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Managed Care Plans Cost Medicare Additional $5.2 Billion in 2005, Report Says

By Mary Agnes Carey, CQ HealthBeat Associate Editor

November 30, 2006 -- Medicare managed care plans last year cost the government $5.2 billion more than if their enrollees had remained in Medicare's traditional fee-for-service program, according to a Commonwealth Fund report released Thursday.

Additional payments to Medicare Advantage (MA) plans exceeded fee-for-service costs by 12.4 percent or $922 for each of the 5.6 million beneficiaries enrolled in those plans, the report found. In some parts of the country, Medicare paid MA plans more than twice the fee-for-service amount, the report said.

Karen Ignagni, president and chief executive officer of America's Health Insurance Plans (AHIP), a trade group representing insurers, said the study's methodology—also used by the Medicare Payment Advisory Commission in a June report—was flawed. Ignagni said the methodology overestimated the differences between MA payment rates and fee-for-service payment costs.

Ignagni said MA plans are able to provide better benefits at lower costs and are returning billions of dollars to both the government and beneficiaries. In rural areas, MA plans may be paid more than fee-for-service providers, but in urban areas payments are often equal to or less than traditional Medicare, she said.

According to the Centers for Medicare and Medicaid Services, beneficiaries in MA plans saved an average of $82 per month compared with those in fee-for-service, for a total of approximately $6.4 billion this year. In addition, MA plans have saved the government approximately $2 billion in payments, according to CMS.

The Commonwealth Fund report's authors estimated that eliminating higher payments to private plans could save Medicare about $30 billion over the next five years, funds that could be used to fill in the "doughnut hole" prescription drug coverage gap in some plans or reduce beneficiaries' Part B premiums by $10 per month.

"While encouraging enrollment in private plans was billed as a way to reduce costs for the program, Medicare Advantage in fact costs Medicare money because of the extra payments," Brian Biles, the study's lead author, said in a statement. "If traditional Medicare and private plans are ever to compete fairly, they need to compete on a level playing field, which would require the elimination of these extra payments." Biles is a professor of health policy at George Washington University.

Rep. Pete Stark, D-Calif., who is expected to chair the House Ways and Means Health Subcommittee next year, said he hopes to "work in a bipartisan fashion to level the playing field" when Democrats assume control of Congress in January.

"When managed care plans were first allowed into Medicare, they said they could provide better care for less and they agreed to accept 95 percent of the fee-for-service rate," Stark said in a statement. "Now, instead of getting savings, taxpayers are getting bamboozled."

Ignagni said that if Congress tries to reduce MA payments, members who support such plans "will have a great deal to say in this discussion about whether these benefits should be changed because their constituents have relied on these programs."

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