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Additional perspectives on Robert Berenson's article
are available by clicking on the author's name below:
Joseph Antos • John Bertko • Ron Klar • Murray Ross •
Patricia Salber and Bruce Bradley
H E A L T H A F F A I R S : P E R S P E C T I V E
W E B E X C L U S I V E
28 N O V E M B E R 2001
Paying Medicare+Choice Plans:
The View From MedPac
What do we do when efficient plans'
costs diverge from what Medicare would have spent in the traditional program?
by Murray N. Ross
Before the Balanced Budget Act (BBA) of 1997, Medicare's payments to managed
care plans were linked to fee-for-service (FFS) costs per beneficiary in individual
counties. Wide variation in FFS costs across counties meant that managed care
payment rates also varied widely. To address a perceived inequity–in which
Medicare beneficiaries in some (mostly urban) areas had access to plans offering
much greater benefits than those available to beneficiaries in other (mostly
rural) areas–Congress changed how Medicare pays such plans when it created
Medicare+Choice (M+C). It put a floor under payments, provided for blending
of local and national payment rates, and limited increases in payments to higher-paid
areas. Last year Congress raised the floor further.
Taken together, these steps have reduced the variation in M+C payment rates
across the country. Reducing variation in payment rates, however, has introduced
a different problem by creating the potential for Medicare's payments to plans
in some market areas to diverge greatly from FFS costs in those markets. In
counties where payment rates have been raised above FFS costs, Medicare may
pay M+C plans more to provide the basic benefit package than it would have spent
otherwise, thus increasing program spending. In other counties payments to M+C
plans may fall below FFS costs as updates are limited. <%-1>Over time,
plans paid less than FFS costs will have difficulty in contracting with providers
if their payments do not allow them to compete with payment rates in the traditional
FFS program.
MedPAC's proposal.
The Medicare Payment Advisory Commission (MedPAC) believes that Medicare's payment
policies should not steer beneficiaries to either M+C plans or the traditional
FFS program. Moreover, the commission recognizes that one cannot fight the market:
No matter how much payments to plans are manipulated, achieving parity in payments
to M+C plans across markets while maintaining parity between M+C and traditional
Medicare within local markets cannot be accomplished as long as there is so
much underlying variation in FFS spending across market areas. Therefore, MedPAC
recommended in its March 2001 report that payments for beneficiaries in the
two sectors of a local market be made equal, taking into account differences
in beneficiaries' health status (risk).1
The commission recognized that its recommendation would not ensure choice for
all beneficiaries, because the characteristics of some markets are simply not
conducive to managed care. In many rural areas, for example, plans have little
negotiating power because there are few hospitals and physicians; the absence
of managed care plans in such areas is not unique to Medicare. But MedPAC's
recommendation would permit choice in areas where it is viable without raising
spending. This contrasts with current policy, which discourages managed care
plans from participating in areas where they have been able to bring additional
value to Medicare beneficiaries and raises payments in areas where they cannot.
Moreover, by raising payments above FFS costs in some areas, current policy
increases spending with no assurance that the extra payments yield additional
benefits to beneficiaries.
Berenson's counterproposal.
Robert Berenson takes issue with the MedPAC recommendation, arguing that the
linkage between spending for M+C plans and traditional Medicare should be removed
rather than reinforced. He proposes instead that in the absence of a comprehensive
restructuring of the Medicare program, M+C plans should be viewed as simply
another type of provider, with payment updates based on their own characteristics
and performance. Berenson's proposal would in essence set M+C payments at what
it costs efficient plans to provide the basic benefit package, with appropriate
adjustments for factors such as risk that are beyond plans' control.
The logical consistency of such an approach is appealing; Berenson would have
Medicare treat a person-month of care the same way it treats a hospital stay
or an office visit. But his approach raises both policy and operational questions.
Policy analysis.
The key policy question is what to do when efficient plans' costs diverge from
what Medicare would have spent in the traditional program. In cases where plans'
costs exceed FFS–as is likely to be the case in rural areas–it is
hard to argue that Medicare should pay more for the same benefit. Indeed, this
is exactly what Medicare now confronts in a number of floor counties: The program
pays a higher rate to a private FFS plan for the same unmanaged care that the
traditional program delivers.
But what if plans provide additional benefits or higher quality? With respect
to additional benefits, why have Medicare only pay for them selectively through
M+C rather than programwide? Paying plans more because they provide higher quality
is certainly worth considering, but as Berenson himself points out, we are a
long way from overcoming the technical and administrative barriers to doing
so.
If plans in higher-cost areas can deliver the basic benefit package less expensively
than can the traditional program, who should benefit? Because participation
in M+C is voluntary for plans and providers, and because Medicare beneficiaries
have no incentive to leave the traditional program unless they get something
in return, the answer surely must be that these parties should share in any
efficiency gains. Were Medicare to seek budgetary savings, participation in
M+C by plans, providers, and beneficiaries would decline, as we have seen in
many areas in the post-BBA period.
Some observers might argue that because M+C plans decide whether to enter markets
on the basis of their own costs, not on local FFS spending, paying them less
than FFS costs will not necessarily have negative consequences. But this argument
ignores the fact that the providers with which plans contract do compare payment
rates to FFS. Moreover, attempting to determine plans' costs to support reducing
payments below FFS suggests requiring plans to file some type of analogue to
the hospital cost report. The question is then whether instituting a costly
and potentially unreliable mechanism to allocate insurers' costs to individual
products and markets for the purpose of calculating payment rates would generate
enough savings to make it preferable to using readily available data on FFS
spending. Such an approach does not appear promising.
This brings us full circle: We do not want to overpay M+C plans, and we cannot
underpay them, or they (and beneficiaries) will not participate. Whether or
not we treat M+C plans as just another type of provider, the appropriate benchmark
for payments is local FFS spending, adjusted for risk.
Crucial first step.
Berenson concludes that instead of viewing private health plans as a vehicle
to reduce costs or provide additional benefits, we might better focus on how
to reward plans that improve quality and help manage care for Medicare beneficiaries
with chronic diseases. He notes that doing so would require a new regulatory
and payment structure and new authority for the Centers for Medicare and Medicaid
Services (CMS) to select better-performing plans. These steps would face numerous
barriers. MedPAC has not addressed the notion of value-based purchasing in M+C,
but the commission has repeatedly endorsed a crucial first step: development
of a risk-adjustment system that can appropriately reward plans that care for
sick beneficiaries. Until such a system is implemented, plans that develop a
reputation for caring for beneficiaries with serious or chronic illnesses will
be punished financially because their payments do not reflect the higher costs
of such enrollees.
The author thanks Glenn M. Hackbarth, MedPAC chair, for his helpful comments.
NOTE
1.
Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment
Policy (Washington: MedPAC, March 2001).
Murray Ross is executive
director of the Medicare Payment Advisory Commission (MedPAC), an independent
legislative agency that advises Congress on Medicare policy issues.
2001 Project HOPE–The People-to-People Health Foundation, Inc.
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