The Wall Street Journal reports (Private Medicare Plans Are Retrenching) that senior citizens enrolling in private Medicare policies, known as Medicare Advantage plans, are facing fewer choices as insurers stop offering certain plans –mainly Private Fee-for-Service (PFFS) plans. However, those who remain insured through Medicare Advantage will generally pay about the same in premiums and have richer benefits. I’d like to see Medicare costs brought under control and so I applaud the reduction in PFFS plans, which are a big waste of taxpayer money. I only wish the cutbacks went further.
Medicare Advantage is a complex topic, and I won’t try to explain it all in this post. Here are some basics, though. About three-quarters of beneficiaries are enrolled in traditional Medicare indemnity coverage. They do not interact with private health insurers. Medicare Advantage plans cover the remaining one-quarter of beneficiaries.
There are three main flavors of Medicare Advantage plans:
- Managed care plans –which are similar in operation to commercial HMOs and PPOs
- Private Fee-for-Service (PFFS) plans –which are essentially indemnity plans offered by private companies. In other words there are no network requirements nor other typical manifestations of managed care
- Other plan types –mainly demonstration projects and experimental forms of coverage. These plan represents a small share of the total.
Medicare Advantage plans have enjoyed rapid growth during the past five years, roughly doubling in membership between to more than 10 million people. PFFS plans have grown even faster since they were introduced in 2003. And Medicare Advantage shoppers have a lot of choice. The typical beneficiary had 35 plans to choose from in 2008, compared with about 12 in 2006.
The original intent of the Medicare Modernization Act of 2003 (MMA) was to increase the availability of private plans. The assumption was that private sector efficiencies would reduce costs over time. Before 1997 Medicare paid managed care (then known as Medicare + Choice) plans 95 percent of the average cost of traditional Medicare fee for service spending, so there was some savings. However, Medicare + Choice plans were hard to operate in rural areas, where it was impractical to build networks due to lack of choice of providers. Medicare PFFS plans were designed to give beneficiaries the option of a private plan even where managed care wasn’t feasible, which sounds reasonable.
However, that assumption about private sector efficiencies turned out to be a bad one in the Medicare Advantage market. It turned out that Medicare Advantage plans became significantly more costly to the government than traditional Medicare, without generating any evidence that of higher quality. Overall, Medicare Advantage plans cost the government about 115 percent of Medicare indemnity rates, with PFFS plans even higher than that.
It’s no wonder Medicare Advantage –and PFFS plans in particular– became popular quickly. Health plans were able to use some of the additional funds to offer low premiums and/or enhance benefits (e.g., providing coverage for hearing aids, gym club memberships), which increased the appeal of the plans to prospective enrollees. Meanwhile, the PFFS plans were very simple to establish and operate. There was no requirement to establish provider networks. Plans could simply “deem” providers as participating and pay Medicare FFS rates. PFFS plans –unlike other Medicare Advantage plans—had no quality reporting requirements and premiums were not subject to approval by Medicare.
But PFFS plans in particular came under fire even in the free spending Bush Administration days. Higher payments to Medicare Advantage plans in general and PFFS plans in particular were highlighted by the Medicare trustees as a key accelerator of Medicare’s insolvency date. It was also noted that increases in payments relative to traditional indemnity Medicare were highly correlated with the growth of PFFS plans. For example, an analysis in Health Care Financing Review estimated that “if Congress reduces payments to traditional FFS levels it would cause… 85 percent of PFFS plans to exit the market.” Patients who quit PFFS plans are likely to return to traditional Medicare rather than shift to other Medicare Advantage plans.
The phenomenon of fewer PFFS plans highlighted by the Journal has been on the horizon for a couple of years, pre-dating the Obama Administration and health reform. In particular implementation of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) is making PFFS plans more complicated to operate. Starting in January of 2010 the plans had to begin reporting HEDIS quality measures, which is not that big of a deal. However, they will also be required to establish contracts with hospitals and physicians beginning in January 2011, and that’s why many plans are being scrapped now.
Medicare costs are killing the country. Even today, more than 40 percent of Medicare’s costs are paid out of general revenue. There are plenty of uninsured working class people paying into Medicare through payroll taxes and income taxes. That’s unreasonable enough, but it really adds insult to injury to give Medicare beneficiaries another 15 percent or so bonus on top of the existing payout just so they can get some freebies and lower premiums.
The Affordable Care Act addresses the overpayments to Medicare Advantage to some degree, but in future years I hope politicians go further. At some point I hope we’ll at least get back to the point where we’re paying less than 100 cents on the dollar rather than more.November 19, 2010