S. 1 and H.R. 1, the prescription drug legislation that passed the Senate (by a vote of 76-21) and the House of Representatives (by a vote of 216-215) on June 27, 2003, respectively, do more than add a prescription drug benefit to Medicare. Both bills make substantial changes to the Medicare program, including imposing additional costs on beneficiaries for current Medicare services. Both bills increase reliance on private insurance to provide Medicare services, with the House bill requiring the traditional Medicare program to compete with private plans in terms of benefits, premiums and cost sharing starting in 2010. Before these bills become law, conferees from the Senate and the House must meet to draft a final version of Medicare legislation that will be acceptable to both houses of Congress.

The Center for Medicare Advocacy will provide analyses of the various provisions of the bill and how they will affect current Medicare beneficiaries. This document compares briefly the current choices available to beneficiaries with the choices that may be available under both bills.

COMPARISON - PRIVATE PLANS

EXPLANATION

Current program: Currently, older people and people with disabilities can obtain their Medicare coverage in two ways. Almost 90% of beneficiaries are enrolled in the traditional Medicare program, which provides a uniform, stable, guaranteed benefit regardless of where a beneficiary lives. A beneficiary with traditional Medicare retains her choice of doctor or health care provider and does not need a referral in order to see a specialist. Premiums, deductibles, and other cost-sharing are set by statute and are the same for all beneficiaries.

The remaining beneficiaries are enrolled in private health plans available through Medicare Part C, the Medicare+Choice (M+C) program. Most M+C plans are HMOs. Two private fee for service plans participate in M+C; and the Centers for Medicare & Medicaid Services (CMS), which oversees Medicare, approved 31 PPO demonstration projects that began operating in 2003. The Medicare+Choice program has not been as successful as anticipated when Congress created the program in 1997. Several of the plan options included in Part C, most notably medical savings accounts (MSAs), have never been offered by private insurance companies. Enrollment has never come close to the projected rate of 34% in 2005; the highest rate of enrollment was 16% in 1998.

Private insurance companies that offer M+C plans are free to enter and leave a market at their own convenience, depriving their enrollees of the stability of the traditional Medicare program. Between 2000 and 2003 the number of M+C plans available to beneficiaries has been reduced by more than half, and approximately 2.4 million beneficiaries have lost their HMOs since the M+C program began in the late 1990's (some beneficiaries have lost their private plan more than once). Beneficiaries in many parts of the country, and in particular those in rural areas, have never had access to M+C plans.

Private insurance companies that offer M+C plans must provide the same benefits as under Medicare Parts A and B, though they may offer a benefit package that is "actuarially equivalent" to the package offered by traditional Medicare. In the early days of HMOs, plans enticed beneficiaries to enroll by offering benefits, notably prescription drug coverage, that were not available under traditional Medicare. As the cost of providing care increased, the private plans reduced their extra benefits or passed additional costs on to their enrollees. Plans often have changed their benefit structure by increasing cost-sharing for those in poorer health. In 2002, average out-of-pocket expenses for enrollees with greater health care needs were more than three times those of enrollees in good health. In some communities, the disparity was even greater.⁽¹⁾

Just as M+C plans are not uniformly available throughout the country, the benefit packages they offer are not uniform. Unlike traditional Medicare, which offers consistent benefits and co-payments and deductibles, private plans charge different premiums and cost-sharing and offer different benefits in different parts of the country. For example, the Commonwealth Fund reports that monthly premiums averaged $3 in New York City in 2002, but averaged $87 in the Long Island suburbs in the same year. The difference in plan options, even within the same geographic area, creates difficulties for many older people and people with disabilities when trying to choose between and among private plans.

H.R. 1 and S. 1: Despite the disappointing performance of the M+C program, both the Senate and House bills expand upon and try to encourage enrollment in private plans. Some of the changes are cosmetic. For example, both bills rename the Medicare+Choice program "Medicare Advantage" (MA) to avoid the unfavorable reaction to M+C. Other changes are more dramatic. None addresses the problems of the current M+C program, including its instability and its confusing array of benefits.

Both the House and the Senate bills incorporate several different methods to encourage growth of the private delivery model and discourage reliance on traditional Medicare. First, both bills require MA and EFFS plans to include benefits that are not available to the majority of beneficiaries who remain in traditional Medicare. Thus, they erode the universality of Medicare by differentiating, for the first time, between required benefit packages in the traditional and private insurance programs. Although most M+C plans currently offer benefits not available under traditional Medicare, they do so at their own discretion. The Medicare statute gives plans that receive payments in excess of their actual costs of providing Medicare benefits the choice of offering additional benefits of their own choosing or of returning funds to Medicare.

Second, the bills try to lure participation by private plans through increased reimbursement. The House bill would increase payments to private plans starting in 2004; the Senate bill provides limited increases in 2005 with more generous funding starting in 2006. Private plans already receive more funding than the traditional program. The General Accounting Office estimates that M+C plans are paid 104% of the cost of providing the same coverage to a beneficiary in the traditional Medicare program. The proposed enhancement in funding will therefore increase the disparity between the funding available to the traditional program, which generally serves a sicker population, and the funding available to private plans. Previous efforts by Congress to increase funding for M+C plans have not stopped plans from leaving the Medicare program or encouraged them to expand into areas not previously served by M+C plans. Indeed, press reports indicate that private insurance companies do not believe that the proposed funding formulas will be adequate enough for them to serve the Medicare population.

Third, in order to encourage private plans to move in to rural and other underserved areas, the new EFFS plans would contract to serve one of 10 regions of the country, rather than a county or other smaller geographic area. Again, press reports indicate that private insurance companies question their ability to offer a regional PPO, given the differences in cost that might exist within any given region, and their continued inability to make a profit in rural areas.

Finally, both bills attempt to increase participation in private plans by making traditional Medicare more costly for beneficiaries. The House bill adds a co-payment in traditional Medicare for home health services, which are generally used by the oldest, sickest, and most frail beneficiaries. The Senate bill adds a co-payment for lab services, services again used by beneficiaries with greater health care needs. The Senate bill also limits Medicare reimbursement for certain durable medical equipment (DME), creating the potential for additional costs to be passed on to the beneficiaries who rely on DME. Most dramatically, both bills change the way the Medicare Part B premium is calculated. By tying the premium to health care inflation, the bills ensure that Part B premiums will rise at a greater rate than they have in the past, thereby passing the cost of health care back to older people and people with disabilities.

Move to Privatization: The House bill contains the most drastic change to the current Medicare system by requiring traditional Medicare to bid competitively against private insurance plans, starting in 2010, in regions in which at least two private plans are offered. Competitive bidding would be used to establish a baseline premium amount; the government would reimburse each plan a percentage of the baseline, and the beneficiary would pay the difference. A beneficiary may limit costs by enrolling in a plan whose premium is lower than the baseline. However, if a beneficiary chooses an option whose premium is higher than the baseline, she would be responsible for the difference in cost between the baseline amount and the plan's premium, in addition to her share of the actual premium.

Competitive bidding is weighted against traditional Medicare. In the years before competitive bidding starts, private insurance plans will be reimbursed, by law, at a rate that exceeds the amount paid on behalf of the average Medicare beneficiary in traditional Medicare. Thus, private plans may be able to offer additional benefits and to attract health enrollees, thereby keeping their costs down. Because the traditional program generally tends to serve sicker, more frail beneficiaries, the cost of providing coverage will be greater than the costs incurred by the private plans. Thus, the premium for traditional Medicare will be higher, and the majority of beneficiaries who choose to stay in traditional Medicare will have to pay even more for their coverage. The Chief Actuary for CMS estimates that the premium for traditional Medicare may increase as much as 25% as a result of competitive bidding.

Competitive bidding has another adverse impact on the Medicare program. Currently, all beneficiaries, regardless of where they live, pay the same premium for their Part B coverage. Under the competitive bidding proposal, premiums would vary depending on the region of the country in which a beneficiary lives. Beneficiaries who do not live in competitive bidding areas would pay the premium established under the Medicare statute, tied to health care inflation. Premiums for beneficiaries in different competitive regions would vary depending on the cost to the private plans of providing health care in each region. Thus, competitive bidding eliminates the universal nature of Medicare.

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1. G. Dallek, B. Biles, L. Nicholas, Lessons From Medicare+Choice for Medicare Reform (Commonwealth Fund June 2003).

© Center for Medicare Advocacy, Inc. 01/08/2010