Medicare has a long-standing history of offering its beneficiaries managed care coveragethrough private plans as an alternative to the traditional fee-for-service (FFS) program, in which apayment is made for each Medicare-covered service provided to a beneficiary. Beginning in the1970s, private health plans were allowed to contract with Medicare on a cost-reimbursement basis. In 1982, Medicare's risk contract program was created, allowing private entities, mostly healthmaintenance organizations (HMOs), to contract with Medicare. Then, in 1997, Congress passed the Balanced Budget Act of 1997 (BBA, P.L. 105-33 ),replacing the risk contract program with the Medicare+Choice (M+C) program. The M+C programestablished a new payment structure, designed to achieve two major goals: (1) reduce spending, and(2) reduce the variation in payments across the country. In general, the program made monthlypayments in advance to participating private health plans for each enrolled beneficiary in a paymentarea (typically a county). In exchange, the plans agreed to furnish all required Medicare-covereditems and services, except hospice services, to each enrollee. Several legislative changes have beenenacted since 1999, to address some of the issues arising from the passage of the BBA. (1) Most recently, Congress made substantial changes to the M+C program with the passage ofthe Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA, P.L.108-173 ). The act creates the Medicare Advantage (MA) program to replace the M+C program and introducesseveral enhancements intended to increase the availability of private plans to Medicare beneficiaries. In addition to the immediate payment increases to plans, beginning in 2006, the MA program willchange the payment structure for local plans and introduce regional plans that operate like PreferredProvider Organizations -- a popular option in the private health insurance market. The MA programprovides financial incentives for plans to participate in this new regional option. Additionally, in2006 beneficiaries will have access to a Medicare Part D prescription drug plan whether they are inFFS Medicare or enrolled in Medicare managed care. (2) Finally, beginning in 2010 a limited number of geographic areaswill be selected to examine enhanced competition among local MA plans and competition betweenthose private plans and FFS Medicare. The MMA made many changes to the payments for Medicare managed care plans, includingimmediate changes, effective March 2004, and then other changes that do not take effect until 2006and 2010. This set of changes creates a multi-tiered payment system, one for local plans, anotherfor regional plans and then beginning in 2010 another one for local plans in areas designated as costcontainment areas. The immediate changes became effective on March 1, 2004. First, a fourth paymentmechanism was added to the calculation of MA payments, so that in 2004, plans are paid the highestof the floor, minimum percent increase, the blend, or a new amount. (See below for a description ofthe three previous payment amounts.) The new payment amount is 100% of fee-for-service (FFS)payments made for persons enrolled in traditional Medicare. The FFS payment is calculated basedon the adjusted average per capita costs for the year for an MA payment area (a county), for servicescovered under Medicare Parts A and B for beneficiaries entitled to benefits under Part A, enrolledin Part B and not enrolled in an MA plan. Other immediate changes were also made to modify thestatutory formulas used to calculate MA payments. All of these immediate changes, discussed inmore detail below, had the effect of increasing payments to MA plans. Additional changes to payments for local MA plans will be made, beginning in 2006. TheSecretary will determine MA payment rates by comparing plan bids (the plan's estimated averagerevenue requirement, (i.e., their estimate of the cost of providing required Medicare Parts A and Bservices) to a benchmark (the maximum amount the federal government is willing to pay a plan forproviding these required benefits). After plans submit their bids, the Secretary will have theauthority to negotiate the bid amount, similar to the authority of the Director of the Office ofPersonnel Management (OPM) with respect to the Federal Employees Health Benefits program. TheSecretary will calculate the benchmark by updating the previous year's payment in a local area bythe statutorily required increase. If a plan's bid is less than the benchmark, its payment will equalits bid plus a rebate of 75% of the difference (between the benchmark and the bid). The rebate maybe used to provide additional benefits, reduce cost sharing, or may be applied towards the monthlyPart B premium, prescription drug premium, or supplemental premium (for services beyond requiredMedicare benefits). The remaining 25% of the difference will be retained by the federal government. If a plan's bid is equal to or above the benchmark, its payment will be the benchmark amount andeach enrollee in that plan will pay an additional premium equal to the amount by which the bidexceeds the benchmark. Although the program is identified as competitive beginning in 2006, in fact the localbenchmark will not be determined in a competitive manner; that is, a payment to one plan in an areawill not be based on any other plan's bid to provide the standard package of Medicare services. Local plans will still continue to compete with one another in order to attract beneficiaries, butpayments to plans in local areas will continue to be based solely on statutorily defined increases. Beginning in 2006, MA plans that choose to offer prescription drug coverage, will also receive abenchmark payment for Part D prescription drug benefits. The benchmark will be competitivelydetermined, based on an adjusted average of all plan bids for the area. By basing the benchmark forPart D benefits on the bids submitted by other plans, the payment methodology applied to MA plansfor providing prescription drug coverage introduces a new form of competition into the program. Also beginning in 2006, the MA program will begin to offer MA regional plans in 26 regionsacross the country. MA regional plans cover both in- and out-of-network required services and haveboth a limit on out-of-pocket expenses and a unified Parts A and B deductible. Each year anorganization will submit a separate monthly bid amount for each plan it intends to offer in a region. The regional benchmark , will include two components; (1) a statutorily determined increase, and (2)a weighted average of plan bids. As with the Part D benchmark for MA plans that offer aprescription drug benefit, the addition of the second component introduces a new form ofcompetition among plans, by basing part of the benchmark on the bids submitted by the plans. Similar to local plans, plans with bids below the benchmark will be given a rebate while plans withbids above the benchmark will require an additional enrollee premium. Additional financial incentives will be provided to encourage regional plan participation. First, starting in 2007, the MMA establishes a stabilization fund to provide incentives for regionalplans to enter into and to remain in the MA program. There will be $10 billion initially provided tothe stabilization fund in 2007 and additional amounts will be added to the fund. Second, during2006 and 2007, Medicare will share risk with an MA regional plan if its costs fall above or belowa statutorily-specified risk corridor. Third, there will be $25 million available beginning in 2006(with an increased amount each year) for additional payments to certain hospitals in regional areasthat demonstrate they have high costs, that would otherwise prevent them from joining an MAnetwork. The MMA requires the Secretary to establish a program for the application of comparativecost adjustment (CCA) in CCA areas. The six-year CCA program is required to begin January 1,2010, and to end December 31, 2015, in a fixed number of geographic locations. The program isdesigned to examine the efficiency both among local private plans and between the MA program andtraditional Medicare. For that purpose (1) payments to local MA plans will, in part, be based oncompetitive bids (similar to payments for regional MA plans), and (2) Part B premiums forindividuals enrolled in traditional Medicare may be adjusted, either up of down, depending on therelative costs of Medicare FFS and managed care. This program will be phased-in so that paymentsand Part B premium adjustments will be fully phased in by the beginning of the fourth year. Thereis also a 5% annual limit on the Part B premium adjustment, so that the amount of the adjustmentfor a year can not exceed 5% of the amount of the monthly Part B premium, in non-CCA areas. In addition to these payment changes, all MA plans will be able to offer Part D Medicareprescription drug coverage beginning in 2006. As part of the annual bidding process, managed careorganizations offering MA plans with prescription drug coverage must include their estimate for thecost of the Part D prescription drug coverage for each MA plan they intend to offer. Plans may alsochoose to offer supplemental benefits, such as vision or dental coverage, which are not included inthe basic Medicare package. Plans will be required to submit a bid for any supplemental benefitsthey intend to offer. Each part of the MA local, regional, and CCA payment structure is discussed in more detailbelow, along with an analysis of the effect of the change in the MMA on Medicare managed care. The Medicare statute for the M+C program set the annual managed care per capita rate fora payment area (for a contract in a calendar year) at the highest of one of three amounts calculated for each county : a rate calculated as a blend of an area-specific (local) rate and a nationalrate, a minimum payment (or floor) rate, or a rate reflecting a minimum increase from the prior year's rate. The revised law for the MA program added a fourth payment type so that beginning March2004, MA plans are paid the highest of the floor, minimum percent increase, the blend, or a newamount. The new payment amount is 100% of fee-for-service (FFS) payments made for personsenrolled in traditional Medicare in the county. Beginning in 2005, the law no longer allows MApayments to be annually updated by the floor or blend, although the increase that was applied to boththe floor and blend, the national growth percentage, is incorporated into the minimum increaseamount. Beginning in 2006, the MMA changes the payment structure for MA local plans byestablishing benchmarks. In general, the benchmark amount is the maximum amount that the federalgovernment would be willing to pay to private plans in an area for the provision of requiredMedicare Parts A and B benefits. The benchmark amount for a local plan will be calculated byincreasing the previous year's payment rate by the minimum increase, or in certain years, (3) by the greater of the minimumincrease or 100% of the per capita FFS amount. Although many of the components of the MA payment structure are not in effect after 2004,each is described in more detail below, in part to provide an historical perspective and in part toprovide a better understanding of the effect of the MMA on Medicare managed care. The majorfactors for determining Medicare's annual local MA per capita rates are summarized in Table 1 . The goal of the blended rate was to reduce variation in payments across the country bygradually shifting county rates away from solely local rates (reflecting wide variations infee-for-service costs) toward a national average rate. Blending is designed to reduce payments incounties where the adjusted average per capita costs (AAPCCs) (4) historically were higher thanthe national average rate, and to increase payments in counties where AAPCCs were lower. Theblended rate in effect for 2004 was based on 50% of the annual area-specific M+C per capita ratefor the year for the payment area and 50% of the input-price adjusted annual national M+C per capitarate for the year. The component of the blend determined by the area-specific (local) rate is based on the 1997AAPCC for the payment area with two adjustments. First, the area-specific rate is reduced toremove an amount corresponding to graduate medical education (GME) (5) payments. Second, rates areupdated each year by a national growth percentage (described below). The component of the blenddetermined by the national rate is a weighted average of all local area-specific rates. This componentof the blend is adjusted to reflect differences in certain input prices, such as hospital labor costs, bya formula stated in the law. Each year, the blended rates are raised or lowered to achieve budgetneutrality; however, there was no budget neutrality adjustment for payments effective March 2004(described below). Effect of MMA. Although the blend will not be used to update payments after 2004,eliminating it will have almost no material effect on payments to plans. Because of the budgetneutrality requirement, the blend was used only once to update payments between 1998 and 2003. The MMA waives budget neutrality for 2004, only, so that plans in about 3% of counties (coveringabout 8% of enrollees) were paid the blend in 2004. (See budget neutrality, below.) Additionally,for 2004, the MMA required an adjustment to the local component of the blend to include additionalpayments that would have been made to plans if Medicare beneficiaries entitled to benefits fromfacilities of the Department of Veteran Affairs (VA) and the Department of Defense (DOD) had notused those services (VA/DOD adjustment). Including the adjustment may have increased paymentsto plans; however, CMS did not implement this adjustment as it did not have the necessary data. Each county is also subject to a floor rate, designed to raise payments in certain countiesmore quickly than would occur through the blend alone. Initially, the BBA provided for a floor ratethat would apply to all counties within the United States and for 2000 this minimum rate was $402per month. A separate minimum was also established for areas outside (i.e., territories) the UnitedStates. Beginning March 2001, BIPA established multiple floor rates, based on population andlocation. For 2001, the floor was $525 for aged enrollees within the 50 states and the District ofColumbia residing in a Metropolitan Statistical Area (MSA) with a population of more than 250,000. For any other areas within the 50 states and the District of Columbia, the floor was $475. For anyarea outside the 50 states and the District of Columbia, the $525 and $475 floor amounts were alsoapplied, except that the 2001 floor could not exceed 120% of the 2000 floor amount. As requiredby law, these payment amounts are increased annually by a measure of growth in program spending(see discussion of national growth percentage, below). In 2002, the floor was $553 for the largerMSAs and $500 for any other areas within the 50 states. The 2003 floors were lower than the 2002floors; $548 for the larger MSAs and $495 for any other areas within the 50 states. (6) The March 2004 floors were$614 for the larger MSAs and $555 for any other areas within the states. Effect of MMA. The floor will not be used to update payments after 2004. The floor amountwas included in the original M+C payment structure as a means to achieve one of its goals --reducing variation in payments across the country. The BBA established a minimum amount thatcould be paid to a plan; increasing the lowest plan payments in the country. For example, prior toM+C the lowest payment to a plan in 1997 was $221 and with the introduction of the floor, thatpayment was increased to $367 in 1998, a jump of 67%. In 1997, the gap from lowest to highestpayment was $546, declining to $416 with the introduction of the floor. Payments for the floor werereset in 2001, which further decreased variation. In 2004, plans in about 67% of counties (coveringabout 29% of enrollees) were paid based on the floor. The gap from lowest to highest paymentincreased in 2004 to $592 and is expected to continue to increase under the new payment rules forMA plans created in the MMA. Historically, the minimum increase rule was included to protect counties that wouldotherwise receive only a small (if any) increase. In 1998, the minimum rate for any payment areawas 102% of its 1997 AAPCC. For 1999 and 2000, the increase was 102% of the annual M+C percapita rate for the previous year. BIPA applied a 3% minimum update for 2001, beginning in March. For subsequent years, the minimum increase returned to an annual January update of an additional2% over the previous year's amount. The minimum percentage increase was the only positive updatefor 2003 M+C payments. The MMA changed the calculation of the minimum percentage increase. For 2004 and beyond the minimum percentage increase will be the greater of a 2% increase over theprevious year's payment rate (as under current law), or the previous year's payment increased by thenational growth percentage (discussed below). Effect of MMA. Previously, the national growth percentage was only applied to the floor rateor the local portion of the blend rate. (7) Plans received the minimum update rate only if they fared betterwith a (2% or 3%) minimum update to their previous year's rate, than if they received a paymentcalculated by increasing the floor by the national growth percentage. This was the case for minimumupdate counties because their payment rate from the prior year was so much higher than the floorrate. Under the new MA payment rules, a plan has its prior year amount increased by the higher ofthe minimum update or the increase in the national growth percentage. This could result in higherpayments to plans than under the previous system. Adding the second component to the minimumincrease (the national growth percentage) incorporates the increase that had been used to update thefloor and blend, both of which will no longer be used after 2004. Another difference is that the calculation of the national growth percentage includes anadjustment for prior year's errors. MMA eliminated the effect of prior years errors for years before2004. In 2004, plans in about 4% of counties (covering about 23% of enrollees) were paid based onthe new minimum increase. In 2005, about 21% of counties (covering about 53% of enrollees) arepaid based on the new minimum increase. In 2006, all counties will receive the minimum updatepayment. For payments, effective March 2004, a fourth payment type was added. The new paymentamount is 100% of fee-for-service (FFS) payments made for persons enrolled in traditionalMedicare. The FFS payment is calculated based on the adjusted average per capita cost for the yearfor an MA payment area (a county), for services covered under Medicare Parts A and B forbeneficiaries entitled to benefits under Part A, enrolled in Part B and not enrolled in an MA plan. This payment is adjusted to remove payments for direct medical education costs and to include theVA/DOD adjustment. (8) Effect of MMA. In 2004, payments in about 26% of counties (covering about 40% ofenrollees) were based on the FFS payments. In future years, the Secretary must rebase FFS at leastonce every three years, but could choose to rebase more often, such as each year or every two years. For 2005, the Secretary decided to rebase FFS. Rebasing FFS rates means that the Centers forMedicare and Medicaid Services (CMS) actuaries recalculate the per capita FFS expenditures foreach county (for End Stage Renal Disease (ESRD) beneficiaries FFS expenditures are calculated bystate) so that FFS rates reflect more recent growth in FFS expenditures. In 2005, payments in about21% of counties are based on the updated FFS rates. In these counties, the rebased FFS local growthrates were larger than the national growth percentage (used in the minimum percentage increase) forthat year, and the MA payment increase was be based on 100% FFS service. However, about 80%of counties had slower (or negative) growth in FFS compared to national rates, and in those countiesthe minimum update was applied. In 2006, the Secretary will not rebase FFS rates. In years inwhich the Secretary chooses to rebase more frequently than required by statute, the announcementwill be provided in the annual "Advance Notice" (released 45 days prior to the first Monday inApril). The BBA required that payments for GME, including both indirect and direct medicalexpenses, must be excluded or "carved out'" of the payments to M+C plans, phased in over fiveyears (by 2002). According to the BBA, GME payments can only be carved out of the blendpayment amount, not the floor or minimum increase payment. As a result, the GME carve out couldnot occur in a year in which no payment was based on the blended rate. The MMA allows a GMEcarve-out for payments to MA plans when based on 100% of FFS, but only for Direct Medicaleducation costs. Effect of MMA. Beginning in 2005, when the blend payment is no longer used to updatepayments for plans, there will no longer be any carve-out for Indirect Medical education costs. Further, any adjustment for Direct Medical education costs will be limited to those MA plans whosepayments are based on 100% of FFS. Payments can only be based on 100% FFS in years in whichthe Secretary rebases FFS. However, as previously discussed, Medicare payments to plans haverarely been based on the blend, the only payment mechanism that allowed a GME adjustment priorto the passage of MMA. Therefore, this change should have very little material impact on MApayments to local plans. The BBA required that once the preliminary rate was determined for each county, a budgetneutrality adjustment would be applied to determine final payment rates. This adjustment was madeso that estimated total M+C payments in a given year would equal total payments that would bemade if payments were based solely on area-specific rates. A budget neutrality adjustment was onlyapplied to the blended rates because rates could not be reduced below the floor or minimum increaseamounts. As a result of this limitation, it was not always possible to achieve budget neutrality. Thelaw made no provision for achieving budget neutrality after all county rates were assigned either thefloor or minimum increase. When this situation occurred for the 1998, 1999, 2001, 2002, and 2003rates, the Centers for Medicare and Medicaid Services (CMS) chose to waive the budget-neutralityrule rather than the floor or minimum rate rules. While the cost of waiving budget neutrality wasnot significant in 1998 and 1999 (less than $100,000 each year), the cost was about $1 billion in2002, and $900 million in 2003. In 2004, the MMA did not allow the budget neutrality adjustmentto be applied to blend payments and beginning in 2005, the blend will no longer be used to updatepayments. Effect of MMA. Budget neutrality is only eliminated for 2004. However, it only affects theblend, which will not be used after 2004. Eliminating budget neutrality in 2004 ensured that theblend payment did not have to be reduced and plans in 3% of counties were able to get a paymentbased on the blend. The national per capita M+C growth percentage is defined as the projected per capita increasein total Medicare expenditures minus a specific reduction set in law for certain years. (9) Because this increase is tiedto total Medicare expenditures, it maintains a link between national Medicare fee-for-servicespending and managed care spending. Starting with the 1999 M+C payments, adjustments were alsomade for errors in the previous years' spending projection. The national growth percentage for 2001, after the reduction and adjustments, was -1.3%. However because BIPA set the floor rates in 2001, the national growth percentage was not used tocalculate the floor rate in 2001. It was only used to calculate the blend rate for 2001. For 2002, the estimated national growth percentage increase over the pre-BIPA paymentamount (used for January and February of 2001) was 8.3%. This figure was based on a 5.6%projected per capita increase in total Medicare expenditures, a 0.3 percentage point reduction set bythe BBRA, a minus 0.3% adjustment for errors in the previous years' projection of spending (1998- 2001), and an increase of 3.2% to account for the impact of BIPA. (10) The increase used tocalculate the floor payment for 2002 was 5.3%, reflecting only the projected per capita increase intotal Medicare expenditures of 5.6% and the 0.3 percentage point reduction set by the BBA. Therewas no adjustment for prior year errors, as the floor amounts were reset by the amounts establishedin BIPA. For 2003, the projected national growth percentage increase was actually a decrease of 2.9%. This decrease reflected a 0.9% increase in per capita costs and a negative 3.8% adjustment for prioryears' errors. The -2.9% factor was used to update the 2002 blend rate. The 2003 update for thefloor was -1%, reflecting the same 0.9% increase in per capita costs, but only a 1.9% decrease forthe prior year error in 2002 estimates. (11) Because both of these updates were negative, the minimumpercentage increase was the only positive update for 2003, yielding the highest M+C payment formost counties. For 2004, the projected national growth percentage increase for January and February was9.5% for the blend and 8.2% for the floor. The revised projection, due to the passage of the MMAwas 12.9% for the blend and 12.1% for the floor, beginning in March. As required by the MMA,the revised increases did not include an adjustment for prior year's errors. For 2005, the projected national growth percentage increase is 6.6%. This increase reflectsa .5% correction for prior year's (2004) estimates. For 2006, the projected national growth percentage is 4.8%. This increase reflects a -.3%correction for prior years (2004 and 2005) estimates. Effect of MMA. Although both the blend and floor payments will not be used to updatepayments after 2004, the same increase that was applied to these payments every year, the nationalgrowth percentage, will continue to be a part of the "MA payment calculation," as it will become oneof the two possible increases to the minimum increase amount. Historically, the adjustment forprior year's errors was negative each year. The MMA wipes the slate clean of prior year adjustments,so that there will be no adjustments for prior year's errors before 2004. However, for 2004 payments,the adjustments would have been positive, so that in fact if these adjustments had been included inthe calculation of the national percentage growth increase, the increase for MA payments in 2004would have been higher; 29.4% for the blend instead of a 12.9% and 16.9% for the floor instead of12.1%. Had this occurred, the increase is large enough that payments in many more counties wouldhave been based on either the blend or the floor. Table 1. Major Factors for Determining Medicare Payments toLocal Medicare Advantage Plans Source : Congressional Research Service (CRS) analysis of provisions in BBA, BBRA, BIPA, andMMA. Note : Information for payment rules is not provided beyond 2004 if rule no longer applies. a. Beginning in 2001, there is a higher floor payment for counties within MSAs with a populationof more than 250,000 and a lower floor payment for any other county in the United States. MA (formerly M+C) payments are risk adjusted to control for variations in the cost ofproviding health care among Medicare beneficiaries. For example, if sicker and older patients allsign up for one plan, risk adjustment is designed to compensate the plan for their above averagehealth expenses. The former Medicare risk contract program adjusted the AAPCCs for demographicrisk factors, and when the M+C program was implemented, it also used these demographic riskadjusters. Demographic risk adjusters include those for age, gender, working status, Medicaidcoverage, whether the beneficiary originally qualified for Medicare on the basis of disability, andinstitutional (nursing home) status. However, these demographic risk adjusters accounted for only a very limited portion of thevariation in health care costs, and as a result, the BBA required the Secretary of HHS to develop anew risk adjustment mechanism that would also account for variations in health status. Beginningin January 2000, CMS implemented this new risk adjustment mechanism built on 15 principalinpatient diagnostic cost groups (PIP-DCGs). Payments were adjusted based on inpatient data usingthe PIP-DCG adjuster and demographic factors, so that this new system accounted for bothdemographic and health-status variations. In addition to a demographic adjustment, under thismechanism, the per capita payment made to a plan for an enrollee was also adjusted if that enrolleehad an inpatient stay during the previous year. Separate demographically-based payments were usedfor newly eligible aged persons, newly eligible disabled Medicare enrollees, and others without amedical history. The BBRA and BIPA made changes to the Secretary's proposed phase-in schedule of thisnew system, through 2002. Plans were concerned because this new risk adjustment methodologyreduced aggregate M+C payments; slowing down its implementation lessened the reduction. Through 2003, 10% of payments included risk adjustment adding the PIP-DCG method and 90%were based solely on the older demographic method. BIPA made additional changes to risk adjustment, in order to account for more of thevariation in health status. A new risk adjustment methodology began in 2004, which adds data fromambulatory settings. This new risk adjustment will be phased in at the rate of 30% in 2004, 50% in2005, 75% in 2006 and 100% beginning in 2007. In March 2002, CMS announced that the new riskadjustment methodology would be based on a "selected significant condition" model comprised ofapproximately 61 disease groups chosen because of their statistical and clinical significance for theMedicare population. Beginning July 1, 2002, M+C organizations have been required to collectinformation on the selected diagnoses and they have been required to submit that data to CMS sinceOctober 2002. Effect of MMA. Starting in 2006, MMA expands risk adjustment in two ways. First, itintroduces a new measure of risk when adjusting beneficiary rebates. MMA directs the Secretaryto adjust the benchmark and the bid for the average of demographic and health history riskcharacteristics of MA enrollees, as described in the law, when calculating a beneficiary rebate. Forlocal plans, the Secretary has the discretion to calculate average risk based on the demographic andhealth characteristics of enrollees in each state, or on a basis other than states, such as the enrollmentof an individual plan. The beneficiary rebate for a local MA plan is calculated as 75% of the amountby which the MA area-specific non-drug monthly benchmark, adjusted with the average riskadjustment factor, exceeds the MA statutory non-drug monthly bid, adjusted with the average riskadjustment factor. By applying the average risk adjustment factor to the benchmark and the bid, allprivate plans that are equally efficient will offer the same rebate to beneficiaries in a particularmarket. Second, MMA expands the Secretary's discretion when risk adjusting payments to privateplans. Previously, payments to plans were adjusted based solely on the demographic and healthstatus risk factors associated with each enrollee. MMA expands the Secretary's ability to adjustpayments by directing the Secretary to consider variation in local payment rates within an area. Ultimately, the Secretary is directed to ensure that the sum of the payment from CMS, and the basicbeneficiary premium do not exceed a plan's risk adjusted bid. This provision ensures that plans arenot paid more than their estimated cost of serving beneficiaries. A summary of payments made to local MA plans is provided in Table 2 . The table includesthe payment made to a plan for covered Medicare services, depending on whether the plan's bid orbenchmark is higher. It also includes any required enrollee basic beneficiary premium or rebate. The table provides an explanation of how risk adjustment is applied to the different payments. Notincluded, are any payments made to plans that choose to offer a Medicare prescription drug program.Plans that provide Medicare prescription drug coverage will receive a separate additionalpayment. (12) Table 2. Total Non-Drug Payments to MA Local Plans forRequired Parts A and B Services, Starting in 2006 Source : The Congressional Research Service (CRS) analysis of MMA provisions. a. The Secretary must adjust payments to local MA plans to ensure that the sum of the payment fromCMS and the Basic Beneficiary Premium does not exceed the plan bid, adjusted for thedemographic and health history risk factors of plan enrollees. b. The rebate to be paid to the plan, the beneficiary rebate, may only be used to provide additionalbenefits, reduce cost sharing, or applied towards the monthly Part B premium, prescriptiondrug premium, or supplemental premium (for services beyond required Medicare benefits). As noted above, between 1997 and 2003, under the M+C program, each county rate was setat the highest amount calculated under three rules (blend, minimum increase, and floor), and thenadjusted for budget neutrality. In 2004, plans were paid the highest amount calculated under fourrules, with 100% of FFS payments for persons enrolled in traditional Medicare added to thecalculation. Figure 1 shows the distribution of payment types by year, since the beginning of theM+C program. Because of the low national growth percentage in 1998 and 1999, no county rate wasset by the blended-rate rule after applying the budget neutrality adjustments. In 2000, the nationalgrowth percentage was sufficiently large (5%), so that payments in 63% of counties were based onthe blended-rate rule. However, the national growth percentage for 2001 was -1.3%, as previouslydiscussed. Therefore, in 2001, no county was paid using the blended-rate rule and about 72% of allcounty payments were set at the floor, with the remainder of counties receiving the minimum 3%increase. Similarly in 2002, no county was paid using the blended-rate rule, and about 79% of allcounties had their payment set at the floor with the remainder of payments set at the minimumupdate of 2%. For 2003, all but six counties had their payments set at the minimum update of 2%,with the remaining six set at the higher floor payment ($548). In 2004 about 26% of counties werepaid 100% of FFS, while most counties, about 67%, were paid the floor; 4% were paid the minimumupdate and 3% received the blend. In 2005, the Secretary chose to rebase payment rates, or in otherwords, allow the county rate to equal 100% of FFS if that rate was higher than the previous year'srate increased by the minimum percentage increase (6.6% in 2005). As a result, in 2005, about 20%of county payment rates are based on the 100 percent of FFS payment rate, with the remaining 80%based on the minimum percentage increase. In 2006, the Secretary will not rebase payment rates andall county rates will be based on the minimum percent increase (4.8%) above the county's 2005 rate. Figure 1. Rule Used to Determine County Payment Rates, by Year, 1998-2006 Calculations for selected 2004 county payment rates are shown in Table 3 . The table showsthe calculation under the four rules. For the eight counties selected, two have their rate set using theminimum update (Los Angeles, California; Dade, Florida;), two set at the floor amount (Hennepin,Minnesota; and Fairfax, Virginia), two set at the blended rate (Bristol Bay, Alaska and San Benito,California) and two set at 100% FFS ( Lackawanna, Pennsylvania and Queens, New York). Startingin 2005, county payment rates will be based on the minimum update rate, or, if larger, 100% of FFSin years when the Secretary rebases payment rates. The floor and blend payments will be eliminatedin 2005. Table 3. Calculation of Monthly Payment Rates for SelectedCounties, 2004 Source : Congressional Research Service (CRS) analysis of CMS data. Large variation in county payment rates was one of the motivating forces behind changesenacted in the Balanced Budget Act. The M+C payment method was designed to reduce thisvariation. Raising the floor in 2001 supported the goal of reducing both the overall variation andincreasing the average payment. However, the effect of "negative" updates for both the blend andfloor payments in 2003 slightly increased variation in payments across counties. The effect of thepayment rule changes in the MMA will no longer decrease variation, and in fact over time, variationwill begin to increase. Examining variations across all counties, Figure 2 shows that the substantial range aboveand below the average payment rate will continue to exist in 2006. Although the differences betweenhighest and lowest payment had diminished each year since the start of the M+C program through2002, in 2004, the gap increased a to $592. For example, in 1997, the average monthly payment rateweighted by the number of Medicare beneficiaries in each county was $467. The lowest rates in thecountry were $221 in two rural Nebraska counties (Arthur and Banner). The highest rates in 1997were $767 and $748, respectively, in Richmond County, New York (Staten Island), and DadeCounty, Florida (Miami). Examining the variation, from highest to lowest payments, the range was$546 in 1997. By 2002, the range had diminished to $356, as the lower floor rate was $500 and thehighest rate (Richmond County) was $856. The average payment in 2002 was $571. Although notshown in the table, in 2003, the range from lowest to highest payment increased to $363 (an increaseof $7 per month per beneficiary, i.e., 2% higher than $356). The average payment increased to $582,an increase of $11 per month per beneficiary over the 2002 amount. While the low floor paymentdecreased from $500 to $495, no M+C plan was paid that amount. The lowest rate in the countrywas $510, representing a 2% increase over the low floor rate of $500 for 2002. The highest rate in2003 was again in Richmond County at $873, with Dade County (Miami) at $851 and Bronx, NewYork at $828. In 2004, the highest rate was in St. Bernard (New Orleans) at $1,147, with DadeCounty (Miami) at $905. The lowest rate, the floor in non-MSA areas, was $555 in areas such asChampaign (Illinois), San Luis Obispo (California), Santa Cruz (Arizona), and Chautauqua (NewYork). In 2005, the difference between the highest and lowest payments is $630, with the highestrate, again, in St. Bernard (New Orleans) at $1,222. The lowest rate in 2005 is $592, in areas thathad previously received the low floor payment, such as Champaign (Illinois), San Luis Obispo(California), and Santa Cruz (Arizona). In 2006, all payment rates will be increased by a 4.8%increase over the 2005 payment. Even though all county rates will increase by the same percentage,the difference between the highest and lowest rates will increase to $661. The highest rate in 2006will be $1,281 in St. Bernard (New Orleans). The lowest rate in 2006 will be $620 in counties thathad in prior years received a low floor payment. Payment rates vary geographically, as well, with higher payments generally occurring in moreurban areas ( Figure 2 ). Because the blend rate was only paid in 2000 and 2004, the large variationsin payment rates that existed prior to the M+C program, have been only partially reduced. The 2001floor rate (increased by BIPA) mostly affected rural counties, but it raised rates for some urbancounties as well. Payments continue to be higher in urban areas and lower in most rural areas. The2005 average payment is $758 in central urban counties, $82 above that for other urban counties,$131 above that for rural-urban fringe counties, and $145 above that for other rural counties. (13) In 2006, the averagepayment rate will be approximately $794 in central urban counties, $85 above that for other urbancounties, $167 above that for rural-urban fringe counties, and $152 above that for other ruralcounties. The range within each of the urban -- rural categories remains substantial as well. Figure 2. Range of County Medicare Managed Care Payment Rates for the Aged, by Location, 1997-2006 Payment rates range widely across geographic areas, as well as withingeographic areas, as shown in Table 4 . For example, plans serving Miami are paidan average of $986 per month in 2005, compared with $654 in Fairfax County,Virginia. But even within neighboring geographic areas, there can be wide variationin payment rates. The payment rate for Dade County in southern Florida is $123more than the rate for neighboring Palm Beach County in 2005 and $128 more in2006. Furthermore, plans competing in the same market may receive substantiallydifferent payments for beneficiaries who live on opposite sides of a county boundary. As illustrated in the Washington, DC metro area and the New Orleans metro area,these differing payment levels may affect plan participation and enrollment. Table 4. Monthly Payment Rates for AgedEnrollees in Selected Areas, in 2005 and 2006 Source : Centers for Medicare and Medicaid Services. Starting in 2006, the MA program will allow plans to operate regionally. MAplans may serve a single region or multiple regions (including all 26 regions) as partof a new regional program. The regional program is designed to encourage plans toserve areas they had not previously served, particularly rural areas. Regional planswill operate like Preferred Provider Organizations -- a popular option in the privatehealth insurance market so that a plan participating in the new regional program will(1) have a network of providers who agree to a contractually specified reimbursementfor covered benefits, and (2) provide for reimbursement for all covered benefits,regardless of whether the benefits are provided within the network. In addition, bothMedical Savings Account (MSA) plans and Private Fee-for-Service (PFFS) plansmay serve one or more regions. (14) The Secretary established 26 regions taking into account such factors as (1)an adequate number of eligible beneficiaries, (2) presence of existing commercial andFederal Employees Health Benefits plans that may consider serving an MA region,(3) limiting the variation of payment rates within regions, and (4) preservation ofexisting patient flow in areas where beneficiaries have a tendency to seek careoutside of their state of residence. Table 5 shows the 26 MA regions, the number ofbeneficiaries in each region, the range of risk adjusted county-level MA rates in theregion, the difference between the highest and lowest risk adjusted county-level MArate in each region, and an average risk adjusted region-level MA rate. The numberof eligible beneficiaries in each MA region range from a high of about 4 million inRegion 24 (California), to a low of approximately 50 thousand in Region 26(Alaska). The difference between the highest and lowest risk adjusted MA rate ineach region range from a high of $493 in Region 17 (Texas) to a low of $64 inRegion 1 (Maine and New Hampshire), Region 21 (Arizona) and Region 25(Hawaii). Because the Secretary has the discretion to make adjustments to accountfor intra-regional variation, the spread of MA rates within a region might not pose asmuch of a risk to plans as it might otherwise have. An MA regional plan may chooseto serve more than one region, or may serve the entire nation, but it can not segmentits service area to offer either different benefits or different cost-sharing requirementsto beneficiaries within the same region. Only the regional plans (not local plans) will be required to have both a singledeductible for Parts A and B services and a catastrophic limit on expenditures. Thedeductible may be applied differently for in-network services and may be waived forpreventive or other items and services. The law specifies that there be onecatastrophic limit for in-network required Parts A and B services and another for allrequired Parts A and B services, although the amount of the catastrophic limit is notspecified in the law. Table 5. Medicare Advantage Regions,Beneficiaries and Per Capita Monthly Payments for Aged Beneficiaries,2005 Source : Table created by the Congressional Research Service (CRS) based on CMSanalysis. Note : Payment rates in this table are risk adjusted. Region level rates are adjustedusing average state aggregate risk scores multiplied by the weighted 2005 countyrates in each state. Payments to regional plans, like local plans, will also be based on abenchmark amount. However, the calculation of regional benchmarks will bedifferent than the calculation of the local benchmarks. For a region, the benchmarkfor part A ad B benefits is comprised of two components, one determined accordingto statute and one based on plan bids. The regional statutory component is theweighted average of all the statutorily determined local payment rates in the region. The weight for the statutory component is based on the percent of eligible individualsin the area, as opposed to enrollees. (15) The plan-bid component is the weighted averageof all the MA regional bids submitted in a region. This weight is based onenrollment by plan. Similar to local plans, each regional plan will submit a bid toprovide coverage of all required benefits, but unlike the benchmark for local plans,the regional benchmark depends on all plan bids. By incorporating the plan bid intothe calculation of the benchmark, the payments amount to any one plan thatparticipates in a region will depend on the bids submitted by other plans in theregion. This introduces a new type of competition, not previously used indetermining Medicare payments. The MA monthly region-specific non-drug benchmark amount will becalculated according to the following formula, for a region for a month in a year. 1. The statutory component of the benchmark is calculated as follows, for aregion and year: a. The statutory region-specificnon-drug amount is equal to the sum (for each of the MA local areas within theregion) of the calculations for the followingformula: (MA area-specific non-drugmonthly benchmark amount for the area and the year) x (number of MA eligibleindividuals residing in the local area/total number of MA eligible individuals residingin the region) b. The statutory national market sharepercentage is the proportion of MA eligible individuals nationally who were not enrolled in an MA plan during the reference month. The reference month is definedas the most recent month during the previous year for which data areavailable. 2. The plan-bid component of the benchmark is calculated as follows, for aregion and a year: a. The weighted average of plan bidsfor an MA region and a year is equal to the sum (for all MA regional plans in thatregion and year) of the calculations of the followingformula: (unadjusted MA statutorynon-drug monthly bid (16) amount for the plan for the year) x (number ofindividuals who reside in the region who were enrolled under that regional planduring the reference month/total number of individuals for all MA regional plans forthat region and year, for plans offered in the region in the referencemonth) b. The non-statutory market sharepercentage is the complement of the statutory market share percentage (1-statutorymarket share percentage) and is the proportion of MA eligible individuals who wereenrolled in an MA plan. Plans not offered in the previous year are excluded. The Secretary willcompute the benchmark for each region before the beginning of each annual electionperiod. Beginning in 2006, the Secretary will annually determine the average of therisk adjustment factors to be applied to regional plan payments. If no plan wasoffered in the region in the previous year, the Secretary will generate an estimateusing factors such as the average for comparable regions or the national average. TheSecretary could apply risk adjustment factors other than on a regional basis, includinga state basis, or a plan-specific basis. Both the plans bids and benchmarks will be risk-adjusted for demographicfactors (including age, disability, gender, institutional status), health status,intra-regional variation, and if applicable, a monthly rebate. To adjust forintra-regional variation, the Secretary will adjust the amounts to take into accountvariation in MA local payment rates among the different MA local areas included inthe region. The Secretary shall adjust payments to MA regional plans to ensure thatthe sum of the monthly payment and any required basic beneficiary premium equalsthe unadjusted MA statutory non-drug bid amount, adjusted for the demographicfactors and intra-regional variation. The MMA establishes a regional plan stabilization fund to encourage regionalplans to serve at least one or even all regions, and to encourage plans to stay inregions they might otherwise leave. Initially, in 2007, $10 billion is to be availableto the fund, but additional amounts may be added. (17) The fundsare to be available through December 2013. The Secretary will be responsible fordetermining the amounts that may be given to MA regional plans from this fund,based on statutory requirements. These funds can be offered either on a national or regional basis. Thenationally based bonus payment will be available for one year to an MA organizationthat offers a MA regional plan in all regions, but only if there was no national planin the previous year. The national bonus amount is 3% of the benchmark amountotherwise applicable for each MA regional plan offered by the organization (thenational plan is comprised of regional plans offered in all regions). More than onenational plan could qualify for this bonus, if the plans were first offered in the sameyear. However, there would be no regional bonus in a year that a national bonus wasawarded. If no national plan was offered in a year, regional bonuses could be awarded. To encourage participation in regions, the Secretary may increase the benchmark ina region that offered no regional MA plans in the previous year. The Secretary willdetermine the bonus amount which will be based on the bids submitted for eachqualifying plan and could vary across regions. Funding could be available for morethan one year. Further, if a plan indicates that it will leave a region, the Secretary mayincrease the benchmark, within limits for up to two years, in that region in order toretain and attract new plans. In this situation, the plan exits must result in fewer thantwo remaining regional organizations, and the percentage of MA enrollment in theregion must be less than the national percentage enrollment. Plans receiving anincreased payment for entering an area would not be able to receive an increasedpayment for retention, in the following year. The increased payment amount wouldbe the greater of: (1) 3% of the benchmark amount in the region, or (2) an amountthat makes the following two ratios equal to each other -- (a) the benchmark plusbonus amount divided by the adjusted average per capita cost for the region, as riskadjusted and (b) the weighted average of the benchmarks for all regions, divided bythe average per capita cost for the United States, as risk adjusted. For payments from the stabilization fund, the Secretary must certify that thethere are adequate funds to cover payments and may limit enrollment in regionalplans receiving the bonus to ensure adequate funding. To further encourage plan participation in the regional program, Medicarewill initially share risk with MA regional plans in 2006 and 2007. If a plan's costsfall outside of a specified range or "risk corridor," plans will assume only a portionof the risk for unexpected high costs and plans will be required to return a portion ofthe savings to Medicare for unexpected low costs. A plan's allowable costs will bemeasured against a target amount. (18) If allowable costs are between 97% and 103% of the target amount for theplan for the year, there will be no payment adjustment for the plan. If the Secretarydetermines that a plan's allowable costs are over 103% but no greater than 108% ofa specified target amount, the plan will receive an additional payment equal to 50%of the difference between the allowable costs and 103% of the target amount. Forcosts above 108% of the target amount, the Secretary will increase the payment bythe sum of 2.5% of the target and 80% of the difference between allowable costs and108% of the target. Conversely, if a regional plan's allowable costs are less than 97% but greaterthan or equal to 92% of the target amount, the Secretary will reduce the payments by50% of the difference between 97% of the target amount and allowable costs. Ifallowable costs are less than 92% of the target amount for the plan and year, theSecretary will reduce the monthly payment by the sum of 2.5% of the target amountand 80% of the difference between 92% of the target amount and such allowablecosts. The MMA also allows the Secretary to provide for an increased paymentamount for certain hospitals that provide inpatient hospital services to MA regionalplan enrollees. This provision was designed to aid MA organizations who offerregional plans to meet the provider access requirement. To qualify for thesepayments, an MA organization offering a plan must certify to the Secretary that theorganization was unable to reach an agreement with an essential hospital (19) to provide inpatient hospital services to plan enrollees. Further, the hospital must prove that thecosts of serving the plan's enrollees exceeds the Medicare Part A payment. In suchcases, the plan must also pay the hospital at least the Medicare Part A payment forinpatient hospital services provided to enrollees. Beginning in 2006, there is to be$25 million available (with an increased amount each year) for these payments. A summary of payments made to regional MA plans is provided in Table 6 . The table includes the payment made to a plan for covered Medicare services,depending on whether the plan's bid or benchmark is higher. It also includes anyrequired enrollee basic beneficiary premium or rebate. The table provides anexplanation of how risk adjustment is applied to the different payments. Notincluded, are any payments made to plans that choose to offer a Medicareprescription drug program. Plans that provide Medicare prescription drug coveragewill receive an separate additional payment. Table 6. Total Non-Drug Payments to MARegional Plans for Required Part A and B Services, Starting in2006 Source : The Congressional Research Service (CRS) analysis of MMA provisions. a. The Secretary must adjust payments to regional MA plans to ensure that the sumof the payment from CMS and the Basic Beneficiary Premium do not exceedthe plan bid, adjusted for the demographic and health history risk factors ofplan enrollees and subject to intra-regional variation. b. The rebate to be paid to the plan, the beneficiary rebate, may only be used toprovide additional benefits, reduce cost sharing, or applied towards themonthly Part B premium, prescription drug premium, or supplementalpremium (for services beyond required Medicare benefits). Beginning in 2010, the Secretary will establish a program for the applicationof comparative cost adjustment (CCA) in CCA areas. The six-year program willbegin January 1, 2010 and end December 31, 2015. The program is designed to testdirect competition among local MA plans, as well as competition between local MAplans and fee-for-service Medicare. This program will only occur in a limited number of statutorily qualifyingareas in the country. The Secretary will select CCA areas from among thoseMetropolitan Statistical Areas (MSAs), or such similar areas as the Secretaryrecognizes, which meet the following requirements for the relevant reference month: (1) at least 25% of MA eligible individuals who reside in the MSA were enrolled inan MA local plan; and (2) before the beginning of 2010, at least two MA local planswill be offered by different organizations in the MSA during the annual coordinatedelection period, each meeting the current law minimum enrollment requirements fora plan. The total number of CCA areas will be the lesser of six MSAs or 25% of thenumber of MSAs meeting the requirements. Additionally, an MA local area (acounty) in an MSA will be excluded from the CCA area, if, in 2010 it does not offerat least two MA local plans, each offered by a different MA organization. If an MAlocal area meets the requirement for 2010 it will continue to be included in the CCAarea for subsequent years, even if it no longer meets the requirements as long as thereis at least one MA local plan offered in the local area. The benchmark for MA local plans in a CCA area will be calculated using aformula that weights the FFS portion and a local plan portion, described below. TheFFS portion is based on the projected FFS amount for the area, with certainadjustments for demographics and health status. The local plan portion is based ona weighted average of bids for plans in the area. For Medicare beneficiaries in FFS, Part B premiums in CCA areas will beadjusted either up or down, depending on whether the FFS amount is more or lessthan the CCA area benchmark. If the FFS amount is greater than the benchmark,beneficiaries in traditional Medicare FFS will pay a higher Part B premium than otherFFS beneficiaries in non-CCA areas. If the FFS amount is less than the benchmark,the Part B premium for FFS beneficiaries will be reduced by 75% of the difference.These increases and decreases are subject to a 5% limit, that is, adjustments to PartB premiums in CCA areas cannot exceed 5% of the national part B premium.Beneficiaries in traditional Medicare FFS with incomes below 150% of poverty, whoqualify for low-income subsides under the Medicare prescription drug program, willnot have their Part B premium increased. Beginning in 2010, the CCA non-drug monthly benchmark amount will becalculated according to the following formula, for a CCA area for a month in a year. 1. The MA local component is calculated as follows, for an area in a year: a. The weighted average (20) of the MAplan bids is equal to the sum (across each of the MA local plans for the area) ofthe calculations for the following formula: (the accepted unadjusted MAstatutory non-drug monthly bid) x (number of individuals who reside in the area andwho were enrolled under the plan during the reference month for that year/totalenrollees for all MA plans for that area and year, for plans offered in the CCA in thereference month). b. The MA (non FFS) market sharepercentage is the proportion of MA eligible individuals who, during the referencemonth, were enrolled in an MA plan, or if greater, the same proportion determinedon a national basis. 2. The FFS component is calculated as follows, for an area in a year: a. The FFS area-specific non-drug amount is the adjusted average per capita cost, which is risk adjusted and alsoexcludes direct graduate medical education and includes the additional payments thatwould have been made if Medicare beneficiaries entitled to benefits from facilitiesof the Department of Veteran Affairs (VA) and the Department of Defense (DOD)hadn't used those services. b. The FFS market share percentage iscomplement of the MA market share percentage (1- MA market share percentage). It is the proportion of MA eligible individuals who, during the reference month, were not enrolled in an MA plan, or if greater, the same proportion determined on anational basis. Plans not offered in the previous year are excluded. The Secretary willcompute the benchmark for each CCA area before the beginning of each annualelection period, beginning in 2010 and continuing until the end of the program. TheCCA program will be phased-in over four years, so that in 2010 only one-fourth ofthe benchmark will be based on the CCA benchmark and three-fourths of thebenchmark will be calculated in the same manner as the benchmark for local MAplans. By 2013, the benchmark will be 100% CCA. Beginning in June 2004, MA plans could begin offering Medicare-endorseddrug discount cards, that were effective in July 2004, to their own enrollees throughthe newly established drug discount card program under MMA. The cards canprovide discounts on drug prices even if the plan does not have a drug benefit, or ifthe plan benefit cap is reached. Beginning in 2006, MA plans may, but are not required to, offer Part Dprescription drug coverage. Furthermore, enrollment in Part D is voluntary and asa result, beneficiaries who chose to enroll in MA plans will not be required to enrollin an MA-Prescription drug (MA-PD) plan. However, the requirements placed onMA plans could lead to a situation in which the only MA plans available in an areaare those offering prescription drug coverage. At least one plan offered by an MAorganization in an area is required to be an MA-PD plan, one that offers Part Dprescription drug coverage. Therefore, if only one organization offers an MA planin an area and it offers only one plan, that plan would have to be an MA-PD and thebeneficiary would have to enroll in Part D in order to enroll in an MA plan. In thissituation, a beneficiary who did not want to enroll in Part D would have to receiveMedicare services through traditional FFS Medicare. If an MA organization offersmore than one plan in an area, only one is required to provide Part D prescriptiondrug coverage. Each organization in an area is subject to this standard, so that evenif there are multiple plans in an area, each organization must offer at least one planthat includes prescription drug coverage. MA-PD plans will receive drug subsidies, for their enrollees. MAorganizations offering prescription drug coverage will receive a direct subsidy foreach enrollee in an MA-PD plan equal to the plan's risk adjusted standardized bidamount (reduced by the base beneficiary premium). The plan will also receive thereinsurance payment amount (21) for the federal share. Finally, an MA-PD planwill also receive reimbursement for premium and cost-sharing reduction for itsqualifying low-income enrollees. Beneficiaries who enroll in a plan offering Part D, must pay the standard PartD premium. However, MA-PD plans offering a rebate, may use all or part of thatrebate as a credit toward the MA monthly prescription drug beneficiary premium. The prescription drug programs offered through MA plans have the potentialto be very different than coverage offered to FFS beneficiaries, and as a result, costsand/or enrollment in MA plans could be affected. Plans might be able to decreasecosts or increase services, thus becoming a more attractive benefit, for the followingreasons: (1) MA plans that currently offer prescription drug coverage will have moreexperience working with Medicare beneficiaries and may be more efficient; (2) MAplans could augment funds they already use for prescription drugs and offer moregenerous coverage than the standard benefit; (3) MA plans could also transfer their"old" prescription drug money to offer other services; and (4) MA plans cover PartsA and B benefits and may therefore be able to realize some savings (which could bepassed onto the beneficiary), such as reduced hospitalization, from Medicare'sprescription drug coverage. On the other hand, enrollment in MA plans coulddecrease if beneficiaries move from MA plans to FFS, once they can receiveprescription drug coverage without the restrictions of a more limited providernetwork. The MMA made many substantial changes to the Medicare managed careprogram, ranging from increasing funds to creating a new regional program. By2010, a limited number of geographic areas will be selected to examine enhancedcompetition among local MA plans and competition between private plans and FFSMedicare. These changes are designed to increase private plan participation inMedicare and thus provide more Medicare beneficiaries with an alternative to FFScoverage. The M+C program had difficulty meeting similar goals and the MMAchanges were designed to address some of these problems. As the major programchanges in MA will not take effect until 2006, it will take a few years, at a minimum,to determine the success of these changes. Part of the success will depend onwhether private plans are receptive to providing services in accordance with thesenew statutes.

Summary: Medicare has a long-standing history of offering its beneficiaries managed care coveragethrough private plans as an alternative to the traditional fee-for-service (FFS) program, in which apayment is made for each Medicare-covered service provided to a beneficiary. Beginning in the1970s, private health plans were allowed to contract with Medicare on a cost-reimbursement basis. In 1982, Medicare's risk contract program was created, allowing private entities, mostly healthmaintenance organizations (HMOs), to contract with Medicare. Then, in 1997, Congress passed theBalanced Budget Act of 1997 (BBA, P.L. 105-33 ), replacing the risk contract program with theMedicare+Choice (M+C) program. Most recently, Congress passed the Medicare Prescription Drug,Improvement and Modernization Act of 2003 (MMA, P.L.108-173 ) which included provisions tocreate the Medicare Advantage (MA) program offering a variety of managed care options forMedicare beneficiaries. The MA program replaces the M+C program. The newly created MA program offers a new payment structure and provides more optionsthan its predecessor, the M+C program. In addition to the immediate payment increases to plans,beginning in 2006, the MA program will change the payment structure and introduce regional plansthat operate like Preferred Provider Organizations -- a popular option in the private health insurancemarket. The MA program provides financial incentives for plans to participate in this new regionaloption. Additionally, in 2006, beneficiaries will have access to a Medicare Part D prescription drugplan whether they are in fee-for-service Medicare or enrolled in Medicare managed care. Finally,beginning in 2010, for a six-year period, a limited number of geographic areas will be selected toexamine enhanced competition among local MA plans and competition between private plans andFFS Medicare. This report focuses on MA payments. For a discussion on the effect of the MMA onMedicare managed care, see CRS Report RS21761 , Medicare Advantage: What Does It Mean forPrivate Plans Currently Serving Medicare Beneficiaries? This report will be updated as necessaryto reflect significant changes to the program.