To reduce out-of-pocket costs that result from cost sharing and the utilization of non-Medicare covered services and items, FFS Medicare beneficiaries may either purchase a private supplemental insurance policy, known as a Medigap plan, or enroll in a private health plan that has contracted to serve Medicare beneficiaries. From 1998 through 2003, M+C, Medicare’s private health plan program, allowed participation by a variety of plan types, including HMOs, PPOs, and PFFS plans, as long as these plans met certain organizational and operational requirements. Unlike in the private insurance market, where PPO plans were the most prevalent type of health plan, the vast majority of M+C plans were HMOs. CMS launched two demonstrations that included plans intended to operate under the PPO model. Beneficiaries in FFS Medicare, which consists of Medicare part A and part B, may incur substantial out-of-pocket costs. Part A helps pay for inpatient hospital, skilled nursing facility, hospice, and certain home health services, although beneficiaries remain liable for a share of the cost of most covered services. For example, Medicare requires beneficiaries to pay a deductible for each hospital benefit period, which was $840 in 2003, and covers a maximum of 90 days per benefit period. Medicare part B helps pay for selected physician, outpatient hospital, laboratory, and other services. Enrollment in part B is voluntary and requires a beneficiary to pay a monthly premium and an annual deductible for most types of part B services — $58.70 and $100, respectively, in 2003 – and may require coinsurance of up to 50 percent for some services. Beneficiaries are also liable for items and services not covered by FFS Medicare, such as routine physical examinations and most outpatient prescription drugs. Many beneficiaries in FFS obtain more comprehensive coverage through supplemental health insurance provided by a former employer or purchased from a private insurer (Medigap). Although many employers do not offer supplemental health insurance to their retirees, Medigap policies are available nationwide. In most states, Medigap policies are organized into 10 standardized plans offering varying levels of supplemental coverage. Medigap plan F is the plan most widely selected by beneficiaries, although it does not offer prescription drug coverage; Medigap plan I offers similar coverage but includes some coverage for prescription drugs. Beneficiaries with Medigap policies receive coverage for services from any provider who is legally authorized to provide Medicare services. Most beneficiaries may also obtain more comprehensive coverage by choosing to receive Medicare benefits through private health plans that participate in Medicare instead of through FFS Medicare. While private Medicare health plans are not available nationwide, about 80 percent of beneficiaries in 2003 had access to at least one plan within the counties where they lived. Beneficiaries who enroll in a private plan may pay a monthly premium, in addition to the Medicare part B premium, and agree to receive their Medicare-covered benefits, except hospice, through the plan. In return, beneficiaries may receive additional non-Medicare benefits and may be subject to reduced cost sharing for Medicare-covered benefits. Beneficiaries who enroll in a private plan that contracts with Medicare are entitled to coverage for all services and items included in the plan’s benefit package, regardless of whether the service or item is covered under FFS Medicare. Congress created the M+C program, in part, to expand health plan options for beneficiaries. Previously, private plan participation in Medicare had been largely limited to HMOs. The M+C program provided the opportunity for PPOs and PFFS plans to serve beneficiaries as well. Generally, M+C plan types differed by the extent to which they used provider networks. M+C HMOs were required to maintain networks of providers, and they generally covered services furnished only by providers in their networks, except in limited circumstances such as urgent or emergency situations. (See table 1.) M+C PPOs were also required to maintain provider networks. Unlike M+C HMOs, M+C PPOs were required to pay for covered services obtained from non-network providers, although they could charge beneficiaries additional cost sharing for these services. A third type of M+C plan, the PFFS plan, was not required to maintain provider networks. Rather, M+C PFFS plans were required to pay for all covered services obtained from any provider authorized to furnish Medicare-covered services who accepted the plan’s terms and conditions of payment. While many M+C requirements were uniform across the different types of plans, two categories of requirements varied by the type of plan: those that were intended to ensure that enrollees had sufficient and timely access to covered services, known as access-to-services requirements, and those that were intended to ensure that services furnished were of sufficient quality, known as quality assurance requirements. (See table 2.) In general, plans that restricted enrollees to provider networks were subject to more extensive access-to-services and quality assurance requirements than those that did not. Accordingly, M+C HMO plans were subject to more extensive quality assurance and access-to-services requirements than M+C PFFS plans. M+C PPOs were subject to the more extensive access-to- services requirements of M+C HMOs, but the less extensive quality assurance requirements of PFFS plans. For example, in order to demonstrate that they provided sufficient access to services, M+C HMOs and M+C PPOs were required to monitor and document the timeliness of the care their enrollees received from providers, while M+C PFFS plans were not required to monitor care in this way. With regard to quality assurance, M+C HMOs each year had to initiate a multi-year quality improvement project, such as a provider or enrollee education program, while M+C PPOs and M+C PFFS plans were not subject to this requirement. M+C HMOs, M+C PPOs, and M+C PFFS plans all were paid a monthly payment per enrollee according to a statutory formula. The M+C payment rate varied by county and could be higher or lower than FFS Medicare’s per capita spending in a county. An M+C plan was at full risk for the costs of covered services for its enrollees. If these costs made up a higher than anticipated portion of the plan’s total revenues—consisting of enrollee premiums and monthly payments from CMS—then the plan would have less than it anticipated for administration, profit, and other contingencies. In recent years, PPO plans have become increasingly prevalent in the private insurance market and tended to displace other types of plans, such as HMOs, that offered less provider choice. From 1996 through 2002, the percentage of individuals with employer-sponsored coverage who were enrolled in HMO plans decreased from 31 percent to 26 percent, while the percentage of individuals with employer-sponsored coverage enrolled in PPOs increased from 28 percent to 52 percent. In contrast, there were approximately 3,000 Medicare beneficiaries enrolled in a total of six M+C PPO plans by 2003. From 1998 through 2003, the total number of M+C plans, the vast majority of which were HMOs, decreased from 346 to 155. The number of beneficiaries covered by M+C plans also fell, from 6.1 million in 1998, or about 16 percent of all beneficiaries, to 4.6 million in 2003, or about 11 percent of all beneficiaries. Section 402(a) of the Social Security Amendments of 1967 authorizes CMS to conduct demonstrations to identify whether changes in methods of payment or reimbursement in Medicare and other specified health care programs would increase the efficiency and economy of those programs without adversely affecting the quality of services. In addition, under section 402(b), CMS may waive requirements relating to payment or reimbursement for health care services in connection with these demonstrations. For example, CMS may be able to offer demonstration plans alternative methods of payment or other financial incentives that are not offered to other providers in the Medicare program. However, CMS does not have the authority to waive rules not related to payment or reimbursement. Prior to the passage of MMA, CMS launched both the M+C Alternative Payment Demonstration and the Medicare PPO Demonstration. The M+C Alternative Payment Demonstration began in 2002 and included one organization offering a PPO in 2003. It is set to expire in December 2004. The Medicare PPO Demonstration, which began in 2003, included 17 organizations representing 33 plans. This demonstration is set to expire in December 2005. Using its authority to waive requirements related to payment and reimbursement, CMS offered financial incentives to Independence Blue Cross and the plans in the Medicare PPO Demonstration that they did not offer to typical M+C plans. These incentives included potentially higher payments and the opportunity to reduce their exposure to financial risk by entering into risk-sharing agreements. CMS also allowed the plans to exceed the limits on the cost sharing that M+C plans could charge beneficiaries. Under federal law, plans in the Medicare PPO Demonstration should have been required to allow beneficiaries to obtain plan services from providers of their choice, as long as those providers were legally authorized to furnish them and accepted the plans’ terms and conditions of payment. CMS did not have authority to waive this requirement, as it was unrelated to payment or reimbursement. However, CMS improperly allowed 29 of the 33 plans in the Medicare PPO Demonstration to require, as a condition of coverage for certain services, that beneficiaries obtain those services only from network providers. Under its authority to waive requirements related to payment for demonstration participants, CMS offered demonstration PPOs a number of financial incentives to participate in the demonstrations.