Even as the nation's managed-care plans gear up to take on what could become a dominant role in the future of Medicare, Congress' effort to introduce market competition into the government-run program for seniors remains so fraught with controversy that some say it may never come to pass.
One of the most politically charged features of the Medicare legislation signed into law earlier this month by President Bush is its attempt to force the federal Medicare program to compete directly with the private sector. Backers insist the injection of market forces will bring innovation to Medicare and control costs in a program that will now include an expensive prescription drug benefit. Critics assail the "privatization" effort as a threat to the entire program.
Some healthcare experts, however, have predicted the heated debate ultimately will prove moot. Because the planned experiment with competition is so controversial, it survived in the final bill only in watered-down form-as a demonstration project limited to selected areas and not set to begin for another six years.
Programs with such long lead times often get revised or canceled, says Robert Reischauer, president of the Urban Institute, a nonpartisan research group and a former director of the Congressional Budget Office. "The chance that these demonstrations will take place is somewhere between zero and an even smaller number," he says.
Under the six-year pilot program, set to begin in 2010, HHS would select six of the nation's roughly 45 metropolitan areas where more than 25% of Medicare beneficiaries are enrolled in private plans. Priority would go to cities that also have large populations and haven't already taken part in a Medicare demonstration project.
In those areas, the government would pay a "benchmark" sum of money for each senior to receive coverage, either from traditional fee-for-service Medicare or from private HMOs or PPOs. The benchmark would be based on bids submitted annually by both traditional Medicare and at least two private plans that want to compete for a share of the business. Because the private plans' bids are expected to pull down the average, the benchmark would be lower than what traditional Medicare needs to cover all its costs.
Seniors who enroll in traditional Medicare would have to make up the difference through higher premiums. But if they select a cheaper private plan, they would be rewarded with re-bates equal to 75% of the monthly per-capita savings, with the government keeping the rest.
This approach, dubbed "premium support," differs from the current setup, in which Medicare beneficiaries typically don't see the savings if they choose a plan that is less expensive than traditional Medicare.
The goal of the pilot is to encourage seniors to move into private plans, which theoretically are more efficient and can provide broader benefit packages with greater coordination of care at a lower cost than traditional Medicare-a program that some analysts say is on track for fiscal disaster. If the pilot is successful, the concept eventually would be expanded nationwide, or so the bill's sponsors say.
"Appropriate levels of competition and choice will encourage innovation, product dynamism and consumer response. And it will save consumers and the government money in the long run," says Howard Phanstiel, president and chief executive officer of PacifiCare Health Systems, which derives about 47% of its revenue from its Medicare plans and is a strong supporter of Medicare reform.
Critics, however, contend the pilot would force Medicare beneficiaries to pay ever-increasing premiums for government benefits they have always had. In addition, they argue, private plans would find ways to "cherry pick" the youngest and healthiest members, forcing the oldest, sickest and most expensive seniors into traditional Medicare, which would face further rising costs even as government payments shrank.
"Ultimately, Medicare would become unaffordable," says Robert Hayes, president of the Medicare Rights Center. "It would be a return to life as it was in 1964, when getting sick meant facing abject poverty."
Karen Ignagni, president of the AAHP-HIAA, the nation's largest health insurance trade group, scoffs at the cherry-picking argument, saying it "turns everything we know about what's going on in the private-sector Medicare program on its head." Recent studies, she says, have shown that Medicare HMO enrollees are disproportionately low-income and minorities with chronic conditions. "People who have chronic illnesses find they are better treated in private Medicare plans."
In any case, premiums would not be allowed to rise more than 5% per year-or 30% during the six-year pilot-and the poorest seniors would be shielded from any increases. The Congressional Budget Office estimates that only 670,000 to 1 million of the nation's 40 million Medicare beneficiaries would face premium increases under the pilot.
Still, politicians already are shrinking from the prospect of making guinea pigs of their senior constituents by forcing them to pay more for coverage while the rest of the nation doesn't have to. "There simply is no political constituency for competition," Reischauer says. He points out that since 1996, four other attempts at experimenting with competition among Medicare HMOs were blocked after members of Congress heard objections from elderly voters and healthcare providers, who don't like the idea of insurers cutting fees to make a profit. "And none of these demonstrations involved competition with traditional Medicare, which is an even more controversial issue," Reischauer adds.
Insurers, frustrated with low Medicare payments in the past, will have a generous "stabilization fund" to tap starting in 2006. Under the renamed Medicare Advantage program, HHS will pay roughly $12 billion in incentives over 10 years to encourage private insurers-mainly regional PPOs-to enter and stay in particularly difficult markets.
Sen. Edward Kennedy (D-Mass.), a major opponent of the bill, has called the money a "slush fund," but insurers say it's a belated acknowledgement that they cannot operate profitably in some regions.
According to former CMS Administrator Tom Scully, PPOs that win a competitive bidding process to provide Medicare coverage in predetermined regions could see payment gains of 20% to 30% in the first year of the program. The new regional structure, which will be established by 2005, will consist of 10 to 50 regions, each at least as large as a state. Half of whatever the PPOs save the government will go back into the stabilization fund.
Health Net is particularly bullish about the role of regional PPOs in Medicare. Steve Nelson, chief Medicare officer of the insurer, says the PPOs will offer seniors the broad choice of providers they have grown accustomed to under fee-for-service, while making business more profitable in rural and other underserved areas by spreading the risk across larger populations. Health Net, he adds, already is having success with two Medicare PPOs it launched this year in Oregon and Arizona under a CMS pilot project.
"We're going to learn everything we can from our current demonstrations and introduce new PPO products over the next few years so that, when 2006 rolls around, we can bid with confidence" in the new Medicare Advantage program, Nelson says.
There will be even more immediate gains for insurers already in Medicare+Choice: The legislation earmarks $1.6 billion in rate increases over the next three years to encourage private plans to continue or expand their role in the program. In 2004, insurers essentially will receive the higher of two options-either a 3.7% annual payment increase or 100% of the fee-for-service rate.
After jumping into Medicare+Choice in the 1990s, HMOs have withdrawn from many markets, dissatisfied with the government's 2% limit on annual reimbursement increases. The pullouts, which forced millions of members to scramble to find new coverage, have left many seniors wary of joining private plans. Only 4.5 million Medicare beneficiaries, or 11%, are enrolled in private plans, down from a peak of 6.3 million, or 17% in 1999.