Government Standardized Benefits

Congress requires all health plans contracting with Medicare to cover the Medicare standard benefits package, which includes new mandates for coverage of preventive health services added to the program in the BBA. Government-dictated health benefits not only deny consumers choice by imposing a one-size-fits-all standard on health benefits, but also inhibit the ability of insurers to respond to consumer needs by marketing different products at different prices to consumers.

Traditionally, many seniors found Medicare HMOs attractive because these organizations were able to offer a variety of benefits to beneficiaries that Medicare did not cover, especially prescription drugs. But as Congress mandates more benefits while holding payments to health plans at the same or, in many cases, lower levels, health plans are less able to tailor affordable products to seniors' needs. In fact, at the beginning of this year--before BBA payment and benefit changes even took effect--Medicare HMOs in California, Maryland, New Jersey, and Pennsylvania announced premium increases and/or benefit cutbacks.²

In addition, President Clinton, by Executive Order, recently required all health plans contracting with Medicare to comply with his "Consumer Bill of Rights and Responsibilities." These additional mandates (which were not authorized by Congress) include access to specialist services for people with chronic conditions, requirements for provider credentialing and timeliness of coverage, ensuring the "cultural competency" of providers, direct access to women's health specialists, and the completion of a baseline health assessment for all new enrollees within 90 days of coverage. Moreover, HCFA has imposed spending limits without congressional authorization by limiting beneficiary cost-sharing to $50 if an enrollee visits an emergency room out of a health plan's network area.³

Price Controls

Medicare attempts to manage its finances through government price-setting rather that market competition. In traditional Medicare, payments to doctors are based on a complicated formula called the resource-based relative value scale (RBRVS), which in turn provides the inputs for the physician fee schedule. Both of these formulas are subject to constant tweaking and meddling by policymakers. When Medicare contracts with private HMOs, another formula is used (the AAPCC) that attempts to measure local and national per capita costs and blend them to come up with a specific dollar amount that Medicare will pay per HMO enrollee.

Medicare's price controls have had a dreadful record in holding down program costs. As often happens when prices do not reflect the relative supply of or demand for services, Medicare's price controls force providers to shift efforts and attention to areas in which these controls do not exist, sending Medicare spending through the roof (as was evident in the Medicare Part A home health program).

This failure to hold down costs also is evident in the Medicare contracting program, where HMOs were paid 95 percent of the average Medicare fee-for-service costs. The assumption was that the government would save 5 percent. Of course, this did not happen. This policy had the effect of overpaying many HMOs in areas with high concentrations of Medicare fee-for-service enrollees and encouraged health plans to seek out healthy seniors.

Although Congress's tinkering with this formula in the BBA may remove some of the previous irrationality, it adds to the confusion surrounding the new program, further discouraging insurers from offering plans. This type of price-setting also invites new distortions in the future.

Health Plan Service Areas

The BBA requires that private health plans charge the same premium and provide the same benefits to everyone within a defined "service area." Before the BBA, Medicare allowed HMOs whose service areas crossed a number of different counties with different AAPCC rates (which are defined by county) to vary premiums and benefits by county (so-called flexible benefits). This new uniformity requirement poses significant challenges to insurers interested in entering this market, particularly for rural health plans.

What is more, HCFA has the discretion to deny the designations of health plan service areas proposed by insurers for a variety of reasons, including a belief by officials that a health plan is attempting to avoid providing coverage in high-cost areas. This concern and the debate that surrounds it are eerily reminiscent of the futile debate over designing boundaries for the government-sponsored regional health alliances in the 1993 Clinton health plan.

In testimony before the Senate Finance Committee, Jim Paquette, CEO of the Sisters of Charity of Leavenworth, Montana, Region, had this to say about the new Medicare rules to govern health plan service areas:

It is difficult for a plan to provide the same benefit throughout a service area without receiving the same payment for each plan member in that area.... Plans have three approaches to resolving this problem under the new rules: reduce benefits in higher-rate areas to cross-subsidize lower-rate areas; pull out of lower-rate areas (rural areas); or seek HCFA approval of multiple M+C plans offered by the same M+C organization.⁴

Paquette went on to say that while the uniformity requirement may have been well intended, he is concerned that the real impact will be felt by seniors residing in rural areas who will have few, if any, health plan options.

Limiting Consumer Choice

Perhaps the most daunting challenge facing health plans is compliance with a host of new performance standards. Insurers have raised concerns about HCFA's intention to apply data collection and quality improvement standards that would discriminate against certain types of health plans and would place unprecedented administrative burdens on all plans contracting with Medicare.

In particular, insurers are concerned that a seemingly innocuous provision requiring the collection of standardized plan data on quality indicators and health outcomes would have the adverse affect of requiring all forms of managed care to operate more like HMOs. HMOs generally have structures for collecting this type of information to help them manage patient care better, and often have information systems in place that make these efforts less burdensome. But managed care products like preferred provider organizations are less "managed" by the insurer in that they offer open access to providers and minimum, if any, care coordination by primary care "gatekeepers." In the case of PPOs, the level of data collection and case management necessary to measure health outcomes would be exceedingly difficult and would force insurers to rewrite very detailed contracts with their affiliated providers to require them to meet these new demands for information-gathering.

In testimony before the Senate Finance Committee, Dr. Daniel Lestage, Vice President of Blue Cross/Blue Shield of Florida, remarked that, "Ironically, far from increasing choice to reflect options in the private sector, the Medicare+Choice regulations might end up restricting choice for Medicare beneficiaries."⁵ Some bills before Congress today, however, purport to protect patients from managed care but would apply the same standards to all private managed care plans.