Medicare is the federal government’s health insurance program that covers more than 44 million people age 65 and older and certain individuals who are disabled or have end-stage renal disease. Most Medicare beneficiaries can choose to receive covered services through Medicare FFS or through an MA plan if one is offered where they live. Beneficiaries in Medicare FFS and in MA plans, including PFFS plans, pay monthly premiums and are responsible for cost sharing, which can be in the form of coinsurance (a percentage payment for a given service that a beneficiary must pay), a copayment (a standard amount a beneficiary must pay for a medical service), or a deductible (the amount a beneficiary must pay before Medicare FFS or an MA plan begins to pay). MA plans operate under annual contracts between MA plan sponsors and CMS and provide Medicare benefits in exchange for a monthly payment from CMS for each beneficiary enrolled in the plan. Beneficiaries can disenroll from MA plans during the annual coordinated election period, from November 15 through December 31 of a given year by enrolling in another plan or in Medicare FFS. Changes made during the annual coordinated election period take effect on January 1 of the following year. Beneficiaries can also disenroll from MA plans once during the open enrollment period, from January 1 through March 31 of a given year. Changes made during this time period take effect on the first day of the month following the plan’s receipt of the beneficiary’s request. Relative to beneficiaries in other MA plans and Medicare FFS in April 2007, beneficiaries in PFFS plans were healthier, generally younger, and more likely to live in rural areas with fewer MA options. Specifically, beneficiaries in PFFS plans had projected health care expenditures—an indicator of health status—that were lower, on average, than those of beneficiaries in other MA plans and Medicare FFS. Beneficiaries in PFFS plans had projected health care expenditures that were 7 percent less than those of beneficiaries in other MA plans and 10 percent less than beneficiaries in Medicare FFS. Beneficiaries in PFFS plans were generally more likely to be younger and reside in rural areas than beneficiaries in other MA plans and Medicare FFS (see table 1). PFFS plans had a smaller percentage of beneficiaries age 85 or older compared to other MA plans and Medicare FFS. Approximately 14 percent of PFFS beneficiaries lived in rural areas compared to 1 percent of beneficiaries in other MA plans and 10 percent of beneficiaries in Medicare FFS. Medicare beneficiaries in rural areas, on average, had access to about 12 different PFFS plan options, but only about 4 other MA plan options. In contrast, Medicare beneficiaries in urban areas had access to an average of about 13 PFFS plan options and about 12 other MA plan options. As a result, beneficiaries in rural areas might have been more likely to enroll in a PFFS plan because there were fewer other MA options available in those areas. New enrollees in PFFS plans as of April 2007 were more likely than new enrollees in other MA plans to have been in Medicare FFS prior to enrollment but less likely to have been new to Medicare altogether or previously in a different type of plan. About 81 percent of new enrollees in PFFS plans were in Medicare FFS prior to joining their plan, compared to 65 percent of new enrollees in other MA plans (see table 2). About 6 percent of new PFFS enrollees were new Medicare beneficiaries prior to joining their plan, compared to about 13 percent of new enrollees in other MA plans. About 13 percent of new enrollees in PFFS plans were in a different type of plan before enrolling in their current plan, compared to 23 percent of new enrollees in other MA plans. In contrast to most beneficiaries in other MA plans and Medicare FFS, beneficiaries in PFFS plans may have faced certain financial risks if they or their providers did not contact their plan before receiving services. Specifically, if PFFS beneficiaries or their providers did not obtain advance coverage determinations, which specified whether services would be covered and how much beneficiaries would have to pay, beneficiaries unexpectedly may have been responsible for the entire cost of the service if coverage was later denied by their PFFS plans as not medically necessary. In addition, even if PFFS plans covered the services as medically necessary, some PFFS beneficiaries may have experienced substantially higher cost sharing if they or their providers did not contact their plans before receiving certain services. PFFS plans sometimes used the term prior authorization inappropriately to describe beneficiary or provider responsibilities for contacting their plans. CMS officials stated that PFFS plans should not have used this term because PFFS plans are not permitted to deny coverage for services when prior plan approval was not obtained. However, CMS guidance for PFFS plans related to prior authorization has been inconsistent and sometimes incorrect. If PFFS beneficiaries or their providers did not contact their plan before receiving a service to obtain an advance coverage determination, beneficiaries may have been responsible for the entire cost of the service if coverage for it was later denied by the plan because it was not medically necessary. Beneficiaries may have learned, from the information they received from their PFFS plan, whether a particular type of service would be covered, subject to a determination of medical necessity. However, from that information, the beneficiary would not know whether the plan would determine a service to be medically necessary in a specific instance. To ascertain before a specific service was received whether it would be covered, beneficiaries or their providers may request an advance coverage determination from the PFFS plan. CMS officials told us that they thought it was rare for beneficiaries in PFFS plans to face unexpected costs of denied claims, but they did not have data on the extent to which this occurs. Beneficiaries in other MA plans, such as HMOs and PPOs, generally had certain protections from unexpected costs when receiving services from network providers. Pursuant to CMS policy, when beneficiaries in other MA plans seek care from network providers and these providers are required to fulfill plan procedures to ensure coverage of services, such as obtaining a referral or prior authorization, beneficiaries are held harmless financially when providers fail to take these steps. In this circumstance, if beneficiaries in other MA plans reasonably believe that services would be covered, they would only be liable for their plan’s cost sharing for the services, even if their plan later denies coverage. In addition, when these beneficiaries are responsible for taking steps to ensure coverage of services they receive from network providers, providers are required to inform beneficiaries of their responsibilities before providing these services. If the providers fail to do so, beneficiaries are responsible only for their plans’ cost sharing for the services even if their plans later deny coverage. Because virtually all PFFS plans did not have provider networks, they did not provide these beneficiary protections. Beneficiaries in Medicare FFS also had protection from the unexpected costs of claims that were denied when services provided were subsequently determined to be not medically necessary. Specifically, beneficiaries in Medicare FFS generally are protected from incurring financial liability if they do not receive an advance beneficiary notice notifying them when Medicare is expected to deny coverage for a given service because it was not medically necessary. Some PFFS plans—plans administered by four of the nine PFFS plan sponsors we reviewed—required their providers, under the terms and conditions of the plans, to inform beneficiaries if a specific service was likely to be denied by the plan. However, these terms and conditions did not specify the penalty, if any, for not complying with this requirement. The terms and conditions of the remaining five plan sponsors did not require that providers notify beneficiaries if a service was likely to be denied by the plan. Beneficiaries in some PFFS plans were responsible for higher cost-sharing amounts if they (or their health care providers) did not contact their plans in advance (a process called prenotification) before obtaining certain covered services. Under CMS policy, PFFS plans can vary cost sharing depending on whether beneficiaries (or their providers) have notified the plan before receiving certain services. Four of the nine PFFS plan sponsors in our review offered plans that charged higher cost sharing if prenotification did not occur for certain services, such as inpatient hospital stays, durable medical equipment, inpatient mental health services, and skilled nursing services. The specific services subject to prenotification requirements and the amount of additional cost sharing varied by PFFS plan and could have been substantial (see table 3), as the following examples illustrate. Three PFFS plan sponsors offered plans that required prenotification for inpatient hospital stays. Plans offered by two of the three PPFS plan sponsors increased required cost sharing by $100 to $150 per inpatient hospital admission without prenotification, while plans offered by the third sponsor required an additional $50 per day up to a maximum of $500 per admission. Four PFFS plan sponsors offered plans that required prenotification for durable medical equipment, and doubled, or more than doubled, beneficiary coinsurance rates if prenotification did not occur. One plan increased the coinsurance rate for durable medical equipment and prosthetic devices from 30 percent to 70 percent for items that cost more than $750 if beneficiaries or their providers did not prenotify. In these plans, for example, cost sharing for beneficiaries who purchased a power wheelchair for approximately $4,000 could increase from about $1,200 if they notified their plan to about $2,800 if they did not. Three PFFS plan sponsors offered plans that required prenotification for inpatient mental health stays and increased cost sharing in amounts ranging from $100 per admission to $50 per day up to a maximum of $500 if prenotification did not occur. One PFFS plan sponsor offered plans that required prenotification for skilled nursing facility stays and increased cost sharing by $50 per day up to a maximum of $500 if prenotification did not occur. In contrast to PFFS plans, the other MA plans we reviewed did not appear to have prenotification requirements for services received from network providers. CMS officials noted that prenotification was generally unnecessary in HMOs, which accounted for about 89 percent of beneficiaries in other MA plans in April 2007, because HMOs typically had a primary care physician who authorized care for the beneficiary. CMS officials also confirmed that Medicare FFS does not have prenotification requirements. Administrators from one of the four plan sponsors that required prenotification told us that they did so for inpatient hospital stays and other services in order to help them identify beneficiaries for case and disease management and for discharge planning. Administrators from another plan sponsor stated that they decided to require prenotificiation for durable medical equipment because the benefit typically had a high likelihood of abuse. A representative from another plan sponsor said that when the plan was prenotified it determined whether the equipment was medically necessary and informed the beneficiary of the potential financial liability that would be associated with the use or purchase of the durable medical equipment. The same representative noted that durable medical equipment was often determined to be not medically necessary. Some PFFS plans we reviewed inappropriately used the term prior authorization rather than prenotification in the informational materials they distributed to beneficiaries, which may have caused confusion about beneficiaries’ financial risks. CMS officials stated that PFFS plans should not have used the term prior authorization because PFFS plans are not permitted to deny service coverage due to lack of prior plan approval. Inconsistent information that CMS provided to PFFS plans may have contributed to some PFFS plans’ inappropriate use of the term prior authorization. One source of CMS guidance—a CMS manual—incorrectly stated that PFFS plans’ terms and conditions were required to indicate “whether the provider must obtain advance authorization from the PFFS organization before furnishing a particular service.” CMS officials acknowledged when we interviewed them in April 2008 that this statement was incorrect and should be deleted from its manual; however, as of August 2008 it had not been deleted. Another source of inconsistent guidance from CMS was the data system that the agency used to obtain benefits information from PFFS and other MA plans. CMS officials explained that, prior to our inquiries, they did not realize that the Plan Benefit Package (PBP) software, which PFFS plans used to specify their benefits, did not allow plans to enter their prenotification information, but did allow plans to specify whether they had prior authorization requirements. As a result, some PFFS plans’ summaries of benefits incorrectly indicated that these plans had prior authorization requirements. CMS officials said that they would update the PBP software for contract year 2010 to ensure that PFFS plans would be unable to specify prior authorization requirements and would make available a screen where PFFS plans could enter their prenotification information for specific services. Following our inquiries on prior authorization and prenotification, CMS issued guidance to all PFFS plan sponsors in May 2008 through an operational policy memorandum to clarify its policy in these areas. This policy memorandum reiterated that PFFS plans could not require prior authorization from providers or beneficiaries as a condition of coverage. Regarding prenotification, the policy memorandum clarified that PFFS plans could not impose penalties, but that they were permitted to offer cost-sharing reductions for complying with voluntary prenotification protocols. From January through April 2007, beneficiaries in PFFS plans disenrolled at an average rate that was more than twice that of other MA plans, and we conclude that CMS did not comply with statutory requirements to mail disenrollment rates to Medicare beneficiaries for the previous 2 years for MA plans in their area. Furthermore, information CMS has provided to beneficiaries on MA plan disenrollment rates and reasons for disenrollment is outdated. Beneficiaries in PFFS plans were more than twice as likely to disenroll as beneficiaries in other MA plans from January through April 2007. PFFS beneficiaries disenrolled at an average rate of about 21 percent, compared to about 9 percent for beneficiaries in other MA plans. Disenrollment rates varied by plan, which could reflect plan-level differences in factors such as beneficiary satisfaction with care, service, and out-of-pocket costs. The range of disenrollment rates for PFFS plans—about 4 percent to 59 percent—was similar to the range of rates for other MA plans—about 2 percent to 54 percent. However, PFFS beneficiaries were more likely than other MA beneficiaries to be in a plan with high disenrollment rates. For example, about 19 percent of PFFS beneficiaries were in plans that experienced disenrollment rates of 30 percent or more. In contrast, only 3 percent of other MA beneficiaries were in plans that experienced such high disenrollment rates. Approximately 15 percent of PFFS beneficiaries, but about 65 percent of other MA beneficiaries, were in plans that had disenrollment rates below 10 percent. (See fig. 1.) On average, disenrollees from PFFS plans were generally sicker compared to the average for all beneficiaries in PFFS plans. This pattern was also evident in other MA plans, although the average health status difference between disenrollees and all beneficiaries in these plans was less pronounced. Beneficiaries’ risk scores indicated that the projected health care expenditures, on average, of disenrollees from PFFS plans were estimated to be about 6 percent higher than the average for all PFFS beneficiaries. Similarly, beneficiaries who disenrolled from other MA plans had projected health care expenditures that were, on average, estimated to be about 3 percent higher compared to average projected health care expenditures for all beneficiaries in other MA plans. PFFS disenrollment rates differed depending on beneficiaries’ age group and location (see table 4). Older beneficiaries in PFFS plans tended to disenroll at higher rates. For example, PFFS beneficiaries age 85 and older had the highest disenrollment rate (about 25 percent) while beneficiaries younger than age 65 had the lowest disenrollment rate (about 18 percent). In contrast, there was no such relationship between age and disenrollment rates for other MA plans. Also, beneficiaries in PFFS plans who resided in urban areas were more likely than rural beneficiaries to disenroll, but this was not the case for other MA plans. We conclude that CMS did not comply with statutory requirements to mail disenrollment rates to Medicare beneficiaries prior to the annual coordinated election period. In creating the MA program (previously called the Medicare+Choice program), Congress required CMS to annually mail information to beneficiaries comparing MA plans, including PFFS plans. The mailings were required to contain information about each MA plan available in a beneficiary’s area, including beneficiary disenrollment rates for the previous 2 years, to the extent that these data were available. CMS officials informed us that they had not mailed disenrollment rate information to all Medicare beneficiaries since the Medicare & You 2001 handbook was sent in fall 2000, but more recent data were available. MA plan sponsors are required to provide CMS with disenrollment rates for beneficiaries who had been enrolled in their plans. Although CMS did not respond to our questions about whether MA plan sponsors complied with requirements to provide CMS with disenrollment rates, CMS does have the information needed to calculate current disenrollment rates by using Medicare enrollment data. We used Medicare enrollment data from CMS to calculate disenrollment rates presented in this report for January through April 2007 and also in previous reports in 1996 and 1998. In response to our inquiries, CMS officials stated that there is no requirement to mail disenrollment rates to Medicare beneficiaries, but did not provide any explanation for the agency’s position. We, however, disagree as under federal law, prior to each annual coordinated election period, CMS is required to provide to Medicare beneficiaries disenrollment rates for plans in their area to the extent these rates are available. Because we concluded that disenrollment rates for MA plans were available, CMS was required to include relevant disenrollment rates in annual mailings to Medicare beneficiaries to enable them to make informed choices about their Medicare coverage. CMS published disenrollment rates and reasons for disenrollment through MOC on Medicare’s Web site. As of August 2008, this information was available through MOC based on data for 2004 and 2005. However, given the recent growth in PFFS plans, from about 109,000 beneficiaries in June 2005 to about 2.3 million beneficiaries in June 2008, disenrollment rates and reasons for disenrollment based on disenrollment in 2004 and 2005 may not accurately represent the experience of PFFS plans available to beneficiaries in 2008. CMS officials stated that information on beneficiaries’ reasons for disenrollment is necessary to understand the underlying differences in disenrollment rates across plans. Nonetheless, CMS officials said that the disenrollment reasons survey was discontinued after 2005 due to budget constraints. A CMS official also noted that providing disenrollment rates without reasons for disenrollment would be misleading because one would not know the extent to which beneficiaries left a plan, for example, because another plan was less expensive or due to poor quality care. We disagree with CMS’s position. Although it would be useful to know the reasons behind beneficiaries’ disenrollment decisions, disenrollment rates alone can provide useful relative information about MA plans and prompt beneficiaries to investigate plans further. The substantial enrollment growth in PFFS plans shows that these plans are an attractive option for Medicare beneficiaries. Yet, beneficiaries in these plans may have faced unexpected out-of-pocket costs if plans denied coverage for services for which beneficiaries or their providers had not obtained an advance coverage determination. While officials from CMS did not believe that PFFS plans often denied services unexpectedly for not being medically necessary, it is important to determine the extent to which such denials occur. Having this knowledge would inform CMS and policy makers about whether additional protective measures or beneficiary educational efforts are warranted. It is also important that beneficiaries have accurate and current information about MA plans’ policies and procedures. As such, ensuring that prior authorization guidance is accurate will help beneficiaries and providers better understand the obligations and financial risks associated with PFFS plans. Similarly, providing beneficiaries with current information about MA plan disenrollment rates would help them make more informed choices when considering enrolling in an MA plan. We recommend that the Acting Administrator of CMS take the following three actions: investigate the extent to which beneficiaries in PFFS plans are faced with unexpected out-of-pocket costs due to the denial of coverage when they did not obtain an advance coverage determination from their plan; ensure that CMS guidance on prior authorization accurately reflects CMS policy and that PFFS plan materials conform to CMS requirements; and mail to Medicare beneficiaries MA plan disenrollment rates for the previous 2 years for MA plans that are or will be available in their areas, as required by statute, and update disenrollment rates provided to Medicare beneficiaries through MOC. We provided a draft of this report to CMS and AHIP for comment. CMS provided us with written comments that are reprinted in appendix II, and representatives from AHIP provided us with oral comments. CMS stated that beneficiaries may have more certainty that a particular service will be covered if that service is obtained from a provider in a plan’s network. As a consequence, CMS stated that it is important for beneficiaries in non-network plans (such as virtually all PFFS plans) to understand their rights and obligations. CMS advised that beneficiaries in non-network plans may want to consider obtaining advance determinations from their plans in appropriate circumstances. CMS said that it would continue to work closely with Congress, GAO, beneficiary advocacy groups, and other interested parties to ensure that beneficiaries receive appropriate health care and do not incur unexpected financial risks. CMS outlined the steps that it was taking, or planned to take, in response to each of our three recommendations. In response to our recommendation that CMS investigate the extent to which beneficiaries in PFFS plans are faced with out-of-pocket costs due to the denial of coverage when they did not obtain an advance coverage determination from their plan, CMS is examining coverage denials and complaints, and will be collecting new information from plans and refining its complaint tracking module to support this effort. In response to our recommendation that CMS ensure prior authorization guidance accurately reflects CMS policy, the agency described several steps it has already taken and planned to take to address the inaccuracies, including providing new guidance, modifying the PBP, and providing model terms and conditions that PFFS plans will be required to use in 2009. In response to our recommendation that CMS mail disenrollment rates to Medicare beneficiaries and update disenrollment rates through MOC, the agency commented that it had recently awarded a contract to obtain disenrollment rates and other performance metrics by late 2009. However, the agency was silent as to how it would distribute information on MA plan disenrollment rates to beneficiaries. In general, AHIP representatives thought the report could better highlight certain points related to prenotification, MIPPA, and case management, and AHIP representatives made several observations about other aspects of the report. AHIP representatives stated that, while our presentation of prenotification requirements was accurate, the report should have more clearly stated that we did not know the extent to which beneficiaries actually faced higher cost sharing as a result of not fulfilling prenotification requirements. They also stated that our discussion of MIPPA should have occurred earlier in the report given the potential impact of this legislation on PFFS plans, and suggested that our finding that all nine PFFS organizations in our study provided either case management or disease management services should have been given greater prominence in the report. We believe our methodology and findings regarding prenotification are clearly presented in the report and do not agree that clarifications are warranted. We also believe the placement and emphasis on MIPPA and case and disease management are appropriate given the focus and timing of our work. AHIP representatives made several other observations they thought might help clarify aspects of the report. They explained that prenotification was originally intended to protect beneficiaries by providing them with an incentive to contact their plan to determine whether a service was covered before the service was rendered. AHIP representatives informed us that CMS had posted standard terms and conditions on its Web site that would help to address use of incorrect terms by the industry. They also stated that one explanation for our finding that beneficiaries in PFFS plans were younger on average could be that younger beneficiaries were more likely to try new types of plans. In addition, AHIP representatives emphasized the importance of collecting information about beneficiary reasons for disenrollment and endorsed making this information available to beneficiaries. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Acting CMS Administrator, appropriate congressional committees and others. The report also 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 III. This appendix explains the scope and methodology that we used to address our reporting objectives that (1) compare the characteristics of beneficiaries in private fee-for-service (PFFS) plans to the characteristics of beneficiaries in other MA plans and Medicare FFS; (2) describe the financial risks that beneficiaries in PFFS plans face, compared to beneficiaries in other Medicare Advantage (MA) plans and Medicare fee- for-service (FFS), if they do not contact their plan prior to receiving services; and (3) compare the rates at which beneficiaries in PFFS plans disenroll to the rates for other MA plans and evaluate whether the Centers for Medicare & Medicaid Services (CMS) met statutory requirements to mail disenrollment rates to beneficiaries. To compare the characteristics of beneficiaries in PFFS plans, specifically age, gender, and residential location, to the characteristics of beneficiaries in other MA plans and Medicare FFS, we used Medicare enrollment data from CMS for April 2007 from the Management Information Integrated Repository (MIIR) database and data from CMS on the average risk score for each MA plan in 2007, which provide an indicator of the health status of the plan’s beneficiaries. We focused our analysis on beneficiaries enrolled in five types of MA plans as of April 2007 that accounted for more than 99 percent of the approximately 7.8 million beneficiaries in MA plans at that time—PFFS plans and four other types of MA plans—Health Maintenance Organizations (HMO), Local Preferred Provider Organizations (PPO), regional PPOs, and Provider-Sponsored Organizations (PSO). Among beneficiaries in the five MA plan types in our analysis, we excluded those (1) who were in plans that have enrollment restrictions (i.e., employer plans, Special Needs Plans (SNP), and plans that only cover Medicare Part B services) and (2) who live outside the 50 states, the District of Columbia, and Puerto Rico. After implementing these exclusions, we analyzed data as of April 2007 for 1,304,288 beneficiaries in 431 PFFS plans, 4,535,881 beneficiaries in 1,567 other MA plans, and 31,680,824 beneficiaries in Medicare FFS. We used the Health Resources and Services Administration’s Area Resource File for 2006 to obtain data on counties’ level of urbanization. We defined new enrollees in PFFS and other MA plans as beneficiaries who were in a given MA plan type in April 2007, based on data from the MIIR database, but who were not in that same plan type in December 2006. To compare the health status of beneficiaries in PFFS plans, other MA plans, and Medicare FFS, we used plan-level risk scores from CMS as a proxy for health status. After excluding beneficiaries in employer plans, SNPs, and plans that only cover certain Medicare FFS services as described above, we analyzed risk scores for 430 PFFS plans in which 1,371,169 beneficiaries were enrolled and 1,576 other MA plans in which 4,610,368 beneficiaries were enrolled as of July 2007. To describe the financial risks that beneficiaries in PFFS plans face, compared to beneficiaries in other MA plans and Medicare FFS, if they do not contact their plan prior to receiving services, we reviewed relevant laws, regulations, documentation from CMS, and materials from nine PFFS plan sponsors interviewed that accounted for about 81 percent of PFFS enrollment in July 2007. We reviewed plan benefit information for 2008 provided to beneficiaries as well as provider terms and conditions of payment for 30 PFFS plans, accounting for more than half of each sponsor’s total PFFS plan enrollment. We reviewed plan benefit information for 2008 provided to beneficiaries for 33 HMO or PPO plans operated by the same nine plan sponsors, accounting for more than half of each sponsor’s total enrollment in other MA plans. If the plan’s benefit information provided to beneficiaries explicitly stated that beneficiaries would face higher cost sharing for certain services if they or their provider did not notify the plan before receiving such services, we considered that plan to have a prenotification requirement. We also interviewed officials from CMS and the plan sponsors. Information gathered from our review of the benefit information provided to beneficiaries for PFFS and other MA plans may not be representative of, or generalizeable to, other types of plans offered by these plan sponsors or to other PFFS and other MA plans that were not in our sample. To compare the rates at which beneficiaries in PFFS plans disenroll to the rates for other MA plans, we used Medicare enrollment data from the MIIR database for 6,913,780 beneficiaries in MA plans in December 2006. Because MA plan selections for 2007 generally take effect from January through April 2007, we identified disenrollees as beneficiaries who were covered under a given MA contract in December 2006 but were no longer covered under that contract in April 2007 based on Medicare enrollment data. Because we calculated disenrollment at the MA contract level, we did not address the extent to which beneficiaries transferred from one plan to another within an MA contract. We chose to calculate disenrollment rates at the MA contract level, rather than at the MA plan level, for two reasons: (1) transferring from one plan to another within a contract can occur for administrative reasons and therefore may not reflect beneficiary decisions, and (2) a beneficiary’s decision to transfer, for example, from a zero premium plan to a plan within the same MA contract that charges a premium and has a richer benefit package does not suggest dissatisfaction with the type of MA plan or the sponsor that administers it. We calculated disenrollment rates for each MA contract as the total number of beneficiaries who disenrolled from their MA contract divided by total enrollment in that contract. The disenrollment rate for an MA contract applies to all plans under that contract. We did not include beneficiaries in disenrollment rate calculations if they disenrolled involuntarily due to factors such as death, loss of Medicare eligibility, moving out of their MA contract’s service area, or to administrative factors such as a change in their MA contract’s service area or a termination of their MA contract or plan. After excluding beneficiaries (1) in certain plans and locations as described above and (2) in contracts or plans that were terminated in 2006 or 2007, we analyzed data for 158 PFFS plans accounting for 805,734 beneficiaries and 169,465 disenrollees and for 1,410 other MA plans accounting for 4,488,653 beneficiaries and 392,704 disenrollees. We used risk scores for 2006—an indicator of projected health care expenditures—to compare the health status of disenrollees to beneficiaries overall in PFFS and other MA plans. To estimate average risk scores of disenrollees from PFFS and other MA plans, we used 2006 beneficiary-level risk scores for 169,271 beneficiaries who disenrolled from PFFS plans and for 391,126 beneficiaries who disenrolled from other MA plans from January through April 2007. To estimate the average risk scores of beneficiaries overall in these plans, we used 2006 plan-level risk scores, which are based on 725,110 beneficiaries in 154 PFFS plans and 4,421,308 beneficiaries in 1,400 other MA plans in July 2006, and weighted each plan’s risk score by its July 2006 enrollment. According to a CMS official, MA plans’ risk scores generally decline over the course of a year, so a plan’s risk score based on beneficiaries in the plan in July 2006 could be higher than it would have been based on beneficiaries in the plan in December 2006. As a result, the actual percentage difference between the average projected health care expenditures for disenrollees in PFFS and other MA plans and beneficiaries overall in these plans may be larger than our estimates indicate. To evaluate whether CMS met statutory requirements to mail disenrollment rates to beneficiaries, we interviewed CMS officials, analyzed relevant federal laws and regulations, and reviewed information CMS provided to Medicare beneficiaries through, for example, Medicare Options Compare (MOC) on Medicare’s Web site. Other contributors to this report include Christine Brudevold, Assistant Director; Jennie Apter; William Black; Daniel Lee; Ba Lin; Hillary Loeffler; and Hemi Tewarson.

Summary: Medicare Advantage (MA) plans are an alternative to the original Medicare fee-for-service (FFS) program. Private fee-for-service (PFFS) plans--one type of MA plan--give beneficiaries an option that is more like Medicare FFS than other MA plans, with a wider choice of providers and less plan management of services and providers. PFFS enrollment increased from about 35,000 beneficiaries in June 2004 to about 2.3 million in June 2008. This report compares PFFS plans to other MA plans and Medicare FFS in three areas: (1) characteristics of beneficiaries, (2) financial risks for beneficiaries who do not contact their plans before receiving services, and (3) disenrollment rates. To do this work, GAO reviewed materials from a selected sample of nine PFFS plan sponsors, analyzed Medicare data, and interviewed officials from CMS, which administers the Medicare program, and other organizations. In April 2007, beneficiaries in PFFS plans tended to be healthier and generally younger than beneficiaries in other MA plans and Medicare FFS. Specifically, projected health care expenditures for PFFS beneficiaries were 7 percent less than the projected average for beneficiaries in other MA plans and 10 percent less than the projected average for beneficiaries in Medicare FFS. Beneficiaries in PFFS plans also generally were more likely than beneficiaries in other MA plans and Medicare FFS to reside in rural areas where fewer other MA plans were available. In addition, about 81 percent of beneficiaries who were new enrollees in PFFS plans were in Medicare FFS before enrolling in their plan, compared to 65 percent in other MA plans. PFFS beneficiaries may have faced certain financial risks if they did not contact their plan before receiving services. These risks were generally not assumed by beneficiaries in other MA plans and Medicare FFS. Specifically, if beneficiaries or their providers did not contact their PFFS plans before obtaining a service to make sure it would be covered, beneficiaries unexpectedly may have had to pay for the entire cost of the service if coverage was later denied by their plan. CMS officials told GAO they did not have data on the extent to which PFFS beneficiaries were faced with such costs. Furthermore, some beneficiaries likely experienced higher out-of-pocket costs for covered services if they did not contact their plan before obtaining the services. For example, one sponsor of PFFS plans increased the share of the cost for which beneficiaries were responsible from 30 percent to 70 percent if the beneficiaries did not contact the plan before obtaining certain durable equipment. GAO found that some PFFS plans were inappropriately using the term prior authorization, which can involve denying service coverage if prior plan approval is not obtained, in their informational materials. CMS officials stated that PFFS plans should not have used this term because these plans were not permitted to deny service coverage due to lack of prior plan approval. However, CMS guidance on this issue has been inconsistent and sometimes incorrect. From January through April 2007, beneficiaries in PFFS plans disenrolled at an average rate of 21 percent compared to 9 percent for other MA plans, and GAO concludes that CMS has not complied with statutory requirements to mail disenrollment rates to Medicare beneficiaries. Disenrollment rates can reflect factors such as beneficiary satisfaction and CMS is required by law to mail this information to Medicare beneficiaries to help them compare available MA plans in their area. Although CMS has not mailed disenrollment rates to beneficiaries since 2000, the agency did provide disenrollment rates through Medicare's Web site. However, this information was based on disenrollment in 2004 and 2005 and, given the enrollment growth since then, may not accurately reflect plans available to beneficiaries in 2008.