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Senate Finance Takes Aim at Medicare Private Fee-for-Service Plans

By Mary Agnes Carey, CQ HealthBeat Associate Editor

January 30, 2008 -- After failing last year to make major payment cuts to Medicare Advantage insurers, Senate Finance Committee Chairman Max Baucus, D-Mont., said Wednesday his panel would take a "close look" this year at Medicare private fee-for-service plans, the fastest-growing sector of Medicare Advantage.

"We will consider what we need to do to reform private fee-for-service plans," Baucus said during the Finance hearing. "We will consider whether we need to check their growth. And we will consider whether we can better design the law to ensure that these plans serve the needs of beneficiaries."

Lawmakers and health care analysts who say Medicare Advantage plans are overpaid have leveled their strongest criticisms at private fee-for-service plans because they say the care they provide is loosely managed and the plans are reimbursed at much higher rates. On average, Medicare Advantage plans are paid 113 percent of the rates paid in traditional Medicare, while private fee-for-service plans are paid 117 percent of those rates, according to the Medicare Payment Advisory Commission (MedPAC). The commission has recommended that all Medicare plans be paid the same as traditional fee-for-service providers.

"This product gives the private sector a bad name," said Sen. Ron Wyden, D-Ore.

Separately on Wednesday, a Kaiser Family Foundation report found that while on average Medicare Advantage plans provided extra benefits above what traditional Medicare covered in 2006, the value of extra benefits were lower for private fee-for-service plans than for other Medicare Advantage plans. The report found that beneficiaries enrolled in private fee-for-service plans received an average net value of $55.92 in extra benefits per month in 2006, compared to $71.22 in other Medicare Advantage plans, and that the sickest and highest-cost enrollees in private fee-for-service plans would have paid $1,000 more for basic Medicare services than those in other Medicare Advantage plans.

Karen Ignagni, president and CEO of America's Health Insurance Plans, noted that cost-sharing for beneficiaries in Medicare private fee-for-service plans was lower than for beneficiaries in traditional fee-for-service, and that enrollees in Medicare Advantage received additional benefits over fee-for-service beneficiaries. She added that beneficiaries want the option to choose different kinds of coverage that offer different networks and services.

Witnesses at Wednesday's Finance hearing gave committee members plenty of ammunition to cut payments to Medicare private fee-for-service plans, saying that they cover fewer medical services and pay hospitals, physicians and other providers at lower rates. Private fee-for-service plans are also not subject to the same federal regulations as other Medicare Advantage plans; they do not have to have networks of providers nor do the plans have to submit data about the quality of care their enrollees receive, witnesses said.

And they said the plans use deceptive marketing tactics to confuse Medicare beneficiaries, who mistakenly believe that they are still enrolled in traditional Medicare but, in fact, have been switched to a private fee-for-service plan, which their physician or hospital may not accept. Baucus said the panel would hold a separate hearing to focus on marketing practices.

Created in 1997, enrollment in the fee-for-service plans exploded after Congress created the Medicare prescription drug benefit (PL 108-173), which increased payment rates for private plans in Medicare. Enrollment in Medicare private fee-for-service plans has increased eight-fold in just two years, now totaling 1.7 million enrollees, according to MedPAC.

While insurers were not invited to testify at the hearing, they have a number of opportunities to speak with Finance staff and will continue to do so, Ignagni said. She said the hearing was a continuation of the Finance panel's ongoing examination of the plans. "They're picking up where they left off in the fall. This is not a shift in position for them," Ignagni said. Bush administration officials have said they do not want Medicare Advantage funding reduced.

Albert Fisk, medical director at the Everett Clinic in Everett, Wash., told the Finance panel that his clinic's "abysmal" experiences with private fee-for-service plans have led facility officials to decide to stop seeing Medicare private fee-for-service patients as of January 2009. The insurers, he said, "are extremely hard to deal with both in terms of negotiating fair rates and collaboration on care coordination. We have been very frustrated with both identifying the private fee-for-service plans and negotiating fair funding."

Daryl Weaver, testifying on behalf of the National Rural Health Association, said that Medicare private-fee-for-service plans are available in 96 percent of rural counties, and that they are the most prevalent type of Medicare plan in rural areas. Rural Medicare beneficiaries enrolled in the plans has increased from 18 percent in December 2005 to 62 percent today, he said.

Weaver, who runs a hospital in Yazoo City, Miss., said that while traditional Medicare pays claims within 15 days, private fee-for-service plans delay payments for months, which hurt rural medical facilities that operate on a cash basis. "Whatever the reason for the delays, at my facility this has contributed to a 30 percent increase in accounts receivable representing almost $1 million in unrealized cash," Weaver testified, adding that payment problems have required a 20 percent increase in business office staffing in addition to puling additional resources from other staff such as administration, nursing and case management.

Ignagni said that rapid increases in plan enrollment may cause some administrative problems that are eventually resolved. "There are very specific rules with respect to payment rates, and our plans are meeting those rules ... the plans are meeting CMS requirements and we take that very seriously," she said.

Another witness, David R. Fillman, an international vice president of the American Federation of State, County and Municipal Employees, told the Finance panel that higher Medicare payment rates for private fee-for-service plans have led insurers to heavily push the plans on private employers and state governments that are eager to reduce the costs of providing health care for current and future retirees. "Aside from the confusion and added complexity, the forced shift to a Medicare replacement product can obscure a reduction in benefits and a shift of costs onto beneficiaries who have limited incomes and may be in fragile health," Fillman said.

In response, Ignagni said that "in many cases, the benefits are better" for retirees enrolled in Medicare private fee-for-service plans.

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