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MedPAC Votes to Urge Billions in Cuts to Private Plans in Medicare

APRIL 21, 2005 -- The Medicare Payment Advisory Commission, a strong proponent of private plan options in Medicare, surprised many observers Thursday by voting to recommend trimming billions of dollars private plans are supposed to receive under the Medicare overhaul law (PL 108-173). The influential panel agreed to the recommendations even though the private plan side of Medicare has only just begun to recover from several years of upheaval. Dozens of plans quit the program, leaving hundreds of thousands of beneficiaries to find new options.

While there's plenty of skepticism whether Congress will adopt the recommendations, the possibility that Congress would vote to make at least some of the cuts can't be ruled out. Lawmakers are under pressure to cut the deficit (see related story in this issue), fund legislation blocking a Medicare payment cut to doctors, and find alternatives to cutting Medicaid. Sen. Max Baucus, top Democrat on the Senate Finance Committee, said Thursday it is "wrong to be cutting [Medicaid] when the administration at the same time is increasing payments to managed care."

Even if lawmakers don't avail themselves this year of the political cover provided by the panel of outside experts, industry observers expressed uneasiness about how long improved payments under the Medicare overhaul law (PL 108-173) will last given the recommendations.

"Insurance companies are in the business of taking on risk. The more uncertainty there is, the less likely they are to expose themselves to risk they can't calculate or control," said a managed care industry executive.
With only one dissenting vote, the 17-member commission voted to adopt a draft recommendation that Congress eliminate the $10 billion stabilization fund for regional preferred provider organizations established by the Medicare overhaul law. The recommendation would generate no savings until 2007, when it is scheduled to begin making payments to attract and retain PPOs. Savings would total $1 to $5 billion over five years, MedPAC staff estimated.

The panel unanimously approved other draft recommendations that would lower spending on Medicare PPOs and HMOs compared to provisions in current law.
Medicare has been following a policy of holding plans harmless from possible reductions caused by "risk-adjusting" payments to plans based on the overall health status of their enrollees.

Commissioners agreed Thursday that "Congress should put in law the scheduled phase-out of the hold-harmless policy that offsets the impact of risk adjustment on aggregate payments through 2010." Agreeing to that advice would decrease spending by more than $1.5 billion over one year and by more than $10 billion over five years, staff estimated.

Another recommended change would remove "indirect medical education" payments from benchmark payments to managed care plans. "IME" payments are made to teaching hospitals and MedPAC said they ought to be taken out of the calculations used to set payments to managed care plans. The change would decrease spending by $200 to $600 million over one year, and by $1 to $5 billion over five years, MedPAC staff estimated.

Benchmark Payment Changes
The commission also agreed that Congress should set benchmark payments to the local HMOs and PPOs in Medicare—called "Medicare Advantage" plans—at 100 percent of the fee-for-service costs of traditional Medicare. The change would save $1.5 billion in one year and $10 billion in five years. Medicare's portion of the savings—the other portion would go to beneficiaries—should be redirected by Congress into a fund that pays plans more if they improve or score well on quality measures, the commission said.

MedPAC acknowledged that its recommended reductions could mean fewer plans take part in Medicare Advantage and that beneficiaries will have fewer choices as a result. But the commission staked out a strong philosophical position that managed care plans ought to compete on a level playing field with the traditional part of Medicare.

Close observers of the panel downplayed the notion that Thursday's recommendations were surprising, saying commissioners have consistently taken the position over the years that payment on the managed care and fee-for-service side of Medicare should be equitable.

They noted the timing of the recommendations was dictated by the Medicare law requiring the commission report back to Congress by June on a number of issues in Medicare Advantage payment.

But MedPAC Chairman Glenn Hackbarth acknowledged congressional acceptance of the recommendations "could not happen today without massive disruption to the system." However, the commission is obligated to give lawmakers its best advice on how to proceed in Medicare Advantage, he said, emphasizing that payment needs to be equitable between the managed care and the fee-for-service side of the program. MedPAC data, disputed by industry, shows that payment to managed care plans is 107 percent that of average per capita payments based on fee-for-service care.

Congress can then decide whether to implement the recommendations and when to do so, Hackbarth said. In assessing the cumulative impact of the recommendations on spending, Hackbarth cautioned that analysts couldn't simply add up the various savings estimates for individual recommendations because they "interact."

Hackbarth also justified the recommendations based on the commission's posture toward fee-for-service payments to hospitals, home health agencies, and skilled nursing facilities.
MedPAC has advised reductions compared to current law in those sectors to spur more efficient care, he suggested. It would be inconsistent to squeeze providers on the fee-for-service side and then pay private plans more than average fee-for-service costs on the managed care side of Medicare, he said.

Commissioners also agreed to other recommendations unrelated to spending levels. They agreed that quality measures should be applied to traditional fee-for-service Medicare that allow it to be compared to the managed care side of the program. They also favored an adjustment to make payments more equitable between regional and local plans.

MedPAC also agreed that the geographic areas used to set payment rates for local Medicare Advantage plans should be larger than the current county-based system of calculating payment levels. The aim is to even out variations.

But the managed care industry executive said these changes too would be disruptive to managed care plans. Counties in which Medicare HMO enrollees received relatively generous benefits would be combined with counties in which enrollees received lesser benefits. "That means that people who have been getting good drug benefits and who pay zero premiums aren't going to get them," he said.

MedPAC hasn't really assessed the real-world impact of the recommendations properly, the executive said. "When ideology and philosophy meets pragmatism, chaos is going to result if [the recommendations] are implemented."
Another industry source said the cumulative financial impact on the industry would be "significant" were Congress to adopt the recommendations, but that is "highly unlikely."

Mohit Ghose, public affairs VP at America's Health Insurance Plans, said it is "premature to revisit such a monumental piece of legislation at a time when it is being implemented to fulfill congressional intent, which is more plan choices and better benefits for beneficiaries. Even MedPAC's own impact analysis shows that the recommendations would reduce the number of beneficiary choices and the number of plans."

Plans have "signaled in good faith their intent to be part of a strong public–private partnership to modernize Medicare and it is critical that the new rules not be changed even before they go into effect."

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