Medicare began contracting with managed care plans on a cost- reimbursement basis in the 1970s. In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA), which created the first Medicare risk contracting program for managed care plans beginning in 1985. The Medicare risk program evolved into today’s MA program. TEFRA also retained and authorized Medicare cost plans as an option if an organization did not have the capacity to bear the risk of potential losses, had an insufficient number of members to be eligible for a risk-sharing contract, or the organization elected to offer a cost plan rather than a risk plan. Enrollment in the Medicare risk program grew from nearly 498,000 in 1985 to about 5.2 million beneficiaries by 1997, primarily concentrated in urban counties. The Balanced Budget Act of 1997 (BBA) phased out the existing risk program and created a new risk program called Medicare+Choice (M+C). Under the M+C program, the method used to pay participating plans was revised significantly, and, due in part to these payment changes, by 2000 many health plans began to withdraw from the program. Enrollment fell from 6.3 million in 1999 to 4.6 million by 2003. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) renamed the M+C program Medicare Advantage and provided increases to MA plan payment rates and other program changes. MA enrollment increased steadily from 2003 to 2009. The MA program includes several types of plans: Local coordinated care plans (CCP) consist of: Health maintenance organizations (HMO), which have defined provider networks and primary care gatekeepers. Beneficiaries enrolled in HMOs generally are required to obtain services from hospitals and doctors in the plan’s network, but some HMOs offer a point-of-service option under which a beneficiary may elect to obtain services from a non-network provider, though at a higher out-of-pocket cost. Preferred provider organizations (PPO), which have defined provider networks and no requirement that beneficiaries obtain referrals for care. Beneficiaries enrolled in PPOs can use non-network providers, but at a higher out-of-pocket cost than in-network providers. Provider sponsored organizations (PSO), which doctors, hospitals, or other Medicare providers operate rather than a health insurance company. The providers that operate the PSO furnish the majority of the health care and share in the financial risk of providing the health care to the beneficiaries enrolled in the plan. Regional PPOs, which have a service area comprising 1 or more of 26 state-level or multistate-level CMS-defined regions. Regional PPOs are also CCPs. Special needs plans exclusively or disproportionately enroll special needs individuals. Special needs individuals are beneficiaries who are institutionalized, eligible for both Medicare and Medicaid, or have a disability or chronic condition. Special needs plans can be any type of CCP. Private fee-for-service (PFFS) plans, which are local plans that are not required to have a contracted provider network as long as they pay willing providers at least the Medicare FFS rate. MA benefit packages may include Medicare Part D coverage; however, all CCPs must offer at least one benefit package with Part D coverage. CMS pays cost plans the reasonable cost of the Medicare-covered services they furnish directly to, or arrange for, Medicare beneficiaries enrolled in their plan, less the value of the deductible and coinsurance. In addition to the costs directly related to the provision of health services, CMS also pays reasonable costs associated with operating a health plan, such as marketing, enrollment, and membership expenses. Cost plans receive an advance interim payment per member per month based on the cost plan’s estimated reimbursable costs. CMS and the cost plans make adjustments after the contract period to align the payments with the actual costs incurred following the plan’s submission of an independently certified cost report that details cost, utilization, and enrollment data for the entire contract period. As of December 2009, 18 organizations operated 22 cost plans, with enrollments ranging from 50 to 74,190. Of the 22 cost plans, 15 were open to enrollment. Nonprofit organizations operated 17 of the 22 cost plans. (See app. I for a list of the organizations that offer cost plans.) Eight cost plans offered Part D coverage in 2009. Cost plans served at least one county in 16 states and the District of Columbia in 2009. Cost plans were most prevalent in Minnesota, where 3 cost plans operated across most of the state. (See fig. 1.) Congress acted to curtail the expansion of cost plans multiple times. The BBA provided that upon enactment, with few exceptions, the Secretary of Health and Human Services could not enter into any new cost plan contracts and could not extend or renew a cost plan contract beyond December 31, 2002. Subsequent laws modified the circumstances under which existing cost plans could continue to operate. The MMA, for example, allowed existing cost plans to be extended indefinitely, with the exception that, beginning January 1, 2008, the Secretary could no longer renew or extend contracts for cost plans serving an area that for the previous year was also served by two or more regional CCPs or two or more local CCPs and that also met specified enrollment thresholds. A cost plan would only be required to leave the counties within its service area that were also served by the CCPs. Most recently, MIPPA extended the exception provision to January 1, 2010, meaning cost plans affected by this provision would close at the beginning of calendar year 2011. MIPPA also requires that the qualifying CCPs used to determine whether the cost plan must close must be offered by more than one organization (see fig. 2). Separately, CMS requires organizations operating cost plans to close their cost plans to new enrollment if they open an MA plan in the same service area. Based on 2009 enrollment information through December, CMS’s preliminary estimates were that 7 of the 22 cost plans would need to withdraw from some or all of their 2009 service area in 2011. Three of the 7 cost plans would need to withdraw from their entire service area. All 3 of these plans already were closed to new enrollment in 2009. In total, CMS estimated that approximately 8,000 beneficiaries enrolled in cost plans, or about 3 percent of total cost plan enrollment, are in counties where their cost plan must discontinue service in 2011. (See app. II for a list of the cost plans that would likely be affected by the MIPPA provision.) All beneficiaries enrolled in cost plans had multiple MA options available to them. Nearly 100 percent of beneficiaries enrolled in cost plans had at least 5 MA plans serving their county in June 2009, and more than 57 percent had a choice of 15 or more MA plans (see fig. 3). About 10 percent of beneficiaries enrolled in cost plans had no local CCPs in their county, which is the MA plan type with the highest enrollment. Two cost plans, located in Colorado and Texas, enrolled about 90 percent of the beneficiaries without a local CCP plan option. About 10 percent of beneficiaries in cost plans were in counties without an HMO, about 62 percent were in counties without a local PPO, and about 8 percent were in counties without a regional PPO. Approximately 42 percent of beneficiaries enrolled in a cost plan were in counties with five or more MA HMOs. All beneficiaries enrolled in a cost plan could enroll in a PFFS plan in June 2009. (See table 1.) Some of the differences between cost plans and MA plans that affect beneficiaries involve out-of-network coverage, enrollment periods, and prescription drug coverage. Cost plans generally scored higher than competing MA plans on the quality scores CMS reports, and their estimated out-of-pocket costs compared to competing MA plans and FFS varied by health status. Cost plans differ structurally from MA plans and Medicare FFS in several ways, including enrollment periods, out-of-network coverage, and prescription drug coverage. For example, cost plans that are open to enrollment must have an open enrollment period of at least 30 consecutive days annually, and some cost plans choose to allow new enrollment all year. Beneficiaries enrolled in cost plans may disenroll at any time. In contrast, beneficiaries enrolled in an MA plan can join, switch, or drop plans, or join FFS, only during certain specified enrollment periods. Beneficiaries enrolled in cost plans who receive Medicare-covered services out of network are covered by Medicare FFS. These services are therefore subject to Medicare FFS coinsurance and deductibles. Out-of- network coverage varies among MA plans according to plan type, but if offered, it is covered by the MA plan, not Medicare FFS. Medicare FFS beneficiaries can receive services from any provider that accepts Medicare. Beneficiaries enrolled in cost plans may obtain Medicare prescription drug coverage by enrolling in any stand-alone Part D plan or a Part D plan offered by the cost plan sponsor. Beneficiaries enrolled in MA plans must choose a Part D plan offered by the MA plan sponsor. Beneficiaries enrolled in PFFS plans also must choose a Part D plan offered by the PFFS sponsor, unless the sponsor does not offer one, in which case beneficiaries can choose any Part D Plan. Beneficiaries enrolled in FFS may choose any Part D plan. For additional information about structural differences between cost plans, MA plans, and Medicare FFS, see appendix III. Our analysis of CMS quality scores found that cost plans’ quality scores, on average, were higher than the average of competing MA plans. All 12 of the cost plans with plan summary scores, based on a scale of 1 (poor quality) to 5 (excellent quality), were rated higher than or the same as their MA competitors in the county with the cost plan’s highest enrollment. These 12 cost plans enrolled about 202,500 beneficiaries, or about 70 percent of the total cost plan enrollment nationwide. (See fig. 4.) The majority of cost plans had higher scores than their MA competitors in each of the five quality dimensions that make up the plan summary score. For example, 15 of the 18 cost plans with a score for the dimension “Ratings of Health Plans Responsiveness and Care,” which includes ratings of beneficiary satisfaction with the plan, were rated higher than their MA competitors. Similarly, 17 of the 20 cost plans with a score for the dimension “Staying Healthy,” which includes how often beneficiaries got various screening tests, vaccines, and other check-ups, were rated higher than their competitors. The majority of cost plans also rated higher than their competitors in the other three quality dimensions reported by CMS. (See fig. 5.) In 2009, estimated average out-of-pocket costs in cost plans, MA plans, and Medicare FFS varied by the health status of beneficiaries. In general, beneficiaries 80 to 84 years old reporting poor health had lower estimated average out-of-pocket costs in cost plans compared to competitor MA plans and Medicare FFS, while beneficiaries in the same age group in cost plans reporting good or excellent health had higher estimated average out- of-pocket costs. Specifically, we found estimated out-of-pocket costs for beneficiaries reporting poor health in 11 of the 12 cost plans without drug coverage to be lower than other MA options, on average, ranging from 69 to 99 percent of the competitor MA plans. Similarly, beneficiaries reporting poor health in all of the cost plans without drug coverage had out-of-pocket costs that ranged from 67 to 92 percent of Medicare FFS. We also found out-of-pocket costs to be lower by similar amounts for beneficiaries in poor health in 4 of the 8 cost plans with drug coverage compared to other MA plans with drug coverage. (See fig. 6.) For 80- to 84-year-old beneficiaries reporting good and excellent health in 8 of the 12 cost plans without drug coverage, we found estimated out-of- pocket costs, on average, that were 5 to 37 percent higher than in competing MA plans without drug coverage. Beneficiaries in the same age category reporting good health in 6 of the 12 cost plans without drug coverage had, on average, higher out-of-pocket costs than FFS, and beneficiaries reporting excellent health in 11 of the 12 cost plans had higher estimated out-of-pocket costs than FFS. Similarly, for beneficiaries reporting good and excellent health in 7 of the 8 cost plans with drug coverage, the estimated out-of-pocket costs were 6 to 36 percent higher than competitor MA plans with drug coverage. In June 2009, 9 of the 18 organizations offering cost plans also offered MA plans in some or all of their cost plans’ service area, which demonstrates that these organizations were capable of bearing financial risk. (See table 2.) These 9 organizations operated a total of 12 cost plans. The combined enrollment in these 12 cost plans in June 2009 was 124,467, or 43 percent of all beneficiaries in cost plans. Seven of the 12 cost plans enrolled fewer than 2,000 beneficiaries, and 2 of the plans enrolled more than 30,000 beneficiaries. Of the 9 organizations that offered both cost plans and MA plans, 1 organization’s only MA plan was a special needs plan. Special needs plans exclusively or disproportionately enroll special needs individuals, so these plans may not be an appropriate option for the beneficiaries enrolled in this organization’s cost plan. All eight organizations offering both cost plans and MA plans that were not special needs plans operated at least one MA plan in some or all of their cost plan’s service area. Seven operated at least one MA plan in their cost plan’s entire service area and one operated at least one MA plan in part of their cost plan’s service area. CMS requires that organizations that offer an MA plan in the same service area as their cost plan close the cost plan to new enrollment. However, officials from CMS stated that there are some exceptions to this requirement. For instance, some organizations were able to keep their cost plan open to enrollment because the units of the organization that contracted with CMS were two distinct entities. The officials stated that they may inspect these organizations to ensure that they do not share beneficiary information across companies and do not route certain beneficiaries into different plans to maximize their profits. The Medicare managed care enrollment composition for the eight organizations that operated both a cost plan and an MA plan that were not special needs plans varied. All eight of these organizations had a total enrollment, including both their cost plan enrollment and MA enrollment, of at least 3,000 beneficiaries. Four of the eight organizations enrolled more than 95 percent of their total Medicare managed care enrollment in their MA plans. Another organization’s Medicare managed care enrollment was fairly evenly split between its MA plan and cost plan. The remaining three organizations had more than 75 percent of their Medicare managed care enrollment in their cost plan. Six of the 11 MA plans offered by organizations that offered both cost plans and MA plans were local HMOs (see table 3). Officials from organizations that offered cost plans cited potential future changes to MA payments and difficulty assuming financial risk as concerns about converting cost plans to MA plans. Officials also expressed concerns about the potential disruption to beneficiaries that could be caused by transferring beneficiaries in cost plans to an MA plan. Officials from organizations that offered cost plans reported that potential changes to MA payments were a significant concern in their decision about whether to convert their cost plans to MA plans. Officials from 13 of the 18 organizations that offered cost plans identified past payment changes in the Medicare risk programs and the potential for future payment changes in the MA program as making the decision to convert difficult, though 6 of these organizations offered an MA plan in some or all of their cost plan’s service area in 2009. For instance, officials from one organization who told us that they would prefer to convert their cost plan to an MA plan, said they have not done so because of concerns future MA payment changes may then necessitate closing the plan. Recent congressional and administration proposals have called for slowing the increase in or reducing MA payments. Officials from some organizations said that the size of their enrollment was insufficient to manage the financial risk associated with the MA program. Officials from 5 of the 18 organizations that offered cost plans stated that their enrollment was too low to spread financial risk. For example, an official from 1 of these 5 organizations stated that, because of the plan’s location in a rural area, its enrollment would never be large, and its cost plan could not take on the financial risk. This official told us that a few high-cost beneficiaries would consume the payments the plan would receive from CMS. In June 2009, the cost plan enrollment levels for these 5 organizations ranged from fewer than 500 beneficiaries to about 37,000 beneficiaries. Despite the concerns of these 5 organizations, we found that plans of equivalent size were able to operate in the MA program. Nationwide, 130 MA plans, or about 21 percent of all MA plans, enrolled fewer than 500 beneficiaries, and 69 percent of MA plans enrolled from 501 to 37,000 beneficiaries. Eleven percent of MA plans enrolled more than 37,000 beneficiaries. According to CMS officials, after 3 years of operation, MA organizations should be able to meet the agency’s enrollment threshold of 1,500 in rural areas and 5,000 in urban areas. However, these officials noted that the total enrollment can include enrollment from other lines of business if the enrollment is with the same legal entity that holds the contract with CMS. Officials from 3 of the 18 organizations that offered cost plans expressed concern about meeting risk-based capital (RBC) requirements, should they be required to convert to an MA plan. An official from the Medicare Cost Contractors Alliance also expressed concern about the ability of some organizations that offered cost plans to raise RBC in the event of a required conversion to an MA plan. The official noted that nonprofit organizations operate most cost plans, and some of these organizations have reservations about their ability to raise additional capital. NAIC officials confirmed that if an organization converted a cost plan to an MA plan, thus assuming more financial risk, the organization would probably need to raise more capital, though the extent of capital needed would depend on the size of the organization and how much of the organization’s business was dependent on Medicare enrollment. Two of the three organizations that reported concerns about RBC did not have an MA plan in June 2009. The third organization operated at least one MA plan, but nearly 85 percent of the organization’s Medicare managed care enrollment was in its cost plan. Officials from more than half of the 18 organizations with cost plans stated they were concerned about the potential disruption to beneficiaries if they were required to convert to a MA plan. Some of these officials noted that the beneficiaries enrolled in their cost plan(s) would not understand the process and would default to Medicare FFS. Officials from two organizations with closed cost plans stated that they have tried in the past to transfer the beneficiaries enrolled in their cost plan into the organization’s MA plan, but had trouble convincing beneficiaries to change plans. In general, if an organization decided to convert a cost plan to an MA plan, the organization would need to close the cost plan and open a new MA plan, if the organization did not already have one. Beneficiaries who wish to enroll in an MA plan offered by the organization that offered their cost plan must affirmatively enroll in the organization’s MA plan. Those who do not choose a plan—whether unintentionally or by design—will be enrolled by default in Medicare FFS. CMS does have a standard process in place to alert beneficiaries when their MA or cost plan discontinues serving the beneficiaries’ area. CMS requires cost plans that discontinue serving an area to notify each Medicare beneficiary enrolled in the plan by mail at least 60 days prior to the end of the contract period and notify the general public at least 30 days prior to the end of the contract period. CMS stated that they would strongly suggest that the cost plans adhere to the more stringent MA requirements regarding plan closures, which require the organization offering the plan to notify each Medicare beneficiary enrolled in the plan at least 90 days before it stops operating by sending a CMS-approved notice to beneficiaries describing available alternatives for obtaining Medicare services within the service area, including MA plans and Medicare FFS. The organization also must publish a notice in one or more local newspapers at least 90 days before the end of the calendar year to alert the public. We provided a draft of this report to CMS and the Medicare Cost Contractors Alliance. CMS provided us with technical comments, which we have incorporated as appropriate, and representatives from the Medicare Cost Contractors Alliance provided us with oral comments. Officials from the Medicare Cost Contractors Alliance stated that it was important to know whether cost plans were open or closed to enrollment in our discussion of competitors and the discussion of organizations offering both cost plans and MA plans. Information on the enrollment status of cost plans is provided in appendices I and II. The Medicare Cost Contractors Alliance officials also stated that cost plans have been in the Medicare managed care market significantly longer than most MA plans and it is this experience that has led the organizations to be weary of potential payment changes to the MA program. In addition, the Medicare Cost Contractors Alliance officials provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Administrator of CMS and other interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. As of December 2009, 18 organizations operated 22 cost plans, with enrollments ranging from 50 to 74,190. Of the 22 cost plans, 15 were open to enrollment. Nonprofit organizations operated 17 of the 22 cost plans. The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) provides that, the Secretary of Health and Human Services would not extend or renew cost plan contracts for service areas where, during the entire previous year, two or more regional coordinated care plans (CCP) or two or more local CCPs were offered by different organizations, if the MA plans met specified enrollment thresholds. Private fee-for-service plans are not CCPs. Appendix III: Structural Differences among Cost Plans, MA Plans, and Medicare FFS for Beneficiaries Medicare Advantage (MA) Preferred Provider Organization (PPO) (Local & Regional) MA Health Maintenance Organization (HMO) Medicare Fee-For- Service (FFS) Enrollment period Cost plans that are open to enrollment must have an open enrollment period of at least 30 consecutive days annually. When beneficiary becomes eligible for Medicare, during the Annual Election Period (AEP), the MA Open Enrollment Period (MA OEP), or a Special Enrollment Period (SEP). When beneficiary becomes eligible for Medicare, during the AEP, the MA OEP, or a SEP. When beneficiary becomes eligible for Medicare, during the AEP, the MA OEP, or a SEP. When beneficiary becomes eligible for Medicare, during the general enrollment period of January 1st to March 31st of each year, or during a SEP. Beneficiary may disenroll at any time and return to FFS. In most cases, beneficiary must stay enrolled for the calendar year in which coverage begins. In most cases, beneficiary must stay enrolled for the calendar year in which coverage begins. In most cases, beneficiary must stay enrolled for the calendar year in which coverage begins. In most cases, beneficiary must stay enrolled until next AEP or MA- OEP. Through Medicare FFS; beneficiary is responsible for FFS coinsurance and deductibles. Services received out of network will generally cost more, but they are covered by the plan. Beneficiary generally responsible for full cost of out-of- network services, however some plans may cover certain services out of network at a higher cost. Any Medicare- approved provider that accepts the plan’s terms. Any provider that accepts Medicare. Any stand-alone Medicare Prescription Drug Plan (PDP) or PDP offered by the cost plan organization. A Part D plan offered by the MA organization. A Part D plan offered by the MA organization. A PDP offered by the PFFS organization. If the organization does not offer a PDP plan, beneficiaries can choose any PDP. Any PDP. Subject to MA plan’s internal appeal process. Subject to MA plan’s internal appeal process. Subject to MA plan’s internal appeal process. Subject to Medicare appeals process. The Annual Election Period (AEP) is from November 15th to December 1st, the MA Open Enrollment Period (MA OEP) is from January 1st to March 1st, and Special Enrollment Periods (SEP) apply whenever a beneficiary meets certain criteria, such as moving out of their current plan’s service area. Beneficiaries have the right to appeal coverage decisions. This chart relates to the first of the five levels of appeals. In addition to the contact above, Christine Brudevold, Assistant Director; Lori Achman; Julianne Flowers; Hannah Marston; Sarah Marshall; Elizabeth T. Morrison; and Amanda Pusey made key contributions to this report.

Summary: Medicare cost plans--managed care plans paid based on the reasonable costs of delivering Medicare-covered services--enroll a small number of beneficiaries compared to Medicare Advantage (MA), Medicare's managed care program in which the plans accept financial risk if their costs exceed fixed payments received for each enrolled beneficiary. Despite the small enrollment, industry representatives stated that cost plans provide a managed care option in areas that traditionally had few or no MA plans. Current law allows existing cost plans to continue operating unless specific MA plans of sufficient enrollment serve the same area. In such cases, the cost plan must discontinue serving that area beginning in 2011. The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) required the Government Accountability Office (GAO) to examine issues related to the conversion of Medicare cost plans to MA plans. In response, GAO (1) determined the MA options available to beneficiaries in cost plans, (2) described key differences for beneficiaries between cost plans, MA plans, and Medicare fee-for-service (FFS); (3) determined the extent to which organizations offering cost plans also offer MA plans; and (4) described concerns cost plans have about converting to MA plans. GAO analyzed data from the Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare. GAO also reviewed requirements for Medicare managed care plans and interviewed officials from all Medicare cost plans and CMS. All Medicare beneficiaries enrolled in the 22 cost plans had multiple MA options available to them. Nearly all beneficiaries enrolled in cost plans had at least 5 MA plans serving their county in June 2009, and more than 57 percent had a choice of 15 or more MA plans. Some of the differences between cost plans and MA plans that affect beneficiaries are out-of-network coverage, enrollment periods, and prescription drug coverage. Cost plans' quality scores, on average, were higher than the average of competing MA plans' scores in the county with the cost plan's highest enrollment. Estimated out-of-pocket costs varied between cost plans and other options depending on the self-reported health status of the beneficiary. In general, beneficiaries reporting poor health had lower estimated average out-of-pocket costs in most cost plans compared to competitor MA plans and FFS, while beneficiaries reporting good or excellent health had relatively higher estimated costs in most cost plans compared to MA plans and FFS. Half of the 18 organizations offering cost plans also offered at least one MA plan in some or all of their cost plans' service area. These 9 organizations operated a total of 12 cost plans. In general, organizations that offer cost plans and MA plans in the same service area must close their cost plan to enrollment. Officials from organizations that offered cost plans cited potential future changes to MA payments and difficulty assuming financial risk as concerns about converting cost plans to MA plans. Unlike cost plans, MA plans assume financial risk if payments from CMS do not cover their costs. Officials from 13 of the 18 organizations offering cost plans identified past and the potential for future payment changes in the MA program as reasons the decision to convert was difficult, though 6 of these organizations offered an MA plan in some or all of their cost plan's service area in 2009. Additionally, officials from 5 organizations said that their enrollment was insufficient to manage the financial risk plans would need to accept in the MA program. Officials from more than half of the organizations that offered cost plans also expressed concerns about the potential disruption to beneficiaries caused by transferring beneficiaries from cost plans to MA plans. GAO provided a draft of this report to CMS. CMS provided GAO with technical comments, which were incorporated as appropriate.