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Study: Overpayments Still a Factor in Medicare Private Fee-for-Service Plans

By Ben Weyl, CQ Staff

October 27, 2008 -- Private fee-for-service (PFFS) plans—the fastest growing part of Medicare Advantage—will continue to be an outsized financial drag on the public sector, despite recent passage of legislation designed to trim the program's costs, according to a new Commonwealth Fund report.

Payments to PFFS plans were, on average, 16.6 percent greater per enrollee than what traditional Medicare fee-for-services would have cost, according to the report, amounting to nearly $2.5 billion of extra spending in 2008.

PFFS payments make up a sizeable portion of the overpayments amassed by Medicare Advantage. A recent analysis of the program found it cost 12.4 percent more per enrollee than what it would have cost traditional Medicare, totaling $8.5 billion in 2008. Payment to PFFS plans, therefore, made up nearly 30 percent of Medicare Advantage's overpayment.

PFFS plans currently operate differently from other Medicare Advantage programs in several ways, according to the report. The plans are exempt from the quality reporting and disclosure requirements other plans are subjected to; they are not subject to bid review or negotiation with Medicare; and providers can charge patients coinsurance of up to 15 percent more than the plan payment amount. Most importantly, PFFS plans are not required to have contracts or network arrangements with physicians, hospitals, or other providers; through a practice known as "deeming," the PFFS plans can pay providers without such agreements.

Some advocates of PFFS plans have cited their importance in bringing private plans and subsequent benefits to rural areas. The report quotes Secretary of Health and Human Services Michael O. Leavitt arguing in a May 2008 letter that without deeming, "PFFS plans would have difficulty establishing provider networks, especially in rural areas. Weakening these plans will hurt beneficiaries in rural areas."

The majority of PFFS enrollment and overpayment has occurred, however, in urban areas, according to the report. In 2008, 60 percent of enrollees were in urban areas and 66 percent of PFFS extra payments were in urban areas, the report found.

America's Health Insurance Plans (AHIP), the trade group for insurance providers, discounted the importance of the urban-rural divide. "I think it's very clear that Medicare Advantage plans provide an important coverage option for seniors in all areas across the country," said AHIP spokesman Robert Zirkelbach.

Enrollment in PFFS plans has grown rapidly, from 220,000 in December 2005 to nearly 2 million in February 2008, according to the report. In part to limit the growth of PFFS plans—and their accompanying costs—Congress passed the Medicare Improvements for Patients and Providers Act of 2008 (PL 110-275), which mandated quality reporting requirements beginning in 2010, and removed the "deeming" authority of PFFS plans and required plans in certain areas to offer provider networks beginning in 2011.

The Congressional Budget Office projects these measures will significantly reduce PFFS growth, but estimates that there will still be about 40 percent more enrollees in the plan in 2013 than there were in 2008, according to the report.

"The legislation passed this year does not adequately address the overpayment problem in private fee-for-service Medicare Advantage plans," said Commonwealth Fund President Karen Davis in a statement.

For AHIP, which opposed the legislation, overpayments are not an issue. "The important thing to keep in mind is these plans are providing these additional benefits and lower out-of-pocket costs," Zirkelbach said.

A spokesman for the Centers for Medicare and Medicaid Services expressed similar sentiments. "Medicare Advantage plans, including private-fee-for-service offerings, are part of the overall Congressional mandate to give beneficiaries broader access to choices," said CMS spokesman Jeff Nelligan in a statement. "These plans are especially important to rural, low-income, and minority beneficiaries and allow enrollees to receive benefits beyond the Medicare benefit package."

The report's lead author, however, warned that the status quo was untenable, especially in light of the looming fiscal challenges. "The intention of the Medicare Advantage program was to save the program money through the use of private plans. Instead, these plans are costing Medicare billions in overpayments," said Brian Biles, of George Washington University's School of Public Health and Health Services, in a statement. "If new Medicare legislation fails to address these issues, we will continue to see PFFS plan enrollment centered on high extra payment urban areas and Medicare spending billions of dollars that unnecessarily deplete federal resources."

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