Medicare Demonstration PPOs: Financial and Other Advantages for Plans, Few Advantages for Beneficiaries
Published: 2004-09-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Preferred provider organizations (PPO) are more prevalent than other types of health plans in the private market, but, in 2003, only six PPOs contracted to serve Medicare beneficiaries in Medicare+Choice (M+C), Medicare's private health plan option. In recent years, the Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, initiated two demonstrations that include a total of 34 PPOs. GAO (1) described how CMS used its statutory authority to conduct the two demonstrations, (2) assessed the extent to which demonstration PPOs expanded access to Medicare health plans and attracted enrollees in 2003, (3) compared CMS's estimates of out-of-pocket costs beneficiaries incurred in demonstration PPOs with those of other types of coverage, including fee-for-service (FFS) Medicare, M+C plans, and Medigap policies in 2003, and (4) determined the effects of demonstration PPOs on Medicare spending.
section_title: What GAO Found
paragraphs: CMS used its statutory authority to offer health-care organizations financial incentives to participate in the two demonstrations. CMS, however, exceeded its authority when it allowed 29 of the 33 plans in the second demonstration, the Medicare PPO Demonstration, to cover certain services, such as skilled nursing, home health, and routine physical examinations, only if beneficiaries obtained them from the plans' network providers. In general, beneficiaries in Medicare PPO Demonstration plans who received care from non-network providers for these services were liable for the full cost of their care. The demonstration PPOs attracted relatively few enrollees and did little to expand Medicare beneficiaries' access to private health plans. About 98,000, or less than 1 percent, of the 10.1 million eligible Medicare beneficiaries living in counties where demonstration PPOs operated had enrolled in the demonstration PPOs by October 2003. Further, although one of the goals of the Medicare PPO Demonstration was to attract beneficiaries from traditional FFS Medicare and Medigap plans, only 26 percent of enrollees in its plans came from FFS Medicare, with all others coming from M+C plans. About 9.9 million, or 98 percent, of the 10.1 million eligible Medicare beneficiaries also had M+C plans available in their counties. Virtually no enrollment occurred in counties where only demonstration PPOs operated. According to CMS's 2003 estimates, on average demonstration PPO enrollees could have expected to incur total out-of-pocket costs--expenses for premiums, cost sharing and noncovered items and services--that were the same or higher than those they would have incurred with nearly all other types of Medicare coverage. However, relative costs by type of coverage varied somewhat depending on beneficiary health status. For certain services and items, such as prescription drugs and inpatient hospitalization, demonstration plans provided better benefits relative to some other types of Medicare coverage. Although it is too early to determine the actual program costs of the two demonstrations, CMS originally projected that the first demonstration would increase Medicare spending by $750 per enrollee per year and the second demonstration would increase Medicare spending by $652 per enrollee per year. Based on the agency's original enrollment projections, which exceed 2003 actual enrollment, CMS estimated the demonstration PPOs would increase program spending by $100 million for 2002 and 2003 combined.

section_title: Letter
paragraphs: In recent years, concerns have been raised that Medicare beneficiaries  lack access to the type of health plan that is most prevalent in the private  health insurance market, the preferred provider organization (PPO). In  2003, only six PPOs—plans that allow enrollees to obtain care from any  provider, but charge enrollees less if they obtain care from the plans’  networks of preferred providers—participated in Medicare’s program for  private health plans, known as Medicare+Choice (M+C). About 3,000 of  Medicare’s 41 million beneficiaries were enrolled in the six M+C PPOs. In  contrast, 4.6 million Medicare beneficiaries were enrolled in 142 M+C  health maintenance organization (HMO) plans, which generally require  enrollees to obtain all covered services from the plans’ networks of  providers. The vast majority of Medicare beneficiaries, about 35.6 million,  were not enrolled in private health plans participating in Medicare, but  rather were enrolled in the traditional fee-for-service (FFS) program, in  which they could obtain care from any Medicare provider. The percentage  of Medicare beneficiaries enrolled in traditional FFS Medicare has  increased in recent years, rising from 83 percent in 1998 to 87 percent in  2003—as the total number of private plans participating in M+C declined,  and their benefit packages grew less generous.
The Centers for Medicare & Medicaid Services (CMS), the agency that  administers Medicare, has authority under section 402(a) of the Social  Security Amendments of 1967 to conduct demonstration programs to test  methods of payment that have the potential to increase the efficiency and  economy of Medicare. CMS is authorized to waive Medicare payment  rules under the demonstrations, which may result in increased Medicare  spending. CMS used this statutory authority to initiate two demonstration  programs that included health plans designed to operate under the PPO  model. In January 2002, CMS began the M+C Alternative Payment  Demonstration, which was intended to encourage certain M+C plans to  remain in the Medicare program. One PPO, Independence Blue Cross,  participated in 2003. In January 2003, CMS began a second demonstration,  known as the Medicare PPO Demonstration, that included 33 plans. The  goals of this demonstration were to encourage plans to participate in the  Medicare program under the PPO model, extend beneficiary access to  private health plans, and provide a health plan option that would attract  beneficiaries from FFS Medicare and Medigap plans. Subsequent to the  start of these two demonstrations, Congress passed the Medicare  Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),  which revised Medicare’s program for private plans and provided for a  new PPO component to begin in 2006.
Because the experience gained through the two demonstrations may help  guide future efforts to incorporate private plans into Medicare, you asked  us to study the demonstrations’ implementation and outcomes as they  pertain to PPOs. Specifically, we (1) described how CMS used its statutory  authority to conduct the two demonstrations; (2) assessed the extent to  which demonstration PPOs expanded access to Medicare health plans and  attracted enrollees in 2003; (3) compared CMS’s estimates of the out-of- pocket costs beneficiaries incurred in demonstration PPOs with those of  other types of coverage, including FFS Medicare, M+C plans, and Medigap  policies in 2003; and (4) determined the effects of demonstration PPOs on  Medicare spending prior to the passage of MMA.
To describe CMS’s statutory authority to conduct demonstrations, we  reviewed applicable federal law and regulations. We also solicited the  agency’s views on its interpretation of relevant statutes and regulations.  Appendix I contains our legal analysis on the Medicare PPO  Demonstration plans’ restriction of enrollees’ choice of providers. To  assess health plan participation and enrollment, we used CMS’s monthly  reports on Medicare’s private health plans, as well as historical enrollment  data for demonstration PPO enrollees provided by CMS’s Office of  Research, Development, and Information (ORDI), which oversees the  demonstrations. To compare beneficiary out-of-pocket costs between  demonstration PPOs, M+C plans, Medigap policies, and FFS Medicare in  2003, we used estimates generated for CMS by Fu Associates, Ltd. (Fu), a  private firm. CMS includes these estimates on the Medicare Web site,  www.Medicare.gov, as a tool to help beneficiaries evaluate their coverage  options. We conducted these comparisons for beneficiaries aged 65  through 69, the age group most likely to join M+C plans, in the 41 counties  with approximately 90 percent of the enrollment in demonstration PPOs.  We analyzed the reliability of CMS’s enrollment data and estimates by  conducting interviews with CMS’s Office of the Actuary (OACT), ORDI,  and Fu and determined that the data were sufficiently reliable for our  purposes. To determine the effects of demonstration PPOs on Medicare  spending, we used projections developed by OACT and conducted  interviews with OACT staff. For all four objectives, we interviewed ORDI  and OACT staff and reviewed relevant CMS materials. Appendix II  contains a complete description of our methodology. We conducted our  work from June 2003 through August 2004 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: To reduce out-of-pocket costs that result from cost sharing and the  utilization of non-Medicare covered services and items, FFS Medicare  beneficiaries may either purchase a private supplemental insurance policy,  known as a Medigap plan, or enroll in a private health plan that has  contracted to serve Medicare beneficiaries. From 1998 through 2003, M+C,  Medicare’s private health plan program, allowed participation by a variety  of plan types, including HMOs, PPOs, and PFFS plans, as long as these  plans met certain organizational and operational requirements. Unlike in  the private insurance market, where PPO plans were the most prevalent  type of health plan, the vast majority of M+C plans were HMOs. CMS  launched two demonstrations that included plans intended to operate  under the PPO model.
subsections: section_title: Beneficiaries Purchase Medigap Plans or Enroll in Private Health Plans
paragraphs: Beneficiaries in FFS Medicare, which consists of Medicare part A and part  B, may incur substantial out-of-pocket costs. Part A helps pay for inpatient  hospital, skilled nursing facility, hospice, and certain home health services,  although beneficiaries remain liable for a share of the cost of most covered  services. For example, Medicare requires beneficiaries to pay a deductible  for each hospital benefit period, which was $840 in 2003, and covers a  maximum of 90 days per benefit period.  Medicare part B helps pay for  selected physician, outpatient hospital, laboratory, and other services.  Enrollment in part B is voluntary and requires a beneficiary to pay a  monthly premium and an annual deductible for most types of part B  services — $58.70 and $100, respectively, in 2003 – and may require  coinsurance of up to 50 percent for some services. Beneficiaries are also  liable for items and services not covered by FFS Medicare, such as routine  physical examinations and most outpatient prescription drugs.
Many beneficiaries in FFS obtain more comprehensive coverage through  supplemental health insurance provided by a former employer or  purchased from a private insurer (Medigap). Although many employers do  not offer supplemental health insurance to their retirees, Medigap policies  are available nationwide. In most states, Medigap policies are organized  into 10 standardized plans offering varying levels of supplemental  coverage. Medigap plan F is the plan most widely selected by  beneficiaries, although it does not offer prescription drug coverage;  Medigap plan I offers similar coverage but includes some coverage for  prescription drugs. Beneficiaries with Medigap policies receive coverage  for services from any provider who is legally authorized to provide  Medicare services.
Most beneficiaries may also obtain more comprehensive coverage by  choosing to receive Medicare benefits through private health plans that  participate in Medicare instead of through FFS Medicare. While private  Medicare health plans are not available nationwide, about 80 percent of  beneficiaries in 2003 had access to at least one plan within the counties  where they lived. Beneficiaries who enroll in a private plan may pay a  monthly premium, in addition to the Medicare part B premium, and agree  to receive their Medicare-covered benefits, except hospice, through the  plan. In return, beneficiaries may receive additional non-Medicare benefits  and may be subject to reduced cost sharing for Medicare-covered  benefits. Beneficiaries who enroll in a private plan that contracts with  Medicare are entitled to coverage for all services and items included in the  plan’s benefit package, regardless of whether the service or item is  covered under FFS Medicare.
section_title: M+C Established Definitions and Operational Requirements for Participating Plans
paragraphs: Congress created the M+C program, in part, to expand health plan options  for beneficiaries. Previously, private plan participation in Medicare had  been largely limited to HMOs. The M+C program provided the opportunity  for PPOs and PFFS plans to serve beneficiaries as well. Generally, M+C  plan types differed by the extent to which they used provider networks.  M+C HMOs were required to maintain networks of providers, and they  generally covered services furnished only by providers in their networks,  except in limited circumstances such as urgent or emergency situations.  (See table 1.) M+C PPOs were also required to maintain provider  networks. Unlike M+C HMOs, M+C PPOs were required to pay for covered  services obtained from non-network providers, although they could charge  beneficiaries additional cost sharing for these services. A third type of  M+C plan, the PFFS plan, was not required to maintain provider networks.  Rather, M+C PFFS plans were required to pay for all covered services  obtained from any provider authorized to furnish Medicare-covered  services who accepted the plan’s terms and conditions of payment.
While many M+C requirements were uniform across the different types of  plans, two categories of requirements varied by the type of plan: those that  were intended to ensure that enrollees had sufficient and timely access to  covered services, known as access-to-services requirements, and those  that were intended to ensure that services furnished were of sufficient  quality, known as quality assurance requirements. (See table 2.) In general,  plans that restricted enrollees to provider networks were subject to more  extensive access-to-services and quality assurance requirements than  those that did not. Accordingly, M+C HMO plans were subject to more  extensive quality assurance and access-to-services requirements than M+C  PFFS plans. M+C PPOs were subject to the more extensive access-to- services requirements of M+C HMOs, but the less extensive quality  assurance requirements of PFFS plans. For example, in order to  demonstrate that they provided sufficient access to services, M+C HMOs  and M+C PPOs were required to monitor and document the timeliness of  the care their enrollees received from providers, while M+C PFFS plans  were not required to monitor care in this way. With regard to quality  assurance, M+C HMOs each year had to initiate a multi-year quality  improvement project, such as a provider or enrollee education program,  while M+C PPOs and M+C PFFS plans were not subject to this  requirement.
M+C HMOs, M+C PPOs, and M+C PFFS plans all were paid a monthly  payment per enrollee according to a statutory formula. The M+C payment  rate varied by county and could be higher or lower than FFS Medicare’s  per capita spending in a county. An M+C plan was at full risk for the costs  of covered services for its enrollees. If these costs made up a higher than  anticipated portion of the plan’s total revenues—consisting of enrollee  premiums and monthly payments from CMS—then the plan would have  less than it anticipated for administration, profit, and other contingencies.
section_title: Plan Participation in M+C Did Not Reflect the Private Marketplace
paragraphs: In recent years, PPO plans have become increasingly prevalent in the  private insurance market and tended to displace other types of plans, such  as HMOs, that offered less provider choice. From 1996 through 2002, the  percentage of individuals with employer-sponsored coverage who were  enrolled in HMO plans decreased from 31 percent to 26 percent, while the  percentage of individuals with employer-sponsored coverage enrolled in  PPOs increased from 28 percent to 52 percent. In contrast, there were  approximately 3,000 Medicare beneficiaries enrolled in a total of six M+C  PPO plans by 2003. From 1998 through 2003, the total number of M+C  plans, the vast majority of which were HMOs, decreased from 346 to 155.  The number of beneficiaries covered by M+C plans also fell, from 6.1  million in 1998, or about 16 percent of all beneficiaries, to 4.6 million in  2003, or about 11 percent of all beneficiaries.
section_title: CMS Launched Two Demonstrations That Include Plans Designed to Operate as PPOs
paragraphs: Section 402(a) of the Social Security Amendments of 1967 authorizes CMS  to conduct demonstrations to identify whether changes in methods of  payment or reimbursement in Medicare and other specified health care  programs would increase the efficiency and economy of those programs  without adversely affecting the quality of services. In addition, under  section 402(b), CMS may waive requirements relating to payment or  reimbursement for health care services in connection with these  demonstrations. For example, CMS may be able to offer demonstration  plans alternative methods of payment or other financial incentives that are  not offered to other providers in the Medicare program. However, CMS  does not have the authority to waive rules not related to payment or  reimbursement.
Prior to the passage of MMA, CMS launched both the M+C Alternative  Payment Demonstration and the Medicare PPO Demonstration. The M+C  Alternative Payment Demonstration began in 2002 and included one  organization offering a PPO in 2003. It is set to expire in December 2004.  The Medicare PPO Demonstration, which began in 2003, included 17  organizations representing 33 plans. This demonstration is set to expire in  December 2005.
section_title: CMS Offered All Demonstration PPOs Financial Incentives, but Improperly Allowed Plans in the Medicare PPO Demonstration to Limit Coverage
paragraphs: Using its authority to waive requirements related to payment and  reimbursement, CMS offered financial incentives to Independence Blue  Cross and the plans in the Medicare PPO Demonstration that they did not  offer to typical M+C plans. These incentives included potentially higher  payments and the opportunity to reduce their exposure to financial risk by  entering into risk-sharing agreements. CMS also allowed the plans to  exceed the limits on the cost sharing that M+C plans could charge  beneficiaries. Under federal law, plans in the Medicare PPO  Demonstration should have been required to allow beneficiaries to obtain  plan services from providers of their choice, as long as those providers  were legally authorized to furnish them and accepted the plans’ terms and  conditions of payment. CMS did not have authority to waive this  requirement, as it was unrelated to payment or reimbursement. However,  CMS improperly allowed 29 of the 33 plans in the Medicare PPO  Demonstration to require, as a condition of coverage for certain services,  that beneficiaries obtain those services only from network providers.
subsections: section_title: CMS Used its Statutory Authority to Offer Plans Financial Incentives to Participate in Demonstrations
paragraphs: Under its authority to waive requirements related to payment for  demonstration participants, CMS offered demonstration PPOs a number of  financial incentives to participate in the demonstrations. By waiving the  M+C requirements applicable to plan payment, CMS offered Independence  Blue Cross and the plans in the Medicare PPO Demonstration an  opportunity to receive payment rates that could be higher than those  received by M+C plans. Per enrollee per month, demonstration PPOs  received the higher of the county-based M+C rate or a rate based on the  average amount Medicare spent in that county for each FFS beneficiary.  A plan’s ability to receive the higher of the M+C rate or FFS-based rate  could substantially increase its payment rates, depending on the counties  it served. In 44 of the 214 counties where the plans in the Medicare PPO  Demonstration were available in 2003, the FFS-based rate ranged from  approximately 0.3 percent to 15.1 percent higher than the M+C payment  rate. For example, in Clark County, Nevada, the FFS-based rate was  $635.79, or 5.6 percent higher than the M+C payment rate of $599.95.
CMS also used its waiver authority to allow Independence Blue Cross and  the plans in the Medicare PPO Demonstration to reduce their financial risk  through risk-sharing agreements. Risk-sharing agreements were not  available to non-demonstration M+C plans, which were required to accept  full financial risk for the cost of providing covered services to their  enrollees. For contract year 2003, CMS signed risk-sharing agreements  with 13 organizations offering a total of 29 plans. The terms of the  agreements varied. Each agreement specified an expected “medical loss  ratio” (MLR), the percentage of a plan’s annual revenue (comprised of  monthly payments from CMS and any enrollee premiums) that would be  spent on medical expenses. Generally, plans could designate the remaining  percentage of revenue for administrative expenses, profit, and other  contingencies. For the 12 organizations in the Medicare PPO  Demonstration that had risk-sharing agreements with CMS, medical  expenses represented a median 87 percent of plan revenue. CMS agreed to  share a designated percentage, negotiated separately with each plan, of  any difference between the plan’s actual MLR and the expected MLR that  fell outside a range around the expected MLR, known as a risk corridor.  For each plan, the designated percentage with which it would share risk  with CMS was identical whether the actual MLR was greater or lower than  the expected MLR.
For example, a plan’s contract might have specified an MLR of 87 percent,  a percentage of shared risk of 50 percent, and a risk corridor of 2 percent  above and below the expected MLR (See fig. 1.) If that plan’s actual  medical expenses exceeded 89 percent of its revenue, CMS would pay the  plan 50 percent of the amount by which the actual MLR exceeded 89  percent. If the plan’s actual MLR was lower than 85 percent of its revenue,  the plan would pay CMS 50 percent of the amount that the actual MLR fell  below 85 percent.
In order to allow organizations with HMO licenses to offer PPO-model  health plans without having to meet the more stringent quality assurance  requirements of M+C HMOs, CMS had organizations sign PFFS contracts  and also waived certain M+C payment requirements. Of the 33 plans in the  Medicare PPO Demonstration, 13 were offered by organizations with HMO  licenses. Under M+C requirements, a PPO offered by an organization  licensed as an HMO would have to adhere to the more stringent quality  assurance standards applicable to HMOs. CMS indicated that it could  permit licensed HMOs to establish PPO-type networks without being  subject to the more stringent quality assurance requirements applicable to  HMOs by structuring their plans as PFFS plans. CMS contracted with all  plans participating in the Medicare PPO Demonstration as M+C PFFS  plans because M+C did not prohibit organizations licensed as HMOs from  offering PFFS plans. Although M+C requires PFFS plans to pay each class  of provider uniformly, CMS waived this payment-related requirement,  thereby enabling these plans to establish provider networks by paying  providers differently depending on whether they belonged to their  networks.
CMS also waived the M+C limits on beneficiary cost sharing. An M+C plan  may set beneficiary cost-sharing requirements that differ from those in  FFS Medicare, but these requirements are subject to statutory limits that  vary by plan type. For example, under M+C rules for PFFS plans, the  actuarial value, or estimated dollar value, of the cost-sharing requirements  for benefits that CMS requires the plans to cover could not exceed the  actuarial value of cost-sharing requirements in FFS Medicare, which was  about $1,200 annually per beneficiary in 2003. Because CMS waived this  provision for demonstration PPOs, these plans were subject to no  statutory or regulatory cost-sharing limits.
section_title: CMS Exceeded Its Authority by Allowing Medicare PPO Demonstration Plans to Restrict Coverage for Certain Services to Network Providers
paragraphs: Because CMS signed PFFS plan contracts with all of the plans in the  Medicare PPO Demonstration, these plans should have been subject to all  PFFS plan requirements. In particular, by federal law, M+C PFFS plans  were required to allow enrollees to receive all covered services from any  provider who is legally authorized to provide Medicare services and  accepts the plans’ terms and conditions of payment. CMS does not have  the authority to waive this requirement because it pertains to beneficiary  access to providers, not payment. However, CMS allowed 29 of the 33  plans in the Medicare PPO Demonstration to establish provider networks  and to exclude coverage for some services, both those covered and not  covered by FFS Medicare, obtained outside the provider network.  Examples of such services include skilled nursing and home health, which  are covered under FFS Medicare, and dental care and routine physical  examinations, which are not covered under FFS Medicare.
In response to our inquiries, CMS, in a letter dated June 15, 2004, agreed  with our view that the restriction of Medicare-covered services to network  providers by plans in the Medicare PPO Demonstration violated Medicare  requirements. The agency noted, however, that the plans did not place  such coverage restrictions on most services in their benefit packages. In  its letter, CMS said that it would instruct plans in the Medicare PPO  Demonstration to provide out-of-network coverage for Medicare-covered  services in 2005, if they want to continue to operate as PFFS plans and  avail themselves of the quality assurance requirements available to M+C  PFFS plans. However, CMS indicated that it would not require plans that  cover non-Medicare services only in network to provide out-of-network  coverage for these services.
We maintain that the Medicare PPO Demonstration plans’ restriction on  coverage of services obtained outside their provider networks is unlawful.  The Social Security Act does not distinguish between Medicare and non- Medicare-covered services with respect to an M+C PFFS plan’s obligation  to cover plan benefits. According to the law, M+C PFFS plans must allow  enrollees to obtain all covered plan services– both Medicare-covered and  non-Medicare-covered—from any provider authorized to provide the  services who accepts the plans’ terms of payment.
Furthermore, allowing plans in the Medicare PPO Demonstration to limit  coverage of certain benefits to network providers is inconsistent with  statutory and regulatory requirements intended to promote quality of care  for beneficiaries in M+C plans. Under M+C, PFFS and PPO plans were  held to less extensive quality assurance requirements than HMOs due, in  part, to the greater choice these plans’ enrollees have in obtaining services  from providers. However, plans in the Medicare PPO Demonstration  were allowed to restrict beneficiary choice of provider for certain services  but were not held to the quality assurance standards that apply to M+C  plans that restrict choice.
section_title: Demonstration PPOs Did Little to Expand Health Plan Options, and Have Enrolled Relatively Few Beneficiaries
paragraphs: Demonstration PPOs did little to expand access to private Medicare health  plans for beneficiaries who lacked such access. In addition, they enrolled  relatively few beneficiaries, less than 1 percent of those living in counties  where they operated. Furthermore, beneficiaries who enrolled in Medicare  PPO Demonstration plans were far more likely to have switched from an  M+C plan instead of FFS Medicare. About 98 percent of the beneficiaries  who lived in counties with demonstration PPOs had other Medicare  private health plans available.
subsections: section_title: Demonstration PPOs Did Little to Expand Access to Private Health Plans
paragraphs: Although demonstration PPOs provided beneficiaries with an additional  plan option in the counties where they operated, they did little to attract  private health plans to counties where no M+C plans existed. In October  2003, demonstration PPOs were available in 214 counties nationwide,  where approximately 10.1 million beneficiaries resided. Some form of  M+C plan was available in 205 of the 214 counties. (See table 3.) About  200,000 of the 10.1 million beneficiaries, or about 2 percent, lived in the  nine counties where only demonstration PPOs were available. (See fig.  2.)
section_title: Demonstration PPOs Enrolled Relatively Few Beneficiaries
paragraphs: Enrollment in demonstration PPOs was relatively low. Of the 10.1 million  eligible Medicare beneficiaries living in demonstration PPO counties,  about 98,000, or less than 1 percent, had enrolled by October 2003. (See  table 4.) These 98,000 enrollees represented about 5 percent of the total  enrollment in Medicare private health plans in demonstration PPO  counties. Enrollment in demonstration PPOs was particularly low in the  nine counties with no M+C plans. In these counties, only about 100 of the  approximately 203,000 beneficiaries living there enrolled.
Two plans, Independence Blue Cross and Horizon Healthcare of New  Jersey, accounted for more than 70 percent of all demonstration PPO  enrollment. (See fig. 3.) Of the approximately 98,000 beneficaries enrolled  in demonstration PPOs, about 23,000, or 23 percent, were enrolled in  Independence Blue Cross, the one PPO plan in the M+C Alternative  Payment Demonstration. Approximately 47,000, or about 48 percent of all  demonstration PPO enrollees, were enrolled in Horizon Healthcare of New  Jersey, a participant in the Medicare PPO Demonstration. The  approximately 28,000 remaining beneficiaries were enrolled in the 32 other  plans in the Medicare PPO Demonstration. These plans had an average  enrollment of 878 beneficiaries.
The Medicare PPO Demonstration largely did not fulfill CMS’s goal of  attracting beneficiaries from FFS Medicare; most beneficiaries who  enrolled in demonstration PPOs came from M+C plans. Specifically, in the  211 counties where plans participating in the Medicare PPO  Demonstration were available, 26 percent of beneficiaries who were  enrolled in Medicare PPO Demonstration plans were formerly enrolled in  FFS Medicare, while 74 percent of these beneficiaries were formerly  enrolled in M+C plans. In these same counties, 1 percent were enrolled in  demonstration PPO plans, 81 percent were enrolled in FFS Medicare, and  approximately 18 percent of Medicare beneficiaries were enrolled in M+C  plans.
The disproportionately high enrollment in demonstration PPOs by  previous enrollees in M+C plans is partially attributable to Horizon  Healthcare of New Jersey, which terminated its M+C HMO plan at the end  of 2002 and offered a demonstration PPO plan in 2003 in the same 21  counties where its HMO had operated in 2002. Nearly all 45,000  beneficiaries who enrolled in the Horizon demonstration plan in the  beginning of 2003 were previously enrolled in the HMO plan that the  demonstration plan replaced. However, even when Horizon enrollees are  excluded from the analysis, 47 percent of enrollees in the other Medicare  PPO Demonstration plans were previously enrolled in M+C plans.
section_title: Demonstration PPOs Left Beneficiaries Exposed to Relatively High Total Out-of- pocket Costs, but Offered Slightly Better Coverage for Some Benefits
paragraphs: According to CMS estimates available on the Medicare Web site, an  average beneficiary aged 65 to 69 enrolled in a demonstration PPO could  expect to incur $391 per month in health care expenses for premiums, cost  sharing, and utilization of noncovered items and services. This amount  was generally similar or higher than the expected out-of-pocket costs  associated with other types of health care coverage. Excluding premiums,  or focusing on beneficiaries in poor health, however, somewhat changed  the pattern of relative cost by type of coverage. To the degree that  enrollees in demonstration PPO plans obtained services from non-network  providers, their average out-of-pocket costs would have been higher than  CMS estimates. Despite the same or higher estimated out-of-pocket costs,  demonstration PPOs may have offered slightly better coverage for certain  items and services, such as prescription drugs and inpatient  hospitalization.
subsections: section_title: Estimated Out-of-pocket Costs in Demonstration PPOs Were at Least as High as Most Other Types of Coverage
paragraphs: In 41 counties with approximately 90 percent of enrollment in  demonstration PPOs, beneficiaries in demonstration PPOs who used only  network providers were estimated to have incurred average monthly out- of-pocket costs of $391. That amount is similar to what beneficiaries with  Medigap plans F and I would have incurred, which averaged $405 and  $397, respectively. (See fig. 4.) Enrollees in M+C HMO and M+C PPO  plans and FFS Medicare were estimated by CMS to have incurred lower  monthly out-of-pocket costs, averaging $349 and $340, respectively. The  highest monthly out-of-pocket costs were estimated to have been incurred  by beneficiaries in M+C PFFS plans, which averaged $423 per month.  Because the reported out-of-pocket costs were averages across  beneficiaries, the difference among types of plans represent the variation  in plans’ premiums, covered benefits, and cost sharing—not the  characteristics of enrollees.
section_title: Excluding Premiums or Focusing on Beneficiaries in Poor Health Changed Relative Patterns of Out-of- pocket Costs
paragraphs: Monthly premiums, which represent a predictable expense, accounted for  a relatively high percentage (26 percent) of expected out-of-pocket costs  in demonstration PPOs compared to FFS Medicare and M+C plans.  Demonstration PPOs had an average monthly premium of $100, which was  higher than the average premium of M+C plans ($35 for M+C HMOs and  PPOs and $86 for M+C PFFS plans) and lower than the average premium  for the two Medigap plans ($139 for plan F and $172 for plan I).  (See fig.  5.) Excluding premiums, out-of-pocket costs in demonstration PPOs were  somewhat lower than M+C plans, but higher than Medigap plans.  Specifically, beneficiaries could expect an average of $231 per month in  demonstration PPOs, $254 in M+C HMOs and M+C PPOs, and $277 in M+C  PFFS plans. Beneficiaries with Medigap plans F and I could expect  monthly expenses for cost sharing and noncovered items and services to  total $205 and $150, respectively.
Relative out-of-pocket costs for beneficiaries in demonstration PPOs also  depended on their expected health status. For beneficiaries expected to  be in poor health, demonstration PPOs were estimated to be less costly  than FFS Medicare, M+C HMOs and M+C PPOs, and M+C PFFS plans but  more costly than Medigap plans F and I. (See fig. 6.) For beneficiaries  expected to be in excellent health, demonstration PPOs were estimated to  be less costly than M+C PFFS plans and Medigap plans F and I, but more  costly than FFS Medicare and M+C HMOs and M+C PPOs.
section_title: Obtaining Services Outside the Demonstration PPO Network Would Increase Beneficiaries’ Costs
paragraphs: To the degree that enrollees in demonstration PPOs obtained services  from non-network providers, their average out-of-pocket costs would have  been higher than those reflected on the Medicare Web site. Most  demonstration PPOs excluded at least one service from coverage if it was  furnished by non-network providers. When beneficiaries obtained services  that were covered outside their plans’ provider networks, they were  required to pay more in cost sharing relative to what they would have paid  for the same services from network providers. Demonstration PPOs  anticipated that at least some enrollees would obtain covered services  from non-network providers. According to 2004 estimates submitted to  CMS by organizations participating in the Medicare PPO Demonstration, a  median of 11 percent of enrollee medical costs would be associated with  covered services from non-network providers and thus higher cost  sharing. For example, a six-night stay in a network hospital in 2003 was  projected to cost a demonstration PPO enrollee an average of $421, while  the same length of stay in a non-network hospital cost an average of  $1,223. Across all services in the Medicare benefit package that were  covered both within and outside the plans’ provider networks, the plans  projected to CMS that, in 2004, enrollees would bear a median of 7 percent  of the costs of those services if they obtained them from network  providers, while they would bear a median of 15 percent of the costs of  those services if they obtained them outside the provider networks.
section_title: For Certain Benefits, Demonstration PPO Coverage Was Better Than That of M+C Plans or FFS Medicare
paragraphs: Although demonstration PPOs had higher enrollee out-of-pocket costs  than M+C plans, except M+C PFFS plans, demonstration PPOs tended to  offer slightly better coverage for some benefits, such as prescription drugs  and inpatient hospitalization. While all beneficiaries living in counties with  demonstration PPOs had at least one demonstration PPO with a  prescription drug benefit operating in their county, only 61 percent had an  M+C HMO or M+C PPO plan with a drug benefit operating in their county,  and none had an M+C PFFS plan with a drug benefit operating in their  county. In 16 of the 41 counties in our sample, at least one demonstration  PPO and one M+C HMO or M+C PPO offered prescription drug coverage.  In these counties, demonstration PPOs offered drug coverage that resulted  in the same out-of-pocket costs for beneficiaries as the drug coverage  offered by M+C HMO and M+C PPO plans ($167 per month), but higher  out-of-pocket costs than the drug coverage offered by Medigap plan I  ($124 per month).
Demonstration PPOs were more likely than M+C HMO and M+C PPO  plans to cover brand-name drugs in counties where both types of plans  offered drug coverage. About 47 percent of the demonstration PPOs in our  sample offered coverage for brand-name drugs, while 37 percent of M+C  HMO and M+C PPO plans covered brand-name drugs. All demonstration  PPOs, M+C HMOs, and M+C PPOs offered some coverage for generic  drugs in these counties. M+C PFFS plans did not offer any drug coverage.  Medigap plan I did not differentiate between generic and brand-name drug  coverage.
For example, in Hillsborough County, Florida, beneficiaries could choose  between five different plans offering prescription drug coverage in 2003;  one demonstration PPO, three M+C HMO plans, and Medigap plan I. (See  table 5.) The demonstration PPO provided both generic and brand-name  drug coverage and required a $12 copayment per prescription for generic  drugs, a $55 copayment per prescription for brand-name drugs, and  capped coverage for all drugs at $750 annually. None of the M+C HMOs  covered brand-name drugs. However, two of the M+C HMOs offered  unlimited coverage for generic drugs, while the third capped coverage at  $500 per year. The three M+C HMOs charged between $7 and $15 per  prescription. Insurers in Hillsborough County offered the standard  Medigap plan I drug coverage: a $250 annual deductible, 50 percent of all  costs, and a $1,250 annual limit. Medigap plan I does not differentiate  between generic and brand-name drugs.
Compared to M+C HMOs and M+C PPOs, FFS Medicare, and M+C PFFS  plans, demonstration PPOs tended to offer lower out-of-pocket costs  related to inpatient hospitalization. In 2003, a six-night stay in a network  hospital would have cost enrollees in demonstration PPOs an average of  $421, while the same six-night stay would have cost enrollees in M+C  plans and FFS Medicare an average of $636 and $840, respectively. A six- night hospitalization for an enrollee in an M+C PFFS plan would have cost  an average of $750. In contrast, beneficiaries with either of the two  Medigap policies would have paid nothing for a six-night hospital stay.
section_title: Demonstration PPOs Were Projected to Increase Medicare Spending
paragraphs: At the time the demonstrations were launched, CMS’s OACT projected  that demonstration PPOs would increase Medicare spending by about $100  million over 2002 and 2003 combined. Specifically, OACT projected that  the PPO plan in the M+C Alternative Payment Demonstration would  increase Medicare spending by a total of $25.2 million over 2002 and 2003  combined, or $750 per enrollee per year, due to higher plan payments and  CMS’s sharing in the plan’s financial risk. The Medicare PPO  Demonstration was projected to increase Medicare spending by a total of  $75 million in 2003, or $652 per enrollee per year, due to plan payments.  The risk-sharing agreements with Medicare Demonstration PPO plans  were not projected to result in additional Medicare spending. CMS does  not yet have data on the actual cost of the demonstrations in 2003.
subsections: section_title: Medicare Payments to Demonstration PPOs Were Projected by CMS to Result in Increased Medicare Spending
paragraphs: CMS’s OACT projected that for 2002 and 2003 additional payments to  demonstration PPOs would increase Medicare spending. According to its  estimates, an average of 16,800 beneficiaries per month would be enrolled  in Independence Blue Cross, the PPO in the M+C Alternative Payment  Demonstration, in 2002 and 2003, and monthly payments for these  beneficiaries would increase Medicare spending by $4.5 million in 2002  and $5.6 million in 2003, or about $300 per enrollee per year. OACT  projected that plans in the Medicare PPO Demonstration would have an  average monthly enrollment of 115,000 in 2003, and that monthly payments  to plans for these enrollees would increase Medicare spending by   $75 million, or about $652 per enrollee during the year.
OACT projected that Medicare spending would increase as a result of its  risk-sharing agreement with Independence Blue Cross. OACT projected  that the plan’s actual MLR would be greater than the MLR the plan  projected in 2002 and 2003. OACT estimated that Medicare’s share of the  difference between the actual and projected MLR would be $4.8 million in  2002 and $10.3 million in 2003, or an average of $450 per enrollee per year.  In contrast, CMS expected that it would neither save nor incur additional  expenses from risk-sharing under any of the agreements in the Medicare  PPO Demonstration, because OACT projected that the actual MLR would  equal the projected MLR.
section_title: Actual Spending Due to Demonstration PPOs Cannot Yet be Determined
paragraphs: At present, it is too early to determine the actual costs of the  demonstrations in 2002 and 2003. As of July 2004, risk-sharing agreements  had not yet been reconciled for any demonstration PPOs. During the  reconciliation process, plans will report their actual MLRs to CMS, and  depending on the difference between the expected and actual MLR,  payment may be made either by the plan to CMS, or by CMS to the plan  under the terms of the risk-sharing agreement. CMS also has not  completed a more recent estimate of the cost of the demonstrations,  which would compare spending for actual enrollment in demonstration  PPOs with projected spending on enrollment in other M+C plans and FFS  Medicare if the demonstrations did not exist. Enrollment in demonstration  PPOs has been different than OACT anticipated, which would affect such a  comparison. Actual monthly enrollment in Independence Blue Cross  averaged 21,840 in 2002 and 22,835 in 2003, somewhat higher than the  estimated average monthly enrollment of 16,800 in both years. Conversely,  enrollment in the Medicare PPO Demonstration in 2003 was roughly half  of projected enrollment. While OACT estimated an average monthly  enrollment of 115,000 across all participating plans in that demonstration,  the actual average monthly enrollment was 61,738. In addition to differing  levels of enrollment, the demonstrations also experienced much higher  than anticipated enrollment by former enrollees of other M+C plans.
section_title: Conclusions
paragraphs: CMS initiated two demonstrations to expand the number of Medicare  health plans operating like PPOs. To encourage participation in the  demonstrations, CMS used its statutory authority to provide financial  incentives to plans, such as payment rates that exceeded M+C rates and  the opportunity to share financial risk with Medicare. CMS also allowed  plans in the Medicare PPO Demonstration to require, as a condition of  coverage for certain services, that enrollees obtain care for those services  only from network providers. However, such a requirement is inconsistent  with federal law for plans in the demonstration, and CMS did not have the  authority to allow plans to restrict enrollees’ choice of providers so long as  they were authorized Medicare providers who accepted the plans’ terms  and conditions of payment.
Despite CMS’s efforts, demonstration PPOs have not yet proven to be an  attractive option for beneficiaries or the Medicare program. The plans  were primarily offered in areas where M+C plans were already available,  and enrollment has been relatively low, even in the few areas where no  M+C plans existed. According to the estimates available to beneficiaries  on the Medicare Web site, enrollees in demonstration PPOs could expect  out-of-pocket costs that were higher than those they would have incurred  in FFS Medicare or M+C plans, other than M+C PFFS plans, and no less  than those they would have incurred with Medigap plans F and I. In  addition to potentially higher costs for beneficiaries, demonstration PPOs  may also have resulted in $100 million in higher Medicare spending in 2002  and 2003, according to initial CMS estimates.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Administrator of CMS promptly instruct plans in  the Medicare PPO Demonstration to provide coverage for all plan services  furnished by any provider authorized to provide Medicare services who  accepts the plans’ terms and conditions of payment.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments, CMS agreed to implement our recommendation and  said it is working to ensure that Medicare PPO Demonstration plans come  into compliance with the provisions that govern their Medicare  participation. CMS also expressed general concern about the tone of the  report and said that beneficiaries benefit from increased access to PPOs.  The agency stated that lessons learned from the Medicare PPO  Demonstration will help the agency implement the new Medicare  Advantage regional PPO plan option in 2006. CMS’s specific comments  largely fell into four areas: the report’s focus on initial demonstration  outcomes, the inclusion of the PPO plan in the M+C Alternative Payment  Demonstration in the analysis, the methodology and data we used to  illustrate potential out-of-pocket costs for the options available to  beneficiaries, and the discussion of our conclusion that CMS exceeded its  statutory authority with respect to the Medicare PPO Demonstration. A  summary of CMS’s specific comments and our evaluation is provided  below. The full text of CMS’s written comments is reprinted in appendix  III. The agency also provided technical comments, which we incorporated  as appropriate.
First, CMS stated that the report, by focusing on the Medicare PPO  Demonstration’s initial outcomes, did not adequately present the context  and value of the demonstration. CMS said that the demonstration is an  experiment designed to increase availability of the PPO model in the  Medicare setting, and that it will provide valuable lessons for nationwide  implementation of the new Medicare Advantage regional PPO component  in 2006. Because the demonstration was not intended to be a fully  developed program, CMS felt that our characterization of enrollment as  “low” was unwarranted. CMS also stated that the financial arrangements  developed for this demonstration, such as the risk-sharing agreements,  were intended to encourage plans to participate, and they provide an  example of how Medicare can encourage PPOs to enter and remain in the  new Medicare Advantage program.
We were asked to evaluate the initial experience of demonstration plans  operating under the PPO model because this experience could help inform  future efforts to incorporate private plans into Medicare. We state in the  report that our findings apply only to 2003, the first year of the Medicare  PPO Demonstration and the second year of the M+C Alternative Payment  Demonstration. We based our evaluation on enrollment in demonstration  PPOs, the out-of-pocket costs Medicare beneficiaries could expect in  demonstration PPOs relative to other types of coverage, and the effect of  demonstration PPOs on Medicare spending. Overall, we found that less  than 1 percent of the beneficiaries living in counties where demonstration  PPOs operated had enrolled in demonstration PPOs, that most of the  enrollees came from M+C plans, and that demonstration PPOs did not  offer lower estimated out-of-pocket costs than most other types of  Medicare coverage, even if beneficiaries obtained services only from  network providers. PPO plans in the demonstrations could receive higher  payment rates and be subject to less financial risk, relative to M+C plans.  We acknowledge that the demonstrations are continuing and that CMS has  contracted for independent evaluations of the demonstrations.
Second, CMS stated that the inclusion of the Independence Blue Cross  PPO from the M+C Alternative Payment Demonstration, along with the  plans from the Medicare PPO Demonstration, was potentially confusing  and did not adequately distinguish the different objectives of the two  separate demonstrations. According to CMS, the purpose of the M+C  Alternative Payment Demonstration was simply to prevent health plans  from leaving the M+C program by offering alternative payment  arrangements. Furthermore, CMS stated that the demonstration was not  designed to encourage alternative delivery systems in general or the PPO  model specifically, and that Independence Blue Cross’s status as a PPO  was irrelevant.
We thought it appropriate to evaluate the Independence Blue Cross plan  and the Medicare PPO Demonstration plans together because the plan  types were similar and because the demonstrations were conducted under  the same statutory authority. Independence Blue Cross and the Medicare  PPO Demonstration plans all operate under the PPO model, and in that  sense the plans in the two demonstrations are indistinguishable to  beneficiaries. While the purposes of the M+C Alternative Payment  Demonstration and the Medicare PPO Demonstration differed, as our  report states, CMS used the same statutory authority to conduct both  demonstrations. This authority permits demonstrations that are designed  to identify whether changes in methods of payment or reimbursement in  Medicare would increase the efficiency and economy of the program  without adversely affecting the quality of services. CMS’s characterization  in its comments of the purpose of the M+C Alternative Payment  Demonstration appears to be inconsistent with the statutory authority.
Third, CMS expressed concerns with the methodology and data we used to  compare the out-of-pocket costs beneficiaries could expect to incur in  demonstration PPOs with those they could expect to incur with other  types of Medicare coverage. In CMS’s opinion, our comparison was  hypothetical because it was based on estimates of enrollees’ utilization of  services, not actual utilization of services, and potentially unreliable  because it may not account for regional variation in health care costs. CMS  also stated that our findings for Medicare beneficiaries aged 65 to 69 may  not be applicable for older beneficiaries. Finally, CMS stated that including  Horizon Healthcare of New Jersey in our analysis may have skewed our  calculations because it had the largest in-network deductible for inpatient  hospital services of all demonstration PPOs.
Our out-of-pocket cost comparisons used the same estimates that CMS  makes available on the Medicare Web site through the Medicare Personal  Plan Finder (MPPF), which is intended to help beneficiaries compare their  health coverage options. These estimates, developed by Fu for CMS,  enabled us to compare out-of-pocket costs among various types of  coverage for beneficiaries of various ages and health statuses, which  actual utilization data would not have enabled us to do. Fu developed  these estimates by applying utilization and spending data from the  Medicare Current Beneficiary Survey (MCBS), a national sample of  beneficiaries, to the 2003 benefit packages and premiums offered locally  by various types of Medicare coverage. Therefore, the estimates for all  types of coverage were derived consistently. If utilization and spending in  our sample were higher than the national average, then actual out-of- pocket costs would have been higher than those we estimated; however,  the relative differences between the types of coverage—which form the  basis for our finding—would be expected to be similar. In conducting our  comparisons, we sought to capture the typical plan options available to all  eligible Medicare beneficiaries—not only PPO enrollees—residing in areas  with demonstration PPOs. To capture the typical plan option in these  areas, we chose a sample of 41 counties containing 90 percent of  enrollment in demonstration PPOs and weighted our calculations by the  number of eligible beneficiaries residing in each county. Horizon  Healthcare of New Jersey remained in our analysis because Horizon’s  demonstration PPO plan was available to 32 percent of all eligible  beneficiaries in these 41 counties in December of 2003. We presented  results for beneficiaries aged 65 to 69, the largest of the six Medicare age  groups for which Fu calculated out-of-pocket cost estimates. We also  conducted our comparison on a substantially older age group— beneficiaries aged 80 to 84—and found similar results.
Fourth, CMS stated that our legal finding—that the agency exceeded its  authority by allowing plans in the Medicare PPO Demonstration to cover  certain services only if beneficiaries obtained them from the plans’  network providers—should be discussed in the context of the  demonstration’s objectives. The agency agreed with our recommendation  that Medicare PPO Demonstration plan participants be instructed to  remove impermissible restrictions on enrollees’ access to providers for all  covered plan benefits, and not just those covered under parts A and B, but  did not provide a date by which the recommendation would be fully  effectuated. CMS stated, however, that the legal finding needed to be  viewed in the context of the policies the agency intended to advance  through the Medicare PPO Demonstration. CMS reiterated many of the  factors that it believes discouraged the offering of PPO plans in the M+C  program, and said that the agency wanted to provide flexibility in the  demonstration in order to facilitate participation by plans. CMS indicated  that it had taken sufficient measures during the Medicare PPO  Demonstration qualification process to ensure that all demonstration plans  provided enrollees with adequate access to network providers for all  covered services, and all plans were required to offer some out-of-network  coverage. In addition, the agency indicated that all PPO plans were  required to provide full disclosure to enrollees concerning the costs for in- network and out-of-network services.
CMS had already identified for us many of the reasons that led it to  implement the Medicare PPO Demonstration in the manner in which it did,  and we included them in this report. The context within which CMS  believes the legal finding must be placed is not relevant to the issue of  whether CMS exceeded its authority. The waiver authority at issue is  limited, and its use must conform to those limits. CMS’s reiteration of the  policy objectives the demonstration was intended to achieve, its  explanations for why some plans did not cover all plan services out of  network, and its discussion of the measures that it took to ensure  adequate access to services and enrollee education are not relevant  considerations and do not make CMS’s actions any less unlawful.
We are sending copies of this report to the Administrator of CMS and  appropriate congressional committees. The report is available at no charge  on GAO’s Web site at http://www.gao.gov. We will also make copies  available to others upon request.
If you or your staffs have any questions, please call me at (202) 512-7119.  Another contact and staff acknowledgments are listed in Appendix III.
section_title: Appendix I: Analysis of PPO Demonstration Participants’ Restriction on Enrollee Choice of Provider
paragraphs: In 2003, the Centers for Medicare & Medicaid Services (CMS) initiated the  Medicare Preferred Provider Organization (PPO) Demonstration. To  facilitate participation in the demonstration, CMS permitted organizations  participating in the demonstration (demonstration participants) to require  their enrollees to obtain specified services, including services covered by  parts A and B of the Medicare program, only from “network” providers in  order to be covered. As discussed below, we believe that CMS’s decision  to permit demonstration participants to restrict enrollees’ choice of  providers exceeded its authority and was, therefore, unlawful.
subsections: section_title: Background
paragraphs: The Balanced Budget Act of 1997 (BBA) established a new part C of the  Medicare program, known as the Medicare+Choice (M+C) program,  adding sections 1851 through 1859 to the Social Security Act (act). Under  section 1851(a)(1) of the act, every individual entitled to Medicare part A  and enrolled under part B may elect to receive benefits through either the  Medicare fee-for-service program or a part C M+C plan, if one is offered  where he or she lives. In general, M+C organizations must provide  coverage for all services that are covered under parts A and B of  Medicare. M+C organizations also may include coverage for other health  care services that are not covered under parts A and B of Medicare. They  may satisfy their coverage obligations by furnishing services themselves,  arranging for enrollees to receive services through contracts with  providers, or by reimbursing providers who furnish services to enrollees.
Section 1851(a)(2) of the act authorizes several types of M+C plans, two of  which are relevant to the Medicare PPO Demonstration: “coordinated care  plans” and “private fee-for-service plans.” M+C coordinated care plans  include health maintenance organization (HMO) plans, with or without  point of service options, and PPO plans. As defined by CMS, coordinated  care plans have a CMS-approved network of providers under contract or  arrangement with the M+C organization to deliver health care to  enrollees. M+C organizations offering coordinated care plans may specify  the network of providers from whom enrollees may receive services if  they demonstrate that all covered services are available and accessible  under the plan. Unlike most other coordinated care plans, PPO plans must  provide coverage for all covered benefits out of network. Generally, PPO  plans require enrollees to pay additional costs for services furnished by  providers outside the network.
Section 1859(b)(2) of the Social Security Act defines the term “private fee- for-service plan” for purposes of the M+C program. As defined, private fee- for-service plans are required to reimburse hospitals and other providers  on a fee-for-service basis without placing the providers at financial risk.  These plans may not vary the amounts paid based on the number or  volume of services they provide. Moreover, in contrast to coordinated  care plans, private fee-for-service plans are not required to have networks  of providers; instead they must allow enrollees to obtain covered services  from any provider who is lawfully authorized to provide them and who  agrees to the terms and conditions of payment, regardless of whether the  provider has a written contract with the plan to furnish services to  enrollees.
While many of the statutory and regulatory requirements governing M+C  plans are similar, others vary by plan type. M+C organizations generally  must be licensed as “risk-bearing entities” by the states where they offer  M+C plans. HMO plans and most other coordinated care plans, however,  are subject to more stringent quality assurance requirements than PPO and  private fee-for-service plans. For example, HMO plans are required by  statute to implement programs to improve quality and assess the  effectiveness of such programs through systemic follow-up and to make  information on quality and outcomes measures available to beneficiaries  to facilitate comparisons among health care options. These requirements  do not apply to private fee-for-service and PPO plans. HMO plans, as well  as other coordinated care plans, are also held to more extensive access  requirements than private fee-for-service plans to ensure timely access to  care. Finally, although M+C PPO plans generally are held to less stringent  quality assurance standards than other coordinated care plans, M+C  organizations licensed as HMOs that offer M+C PPO plans may not avail  themselves of the less stringent quality assurance standards applicable to  M+C PPOs. Instead, a licensed HMO that offers an M+C PPO plan must  comply with the quality assurance standards applicable to HMOs.
CMS is authorized by section 402(a)(1)(A) of the Social Security  Amendments of 1967 to conduct demonstrations designed to test whether  changes in methods of payment or reimbursement in Medicare and other  specified health care programs would increase the efficiency and economy  of those programs without adversely affecting the quality of services.  Section 402(b) authorizes CMS to waive requirements related to payment  or reimbursement for providers, services, and other items for purposes of  demonstration projects, but does not authorize the agency to waive  requirements unrelated to payment or reimbursement. Section 402(b)  also authorizes CMS to pay costs in excess of those that would ordinarily  be payable or reimbursable, to the extent that the waiver applies to these  excess costs.
According to CMS, the agency initiated the 3-year Medicare PPO  Demonstration in January 2003 to make the PPO health care option, which  had been found to be successful in non-Medicare markets, more widely  available to Medicare beneficiaries. Its objective was to introduce more  variety into the M+C program so that Medicare beneficiaries would have  more options available to them. In addition, CMS believed that the PPO  demonstration plans would introduce incentives that would result in more  efficient and cost-effective use of medical services.
CMS entered into contracts with all demonstration participants. To  facilitate HMO participation in the Medicare PPO Demonstration, CMS  permitted licensed HMOs, as well as all other demonstration participants,  to offer private fee-for-service plans. Exercising its authority under  section 402(b), CMS waived statutory and regulatory payment  requirements applicable to private fee-for-service plans, allowing the  participating organizations to vary the amount of payments among  providers, among other things, so that the plans offered would more  closely resemble PPO plans. As a result, M+C organizations with HMO  licenses were able to establish PPO-type plans and were not subject to the  more stringent quality assurance standards applicable to HMOs and most  other coordinated care plans. The private fee-for-service plan model  contract provided that requirements that were not expressly waived by  CMS would remain in effect during the term of the contract. Nevertheless,  CMS approved plan provisions that required enrollees to obtain various  items and services, including those covered under parts A and B of  Medicare, from “network” providers. CMS officials told us that prospective  demonstration participants had expressed concerns about their ability to  determine appropriate payment rates for providers who were not under  contract with the demonstration participant, and that the agency had  decided to afford demonstration participants flexibility in this area in  order to get the demonstration project underway. CMS officials also  indicated that they had encouraged the demonstration participants to  cover all benefits “out of network” before the end of the demonstration  period. Notably, guidance issued by CMS to assist M+C organizations,  including demonstration participants, in developing plan brochures for  2004 contained specific instructions for demonstration participants to  indicate in their brochures if they do not cover all Medicare benefits “out  of network.”
section_title: Discussion
paragraphs: The Social Security Act places restrictions on private fee-for-service plans’  authority to limit enrollees’ selection of providers. Specifically, section  1852(d)(4) requires an organization offering an M+C private fee-for-service  plan to demonstrate that the plan affords sufficient access to health care  providers by showing that it has established payment rates that are no  lower than the corresponding rates under the Medicare fee-for-service  program or that it has contracts with a sufficient number of providers to  provide covered services, or both. That section also provides that the  access standards may not be used to restrict the persons from whom  enrollees may obtain covered services, thus suggesting that private fee-for- service plans are not authorized to limit their enrollees’ selection of  providers, for example, to those within an established “network.” The  definition of the term “private fee-for-service plan” at section 1859(b)(2)  echoes this provision, stating that such plans do not restrict the selection  of providers from among those who may lawfully provide covered services  and agree to accept the terms and conditions of payment.
In 42 C.F.R. § 422.114(b), we specify that the plan must permit the enrollees to receive  services from any provider that is authorized to provide the service under original  Medicare. This implements that part of section 1852(d)(4) that says that the access  requirements cannot be construed as restricting the persons from whom enrollees of the  M+C private fee-for-service plan may obtain covered services.
In light of the statutory language and CMS’s interpretation, we conclude  that Medicare PPO Demonstration plan provisions limiting enrollees to  “network” providers are inconsistent with sections 1852(d)(4) and  1859(b)(2) of the act. Because these sections are unrelated to payment,  CMS was not authorized to waive them in connection with the Medicare  PPO Demonstration.
Further, the plans’ exclusions of coverage for services furnished by “non- network” providers are incompatible with statutory requirements designed  to ensure quality of care to enrollees in M+C plans. As discussed earlier,  private fee-for-service and PPO plans participating in the M+C program are  held to less stringent quality assurance standards than HMOs and certain  other coordinated care plans. The applicability of less stringent quality  assurance standards is due, in part, to the increased choices enrollees in  private fee-for-service and PPO plans have in comparison to enrollees in  most other types of plans. CMS has expressly recognized this rationale for  the distinction among various types of plans. In connection with an M+C  rulemaking on the matter, CMS responded to a concern that private fee- for-service plan quality assurance requirements were inadequate to protect  enrollees by explaining that quality assurance standards may not be as  important in the case of private fee-for-service plans “in which the enrollee  has complete freedom of choice to use any provider in the country, and is  not limited to a defined network of providers.” CMS’s approval of  restrictions on enrollee choice and simultaneous failure to apply the more  stringent quality standards applicable to HMO and most other coordinated  care plans were inconsistent with the statutory framework under which  M+C plans are required to operate.
Moreover, while CMS stated that the demonstration was intended to offer  beneficiaries greater choice by encouraging the availability of PPO-type  plans, regulatory provisions applicable to M+C PPO plans would have  precluded demonstration participants from requiring enrollees to obtain  services only from “network” providers as a condition of coverage. CMS  has defined a PPO plan, in part, as a plan that “provides for reimbursement  for all covered benefits regardless of whether the benefits are provided  within the network of providers.” (Emphasis added). Since this  regulatory provision is not related to payment or reimbursement, section  402(b) of the Social Security Amendments of 1967 would not have  authorized CMS to waive it in connection with the Medicare PPO  Demonstration.
In its written response to our inquiry about the demonstration, CMS  indicated that the demonstration plans’ conditioning coverage of  “Medicare-covered services” (those services covered under parts A & B of  Medicare) on their being furnished by “network” providers violates  statutory access requirements applicable to private fee-for-service plans.  CMS explained, however, that while it had reviewed all plans to ensure  that services covered by parts A and B of the Medicare program were  covered “in network,” some organizations had indicated that they were  unable to cover certain services “out of network” because of the  complexities associated with determining payment for “out-of-network”  providers. CMS, nevertheless, believed that “the basic principle of out-of- network access was satisfied” because “the demonstration products offer  access to most Medicare-covered services.” CMS also denied that it had  waived applicable access requirements, stating that it did not have the  authority to do so.
CMS indicated that it will instruct demonstration participants that they  must provide out-of-network coverage for all “Medicare-covered services”  in 2005, the third year of the Medicare PPO Demonstration, if they wish to  continue to avail themselves of the quality assurance standards applicable  to private fee-for-service plans. CMS also indicated, however, that it will  not require plans to provide out-of-network coverage for other covered  benefits for which the demonstration plans provide only in-network  coverage. CMS did not provide a legal basis for distinguishing between  Medicare-covered services and other plan services with respect to a  demonstration plan’s obligation to provide “out-of-network” coverage.
We disagree with CMS’s assertion that it did not waive the statutory  requirements at issue. CMS knowingly permitted organizations  participating in the demonstration to operate in a manner that was  inconsistent with sections 1852(d)(4) and 1859(b)(2) of the Social Security  Act. The agency’s decision to do so achieved a result for demonstration  participants that CMS acknowledges it did not have the authority to  provide. Therefore, we view CMS’s action as tantamount to a waiver.
We also conclude that all benefits covered under a PPO demonstration  plan, not just services covered under parts A and B, must be covered “out  of network” by demonstration plans. The Social Security Act defines a  private-fee-for service plan, in part, as a “Medicare+Choice plan” that  “does not restrict the selection of providers among those who are lawfully  authorized to provide the covered services.” A “Medicare+Choice plan,”  for purposes of the definition of a private fee-for-service plan, is defined,  in part, as “health benefits coverage offered under a policy, contract, or  plan by a Medicare+Choice organization.” Furthermore, CMS guidance  also provides that enrollees in M+C private fee-for-service plans can obtain  “plan covered health care services from any entity that is authorized to  provide services under parts A and B and who is willing to accept the  plan’s terms and conditions of payment.” The act, therefore, does not  distinguish between Medicare covered services and other covered services  in specifying the private fee-for-service plan’s obligations to cover plan  benefits.
Section 402(b) of the Social Security Amendments of 1967 provides CMS  with waiver authority, but also limits that authority by providing that the  agency may only waive requirements related to payment or  reimbursement. In connection with the Medicare PPO Demonstration,  CMS overrode the limitation contained in section 402(b), tacitly waiving  statutory provisions unrelated to payment. As a general matter, agencies  may not override statutory limitations on their activities by administrative  action. Therefore, we conclude that CMS’s decision to allow  demonstration participants to restrict enrollees’ access to providers for  any services covered by the plans exceeds its authority and is, therefore,  unlawful.
section_title: Appendix II: Scope and Methodology
paragraphs: This appendix provides additional information on the key aspects of our  analysis. First, it describes the Centers for Medicare & Medicaid Services’  (CMS) administrative data sources we used to assess demonstration  preferred provider organization (PPO) enrollment and plan participation.  Second, it describes the CMS data sources we used to compare estimated  beneficiary out-of-pocket costs between six types of coverage. Third, it  describes CMS data sources used to compare 2003 benefits between the  six types of coverage. Fourth, it describes CMS data we used to estimate  the proportion of expected 2004 annual out-of-pocket costs and cost  sharing when demonstration PPO enrollees utilize services outside of plan  provider networks. Fifth, it describes how CMS estimated the effect of  demonstration PPOs on Medicare spending. Finally, it addresses data  reliability issues and limitations.
subsections: section_title: Enrollment
paragraphs: We used the following CMS administrative data sets to identify the number  of eligible Medicare beneficiaries and enrollment by health plan in each  county where demonstration PPOs operated: the Geographic Service Area  (GSA) file for October 2003, the Medicare Managed Care Plan Monthly  Report for October 2003, and the Medicare Managed Care Contract  (MMCC) report of 2003. Because the focus of our analysis was on plans  available to Medicare beneficiaries at large, we used plan enrollment data  from GSA to exclude demonstration PPO and Medicare+Choice (M+C)  plans that were employer-only plans; cost plans; and demonstration plans  only available to specific beneficiaries such as Medicare dual-eligibles.  Demonstration PPO and M+C plan county data from GSA were also used  to construct our county-level U.S. map.
section_title: Estimated Out-of- pocket Cost Comparisons
paragraphs: To compare out-of-pocket costs for beneficiaries, we used administrative  data from GSA and CMS’s 2003 Medicare Health Plan Compare (MHPC)  data set to identify private health plans. For each plan in each county, we  then used CMS’s 2003 Medicare Personal Plan Finder (MPPF) to obtain  estimated monthly out-of-pocket costs. We then averaged these costs  across counties for enrollees in demonstration PPOs, M+C health  maintenance organizations (HMO) and M+C PPOs, M+C private fee-for- service (PFFS) plans, Medigap plans F and I, and fee-for-service (FFS)  Medicare.
First, we used data from MHPC to identify one plan offered by each  organization in each county where demonstration PPOs were available.  Because organizations may offer numerous options for each plan, each  with its own benefit package and premium, we selected the one option  that was most favorable for beneficiaries in each service area. Selecting  one option for each plan may have resulted in underestimated actual  beneficiary out-of-pocket costs for beneficiaries in some health plans. In  addition, we established a sample group of 41 counties containing  approximately 90 percent of all demonstration PPO enrollment. This  sample group includes the 21 counties where Horizon Healthcare of New  Jersey’s demonstration PPO plan was available, and the 23 counties that  made up 80 percent of enrollment in demonstration PPOs other than  Horizon.
Next, we used estimated beneficiary out-of-pocket cost data from CMS’s  MPPF to calculate the 2003 average monthly out-of-pocket costs for  enrollees in demonstration PPOs and the other types of coverage. CMS,  and its contractor Fu Associates, Ltd. (Fu), estimated all costs related to  covered and noncovered benefits when an enrollee utilizes services within  the plan’s network of providers. We calculated average monthly out-of- pocket costs for beneficiaries aged 65 to 69 for each type of coverage, in  each county, and across all health statuses. We weighted the estimates of  demonstration PPOs, M+C HMO and M+C PPO plans, M+C PFFS plans,  and Medigap plans F and I by the distribution of health statuses of the  beneficiary cohorts used to create Fu’s estimates, and the number of  eligible Medicare beneficiaries in each county. We separated M+C PFFS  plans from M+C HMOs and PPOs, because the out-of-pocket costs of  enrollees in M+C PFFS plans tended to be substantially higher than the  other two types of M+C plans.
section_title: Benefits Comparison
paragraphs: We used CMS’s 2003 MHPC administrative data set in conjunction with  CMS’s 2003 guide to “Choosing a Medigap Policy” to compare the benefit  packages for enrollees in demonstration PPOs, M+C HMOs and M+C  PPOs, M+C PFFS plans, Medigap plans F and I, and traditional FFS  Medicare. We compared prescription drug coverage and inpatient  hospital services for each type of coverage using our sample of plans in 41  counties. We selected the one plan option for each plan that appeared  most favorable to beneficiaries. We also compared prescription drug  coverage between these types of plans in a sample of 16 counties where at  least one demonstration PPO and one M+C plan offered prescription drug  coverage as a part of their benefit package. In addition, data from CMS’s  Health Plan Management System (HPMS) were used to compare the non- network benefits offered by each demonstration PPO to the 2003 network  benefits offered by demonstration PPOs.
section_title: Costs of Out-of- network Services
paragraphs: CMS’s Office of the Actuary (OACT), which projects trends in Medicare  spending, provided the data we used to compare the proportion of  expected 2004 gross annual out-of-pocket costs and cost sharing when  demonstration PPO enrollees utilize services inside and outside of plan  provider networks. The data we obtained were submitted by plans to  OACT as part of their annual revenue and medical expense projections  and contained estimates of per member per month gross medical costs  and target medical loss ratio (MLR) for 2004. We contacted OACT to  verify that we possessed a submission for each of the 20 demonstration  PPOs in our sample of 41 counties.
section_title: Effect on Medicare Spending
paragraphs: To determine the effects of demonstration PPOs on Medicare spending,  we used projections developed by OACT and conducted interviews with  OACT staff. To arrive at these projections, OACT compared how much  Medicare would pay demonstration PPOs per enrollee with the amount  Medicare would spend on those beneficiaries if the demonstration did not  exist and those beneficiaries were instead enrolled in M+C plans or FFS  Medicare. OACT also estimated the effect that risk-sharing agreements  signed between CMS and demonstration PPOs had on Medicare spending.
section_title: Data Reliability
paragraphs: We used a variety of CMS data sources in our analysis; October 2003 GSA  file, October 2003 Monthly Report, October 2003 MMCC, 2003 MPPF, 2003  HPMS, 2003 MHPC, and the estimated 2004 Medicare PPO Demonstration  plan medical cost files. In each case, we determined that the data were  sufficiently reliable for our purposes in addressing the report’s objectives.
We verified the reliability of the administrative data we used to determine  enrollment figures—CMS’s GSA, M+C Monthly Report, and MMCC—by  comparing the list of unique demonstration PPO contract identification  numbers and organization names to CMS’s list of participating  demonstration PPO plans and organizations. We did not find any  discrepancies between the two lists. We worked closely with CMS staff  and Fu to verify the validity of out-of-pocket cost estimates from the 2003  MPPF. We verified that the results of our out-of-pocket cost analysis were  consistent with CMS’s initial tests of its own data, and that our  methodology, in conjunction with its methodology, did not introduce bias.  In addition, we worked with CMS to verify the validity of the 2004  Medicare PPO Demonstration plan medical cost files submitted by the  health care organizations by assuring that the information they provided to  us corresponded with our data for the sample of 41 counties.
We identified three potential limitations of our analysis; however we have  addressed these limitations through conversations with CMS and Fu, and  by using the best available data. Our report focuses on the results of our  analysis of estimated enrollee out-or-pocket costs for beneficiaries aged 65  to 69. We also obtained similar results when we analyzed estimated  enrollee out-of-pocket costs for beneficiaries aged 80 to 84. In addition, we  verified with CMS and Fu that the trends associated with the 2003 out-of- pocket costs of the 65 to 69 age group were similar to the out-of-pocket  costs of Medicare beneficiaries aged 70 to 74. Second, for our out-of- pocket cost analysis, we used national FFS Medicare estimates, rather  than county-level estimates, because county-level estimates were not  available. Based on our conversations with CMS and Fu, we believe that  CMS’s national figures were more accurate than adjusting the national  estimates to the county level using national FFS spending in each county.  Third, while county-level Medigap out-of-pocket costs and benefit package  information were not available to us, we used CMS estimates of national  Medigap out-of-pocket costs and standardized national Medigap benefits  descriptions for our benefits comparison.
section_title: Appendix III: CMS Comments
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: James C. Cosgrove at (202) 512-7029.
section_title: Acknowledgments
paragraphs: In addition to the person named above, key contributors to this report  were: Yorick F. Uzes, Zachary R. Gaumer, Jennifer R. Podulka, Jennie F.  Apter, Helen T. Desaulniers, and Kevin C. Milne.
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