page 14 GAO-10-185 Medicare Cost Plans
 

Figure 5: Number of Cost Plans with Quality Scores Higher, the Same, or Lower 

than Competitors 

Quality dimension scores

Source: GAO analysis of CMS data.

-10 -5 0 5 10 15 20

-10 -5 0 5 10 15 20

Plans that scored higher than competitors

Plans that scored same as competitors

Plans that scored lower than competitors

Plan summary scoref

Staying healthy: screenings,

tests, and vaccinese

Getting timely care from

doctors and specialistsd

Ratings of health plan

responsiveness and carec

Managing chronic

(long-lasting) conditionsb

How well and quickly health

plans handled appealsa

Number of plans

Plans that scored lower than competitors

Plans that scored same as competitors

Plans that scored higher than competitors

2

3

3

7

2

0

1

1

1

5

12

15

11

17

11

10 5 0 5 10 15 20

Note: Cost plan and competitor scores are based on the counties with the cost plan’s highest 

enrollment. CMS computes these scores at the contract level based on reported information from the 

Health Effectiveness Data and Information Set (HEDIS), a tool that is used by health plans to 

measure performance on dimensions of care; the Consumer Assessment of Healthcare Providers 

and Systems (CAHPS), which is a group of surveys that asks consumers and patients to report on 

and evaluate their experiences with healthcare; and appeals data. Scores for competitors are an 

enrollment-weighted average. CMS only reports data for managed care plans that have been 

operational for a full year and meet minimum enrollment criteria or, in cases where an individual 

quality score reports on a subpopulation, a minimum number of beneficiaries within that 

subpopulation. Consequently, not all plans had scores for each quality dimension or plan summary 

scores. If the score for the cost plan was missing, we did not report a comparison. 

a

CMS calculates the score for this dimension by using individual measures regarding the plan’s ability 

to make timely decisions about appeals and their review of appeals decisions. 

b

CMS calculates the score for this dimension by using individual measures that include rates of 

osteoporosis management, diabetes care, and rheumatoid arthritis management. 

c

CMS calculates the score for this dimension by using individual measures that include beneficiary 

reports of their ability to get appointments and care quickly, overall health care quality, and doctors’ 

communication. 

d

CMS calculates the score for this dimension by using individual measures that include follow-up visit 

rates following hospital stays for mental illness, doctor follow up for depression, and beneficiary 

reports of their ability to get needed care without delays. 

e

CMS calculates the score for this dimension by using individual measures that include breast and 

colorectal cancer screening rates, diabetes care, osteoporosis testing, and administration of the 

annual flu vaccine. 

Page 15 GAO-10-185 Medicare Cost Plans
 

f

CMS calculates the plan summary score by averaging the individual measures and the five quality 

dimensions, as well as applying an integration factor that rewards plans for consistently high scores. 

Cost Plans’ Estimated 

Average Out-of-Pocket 

Costs Generally Lower for 

Beneficiaries Reporting 

Poor Health, Higher for 

Beneficiaries Reporting 

Good and Excellent Health 

In 2009, estimated average out-of-pocket costs in cost plans, MA plans, and 

Medicare FFS varied by the health status of beneficiaries. In general, 

beneficiaries 80 to 84 years old reporting poor health had lower estimated 

average out-of-pocket costs in cost plans compared to competitor MA 

plans and Medicare FFS, while beneficiaries in the same age group in cost 

plans reporting good or excellent health had higher estimated average outof-pocket costs.19 Specifically, we found estimated out-of-pocket costs for 

beneficiaries reporting poor health in 11 of the 12 cost plans without drug 

coverage to be lower than other MA options, on average, ranging from 69 

to 99 percent of the competitor MA plans.20 Similarly, beneficiaries 

reporting poor health in all of the cost plans without drug coverage had 

out-of-pocket costs that ranged from 67 to 92 percent of Medicare FFS. We 

also found out-of-pocket costs to be lower by similar amounts for 

beneficiaries in poor health in 4 of the 8 cost plans with drug coverage 

compared to other MA plans with drug coverage.21 (See fig. 6.) 

 

19The estimates of out-of-pocket costs are based on the reported utilization patterns of 

Medicare FFS beneficiaries who participated in the Medicare Current Beneficiary Survey. 

These utilization patterns are combined with price data and benefit package information to 

estimate beneficiary out-of-pocket costs in different age groups and self-reported health 

categories. We compared data for the 80-84 age group because industry representatives and 

CMS officials told us that beneficiaries enrolled in cost plans tend to be older than the 

average MA beneficiary. We excluded special needs plans from this analysis because their 

benefit packages may be tailored to the specific special needs population that each plan 

serves and may not be an appropriate alternative to beneficiaries in cost plans. 

20Eight cost plans did not submit plan benefit package information through CMS’s plan 

benefit package submission module and are therefore not included in this analysis. Of 

the remaining 14 plans, as of May 2009, 6 had enrollment only in benefit packages without 

Part D, 2 had enrollment only in benefit packages with Part D, and 6 had enrollment in 

benefit packages both with and without Part D. 

21As of June 2009, 65 percent of beneficiaries in cost plans had Part D coverage through 

their cost plan. 

Page 16 GAO-10-185 Medicare Cost Plans
 

Figure 6: Number of Cost Plans with Higher or Lower Estimated Out-of-Pocket 

Costs for 80- to 84-Year-Old Beneficiaries Reporting Poor Health, Compared with 

Competing MA Plans and Medicare FFS, 2009 

0

2

4

6

8

10

12

14

Cost plan’s out-of-pocket costs higher

Cost plan’s out-of-pocket costs lower

MA MA FFS 

Number of cost plans

Plans with

drug coverage

Plans without

drug coverage

11 12

4

1

4

Source: GAO analysis of CMS data.

Note: We compared the estimates for cost plan benefit packages without Part D coverage to 

competitor MA benefit packages without Part D coverage and to Medicare FFS for beneficiaries 80 to 

84 years old reporting poor health. Out-of-pocket cost data are available for six different age groups. 

We chose the 80 to 84 age group because industry representatives and CMS officials told us that 

beneficiaries enrolled in cost plans tend to be older than the average MA beneficiary. We did not 

compare the estimates for cost plan benefit packages with Part D to FFS because the FFS estimate 

assumes no drug coverage. We weighted estimates for both cost plans and MA plans according to 

their enrollment throughout the cost plan’s service area. Eight cost plans did not submit plan benefit 

package information through CMS’s plan benefit package submission module and are therefore not 

included in this analysis. Of the remaining 14 plans, as of May 2009, 6 had enrollment only in benefit 

packages without Part D, 2 had enrollment only in benefit packages with Part D, and 6 had enrollment 

in benefit packages both with and without Part D. 

For 80- to 84-year-old beneficiaries reporting good and excellent health in 

8 of the 12 cost plans without drug coverage, we found estimated out-ofpocket costs, on average, that were 5 to 37 percent higher than in 

competing MA plans without drug coverage. Beneficiaries in the same age 

category reporting good health in 6 of the 12 cost plans without drug 

coverage had, on average, higher out-of-pocket costs than FFS, and 

beneficiaries reporting excellent health in 11 of the 12 cost plans had 

higher estimated out-of-pocket costs than FFS. Similarly, for beneficiaries 

Page 17 GAO-10-185 Medicare Cost Plans
 

reporting good and excellent health in 7 of the 8 cost plans with drug 

coverage, the estimated out-of-pocket costs were 6 to 36 percent higher 

than competitor MA plans with drug coverage. 

Figure 7: Number of Cost Plans with Higher or Lower Estimated Out-of-Pocket 

Costs for 80- to 84-Year-Old Beneficiaries Reporting Good and Excellent Health, 

Compared with Competing MA Plans and Medicare FFS, 2009 

0

2

4

6

8

10

12

14

Cost plan’s out-of-pocket costs higher

Cost plan’s out-of-pocket cost the same

Cost plan’s out-of-pocket costs lower

MA MA FFS

Beneficiaries reporting good health

Plans with

drug coverage

Plans without

drug coverage

4

2

6

4

1

8

7

0

2

4

6

8

10

12

14

Cost plan’s out-of-pocket costs higher

Cost plan’s out-of-pocket cost the same

Cost plan’s out-of-pocket costs lower

MA MA FFS

Beneficiaries reporting excellent health

Plans with

drug coverage

Plans without

drug coverage

1

11

4

1

8

7

Source: GAO analysis of CMS data.

Note: We compared the estimates for cost plan benefit packages without Part D Coverage to 

competitor MA benefit packages without Part D coverage and to Medicare FFS for beneficiaries 80 to 

84 years old reporting good and excellent health. Out-of-pocket cost data are available for six 

different age groups. We chose the 80 to 84 age group because industry representatives and CMS 

officials told us that beneficiaries enrolled in cost plans tend to be older than the average MA 

beneficiary. We did not compare the estimates for cost plan benefit packages with Part D to FFS 

because the FFS estimate assumes no drug coverage. We weighted estimates for both cost plans 

and MA plans according to their enrollment throughout the cost plan’s service area. Eight cost plans 

did not submit plan benefit package information through CMS’s plan benefit package submission 

module and are therefore not included in this analysis. Of the remaining 14 plans, as of May 2009, 6 

had enrollment only in benefit packages without Part D, 2 had enrollment only in benefit packages 

with Part D, and 6 had enrollment in benefit packages both with and without Part D. 

Page 18 GAO-10-185 Medicare Cost Plans
 

In June 2009, 9 of the 18 organizations offering cost plans also offered MA 

plans in some or all of their cost plans’ service area, which demonstrates 

that these organizations were capable of bearing financial risk. (See 

table 2.) These 9 organizations operated a total of 12 cost plans. The 

combined enrollment in these 12 cost plans in June 2009 was 124,467, or 

43 percent of all beneficiaries in cost plans. Seven of the 12 cost plans 

enrolled fewer than 2,000 beneficiaries, and 2 of the plans enrolled more 

than 30,000 beneficiaries. Of the 9 organizations that offered both cost 

plans and MA plans, 1 organization’s only MA plan was a special needs 

plan. Special needs plans exclusively or disproportionately enroll special 

needs individuals, so these plans may not be an appropriate option for the 

beneficiaries enrolled in this organization’s cost plan. 

Half of Organizations 

Offering Cost Plans 

Also Offered MA 

Plans 

Table 2: Organizations That Offered Cost Plans and MA Plans, June 2009 

Organization offered a cost plan 

and also offered 

Number of 

organizations 

Percentage of 

organizations 

with cost plan 

Percentage 

of total 

beneficiaries 

enrolled in 

cost plans 

No MA plan 9 50 57

1 or more MA plan(s) 9 50 43

Total 18 100 100

Source: GAO analysis of CMS data. 

Note: For this analysis, we counted all the MA plans (local HMOs, local PPOs, local PSOs, regional 

PPOs, PFFS plans, and MA special needs plans) under each organization. In some situations we 

also counted the MA plans under each parent organization. This determination of whether to count 

MA plans offered by the parent organization was based on the information provided by cost plan 

representatives we interviewed and verified by CMS reports and the organizations’ Web sites. 

All eight organizations offering both cost plans and MA plans that were not 

special needs plans operated at least one MA plan in some or all of their 

cost plan’s service area. Seven operated at least one MA plan in their cost 

plan’s entire service area and one operated at least one MA plan in part of 

their cost plan’s service area. CMS requires that organizations that offer an 

MA plan in the same service area as their cost plan close the cost plan to 

new enrollment. However, officials from CMS stated that there are some 

exceptions to this requirement. For instance, some organizations were 

able to keep their cost plan open to enrollment because the units of the 

organization that contracted with CMS were two distinct entities. The 

officials stated that they may inspect these organizations to ensure that 

they do not share beneficiary information across companies and do not 

route certain beneficiaries into different plans to maximize their profits. 

Page 19 GAO-10-185 Medicare Cost Plans
 

The Medicare managed care enrollment composition for the eight 

organizations that operated both a cost plan and an MA plan that were not 

special needs plans varied.22 All eight of these organizations had a total 

enrollment, including both their cost plan enrollment and MA enrollment, 

of at least 3,000 beneficiaries. Four of the eight organizations enrolled 

more than 95 percent of their total Medicare managed care enrollment in 

their MA plans. Another organization’s Medicare managed care enrollment 

was fairly evenly split between its MA plan and cost plan. The remaining 

three organizations had more than 75 percent of their Medicare managed 

care enrollment in their cost plan. Six of the 11 MA plans offered by 

organizations that offered both cost plans and MA plans were local HMOs 

(see table 3). 

Table 3: Types of MA Plans Offered by Organizations That Offer Cost Plans and MA 

Plans, June 2009 

Type of MA plan Number of organizations offering each plan type

Local HMOs 6

Local PSO 1

Local PPOs 1

PFFS plans 2

Regional PPOs 1

Source: GAO analysis of CMS data. 

Note: Special needs plans are not included in this analysis.Three of the organizations offered two 

different types of MA plans and were counted in this table under each plan type. 

Officials from organizations that offered cost plans cited potential future 

changes to MA payments and difficulty assuming financial risk as concerns 

about converting cost plans to MA plans. Officials also expressed concerns 

about the potential disruption to beneficiaries that could be caused by 

transferring beneficiaries in cost plans to an MA plan. 

Financial and 

Beneficiary Transition 

Issues Cited as 

Concerns Regarding 

Conversion to MA 

Plans 

 

22Medicare managed care enrollment includes local HMOs, local PSOs, local PPOs, PFFS 

plans, regional PPOs, and cost plans open to individuals. 

Page 20 GAO-10-185 Medicare Cost Plans
 

Officials from organizations that offered cost plans reported that potential 

changes to MA payments were a significant concern in their decision 

about whether to convert their cost plans to MA plans. Officials from 13 of 

the 18 organizations that offered cost plans identified past payment 

changes in the Medicare risk programs and the potential for future 

payment changes in the MA program as making the decision to convert 

difficult, though 6 of these organizations offered an MA plan in some or all 

of their cost plan’s service area in 2009. For instance, officials from one 

organization who told us that they would prefer to convert their cost plan 

to an MA plan, said they have not done so because of concerns future MA 

payment changes may then necessitate closing the plan. Recent 

congressional and administration proposals have called for slowing the 

increase in or reducing MA payments. 

Organizations Cited MA 

Payment Rates and 

Financial Risk as Concerns 

to Becoming MA Plans 

Officials from some organizations said that the size of their enrollment 

was insufficient to manage the financial risk associated with the MA 

program. Officials from 5 of the 18 organizations that offered cost plans 

stated that their enrollment was too low to spread financial risk. For 

example, an official from 1 of these 5 organizations stated that, because of 

the plan’s location in a rural area, its enrollment would never be large, and 

its cost plan could not take on the financial risk. This official told us that a 

few high-cost beneficiaries would consume the payments the plan would 

receive from CMS. In June 2009, the cost plan enrollment levels for these 5 

organizations ranged from fewer than 500 beneficiaries to about 37,000 

beneficiaries.23 Despite the concerns of these 5 organizations, we found 

that plans of equivalent size were able to operate in the MA program. 

Nationwide, 130 MA plans, or about 21 percent of all MA plans, enrolled 

fewer than 500 beneficiaries, and 69 percent of MA plans enrolled from 501 

to 37,000 beneficiaries. Eleven percent of MA plans enrolled more than 

37,000 beneficiaries.24 According to CMS officials, after 3 years of 

operation, MA organizations should be able to meet the agency’s 

enrollment threshold of 1,500 in rural areas and 5,000 in urban areas. 

However, these officials noted that the total enrollment can include 

enrollment from other lines of business if the enrollment is with the same 

legal entity that holds the contract with CMS. 

 

23One of these five organizations also operates an MA special needs plan. The other four do 

not operate any MA plans. 

24Percentages do not equal 100 because of rounding. 

Page 21 GAO-10-185 Medicare Cost Plans
 

Officials from 3 of the 18 organizations that offered cost plans expressed 

concern about meeting risk-based capital (RBC) requirements, should they 

be required to convert to an MA plan.25 An official from the Medicare Cost 

Contractors Alliance also expressed concern about the ability of some 

organizations that offered cost plans to raise RBC in the event of a 

required conversion to an MA plan. The official noted that nonprofit 

organizations operate most cost plans, and some of these organizations 

have reservations about their ability to raise additional capital. NAIC 

officials confirmed that if an organization converted a cost plan to an MA 

plan, thus assuming more financial risk, the organization would probably 

need to raise more capital, though the extent of capital needed would 

depend on the size of the organization and how much of the organization’s 

business was dependent on Medicare enrollment. Two of the three 

organizations that reported concerns about RBC did not have an MA plan 

in June 2009. The third organization operated at least one MA plan, but 

nearly 85 percent of the organization’s Medicare managed care enrollment 

was in its cost plan. 

Cost Plans Cited Concerns 

about Transitioning 

Beneficiaries 

Officials from more than half of the 18 organizations with cost plans stated 

they were concerned about the potential disruption to beneficiaries if they 

were required to convert to a MA plan. Some of these officials noted that 

the beneficiaries enrolled in their cost plan(s) would not understand the 

process and would default to Medicare FFS. Officials from two 

organizations with closed cost plans stated that they have tried in the past 

to transfer the beneficiaries enrolled in their cost plan into the 

organization’s MA plan, but had trouble convincing beneficiaries to change 

plans. 

In general, if an organization decided to convert a cost plan to an MA plan, 

the organization would need to close the cost plan and open a new MA 

plan, if the organization did not already have one. Beneficiaries who wish 

to enroll in an MA plan offered by the organization that offered their cost 

plan must affirmatively enroll in the organization’s MA plan. Those who do 

 

25RBC refers to the minimum amount of capital an insurer should hold in order to ensure 

that it can pay its obligations. The NAIC established a formula to calculate RBC that takes 

into account the risk profile and size of a plan. Generally, the more risk a health insurer 

takes on, the more RBC the health insurer needs in reserve. Based on NAIC’s model law, if 

a health insurer has less than 150 percent of the RBC required by the formula, a state 

insurance regulator may begin taking action to require the insurer to raise its capital 

reserves. 

Page 22 GAO-10-185 Medicare Cost Plans
 

not choose a plan—whether unintentionally or by design—will be enrolled 

by default in Medicare FFS. 

CMS does have a standard process in place to alert beneficiaries when 

their MA or cost plan discontinues serving the beneficiaries’ area. CMS 

requires cost plans that discontinue serving an area to notify each 

Medicare beneficiary enrolled in the plan by mail at least 60 days prior to 

the end of the contract period and notify the general public at least 30 days 

prior to the end of the contract period. CMS stated that they would 

strongly suggest that the cost plans adhere to the more stringent MA 

requirements regarding plan closures, which require the organization 

offering the plan to notify each Medicare beneficiary enrolled in the plan 

at least 90 days before it stops operating by sending a CMS-approved 

notice to beneficiaries describing available alternatives for obtaining 

Medicare services within the service area, including MA plans and 

Medicare FFS. The organization also must publish a notice in one or more 

local newspapers at least 90 days before the end of the calendar year to 

alert the public. 

We provided a draft of this report to CMS and the Medicare Cost 

Contractors Alliance. CMS provided us with technical comments, which 

we have incorporated as appropriate, and representatives from the 

Medicare Cost Contractors Alliance provided us with oral comments. 

Agency and Other 

External Comments 

Medicare Cost Contractors 

Alliance Comments 

Officials from the Medicare Cost Contractors Alliance stated that it was 

important to know whether cost plans were open or closed to enrollment 

in our discussion of competitors and the discussion of organizations 

offering both cost plans and MA plans. Information on the enrollment 

status of cost plans is provided in appendices I and II. The Medicare Cost 

Contractors Alliance officials also stated that cost plans have been in the 

Medicare managed care market significantly longer than most MA plans 

and it is this experience that has led the organizations to be weary of 

potential payment changes to the MA program. In addition, the Medicare 

Cost Contractors Alliance officials provided technical comments, which 

we incorporated as appropriate. 

We are sending copies of this report to the Administrator of CMS and 

other interested parties. In addition, this report will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

Page 23 GAO-10-185 Medicare Cost Plans
 

If you or your staff have any questions about this report, please contact me 

at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

James C. Cosgrove 

listed in appendix IV. 

Director, Health Care 

Page 24 GAO-10-185 Medicare Cost Plans
Appendix I: Organizations That Offer Appendix I: Organizations That Offer Medicare Cost Plans 

Medicare Cost Plans 

As of December 2009, 18 organizations operated 22 cost plans, with 

enrollments ranging from 50 to 74,190. Of the 22 cost plans, 15 were open 

to enrollment. Nonprofit organizations operated 17 of the 22 cost plans. 

Table 4: Organizations That Offer Medicare Cost Plans 

Organization 

States 

served 

Number of cost 

contracts

Open/closed 

enrollmenta

Corporate status 

Total enrollment 

as of 

December 2009

Blue Cross Blue Shield of 

Minnesota 

MN 1 Open Nonprofit 791

Clarian Health Plans, Inc. IN 1 Open For-Profit 4,807

Colorado Choice Health Plans CO 1 Open Nonprofit 547

Contra Costa Health Plan CA 1 Closed Nonprofit 578

Dean Health Plan, Inc. WI 1 Open For-Profit 13,417

Excellus Health Plans, Inc. NY 2 Closed Nonprofit 2,736

Group Health, Inc. 

(HealthPartners, Inc.) 

MN, WI 1 Open Nonprofit 36,676

Hawaii Medical Service 

Association 

HI 1 Open Nonprofit 36,107

Heart of America HMO ND 1 Open Nonprofit 454

HIP of Greater New York NY 1 Closed Nonprofit 1,248

Kaiser Foundation Health 

Plan of the Mid Atlantic States 

DC, MD, VA 1 Open Nonprofit 37,680

Kaiser Foundation Health 

Plan, Inc. 

CA, HI 3 Closed Nonprofit 4,445

Kaiser Foundation Health 

Plan, Inc. of Ohio 

OH 1 Open Nonprofit 19,680

Medica Insurance Company MN, ND, 

SD, WI 

1 Open For-Profit 74,190

Medical Associates Clinic IA, IL, WI 2 Open For-Profit/Nonprofitb10,562

Rocky Mountain Health 

Maintenance Organization 

CO, WY 1 Open Nonprofit 21,813

Scott and White Health Plan TX 1 Open Nonprofit 23,526

Welborn Health Plan IN 1 Open For-Profit 1,502

Source: GAO analysis of CMS data. 

a

CMS requires organizations operating cost plans to close their cost plans to new enrollment if they 

open an MA plan in the same service area. 

b

Medical Associates Clinic operated two cost plans. The plan that served Iowa and Illinois operated 

as a for-profit organization and the plan that served Wisconsin operated as a nonprofit organization. 

Page 25 GAO-10-185 Medicare Cost Plans 
Appendix II: Organizations That Would Likely 

Be Affected by Medicare Improvements for Appendix II: Organizations That Would Likely Patients and Providers Act of 2008 Provision 

Be Affected by Medicare Improvements for 

Patients and Providers Act of 2008 Provision 

The Medicare Improvements for Patients and Providers Act of 2008 

(MIPPA) provides that, the Secretary of Health and Human Services would 

not extend or renew cost plan contracts for service areas where, during 

the entire previous year, two or more regional coordinated care plans 

(CCP) or two or more local CCPs were offered by different organizations, 

if the MA plans met specified enrollment thresholds. Private fee-for-service 

plans are not CCPs. 

Table 5: Preliminary Centers for Medicare & Medicaid Services (CMS) Estimates of the Cost Plans and Percentage of Cost 

Plan Enrollment Likely Affected by MIPPA Provision 

Organization States Served

Total enrollment 

in organization’s 

cost plan as of 

December 2009

Percentage of 

total cost plan 

enrollment 

affected 

Open/closed 

enrollmentb 

Contra Costa Health Plan CA 578 100 Closed 

Excellus Health Plans, IncaNY 2,686 100 Closed 

Excellus Health Plans, IncaNY 50 100 Closed 

HIP Of Greater New York NY 1,248 93 Closed 

Kaiser Foundation Health Plan, IncaCA 958 98 Closed 

Kaiser Foundation Health Plan, Inca CA 3,224 68 Closed 

Rocky Mountain Health Maintenance Organization CO, WY 21,813 17 Open 

Source: CMS. 

Note: CMS excluded special needs plans and employer group health plans that are not open to 

enrollment by non-employer group members from the CCPs considered to be available MA plans for 

the purposes of its analysis. CMS analyzed MA competitor enrollment at the benefit package level to 

determine which cost plans would need to discontinue serving portions of their service area in 2011. 

By analyzing at this level rather than at the contract level, it is likely that fewer competitors would 

have sufficient enrollment to meet the thresholds because enrollment in a contract would be divided 

among the benefit packages offered under a contract. 

a

Excellus Health Plans, Inc, and Kaiser Foundation Health Plan, Inc. operated more than one cost 

plan that will likely be affected by the MIPPA provision regarding the extension of cost plan contracts. 

b

CMS requires organizations operating cost plans to close them to new enrollment if the organization 

opens an MA plan in the same service area. 

Page 26 GAO-10-185 Medicare Cost Plans
Appendix III: Structural Differences among 

Cost Plans, MA Plans, and Medicare FFS for Appendix III: Structural Differences among Beneficiaries 

Cost Plans, MA Plans, and Medicare FFS for 

Beneficiaries 

Coordinated Care Plans 

Cost plan 

Medicare 

Advantage (MA) 

Preferred Provider 

Organization (PPO)

(Local & Regional) 

MA Health 

Maintenance 

Organization 

(HMO) 

MA Private FeeFor-Service (PFFS) 

plan 

Medicare Fee-ForService (FFS) 

Enrollment period Cost plans that are 

open to enrollment 

must have an open 

enrollment period of 

at least 30 

consecutive days 

annually. 

When beneficiary 

becomes eligible for 

Medicare, during the 

Annual Election 

Period (AEP), the 

MA Open Enrollment 

Period (MA OEP), or 

a Special Enrollment 

Period (SEP).a

When beneficiary 

becomes eligible for 

Medicare, during the 

AEP, the MA OEP, 

or a SEP.a

When beneficiary 

becomes eligible for 

Medicare, during the 

AEP, the MA OEP, 

or a SEP.a

When beneficiary 

becomes eligible for 

Medicare, during the 

general enrollment 

period of January 1st 

to March 31st of 

each year, or during 

a SEP.a

Disenrollment Beneficiary may 

disenroll at any time 

and return to FFS. 

In most cases, 

beneficiary must 

stay enrolled for the 

calendar year in 

which coverage 

begins.b

 

In most cases, 

beneficiary must 

stay enrolled for the 

calendar year in 

which coverage 

begins.b

In most cases, 

beneficiary must 

stay enrolled for the 

calendar year in 

which coverage 

begins.b

In most cases, 

beneficiary must 

stay enrolled until 

next AEP or MAOEP. 

Online enrollment Not available Available Available Available Not applicable 

Out-of-network 

coverage 

Through Medicare 

FFS; beneficiary is 

responsible for FFS 

coinsurance and 

deductibles.c

Services received 

out of network will 

generally cost more, 

but they are covered 

by the plan.c

Beneficiary generally 

responsible for full 

cost of out-ofnetwork services, 

however some plans 

may cover certain 

services out of 

network at a higher 

cost.c

Any Medicareapproved provider 

that accepts the 

plan’s terms.d

Any provider that 

accepts Medicare. 

Part D coverage Any stand-alone 

Medicare 

Prescription Drug 

Plan (PDP) or PDP 

offered by the cost 

plan organization. 

A Part D plan offered 

by the MA 

organization. 

A Part D plan offered 

by the MA 

organization. 

A PDP offered by 

the PFFS 

organization. If the 

organization does 

not offer a PDP plan, 

beneficiaries can 

choose any PDP. 

Any PDP. 

Initial appealseSubject to cost 

plan’s internal 

appeal process. 

Subject to MA plan’s 

internal appeal 

process. 

Subject to MA plan’s 

internal appeal 

process. 

Subject to MA plan’s 

internal appeal 

process. 

Subject to Medicare 

appeals process. 

Source: GAO. 

a

The Annual Election Period (AEP) is from November 15th to December 31st, the MA Open 

Enrollment Period (MA OEP) is from January 1st to March 31st, and Special Enrollment Periods 

(SEP) apply whenever a beneficiary meets certain criteria, such as moving out of their current plan’s 

service area. 

b

If the beneficiary moves out of the plan’s service area, has both Medicare and Medicaid, qualifies for 

the Part D low-income subsidy, or lives in an institution, they may be able to drop their plans at other 

times. 

Page 27 GAO-10-185 Medicare Cost Plans
Appendix III: Structural Differences among 

Cost Plans, MA Plans, and Medicare FFS for 

Beneficiaries 

c

The plan is responsible for certain services provided out of network, including emergency services. 

d

Beginning in 2011, all employer- or union-sponsored PFFS plans, and all nonemployer- or unionsponsored PFFS plans in areas that have at least two available network-based plans, (such as an 

HMO or PPO) must form contracted networks of providers. In areas with fewer than two networkbased plans, PFFS plans not sponsored by employer or union groups will continue to have the option 

of operating without networks if they pay providers at Medicare FFS rates or higher. 

e

Beneficiaries have the right to appeal coverage decisions. This chart relates to the first of the five 

levels of appeals. 

Page 28 GAO-10-185 Medicare Cost Plans
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 29 GAO-10-185 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

GAO Contact James C. Cosgrove, (202) 512-7114 or cosgrovej@gao.gov 

In addition to the contact above, Christine Brudevold, Assistant Director; 

Lori Achman; Julianne Flowers; Hannah Marston; Sarah Marshall; 

Elizabeth T. Morrison; and Amanda Pusey made key contributions to this 

report. 

 Medicare Cost Plans 

Staff 

Acknowledgments 

(290748) 
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