Public Policy Institute

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1 Public Policy Institute MEDICARE+CHOICE: PAYMENT ISSUES IN RURAL AND LOW PAYMENT AREAS Background Purpose of Medicare+Choice (M+C): broader choice, greater geographic reach The Balanced Budget Act of 1997 (BBA) established the M+C program to provide Medicare beneficiaries a range of health care choices similar to those available to their younger counterparts in the private sector. 1 In addition, through a new payment methodology that established a floor payment to M+C plans, the BBA sought to reduce the payment disparity between high- and low-cost areas. The floor payment was intended to encourage market entry of M+C plans to low payment areas with the expectation that they would offer the richer benefit packages characteristic of Medicare HMOs operating in urban areas. 2 Plan participation in M+C In response to payment changes and other market factors, since passage of the BBA, large numbers of M+C plans have reduced their service areas or benefits, increased beneficiary costsharing, or withdrawn from the Medicare program entirely. In and, beneficiaries in small urban, fringe 3, and urban counties were disproportionately affected by service area reductions or plan withdrawals. However, as indicated in Table l, in, enrollees affected by these changes were evenly distributed between urban and less densely populated (e.g., rural, fringe) areas. Table 1 Beneficiaries affected by plan withdrawals by geographic impact, Geographic area Total M+C enrollees affected for Percent of total National 925, Rural 69, Small Urban, Fringe 363, Major Urban 493, Source: GAO/HEH-00183, September As indicated in Figure 1, few new plans have entered the program to replace those that have departed, and there are substantially fewer plans participating in the M+C program than there were before the BBA. 1 In addition to HMOs, M+C options include Provider Sponsored Organizations (PSO)), Preferred Provider Organizations (PPOs), private fee-for-service plans, and Medical Savings Accounts. 2 Although, in general, M+C plans in urban areas continue to offer broader benefits than those in rural/low payment areas, M+C plans in urban areas have reduced benefits and begun to charge or raise premiums significantly since Small urban counties are those located in urban areas with populations under 1 million. Fringe counties are non-urban counties adjacent to metropolitan counties. Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing Choice While Achieving Savings, (GAO/HEHS ), p.10.

2 # Contracts Figure 1 M+C Plan Participation, Jan. Source: AAHP, January Post-BBA efforts to encourage plan participation in rural and low payment areas Since the BBA, Congress has twice adjusted the M+C payment methodology 4 to encourage greater plan participation in rural or low payment areas. 5 Among the changes in the Balanced Budget Refinement Act of (BBRA), Congress authorized temporary payment increases to plans entering an area where an M+C plan had not been offered since This provision was extended in the Medicare, Medicaid, and SCHIP Benefits 4 For a more detailed discussion of the M+C payment methodology, see Data Digest #47, Payment to Medicare+Choice Organizations, April. (An update of this publication will be available shortly.) 5 The terms rural and low payment are not interchangeable. Rural counties are nonmetropolitan. Low payment counties are those that qualify for the floor payment because their prevailing costs are below the floor rate. Low payment counties are not necessarily located in rural areas. For example, in, about threequarters of the non-metropolitan (rural) counties receive $475 per beneficiary per month (i.e., floor rate). About half of metropolitan counties receive $525 high floor. 6 The bonus increases payments by an additional 5 percent the first year a plan is offered and by an additional 3 percent during the second year. Bonuses are limited to the first plan offered in an area. Improvement and Protections Act of (BIPA). HCFA has approved ten plans for bonus payments as of March, including the insurer offering the private fee-for-service plan. 7 In addition, BIPA continued to try to stimulate M+C participation in rural areas and addressed concerns about M+C payment in certain metropolitan areas. Toward this end, beginning in March, a new high floor rate of $525 was established for counties in Metropolitan Statistical Areas (MSAs) with populations greater than 250,000 persons. In all other floor counties (the low floor counties), the monthly payment was increased to $475. For, the low floor rate was 18 percent higher than it would have been before the passage of BIPA. Had BIPA not been enacted, the floor payment for would have increased by only 3 percent to $415. BIPA also restored a total of $11 billion over five years to the M+C program. 8 M+C plans used the BIPA give-back funds primarily to increase (or enhance ) provider payments. 9,10 Overall, 65 percent of enrollees are in M+C plans that used funds to enhance provider networks. The largest 7 Personal communication, HCFA. 8 In response to concerns raised by providers that the savings achieved by the BBA were too large, Congress restored funds to the Medicare program. (See GAO/HEHS , DHHS, OIG A ) 9 BIPA required M+C organizations to use new payments in one of four ways: reduce beneficiary premiums or cost-sharing; enhance benefits; enhance provider networks; contribute to a rate stabilization fund to offset future premium increases or benefit reductions. 10 Given the short time between passage of the give back legislation and its implementation, experts suggest that many of the plans did not have sufficient time to put in place other changes. Eleven percent of the plans chose to apply the funds to a stabilization fund that had rarely been previously used. 2

3 premium declines occurred in high floor counties where premiums were reduced 16.5 percent from pre-bipa levels for, or about $6.00 per month. The largest increase in the percentage of enrollees who gained drug coverage as a result of BIPA give-backs occurred in low floor counties (from 31 percent to 38 percent). However, this represents an increase of only 6,600 enrollees with new drug coverage. The majority of beneficiaries live in counties that received just one percent increases above their pre-bipa rates for. The highest increases in payment rates, an average of 9.7 percent, went to the high floor counties, where 23 percent of M+C enrollees live. Only 1.8 percent of M+C enrollees live in the low floor counties that received an 8.3 percent increase above the pre-bipa rates. Discussion The overall effects of the BBA payment methodology, as amended by the BBRA of and BIPA, have been to increase payments substantially at the low end of the distribution (thus favoring rural areas), while slowing increases at the high end (thus reducing the disparities between high and low payment areas). Effective March, M+C monthly rates for aged beneficiaries ranged from the floor rate of $475 to $839 in Richmond (Staten Island), NY. In contrast, in 1997, county payment rates for the aged ranged from $221 to $767 per month. increased spending for M+C options compared to the pre-bba methodology. By design, the floor payment pays M+C organizations more than Medicare would otherwise spend on the same beneficiaries in the original Medicare program. MedPAC has estimated that for, the average M+C payment in the floor counties exceeds fee-for-service spending in the traditional program by 12 percent. 11 In authorizing the floor, Congress intended to make the M+C program financially viable in areas where the prevailing fee-for-service costs were too low for a managed care plan to recoup its costs. 12 This was done with the expectation that plans would enter markets in these areas and offer beneficiaries broader choice and, potentially, broader benefits. However, MedPAC has expressed concern that differences between the M+C payment rates and Medicare spending for the traditional program could be exploited by private insurers. In addition, the traditional program could face challenges over time in retaining physicians when private insurers reimburse them at higher rates than does the Medicare fee-for-service program. Table 2 reviews the distribution of counties by payment category and rate since 1998, and shows that the vast majority of counties currently receive the floor payment. Relationship of M+C payments to feefor-service spending An important effect of the floor payment has been that Medicare has actually 3 11 MedPAC, Report to the Congress, March. 12 Federal Register, Vol. 65, No. 126, June 29,, page

4 Table 2 Percent of Counties Receiving Floor, Blend, or Minimum Increase, Year Floor Blend Minimum increase $367 Floor Payment $ $ $415 (Post BIPA) %/low 19%/high $475/high $525/low $500/low $553/high Source: HCFA, Public Policy Institute, AARP Availability of M+C in rural and low payment areas The private fee-for-service carrier is offered disproportionately in floor counties and is responsible for substantially increasing M+C penetration in these counties. 13 The private fee-for-service option carries a relatively high premium ($65/month in ) and does not offer prescription drugs. Thus, broader choice in the form of private fee-for-service has not provided Medicare beneficiaries with the opportunity to gain additional benefits. As of March 1,, almost 13,000 beneficiaries were enrolled in this option. Table 3 Effect of Private Fee-for-service on Availability of M+C to Medicare Beneficiaries Percent Beneficiaries in any M+C HMO in Percent Beneficiaries in any HMO or PFFS plan National Rural Urban 63% 15% 78% 81% 61% 87% in Source: MedPAC analysis of Medicare Compare data (1/00) and ACR submissions Although approximately half of all beneficiaries now live in floor counties, enrollment in rural areas is still low. Only about 3 percent of beneficiaries residing in non-metropolitan areas are M+C enrollees. (This compares to 21 percent of beneficiaries in metropolitan areas.) MedPAC has noted that counties that received the highest payment increases actually saw a higher rate of plan withdrawal than areas that received lower updates in their payments. 14 Mirroring the national decline of availability of M+C HMOs, in, 15 percent of beneficiaries in rural areas had access to an M+C HMO compared to 33 percent before the BBA. 15 Only 8 percent and 2 percent of enrollment growth occurred in the low and high floor counties respectively, since the BBA introduced participation incentives. 16 Raising the level of payments in rural/low payment areas by means of a floor payment has not had the intended effect of 13 Currently, this plan is offered in 1600 counties, three-quarters of which receive the floor payment rate. (Statement of Murray Ross before the Committee on Finance, US Senate, Improving the Medicare+Choice Program: Recommendations of the Medicare Payment Advisory Commission, April 3,.) 4 14 Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March, page Unpublished HCFA analysis, April. The 33 percent figure was the highest rate of managed care availability between Ibid.

5 broadening the choice of health plan options offering enhanced benefits. Table 4 demonstrates that, compared to beneficiaries in urban areas, those living in rural or small urban areas are still more likely to have only the traditional Medicare fee-for-service program as an option. Table 4 Availability to Medicare Beneficiaries (Percent) of M+C HMOs with Selected Benefits, - (Post-BIPA) Any M+C Plan: Zeropremium Plan: Plan w. Rx coverage: Zeropremium plan w. Rx: National Rural Urban Source: MedPAC, April Effect of high floor payment It should be noted, however, that the introduction of a high floor payment may stabilize M+C in areas that are metropolitan but have historically received low payment. In March, approximately 1.5 million M+C enrollees lived in high floor counties. 5 When comparing the Adjusted Community Rate (ACR) proposals of plans in these areas, MedPAC found the variation in payment rates to counties exceeded the variation in the plans underlying costs of providing basic benefits. MedPAC also found little correlation between the average commercial premiums and Medicare payment rates. These analyses suggest that plans in low payment areas may have trouble remaining financially viable, and help to explain why some plans withdraw from Medicare rather than lose money. As noted above, relative to the pre-bipa premiums, the post-bipa premiums charged by the M+C plans were reduced more in the high floor counties than elsewhere. Non-payment reasons for low penetration of M+C HMOs in rural areas Payment is an important, but not the only, reason for low M+C penetration. In spite of the fact that Congress has addressed low reimbursement, M+C enrollment in rural and low payment areas lags considerably behind that in the most populated locations. MedPAC noted in its March Report to the Congress, that rural areas remain unlikely to attract HMOs, even if the payments in those areas rise above fee-forservice costs (page 122). The report identifies several non-payment-related reasons why managed care plans have not responded to the financial incentives that have been offered. First, managed care plans have difficulty in organizing delivery systems in areas where the population is dispersed; often, they are not able to comply with requirements for the network to offer services that are reasonably accessible. In addition, if the provider community is sparse, or sometimes even monopolistic, health plans are not in a good position to negotiate favorable arrangements. Finally, since the population to be served is not

6 concentrated, marketing and other overhead costs are high because they cannot be spread over large numbers of enrollees. 17 Conclusion Figures 2 and 3 show the percentages of M+C enrollees by payment type and metropolitan or non-metropolitan, respectively. In spite of considerable effort to address low plan participation in rural and low payment areas, the number of beneficiaries enrolled in M+C plans remains low. Figure 2 Percent of M+C enrollees by payment type, March 72% 4% 24% Low floor High floor Minimum update Source: PPI analysis of Medicare Managed Care Market Penetration Reports, March, at Figure 3 M+C Enrollment, December Metropolitan 95% Nonmetropolitan 5% Source: PPI analysis of Medicare Managed Care Market Penetration for All Medicare Plan Contractors- Quarterly State/County Data Files, Dec.. MedPAC has advised Congress that Medicare payments should be neutral with respect to coverage options and that payment policies should not steer beneficiaries towards any particular Medicare coverage option. In this level playing scenario, M+C plans and the traditional Medicare program in the same county would receive the same level of payment. This policy calls into question the floor payment strategy that permits M+C payments to be higher than fee-for-service spending. If the congressional objective of benefit parity between urban and rural/low payment areas is to be achieved, the inclusion of additional benefits, particularly outpatient prescription drugs in all Medicare coverage options, may be a more direct approach. 17 There is considerable expert opinion to support MedPAC s position. See, for example, Rural Policy Research Institute, The Rural Implications of Medicare AAPCC Capitation Payment Changes, pp.13-15, May 29, Written by Joyce Dubow Public Policy Institute April AARP AARP, 601 E St., NW, Washington, DC Reprinting with permission only.