Medicare Advantage: What Does It Mean For Private Plans Currently Serving Medicare Beneficiaries?
Released: 2004-04-20T00:00:00

RS21761 -- Medicare Advantage: What Does It Mean For Private Plans Currently Serving MedicareBeneficiaries?

Updated April 20, 2004

Introduction

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173 ) added a voluntary prescription drug benefit to Medicare and made manychanges to the Medicare+Choice (M+C) program, now called Medicare Advantage (MA). Changes to MA include(1) increased payment rates, (2) a competition program in2006, (3) the addition of regional plans beginning in 2006, and (4) a six-year comparative cost adjustment programin 2010 that enhances competition between MA plans andrequires traditional Medicare to compete with MA plans. Although plan participation is likely to increase due tothe increased payments, long-term plan participation isunknown.

Prescription Drugs

MMA added a voluntary prescription drug benefit to Medicare. Starting in 2006, beneficiaries will have access to a drug plan whether they are in traditional fee-for-service(FFS) Medicare, or enrolled in managed care. The prescription drug coverage will be provided through either newlycreated prescription drug plans or for those beneficiaries inMA, Medicare Advantage Prescription Drug (MA-PD) plans. Managed care organizations will be required to offerat least one plan that includes the standard prescription drugbenefit, or an actuarially equivalent drug benefit, but may offer additional plans without a drug benefit, or with amore generous benefit. Generally, organizations offeringMA-PD plans will be required to comply with the rules and procedures required of companies offering a prescriptiondrug plan to beneficiaries in the FFS Medicare programunder the new Part D. Similar rules and procedures will be established for the prescription drug plans and MA-PDplans with respect to: enrollment, dis-enrollment,termination, coverage periods, appeals, information dissemination and the procedure of submitting a bid for the costof providing the drug benefit.

Historically Medicare managed care plans were able to attract enrollees by offering additional benefits, one of the most popular being prescription drugs. Beneficiaries whoenrolled in these plans were willing to accept some of the restrictions of managed care, such as limitations onprovider choice, in order to have the additional benefits. Beginning in 2006, beneficiaries will be able to get prescription drugs whether they are in traditional FFS Medicareor an MA-PD plan. To compete with traditional Medicare,some plans may redesign their benefit packages to remain attractive to their enrollees. For example, they mayconsider adding vision or dental services, if they do not alreadyinclude them, reducing cost sharing, or enhancing the prescription drug benefit.

In 2004, 36% of Medicare Advantage enrollees are enrolled in a plan that includes prescription drugs with no additional premium. (1) These plans are providingprescriptiondrug coverage to enrollees because their cost of providing all benefits covered by Medicare under Hospital Insurance(Part A) and Supplementary Medical Insurance (Part B) isless than the current payment rate. Starting in 2006, MA-PD plans will receive additional money from Medicareto pay for the prescription drug benefit. If a plan can continueto provide the standard Part A and B benefits at a lower cost (i.e., if its bid for covering Part A and B benefits is lessthan the benchmark, explained in more detail below), thenit can provide other additional benefits with some of the savings that might, in previous years, have gone towardsproviding prescription drugs.

What can plans do to compete with traditional FFS Medicare? Managed care organizations will be allowed to make their plans more attractive to beneficiaries by reducingout-of-pocket expenses (copayments for Part A and Part B benefits, the premium for Part B coverage, or thepremium for the prescription drug coverage) or by adding benefitssuch as eyeglasses and earing aids. Plans may also add additional drug coverage beyond the basic Medicare benefit,but there is a disincentive for them to do this. Once anenrollee reaches the annual out-of-pocket threshold for catastrophic drug coverage ($3,600 in 2006, which wouldbe reached with $5,100 in total drug spending under a standardplan) Medicare provides reinsurance -- paying the plan a portion of the enrollee's additional drug costs. Third partypayments, including MA payments, do not count towardthe beneficiary's out-of-pocket threshold. Additional drug coverage would reduce the enrollees' out-of-pocketexpenses, so that fewer enrollees would reach the out-of-pocketthreshold, and those who did would reach it later in the year. The additional coverage would thus reduce the moneya plan would receive from Medicare.

Alternatively, plans may decide to add or enhance a drug benefit in 2004 to increase enrollment and gain a competitive advantage in the managed care market prior to thebeginning of the Medicare drug benefit in 2006. Some plans have enhanced their drug benefits for 2004, asdiscussed below. Plans may also offer Medicare-endorsed drugdiscount cards to their own enrollees through the newly established drug discount card program under MMA. Thecards could provide discounts on drug prices even if the plandoes not have a drug benefit, or if the plan benefit cap is reached. (2) Beneficiaries who enroll in a plan in 2004 may be more likely to remain with the plan when theMedicaredrug benefit is added to the program in 2006.

Payment Rate Changes

For 2004, MMA changed the payment rate calculation for Medicare managed care plans, resulting in increased payment rates for all counties. (3) Previously, plansreceived thehighest of three possible rates -- a floor rate, a minimum increase above the previous year's rate, or a blend of localand national rates -- subject to a budget neutralityprovision. (4) MMA made three major changes to thepayment formula for 2004, all designed to increase payment rates. First, a fourth payment type was added: 100%of percapita fee-for-service Medicare costs. (5) Second, thebudget neutrality adjustment was eliminated, allowing a blend payment to be paid when it is the highest of the fourrates,even when that would increase total expenditures. The blend payment uses a combination of local and nationalrates, and is designed to reduce variance in payments acrosscounties. Third, the minimum increase was changed from a 2% increase above the previous year's rate to the greaterof 2% or the percentage by which per capita Medicareexpenditures grew nationally in the previous year. In 2005 and beyond, payments will be annually updated by thenew minimum increase or, at the Secretary's discretion, but atleast once every three years, the higher of either the new minimum increase or 100% of the updated (rebased) FFSper capita payment.

Payment rate increases beginning in March 2004 vary from county to county. The average increase (weighted by the number of enrollees) relative to the 2003 rate is 10.8%. The smallest increase for the same period is approximately 6.3%. Approximately 94% of enrollees live in countieswhere the increase is 20% or less. A small number of planswill receive increases of more than 45%. The higher payment rates may encourage organizations to stay inMedicare, and may attract other organizations, increasingcompetitive pressures on existing plans. It may also encourage plans to expand their service areas. Approximately21% of counties not currently served by a managed care planqualify for an average payment increase of 15% or greater. For six consecutive years private plans have withdrawnfrom Medicare or reduced their service areas citing lowpayment rates as the primary cause. CMS indicates that plans are using the increases to 2004 payments to: (1)strengthen provider networks with 43% of the funds; (2) reducepremiums with 31% of the funds; (3) enhance benefits, including prescription drug cards, with 17% of the funds;and (4) reduce cost sharing with 5% of the funds. Five percentof the additional funds are being held in the stabilization fund for use before the end of 2005.

Competition Program Starting in 2006

Until 2006, organizations participating in Medicare managed care must submit to CMS an estimate of the cost of providing Part A and B benefits to the average beneficiary. This estimate is called an Adjusted Community Rate (ACR) proposal and it is submitted each year for each planthe organization offers. The ACR is compared to the paymentthe plan would receive for serving beneficiaries. If the payment is larger than the cost of serving beneficiaries, theplan is required to return the full amount of the difference tothe beneficiary in the form of additional benefits, reduced cost-sharing or a reduction in the Part B premium. Theorganization may also save the difference in a "stabilizationfund" to defray future costs.

Starting in 2006, plans will no longer file ACRs. Instead, their estimate of the cost of providing benefits to beneficiaries will be called a bid. The bid will be compared to a percapita benchmark for the area that is similar to a payment rate prior to 2006. If the benchmark is higher than thebid, the plans must return 75% of the difference to thebeneficiaries in the form of reduced cost-sharing for Part A and B benefits, additional MA benefits, or a credittowards any monthly MA premium, prescription drug premium,or Part B premium. If the bid is above the benchmark, Medicare will pay the plan the benchmark and the beneficiarywill pay the difference between the bid and thebenchmark.

The bid portion of the competition program starting in 2006 differs from the ACR process in two ways. First, MMA grants the Secretary the authority to negotiate plan bids. Second, prior to 2006, plans return 100% of the difference to beneficiaries if the payment exceeds the ACR; after2006, plans will return only 75% of the difference if thebenchmark exceeds the bid, and the remaining 25% will be returned to the government as savings.

It is unclear whether the Secretary's ability to negotiate will have an impact on plans currently in Medicare. It is also unclear whether returning 25% of plan savings to thegovernment instead of providing that amount to the beneficiary will have an effect on plans. Some observers expectplan bids to be close to the benchmark with little savingsreturned to either the beneficiary or the government. Others, including the Congressional Budget Office, estimateplan bids will be below the benchmarks, resulting in savingsfor both beneficiaries and the government. Sharing savings with the government could result in plans providingless generous supplemental benefits than they otherwise wouldhave, which could make it more difficult to compete with traditional Medicare

It is possible that the bid process may be less burdensome than the ACR process, though that will depend on details of how the implementing regulations are written. The ACRprocess, in effect until 2006, requires a comparison that is not required in the bid. Under the Medicare+Choiceprogram, plans are not allowed to earn a higher return from theirMedicare business than their commercial market. One section in the ACR requires a calculation of the plan'sexpected returns from providing Medicare-covered benefits toMedicare beneficiaries versus providing the same benefits to their non-Medicare business. No such calculation isrequired under the bid process beginning in 2006.

Regional Plans Starting in 2006

Private plans participating in Medicare specify the areas they want to serve. They define their service areas as sets of counties and county parts. Starting in 2006, plans will beencouraged (but not required) to serve entire regions designated by the Secretary as part of a new regional program. The regional program is designed to encourage plans,specifically preferred provider organizations (PPOs), to serve areas they had not previously served, particularly ruralareas, in an effort to make Medicare managed care moreclosely resemble the Federal Employees Health Benefits Program (FEHBP). A plan participating in the newregional program will (1) have a network of providers who agree toa contractually specified reimbursement for covered benefits, (2) provide for reimbursement for all covered benefits,regardless of whether the benefits are provided within thenetwork, and (3) serve one or more regions.

The Secretary will establish between 10 and 50 regions throughout the country based on analyses of current insurance markets. Plans offered in the regional program will becalled MA regional plans, while non-regional plans will be called MA local plans. An MA regional plan maychoose to serve more than one region, or may serve the entirenation, but it can not segment its service area to offer different benefits or cost sharing requirements to beneficiarieswithin the same region.

In addition to the difference in service areas, MA regional plans will differ from MA local plans in (1) benefit package, (2) access to risk-sharing arrangements and incentivepayments, and (3) potential additional payments to hospitals that join managed care networks. First, the benefitpackage for MA regional plans must include a single deductiblefor Part A and B services, and it must include a catastrophic limit on expenditures. The conference report for MMA( H.Rept. 108-391 ) indicates these requirements will makethe regional plans more closely resemble the private plans for the under-65 population. The amount of thecatastrophic limit is not specified in the law. Second, to encourageplans to participate in the regional program and serve areas they have not previously chosen to serve, Medicare willinitially share risk with MA regional plans in 2006 and 2007if a plan's costs fall outside of a specified range or "risk corridor"; plans will assume only a portion of the risk forunexpected high costs and plans will be required to return aportion of the savings to Medicare for unexpected low costs. Another incentive to participate in the regionalprogram is a stabilization fund that can be used to encourage plansto serve one or all regions, or to encourage plans to stay in regions they might otherwise leave. Initially $10 billionwill be available to the fund, but additional funds will beavailable from any savings from regional plans with bids below the regional benchmark. Third, since establishingnetworks can be difficult in less-populated areas, MMAincludes a provision whereby hospitals can receive a payment from CMS to join an MA regional plan's network ifthe hospital can prove that the costs of serving the plan'senrollees exceed the Medicare Part A payment. In such cases, the plan must also pay the hospital at least theMedicare Part A payment for services provided to enrollees.

What does this mean for plans currently in Medicare? All areas of the country will be part of a region in the regional program, including areas currently served by local MAplans. It is unclear whether the incentives to participate in the regional program will be (1) enough to encourageplans to participate, or (2) so great that regional plans can offermore generous benefits than local MA plans and attract beneficiaries away from the local plans within the region. Moreover, some plans may choose to participate in theregional program in addition to, or instead of participating as local MA plans. How local MA plans react to theregional program will be based on business decisions about risk,profit and competition.

Comparative Cost Adjustment Starting in 2010

The Secretary is to establish a six-year comparative cost adjustment (CCA) program beginning on January 1, 2010, and ending on December 31, 2015. The CCA program isdesigned to enhance competition between local private plans in the Medicare program and to compare the overallefficiency of these plans with respect to traditional Medicare. MA plans in CCA area can only be local plans, as regional plans can not participate in the program. An area canqualify for the program if it is a metropolitan statistical area(MSA) with at least two MA organizations and has at least 25% of Medicare beneficiaries enrolled in MA localplans. Of those MSAs that qualify, no more than 6 areas, or25% of the areas that meet the requirements will participate.

There are two major differences between comparative cost adjustment areas and non-CCA areas. First, in a CCA area, payments to local MA plans will be based oncompetitive bids, similar to payments for the regional MA plans. The benchmark that is compared to each plan'sbid is not strictly an increase over the previous year'sbenchmark (as in non-CCA areas), but rather a weighted average of plan bids and the cost of traditional FFSMedicare in an area. (There is a five-year phase-in of CCAbenchmarks.) Second, in a CCA area, traditional Medicare will compete with local MA plans. While FFSbeneficiaries in non-CCA areas will continue to pay the standardMedicare Part B premium, beneficiaries in CCA areas could have their Part B premium either increased ordecreased. FFS beneficiaries in CCA areas would pay higher Part Bpremiums if the cost of providing the standard Medicare benefit package was more expensive in FFS than the costin the local MA plans. Conversely, FFS beneficiaries in aCCA area would paid lower Part B premiums if the FFS costs are less expensive the MA costs. The premium isphased-in over five years, and additionally, cannot exceed105% of what it would have been for beneficiaries in the CCA area.

Proponents of the CCA program anticipate that competition in CCA areas would decrease costs to the Medicare program, perhaps through such strategies as steepernegotiations with providers or more attention to disease management. Opponents of the CCA program argue thatbeneficiaries who want to remain in traditional Medicare maybe financially penalized with increased Part B premiums.