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Testimony on Medicare+Choice by Robert A. Berenson, M. D.
Director, Center for Health Plans & Providers
Health Care Financing Administration
U.S. Department of Health and Human Services

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you for inviting us to discuss the Medicare+Choice program. Despite challenges facing this program, it continues to grow. About 50,000 beneficiaries have enrolled in Medicare+Choice plans each month since January. There are now more enrollees in the program than there were before some plans made business decisions last year to trim their participation in the program. We expect to see continued program growth despite similar decisions by some plans this year.

The vast majority -- 95% -- of Medicare+Choice enrollees are not affected by pending changes in plan participation. Nevertheless, we are concerned about the disruption in service to beneficiaries, particularly to disabled beneficiaries and those who have relied on prescription drug benefits that they may no longer be able to receive. Because of the recent actions by health plans, we have taken steps to ensure that beneficiaries being forced to change their health insurance coverage are informed of their rights to obtain certain Medigap plans regardless of preexisting conditions. We also are ensuring that they receive clear information about their health care options.

Still, the disruptions underscore the importance of the President's Medicare reform plan. It will stabilize the Medicare managed care market by:

• setting plan payment rates through market competition rather than a statutory formula;
• ensuring that all beneficiaries have access to affordable drug coverage;
• paying plans directly for providing drug coverage;
• dedicating a significant portion of the budget surplus to Medicare to help ensure that payment rates will be adequate well into the future; and,
• strengthening protections for beneficiaries when plans withdraw.

BACKGROUND

Medicare+Choice allows private plans to offer beneficiaries a wide range of options, similar to what is available in the private sector today. It requires a massive new beneficiary education campaign to inform beneficiaries about these options. It includes important new protections for patients and providers, as well as statutory requirements for quality assessment and improvement. And it initiates a 5-year transition to a fairer and more accurate payment system.

Medicare+Choice success is a high priority for us. We believe very strongly that private plans are important voluntary options next to original Medicare. Medicare managed care enrollment has tripled under the Clinton Administration, and there are now 6.48 million beneficiaries enrolled in Medicare+Choice plans. We meet regularly with beneficiary advocates, industry representatives, and others to discuss ways to improve the program. We launched a national education campaign and participated in more than 1,000 events around the country to help beneficiaries understand their health plan options. And we are establishing a federal advisory Committee to help us better inform beneficiaries about Medicare.

Reductions in Service

Plans make business decisions each year about the extent to which they will continue participation in Medicare+Choice. As of the July 1 deadline for plans to notify us about their participation next year, 99 Medicare+Choice plans will reduce the services they provide as of January 1, 2000. This includes withdrawals from the program by 41 specific plans and cuts in the geographic regions served by another 58 plans. These changes affect about 327,000 beneficiaries in 329 counties in 33 States, or about 5% of all Medicare+Choice enrollees. The total is less than the 407,000 beneficiaries in 407 counties in 29 States who were affected last year. An even smaller number, 79,000 (1.3%), will return to traditional Medicare because the only managed care plan available in their county is leaving. This is more than the 51,000 abandoned enrollees left without access to another managed care plan last year.

As directed by President Clinton in 1998, we will continue to expedite review and approval of plans seeking to enter markets that have been left without a plan. We have approved 41 plans for participation or expansion in the program since last July, and we are reviewing applications to start or expand participation by another 22 plans. Total managed care enrollment this year returned to pre-withdrawal levels within just two months.

Many factors affect plan decisions to trim participation in Medicare+Choice, as was documented in a report released by the General Accounting Office (GAO) in April. For instance, plans may have trouble establishing adequate provider networks, enrolling enough beneficiaries to support fixed costs, or otherwise competing in a given market. Plans withdrawing from Medicare in specific markets often are withdrawing from those same markets in their commercial and other business. For example, Pacificare is withdrawing both Medicare and commercial service in several Washington State counties. And the Federal Employee Health Benefit Plan expects about about 13 percent of plans to withdraw from its program this year, affecting about 1% of its enrollees. There are a disproportionate number of withdrawals this year in rural areas where it is more difficult to maintain provider networks and enrollment level.

Payment Increases

Inadequate reimbursement to plans does not explain plan decisions to trim participation in the program. Payment is rising in all counties this coming year by an average of 5%, and will rise by as much as 18% in some areas. Balanced Budget Act (BBA) payment reforms were designed to increase payment in counties that had the lowest rates and therefore the fewest number of plans. Yet counties receiving the largest increases under the BBA payment system are experiencing the most disruption. Plan withdrawals are affecting 11.1% of enrollees in counties where rates are rising by 10%, but affecting only 2.3% of enrollees where rates are rising by just 2%.

In fact, despite BBA reforms, aggregate payment to plans continues to be excessive, according to another GAO report issued in June. BBA reforms may, however, mean that payments in some counties no longer include enough excess to cover losses in other areas or to subsidize extra benefits that fee-for-service Medicare does not currently cover, such as prescription drugs.

As such, plans are less likely to provide extras like drug coverage without charging premiums. In plans that do offer a drug benefit, its value is declining. In 1998 only a third of plans capped drug coverage below $1000, but next year nearly three fifths will, and more than one fourth will cap coverage below $500. Drug coverage by plans is available mostly in high-paid urban areas, which is unfair to rural beneficiaries who also have the least access to private retiree drug coverage. Private retiree coverage itself is unstable and declining, with now less than a third of firms offering it. And at least a third of all beneficiaries have no drug coverage at all.

Clearly all beneficiaries need a more stable and reliable source of prescription drug coverage. And, if plans' primary problem is paying for benefits beyond the Medicare benefit package, the best solution is to improve the benefit package by providing all beneficiaries with access to an affordable prescription drug benefit, and paying plans explicitly for what most now offer only in areas where payments are excessive.

The President's Reform Plan

That is why it is essential to enact the President's Medicare reform plan. It gives all beneficiaries the option to pay a modest premium for a prescription drug benefit. This benefit will cover half of all prescription drug costs up to $5,000 when fully phased in, with no deductible -- all for a modest premium that will be less than half the price of the average private Medigap policy.

Medicare+Choice plans would be explicitly paid for providing a drug benefit under the President's plan. They would no longer have to depend on what the rate is in a given area to determine whether they can offer to do so.

The President's plan also will modernize the way Medicare pays managed care plans. Rates would be set through competition among plans rather than through a complicated statutory formula, as they are today. All plans would be paid their full price through a combination of government and beneficiary payments. The lower the price, the less beneficiaries pay since the beneficiary contribution rate declines relative to the price of the plan, as in the Federal Employees' Health Benefits Program. Beneficiaries choosing plans that cost approximately 80% of traditional fee-for-service will pay no Part B premium.

The President's plan also will preserve beneficiary options and strengthen protections when plans withdraw from Medicare by:

• giving beneficiaries access to all Medigap plans regardless of preexisting conditions, including those with prescription drug coverage;
• expanding the Medigap 6-month open enrollment period to newly disabled beneficiaries and those with end stage renal disease;
• allowing beneficiaries with end stage renal disease to enroll in another plan;
• mandating a special one-time additional Medigap open enrollment period for beneficiaries who were affected by a plan termination last fall; and
• increasing civil monetary penalties of up to $50,000 per violation plus $5,000 per day per violation of the Medigap open enrollment requirements.

The President's plan also dedicates 15 percent of the budget surplus to Medicare for the next 15 years. This will assure the financial health of the Medicare Trust Fund through at least 2027, and help ensure that Medicare+Choice plan payment rates will be adequate well into the future.

Encouraging Plan Participation

To assist plans, we worked with Congress to give plans two more months to file the information used to approve benefit and premium structures. We allowed plans to submit this "Adjusted Community Rate" data on July 1, rather than May 1, so plans were able to use more current experience when designing benefit packages and setting cost sharing levels. July 1 is the latest we can accept, process, and approve premium and benefit package data, have the data validated, and still mail beneficiaries information about available plans in time for the November open enrollment.

To further encourage plan participation, we have worked with plans to minimize the administrative workload associated with participating in Medicare+Choice. In February, we published initial refinements to the Medicare+Choice regulation that improve beneficiary protections and access to information while making it easier for health plans to offer more options to beneficiaries. The new rule:

• clarifies that beneficiaries in a plan that leaves the program are entitled to enroll in remaining locally available plans;
• specifies that changes in plan rules must be made by October 15 so beneficiaries have information they need to make an informed choice during the November open enrollment;
• allows plans to choose how to conduct the initial health assessment;
• waives the mandatory health assessment within 90 days of enrollment for commercial enrollees who choose the same insurer's Medicare+Choice plan when they turn 65, and for enrollees who keep the same primary care provider when switching plans;
• stipulates that the coordination of care function can be performed by a range of qualified health care professionals, and is not limited to primary care providers;
• limits the applicability of provider participation requirements to physicians; and,
• allows plans to terminate specialists with the same process for terminating other providers.

We intend to publish a comprehensive final rule with further refinements this fall.

BBA Payment Reforms

While the President's reform plan will use competition to set plan payment rates, the BBA initiated other important payment reforms that are already underway. The BBA begins to break the link between managed care and fee-for-service rates. And, starting in January, the BBA mandates that we Arisk adjust@ payments to account for the health status of each enrollee.

Under the BBA system, a rate for a particular county is the greater of three possible rates: a new minimum or "floor" payment; a minimum 2% increase over the previous year's rate, or a blend of the county rate and an input price adjusted national rate. The new system is phased in over five years, and therefore has several different moving parts. Medical education costs, which had been included in HMO payments under the old system, are paid instead directly to teaching hospitals. The blend of county and national rates phases up to a 50/50 balance. The national rate, local rates and minimum payment amount are annually updated based on per capita Medicare cost growth. As mentioned above, payments will increase an average of 5% for next year.

The BBA also established a competitive pricing demonstration in which plan payment rates will be set through a bidding process, similar to what most employers and unions use to decide how much to pay plans. To ensure broad community involvement in this project, a Medicare Competitive Pricing Advisory Commission, chaired by General Motors Health Care Initiative Executive Director James Cubbin, has made recommendations regarding key design features. It also has selected the markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as initial demonstration sites. We established local advisory Committees in these communities and, at their request, the national advisory commission agreed to delay implementation for one year in order to ensure adequate time for all parties to prepare for this essential project.

There is considerable evidence that we have overpaid and continue to overpay plans. That is because payments are linked to local fee-for-service spending and not adjusted for risk, according to studies by the Congressional Budget Office, Physician Payment Review Commission, Mathematica Policy Research, and many others. As mentioned previously, a GAO report released this June documents that, despite BBA reforms, plans are still being paid more than it costs them to provide the Medicare covered services that they are required to provide. The GAO says excess payments to plans totaled $1.3 billion in 1998, and will increase each year because of a forecasting error that the BBA locked in the statutory payment formula.

Payment to plans will be more accurate with risk adjustment. Data on each individual beneficiary use of health care services in a given year will be used to adjust payment for that beneficiary the following year. Risk adjustment helps assure that payments are more appropriate, and curtails the disincentive to enroll sicker beneficiaries.

The law does not call for a transition to risk adjustment, but we believe incremental implementation will prevent disruptions to beneficiaries or the Medicare+Choice program. We are therefore using flexibility afforded to us in the law to phase in risk adjustment over five years. In the first year, only 10% of payment to plans for each beneficiary will be based on the new risk adjustment method, which for the time being is based only on inpatient data. By 2004, we will be able to use data from all sites of care for risk adjustment. Then, and only then, will payment to plans be 100% based on risk adjustment. In the meantime, even with its limitations, the initial risk adjustment system based on inpatient data alone will increase payment accuracy 5-fold.

It is essential to stress that risk adjustment will not and cannot be budget neutral. The whole reason for proceeding with risk adjustment is that Medicare has not been paying plans accurately. Congress also recognized that plans have been paid too little for enrollees with costly conditions, and too much for those with minimal care needs. The vast majority of beneficiaries enrolled in Medicare+Choice cost far less than what Medicare pays plans for each enrollee.

Medicare fee-for-service statistics make clear why risk adjustment should not be budget neutral. More than half of all Medicare fee-for-service beneficiaries cost less than $500 per year, while less than 5% of fee-for-service beneficiaries cost more than $25,000 per year, according to the latest available statistics for calendar year 1996. The most costly 5% account for more than half of all Medicare fee-for-service spending.

Since Medicare+Choice enrollees tend to be healthier than fee-for-service Medicare beneficiaries, the ratio of high to low cost beneficiaries in health plans is even more stark. Clearly, care for the overwhelming majority of Medicare enrollees cost plans much less than what Medicare pays because our payments are predicated on the average beneficiary cost of care, calculated by

county. This average includes the most expensive beneficiaries in fee-for-service, who generally do not enroll in managed care.

Budget neutral risk adjustment would mean Medicare and the taxpayers who fund it would continue to lose billions of dollars each year on Medicare+Choice. Budget neutral risk adjustment would cost taxpayers an estimated $200 million in the first year of the phase-in, and $11.2 billion over five years if health plans maintained their current, mostly healthy beneficiary mix. Actual savings to taxpayers from risk adjustment will vary to the extent that less healthy beneficiaries enroll in Medicare+Choice plans, resulting in higher payments than health plans receive today.

The amount of payment change will vary among plans and depend on each plan's individual enrollees. Overall, we project that payment on average will change by less than 1% in the first year. How it will change over time depends on the mix of beneficiaries in each plan. Risk adjustment significantly changes incentives for plans and could well lead to enrollment of beneficiaries with greater care needs who could benefit most from managed care. That could result in plans receiving higher payments. Phasing in risk adjustment also substantially buffers the financial impact. Taxpayers are forgoing $1.4 billion in the first year and up to $4.5 billion over the full five years because of the phase in.

Beneficiary Education

We are working to help beneficiaries affected by plan withdrawals move to other plans or back to traditional Medicare. We are working diligently to make sure beneficiaries affected by plan terminations and service area reductions know about their rights and options. We are providing plans with a model letter that meets the requirement that they send all affected beneficiaries an information package by September 15, 1999. This information should explain options to return to fee-for-service Medicare with supplemental coverage or to enroll in another Medicare HMO. We review and approve all materials sent by plans to beneficiaries to ensure that they are accurate.

All beneficiaries have the option of returning to original fee-for-service Medicare. Most beneficiaries also have the option of enrolling in another Medicare HMO where they live. If beneficiaries take no action, they will automatically return to original fee-for-service Medicare on Jan. 1, 2000. If they return to fee-for-service Medicare before December 31, they may lose important rights to supplemental Medigap coverage.

For example, beneficiaries who remain in a withdrawing plan until December 31 are guaranteed the right to buy any Medigap plan designated A, B, C, or F available in their state until March 3, 2000. If they apply for one of these Medigap policies no later than March 3, companies selling the policies cannot place limits or discriminate in price because of beneficiary preexisting conditions. These protections are not guaranteed if beneficiaries disenroll before December 31, 1999 which, as mentioned above, is a policy that the President's Medicare reform plan will change.

Help in understanding such rights and options, as well as up-to-date information about other Medicare+Choice plans available in a given county, is available at 1-800-MEDICARE (1-800-633-4227), at 1-877-486-2048 for the hearing impaired, and on the Medicare Compare web page at www.medicare.gov. Many libraries and senior centers can help beneficiaries obtain Medicare information from the Internet. Beneficiaries also can contact their State Health Insurance Assistance Program for assistance. And many other groups provide information about Medicare, including the AARP, local Area Agency on Aging offices, National Rural Health Association, Social Security Administration and HCFA regional offices.

We are also working diligently to educate all beneficiaries about the Medicare+Choice program. We launched the National Medicare Education Program to make sure beneficiaries receive accurate, unbiased information about their benefits, rights, and options. The campaign includes:

• mailing a Medicare & You handbook to explain health plan options;
• a toll-free "1-800-MEDICARE@ [1-800-633-4227] call center with live operators to answer questions, and provide detailed plan-level information;
• a consumer-friendly Internet site, www.medicare.gov, which includes comparisons of benefits, costs, quality, and satisfaction ratings for plans available in each zip code;
• working with more than 120 national aging, consumer, provider, employer, union, and other organizations who help disseminate information to their constituencies;
• beneficiary counseling from State Health Insurance Assistance Programs;
• a national publicity campaign;
• a Regional Education About Choices in Healthcare (REACH) campaign that will conduct State and local outreach activities nationwide; and,
• a comprehensive assessment of these efforts.

We tested the system in five States in 1998 and learned how to improve efforts for this November's open enrollment period. For example, we have made the Medicare & You handbook easier to use and improve the accuracy of information about plans that are withdrawing. We have added new links on our Medicare Compare website at www.medicare.gov to help users find information faster. We are standardizing plan marketing materials that summarize benefits so beneficiaries can more easily make apples-to-apples comparisons among plans in this November's open enrollment period. And we have added information on managed care plan withdrawals to the Important Notes section of the 1999 plan information on our Medicare Compare website.

To help us continually improve our education efforts, we are establishing the Citizens= Advisory Panel on Medicare Education, under the Federal Advisory Committee Act. The panel will help enhance our effectiveness in informing beneficiaries through use of public-private partnerships, expand outreach to vulnerable and underserved communities, and assemble an information base of Abest practices@ for helping beneficiaries evaluate plan options and strengthening community assistance infrastructure. Panel members will include representatives from the general public, older Americans, specific disease and disability groups, minority communities, health communicators, researchers, plans, providers, and other groups.

CONCLUSION