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Medicare Advantage plans: finding the right regulatory and funding mix (1 of 2)

In March 2011 when Medicare released its proposed rules for accountable care organizations, few people anticipated the outcry. Most medical experts said that the proposed rules were excessive. Within a few weeks, an executive of the Mayo Clinic said that it was “not going to participate in a Medicare accountable care organization under the circumstances proposed.”

Opposition to the proposed rules was widespread. The American Medical Group Association, which represents nearly 400 of the country’s largest provider organizations that collectively gives medical care to one-third of the country’s population, said that more than 90% of its members would not take part in the program. The organizations saying they would not participate included some that had previously been praised by government officials as examples of what accountable care should be — the Cleveland Clinic, Geisinger Health System in Pennsylvania, and Intermountain Healthcare in Utah.

Dr. Delos Cosgrove of the Cleveland Clinic appeared to sum up many of the objections in his letter to Medicare when he wrote that the rules would create “significant administrative burdens” and impose requirements “that have little to do with outcomes.”

In the months thereafter, Medicare significantly revised the rules and gradually enlisted the support of most large providers. And in fairness to Medicare, the first rules were merely proposed ones, but even so they seemed to go too far for most provider groups.

Perhaps more important, Medicare’s initial overreach in 2012 illustrates government’s age-old dilemma. Too little regulation encourages abuses, e.g., the mortgage lending crisis. Too much regulation adds costs, stifles innovation, and causes companies to abandon a market. The trick is finding the right balance, a process that can sometimes take decades.

A case in point is Medicare’s managed care plans, which have been called Advantage plans since 2004. In the 30-year history of these plans, Congress has often changed the rules and reimbursement policies, sometimes making them too severe and at other times too liberal. In the “too severe” camp was Congress enactment of the 1997 Balanced Budget Amendment, which set reimbursement rates artificially low.

In the following six years, insurance companies left a market in which they couldn’t turn a profit. By November 2003 – the month before Congress changed directions again — there were only 155 plans left, and they had a total enrollment of 4.6 million, which was only 11% of all Medicare beneficiaries at that time.

The Medicare Modernization Act that was signed in December 2003 went to the other extreme, overpaying plans and setting the conditions for plan abuses. The ensuing gold rush of new entrants was such that within four years the number of plans and enrollees had doubled. From that point on, however, the rules were gradually tightened and higher coverage standards were mandated. Moreover, Congress began trimming subsidies that had often been 10%-20% higher than fee-for-service Medicare would have paid for medical care.

The tightening of rules that began five years ago has taken the Advantage program to a sweet spot. Many Democrats have overcome their long-held skepticism about Medicare’s managed care program that, they have traditionally believed, enriched insurance companies at the expense of government. Now, however, the Department of Health and Human Services in a Democractic administration periodically issues press releases touting the Advantage program’s achievements. Not to be outdone, Medicare (headed by a Democratic appointee) launched a three-year demonstration project to reward Advantage plans with an extra $8 billion in bonuses, an experiment that has been criticized by the Government Accountability Office.

Today Advantage plan enrollment is at an all-time high of 13.5 million and quality appears to be improving. Foremost in the minds of many seniors, of course, is these plans’ low costs. As one example, a 65-year-old in Long Island can save an eye-popping $2,000 or more a year by enrolling in the UnitedHealthcare Medicare Complete Choice Regional PPO plan compared to buying a comprehensive Medigap policy.

This particular PPO has quality rating of 3.5 stars and a network of 16,000 providers. If a retiree’s doctor is not in the network, then that person is also covered outside of the network, but with a higher co-payment. The out-of-pocket limit for network medical services is $4,900, and it would be difficult for someone in relatively good health not to substantial amounts, even while they retain the flexibility to see any physician.

Another example: a 65-year-old living in Orlando, Florida who takes one generic drug will probably save more than $1,500 a year by enrolling in the Optimum Gold Rewards plan, a 2,000-physician HMO with a point-of-service option that provides some coverage when people see non-network providers. This plan has no premiums for either medical or drug coverage, and it has a 4-star quality rating as well as a $3,400 out-of-pocket limit in network.

Seniors should also be attentive to the quality of care they receive, although studies have indicated that most do not take it into account when choosing a plan. Here again, Advantage plans may have the edge over fee-for-service Medicare. The plans are measured annually on 53 quality criteria that include clinical standards as well as member ratings. Advantage plans also have a strong incentive to improve quality, since doing so may bring in millions in bonuses.

Princeton economist Uwe Reinhardt wrote about Advantage plans’ quality of care in a recent New York Times blog post, comparing it to the quality in fee-for-service Medicare. He pointed out that quality varies among the various kinds of Advantage plans, with HMO’s and PPO’s getting the highest scores. Quality also varies by plan, and one HMO plan may have superior quality while another may not. Reinhardt cited five studies, three of them by researchers not affiliated with the insurance industry, which indicate that Advantage plans provide better quality healthcare.

As Reinhardt acknowledges, Advantage plans have incentives not just for bonuses, but to keep services at a minimum. Some plans may do that to the detriment of their members’ health. But the quality measures make it more difficult for plans to do that. Reinhardt concludes that Advantage plans provide better quality, on average, than does fee-for-service medicine.

Critics point out that Advantage plans enroll healthier individuals, and thus should be expected to have better quality and in some cases lower costs. No one disputes that Advantage enrollees have a disproportionate share of healthy people, yet the carefully done studies have controlled for that by adjusting costs for members’ health status. If Advantage plans do a better job of reducing preventable hospital admissions, as two of the studies cited by Reinhardt indicated, the plans may results in a net savings for Medicare even if the reimbursement rates are too high.

This year Medicare is lowering payments to plans in areas where fee-for-service costs are high, which the Kaiser Family Foundation has said 80% of the country’s population. And plans in areas where fee-for-service costs are low will get higher reimbursements. Neither of these is likely to have negative impact on the larger plans. Still, most of the tinkering from here on should be around the edges, at least until there is convincing evidence that the plans are being overpaid. ◊◊

The next blog post is February 5

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