Introduction

Spring is blooming in Washington, D.C. The nation’s capital will soon be filled with tourists from around the world intent on participating in the National Cherry Blossom Festival. Spring in Washington also means one thing on Capitol Hill: the Budget. The President’s proposed budget for 2008 looks for savings in the Medicare program - $66 billion over five years - with $11.5 billion of these savings to come by charging higher-income beneficiaries more for their Part B premiums, cutting reimbursements to health care providers, and reducing coverage.

There is another important source of savings for the Medicare program, however. Many research reports have shown that the Medicare Advantage (MA) plans, private plans with whom the government contracts to provide Medicare benefits to beneficiaries, are overpaid for the services they provide. The Congressional Budget Office (CBO) recently estimated that changing the payment policies for MA plans would save Medicare almost $65 billion over the next five years and almost $160 billion over the next ten years.

Background

Medicare began experimenting with private health plans in the 1970s. This option was formalized in the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1982. The Balanced Budget Act of 1997 (BBA) updated the program and named it “Medicare+Choice” (M+C). The Medicare Modernization Act of 2003 (MMA) expanded the payments made by Medicare to the private MA plans that constitute Medicare Part C and renamed the program “Medicare Advantage.”

Originally, the logic for the program was that risk Health Maintenance Organizations (HMOs) could, by coordinating care and other means, provide the same services as the traditional Medicare program at reduced costs. These HMO plans were paid a fee for each enrolled beneficiary. They received 95% of the average cost of providing Traditional Medicare in the county in which that beneficiary lived. If the plans were able to provide the Part A and B benefits using less money, they would be able to use any surplus to provide additional benefits to beneficiaries or to keep the surplus as a profit:

These plans typically have a financial incentive to hold down costs; in fact, Medicare’s method for paying risk contract health maintenance organizations - Medicare’s principal managed care option - was designed to save the program 5 percent of the costs for beneficiaries who enroll in HMOs. However, a decade of research has found that enrolled beneficiaries would have cost the program less if they had stayed in the fee-for-service (FFS) sector. (Emphasis added.)

This quote is from a 1997 report by the U.S. General Accounting Office (GAO), which said that Medicare could easily save hundreds of millions of dollars. Congress solved this problem, and private plans are now paid risk-adjusted amounts, which accounts for the fact that plans enroll healthier beneficiaries. Yet Congress also created a new system of overpayment to private plans.

The Current System

MA plans are still paid per beneficiary enrolled, but they are no longer paid at 95% of the per capita FFS costs in the county. The current payment system is based on local benchmarks or bidding targets. The private plans submit a bid for each area where they wish to operate. If they bid at or below the benchmark, they are paid what they bid and enrollees in the plan receive additional benefits or reduced out-of-pocket costs. If the plan bids above the benchmark (which rarely happens), enrollees must pay an additional premium equal to the difference between the bid and the benchmark.

The benchmarks are established by Congress and the Centers for Medicare and Medicaid Services (CMS) and are updated each year in one of three ways: (1) Benchmarks are increased by the national growth rate in per capita Medicare spending (6.3% in 2004); (2) If the national growth rate is less than 2%, benchmarks are increased by 2%; or (3) Benchmarks are set to an amount equal to the per capita FFS expenditure level for that county. CMS must always use the method that results in the largest increase.

In the original TEFRA program, per capita FFS costs were much lower in rural counties than in urban counties, which discouraged private plans from operating in the rural counties. In the MMA, and in the BBA before that, Congress encouraged private plans to operate in rural counties by adjusting payments. For 2005, the MMA mandated minimum benchmarks (or floors) for large urban, small urban, and rural areas. Once those floors were put into place in 2005, the benchmarks had to continue to go up by at least 2% as described above. These benchmarks are so high that plans can easily bid under the benchmark and still get paid more than per capita FFS costs.

Overpayment

How much more do they get paid? The Medicare Payment Advisory Commission (MedPAC), an independent federal body established by the BBA to advise Congress, released its annual “Report to Congress” on March 1, 2007. Their analysis indicates that benchmarks are 116% of the average Medicare FFS expenditures and payments to plans are 112% of the average Medicare FFS expenditures. Brian Biles, MD, MPH, a professor in the Department of Health Policy at George Washington University, and his colleagues recently released a report through The Commonwealth Fund. Their analysis found that payments to MA plans averaged 12.4% more than costs in traditional Medicare during 2005. If Congress were to eliminate these overpayments by setting the benchmarks in each county equal to per capita FFS spending, the CBO estimates that Medicare would save $8.1 billion in 2008 and $159.8 billion through 2017.

HMO’s are not the only private plans participating in Medicare.  Other plans include Local and Regional Preferred Provider Organizations (PPOs), Private Fee-for-Service plans (PFFS), and Special Needs Plans (SNPs). Insurance companies have continued to offer private plans in more areas and now at least one private plan alternative is available to every Medicare beneficiary. 

PFFS is the fastest-growing plan type, accounting for 46% of total enrollment growth from December 2005 to July 2006. PFFS was available to 45% of beneficiaries in 2005 and is now available to almost 100% of beneficiaries. Payments to PFFS plans are 119% of the per capita Medicare FFS expenditures. It is no wonder that PFFS plans are growing at such a rapid rate.

Arguments from the Plans

Many members of Congress have begun to seize on these overpayments to private plans as a significant source of potential savings for Medicare.  Not surprisingly, the private insurance plans are very concerned that they might lose billions of dollars.

The plans have argued that cutting funding to the MA plans would hurt low-income beneficiaries. We agree that low-income beneficiaries need extra help the most. Medicare provides help to low-income beneficiaries in the form of Medicare Savings Programs (MSPs). These programs reduce out-of-pocket expenses for individuals with incomes below 135% of the Federal Poverty Level, but these programs could use an expansion. The savings from MA plans could be used to provide more benefits to more low-income beneficiaries, not just those who choose to enroll in an MA plan.

Private plans have also pointed out that people who enroll in an MA plan receive more benefits than are offered by traditional Medicare. It is obvious that beneficiaries should receive as many benefits as possible, but those benefits should be distributed equitably. Why limit extra benefits to just the beneficiaries who enroll in MA plans, and how significant are these additional benefits, actually? These services should, and could with efficient spending, be available to all Medicare beneficiaries.

Conclusion

MA plans may offer some beneficiaries a useful Medicare coverage choice. But the payments to these plans must be financially neutral when compared to the costs of traditional Medicare. The Medicare Trustees will soon issue their annual report, and will inevitably raise alarms that Medicare is in financial peril. Removing overpayments to MA plans is a clear way to save Medicare hundreds of billions of dollars and make the program more equitable in the process, ensuring fair access to health care for millions of older people and people with disabilities, now and in the future.