Issues regarding health plan payments under Medicare and recommendations for reform.

The failures of the market for current Medicare health plans include poor information and price distortions and can be attributed to government policy. Reforms that could improve its structure are annual open enrollment periods, premium rebates from health management organizations (HMOs) to members, and termination of the federal government's subsidy of Medicare supplementary insurance. However, the price for a basic Medicare benefits package would still be distorted because Medicare bases its contribution on the cost of a comparable package in the fee-for-service (FFS) sector rather than on the cost of the most efficient plan available to beneficiaries in each market area. The present Medicare HMO program almost certainly increases total Medicare costs and actually discourages HMO growth by shielding beneficiaries from the true price difference between basic benefits in the HMO and FFS sectors. Lacking payment reforms, the Medicare HMO program should be terminated.     

Pay-for-performance: the MedPAC perspective

Medicare payment systems are neutral and sometimes negative toward quality of care. The Medicare Payment Advisory Commission (MedPAC) has recommended that Congress build incentives for quality into Medicare's payment systems for hospitals, physicians, home health agencies, facilities that treat dialysis patients, and Medicare Advantage plans. In this Commentary we describe the rationale for the recommendations, criteria for determining which settings are ready, program design principles, and potential measures.     

A tale of four cities: Medicare reform and competitive pricing

The current payment system for Medicare + Choice (M + C) plans is based on prices calculated from administrative records. This system has been criticized as arbitrary, inefficient, and unfair. Most Medicare reform proposals would replace the current payment system with some form of competitive pricing. However, efforts over the past five years to demonstrate competitive pricing for M + C plans have been blocked repeatedly by Congress, even when the demonstrations were directly responsive to a congressional mandate. In the absence of political support, a demonstration of competitive pricing may be infeasible, and Congress could be forced to take the risky step of implementing broad Medicare reforms with very little information about their effects.     

The Effect of Health Plan Characteristics on Medicare+Choice Enrollment

Objective. To provide national estimates of the effect of out-of-pocket premiums and benefits on Medicare beneficiaries' choice among managed care health plans.
Data Sources/Study Setting. The data represent the population of all Medicare+Choice (M+C) plans offered to Medicare beneficiaries in the United States in 1999.
Study Design. The dependent variable is the log of the ratio of the market share of the j th health plan to the lowest cost plan in the beneficiary's county of residence. The explanatory variables are measures of premiums and benefits in the j th health plan relative to the premiums and benefits in the lowest cost plan.
Data Collection Methods. The data are from the 1999 Medicare Compare database, and M+C enrollment data from the Centers for Medicare and Medicaid Services (CMS).
Principal Findings. A $10 increase in an M+C plan's out-of-pocket premium, relative to its competitors, is associated with a decrease of four percentage points in the j th plan's market share (i.e., from 25 to 21 percent), holding the premiums of competing plans constant.
Conclusions. Although our price elasticity estimates are low, the market share losses associated with small changes in a health plan's premium, relative to its competitors, may be sufficient to discipline premiums in a competitive market. Bidding behavior by plans in the Medicare Competitive Pricing Demonstration supports this conclusion.     

Fee-for-service Medicare in a competitive market environment

Since its inception, the Medicare Program has allowed for the participation of private health plans, but the relationship of private plans to the government-sponsored fee-for-service (FFS) plan has been the subject of debate. Increased payments to private plans, the introduction of regional preferred provider organizations (PPOs), and a mandated demonstration of price competition that includes FFS Medicare reflect an ongoing attempt to define the role of private plans. The purpose of this article is to explore the roles of private plans and FFS Medicare and to attempt to identify the advantages and disadvantages of each.     

Setting physicians' prices in FFS medicare: an economic perspective

Recent policy discussions by the Medicare Payment Advisory Commission (MedPAC) regarding physician prices in the traditional fee-for-service (FFS) Medicare Program reflect movement toward a market pricing model. Earlier objectives such as sustainable levels of spending have given way to concerns over the relationship between fees and actual costs, access to care, and the importance of demand and supply in local markets. An important objective in other policy settings is economically efficient distribution of services. We explain the meaning of economic efficiency for Medicare physician prices and explore difficulties one might encounter in pursuing economic efficiency, as well as the cost of not pursuing it.     

Service-level selection by HMOs in Medicare

In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of selection is that health plans may design their mix of health care services in order to effectuate favorable selection. This paper scrutinizes patterns of HMO membership and costs by service in the FFS sector for evidence consistent with the hypothesis that HMOs engage in service-level product distortion. We develop a multi-service model of choice between FFS and HMOs and show that if the HMO sector is underproviding (overproviding) a service relative to the FFS sector, we should observe a positive (negative) correlation between the HMO market share and average costs of those remaining in the FFS sector. We estimate the correlation between the HMO market share and the average FFS costs for different health care services using Medicare data for 1996. We find evidence indicating that there exists significant service-level selection by HMOs.     

Trends in the health status of medicare risk contract enrollees

Previous research has found Medicare risk contract enrollees to be healthier than beneficiaries in fee-for-service (FFS). Medicare Current Beneficiary Survey (MCBS) data were used to examine trends in health and functional status measures among risk contract and FFS enrollees from 1991 to 2004. Risk contract enrollees reported better health and functioning, but the differences tended to narrow over time. Most of the differences in trends were observed for functional status measures and institutionalization; differences in trends for perceived health status and prevalence rates of chronic conditions tended to be small or non-existent. The narrowing of functional and health status differences between the risk contract and FFS populations may have implications for payment policy, as well as implications for the role of private health plans in Medicare.     

Managed care and dually eligible beneficiaries: challenges in coordination

This article describes administrative issues and beneficiary perspectives on the delivery of medical services under Medicare+Choice (M+C) and/or Medicaid managed care organizations (MCOs) for dually eligible beneficiaries. We interviewed staff at nine health plans in four market areas in 2000 and 2001, and conducted beneficiary focus groups in 2001. The study reveals beneficiary confusion about the relationship between their dual coverage and managed care enrollment, and problems with care and benefit coordination across these arrangements, based on regulatory and administrative obstacles to effective benefit and care coordination for beneficiaries enrolled in these varied managed care arrangements.     

Beneficiary decisionmaking: the impact of labeling health plan choices

One critical health plan decision concerns choosing an original Medicare plan or a Medicare managed care plan. Evidence suggests that people are confused by the phrase "Original Medicare plan." Using focus group and Q-sort methodology, the authors sought to identify a name for the Medicare fee-for-service (FFS) product. Two key insights were gained. First, participants used the word "Medicare" to name the FFS product. Second, participants did not choose between two plans. Rather, they decided between supplemental insurance and a managed care product. These factors should influence how CMS "brands" not only the FFS product but also the overall Medicare program.     

Variations in patterns of care and outcomes after acute myocardial infarction for Medicare beneficiaries in fee-for-service and HMO settings

OBJECTIVE: To assess revascularization and mortality after acute myocardial infarction (AMI) for all Medicare patients in fee-for-service (FFS) and health maintenance organization (HMO) settings in California. DATA SOURCES/STUDY SETTING: Hospital discharge abstract and death certificate data linked with Medicare enrollment files for patients aged 65 and over with Medicare coverage (69,040) discharged from a California-licensed hospital in 1994-1996. STUDY DESIGN: Risk-adjusted results were assessed for HMOs and FFS, as well as for FFS beneficiaries from areas served by each plan. DATA COLLECTION/EXTRACTION METHODS: Risk models were based on all sampled patients. The HMO patients were aggregated into 17 pseudoplans: 5 individual plans, 4 large plans split geographically (10 observations), and 2 "pseudoplans" of small HMOs. Observed versus expected 30-day mortality rates, lengths-of-stay (LOS) during the index hospitalization and any transfers, revascularization (coronary artery bypass graft [CABG] surgery and/or percutaneous transluminal coronary angioplasty [PTCA]) during the index hospitalization or 30 days after admission, were calculated for each pseudoplan. PRINCIPAL FINDINGS: Risk-adjusted death rate was slightly higher in FFS than in HMO settings (p < .01 with one risk adjustment model, n.s. with another). Three pseudoplans had significantly (p < .01) better than expected mortality rates. One pseudoplan was significantly worse (p < .05) with one risk adjustment model but not the other. The LOS and revascularization rates varied widely, but were not associated with outcomes. Plans with among the best results had the lowest LOS and revascularization rates. These pseudoplans were less likely to have their patients initially admitted to a hospital with revascularization capability, but the hospitals they used had higher CABG volumes. Even if CABG facilities were available during the index admission, in these plans with better than expected mortality rates, revascularization was often postponed or carried out elsewhere. CONCLUSIONS: For Medicare patients having an AMI in the mid-1990s in California, risk-adjusted outcomes were no different, or slightly better on average, for those in HMOs than in FFS. Not all plans performed equally well, so understanding what leads to differences in quality is more important than simple comparisons of HMOs versus FFS.     

Consumer information and biased selection in the demand for coverage supplementing Medicare.

This study examines how the relationship between health insurance knowledge and the health status of health insurance consumers influences their decisions to purchase insurance coverage. Data from the federal Medicare health insurance program for the elderly in the United States are used. The basic Medicare program provides a limited amount of coverage for health care services obtained from any provider in the private fee-for-service (FFS) market. Beneficiaries of this program may choose to supplement the basic coverage which they receive by two mechanisms: either they may purchase private insurance designed to fill some of the gaps left by the federal program ('Medigap' policies), thereby remaining in the FFS market and preserving their choice of provider, or they may enroll in health maintenance organizations (HMOs), thereby leaving the FFS market and agreeing to use only those providers affiliated with the HMO, and in return receiving broader coverage at little additional out-of-pocket cost. The study was made possible by a unique data set which combines measures of beneficiary knowledge of Medicare coverage with measures of perceived health status, socio-economic characteristics, and insurance coverage choices for a sample of Medicare beneficiaries who participated in an educational workshop about their insurance coverage options. These data were used to estimate a multinomial logistic model of the determinants of insurance choices, where the options included the two listed above and a basic Medicare option. The study explicitly recognizes the interaction between insurance information and health status in health plan choice. These results show that knowledge of coverage does have a differential impact on the decision to purchase health insurance depending on health status. With a high level of knowledge, sicker beneficiaries are less likely to have basic Medicare alone, compared with HMOs or Medigap policies, while healthier beneficiaries are less likely to be enrolled in HMOs, compared with Medigap policies. This finding has important implications for the use of health status measures to adjust capitated payment formulas when knowledgable consumers have the option to enroll in HMOs or remain in the FFS environment. In the absence of health status adjusters for the HMO capitation payments, high levels of coverage knowledge may exacerbate inherent selection bias among these coverage options by healthier and sicker consumers of health insurance.     

Hospitals respond to Medicare payment shortfalls by both shifting costs and cutting them, based on market concentration

The coverage expansions planned under the Affordable Care Act are to be financed in part by slowing Medicare payment updates to hospitals, thereby reigniting the debate over whether low prices paid by public payers cause hospitals to increase prices to private insurers--a practice known as cost shifting. Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an alternative explanation of hospital pricing and profitability that could be used to support policies that pressure hospitals to reduce overall costs rather than to only raise prices. This study evaluated the cost-shift and MedPAC perspectives using 2008 data on hospital margins for 30,514 Medicare and privately insured patients undergoing any of seven major procedures in markets where robust hospital competition exists and in markets where hospital care is concentrated in the hands of a few providers. The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs. Policy makers need to examine whether efforts to promote clinical coordination through provider integration may interfere with efforts to restrain overall health care cost growth by restraining Medicare payment rates.     

Medicare+Choice: an interim report card.

While the aim of Medicare+Choice (M+C) was to expand choice, the choices available to Medicare beneficiaries have diminished since its inception: Existing plans have withdrawn from M+C, few new plans have entered the program from among the newly authorized plan types, greater choice has not developed in areas that lacked choice, and the inequities in benefits and offerings between higher- and lower-paid areas of the country have widened rather than narrowed. Operational constraints probably explain the most immediate declines in M+C enrollment, but Congress's ability to foster success for M+C will ultimately depend on the way in which historical tensions related to competing goals and ideologies for the Medicare program are resolved.     

Home health care outcomes under capitated and fee-for-service payment

In this article, case-mix-adjusted outcomes of home health care are found to be superior for Medicare fee-for-service (FFS) patients relative to Medicare health maintenance organization (HMO) patients. The superior outcomes for FFS patients were accompanied by higher utilization and cost of home health services, suggesting a volume-outcome (or dose-response) relationship that was further substantiated by within-HMO and within-FFS analyses. The findings suggest that greater attention should be paid to both outcome-based quality assurance and managed care practices that may be overly restrictive in terms of the use of home health services.     

Variations in hospital resource use for Medicare and privately insured populations in California

The amount of resources used in the care of chronically ill Medicare fee-for-service (FFS) patients varies widely across hospitals. We studied variations across California hospitals in hospital resource use for chronically ill patients covered by Medicare health maintenance organizations (HMOs) and private insurers and found substantial variation in all of the coverage groups studied. Resource-use measures based on Medicare FFS data often reflect patterns evident for other payers. Previous estimates of savings if the most resource-intensive hospitals more closely resembled less resource-intensive hospitals, based on just Medicare FFS spending, could underestimate possible savings when other payers are taken into account.