President Clinton said he wants Medicare to operate more like the private sector, using competition to drive quality up and costs down.
The trouble with Clinton's plan, say HMOs, is that it would exempt the fee-for-service sector from competition, insulating a huge majority of Medicare expenditures from market forces and reducing the cost savings of competitive pricing.
Clinton's Medicare reform plan, released last month, proposes a "competitive defined benefit" structure under which health plans would bid to cover the cost of benefit packages, including prescription drugs, for beneficiaries.
The government would pay the entire premiums of beneficiaries who joined a plan that cost no more than 80% of the cost for the average beneficiary enrolled in the fee-for-service program.
For beneficiaries who enrolled in plans that cost between 80% and 96% of the fee-for-service program, the government would cover 25% of the cost above 80% of fee-for-service. If beneficiaries enrolled in plans that cost more than 96% of fee-for-service costs, they would have to pay the total cost.
The White House said the plan would make Medicare managed-care plans compete based on price rather than on benefits as they do today.
Since all the plans in an area are paid the same rate based on a government formula, they often can attract enrollees only by offering benefits that traditional Medicare doesn't offer.
By reducing or eliminating premiums, managed-care plans would compete based on price, the White House said.
"There is not an ability for managed-care providers to compete on the basis of price on a defined, specific benefit," Gene Sperling, Clinton's national economic adviser, said at a recent press briefing in Washington about the plan. "Everybody gets paid the same amount, regardless of their cost, regardless of how efficiently they could provide the service."
The plan is similar in many ways to the proposal drafted by the National Bipartisan Commission on the Future of Medicare, chaired by Sen. John Breaux (D-La.). But Breaux's plan, which the commission never formally approved, differed in its inclusion of fee-for-service in the competitive-bidding framework.
While saying competition may be necessary to control Medicare costs, Stuart Altman, a Brandeis University healthcare policy professor whom President Clinton appointed to the commission, said senior groups are more likely to oppose Breaux's proposal than Clinton's.
"That was going to be a fight to the death," Altman said.
But of Clinton's plan, he said, "it's a politically more salable degree of competition."
Advocates of the Breaux commission's work, however, argued that for Medicare to rein in its cost growth, fee-for-service must face the same competitive forces as managed care.
Since 84% of seniors still are enrolled in traditional fee-for-service Medicare, managed-care plans say Clinton's plan omits a significant part of the market. Fee-for-service payments represent 82.6% of the $212.1 billion in Medicare benefit payments in fiscal 1999, according to the Congressional Budget Office.
Managed-care plans have argued against HCFA's competitive-pricing demonstrations in four cities based on the omission of the fee-for-service sector. HCFA has withdrawn demonstrations in Baltimore and Denver. Objections from health plans and providers continue to bedevil the Phoenix demonstration, while the one in Kansas City, Kan., is proceeding.
A competitive-bidding framework that excludes Medicare is flawed partly because beneficiaries have little incentive to leave fee-for-service coverage, managed-care plans say.
When a private-sector employer offers a choice of plans, the employer often sets its share of the premium at the rate charged by the lowest-cost plan, while charging substantially more for more-expensive plans, said Marianne Miller, director of federal regulatory affairs and policy development at the Health Insurance Association of America. That motivates employees to join the lowest-cost plan.
But if Medicare continues to offer the current fee-for-service coverage, the incentive to join a lower-cost plan isn't nearly as strong, Miller said.
It also leaves Medicare managed-care payments pegged to fee-for-service rates, said Jeff Lemieux, who worked for the Breaux commission's staff before the panel disbanded.
Now a senior economist with the Progressive Policy Institute, a think tank of the moderate Democratic Leadership Council, Lemieux contrasted that problem with the commission plan, which pegged the government's share of the premium to a percentage of the average plan's bid.
Although in the short run, government expenditures under the Clinton and Breaux plans probably would be similar, long-term costs may be very different, Lemieux said. He said he could not predict which would be more costly.
Administration officials, however, object to the health plans' arguments. They said subjecting the fee-for-service program to competitive bidding would raise program costs so high that many seniors would have no choice but to join managed-care plans.
"If they're choosing a managed-care option, it should be because that option was more attractive than the existing system," Sperling said. "It should be choice, not financial coercion."