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Keeping It Real: Wall Street Sees Fadeout of Private Fee-For-Service Plans

By John Reichard, CQ HealthBeat Editor

July 9, 2008 --A panel of Wall Street analysts said Wednesday that the days are numbered for Medicare's private fee-for-service plans, at least in their current form—an assessment made even before a dramatic Senate vote later in the day approving a House-passed Medicare bill (HR 6331) imposing new restrictions on the plans.

The White House has said it will veto the measure, but supporters, at least for the time being, have the votes needed to override the veto.

The analysts, who appeared at a Washington, D.C., forum, also weighed in on a potential overhaul next year of the health care system, warning that the shift away from employer-based coverage proposed by presumptive GOP nominee Sen. John McCain of Arizona is fraught with peril but nevertheless could work if McCain dropped his loose regulatory approach to overseeing insurance.

Washington may be full of people wedded to pet ideas and wishful thinking about health policy proposals, but New York offers an unsentimental antidote—financial analysts who have to be realistic about what is actually likely to happen in health care if they want to keep their jobs advising people how to invest money. They also offer another form of reality therapy—a perspective on what is actually happening in the health care market that often is at odds with the notions of policy wonks about how to cure the ills of the health care system.

Goldman Sachs analyst Matthew Borsch said that Humana, a major player in the market for private fee-for-service plans, is beginning to organize networks on the assumption that the plans will no longer be permitted in their current form. Robert Laszewski, a health care market analyst with the firm Health Policy and Strategy Associates, said at the forum sponsored by the Center for Studying Health System Change that the plans "were never intended to be a permanent product. It was intended to be a transition product."

Under current law, the plans need not form networks of providers. Doctors are "deemed" to be part of the plans merely by treating a patient. The Medicare bill passed by the House and Senate would end this deeming mechanism and require the plans to form networks.

Critics complain that the plans are paid more than any other type of plan in the Medicare Advantage program, the private plan side of Medicare, but lack any of the fundamental elements of managed care, such as networks of providers and measures of the quality of care they provide.

Panelist Christine Arnold, who until recently was an analyst with the investment firm Morgan Stanley, said, "we're paying 19 percent more for a senior that's enrolled in a private fee-for-service plan relative to what we would have paid had they stayed in regular Medicare . . . The issue here is, is it fair that we're depleting the Medicare Trust Fund by overpaying for this small portion of seniors presuming they're getting better benefits and potentially overpaying the managed care plans?"

"I would agree that private fee-for-service is not the answer," said Lehman Brothers analyst Joshua R. Raskin. But he noted that Medicare HMOs have been able to deliver Medicare benefits for 95 cents on the dollar, showing that private plans can save the program money. That suggests the long-term viability of the Medicare Advantage program, he said.

Laszewski noted that HR 6331 does not actually propose to cut the rates paid to private fee-for-service plans. The measure says that by 2011 the plans have to have networks. "That's a pretty reasonable thing for Democrats to be expecting. They're not cutting the rates, they're simply saying, 'Gee whiz, guys, you've been doing this since 2004 now, you get to 2011, seven years later, maybe we can kind of take the training wheels off.' "

"Private fee-for-service is not sustainable because it was never intended to be sustainable." The idea was to launch the plans in areas without Medicare alternatives and to allow them to build up a block of enrollment that would create leverage to form networks, he said.

Arnold opined that the plans could be made sustainable if they were reconfigured to serve only low-income beneficiaries and Medicare acquired the authority to audit the plans to ensure they deliver needy seniors additional benefits for the added money they receive.

On the issue of a health overhaul, analysts noted that firms like Aetna and Cigna were making some moves to target the individual, or non-group market. However, Raskin, the Lehman Brothers analyst, said the biggest efforts to prepare for an overhaul haven't been made in the market itself but in hiring lobbyists to try to influence legislation revamping the health care system.

"Leaders in the health insurance industry are firmly behind expansion though the employer-based system," Laszewski said, raising questions about shifting insurance coverage sharply to individual sales. "There is a discomfort in moving in the individual direction."

Analysts said that a shift to individual sales that would be encouraged by McCain would need to be accompanied with certain regulatory changes to be successful. Arnold said steps would be needed to attract healthy, low-cost individuals to the risk pool on which individual rates would be based.

Doing so is possible, Laszewski said, and need not involve mandating that people buy insurance coverage. As a potential model, he pointed to the Medicare Part D program governing prescription drug benefits. Part D participation is voluntary, he noted, and involves delivering benefits on a community-rated basis for large numbers of relatively sick people. The program is working quite well, he said. Arnold agreed that a mandate to buy health insurance wouldn't be needed if certain disincentives were to come into play if people didn't buy it, such as requiring "medical underwriting" for those who delayed participation. The term refers to charging people more if they have costly medical conditions or denying them coverage for those particular conditions while covering other ailments.

But Laszewski cautioned that "I don't think you tell the American people to give up their employer-based health insurance without giving them some assurances about how they make that transition."

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