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Historically, Medicare HMOs offered seniors an opportunity to trade provider access for improved benefits; although HMO beneficiaries were limited to seeing doctors within their network, they received greater benefits than those beneficiaries insured under different plans. For taxpayers, HMOs offered expense savings. However, HMO plans were typically not available in many areas, particularly rural counties due to insurer reluctance to invest in a provider network.

PFFS plans were introduced for a variety of reasons, most importantly to offer choice to rural seniors and to offer a way for employers to enroll retirees scattered over the country. Without the confines of a network, seniors enrolled in PFFS plans could pay on a service by service basis and see whichever provider they wished, as long as the provider accepted PFFS payment terms. To make this option attractive for insurers to offer, CMS proposed “bids” that were over the average payment rate. These “overpayments” were intended to be temporary, to get the insurers in the rural markets, and over time to encourage the insurers to develop provider networks, or HMOs. In fact, 2010 is the final year PFFS plans will exist. So even if the government makes no cuts to the Medicare system in an effort to reduce spending, huge savings will be realized in 2011 Medicare Advantage costs, as PFFS overpayments expire.

It is not clear if in fact the insurers will offer HMOs in rural areas in 2011 when the PFFS plans go away. For example, in Maine and New Hampshire where Anthem Blue Cross is the dominant MA player,  MA plans are yet to be introduced. It may be that the rural provider community is too small to support Medicare HMOs where access is traded for benefits. Insurers may be forced to offer PPOs as an alternative option to PFFS plans-or drop MA coverage altogether. At the end of the day, MA plans-be them HMOs or PPOs-need to deliver high quality care at a savings or they will go the way of the dodo bird. We will know in 2011.

The demise of Medicare Advantage plans would merely change the contract that Medicare has with private insurers. For traditional Medicare, CMS pays the health plan a claim administration fee. For Medicare Advantage, CMS pays the insurance company a fixed fee for each enrollee, based on the age, gender, county of residence and health status of the enrollee. The insurance company then attempts to create a margin by savings on claims through various programs: excluding inefficient high cost providers from the network, medical case management, utilization review, etc.

The insurers can usually manage members at a very large savings, but then much of this savings is eaten up by the cost of acquiring members. A health plan’s average acquisition cost of a member is well over $1,000 and often as high as $1,500. If the member stays on the plan for a few years, the health plan can profit and Medicare saves money. If the member leaves after a year, the health plan loses money. As good government policy, CMS (and Congress) need to have consistent reimbursement to encourage health plans to invest in acquiring members. Unfortunately, the program has been marked by big swings in reimbursement.

This should not be a partisan issue. If the private sector can deliver a high quality efficient solution, we should want more of it. Government left to its own devices will use the clumsy lever of reducting provider fee schedules to save money. Providers just pass costs on to the private sector. Fortunately right now the government can rely on the private sector to pick up the tab. Did you ever wonder why medical trends in Medicare and Medicaid are in the single digits and the private sector is in the duoble digits? For my national health care enthusiasts, be careful what you wish for.

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