Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing Choice While Achieving Savings
Released: 2000-09-07T00:00:00

Letter

Background

As of July 2000, about 6.2 million people—or approximately 16 percent of Medicare's 39 million beneficiaries—were enrolled in Medicare+Choice plans. These plans receive a fixed monthly payment for each beneficiary, regardless of what an individual enrollee's care actually costs. Higher costs reduce a plan's profits or result in losses, while lower costs can enable it to offer additional benefits that help it to retain existing enrollees and attract new enrollees. Because managed care plans have a financial incentive to provide care efficiently, policymakers have long looked to them to curb unnecessary spending and produce savings for Medicare. Among BBA's major reforms to contain Medicare spending was the creation of Medicare+Choice, which was also designed to increase the plan options available to Medicare beneficiaries.

Medicare Managed Care Before the BBA

Before the BBA, numerous studies by us, the Physician Payment Review Commission—which has been incorporated into the Medicare Payment Advisory Commission—HCFA, and others demonstrated that the Medicare program spent hundreds of millions more on beneficiaries enrolled in health plans than it would have spent if the same individuals had remained in traditional FFS Medicare.This occurred because Medicare payments were based on the estimated cost of FFS beneficiaries with average health and were not adequately adjusted to reflect the fact that plans tended to enroll beneficiaries in better-than-average health who had lower health care costs—a phenomenon known as favorable selection.

Before 1998, base payment rates to plans in each county were set at 95 percent of the estimated FFS cost of the average beneficiary. The wide variation in local FFS expenditures, caused by local differences in both the prices of medical services and in beneficiaries' use of services, led to corresponding variation in these base rates. This variation may have accounted for some of the unevenness in plan availability across the country. Other factors, such as the higher concentration of Medicare beneficiaries, may have prompted plans to serve primarily urban areas. Beneficiaries in most rural areas lacked access to plans.

BBA Changes to Medicare Managed Care

Beginning in 1998, the BBA substantially changed the method used to set plan payment rates. The new method involves paying the highest of three alternative rates: a minimum amount, or “floor”; a minimum increase over the previous year's payment rate; or a blend of historical FFS spending in a county and national average costs adjusted for local price levels. Some of the new payment provisions were designed to reduce excess payments, while others were designed for different purposes—such as increasing plan participation in geographic areas that had low payment rates.

The BBA aims to reduce the excess in Medicare's health plan payments primarily by holding down per capita payment increases for 5 years and by mandating a new health-based risk adjustment system. In January 2000, HCFA implemented a method for adjusting plan payments based on beneficiary health status, as required by the BBA. The new method, to be phased in over time, will pay plans more for serving Medicare beneficiaries with serious health problems and less for serving relatively healthy ones.

The BBA also contains provisions to gradually remove graduate medical education (GME) payments from plan payments and provide for teaching hospitals to receive these payments directly from Medicare.Because GME spending is concentrated in high-payment-rate counties, its removal is expected to slow payment rate growth more in those areas.

Another BBA objective is to reduce the geographic disparity in payment rates. A methodological approach known as “blending” will, over time, move all rates closer to the national average by providing for larger payment increases in low-rate counties and smaller payment increases in high-rate counties. In addition, the BBA established a minimum payment rate, known as a “floor,” to encourage plans to offer services in areas that historically had low payment rates and few participating plans—primarily rural counties. The BBA also eliminated the requirement that no more than 50 percent of a plan's enrollment may consist of Medicare and Medicaid beneficiaries. This means that Medicare plans can now serve areas without first building a commercial base.

Medicare+Choice Plan Participation in 1999

In 1999, 45 of the 346 plans that participated in 1998 terminated their Medicare contracts and 54 others reduced the number of counties they served. These withdrawal decisions affected about 407,000 enrollees (7 percent of the managed care population) who had to choose a new plan (if one was available in their county) or switch to FFS. About 61,000 of these enrollees, or 1 percent of the total Medicare managed care population, lived in counties in which no other plan was offered. Even if another plan was available, the approximately 450 beneficiaries affected by the withdrawals who had end-stage renal disease (ESRD) had to return to FFS.Medicare prohibits beneficiaries with ESRD from joining a health plan, although they may stay in one if they develop the disease while enrolled.

Plan withdrawals can be disruptive and costly for affected beneficiaries. Although many affected beneficiaries can enroll in another plan, this option may require them to switch health care providers and accept different benefit coverage. Those who return to FFS may be able to retain their providers, but typically face out-of-pocket costs that are higher than they incurred as managed care enrollees. For example, most plan enrollees receive some coverage for outpatient prescription drugs, a benefit not offered in the FFS program. Although the BBA guarantees beneficiaries affected by plan withdrawals the right to purchase certain supplemental insurance policies (known as Medigap), none of the guaranteed policies cover prescription drugs.

Officials from organizations representing plans reported that the BBA changes to the payment rates and the increased administrative burden of the new regulations were largely responsible for the plan withdrawals. According to the officials, Medicare payment rate increases did not keep pace with plans' costs or medical inflation.

Our analysis indicated that a combination of market factors may have influenced plans' participation decisions. Plans more frequently withdrew from counties they had entered more recently, where they had attracted fewer enrollees, or where they faced larger competitors. Some plans indicated that they withdrew from areas where they were unsuccessful in establishing sufficient provider networks. The effect of Medicare's payment rates on withdrawals was much less obvious. For example, about 90 percent of high-payment-rate counties experienced a plan withdrawal compared with only 34 percent of low-payment counties. Taken as a whole, these findings suggested that a portion of the withdrawals may have been the result of plans that were less able to compete effectively in certain areas.

Post-BBA Legislative Changes

In November 1999, the Congress passed the Balanced Budget Refinement Act of 1999 (BBRA). The BBRA contains provisions designed to encourage plan participation in Medicare+Choice. Among other changes, the BBRA provides a new entry bonus to plans that begin serving currently unserved areas. It also increases plans' flexibility to vary benefits within a geographic area and reduces some administrative requirements. In addition, the act slows the phase-in of the new risk adjustment methodology, reducing the short-term effect of the new methodology on plan payments. The BBRA also reduces the length of time that a plan has to wait to reenter the program after terminating its Medicare contract. The effect of these provisions on future plan participation is uncertain.

Withdrawals Widespread but Disproportionately Affect Rural and Smaller Urban Areas

In 2000, 41 of 309 participating plans terminated their Medicare+Choice contracts and another 58 plans reduced the number of counties they serve. This pattern will continue in 2001, when 65 of 261 plans currently participating in Medicare+Choice have announced they will terminate and another 53 plans will change their service areas. Combined, these plan withdrawals directly affect about 1.3 million Medicare+Choice enrollees. The 2001 withdrawals affect a much larger percentage of enrollees, approximately 15 percent, compared with the 2000 withdrawals that affected about 5 percent of all enrollees. All affected enrollees have to choose a new plan (if a plan accepting new enrollees is available in their county) or switch to FFS. By 2001, almost 75 percent of the counties that had a Medicare+Choice plan in 1999 will have been affected.About 238,000, or approximately 19 percent, of the affected enrollees live in counties in which no other managed care plan is being offered. Some of these beneficiaries may have the option of enrolling in a new private FFS plan, but the remainder will have no alternative to the traditional FFS program. The 1,940 beneficiaries in withdrawing plans who have ESRD must return to FFS.

Plan withdrawals in both years disproportionately affect beneficiaries living in small urban, fringe, and rural counties.In 2000, approximately 65 percent of the 328,000 beneficiaries affected by the withdrawals lived in one of these types of counties even though these areas accounted for less than 33 percent of Medicare's managed care enrollees. (See fig. 1.) In contrast, the effects of the 2001 withdrawals will be more widespread and more representative of the distribution of Medicare+Choice enrollees. In both years, beneficiaries living in less densely populated areas were also likelier to be left only with the FFS alternative compared to affected beneficiaries in major urban areas. (See table 1.)

A small number of plans accounted for a substantial portion of the affected enrollees in both years—the 10 largest withdrawing plans accounting for 45 percent in 2000 and 37 percent in 2001. (See tables 2 and 3.) Whereas the largest plans that withdrew in 2000 were concentrated in small urban, fringe, and rural counties, the largest withdrawing plans in 2001 are more uniformly distributed among these and major urban areas. Also, the withdrawing plans in 2001 tend to have significantly larger enrollments than the withdrawing plans in 2000.

Although some plans continue to submit applications to enter the Medicare+Choice program or expand their service areas, the volume of applications has decreased from 30 in 1999 to 10 in 2000. HCFA has already approved many of the applications submitted since July 1998, including one for a private FFS plan called Sterling Option I that initially will serve 1,221 counties in 17 states.The new plan's service area encompasses 940 counties, including many rural counties, previously not served by a Medicare+Choice plan. Since the initial offering, Sterling has added 8 more states to its service area.(See fig. 2.) Beneficiaries who enroll in Sterling will pay a $55 monthly premium (in addition to the Medicare part B premium) in exchange for reduced out-of-pocket costs for many services and extended coverage for hospitalizations, among other benefits. However, Sterling Option I does not offer prescription drug coverage.

Many Recent Market Entrants With Relatively Low Enrollment Withdrew in 2000; This Pattern Less Evident in 2001

Plan participation in Medicare managed care increased rapidly after 1993, peaked in 1998, and began declining in 1999. This experience is not unique to Medicare and, in fact, closely tracks plan participation in the Federal Employees Health Benefits Program (FEHBP), another large program offering multiple health plan choices. The withdrawals in 2000 followed a pattern that is similar to the pattern of withdrawals in FEHBP, as well as the pattern we found in our prior analysis of the 1999 Medicare plan withdrawals.Nearly all of the plans that terminated their Medicare contracts for 2000 or reduced their service areas were relatively new entrants in their respective markets, had attracted few beneficiaries, or had only a small share of the local Medicare managed care market. The plan withdrawals for 2001 deviate somewhat from this pattern in that some older, more established plans are terminating. However, the service area reductions in 2000 and 2001 are consistent with the 1999 pattern of withdrawals. In both years, other factors—such as plans' inability to establish sufficient provider networks—are often evident.

Several Years of Rapid Program Expansion Preceded Recent Plan Withdrawals From Medicare and FEHBP

Between 1993 and 1998, the Medicare managed care program grew rapidly and the number of plans more than tripled—from about 110 plans to 350 plans.Since 1998, however, 151 plans have terminated their Medicare contracts or announced that they will, and few new plans have joined the program. Despite the drop in plan participation, enrollment has continued to increase—although at a slower pace—with the result that the total number of Medicare managed care enrollees has remained approximately the same or even increased slightly over the past 2 years. However, the substantial decline in plan participation next year may cause total enrollment to fall.

FEHBP experienced a similar rapid rise in the number of participating plans followed by a decline.(See fig. 3.) Between 1994 and 1997, the number of plans participating in FEHBP increased from 369 to 470. Since then, the number of FEHBP plans has declined steadily and may fall to approximately 240 next year. This roughly 50 percent decline in the number of FEHBP plans is similar to the approximately 57 percent decline experienced in Medicare over the same period. However, the percentage of FEHBP enrollees affected is substantially smaller than the percentage of Medicare+Choice enrollees affected. In 2001, for example, FEHBP plan withdrawals are expected to affect about 1 percent of enrollees, compared to Medicare+Choice withdrawals affecting 15 percent of enrollees.

At the same time new plans were joining the Medicare program, many existing plans expanded their geographic service areas. Some plans entered previously unserved rural counties while others entered urban counties with one or more existing Medicare plans. As a result, the percentage of rural beneficiaries with access to Medicare managed care increased from about 10 percent in 1993 to over 31 percent in 1998. Because of recent plan withdrawals, however, the percentage of beneficiaries in rural areas with access to a Medicare managed care plan has fallen to about 21 percent in 2000.

Urban beneficiaries, nearly all of whom already had access to at least one plan in 1993, had a wider choice of plan options. In recent years, however, even large urban areas have seen a decline in plan participation. The percentage of beneficiaries living in large urban areas with access to at least one plan has declined from 99 percent in 1999 to 97 percent in 2000 and is expected to fall again in 2001.

In 2000, Most Terminating Plans Were Recent Entrants With Relatively Low Enrollments; Pattern Less Evident in 2001

The vast majority of Medicare+Choice plans that terminated their Medicare contracts in 2000, as opposed to reducing the number of counties they served, were recent entrants into urban areas that already had substantial plan participation. Many terminating plans had few beneficiaries or a relatively small share of the local Medicare managed care enrollment. These factors are the same ones that were associated with the 1999 withdrawals. In 2000, 38 of the 41 terminating plans were either recent entrants, had attracted fewer than 200 enrollees, or had less than a 15 percent share of the local Medicare plan market in each of the counties they served.(See table 4.) Plans that terminated their participation in FEHBP had similar characteristics: 42 percent of the terminating plans had fewer than 300 enrollees and many of those were recent entrants.

The pattern of plan withdrawals is different in 2001 in that some older, larger, and more established plans are also terminating their Medicare contracts. For example, almost 43 percent of terminating plans entered the market before 1996 and 29 percent had total plan enrollments that exceeded 10,000 enrollees.

Plans That Reduced Their Service Areas Dropped Recently Entered and Relatively Low-Enrollment Counties in 2000 and 2001

Although the patterns of contract terminations in 2000 and 2001 appear to be somewhat different, the patterns of service area reductions in the 2 years are similar. In both years, plans that withdrew from only a portion of the counties they served tended to pull out of counties that they had more recently entered or where they had relatively low enrollment. In the majority of cases—92 percent in 2000 and 79 percent in 2001—plans withdrew from counties where they had recently entered, where they enrolled fewer than 200 beneficiaries, or where they enrolled fewer than 15 percent of the Medicare managed care enrollees. This pattern was more pronounced in 2000 than in 2001, but the 2001 service area reductions still follow the same general trend. In some cases, plans consolidated into one or more core areas where they were most strongly established.

Service area reductions have been more concentrated in rural areas. Despite the floor payment rates, enacted in BBA, which make payments to plans considerably higher than FFS costs in many rural counties, the challenge of providing managed care in rural areas may be a significant contributing factor. The sparseness of both beneficiaries and providers may present difficulties for plans. Without sufficient beneficiary populations, plans say they cannot enroll enough individuals to spread risk and cover fixed operating costs.In addition, plans may have difficulty obtaining discounts and negotiating contracts with physicians and hospitals when an area has few competing providers.

Humana Health Plan of Texas Provides One Example of Plans' Consolidation Behavior

Humana Health Plan of Texas, the plan with the single largest number of affected enrollees in 2000, illustrates the consolidation behavior exhibited by a number of the plans that reduced their service areas. Humana started serving Medicare beneficiaries in areas around Corpus Christi, Texas, in 1986 and added San Antonio in 1988. It more recently expanded its service area by adding a total of 23 counties in 1995, 1997, and 1999. (See fig. 4.) In 2000, the plan withdrew from 16 of the counties, both urban and rural, it entered in 1997 and 1999, as well as a few it entered in 1995. The plan remained in the central counties encompassing San Antonio and Houston, both urban areas where the plan had by far its largest concentration of enrollment, and the Corpus Christi area. Humana remained in San Antonio despite the fact that the county's monthly payment rate for 2000 was, on average, $26 lower than payments in the four urban counties it dropped. The 10 counties it retained in 2000 accounted for 70 percent of its Medicare managed care enrollees in Texas.

In 2001, Humana will consolidate even further, serving only the San Antonio and Corpus Christi areas. This time, the 2001 monthly payment rate in San Antonio is, on average, $147 lower than the six counties the plan is dropping. Humana recently stated that it incurred pre-tax losses exceeding $26 million during 1999 in the counties it will leave in 2001. However, only a fraction of these losses may be due to providing Medicare covered benefits. The plan is currently offering, at no additional charge, an unlimited generic prescription drug benefit and a brand name benefit up to $1,400 per year, in addition to some coverage for physical exams and vision services, to the beneficiaries in these Texas counties.

Medicare Managed Care Experience in Maryland Provides Another Example of Plan Consolidations

The Medicare managed care experience in Maryland illustrates both the service area reductions that occurred in 2000 and the trend toward larger, more established plans terminating their contracts in 2001. In 2000, plans withdrew from recently entered rural counties while continuing to serve more heavily populated urban areas. In 2001, these plans are continuing the exodus from Medicare by withdrawing from these urban areas and terminating their contracts.

Between 1986 and 1993, only one plan, Freestate Health Plan—sponsored by Blue Cross operated in Maryland. Its service area included only 6 of Maryland's 24 counties, all located in Maryland's major metropolitan area—the areas surrounding Baltimore and Washington, D.C. Over time, new plans began operation in the state, mostly in the same Baltimore- Washington corridor. (See fig. 5.) One plan, Optimum Choice, began offering service statewide in 1994, followed by 2 more statewide plans in 1996. Between 1997 and 1999, however, these 3 plans reduced their service areas until, by 1999, only Freestate continued to serve Maryland's rural counties. In 2000, Freestate reduced its service area to the Baltimore- Washington area—its historical core service area. Rural Maryland beneficiaries, who had a managed care option between 1994 and 1999, were left with no alternative to traditional FFS Medicare.

The difficulty of serving sparsely populated rural areas may have been an important factor in the Maryland plans' withdrawal decisions for 2000. Freestate Health Plan, for example, withdrew from rural Caroline County where it faced no competition and enrolled nearly one in five of the county's beneficiaries despite charging a $75 per month enrollee premium. However, the plan's relatively large market share in the county amounted to only 895 enrollees. In contrast, the plan's 2 percent market share in urban Montgomery County, an area it continued to serve, resulted in more than 2,000 enrollees. In addition, Medicare payment rates were increasing faster in the rural counties the plan left because of the floor and the blend provisions in the BBA.

Freestate has announced it will terminate its contract in Maryland for 2001, leaving Kaiser Health Plan as the only remaining Medicare plan serving the state. Freestate has said that it expects to incur losses of $7.5 million by the end of 2000.

Other Factors, Including Provider Contracting Problems, May Have Contributed to Plan Withdrawals

Although recent entry, low enrollment, or low market share are characteristics of most withdrawing plans, in some cases plan withdrawals appear to have little to do with these factors. In one case, a merger caused a plan to change operations to avoid anti-trust violations and subsequently resulted in termination of selected contracts. In other cases, plans terminated all operations—Medicare, Medicaid, and commercial—in an area. Finally, some plans have reported that providers in some areas are becoming increasingly resistant to contracting with them, making it more difficult for plans to assemble viable provider networks in certain areas. The following examples illustrate other factors that may have contributed to plan withdrawals.

Aetna U.S. Healthcare acquired NYLCare Health Plans in July 1998, and later purchased Prudential Health Care in August 1999. Because Texas officials were concerned that Aetna would have too large a share of the state's market after it acquired Prudential, they agreed to the purchase under the condition that Aetna sell its NYLCare business in the state. However, under special agreement, Aetna was allowed to continue managing the Medicare component. Aetna subsequently terminated this contract.

Capital Area Community Health Plan of Albany, NY, was affiliated with Kaiser Permanente, which withdrew from all of its operations in the entire northeast region in 2000.

Humana terminated all of its business—commercial and Medicare—in Nevada.

United Health Care of Louisiana was one of the first national plans to buy out local plans in Louisiana. Local providers, who preferred dealing with the local plans, resisted contracting with United. The plan eventually withdrew from these areas.

Oxford Health Plans of NY had trouble assembling a viable provider network in one of the large counties it served, so it withdrew from that county.

Medicare+Choice Payment Rates Exceed Costs of Covered Benefits

Industry representatives have stated that low Medicare payments, resulting from BBA provisions designed to control program spending, are primarily to blame for the recent plan withdrawals. The American Association of Health Plans contends that the BBA created a “fairness gap” by decreasing payments to health plans relative to spending on beneficiaries in the FFS program. However, since the BBA was enacted the increase in Medicare+Choice payment rates has exceeded the growth in per capita FFS spending. Furthermore, our recent study of plan payments found that Medicare paid plans $5.2 billion (or about 21 percent) more than it would have spent in 1998 if plan enrollees had received standard Medicare covered services through the traditional FFS program. According to reports that plans submit to HCFA, Medicare's payments are also substantially higher than the average plan's projected costs of providing Medicare-covered benefits. Moreover, although industry representatives have called for higher payment rates, the extent to which rate increases would affect plans' decisions to participate in Medicare is unclear. In 2000 and 2001, withdrawals have not been confined to counties where payment rate increases, or payment rates, were low.

Plan Payment Rate Growth Since 1997 Exceeds FFS per Capita Spending Increase

Between 1997—the year the BBA was enacted—and 1999, Medicare+Choice payment rates increased on average by about 4.2 percent.(See fig. 6.) Furthermore, the payment rate increase was applied to 1997 rates that HCFA now estimates were inflated by about 3 percent because of an error in the spending forecast used to set the rates.In contrast, per capita FFS spending fell 1.7 percent during the same period.

HCFA estimates that between 1999 and 2001, per capita FFS spending will grow faster than Medicare+Choice payment rates. If these estimates prove accurate, the cumulative increase in Medicare+Choice payment rates between 1997 and 2000 will still exceed the growth in per capita FFS spending, but the gap will be much narrower. By 2001, HCFA's current projections indicate that average spending in the traditional program will have increased 11.9 percent, while plan payment rates will have increased 10.7 percent.

Medicare Payments Exceed Estimated Costs of Providing Benefits in Traditional FFS Program

Recently, we reported that Medicare+Choice plan payments likely exceed the amount that beneficiaries enrolled in plans would cost in the traditional FFS program.In 1998, aggregate payments exceeded enrollees' estimated FFS costs by about 21 percent—or approximately $5.2 billion. On a per enrollee basis, Medicare paid plans about $1,000 more than the FFS program would have spent to provide Medicare-covered benefits.

A portion of the estimated $5.2 billion in annual excess plan payments may diminish over time. Approximately $2 billion of these excess payments resulted from FFS spending forecast errors built into the 1997 county payment rates due to the BBA provisions that based future county rates on the 1997 rates and guaranteed 2 percent minimum annual rate increases. The effect of the 1997 forecast error will largely be mitigated by the BBA provision that slows Medicare+Choice rate increases relative to the growth in FFS spending between 1998 and 2002.

The bulk of the excess payments we estimated for 1998 ($3.2 billion) will persist each year until payments on behalf of individual enrollees better match their expected health care costs. Medicare+Choice plans attracted a disproportionate selection of healthier and less-expensive beneficiaries relative to traditional FFS Medicare (a phenomenon known as favorable selection), while payment rates largely continued to reflect the expected FFS costs of beneficiaries in average health. Consequently, we estimate that the program spent about 13.2 percent more on plan enrollees than if they had received services through the traditional FFS program. This year, HCFA implemented a new methodology to adjust payments for beneficiary health status. However, our results suggest that this new methodology, which will be phased in over several years, may ultimately remove less than half of the excess payments caused by favorable selection.HCFA expects to introduce a more refined methodology in 2004 that may better adjust payments to reflect enrollees' expected health care costs.

Payment Rates Exceed Plans' Costs of Providing Medicare-Covered Benefits

Medicare+Choice payment rates not only surpass what the FFS program would spend to provide Medicare-covered benefits to plans' enrollees, but data submitted by plans show that rates also generally exceed plans' estimated costs to provide those same benefits. As part of the annual contracting process, each Medicare+Choice plan is required to project its per enrollee cost of providing Medicare-covered benefits.If estimated Medicare payments exceed a plan's projected costs, the plan must use the difference to provide additional benefits during the contract year or contribute to an escrow account and use the funds to provide benefits in future years. To fulfill Medicare's requirement, plans choose to provide additional benefits—such as routine vision care, dental care, and coverage for outpatient prescription drugs—that are not covered in the traditional FFS program.

In their 1999 contract submissions, the average plan—including plans that withdrew in 2000—projected that its costs would be substantially less than its Medicare payment. On average, plans estimated that they could provide Medicare-covered services for about 89 percent of Medicare's payment.Plans indicated that they would provide additional benefits to make up the difference. Most plans' benefit packages exceeded the minimum requirements. Consequently, the average plan in 1999 estimated it would spend about $1,300 per enrollee, an amount equal to about 22.5 percent of its Medicare payment, on benefits that are not covered in the FFS program. Among plans that terminated their contracts or reduced their service areas in 2000, the average annual amount spent on additional benefits was slightly lower—about $1,100, or 21.6 percent of Medicare's payment. (See table 5.)

Plans' contract submissions for 2000 exhibited a similar pattern of additional benefits.Plans that will terminate their contracts in 2001 projected that they would spend an average of about $1,200 per enrollee, or 22 percent of their Medicare payment, on additional benefits in 2000. Plans that will reduce their service areas projected they would spend slightly less, about $1,000 or 18 percent of their Medicare payment, on additional benefits. In contrast, spending on additional benefits was estimated at nearly $1,500 per enrollee, or about 25 percent of 2000 Medicare payments, for plans that will remain in the program in 2001.

Relationship Between Payment Rates and Plan Withdrawals Difficult to Interpret

The effect of payment rates on Medicare+Choice plan participation is ambiguous. While changes in payment rates are an important influence on plans' participation decisions, we found that plan withdrawals were not limited to counties with low payment rates.

On the one hand, plan withdrawals appear to be more extensive in the 2 years with lower payment rate increases. In both 1999 and 2001, county rates increased by an average of 2 percent. In 1999, plan withdrawals affected 42 percent of counties that previously had a managed care plan, and in 2001 plan withdrawals will affect 58 percent of such counties. In contrast, a smaller proportion of counties—approximately 37 percent— were affected in 2000 when rates increased by about 4 percent. The extensiveness of plan withdrawals may also be related to the gap between average county rate increases and the change in expected per capita FFS spending. For example, the projected increase in per capita FFS spending is much higher for 2001 than it was for 1999 and withdrawals will be more extensive.Therefore, withdrawals may moderate after 2002 when payment rate increases will mirror expected increases in per capita FFS spending except for adjustments to correct prior spending forecast errors.

The relationship across counties between plan participation and payment rates, and rate increases, is not clear. Both high-payment rate and low- payment rate counties are affected by the 2000 and 2001 plan withdrawals, although the relationship between payment rates and withdrawals is somewhat different in the two years. In 2000, approximately 39 percent of the non-floor counties that had at least one plan in 1999—those with payment rates set above the minimum payment of $402—were affected by a plan withdrawal. A slightly higher proportion of counties in the middle payment categories were affected compared to the proportion of affected counties in the highest rate category and the rate category just above the floor. (See table 6.) In 2001, about 80 to 90 percent of counties in the higher payment ranges, but less than two-thirds of the counties in the lower payment ranges will be affected. (See table 7.) The 2001 withdrawal pattern is similar to the one that occurred in 1999 in that a disproportionate number of high payment rate counties were affected by withdrawals. In both 2000 and 2001, floor counties that previously had a Medicare+Choice plan will be proportionately less affected by the withdrawals compared to counties that receive payment rates above the floor. However, the difference between floor and nonfloor counties is less pronounced in the 2001 withdrawals.

The relationship between payment rate increases and plan participation in a particular county is unclear. In 2000 and 2001 floor counties may have been less affected by the withdrawals because the BBA substantially increased payment rates in those counties, and those rates remain considerably above the average cost of Medicare benefits in the traditional FFS program. Between 1997 and 2001, payment rates in floor counties increased by 27 percent. In contrast, payment rate increases have been more modest in nonfloor counties, around 11 percent.However, the pattern of plan withdrawals in 2000 suggests that even relatively large payment rate increases may not be enough to keep some plans in certain counties. While county payment rates increased by an average of 4 percent in 2000, the BBA's rate “blending” provision increased rates by 10 percent or more in certain counties.Nonetheless, 40 percent of these counties with large increases were affected by plan withdrawals in 2000—about the same as the percentage of affected counties among those that received the lowest (2 percent) rate increase.(See table 8.) Some areas may have too few beneficiaries or providers to support multiple plans, or even a single plan. Moreover, plans that fail to attract a sufficient number of enrollees will not realize their revenue goals even if payments are adequate on a per capita basis.

Conclusions

Medicare+Choice is at a crossroads. Because of contract terminations and service area reductions, by January 2001 more than 1.6 million beneficiaries will have had to switch to a different plan or the traditional fee-for-service program since 1999. Industry representatives contend that payment rate increases are necessary to keep the program viable.

However, the Medicare+Choice program has already been expensive for taxpayers. As our work on payment rates shows, the vast majority of plans have gotten paid more for their Medicare enrollees than the government would have paid had these enrollees remained in the traditional fee-for- service program. Raising payment rates to a level sufficient to retain the plans leaving Medicare would mean increasing the excess that currently exists in payments for plan enrollees relative to their expected fee-for- service costs. In areas of the country where there are few beneficiaries and providers are in short supply, no reasonable payment rate increase is likely to entice plans to participate in Medicare. Thus, a trade-off exists between the significant additional costs that would be needed to keep more plans in the program and the benefits of providing more beneficiaries with options for accessing Medicare covered services. Such a trade-off raises questions about the equity of providing a greater array of benefits to a fraction of the Medicare beneficiary population. In our view, efforts to protect the viability of Medicare+Choice plans come at the expense of ensuring Medicare's financial sustainability over the long term.

Agency Comments and Our Evaluation

In commenting on our report, HCFA stated that our findings confirmed its own analysis of Medicare+Choice plan withdrawals. HCFA noted that the pattern of withdrawals, analyzed at the corporation level instead of at the individual plan level, reinforces our finding that factors besides payment rates likely influenced plans' participation decisions. For example, HCFA said that in 2001, 54 percent of Aetna's Medicare+Choice enrollees and 69 percent of Cigna's enrollees will be affected by plan withdrawals, but less than 2 percent of Pacificare's enrollees and only 0.1 percent of Kaiser's enrollees will be affected. The agency contends that these differences provide evidence that the withdrawals reflect corporations' strategic business decisions that go beyond Medicare payment adequacy. HCFA also said that it believes the Administration's proposal to provide a prescription drug benefit to all enrollees would both reduce inequities in benefit availability and increase payments to Medicare+Choice plans that cover prescription drugs. (HCFA's comments appear in app. IV.)

We also provided representatives of the American Association of Health Plans (AAHP), the BlueCross BlueShield Association (BCBSA), and the Health Insurance Association of America (HIAA) an opportunity to comment on the report. All three groups disagreed with our conclusions and stated that our report did not touch on important issues relevant to plan withdrawals. They also said that withdrawals can be costly for beneficiaries because Medicare+Choice plans typically provide preventive care services and other benefits that are not covered in the traditional FFS program. (AAHP's, BCBSA's, and HIAA's comments appear in apps. V, VI, and VII.)

AAHP, BCBSA, and HIAA believe that inadequate Medicare+Choice payment rates are a principal cause of plan withdrawals. BCBSA stated that many plans could not afford to continue providing sufficient additional benefits (beyond those covered in FFS) to attract beneficiaries. All three industry groups stated that it is inappropriate to compare Medicare+Choice payment rate increases with changes in per capita FFS spending (as we did in fig. 6) because plans' costs have been growing faster than per capita FFS spending. HIAA said that FFS spending slowed only as a result of BBA's unprecedented reductions in Medicare reimbursements and that the Congress began correcting these reductions with the enactment of BBRA in 1999. BCBSA commented that the comparison is unfair because the traditional program can control costs in ways that are unavailable to plans. In our report, we acknowledge that plans typically provide benefits that are not available in the FFS program. However, we found that Medicare+Choice payments substantially exceeded plans' projected costs (including normal profits) of providing Medicare-covered benefits and that plans contracted with Medicare to use the difference to provide benefits that are not available in the FFS program. Furthermore, the contention that plans' costs have grown more rapidly than per capita FFS spending, or that plans have a limited ability to control their own cost increases, does not alter our finding that Medicare+Choice payments exceed the estimated amount that the traditional program would spend on the individuals enrolled in plans.

AAHP and HIAA stated that our methodology for estimating the FFS costs of plan enrollees, based on enrollees' prior use of services in the FFS program, underestimates the health care costs of plan enrollees and therefore overestimates excess payments to plans. In developing our methodology, however, we employed assumptions that would tend to underestimate excess payments.Therefore, we believe our findings likely represent a lower bound on the estimated excess payments plans receive and the potential savings from improved risk adjustment. HIAA stated that services are overutilized in the FFS program and that by using FFS spending as a comparison we overestimated the degree of favorable selection and the extent of excess payments to plans. In our analysis, we did not attempt to quantify an appropriate level of care. If services are overutilized in the FFS program, a comparison of plan payments with a more efficient delivery system might indicate less favorable selection, but it would not alter our finding that current Medicare+Choice payment rates— largely based on FFS spending patterns—exceed the estimated cost of providing Medicare-covered benefits in the FFS program.

AAHP, BCBSA, and HIAA said that we did not address the issue of regulatory burden in our report. They believe that recent regulations have increased plans' administrative costs and discouraged plan participation. Because many of the recent regulations resulted from provisions in BBA designed to increase plan accountability, facilitate informed choice and plan comparisons, protect beneficiary rights, or foster quality improvement efforts, a comprehensive analysis of this issue would require an assessment of the regulations' benefits as well as their costs. Such an analysis was beyond the scope of our report.

Finally, AAHP and BCBSA stressed that plans typically provide benefits not covered in the traditional FFS program and that plan withdrawals are not only disruptive for beneficiaries but can also result in beneficiaries having to pay more in out-of-pocket costs. Although we agree, and did discuss this issue in the report, it was not the focus of our study.

We are sending copies of this report to the Honorable Nancy-Ann Min DeParle, Administrator of the Health Care Financing Administration, and other interested parties who request them.

If you or your staffs have any questions about this report, please call me on (202) 512-7114 or Laura A. Dummit, Associate Director, on (202) 512-7119. Other major contributors included George Duncan, Beverly Ross, and Susanne Seagrave under the direction of James C. Cosgrove.

Scope, Methodology, and Data Sources

We reviewed pertinent laws, regulations, HCFA policies, and research by others to obtain information on the Medicare+Choice program, including revisions to the payment methodologies. To obtain different perspectives on why plans withdrew or reduced their service areas, we interviewed officials at HCFA's regional offices and representatives from the American Association of Health Plans and Blue Cross/Blue Shield of Maryland, one of the plans that withdrew. To do our analysis, we obtained data files from HCFA, which the agency uses to compute Medicare+Choice plan payments and which are widely used by researchers.

To identify counties with a plan in 1999, we used HCFA's 1999 Medicare Compare Database combined with HCFA's July 1999 Medicare Managed Care Market Penetration for All Medicare Plan Contractors Quarterly State/County/Plan Data Files. We excluded cost, demonstration, and health care prepayment plans from our analysis and used only those plans identified as Medicare+Choice. We concluded that a plan was offered in a particular county only if both databases agreed. The count of enrollees by plan by county in a plan's service area as of July 1999 was obtained from the State/County/Plan Penetration Files, except in four cases where plans reduced their service areas and withdrew from only part of a county. In these cases, we obtained the actual number of enrollees affected from HCFA's Center for Health Plans and Providers.

Similarly, we identified counties with a plan in 2000 using HCFA's 2000 Medicare Compare Database combined with HCFA's March 2000 Medicare Managed Care Market Penetration for All Medicare Plan Contractors Quarterly State/County/Plan Data Files. Again, we excluded cost, demonstration, and health care prepayment plans from our analysis and used only those plans identified as Medicare+Choice. We concluded that a plan was offered in a particular county only if both databases agreed. HCFA's Center for Health Plans and Providers gave us a list of contract consolidations that occurred in 2000, and we adjusted our information accordingly. The count of enrollees by plan by county in a plan's service area as of March 2000 was obtained from the State/County/Plan Penetration Files.

To analyze the changes in plan participation in the Medicare+Choice program in 2000 and 2001, we used HCFA data on Medicare+Choice plan contracts. In July 1999, HCFA provided us with a list of plans that had announced they were withdrawing from the program or reducing their service areas as of January 1, 2000, and the counties and number of enrollees affected. In July 2000, HCFA provided us with the same information for plans that had announced changes for 2001.

We excluded Guam, Puerto Rico, and the Virgin Islands from all county- level analyses. In some of the analyses, the same counties are defined as separate entities if plans can contract with them separately. For example, Los Angeles County, California, is divided into Los Angeles-1 and Los Angeles-2; they are counted separately because plans may contract with them separately. The independent cities of Virginia are also counted as separate counties because their payment rates differ from those of their counties, and plans contract to serve these areas as if they were independent counties.

We classified counties as urban, rural, or small urban/fringe using the rural/urban continuum codes in the February 1999 Area Resource File, which we obtained from the Bureau of Health Professions, Health Resources and Services Administration of the Department of Health and Human Services. We defined urban counties as the central counties of metropolitan areas of 1 million population or more and rural counties as all nonmetropolitan counties. Finally, included in the small urban/fringe counties are counties in metropolitan areas of less than 1 million population and fringe counties of metropolitan areas of 1 million population or more. The February 1999 Area Resource File combines the Virginia independent cities into their original counties and does not report separate rural/urban continuum codes for these. We kept these cities separate in keeping with the HCFA data, and we assigned these cities the same rural/urban continuum codes as their original counties.

To analyze geographic differences in beneficiaries' access to a plan from 1993 to 1998, we used the December 1993-1998 State/County/Plan Penetration Files and deleted all plan/county combinations where a plan enrolled fewer than 10 enrollees. Because we were not able to obtain actual contract information on plan service areas before 1997, this provided an approximation of plans' service areas. We then used the same urban, rural, and small urban/fringe county designations as before from the February 1999 Area Resource File to determine the percentage of beneficiaries with access to a Medicare+Choice plan in these different areas.

We obtained county-level payment rate information for 1997 through 2001 for Medicare risk plans and Medicare+Choice plans, including payment reductions resulting from the removal of graduate medical education (GME) spending, from HCFA's Web site. In addition, we used a February 1999 file from HCFA's Office of Information Systems containing historical county-level information on the year that plans first entered individual counties.

Plans Withdrawing From Medicare+Choice, January 2000

Healthsource, Arkansas, Inc.

United Healthcare of Arkansas, Inc.

Premier Healthcare, Inc.

Humana Health Plan, Inc.

Health Plan of Nevada, Inc.

Pacificare of California, Inc.

National Med, Inc.

Aetna U.S. Healthcare of CaliforniaCigna Healthcare of Colorado, Inc.

Qual-Med, Inc., Denver HMO Colorado, Inc.

Qual-Med, Inc., Pueblo Qual-Med, Inc., Colorado Springs Kaiser Foundation Health Plan of Connecticut Physicians Health Service of Connecticut, Inc.

Connecticare, Inc.

Florida Health Choice, Inc.

Community Health Care Systems, Inc.

Humana Medical Plan, Inc.

HIP Health Plan of Florida, Inc.

Cigna Healthcare of Florida, Inc.

Av-Med Health Plan, Inc.

Av-Med Health Plan, Inc.

1,600 (Continued From Previous Page)

Health Options, Inc.

United Healthcare of Georgia, Inc.

Kaiser Foundation Health Plan of Georgia, Inc.

Exclusive Healthcare, Inc.

Humana Health Plan, Inc.

Humana Kansas City, Inc.

United Healthcare of the Midwest, Inc.

United Health Care of Louisiana United Health Plans of New EnglandUnited Healthcare of the Mid-AtlanticUnited Healthcare of the Midwest, Inc.

Exclusive Healthcare, Inc.

Healthsource New Hampshire, Inc.

United Healthcare of New Jersey, Inc.

Physicians Health Services of New Jersey, Inc.

Cigna Healthcare of New Jersey, Inc.

Cigna Healthcare of New Jersey, Inc.

40 (Continued From Previous Page)

Humana Health Plan, Inc.

Capital Area Community Health Plan Oxford Health Plans (New York) Inc.

Capital Area Community Health Plan Physicians Health Service of New York, Inc.

United Healthcare of New York, Inc.

Capital Area Community Health Plan Cigna Healthcare of New YorkHum/Healthcare Systems, Inc.

Pacificare of Ohio, Inc.

Cigna Healthcare of Ohio, Inc.

Summacare, Inc.

Community Health Plan of Ohio Aetna U.S. Healthcare, Inc.

Health Alliance Plan of Michigan Family Health Plan, Inc.

Bluelincs HMO, Inc.

Pacificare of Oregon, Inc.

Cigna Healthcare of Pennsylvania, Inc.

United Health Plans of New England, Inc.

1,100 (Continued From Previous Page)

United Healthcare of Tennessee, Inc.

United Healthcare of Tennessee, Inc.

Tennessee Health Care Network, Inc.

United Healthcare of Tennessee, Inc.

Humana Health Plan of Texas Healthcare Partners Plans, Inc.

Cigna Healthcare of Texas, Inc.

HMO Blue, Northeast Texas Humana Health Plan of Texas United Healthcare of Texas, Inc.

Healthkeepers, Inc.

Pacificare of Washington, Inc.

Group Health Cooperative of Puget Sound Group Health Cooperative of Puget Sound Options Health Care, Inc.

Humana Wisconsin Health Organization Insurance Corporation Primecare Health Plan, Inc.

Plan remained in Medicare but reduced the number of counties served.

Plans Withdrawing From Medicare+Choice, January 2001

Health Partners of Alabama, Inc.

Intergroup Prepaid Health Service of ArizonaCigna Healthcare of Arizona, Inc.

Pacificare of Arizona, Inc.

Aetna U.S. Healthcare of California National Med, Inc.

Maxicare, A California CorporationPacificare of Colorado, Inc.

Mutual of Omaha of Colorado, Inc.

Anthem Health Plans, Inc. (CT)

Aetna U.S. Healthcare, Inc.

Cigna Healthcare of Connecticut, Inc.

Physicians Health Service of ConnecticutCigna Healthcare Mid-Atlantic, Inc.

Cigna Healthcare of Delaware, Inc.

Humana Medical Plan, Inc.

Prudential Health Care Plan, Inc.

Cigna Healthcare of Florida, Inc.

8,600 (Continued From Previous Page)

Prudential Health Care Plan, Inc.

Cigna Healthcare of Florida, Inc.

Prudential Health Care Plan, Inc.

United Healthcare of Florida, Inc.

Aetna U.S. Healthcare, Inc.

Prudential Health Care Plan, Inc.

Av-Med Health Plan, Inc.

Physicians Healthcare Plans, Inc.

Preferred Medical Plan, Inc.

Cigna Healthcare of Georgia, Inc.

Aetna U.S. Healthcare of Georgia, Inc.

United Healthcare of Georgia, Inc.

HMO Georgia, Inc.

Humana Health Plan, Inc.

Aetna Health Plan of Illinois, Inc.

United Healthcare of the Midwest, Inc.

Mercy Health Plans of MissouriMaxiCare Indiana, Inc.

Anthem Insurance Companies, Inc.

Aetna Health Plan of Illinois, Inc.

Aetna U.S. Healthcare, Inc.

Pacificare of Ohio, Inc.

Humana Health Plan of Ohio, Inc.

HMO Louisiana, Inc.

Aetna U.S. Healthcare, Inc.

Gulf South Health Plans, Inc.

Maxicare Louisiana, Inc.

United Health Plans of New England, Inc.

10,100 (Continued From Previous Page)

Fallon Community Health Plan, Inc.

United Healthcare of the Mid-Atlantic Cigna Healthcare Mid-Atlantic, Inc.

NYLCare Health Plans of Maine, Inc.

HMO Missouri, Inc.

Group Health Plan, Inc.

Humana Kansas City, Inc.

Wellpath Select, Inc.

Qualchoice of North Carolina, Inc.

Harvard Pilgrim Health Care of New HampshireOxford Health Plans (New Jersey), Inc.

Cigna Healthcare of New Jersey, Inc.

Amerihealth HMO, Inc.

Qualmed Plans for Health, Inc.

Lovelace Health Plan, Inc.

St. Joseph Healthcare PSO, Inc.

Aetna U.S. Healthcare, Inc.

HIP of Greater New YorkCigna Healthcare of New York MDNY Healthcare, Inc.

Health Services Medical Corps Central New York 2,300 (Continued From Previous Page)

Physicians Health Service of New York, Inc.

Aetna U.S. Healthcare, Inc.

Prudential Health Care Plan of Northern Ohio Humana Health Plan of Ohio, Inc.

Aetna U.S. Healthcare, Inc.

Pacificare of Ohio, Inc.

Paramount Care, Inc.

Kaiser Foundation HP of OhioSummacare, Inc.

Bluelincs HMO, Inc.

Community Care HMO, Inc.

HMO of Northeastern Pennsylvania, Inc.

Penn State Geisinger Health PlanKeystone Health Plan Central, Inc.

Healthcentral, Inc.

Healthguard of Lancaster, Inc.

Qualmed Plans for Health, Western Pennsylvania Qualmed Plans for Health, Inc.

United Health Plans of New England, Inc.

Tennessee Health Care Network, Inc.

Healthsource Tennessee, Inc.

NYLCare Health Plans, Inc.

NYLCare Health Plans, Inc.

20,500 (Continued From Previous Page)

Prudential Health Care Plan, Inc.

Presbyterian Health Plan, Inc.

Methodistcare, Inc.

Pacificare of Texas, Inc.

Cigna Healthcare of Texas, Inc.

Texas Health Choice, L.C.

Prudential Health Care Plan, Inc., San Antonio Cigna Healthcare of Virginia, Inc.

Cigna Healthcare Mid-Atlantic, Inc.

Aetna U.S. Healthcare, Inc.

Pacificare of Washington, Inc.

Network Health Plan of Wisconsin, Inc.

Plan remained in Medicare but reduced the number of counties served.

Comments From the Health Care Financing Administration

Comments From the American Association of Health Plans

Comments From the BlueCross BlueShield Association

Comments From the Health Insurance Association of America

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