Medicare is the nation’s health insurance program for those aged 65 and older and certain disabled individuals. All beneficiaries may receive health care through Medicare’s traditional FFS arrangement. Alternatively, a beneficiary may enroll in a Medicare managed care plan if one is available in the county in which he or she lives. The vast majority of the nation’s 39 million Medicare beneficiaries remain in the traditional FFS program, but enrollment in Medicare managed care plans has grown rapidly in recent years. Currently, about 17 percent of all Medicare beneficiaries are enrolled in a managed care plan. As of December 1, 1998, about 90 percent of Medicare’s managed care enrollees were in risk plans. Such plans assumed the financial risk of providing care for a fixed monthly per-beneficiary fee paid by Medicare. Payment rates were determined for each county on the basis of the average adjusted per capita FFS spending in that county. Because these plans were assumed to be able to provide services more efficiently than the FFS sector, Medicare law set payment rates at 95 percent of the FFS amount in each county. These county rates were adjusted up or down on the basis of enrollees’ demographic characteristics, such as age and gender. The adjustments, known as risk adjustments, were intended to account for differences in beneficiaries’ expected health care costs. That is, payment rates for enrollees who were expected to require more medical care were supposed to be higher than the rates for healthier enrollees. This payment methodology has been criticized for a number of weaknesses. Basing payments on per capita FFS spending resulted in significant variation in capitation rates across counties that did not necessarily reflect differences in costs faced by managed care plans.Rural areas, which generally had much lower payment rates than urban areas, often had few or no managed care plans. In addition, years of research indicated that Medicare’s payment methodology and demographic risk adjusters resulted in excess payments to plans because they generally attracted healthier beneficiaries with below-average health care costs. Consequently, many managed care enrollees would have cost Medicare less if they had stayed in the FFS sector. In 1997 the Physician Payment Review Commission estimated that Medicare paid as much as $2 billion annually in excess payments to managed care plans. In recent years, plan participation in Medicare has grown steadily (see fig. 1). Between 1987 and 1991, however, the number of plans dropped dramatically, from 165 to 93. The number of enrollees affected by these withdrawals was fairly small because many of the terminating plans had few or no enrollees. In fact, HMO enrollment has steadily increased each year, even during the years when the number of plans decreased. In the last 3 years, enrollment in Medicare plans has more than doubled, from about 3 million in 1995 to over 6 million in 1998. Managed care enrollment is not evenly distributed nationwide. A comparison of counties with Medicare managed care plan enrollment greater than 5 percent in 1995 and 1998 shows that enrollment has increased in many counties but remains concentrated in the West, Northeast, and Florida. (See fig. 2.) The BBA substantially changed the method used to set the payment rates for Medicare managed care plans. As of January 1, 1998, plan payments for each county are based on the highest rate resulting from three alternative methodologies: a minimum payment amount, a minimum increase over the previous year’s payment, or a blend of national and local FFS spending (see app. II for a description of the new payment methodology). The changes were intended to address criticisms of the original payment system by loosening the link between local FFS spending increases and managed care rate increases in each county. In addition, the establishment of a minimum payment rate was meant to encourage plans to offer services in rural areas, which have historically had low payment rates and few participating plans. The BBA also directed the Secretary of Health and Human Services to develop and implement a better risk-adjustment system based on beneficiaries’ health status by January 1, 2000. The BBA created the Medicare+Choice program, effective January 1, 1999, to broaden beneficiaries’ health plan options. In addition to HMOs, two new types of managed care organizations were allowed to participate in Medicare: provider-sponsored organizations (PSO) and preferred provider organizations (PPO). The BBA also permits private indemnity plans to serve Medicare beneficiaries and allows beneficiaries to participate in medical savings accounts. Traditional FFS Medicare remains available to all beneficiaries. Other BBA provisions changed the requirements for plans participating in Medicare+Choice. For example, plans are required to implement new and more comprehensive quality improvement programs. Compared with pre-BBA requirements, plans must also collect more information on such activities as appeals filed by enrollees and the number and type of the services provided by the plan; in addition, plans must report more information to HCFA and to beneficiaries. The BBA moved up the date for plans to submit their benefit package proposals from November 15 to May 1 of each year, allowing more lead time to coordinate the beneficiary information campaign. Additionally, the BBA eliminated the requirement that no more than 50 percent of a plan’s enrollment may consist of Medicare and Medicaid beneficiaries. The elimination of this restriction means that Medicare plans can now serve areas without first building a commercial base. While expressing support for many of the changes implemented under the Medicare+Choice program, officials from organizations representing managed care plans have also voiced a number of concerns about payment rates and the administrative burden created by some of the new requirements. They stated that the recent rate increases have not kept pace with plan costs or medical inflation. In both 1998 and 1999, many health plans received the minimum 2-percent payment increase. Managed care plans are also concerned about the impact that the new risk-adjustment methodology will have on payments. HCFA estimates that the new risk-adjustment methodology, which will be phased in over 5 years beginning in 2000, will reduce plan payments by $11.2 billion over the period from 2000 to 2004. This reduction is in addition to the Congressional Budget Office’s (CBO) estimates of $22.5 billion in savings between 1998 and 2002 from the BBA’s plan payment changes. In addition, officials from organizations representing managed care plans believed that many of the new BBA requirements, as implemented by HCFA, are overly prescriptive, too costly, and being phased in too quickly. HCFA has responded to some of these concerns, for example, by giving plans more flexibility in meeting the new quality improvement requirements. Plans would also prefer a later submission date for their benefit package proposals so they can base their proposals on more current data. They believed that the May 1 date—8 months before the start of the contract year—is too early. Plans have to meet a similar deadline in order to participate in the Federal Employees Health Benefits Plan (FEHBP): they must submit similar benefit and rate information by May 31 each year to allow FEHBP to coordinate an information campaign for federal employees. To respond to plan concerns, HCFA officials recently changed Medicare’s benefit proposal submission date to July 1, 1999, for the year 2000. Plans, however, continue to have concerns about these and other aspects of the new Medicare+Choice regulations and would like to see further revisions. In the fall of 1998, an unusually large number of plans decided to not renew their Medicare contracts for 1999 or to reduce the number of counties in which they offered services. As a result of these decisions, about 7 percent of all Medicare managed care enrollees had to switch to another plan or return to FFS. A small group of the affected beneficiaries was left with no choice but to return to FFS. While some plans were deciding to leave, however, a number of plans were applying to enter the program or expand their existing service areas. If HCFA approves all of these applications, the number of beneficiaries with access to a managed care plan could increase in 1999 compared with 1998. As of December 1, 1998, there were 346 plans to serve Medicare beneficiaries in specific locations. Each plan represents a contract to serve a particular geographic area. Many managed care organizations, such as Aetna/U.S. Healthcare and Kaiser, operate numerous plans across the country. MCOs terminated 45 (or 13 percent) of these plans as of January 1, 1999. The vast majority of organizations involved in these terminations, however, continue to offer services to Medicare beneficiaries in other areas. For example, Aetna/U.S. Healthcare dropped its plans in Delaware and Maryland but continues to offer plans in California and Florida. An additional 54 plans (16 percent) reduced the number of counties in their service areas. Nonetheless, over 70 percent of the plans operating in December 1998 remain in Medicare with no reduction in their service areas. These withdrawal decisions affected about 407,000 enrollees who could not continue receiving services in their chosen plan. Instead, they had to either choose a new managed care 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 Medicare+Choice plan was offered. Even if another managed care plan was available, about 450 beneficiaries affected by the withdrawals had end-stage renal disease (ESRD) and thus had to return to FFS.Medicare prohibits beneficiaries with ESRD from joining a managed care plan, although they may stay in a plan if they develop the disease while enrolled. For all affected beneficiaries, plan withdrawals can be highly disruptive and costly. Those who return to FFS typically face higher out-of-pocket costs than they incurred as managed care enrollees. Beneficiaries who choose another plan may have to switch health care providers and may have different benefit coverage. Of the 957 counties that were covered by Medicare managed care plans as of September 1, 1998, 406 experienced at least one plan withdrawal; 94 of these counties were left with no Medicare plans. However, of all the instances of plans withdrawing from a county, about 37 percent were by plans withdrawing from a county with 100 or fewer managed care enrollees, including 43 instances in which a plan withdrew from a county with no enrollees. For example, Southeastern United Medigroup of Kentucky eliminated 11 counties from its service area, but had no enrollees in those counties. Consequently, while over 40 percent of counties with at least one plan experienced a plan withdrawal, only 7 percent of managed care enrollees were affected. While some plans have chosen to curtail their participation in Medicare, new plans are entering the program and some existing plans are expanding the areas they serve. HCFA has approved applications from 10 new plans that were able to enroll beneficiaries as of January or February 1999. HCFA is also reviewing 30 additional new plan applications. In addition, 6 service area expansions had been approved and 14 other service area expansion applications were pending as of January 1999. The number of recently approved and pending applications suggests that there is still considerable plan interest in participating in Medicare. Furthermore, total managed care enrollment has increased following the drop that occurred in January 1999 and is now slightly higher than it was when the withdrawals took effect. The 10 new Medicare plans approved by HCFA as of January 20, 1999, offer services in Florida, Hawaii, Illinois, New Jersey, New Mexico, New York, Ohio, Oregon, Washington, West Virginia, and Wisconsin (fig. 3 shows the counties affected by the new plans and by plan withdrawals). Fourteen of the new or pending plans are applying to enter counties that previously had no Medicare managed care options. In 1998, for example, no plans were available in any of the counties in which the newly approved plans in Illinois and Oregon are offering services. One pending new plan has applied to offer services in 68 counties in Iowa, Minnesota, and South Dakota that did not have any plan as of September 1998. Figure 4 shows those counties that have pending new plan applications or pending service area expansions. Even with these newly approved plans, the number of counties with at least one Medicare managed care plan decreased from 957 in September 1998 to 883 in January 1999 (see table 1). However, if all pending new applications and expansions are approved, 1,045 counties will have at least one managed care plan, including 181 counties that had no such plans in 1998. These counties are identified in figure 5 along with those counties that no longer have a plan as a result of the withdrawals and service area reductions. Although it is too early to estimate the impact of the recently approved and pending applications on managed care enrollment, it is possible to calculate the number of beneficiaries that have a plan available in their counties. In September 1998, 28.4 million beneficiaries lived in counties served by at least 1 managed care plan (see table 2). In January 1999, that number dropped by almost 800,000 beneficiaries because of plan withdrawals and service area reductions. However, if all pending new applications and service area expansions are approved, slightly more beneficiaries in 1999 will have the option to join a managed care plan than did in 1998. Nonetheless, fewer beneficiaries will have more than one plan to choose from even if all the new applications are approved. Most of the new plan applications are from traditional HMOs. Thus far, HCFA has approved one PSO and no PPOs, medical savings accounts, or private FFS plans. However, it may be too early to assess how many of these new types of health plans will be interested in participating in the program. Medicare+Choice is still very new, and interim final regulations governing the program were just published in June 1998. Plans had little time to prepare and submit applications for 1999. The number and diversity of applications may increase in future years as plans become more familiar with the new program. However, officials from organizations representing managed care plans believe that the reduced growth in payments and increased administrative burden under Medicare+Choice may discourage future plan participation. No one factor can explain why plans choose to participate in particular counties. Although plans obviously consider payment rates, many other factors also influence their business decisions. Our previous work showed that some areas, such as Boston, Massachusetts, had relatively high payment rates in 1993 but few managed care plans and enrollees. Other areas, such as a number of Oregon counties, had low payment rates but still had several managed care plans with high enrollment in 1995. The pattern of recent plan withdrawals suggests that several factors, including payment rates, may have influenced plans’ decisions. A plan was more likely to withdraw from a county where payment rates were low relative to other counties in the plan’s service area, the plan had been operating since 1992, the plan had low enrollment, or the plan was in a weak competitive position compared with other plans in the county. An unusually high number of plans also withdrew from FEHBP in 1998, suggesting that general market conditions may have played some role in the Medicare plan withdrawals. In some respects, the current Medicare withdrawals are similar to those that occurred in the late 1980s. At that time, many plans left Medicare because they were unable to attract members and were unprofitable. Other factors, such as plans’ inability to establish provider networks, also may have influenced the current withdrawals, but we were unable to quantify those effects. Both before and after the recent withdrawals, managed care plans were much more likely to offer services in high-payment-rate counties than in low-payment-rate counties. In 1999, for example, 91 percent of counties with monthly payment rates over $694 are served by a managed care plan. By contrast, only 11 percent of counties with the minimum payment rate of approximately $380 are served by a managed care plan. High-payment-rate counties, however, were disproportionately affected by the withdrawals (see table 3). Over 90 percent of the counties with the highest payment rates experienced a plan withdrawal, compared with 34 percent of counties with the lowest payment rate. It is possible that some plans withdrew from high-payment-rate counties because they anticipated that these counties will receive below-average payment increases in the coming years. In fact, for those counties with payments based on a blend of national and local FFS spending as specified in the BBA, this payment blending provision (expected to be implemented for the first time in 2000) will result in smaller payment increases for higher-payment-rate counties and larger payment increases for lower-payment-rate counties (see app. II for more information on the BBA’s payment provisions). In addition, over the next 5 years, Medicare payments for graduate medical education (GME) will be eliminated from the blended rates. Because GME spending is concentrated in high-payment-rate counties, its removal will disproportionately slow payment rate growth in high-payment-rate counties. Although a smaller percentage of low-payment counties were affected by withdrawals compared with high-payment counties, enrollees living in the low-payment counties were more likely to be affected by the withdrawals. For example, 16 percent of enrollees who lived in counties with the lowest payment rates were affected by a plan withdrawal compared with 1 percent of enrollees in the highest-payment-rate counties (see table 4). These findings indicate that the plans that withdrew from high-payment counties had relatively few members. For plans that dropped selected counties from their service areas, payment rates appear to be one factor that influenced their decisions. In 1999, for example, PacifiCare of Arizona withdrew from four of the eight counties in its service area, withdrawing primarily from counties with the lowest payment rates. It continued to provide services in Pinal County, which had the highest payment of all the counties in its service area, but dropped Cochise County, where the payment rate was about 25 percent lower. To assess the impact of relative county payment rates on plans’ service area decisions, we compared the payment rate for each county in a plan’s service area with the highest county payment rate in that plan’s service area. We repeated our calculation for every plan. The results (shown in table 5) suggest that counties with payment rates that were low relative to the maximum county payment rate in a given service area were disproportionately affected by service area reductions. For example, while plans reduced their service areas in 5 percent of counties with payments that were between 90 and 100 percent of a plan’s maximum-payment-rate county, they reduced their service areas in 28 percent of counties that had payment rates between 50 and 60 percent of the plan’s maximum-payment- rate county. Several factors, in addition to payment rates, appear to be associated with a plan’s decision to withdraw from a specific county: short length of time operating in the county, low enrollment, and a weak competitive position compared with other Medicare plans in a county. The Medicare managed care program expanded rapidly in recent years; many new plans entered the program, and existing plans expanded the areas they served. The recent withdrawals may represent a market correction—some plans with low Medicare enrollment and in counties dominated by large plans may have concluded that they could not compete effectively and so withdrew. A number of plans left the Medicare program between 1988 and 1991 for similar reasons. Moreover, the market conditions that led to the recent withdrawals may not be unique to the Medicare program. The experience of FEHBP, which also sustained an unusually high number of plan withdrawals this year, suggests that plans may be reacting to general market conditions as well as program-specific ones. Plans were more likely to withdraw from counties in which they had less Medicare experience. We looked at all instances in which a Medicare plan provided services in a county as of February 1998 and determined how long the plan had participated in Medicare in that county. In less than 1 percent of the instances in which a plan entered a county for the first time between 1980 and 1986—that is, plans with more than 12 years of Medicare experience in a county—did the plan withdraw from that county in 1998 (see fig. 6). In contrast, plans were much more likely to withdraw from areas in which they had less than 7 years experience. For example, about one-third of the plans with 5 years of Medicare experience in a county withdrew from that county in 1998. The withdrawal pattern suggests a retrenchment from the rapid growth of Medicare managed care that began in 1994. Plans that had difficulty attracting or retaining enrollees in a county were also more likely to withdraw from that county (see table 6). In almost a third of the instances in which a plan had no enrollees in a county, the plan withdrew from that county. In contrast, in only 12 percent of the instances in which a plan had more than 1,000 enrollees in a county did the plan withdraw. A plan was also more likely to withdraw from a county if it faced larger competitors. Specifically, a plan was more likely to withdraw from a county if its Medicare market share in that county was small relative to the market share of the plan with the highest Medicare enrollment in the county. The bigger the difference in market shares, the more likely the smaller plan was to withdraw from the county. Moreover, the smaller plan was more likely to withdraw if the rest of the market was dominated by a few firms rather than divided up among many firms. Some plans may have withdrawn from counties where they found it difficult to build or maintain provider networks. For example, a Medicare HMO in a rural area of North Dakota withdrew from the program when its hospital provider discontinued its contract with the plan. A HCFA official also told us that the two plans that withdrew from Utah made their decisions early in 1998, before the publication of the interim final regulations implementing Medicare+Choice. According to the official, the plans withdrew because they could not contract with enough physicians to maintain adequate provider networks. Physicians wanted higher reimbursements than the plan was willing or able to pay. Officials from organizations that represent managed care plans have also cited the administrative burden of the new Medicare+Choice requirements as a significant reason for plan withdrawal decisions. For the most part, however, this burden was not so great as to induce MCOs to leave the Medicare program entirely. Many national MCOs, such as Aetna/U.S. Healthcare or Kaiser, offer numerous plans across the country. Nearly all of the MCOs that terminated a Medicare plan in one area continued to operate Medicare plans in other areas. Nonetheless, it may be that the increased administrative requirements, coupled with the expected slow growth in payments and the uncertainties associated with a new risk-adjustment methodology, affected some plans’ participation decisions. Finally, an anomaly related to the transition from the previous Medicare managed care program to Medicare+Choice may have played a role in the unusually high number of withdrawals witnessed this year. Under the previous managed care program, if a plan withdrew from a county, it could not reenter that area for 5 years. The BBA included a similar provision for Medicare+Choice plans, but did not make it retroactive to include plans with contracts under the earlier program. Plans that withdrew before January 1, 1999, have by definition never been Medicare+Choice plans. Consequently, these plans do not face the exclusion period and can reenter any county without waiting 5 years. The effect of this provision may have been to concentrate some of the plan withdrawals in 1998. Some plans may have viewed this year as a one-time opportunity to pull back from the program while they waited to see what future changes might bring. Medicare managed care plans have typically offered more generous benefits—such as coverage for prescription drugs, dental care, and hearing exams—than those available in the FFS program. Although the extent of extra benefits varies by plan, they are more commonly offered in high-payment counties. Since the BBA payment changes were implemented, overall beneficiary access to plans that offer certain additional benefits declined slightly. However, beneficiaries who live in low-payment-rate counties experienced greater decreases in access between 1997 and 1999 than the average beneficiary. While the current benefit changes are having a greater impact on beneficiaries in low-payment counties, the BBA constraints on plan payment increases may lead plans to offer less generous benefits in the future to all beneficiaries than they have in the past. Because of limitations in the available data sources, we can only report on whether a plan offered a particular benefit. The scope of the actual benefit may vary significantly among plans and over time. For example, while two plans may offer coverage of prescription drugs, one plan may have a dollar cap on the benefit and offer coverage only for plan-approved drugs, while the second plan may cover drugs without any limitations. Our study did not distinguish between these two different benefit levels. Plans in counties with lower payments have generally offered fewer additional benefits; as a result, fewer beneficiaries living in lower-payment counties have had the opportunity to join plans that offer these benefits compared with beneficiaries living in higher-payment counties. In 1997, for example, only 61 percent of beneficiaries living in counties with payments under $330 (and with at least one plan) had access to a Medicare plan that offered prescription drug coverage, while 100 percent of beneficiaries living in counties with payments over $658 had such access (see fig. 7). In comparing 1997 and 1999 plan benefit packages for beneficiaries living in counties with at least one managed care plan, we found that access to plans offering different additional benefits decreased slightly after the BBA payment changes (see fig. 8). For example, 71 percent of beneficiaries had access to foot care in 1997, but only 64 percent had access to such coverage in 1999. Access to physical examinations and immunizations did not change. The only benefit for which beneficiary access increased was prescription drug coverage—a benefit valued highly by beneficiaries who enroll in plans. Plans may be choosing to offer a different mix of benefits—substituting prescription drug coverage for other services. It is also possible that the drug benefit plans are offering is more limited; for example, it may have a lower maximum dollar amount that the plan will pay. Most beneficiaries with access to a managed care plan can enroll without paying a separate monthly premium. The percentage of beneficiaries living in counties where plans require enrollees to pay a monthly premium increased slightly from 12 percent in 1997 to 15 percent in 1999 (see fig. 9). In addition, the percentage of beneficiaries living in counties where the minimum plan premium was over $40 increased slightly. Although the changes in beneficiary access to plans offering additional benefits were relatively small, these benefit reductions were concentrated in low-payment-rate counties (see fig. 10). Access to plans offering additional benefits remained nearly constant for beneficiaries in high-payment-rate counties, although we do not know whether plans changed the scope of these benefits. For example, the percentage of beneficiaries in the lowest-payment-rate category with access to Medicare plans offering eye exams decreased from 98 percent in 1997 to 72 percent in 1999. In contrast, all beneficiaries living in the highest-payment-rate counties could obtain covered eye exams from a managed care plan in both years. Access to a plan offering prescription drug coverage, the only benefit for which overall beneficiary access increased between 1997 and 1999, decreased slightly for beneficiaries living in the lowest-payment-rate counties. The decrease in access to plans offering additional benefits in the lowest-payment counties is interesting because these counties experienced an average payment increase of 23 percent between 1997 and 1999 compared with a 4-percent increase for all other counties. It is unclear why coverage of additional benefits would decrease in the lowest-payment counties, given their relatively large payment increase in the past 2 years and higher-than-average payment increases expected in the future. Without data on the level of benefits being offered, the picture is incomplete. Plans in higher-payment-rate counties typically have more competitors than plans in lower-payment counties. Faced with more competition, plans in high-payment-rate counties may prefer to reduce benefit levels rather than eliminate benefit categories altogether. For example, a plan may lower the dollar limit on a prescription drug benefit or impose certain restrictions on the benefit. Plans facing less competition in lower-payment-rate counties may be more willing to eliminate benefits in the face of rising costs. BBA constraints on plan payment increases may lead to more global reductions in future plan benefits. One indication of this potential effect is the effort by plans to revise their 1999 benefit packages. In 1998, plans were required to submit their proposed 1999 benefit packages to HCFA much earlier than in previous years and before HCFA had published the regulations implementing the new Medicare+Choice requirements. After HCFA published the new regulations in June 1998, some plans asked to revise their 1999 benefit packages. They argued that their initial submissions did not include the estimated costs of complying with the new regulations. In addition, plans noted that health care costs, especially prescription drug costs, had grown much faster than they had anticipated earlier. HCFA did not allow plans to revise their 1999 benefit packages because doing so might undermine the benefit submissions process. Plans normally establish benefit packages before they know what their competitors will offer. HCFA officials believe this uncertainty may motivate plans to offer more generous benefits. If plans were allowed to revise their benefit packages after they knew what other plans were offering, HCFA was concerned that plans whose original benefit packages were more generous than their competitors’ might reduce enrollee benefits or raise premiums. In addition, it would have been difficult for HCFA to review and approve benefit changes for all plans and still meet the statutory deadline for providing beneficiaries with comparative plan information. As a result of HCFA’s decision, some plans may have withdrawn from the program because they could not afford to provide the benefit packages they initially proposed. Other plans remained in the program but may revise their benefit packages in the future. The Medicare provisions of the BBA were intended to control the growth in Medicare expenditures and offer beneficiaries more health plan options. Toward those ends, the BBA slowed the rate of growth in FFS payments to certain health care providers, such as hospitals and physicians, and mandated new payment methodologies for other FFS providers, such as home health agencies. At the same time, the BBA addressed a number of known problems with the Medicare managed care program. It revised plan payments to address significant overpayment problems and to encourage managed care plans to offer services in areas with few plans. It also allowed new types of plans to participate in Medicare and imposed new requirements to ensure the quality of care provided by plans. When plans announced they would be withdrawing from Medicare or reducing the areas in which they offered services, however, some observers expressed concern about the future of Medicare managed care and debated whether certain provisions established by the BBA should be revised. While future plan participation should be monitored, it is premature to conclude that Medicare+Choice must be radically revised to ensure the success of Medicare managed care. Enrollees affected by the withdrawals had to choose another plan or return to FFS, but only 1 percent of previously covered managed care enrollees were left without any Medicare+Choice plans. At the same time, HCFA has approved a small number of new plans and is reviewing 30 new plan applications, indicating continued plan interest in participating in Medicare. Some of these new plans, if approved, would offer services in counties that previously had few or no managed care plans. The current movement of plans in and out of Medicare may be primarily the normal reaction of plans to market competition and conditions. While the new payment rates and regulations were undoubtedly considered by plans in making their participation decisions, other factors associated with plan withdrawals—recent entry in the county, low enrollment, and higher levels of competition—suggest that a number of Medicare plans withdrew from markets in which they had difficulty competing. During the early years of the Medicare managed care program, a number of plans with low enrollment that were not operating profitably also withdrew from the program. The BBA transformed the Medicare risk program into Medicare+Choice with the goal of taking advantage of the efficiencies and choices that exist in the private managed care market. Medicare may not be able to harness these benefits without also experiencing some of the adjustments that occur in the health care market. In commenting on our report, HCFA found our analysis of plan participation in the Medicare+Choice program to be sound and agreed with our findings and conclusions. HCFA emphasized that recent trends in the overall managed care market, such as low profit margins, increased competition, and plan consolidations, played a major role in plans’ Medicare+Choice participation decisions. HCFA also noted that the withdrawal of many plans from FEHBP suggests the significance of overall market trends in plans’ decision-making. In its comments, HCFA listed the Medicare+Choice program changes it has proposed to (1) protect beneficiaries affected by plan withdrawals and (2) promote program stability by alleviating plans’ concerns regarding certain administrative requirements. (HCFA’s comments appear in app. III.) HCFA also provided us with technical comments, which we incorporated in the report where appropriate. We also provided a copy of the draft to representatives of the American Association of Health Plans (AAHP) and the Health Insurance Association of America (HIAA). Both groups expressed concern that our report understates the role of reductions in payment increases and the heavier administrative burden created by the Medicare+Choice regulations on the recent plan withdrawals. Similarly, they disagree with our conclusion that plans may be responding to current market conditions and competition. Instead, they believe that significant changes in program payments and regulations are needed to ensure future plan and beneficiary participation in Medicare+Choice. (AAHP’s and HIAA’s comments appear in apps. IV and V.) Both groups also provided technical comments, which we incorporated where appropriate. We recognize that the payment rates and administrative requirements of Medicare+Choice may have played a role in the decisions of some plans to withdraw from a county, particularly plans with low enrollment. However, we also believe that plan participation decisions are based on a number of factors. The relative importance of any single factor can be difficult to determine, in part because the significance of its role may vary among plans. We agree with AAHP and HIAA that plan participation in Medicare+Choice should be monitored, but we continue to believe that it is premature to conclude that the program needs to be radically revised. We are sending copies of this report to the Honorable Donna E. Shalala, Secretary of Health and Human Services, and other interested parties. We will make copies available to others on request. If you or your staffs have any questions about this report, please call me at (202) 512-7114 or James Cosgrove at (202) 512-7029. Other major contributors to this report include Kathryn Linehan, Susanne Seagrave, Patricia Spellman, and Michelle St. Pierre. We reviewed pertinent laws, regulations, HCFA policies, and research by others to obtain information on the Medicare+Choice program, including its new payment methodology and new requirements for plans. To obtain different perspectives on why plans withdrew or reduced their service areas, we interviewed officials at HCFA’s Center for Health Plans and Providers and representatives from the American Association of Health Plans and the Health Insurance Association of America. We conducted our study from December 1998 to March 1999 in accordance with generally accepted government auditing standards; however, we did not independently verify data obtained from HCFA. To identify counties with a risk plan in 1998, we used HCFA’s September 1998 Medicare Managed Care Geographic Service Area Report (GSAR). We excluded cost, demonstration, and health care prepayment plans from our analyses. In cases in which the contract type was not identified with the plan name and contract number, this information was verified using the September 1998 Medicare Managed Care Market Penetration for All Medicare Plan Contractors—Quarterly State/County/Plan Data Files, September 1998 Medicare Managed Care Contract and Segment Service Area File, or HCFA’s Plan Information Control System. The GSAR provides a list of the service areas for all risk and cost managed care contracts. The count of enrollees by plan by county in a plan’s service area as of September 1998 was obtained from the State/County/Plan Penetration Files. To determine the effects of competitive market forces on plans’ decisions to withdraw from particular counties, we used this enrollee information to construct market shares for each plan in each county. We then used a linear probability regression model to analyze the market share information. To analyze the changes in plan participation in the Medicare+Choice program, we used HCFA data on the 1999 Medicare+Choice plan contracts. HCFA provided us with a list of plans that withdrew from the program or reduced their service areas as of January 1, 1998, and the counties and number of enrollees affected. We used this source to determine enrollees affected by withdrawing plans, because data from the State/County/Plan Penetration Files would have overstated the number of enrollees affected by service area reductions in those cases where a plan withdrew from only part of a county. HCFA also provided a list of new Medicare+Choice plans and service area expansion applications approved and under review as of January 1999 and the counties affected. We noted some inconsistencies between the service areas listed on the GSAR and the list of contract nonrenewals and service area reductions. To improve the accuracy of the GSAR, counties were added if they appeared on the contract nonrenewal/service area reduction file and were listed on the Plan Information Control System as part of a plan’s contracted service area but excluded from the original GSAR. We excluded Guam, Puerto Rico, and the Virgin Islands from the 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. County-level payment rate information for 1990 to 1999 for Medicare risk plans and Medicare+Choice plans, including payment reductions resulting from the removal of graduate medical education (GME) spending, was obtained from the HCFA Web site. In addition, we obtained a February 1998 file from HCFA’s Office of Information Systems containing historical county-level information on the year that plans first entered individual counties. There are 29 cases in which plans that withdrew from a particular county in January 1999 are not listed in the historical county-level information as ever having served that county. Some plans may have started serving these counties after February 1998, or the information might have been inadvertently omitted from the historical county-level information. As a result, the total number of plan/county combinations affected by the recent withdrawals contained in this file is incomplete. We obtained information on the number of Medicare beneficiaries by county and Medicare managed care enrollees by county and plan from HCFA. The September 1998 Medicare Managed Care Market Penetration for All Medicare Plan Contractors—Quarterly State/County Data Files showed the number of Medicare beneficiaries by county. This file was used to determine the net effect of the plan withdrawals, new plans, and service area expansions on Medicare beneficiary access to 1999 Medicare+Choice plans and benefits. Similarly, 1997 beneficiaries by county were counted from the December 1997 State/County Penetration Files. Medicare managed care plan enrollment for 1999 was obtained from the September 1998 State/County/Plan Penetration Files. To obtain information on benefits offered by plans in 1999, we used the 1999 Medicare Compare database and the January 1999 Medicare Managed Care Monthly Report. Merging these two sources provided us with plan benefits at a county level. We compared the 1999 benefits with 1997 benefits to identify any changes. We chose 1997 because it was the year before the implementation of the BBA changes. To obtain information on benefits offered by plans in 1997, we used the December 1997 GSAR, the December 1997 Medicare Managed Care Monthly Report, and the 1997 adjusted community rate submissions. Merging these three sources gave us benefits provided by each plan at a county level. Where a plan provided flexible benefits to a county in 1997, those benefits were used in the analyses. Of the 307 risk plans that contracted with HCFA in December 1997, we did not have benefit information for 10 plans. These 10 plans were excluded from both the benefit and premium analyses. Of the 311 plans contracting with HCFA in January 1999, 5 plans were excluded from the benefit analysis and 8 plans were excluded from the premium analysis because of a lack of benefit or premium information. The BBA changed how payments to Medicare managed care plans were calculated in response to criticisms that the rates (1) overcompensated many plans for the beneficiaries they served, (2) varied greatly among counties, and (3) were too low in certain rural areas. This appendix describes the pre-BBA and post-BBA payment methodologies. Before the BBA changed the rate-setting process in 1998, the monthly amount Medicare paid managed care plans for each plan enrollee was directly tied to local spending in the FFS program. Although the actual rate-setting formula was complex, the methodology, in effect, was as follows. Each year, HCFA estimated how much it would spend in each county to serve the “average” FFS Medicare beneficiary. Because managed care plans were assumed to be more efficient than FFS, Medicare set plan payments in each county at 95 percent of the FFS amount. Payments for individual beneficiaries were based on county of residence. Because some beneficiaries were expected to require more health care services than others, HCFA adjusted the payment for each beneficiary up or down from the county payment depending on the beneficiary’s age, sex, and eligibility for Medicaid and whether the beneficiary was a resident in an institution. In 1997, the average county payment was $395 per month. This average increases to $468 when weighted by the number of beneficiaries in each county. From county to county, however, the rates vary dramatically. For example, a plan that served an average beneficiary in Arthur County, Nebraska, would have received about $221 per month. A plan that served a similar beneficiary in Richmond County (Staten Island), New York, would have received approximately $767. The wide variation in capitation rates among counties reflected the underlying variation in Medicare per-beneficiary FFS spending, which in turn was the result of local differences in the price and use of medical services. The BBA loosened the link between the payment rate in each county and the average FFS spending in that county. This change was made to reduce the wide disparity in payment rates that existed under the previous system. Payment rates in each county are now set at the highest of three possible payment rates: a minimum or “floor” rate, a minimum increase rate, and a “blended” rate. The BBA established a floor rate of $367 in 1998. The floor rate will be increased each year to reflect overall growth in Medicare spending. The BBA also established a minimum rate increase of at least 2 percent each year in every county. Finally, the BBA specified a blended rate for each county that reflects a combination of local and national average FFS spending. The blended rate is designed to reduce payment rate variation among counties. Blending will reduce payment increases in counties whose average FFS spending has been higher than the national average and will create larger payment increases in counties whose average FFS spending has been lower than the national average. Over time, the blended rate will rely more heavily on the national rate and less on the local rate. In 1998 and 1999, plans received either the floor rate or a 2-percent increase over their payment from the previous year. Because of a BBA requirement to keep overall county payments budget neutral to what they would have been without the legislation, no county received the blended rate in 1998 or 1999. For the year 2000, however, payment for 63 percent of counties will be based on the blended rate. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Summary: Pursuant to a congressional request, GAO provided information on managed care plans' decisions to leave the Medicare program or to reduce the geographic areas that they serve, focusing on: (1) plans that receive capitated payments; (2) the patterns of plan and beneficiary participation in managed care; (3) factors associated with plans' decisions to enter or leave the Medicare Choice program; and (4) changes in plans' benefit packages and premiums. GAO noted that: (1) although an unusually large number of managed care plans left the Medicare program, a number of new plans have demonstrated their interest in serving beneficiaries by applying to enter the program or expanding the areas in which they offer services; (2) last fall, shortly before Medicare Choice was implemented, 45 plans announced they would not renew their Medicare contracts and 54 others announced they would reduce the geographic areas in which they provided services; (3) about 407,000 enrollees had to choose a new managed care plan or switch to fee-for-service; (4) at the same time, however, several new plans applied to enter the program; (5) thus far, the Health Care Financing Administration has approved 10 new plans for 1999 and is reviewing 30 additional plan applications; (6) some of the pending plan applications are for counties that previously had few or no managed care plans; (7) plan withdrawals cannot be traced to a single cause; a variety of factors appear to be associated with plans' participation decisions; (8) payment level is one factor that influences where plans offer services, but withdrawals were not limited to counties with low payments; (9) when a plan reduced its service area, however, GAO found that counties with low payment rates relative to payments in the rest of a plan's service area were more likely to experience a withdrawal than counties with higher payment rates; (10) a review of other factors suggests that a portion of the withdrawals may have been the result of plans deciding that they were unable to compete effectively in certain areas; (11) for example, plans were more likely to withdraw from counties where they had begun operating since 1992, where they had attracted fewer enrollees, or where they faced larger competitors; (12) some plans have indicated that they withdrew from areas where they were unsuccessful in establishing sufficient provider networks; (13) a broad comparison of plan benefit packages from 1997 and 1999 indicates modest reductions in the inclusion of certain benefits; (14) in 1999, a slightly greater percentage of beneficiaries can join a plan that offers prescription drug coverage, while a slightly smaller percentage of beneficiaries have access to a plan offering dental care, hearing exams, and foot care; (15) beneficiaries living in the lowest-payment-rate areas experienced greater decreases in access than the average beneficiary; and (16) those living in the lowest payment areas experienced a decrease in access to plans offering prescription drug benefits, while beneficiaries in higher payment areas saw an increase in access to plans offering drug benefits.