Medicare+Choice

The Medicare+Choice program was created in 1997 to expand beneficiaries' health plan options, both by encouraging the wider availability of health maintenance organizations and by permitting other types of health plans, such as preferred provider organizations, to participate in Medicare. At the same time, the methodology used to determine plan payments was changed, in part because of concerns that (1) many health plans were overcompensated for the beneficiaries they served and (2) Medicare's managed care program had not, as originally expected, saved the program money. The new methodology is designed to both slow the growth of aggregate payments and more closely align per capita payments with the expected health care costs of plan members. Some health plan and industry representatives believe that these payment changes were too severe and will reduce beneficiaries' access to plans and additional benefits, such as outpatient prescription drug coverage, that are unavailable under fee-for-service plans. This report (1) reviews the extent to which health plans now provide additional benefits and whether they could continue to provide additional benefits if payments were reduced, (2) summarizes the evidence about managed care's effect on Medicare spending, and (3) assesses whether the provisions of the Balanced Budget Act will eliminate excess plan payments.

GAO noted that: (1) although all health plans are required to provide at least the package of benefits available in traditional fee-for-service (FFS), most plans provide many more benefits; (2) the extra benefits result because projected Medicare payments tend to exceed plans' estimated costs of providing the FFS package of benefits, and the program requires that the difference between payments and plan costs be used to fund additional benefits; (3) in 1997, the average enrollee in a health plan received more than $90 per month in required and voluntary additional benefits; (4) thus, even if plan payments were reduced, the typical plan could provide the FFS package of benefits as well as some additional benefits and still earn a profit; (5) health plans have not produced the expected savings for the Medicare program; (6) until 1997, Medicare plans were paid 95 percent of the expected FFS cost of beneficiaries; (7) the 5-percent discount was established to allow the program to benefit from the efficiencies commonly associated with managed care; (8) however, numerous studies conducted by GAO, the Physician Payment Review Commission, the Health Care Financing Administration (HCFA), and others demonstrated that the Medicare program spent more on beneficiaries enrolled in health plans than it would have if the same individuals had been in FFS; (9) this unexpected result occurred because Medicare payments were based on the estimated cost of FFS beneficiaries in average health and were not adequately adjusted to reflect the fact that plans tended to enroll beneficiaries with better-than-average health who had lower health care costs; (10) BBA's new formula for paying health plans takes steps to lower excess plan payments; (11) the new formula slows the growth of plan payment rates relative to FFS spending growth for 5 years; (12) BBA mandates the implementation of a health-based risk adjustment system intended to better match payments to beneficiaries' expected health care costs and reduce the excess payments caused by favorable selection; (13) the effect of these changes is reduced because BBA locked in place the excessive payment rates that existed in 1997; (14) the HCFA actuaries now know that those rates were too high because the forecast overestimated FFS spending by 4.2 percent; (15) BBA specified that the 1997 rates be used as the basis for the 1998 rates; (16) this implicit inclusion of the forecast error resulted in excess payments of $1.3 billion in 1998; and (17) the annual excess payments associated with the forecast error will increase each year as more beneficiaries join health plans.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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