Medicare began contracting with managed care plans on a cost- reimbursement basis in the 1970s. In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA), which created the first Medicare risk contracting program for managed care plans beginning in 1985. The Medicare risk program evolved into today’s MA program. TEFRA also retained and authorized Medicare cost plans as an option if an organization did not have the capacity to bear the risk of potential losses, had an insufficient number of members to be eligible for a risk-sharing contract, or the organization elected to offer a cost plan rather than a risk plan. Enrollment in the Medicare risk program grew from nearly 498,000 in 1985 to about 5.2 million beneficiaries by 1997, primarily concentrated in urban counties. The Balanced Budget Act of 1997 (BBA) phased out the existing risk program and created a new risk program called Medicare+Choice (M+C). Under the M+C program, the method used to pay participating plans was revised significantly, and, due in part to these payment changes, by 2000 many health plans began to withdraw from the program. Enrollment fell from 6.3 million in 1999 to 4.6 million by 2003. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) renamed the M+C program Medicare Advantage and provided increases to MA plan payment rates and other program changes. MA enrollment increased steadily from 2003 to 2009. The MA program includes several types of plans: Local coordinated care plans (CCP) consist of: Health maintenance organizations (HMO), which have defined provider networks and primary care gatekeepers. Beneficiaries enrolled in HMOs generally are required to obtain services from hospitals and doctors in the plan’s network, but some HMOs offer a point-of-service option under which a beneficiary may elect to obtain services from a non-network provider, though at a higher out-of-pocket cost. Preferred provider organizations (PPO), which have defined provider networks and no requirement that beneficiaries obtain referrals for care. Beneficiaries enrolled in PPOs can use non-network providers, but at a higher out-of-pocket cost than in-network providers. Provider sponsored organizations (PSO), which doctors, hospitals, or other Medicare providers operate rather than a health insurance company. The providers that operate the PSO furnish the majority of the health care and share in the financial risk of providing the health care to the beneficiaries enrolled in the plan. Regional PPOs, which have a service area comprising 1 or more of 26 state-level or multistate-level CMS-defined regions. Regional PPOs are also CCPs. Special needs plans exclusively or disproportionately enroll special needs individuals. Special needs individuals are beneficiaries who are institutionalized, eligible for both Medicare and Medicaid, or have a disability or chronic condition. Special needs plans can be any type of CCP. Private fee-for-service (PFFS) plans, which are local plans that are not required to have a contracted provider network as long as they pay willing providers at least the Medicare FFS rate. MA benefit packages may include Medicare Part D coverage; however, all CCPs must offer at least one benefit package with Part D coverage. CMS pays cost plans the reasonable cost of the Medicare-covered services they furnish directly to, or arrange for, Medicare beneficiaries enrolled in their plan, less the value of the deductible and coinsurance. In addition to the costs directly related to the provision of health services, CMS also pays reasonable costs associated with operating a health plan, such as marketing, enrollment, and membership expenses. Cost plans receive an advance interim payment per member per month based on the cost plan’s estimated reimbursable costs. CMS and the cost plans make adjustments after the contract period to align the payments with the actual costs incurred following the plan’s submission of an independently certified cost report that details cost, utilization, and enrollment data for the entire contract period. As of December 2009, 18 organizations operated 22 cost plans, with enrollments ranging from 50 to 74,190. Of the 22 cost plans, 15 were open to enrollment. Nonprofit organizations operated 17 of the 22 cost plans. (See app. I for a list of the organizations that offer cost plans.) Eight cost plans offered Part D coverage in 2009. Cost plans served at least one county in 16 states and the District of Columbia in 2009. Cost plans were most prevalent in Minnesota, where 3 cost plans operated across most of the state. (See fig. 1.) Congress acted to curtail the expansion of cost plans multiple times. The BBA provided that upon enactment, with few exceptions, the Secretary of Health and Human Services could not enter into any new cost plan contracts and could not extend or renew a cost plan contract beyond December 31, 2002. Subsequent laws modified the circumstances under which existing cost plans could continue to operate. The MMA, for example, allowed existing cost plans to be extended indefinitely, with the exception that, beginning January 1, 2008, the Secretary could no longer renew or extend contracts for cost plans serving an area that for the previous year was also served by two or more regional CCPs or two or more local CCPs and that also met specified enrollment thresholds. A cost plan would only be required to leave the counties within its service area that were also served by the CCPs. Most recently, MIPPA extended the exception provision to January 1, 2010, meaning cost plans affected by this provision would close at the beginning of calendar year 2011. MIPPA also requires that the qualifying CCPs used to determine whether the cost plan must close must be offered by more than one organization (see fig. 2). Separately, CMS requires organizations operating cost plans to close their cost plans to new enrollment if they open an MA plan in the same service area. Based on 2009 enrollment information through December, CMS’s preliminary estimates were that 7 of the 22 cost plans would need to withdraw from some or all of their 2009 service area in 2011. Three of the 7 cost plans would need to withdraw from their entire service area. All 3 of these plans already were closed to new enrollment in 2009. In total, CMS estimated that approximately 8,000 beneficiaries enrolled in cost plans, or about 3 percent of total cost plan enrollment, are in counties where their cost plan must discontinue service in 2011. (See app. II for a list of the cost plans that would likely be affected by the MIPPA provision.) All beneficiaries enrolled in cost plans had multiple MA options available to them. Nearly 100 percent of beneficiaries enrolled in cost plans had at least 5 MA plans serving their county in June 2009, and more than 57 percent had a choice of 15 or more MA plans (see fig. 3). About 10 percent of beneficiaries enrolled in cost plans had no local CCPs in their county, which is the MA plan type with the highest enrollment. Two cost plans, located in Colorado and Texas, enrolled about 90 percent of the beneficiaries without a local CCP plan option. About 10 percent of beneficiaries in cost plans were in counties without an HMO, about 62 percent were in counties without a local PPO, and about 8 percent were in counties without a regional PPO. Approximately 42 percent of beneficiaries enrolled in a cost plan were in counties with five or more MA HMOs. All beneficiaries enrolled in a cost plan could enroll in a PFFS plan in June 2009. (See table 1.) Some of the differences between cost plans and MA plans that affect beneficiaries involve out-of-network coverage, enrollment periods, and prescription drug coverage. Cost plans generally scored higher than competing MA plans on the quality scores CMS reports, and their estimated out-of-pocket costs compared to competing MA plans and FFS varied by health status. Cost plans differ structurally from MA plans and Medicare FFS in several ways, including enrollment periods, out-of-network coverage, and prescription drug coverage. For example, cost plans that are open to enrollment must have an open enrollment period of at least 30 consecutive days annually, and some cost plans choose to allow new enrollment all year. Beneficiaries enrolled in cost plans may disenroll at any time. In contrast, beneficiaries enrolled in an MA plan can join, switch, or drop plans, or join FFS, only during certain specified enrollment periods. Beneficiaries enrolled in cost plans who receive Medicare-covered services out of network are covered by Medicare FFS. These services are therefore subject to Medicare FFS coinsurance and deductibles. Out-of- network coverage varies among MA plans according to plan type, but if offered, it is covered by the MA plan, not Medicare FFS. Medicare FFS beneficiaries can receive services from any provider that accepts Medicare. Beneficiaries enrolled in cost plans may obtain Medicare prescription drug coverage by enrolling in any stand-alone Part D plan or a Part D plan offered by the cost plan sponsor. Beneficiaries enrolled in MA plans must choose a Part D plan offered by the MA plan sponsor. Beneficiaries enrolled in PFFS plans also must choose a Part D plan offered by the PFFS sponsor, unless the sponsor does not offer one, in which case beneficiaries can choose any Part D Plan. Beneficiaries enrolled in FFS may choose any Part D plan. For additional information about structural differences between cost plans, MA plans, and Medicare FFS, see appendix III. Our analysis of CMS quality scores found that cost plans’ quality scores, on average, were higher than the average of competing MA plans. All 12 of the cost plans with plan summary scores, based on a scale of 1 (poor quality) to 5 (excellent quality), were rated higher than or the same as their MA competitors in the county with the cost plan’s highest enrollment. These 12 cost plans enrolled about 202,500 beneficiaries, or about 70 percent of the total cost plan enrollment nationwide.