Health Affairs, 25, no. 3 (2006): 864-868 doi: 10.1377/hlthaff.25.3.864 © 2006 by Project HOPE	New Online   McAllen, TX & Beyond: An Expert Roundtable   Geography & Reform   Medicaid or Insurance Exchange?   Siren Song of New GME   Public Plan Option: Pro & Con

This Article Abstract Reprint (PDF) Submit a response to this article Alert me when this article is cited Alert me when Comments are posted Alert me if a correction is posted Services E-mail this article to a friend Similar articles in this journal Similar articles in PubMed Alert me to new issues of the journal Add to My Personal Archive Download to Citation Manager Reprints & Permissions Citing Articles Citing Articles via HighWire Citing Articles via Google Scholar Google Scholar Articles by Foote, S. B. Articles by Halaas, G. W. Search for Related Content PubMed PubMed Citation Articles by Foote, S. B. Articles by Halaas, G. W. Related Collections Medicare

UpDate

UPDATE: SPECIAL REPORT

Defining A Future For Fee-For-Service Medicare

Abstract

 
The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) provides economic incentives that favor health plans over traditional fee-for-service (FFS) Medicare. This reflects an ideological preference for private plans rather than government-administered pricing and recognition that private plans can use tools effectively to improve quality. However, enrollment projections indicate that FFS will continue to attract the majority of beneficiaries for years to come. We argue that MMA’s contractor reform provisions create the opportunity to build critical FFS infrastructure, and contractors have the potential to encourage quality and manage utilization to compete with private plans in a modernized Medicare.

Although a health plan option in Medicare has coexisted with FFS for twenty years, traditional FFS Medicare has been the mainstay of the program, allowing beneficiaries a wide choice of doctors and hospitals. Despite Medicare’s long-term focus on health plan options, 88 percent of Medicare beneficiaries (thirty-six million) chose FFS in 2004.³ The Congressional Budget Office (CBO) projects that FFS will still account for 84 percent of enrollment by 2013; the U.S. Department of Health and Human Services (HHS), an ardent advocate of MMA, projects a 70 percent FFS share over the same time period.⁴ Additional beneficiaries might land in FFS if policy-makers succumb to fiscal pressures to reduce MMA’s economic incentives for plans.

Although it is hard to argue that private plans are more efficient than FFS, given the economics of the MA program, it is fair to ask whether FFS Medicare severely constrains the ability of the program to use management tools to improve quality of care and resource use. John Wennberg has noted that FFS Medicare might, "at least in theory, adopt a population-based strategy for managing resources and utilization that is similar to the strategies used by staff-model or prepaid group practice HMOs."⁵ But can the theory become a reality?

Granted, Medicare FFS has a long way to go. The decentralized program is plagued with wide variation that inevitably reflects quality and access inequities that cannot be explained by illness, patients’ preferences, or the dictates of evidence-based medicine.⁶ FFS Medicare lacks a structural design and appropriate tools to manage care.

We believe that Medicare’s contractors, with their experience and expertise, have the potential to fill the void. The Centers for Medicare and Medicaid Services (CMS) has been hampered by statutory inflexibility, and contractors have inadequate authority, limited management tools, and uneven resources. MMA’s contractor reform provisions include important statutory changes, which open the opportunity for contractors to undertake greater and more effective program management. The CMS has taken some important steps in its early implementation of contractor reform but does not appear to envision contractors in an expanded role. This paper lays out the case for the CMS to design a more robust FFS option so that traditional Medicare can compete with private plans in a modernized program.

What Local Contractors Do Now

Top What Local Contractors Do... MMA's Contractor Reform Our Recommendations NOTES

 
Process claims. The 1965 Medicare statute established local contractors—called fiscal intermediaries for Part A and carriers for Part B—to serve as a buffer between the government and providers in processing claims for payment. The law required that only insurance companies could be contractors.⁷ In 1980 there were more than 100 local contractors. By 2003, their numbers had fallen to twenty carriers and twenty-eight intermediaries because of exits and consolidations. Some contractor organizations acquired multiple contracts covering disparate states, while others remained single-state entities. The result was little regional coherence and large variation in resources and capacity.⁸

Provide a link between providers and government. Contractors also serve as a key link between providers and the government. All carriers and many intermediaries have Carrier Advisory Committees (CACs), which consist of representatives of medical specialty societies. The CACs offer advice and provide information to the medical communities they serve.⁹

Develop local coverage policies. Contractors also have the authority to develop local coverage policies that now account for 90 percent of all Medicare coverage decisions. The vast majority of coverage policies involve efforts to define the appropriate usage parameters for commonly used procedures and services.¹⁰ Differences in these utilization management policies reflect variations in practice patterns across the country.

Assess new technology. Contractors also assess new technologies prior to issuing local coverage policies, particularly in the early stages of technology before the CMS drafts national policies. Although many of these assessments are quite sophisticated, smaller contractors often lack the resources to engage in rigorous assessments. In addition, contractors identify misuse of services from their claims data and develop policies designed to improve utilization or refer suspected fraud cases to the Medicare Integrity Program. Contractors lack the incentives, tools, and resources, however, to enforce the coverage policies or to change providers’ behavior.

Manage new projects. On occasion, contractors have been called upon to help Medicare manage new projects. In a recent competitive bidding demonstration for durable medical equipment (DME), the CMS contracted with Palmetto GBA, a regional DME contractor that is also one of the largest multistate Part A and Part B contractors, to implement the demonstration. Palmetto developed the standards and provided practical information on how to make operational a competitive bidding model.¹¹

MMA’s Contractor Reform

Top What Local Contractors Do... MMA's Contractor Reform Our Recommendations NOTES

 
Many CMS administrators have sought reform of the 1965 Medicare statute to permit greater flexibility in contract rules.¹² Tom Scully, CMS administrator during the Medicare reform debate that led to MMA, also strongly advocated contractor reform. In 2003 testimony, Scully urged Congress to provide the CMS "with more flexibility to adapt its business model to meet the evolving needs of the Medicare program."¹³ Scully supported improved communication among the CMS, contractors, and providers; the means to reward contractors that perform well; and authority to redraw the regional lines.

MMA included many important contractor reform provisions. Contractors will now be known as Medicare administrative contractors, or MACs. The law provides the CMS with greater flexibility in contracting functions, the discretion to reduce the number of contractor regions, and the ability to include performance requirements in contracts.

The CMS took a tentative first step by announcing that it will merge Parts A and B contractors into fifteen new regions with one MAC for each. The new MAC regions are designed to accomplish efficiency goals by consolidating and integrating program operations and improving benefit administration.¹⁴ These reforms no doubt will improve accountability and equity among contractors.

HHS secretary Michael Leavitt’s February 2005 report to Congress notes that the fiscal year 2006 budget request for contractor reform activities would support the transition to MACs, improvements in customer service, and a modernized information technology platform.¹⁵ He anticipates offsetting cost reductions as a result of competitive bidding, to reward reductions in claims processing costs. Although many of these changes will improve contractors’ capacity, reducing costs to process claims will not achieve the more substantive goals of improving health care quality and efficiency.

Our Recommendations

Top What Local Contractors Do... MMA's Contractor Reform Our Recommendations NOTES

 
We strongly urge a broader view for contractors in Medicare and provide the following recommendations.

Data coordination, analysis, and reporting. Contractors could be the data repository for information about each region’s health plans and FFS providers. The CMS does not routinely publish Health Plan Employer Data and Information Set (HEDIS) measures for FFS providers. All existing and potential comparative data could be aggregated and analyzed at the regional level. This data repository could become the foundation for measuring performance. Contractors analyze claims data as part of the claims processing function but are not expected to aggregate the data and report them to the CMS, providers, or the public. With this reform, they would be well positioned to carry out this function.

However, we believe that MACs would need to increase their evaluative expertise to engage in this role. MMA defines a new category called "functional contractors" to perform specific contracted services. We recommend that each MAC be served by a functional contractor with expertise in health services research. This capability could be developed using existing or expanded Quality Improvement Organizations (QIOs), the Agency for Healthcare Research and Quality’s (AHRQ’s) Evidence-based Practice Centers (EPCs), or the health services research capacity of academic institutions.

Regional quality improvement. Contractors could move beyond data gathering and analysis to an active role in improving population health. For example, the most costly Medicare patients are elderly people with multiple chronic conditions. Repeated hospitalizations for the same condition result in high costs and are preventable. These costs are higher in areas with reduced access to primary care.¹⁶ Contractors could encourage and reward practices that achieve high rates of flu shots, ensure the selection of a primary care physician, or reduce repeat hospitalization rates for certain chronic conditions.

Contractors could provide a "managed care" function for the FFS providers in the region through the use of evidence-based guidelines and incentives to follow them. They could encourage competition and selection based on quality by publishing benchmark data for providers demonstrating the most cost-effective care with good outcomes.¹⁷ In turn, the CMS could reward contractors that demonstrate improvements in care, using bonus payments and other recognition.

Role in demonstration projects. In 2000, Congress authorized a project whereby Medicare would reward selected large group practices that improve outcomes measured against performance in the community.¹⁸ MMA mandates similar demonstrations to encourage quality improvements such as disease management. Many of the demonstrations rely on large, organized groups to participate. For example, the new Medicare Health Care Quality (MHCQ) Demonstration Program will be open to eight to twelve organizations, defined as integrated delivery systems and group practices.¹⁹ In many regions, the fragmented and highly competitive FFS providers are not well positioned to participate. Contractors could coordinate participation among smaller provider groups, encourage the use of evidence-based resources, and assist with data collection and evaluation.

Manage competition between FFS and private plans. The Medicare Payment Advisory Commission (MedPAC) has noted that giving beneficiaries the right to choose between FFS or a health plan, if properly structured, keeps the pressure on both options to perform. The challenge is to design the proper structure for both choices. Contractors could play a role in raising the bar for both sides of the Medicare program.

MedPAC has noted that for the two models to compete fairly, there must be fiscal neutrality between them. Paying private plans more than FFS "encourages inefficiency and contributes to the increased overall spending for the Medicare program."²⁰ The current payment formulas favoring private plans violate the principle of neutrality and will hinder fair and effective competition. In addition, the CMS should encourage competition between FFS and health plans in terms of outcomes and quality. It seems clear that the CMS does not envision competition between the two delivery models: It drew inconsistent regional divisions based on different rationales for the new preferred provider organizations (PPOs) and the MACs.²¹ Although the future of PPOs in the program is unclear, if the CMS had seen FFS as a competitive option, compatible regions would have been essential.²² We recommend that the CMS reconsider the regional and fiscal design to allow FFS and MA to truly compete.

Invest in FFS infrastructure. Medicare is known for its low administrative costs, and a plan to expand contractors’ roles will require additional dollars. There are some efficiencies to be gained: Contractors are already in place, and many have the skills, sophistication, and experience to take on the tasks we have described. Congress appeared willing to invest in and, some would argue, overpay health plans to encourage participation. We hope that private plans, in turn, will be required to provide evidence of increased value to Medicare. We suggest that additional investments in FFS would likely have major long-term economic and quality benefits. The CMS should raise the bar for performance for both health plans and traditional FFS Medicare.

SECRETARY LEAVITT recently called Medicare FFS "a premier health plan that allows for comprehensive, quality care and world-class beneficiary and provider service."²³ Those are admirable goals, but they are not a current reality. In fact, some decisions, such as private plan overpayment and divergent regions, raise questions about the administration’s long-term support for FFS Medicare. With appropriate reforms, however, FFS Medicare can assume its rightful place as an important option for beneficiaries in the future. An expanded role for contractors, the low-key workhorses of the Medicare program for many years, could make Leavitt’s vision a reality.

Editor's Notes

 
Susan Foote (foote003{at}umn.edu) is an associate professor in the Division of Health Services Research and Policy, School of Public Health, at the University of Minnesota in Minneapolis. Gwen Halaas is director of the Rural Physician Associate Program, Department of Family Medicine and Community Health, at the University of Minnesota and an assistant professor at the University of Minnesota Medical School.

This research was supported in part by a grant from the Robert Wood Johnson Foundation’s Changes in Health Care Financing and Organization (HCFO) initiative.

NOTES

Top What Local Contractors Do... MMA's Contractor Reform Our Recommendations NOTES

 

1. R.A. Berenson, "Medicare Disadvantaged and the Search for the Elusive ‘Level Playing Field’," Health Affairs 23 (2004): w572–w585 (published online 15 December 2004; 10.1377/hlthaff.w4.572); and Medicare Payment Advisory Commission, Issues in a Modernized Medicare Program: Report to the Congress (Washington: MedPAC, June 2005).
2. MedPAC, Issues in a Modernized Medicare Program; and R.E Hurley, B.C. Strunk, and J.M. Grossman, "Geography and Destiny: Local-Market Perspectives on Developing Medicare Advantage Regional Plans," Health Affairs 24, no. 4 (2005): 1014–1021.[Abstract/Free Full Text]
3. MedPAC, Issues in a Modernized Medicare Program.
4. Henry J. Kaiser Family Foundation, "Medicare Advantage," Fact Sheet, September 2005, http://www.kff.org/medicare/upload/Medicare-Advantage-April-2005-Fact-Sheet.pdf (accessed 16 February 2006).
5. J.E. Wennberg, "Practice Variations and Health Care Reform: Connecting the Dots," Health Affairs 23 (2004): var140–var144 (published online 7 October 2004; 10.1377/hlthaff.var.140).
6. Ibid.; S. Leatherman and D. McCarthy, Quality of Health Care for Medicare Beneficiaries: A Chartbook, May 2005, http://www.cmwf.org/publications/publications_show.htm?doc_id=275195 (accessed 15 February 2006); J.E. Wennberg et al., "Use of Medicare Claims Data to Monitor Provider-Specific Performance among Patients with Severe Chronic Illness," Health Affairs 23 (2004): var5–var18 (published online 7 October 2004; 10.1377/hlthaff.var.5); and K. Baicker and A. Chandra, "Medicare Spending, the Physician Workforce, and Beneficiaries’ Quality of Care," Health Affairs 23 (2004): w184–w197 (published online 7 April 2004; 10.1377/hlthaff.w4.184).
7. S.B. Foote, "Focus on Locus: Evaluation of Medicare’s Local Coverage Policy," Health Affairs 22, no. 4 (2003): 137–146.[Abstract/Free Full Text]
8. S.B. Foote et al., "Resolving the Tug-of-War between Medicare’s National and Local Coverage," Health Affairs 23, no. 4 (2004): 108–123.[Abstract/Free Full Text]
9. Foote, "Focus on Locus."
10. Ibid.
11. U.S. Government Accountability Office, Medicare: Past Experience Can Guide Future Competitive Bidding for Medical Equipment and Supplies, Pub. no. GAO-04-765 (Washington: GAO, September 2004).
12. Foote, "Focus on Locus."
13. Thomas A. Scully, administrator, CMS, testimony before the House Ways and Means Subcommittee on Health, Hearing on Medicare Regulatory and Contract Reform, 13 February 2003, http://waysandmeans.house.gov/hearings.asp?formmode=view&id=74 (accessed 17 February 2006).
14. Centers for Medicare and Medicaid Services, "Medicare Contracting Reform: Medicare’s New Administrative Contractor Jurisdictions," February 2005, http://www.cms.hhs.gov/MedicareContractingReform/Downloads/mac_jurisdiction_facts.pdf (accessed 16 February 2006).
15. M.O. Leavitt, "Report to Congress—Medicare Contracting Reform: A Blueprint for a Better Medicare," 7 February 2005, http://new.cms.hhs.gov/MedicareContractingReform/Downloads/report_to_congress.pdf (accessed 16 February 2006).
16. T. Bodenheimer and A. Fernandez, "High and Rising Health Care Costs, Part 4: Can Costs Be Controlled while Preserving Quality?" Annals of Internal Medicine 143, no. 1 (2005): 26–31.[Abstract/Free Full Text]
17. J.E. Wennberg et al., "Evaluating the Efficiency of California Providers in Caring for Patients with Chronic Illnesses," Health Affairs 24 (2005): w526–w541 (published online 16 November 2005; 10.1377/hlthaff.w5.526).
18. "Notice: Medicare Program: Solicitation for Proposals for Physician Group Practice Demonstration," Federal Register 67 (27 September 2002): 61,116.
19. "Notice: Medicare Program: Medicare Health Care Quality (MHCQ) Demonstration Programs," Federal Register 70 (16 September 2005): 54,751.
20. MedPAC, Issues in a Modernized Medicare Program, 60.
21. Leavitt, "Report to Congress—Medicare Contracting Reform." Minnesota, for example, is grouped with six states (Jurisdiction 19) for regional PPOs and two different states (Jurisdiction 6) for its MAC region.
22. S.D. Pizer, R. Feldman, and A.B. Frakt, "Defective Design: Regional Competition in Medicare," Health Affairs 24 (2005): w339–w340 (published online 23 August 2005; 10.1377/hlthaff.w5.339).[Abstract/Free Full Text]
23. Leavitt, "Report to Congress—Medicare Contracting Reform," II-1.

                      What's this?

This article has been cited by other articles:

				S. Keyhani, J. S. Ross, P. Hebert, C. Dellenbaugh, J. D. Penrod, and A. L. Siu Use of Preventive Care by Elderly Male Veterans Receiving Care Through the Veterans Health Administration, Medicare Fee-for-Service, and Medicare HMO Plans Am J Public Health, December 1, 2007; 97(12): 2179 - 2185. [Abstract] [Full Text] [PDF]

				S. B. Foote and R. J. Town Implementing Evidence-Based Medicine Through Medicare Coverage Decisions Health Aff., November 1, 2007; 26(6): 1634 - 1642. [Abstract] [Full Text] [PDF]