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Sharp Spike Seen in '08 in Private Fee-for-Service Plans

By John Reichard, CQ HealthBeat Editor

October 1, 2007—An analysis of private plans to be offered next year in Medicare shows a big increase in the number of private fee-for-service plans and "special needs plans," two types of plans in the Medicare Advantage program facing skepticism and scrutiny from Congress. But the fast-growing popularity of the plans could complicate efforts by lawmakers to trim their reimbursement.

The number of private fee-for-service plans in 2008 will jump to 506, nearly a 500 percent increase compared to 2006, said the analysis by the Washington consulting firm Avalere Health. Meanwhile, the number of Special Needs Plans (SNPs) will rise to 720 in 2008, up from 471 in 2006.

Private fee-for-service plans got their start in the 1997 Balanced Budget Act, which was passed at a time when concerns were high that rising enrollment in HMOs and other managed care plans would lead to more rationing of care. The plans were depicted as a bulwark against the advance of HMOs, which had a reputation of forcing doctors and hospitals to accept low payment rates and restricting where enrollees could go for care.

In contrast, the words fee-for-service in the moniker private-fee-for-service-plan connoted the practice of traditional medicine, with its unfettered access to doctors and hospitals. The plans also were portrayed as entities that would pay doctors and hospitals more than penny-pinching HMOs would, easing the desire to ration care.

The SNPs are plans that primarily enroll low-income Medicare beneficiaries who also receive Medicaid benefits. The plans target specific types of illnesses and promise better coordinated care that improves treatment for those with serious chronic illnesses. They also offer a single, coordinated point of distribution of Medicare and Medicaid dollars, a feature that may bring more efficient use of federal dollars.

At first, private fee-for-service plans lacked a clear identity in the Medicare marketplace because of their seeming similarity to traditional Medicare, which doesn't restrict choice of provider or include the same curbs on access to specialty care that a managed care plan might. But with improving reimbursement rates, private fee-for-service plans spread to rural areas, offering seniors an alternative that claimed to sharply lower out-of-pocket costs and offer extra benefits compared to traditional Medicare.

But those much higher rates paid to private fee-for-service plans compared to managed care plans in Medicare, coupled with the rapid growth of enrollment in such plans, have drawn scrutiny from lawmakers and congressional budget analysts. Congressional Budget Office Director Peter R. Orszag told managed care executives last week that enrollment in private fee-for-service plans has climbed to 750,000 since the start of 2007. The Avalere analysis shows that enrollment in SNPs has shot up to more than one million Medicare beneficiaries.

Avalere President Dan Mendelson said Monday that state and municipal governments are among those fueling the rapid rise in private fee-for-service plan enrollment. Such "institutional sales," rather than growing enrollment of individuals, are causing the enrollment numbers to jump, he said. The ability of these employers to put all their retirees on a single plan, instead of having to choose a variety of managed care plans to fit the geographic distribution of retirees, helps explain the appeal of the plans to employers, he said.

The rising number of plans and enrollees would undoubtedly complicate efforts in Congress to trim their reimbursement, Mendelson said. There also are questions on the Hill about the level of reimbursement SNPs receive, he noted. But he predicted that when lawmakers take a look at the original policy arguments for the plans—offering rural beneficiaries options in the case of private fee-for-service plans and better coordinated care in the case of special needs plans—lawmakers may reconsider the extent to which they want to make cuts. Now that private fee-for-service plans are available in rural areas, they create an opportunity for lawmakers to tinker with the plans in other ways, such as by requiring that they offer more coordinated care, he said. One of the criticisms of the plans is that unlike HMOs and PPOs in Medicare, they do little to coordinate care.

Mendelson said the growing number of private fee-for-service plans and SNPs are key reasons for an increase in 2008 in the number of MA-PDs, the term for Medicare Advantage plans that offer prescription drug benefits. "On average, each state will see an increase of 52 MA-PD plans," the Avalere analysis said.

Some consumer advocates say the growing number of plans in some markets is an overall negative for the elderly because it makes picking the most appropriate plan more difficult. But the Bush administration claims that competition has helped to bring down premium charges and creates plan variation that allows a better match to the needs of the particular beneficiary involved. Virtually all beneficiaries will be able to switch next year to plans charging lower premiums, the Centers for Medicare and Medicaid Services added.

However, according to Avalere, average premiums in the Part D prescription drug program will rise an average of 8.7 percent in 2008, despite the availability of lower cost options. And an analysis by Consumers Union concludes that even careful shopping to compare plan premiums still leaves beneficiaries at risk for rising drug costs. In addition to paying premiums, beneficiaries pay other out-of-pocket costs for drugs, which go up as plans charge more for their products.

"Insurers hike the cost of their drugs during the year—in one extreme case, by 28 percent," Consumers Union said in a news release Monday. From February to September 2007, 95 percent of plans offered in sampled areas raised their drug costs, with one-quarter doing so by five percent or more, the consumer group said. "Medicare expects seniors to lock into a drug plan for 12 months, but it doesn't require the drug plan to lock in their prices for that same time. How is that logical?" asked Consumers Union Policy Analyst Bill Vaughan.

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