RS21761 -- Medicare Advantage: What Does It Mean For Private Plans Currently Serving MedicareBeneficiaries? Updated April 20, 2004 The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA, P.L. 108-173 ) added a voluntary prescription drug benefit to Medicare and made manychanges to the Medicare+Choice (M+C) program, now called Medicare Advantage (MA). Changes to MA include(1) increased payment rates, (2) a competition program in2006, (3) the addition of regional plans beginning in 2006, and (4) a six-year comparative cost adjustment programin 2010 that enhances competition between MA plans andrequires traditional Medicare to compete with MA plans. Although plan participation is likely to increase due tothe increased payments, long-term plan participation isunknown. MMA added a voluntary prescription drug benefit to Medicare. Starting in 2006, beneficiaries will have access to a drug plan whether they are in traditional fee-for-service(FFS) Medicare, or enrolled in managed care. The prescription drug coverage will be provided through either newlycreated prescription drug plans or for those beneficiaries inMA, Medicare Advantage Prescription Drug (MA-PD) plans. Managed care organizations will be required to offerat least one plan that includes the standard prescription drugbenefit, or an actuarially equivalent drug benefit, but may offer additional plans without a drug benefit, or with amore generous benefit. Generally, organizations offeringMA-PD plans will be required to comply with the rules and procedures required of companies offering a prescriptiondrug plan to beneficiaries in the FFS Medicare programunder the new Part D. Similar rules and procedures will be established for the prescription drug plans and MA-PDplans with respect to: enrollment, dis-enrollment,termination, coverage periods, appeals, information dissemination and the procedure of submitting a bid for the costof providing the drug benefit. Historically Medicare managed care plans were able to attract enrollees by offering additional benefits, one of the most popular being prescription drugs. Beneficiaries whoenrolled in these plans were willing to accept some of the restrictions of managed care, such as limitations onprovider choice, in order to have the additional benefits. Beginning in 2006, beneficiaries will be able to get prescription drugs whether they are in traditional FFS Medicareor an MA-PD plan. To compete with traditional Medicare,some plans may redesign their benefit packages to remain attractive to their enrollees. For example, they mayconsider adding vision or dental services, if they do not alreadyinclude them, reducing cost sharing, or enhancing the prescription drug benefit. In 2004, 36% of Medicare Advantage enrollees are enrolled in a plan that includes prescription drugs with no additional premium. (1) These plans are providingprescriptiondrug coverage to enrollees because their cost of providing all benefits covered by Medicare under Hospital Insurance(Part A) and Supplementary Medical Insurance (Part B) isless than the current payment rate. Starting in 2006, MA-PD plans will receive additional money from Medicareto pay for the prescription drug benefit. If a plan can continueto provide the standard Part A and B benefits at a lower cost (i.e., if its bid for covering Part A and B benefits is lessthan the benchmark, explained in more detail below), thenit can provide other additional benefits with some of the savings that might, in previous years, have gone towardsproviding prescription drugs. What can plans do to compete with traditional FFS Medicare? Managed care organizations will be allowed to make their plans more attractive to beneficiaries by reducingout-of-pocket expenses (copayments for Part A and Part B benefits, the premium for Part B coverage, or thepremium for the prescription drug coverage) or by adding benefitssuch as eyeglasses and earing aids. Plans may also add additional drug coverage beyond the basic Medicare benefit,but there is a disincentive for them to do this. Once anenrollee reaches the annual out-of-pocket threshold for catastrophic drug coverage ($3,600 in 2006, which wouldbe reached with $5,100 in total drug spending under a standardplan) Medicare provides reinsurance -- paying the plan a portion of the enrollee's additional drug costs. Third partypayments, including MA payments, do not count towardthe beneficiary's out-of-pocket threshold. Additional drug coverage would reduce the enrollees' out-of-pocketexpenses, so that fewer enrollees would reach the out-of-pocketthreshold, and those who did would reach it later in the year. The additional coverage would thus reduce the moneya plan would receive from Medicare. Alternatively, plans may decide to add or enhance a drug benefit in 2004 to increase enrollment and gain a competitive advantage in the managed care market prior to thebeginning of the Medicare drug benefit in 2006. Some plans have enhanced their drug benefits for 2004, asdiscussed below. Plans may also offer Medicare-endorsed drugdiscount cards to their own enrollees through the newly established drug discount card program under MMA. Thecards could provide discounts on drug prices even if the plandoes not have a drug benefit, or if the plan benefit cap is reached. (2) Beneficiaries who enroll in a plan in 2004 may be more likely to remain with the plan when theMedicaredrug benefit is added to the program in 2006. For 2004, MMA changed the payment rate calculation for Medicare managed care plans, resulting in increased payment rates for all counties. (3) Previously, plansreceived thehighest of three possible rates -- a floor rate, a minimum increase above the previous year's rate, or a blend of localand national rates -- subject to a budget neutralityprovision. (4) MMA made three major changes to thepayment formula for 2004, all designed to increase payment rates. First, a fourth payment type was added: 100%of percapita fee-for-service Medicare costs. (5) Second, thebudget neutrality adjustment was eliminated, allowing a blend payment to be paid when it is the highest of the fourrates,even when that would increase total expenditures. The blend payment uses a combination of local and nationalrates, and is designed to reduce variance in payments acrosscounties. Third, the minimum increase was changed from a 2% increase above the previous year's rate to the greaterof 2% or the percentage by which per capita Medicareexpenditures grew nationally in the previous year. In 2005 and beyond, payments will be annually updated by thenew minimum increase or, at the Secretary's discretion, but atleast once every three years, the higher of either the new minimum increase or 100% of the updated (rebased) FFSper capita payment. Payment rate increases beginning in March 2004 vary from county to county. The average increase (weighted by the number of enrollees) relative to the 2003 rate is 10.8%. The smallest increase for the same period is approximately 6.3%. Approximately 94% of enrollees live in countieswhere the increase is 20% or less. A small number of planswill receive increases of more than 45%. The higher payment rates may encourage organizations to stay inMedicare, and may attract other organizations, increasingcompetitive pressures on existing plans. It may also encourage plans to expand their service areas. Approximately21% of counties not currently served by a managed care planqualify for an average payment increase of 15% or greater. For six consecutive years private plans have withdrawnfrom Medicare or reduced their service areas citing lowpayment rates as the primary cause. CMS indicates that plans are using the increases to 2004 payments to: (1)strengthen provider networks with 43% of the funds; (2) reducepremiums with 31% of the funds; (3) enhance benefits, including prescription drug cards, with 17% of the funds;and (4) reduce cost sharing with 5% of the funds. Five percentof the additional funds are being held in the stabilization fund for use before the end of 2005. Until 2006, organizations participating in Medicare managed care must submit to CMS an estimate of the cost of providing Part A and B benefits to the average beneficiary. This estimate is called an Adjusted Community Rate (ACR) proposal and it is submitted each year for each planthe organization offers. The ACR is compared to the paymentthe plan would receive for serving beneficiaries. If the payment is larger than the cost of serving beneficiaries, theplan is required to return the full amount of the difference tothe beneficiary in the form of additional benefits, reduced cost-sharing or a reduction in the Part B premium. Theorganization may also save the difference in a "stabilizationfund" to defray future costs. Starting in 2006, plans will no longer file ACRs. Instead, their estimate of the cost of providing benefits to beneficiaries will be called a bid. The bid will be compared to a percapita benchmark for the area that is similar to a payment rate prior to 2006. If the benchmark is higher than thebid, the plans must return 75% of the difference to thebeneficiaries in the form of reduced cost-sharing for Part A and B benefits, additional MA benefits, or a credittowards any monthly MA premium, prescription drug premium,or Part B premium. If the bid is above the benchmark, Medicare will pay the plan the benchmark and the beneficiarywill pay the difference between the bid and thebenchmark. The bid portion of the competition program starting in 2006 differs from the ACR process in two ways. First, MMA grants the Secretary the authority to negotiate plan bids. Second, prior to 2006, plans return 100% of the difference to beneficiaries if the payment exceeds the ACR; after2006, plans will return only 75% of the difference if thebenchmark exceeds the bid, and the remaining 25% will be returned to the government as savings.