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Private Fee-for-Service Looms Large in Medicare Advantage Growth

By John Reichard, CQ HealthBeat Editor

July 16, 2007 – Congressional Budget Office Director Peter R. Orszag reminded congressional aides Monday that much of the growth in the Medicare Advantage program is projected to be in private fee-for-service plans—a reminder aides might find particularly noteworthy as Congress considers Medicare Advantage payment cuts because those plans don't coordinate care the way other Medicare's other private plans do. Lawmakers also might find those plans a particularly inviting target for cuts because they are paid more than Medicare Advantage plans—119 percent on average of the rates paid in traditional Medicare, compared to 112 percent for other Medicare Advantage plans.

At a forum on Medicare Advantage payments sponsored by the nonpartisan Alliance for Health Reform, Orszag detailed CBO projections showing that Medicare Advantage will account for about 25 percent of Medicare's total enrollment by 2016, up from 20 percent now. But the percentage of Medicare beneficiaries in HMOs and PPOs won't really change over that period, holding steady at about 15 percent, while the slice going into private fee-for-service plans will get much larger. Those plans will account for about 40 percent of the enrollment in Medicare Advantage, up from about 12 percent now. Orszag said that if anything, those figures might understate the growth in private fee-for-service plans under current payment law.

A big part of the rationale for spurring the growth of Medicare Advantage is that—in theory, at least—it does a better job of coordinating care—of ensuring that services are delivered in the most cost-effective setting. Coordinated care, backers say, offers the prospect of not only higher quality, but also lower costs. But private fee-for-service plans don't coordinate care, which may make them particularly vulnerable to cuts because of their relatively high payment rates.

Orszag said paying private fee-for-service plans the same rates paid in traditional Medicare would save $15 billion over five years.

But Orszag gave aides something more to think about—whether or not coordinated care actually saves money, despite the claims of many in the health policy field. A test of that concept raises doubts on that point, the CBO director said. "The evidence that we're getting from the coordinated care demonstration within Medicare is not very promising, especially with regard to costs," he said.

Does that suggest lawmakers might react by going after Medicare Advantage plans more broadly? After all, if coordinated care isn't what it's cracked up to be, why not cut Medicare Advantage more deeply? That's what some observers are expecting to happen in the House, at least. One managed care industry executive predicted that cuts coming out of the House may seek to pay all Medicare Advantage plans at the same rate as traditional Medicare, which CBO projects would save $54 billion over five years. Steep Medicare Advantage cuts, along with tobacco taxes, will be the key ways Democrats seek to raise money to cover uninsured kids and to block a Medicare physician payment cut, the executive said.

The House Ways and Means Committee majority "dislikes the managed care industry even more than it dislikes the tobacco industry," the executive said.

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