Medical Loss Ratios

Background:  The term medical loss ratio refers to the percentage of health insurance premium costs used to pay medical claims, as opposed to overhead for various administrative expenses or surplus/profit for the insurance carrier.  For example, a medical loss ratio of 70% indicates that 70 cents of every premium dollar is spent on claims for medical services, with 30 cents dedicated towards administrative expenses, marketing costs, related overhead, and any profit for the carrier.  While the medical loss ratios of publicly-traded insurance carriers are available in filings with the Securities and Exchange Commission (SEC), privately-held and not-for-profit insurers often do not face similar public reporting and disclosure requirements.

Legislative History:  In July 2007, Section 414 of H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act, proposed several reporting requirements and restrictions on Medicare Advantage (MA) plans with respect to their medical loss ratios.  Specifically, the bill required MA plans to submit information to the Department of Health and Human Services (HHS) regarding overall expenses on medical claims, marketing and sales, indirect and direct administration, and any medical reinsurance.  The Secretary would be required to publish this information annually.

In addition to the reporting requirements outlined above, the CHAMP Act also proposed punitive measures against MA plans which did not meet new federal requirements with respect to their medical loss ratios.  Subsection (c) of Section 414 proposed sanctions for MA plans which did not spend at least 85% of payments received (both from the federal government and beneficiary premiums) on medical services: plans below the ratio for one year would receive a decrease in their funding rate, plans below the ratio for three years would be banned from enrolling new beneficiaries, and plans below the ratio for five years would be terminated from the Medicare Advantage program.  While the bill passed the House by a 225-204 vote, the Senate has yet to take up the measure.

Presidential and State Proposals:  The actions proposed by House Democrats last year with respect to Medicare Advantage plans are consistent with the proposals advocated by the Democrat candidates for President.  During her campaign, Sen. Hillary Rodham Clinton (D-NY) proposed an unspecified minimum medical loss ratio for insurers, because “premiums collected by insurers must be dedicated to the provision of high-quality care, not excessive profits and marketing.”[1]   Similarly, the health plan of Sen. Barack Obama (D-IL) dedicates a section of his platform to explaining why insurance carriers’ “record profits” constitute “needless waste,” and pledges that “in markets where the insurance business is not competitive enough, [the Obama] plan will force insurers to pay out a reasonable share of their premiums for patient care instead of keeping exorbitant amounts for profits and administration.”[2]  However, the plan does not specify what constitutes a “competitive” state insurance market, nor the level of a “reasonable” medical loss ratio.

In recent months, several state-based efforts to reform health care have incorporated proposals to regulate medical loss ratios by insurers.  Proposals in California, Pennsylvania, New Mexico, Michigan, Illinois, and Wisconsin have all discussed setting a minimum medical loss ratio, often at 85%.  While some states currently do impose minimum medical loss ratios, these are significantly lower than the proposed new standards; in some cases, minimum ratios are designed to ensure that the policy is a bona fide insurance product, rather than attempting to influence the structure of an insurance policy or the business model of an insurance carrier.

Medicare Advantage Reports:  This week, the Government Accountability Office (GAO) released a report requested by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) regarding profit levels by Medicare Advantage plans.  The report noted that in 2005, Medicare Advantage plans’ actual profits were higher, and their medical and administrative expenditures lower, than originally projected before the start of the contract year.  However, even the lower-than-expected percentage of revenue devoted to medical expenses—85.7%—exceeded the minimum loss ratio proposed by Congressional Democrats under the CHAMP Act.[3]  GAO also conceded that the disparity between actual and projected expenses had no impact on the total payments made to Medicare Advantage plans.[4]

In response to the GAO report, the Centers for Medicare and Medicaid Services (CMS) pointed out that contract bids for Medicare Advantage plans in 2005 were submitted under a since-replaced bidding formula, and have since been subjected to more stringent actuarial standards with respect to the accuracy of the original projections—both of which would tend to cast doubts on the relevancy of the three-year-old data on the current Medicare Advantage program.  Additionally, the fact that nearly half of the “unexpected” profits arose from a single Medicare Advantage plan raises additional questions as to whether the disparity between projected and actual medical expenditures is a system-wide problem or a relatively confined anomaly.[5]

Some conservatives may view higher-than-projected profits for Medicare Advantage plans as consistent with the free-market principles that encourage companies—in this case, private health insurers—to improve efficiencies in the hope of generating improvements for their customers and a return to their investors.  The fact that nearly half of Medicare Advantage beneficiaries were covered by plans with lower-than-expected administrative and non-medical expenses could suggest that plans took steps to reduce bureaucracies that made their delivery more efficient.[6]  Moreover, to the extent that improved care management tools implemented by insurance carriers resulted in lower-than-expected medical expenditures for plans, conservatives may argue that allowing Medicare Advantage carriers to retain these profits is not only appropriate, but desirable.

Moreover, another GAO report released in February injected a note of caution regarding attempts to use headlines about Medicare Advantage plan profits to regulate medical loss ratios, noting that “there is no definitive standard for what a medical loss ratio should be.”[7]  In the February report, officials at CMS commented that some plans may consider certain care management services an administrative expense, while other plans may classify these costs as medical treatments.  The fact that Health Maintenance Organizations (HMOs)—which are traditionally known for intensive care management techniques, and whose per-beneficiary costs are slightly lower than those for traditional fee-for-service Medicare—had the highest percentage of beneficiaries in plans under the 85% threshold ratio included in the CHAMP Act demonstrates the inherent difficulties in applying a single regulatory standard to all types of insurance.[8]

Conclusion:  The issue of regulating medical loss ratios, although not as prominent as other elements of Democrat proposals for health care reform, nevertheless deserves scrutiny.  An article in the journal Health Affairs concluded that medical loss ratios had little correlation to the quality of care provided by carriers; moreover, the article’s discussion of the loss ratio as an inherently arbitrary measure dovetails with the unintended consequences of applying a one-size-fits-all standard for health insurance.  For instance, individual insurance plans face higher administrative charges than group policies, because of the increased costs associated with selling policies on a person-to-person basis, as opposed to the hundreds or thousands of beneficiaries who obtain insurance through a single group employer.  Additionally, regulating medical loss ratios may prompt some insurance carriers to stop offering high-deductible insurance plans—which, due to their smaller premiums, may have greater difficulty meeting a federally-imposed standard—thus diminishing the impact of Health Savings Accounts (HSAs), which have over the past few years helped slow the growth of health insurance premiums.

More broadly, some conservatives may be concerned that regulating medical loss ratios represents an effort by Democrats to impose price controls on the health insurance industry.  Proposals such as those included in the CHAMP Act are unlikely to result in higher spending on medical claims, or lower profits for insurance companies; carriers could instead choose to reduce administrative costs in order to comply with a mandated medical loss ratio, resulting in additional delays for beneficiaries seeking to have their claims processed.

An alternative solution could lie in proposals for increased public transparency and disclosure of medical loss ratios.  Applied evenly to for-profit and not-for-profit insurers alike, this information would allow consumers to make an informed choice, considering the percentage of premiums devoted to medical claims payment as one element among many when selecting an insurance policy.  Although some policy-makers may find it politically expedient to criticize the profits of certain insurance carriers, many conservatives would greatly prefer the transparency of a free marketplace to heavy-handed government price controls.

 

[1] “American Health Choices Plan,” available online at http://www.hillaryclinton.com/issues/healthcare/americanhealthchoicesplan.pdf (accessed March 11, 2008), p. 7.

[2] “Barack Obama’s Plan for a Healthy America,” available online at http://www.barackobama.com/issues/pdf/HealthCareFullPlan.pdf (accessed March 11, 2008), pp 9-10.

[3] “Medicare Advantage Organizations: Actual Expenses and Profits Compared to Projections for 2005,” Letter to Hon. Pete Stark, Report GAO-08-827R, (Washington, DC, Government Accountability Office, June 2008), available online at http://www.gao.gov/new.items/d08827r.pdf (accessed June 26, 2008), p. 5.

[4] Ibid., p. 8.

[5] Ibid., pp. 11-14.

[6] Ibid., p. 6.

[7] “Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,” Report GAO-08-359 (Washington, DC, Government Accountability Office, February 2008), available online at http://www.gao.gov/new.items/d08359.pdf (accessed March 11, 2008), p. 32n.

[8] Ibid., pp. 27-28.

Weekly Newsletter: June 30, 2008

Senate Blocks Deep Cuts to Medicare Advantage…

Before recessing for the Independence Day recess, the House passed—and the Senate declined to limit debate on—legislation (H.R. 6331) addressing physician reimbursement levels under Medicare. The bill would prevent for 18 months a reduction in fee schedule levels scheduled to take effect on July 1, and would expand access to certain subsidy programs for low-income beneficiaries. These provisions would be offset largely by cuts to private Medicare Advantage plans, particularly private fee-for-service plans.

Some conservatives may be concerned that the House-passed bill’s significant cuts to Medicare Advantage would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors, especially the 2.2 million beneficiaries in private fee-for-service plans. Some conservatives also may be concerned that the bill fails to address the long-term integrity of the Medicare program, relying on funding gimmicks and government-controlled price-fixing rather than undertaking comprehensive reform that would inject market forces into the program as a means to slow the growth of health care costs.

Following the House vote, nearly six dozen House Members—including RSC Chairman Hensarling— weighed in asking the Senate to revive bipartisan compromise legislation, crafted by Finance Committee Chairman Baucus and Ranking Member Grassley, that would address physician reimbursements without damaging beneficiary access to Medicare Advantage plans.

The Legislative Bulletin on H.R. 6331 can be found here.

…While Democrat Political Gamesmanship Prevents Physician Fix

After the Senate vote to limit debate on physician payment legislation that included significant cuts to Medicare Advantage failed on Thursday, Senate Republican Leader Mitch McConnell attempted to pass by unanimous consent a 30-day extension of current reimbursement provisions. However, Majority Leader Reid objected, and in so doing referred to several House special election results while commenting that “I don’t know how many people are up here for re-election, but I am watching a few of them pretty closely.” Because Senate Democrats objected to Republicans’ unanimous consent requests to pass a “clean” physician payment bill, physicians will take a 10% cut in their reimbursement levels beginning today unless and until Congress passes a retroactive fix. However, today’s Politico reports that the Administration is considering ways to delay the impact of the reimbursement adjustment, pending efforts by Congress after the recess to address the matter.

Some conservatives may be concerned by the Senate Majority Leader’s actions blocking a “clean” extension of current-law policies on physician reimbursement. Some conservatives may also believe that the short-term nature of current physician reimbursement extensions, coupled with their potential to become entwined in unrelated disputes and/or “held hostage” due to various political considerations, makes a powerful argument for more comprehensive reforms to Medicare, including a long-term solution to physician reimbursement policy.

While it is currently unclear whether Democrats will continue to block Republican attempts to pass noncontroversial physician payment legislation, or what precise form a more bipartisan bill designed to address the reimbursement provisions will take, the RSC will weigh in with conservative concerns and updates on H.R. 6331 and any other physician payment legislation which may be introduced or considered following the recess.

There are additional RSC Policy Briefs on issues related to the Medicare bill: Physician Payments; Medicare Advantage; Bidding for Durable Medical Equipment; and the Medicare Trustees Report.

Report Could Presage Democrat Efforts at Insurer Price Controls

In a related development, Ways and Means Health Subcommittee Chairman Pete Stark released a Government Accountability Office (GAO) study on Tuesday, which noted that in 2005 Medicare Advantage plans had lower medical costs and higher profits than first projected when submitting their bids for that contract year. Although the Centers for Medicare and Medicaid Services (CMS) noted that the profit projections were made under a now-defunct bidding process that may have explained much of the disparity, Democrats may attempt to use the GAO study to revive provisions in legislation (H.R. 3162) the House passed last year imposing a minimum “medical loss ratio” that would require Medicare Advantage plans to spend at least 85% of their total revenues on health care expenses.

To the extent that the higher-than-expected profits highlighted in the report are derived from improved care models and administrative and related efficiencies, some conservatives may view these proceeds as consistent with the free-market principles that reward companies who take measures to streamline operations while improving quality of care. Conversely, some conservatives may also believe that efforts to restrict medical loss ratios constitute de facto price controls on the insurance industry that will prove ineffective at controlling the growth of health care costs and could lead to unintended and potentially adverse consequences for enrollees.

The RSC has prepared a Policy Brief on this issue, available here.

Article of Note: Public vs. Private Debate Revolves Around Taxes

A study released last week by researchers affiliated with the liberal Center for Budget and Policy Priorities, and published online by Health Affairs, studied the relative efficiencies of private and public health insurance models. The authors conclude that public coverage through government programs like Medicaid is more efficient than private insurance, largely because public programs feature less cost-sharing than private coverage.

Given that a similar study released in 2003 found that lower reimbursement rates to providers were the primary reason that public programs had lower medical costs than private insurance, some conservatives may take issue with the study’s findings. The authors admit that providers are paid less under Medicaid than most private payers, and advocate an increase in reimbursement rates that would “improve patients’ access to and quality of care.” Yet the study methodology fails to take into account that medical spending for Medicaid patients is lower than private insurance precisely because beneficiaries in public programs have poorer access to provider care—in other words, that costs for Medicaid patients could be lower because they have coverage they cannot as readily use.

Some conservatives may believe that the authors’ admission that public programs reimburse providers at lower levels highlights the double taxation associated with expansions of Medicaid or the State Children’s Health Insurance Program (SCHIP). In addition to the amounts government spends to cover individuals in a public program, the cost-shifting that results from unrealistically low government reimbursement rates represents secondary taxes throughout the economy—on individuals with private insurance who pay more to subsidize health care costs the government will not pay; on Medicaid beneficiaries with reduced access to care; and on providers who are forced to work longer hours, or shorten the amount of time spent with each patient, in order to compensate for costs the government will not pay. For these reasons, many conservatives may believe that market-based reforms to the health care sector represent a far more preferable way to improve the quality of care while controlling the growth of health care costs.

Medicare Physician Payment Policy

History and Background:  In 1989, the Omnibus Budget Reconciliation Act (P.L. 101-239) established a new physician fee schedule for Medicare, replacing the reasonable charge payment formula that had existed since the program’s inception.  The fee schedule was designed to alleviate perceived disparities in physician reimbursement levels by more closely tying payment to the amount of resources used for a given service or procedure.  The Balanced Budget Act of 1997 (P.L 105-33) modified the fee schedule formula, creating the Sustainable Growth Rate (SGR) mechanism as a means to incorporate cumulative physician spending into reimbursement levels.  In addition to slowing the growth of Medicare spending by setting an overall target for physician expenditure levels, the SGR was also intended to eliminate the fluctuations associated with setting annual (as opposed to cumulative) spending targets.

Payment Formula:  Under current Medicare law, doctors providing health care services to Part B enrollees are compensated through a “fee-for-service” system, in which physician payments are distributed on a per-service basis, as determined by the fee schedule and an annual conversion factor (a formula dollar amount).  The fee schedule assigns “relative values” to each type of provided service, reflecting physicians’ work time and skill, average medical practice expenses, and geographical adjustments.  In order to determine the physician payment for a specific service, the conversion factor ($38.0870 through June 2008) is multiplied by the relative value for that service.  For example, if a routine office visit is assigned a relative value of 2.1, then Medicare would provide the physician with a payment of $79.98 ($38.0870 x 2.1) for that service.

Medicare law requires that the conversion factor be updated each year.  The formula used to determine the annual update takes into consideration the following factors:

  • Medicare economic index (MEI)–cost of providing medical care;
  • Sustainable Growth Rate (SGR)–target for aggregate growth in Medicare physician payments; and
  • Performance Adjustment–an adjustment ranging from -13% to +3%, to bring the MEI change in line with what is allowed under SGR, in order to restrain overall spending.

Every November, the Centers for Medicare and Medicaid Services (CMS) announces the statutory annual update to the conversion factor for the subsequent year. The new conversion factor is calculated by increasing or decreasing the previous year’s factor by the annual update.

From 2002 to 2007, the statutory formula calculation resulted in a negative update, which would have reduced physician payments, but not overall physician spending. The negative updates occurred because Medicare spending on physician payments increased the previous year beyond what is allowed by SGR.  The SGR mechanism is designed to balance the previous year’s increase in physician spending with a decrease in the next year, in order to maintain aggregate growth targets.  Thus, in light of increased Medicare spending in recent years, the statutory formula has resulted in negative annual updates.  It is important to note that while imperfect, the SGR was designed as a cost-containment mechanism to help deal with Medicare’s exploding costs, and to some extent it has worked, forcing offsets in some years and causing physician payment levels to be scrutinized annually as if they were discretionary spending.

Since 2003, Congress has chosen to override current law, providing doctors with increases each year, and level funding in 2006.  In 2007, Congress provided a 1.5% update bonus payment for physicians who report on quality of care measures, and legislation enacted in December 2007 (P.L. 110-173) provided a 0.5% update for January through June of 2008.  The specific data for each year are outlined in the following table.

Year Statutory

Annual

Update (%)

Congressional “Fix” to the Update (%)*
2002 -5.4 -5.4**
2003 -4.4 +1.6
2004 -4.5 +1.5
2005 -3.3 +1.5
2006 -4.4 0
2007 -5.0 +1.5***
2008 -10.1 0.5 (Jan.-June)

* The annual update that actually went into effect for that year.

** CMS made other adjustments, as provided by law, which resulted in a net update of – 4.8%; however, Congress did not act to override the -5.4% statutory update.

*** The full 1.5% increase was provided to physicians reporting quality of care measures; physicians not reporting quality of care received no net increase.

Because the Tax Relief and Health Care Act (P.L. 109-432), signed into law in December 2006, provided that 2007’s Congressional “fix” was to be disregarded for the purpose of calculating the SGR in 2008 and future years, the 10.1% negative annual update for 2008 will be restored once the December 2007 legislation expires on July 1, 2008, absent further Congressional action.

Participation and Assignment:  When treating Medicare beneficiaries, physicians may choose to accept assignment on a claim, agreeing to accept Medicare’s payment of 80% of the approved fee schedule amount—with the beneficiary paying the remaining 20% as coinsurance—as payment in full for the claim of service.  Physicians who agree to accept assignment on all Medicare claims in a given year are classified as participating physicians.  Physicians classified as non-participating—those who may accept assignment for some, but not all, claims in a given year—only receive 95% of the fee schedule amount for participating physicians on those claims for which they accept assignment.  The Medicare Payment Advisory Commission (MedPAC) reports that 93.3% of physicians and other providers who bill Medicare agreed to participate in Medicare during 2007, with 99.4% of allowed charges being accepted on assignment from physicians (both participating and non-participating).[1]

In cases where a physician considers the Medicare payment level under the fee schedule and SGR formula an insufficient reimbursement for the time and resources necessary to perform the relevant service, the physician’s opportunities to charge beneficiaries the full value of the service performed are extremely limited.  Non-participating physicians may “balance bill” beneficiaries for charges above the Medicare fee schedule amount on claims where the physician does not accept assignment from Medicare.  However, physicians may not bill beneficiaries in excess of 115% of the non-participating fee schedule amount—which, because Medicare fees are lower for non-participating physicians, has the effect of limiting “balance billing” to 9.25% above the fee schedule amount for participating physicians.  Moreover, providers who wish to “balance bill” their beneficiaries in some cases will therefore be classified as non-participating, resulting in a 5% reduction in fee schedule amounts for all claims—including those for which the provider is willing to accept assignment—in a given year.

Conclusion:  The Medicare funding warning issued by the plan’s trustees last year, and again this past March, provides an opportunity to re-assess the program’s structure and finance.  These two consecutive warnings—coupled with the trustees’ estimate that the Medicare trust fund will be exhausted in just over a decade’s time—should prompt Congress to consider ways to reduce the growth of overall Medicare costs, particularly those which utilize competition and consumer empowerment to create a more efficient and cost-effective Medicare program.

Viewed through this prism, the current Medicare physician reimbursement fee schedule may be perceived by some conservatives as symptomatic of the program’s larger problems.  While the SGR mechanism has provided several opportunities in recent years to review physician payment levels, the changes made by Congress as a result of such reviews have generally only made minor, temporary adjustments to the current system of government-dictated fee schedules.  These legislative vehicles have not revamped or repealed the fee schedule formula to take market forces into account, instead delving into the minutiae of provider reimbursement levels to arrive at a short-term fix that meets budgetary muster.  However, as Senate Finance Committee Chairman Baucus recently conceded at a health care summit: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[2]  Therefore, even though supporting actions that yield budgetary offsets slowing the growth of Medicare spending, some conservatives may still view legislative outcomes that do not comprehensively address the lack of market forces in a government-dictated fee schedule as lacking.

Some conservatives may support legislative provisions designed to repeal prohibitions on “balance billing” by providers, either for all Medicare beneficiaries or only for those beneficiaries already subject to means-testing for their Part B premiums.  Such a measure, which has been introduced by several RSC Members in various forms in recent Congresses, would inject some free-market principles into Medicare, by allowing providers to charge reasonable levels for their services rather than adhering to government-imposed price controls.  Additionally, this policy change could have the potential to slow the growth of health costs at the margins, by providing slightly greater beneficiary exposure to the true cost of care, which in some cases may be subsidized by the monopsony power Medicare exercises over providers.

On a more fundamental level, some conservatives may also support a premium support model that would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.  Just as important, by potentially shifting the focus of Medicare from a government-run program to a series of private payers, it would reduce or eliminate the need for the seemingly annual ritual of adjustments to Medicare fee schedule amounts, and may ensure that providers receive more reasonable and consistent reimbursement levels.  By confining the growth of Medicare spending and limiting the opportunities for Congress to tinker with physician and other reimbursement policies, some conservatives may view a premium support model as a return to the principle of more limited government.

 

[1] Medicare Payment Advisory Commission, “Report to the Congress: Medicare Payment Policy,” (Washington, DC, March 2008), available online at http://www.medpac.gov/documents/Mar08_EntireReport.pdf (accessed June 16, 2008), pp. 110-11.

[2] Quoted in Anna Edney, “Bernanke: Health Care Reform Will Require Higher Spending,” CongressDailyPM June 16, 2008, available online at http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php (accessed June 16, 2008).

Weekly Newsletter: June 23, 2008

Controversial Medicare Bill to be Considered Tuesday

On Tuesday, the House is scheduled to consider under suspension of the rules legislation (H.R. 6331) addressing physician reimbursement levels under Medicare. The bill would prevent for 18 months a reduction in fee schedule levels scheduled to take effect on July 1, and would expand access to certain subsidy programs for low-income beneficiaries. These provisions would be offset largely by cuts to private Medicare Advantage plans, particularly private fee-for-service plans. Similar legislation (S. 3101) failed to advance on a procedural vote in the Senate on June 12.

Some conservatives may be concerned that a bill making significant changes to the Medicare program— which in 2006 spent more money than the national economies of Israel, the Czech Republic, and Colombia combined—is being considered under expedited procedures usually reserved for minor, noncontroversial matters. Some conservatives may also be concerned that the bill fails to address the long-term integrity of the Medicare program, relying on funding gimmicks and government-controlled price-fixing rather than undertaking comprehensive reform that would inject market forces into the program as a means to slow the growth of health care costs. Finally, some conservatives may be concerned that the bill’s significant cuts to Medicare Advantage would have the effect of driving beneficiaries away from a privately-run model of health insurance that has provided enhanced benefits and choice for millions of seniors.

Bipartisan Senate talks resumed last week in the hopes of reaching agreement on physician payment language before Congress begins its Independence Day recess this Friday. The RSC will weigh in with conservative concerns and updates on H.R. 6331 and any other physician payment legislation which may be introduced or considered in the coming days.

The Legislative Bulletin on H.R. 6331 can be found here.

There are additional RSC Policy Briefs on issues related to the Medicare bill: Physician Payments; Medicare Advantage; Bidding for Durable Medical Equipment; and the Medicare Trustees Report.

Supplemental Language Would Override Medicaid Fiscal Integrity Regulations

The House’s vote on amendments to wartime supplemental legislation (H.R. 2642) included several domestic spending provisions, including language that would postpone the implementation of six regulations proposed by the Administration to prevent funding abuses related to the Medicaid program. During negotiations on the components of the package, Congressional Democrats agreed to allow one of the proposed regulations—concerning the definition of an outpatient hospital—to move forward, and removed restrictions on physician-owned specialty hospitals and provisions extending access to reduced-priced pharmaceuticals to Planned Parenthood clinics incorporated into the supplemental in the Senate.

Despite the improvements over the Senate-passed language, and the maintenance of the outpatient hospital regulation, some conservatives may remain concerned by congressional actions to block six other regulations that respond to more than a dozen Government Accountability Office (GAO) reports released since 1994 highlighting the various ways states have attempted to “game” the Medicaid program and increase the amount of federal matching funds received.

Because the provisions only place moratoria on further administrative action until April 2009, the stated cost of the legislation is $1.65 billion. However, some conservatives may be skeptical that Congress would ever let these moratoria be lifted, and thus may be concerned that passage of the legislation ultimately could result in the nullification of approximately $16-18 billion in proposed savings—which, though significant, will slow the growth of federal Medicaid spending by just over 1% over the next five years.

In December 2005, 212 Members of Congress—all Republicans—voted to slow the growth of Medicaid spending by less than $4.8 billion as part of the Deficit Reduction Act. If these moratoria remain intact, some conservatives may be concerned that Congress will have more than undone the modest savings which a Republican-led Congress enacted over sharp Democrat protests.

RSC Briefs on the federal-state Medicaid relationship can be found here, here, here, and here.

Durable Medical Equipment

Background:  In addition to providing coverage for outpatient physician services, Medicare Part B also helps pay for durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) needed by beneficiaries.  Currently, Medicare reimburses beneficiaries for supplies using a series of fee schedules, which are generally based on historical prices subject to annual updates or other adjustments.  Medicare finances 80% of the actual costs or the fee schedule amount, whichever less, with the beneficiary paying the difference.  The Centers for Medicare and Medicaid Services (CMS) estimates that about 10 million individuals—or about one-quarter of all beneficiaries—receive medical supplies under Part B in a given year, at a cost to Medicare of approximately $10 billion annually.[1]

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for DMEPOS were in excess of market prices.  In 2002, testimony by the Department of Health and Human Services Inspector General revealed that the prices paid by Medicare for 16 selected items of durable medical equipment were higher than prices paid by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and consumers purchasing directly from retailers.  The Inspector General projected that using the lower prices by other payers for these 16 common items alone would have saved Medicare more than $100 million annually.[2]

In response to the above findings, Congress in the Medicare Modernization Act (MMA) of 2003 (P.L. 108-173) enacted cuts in the fee schedule levels for the 16 specific items studied by the Inspector General’s testimony, while creating a new competitive bidding process for DMEPOS suppliers in Section 302 of the law.  This nationwide program followed on the heels of three demonstration projects, authorized under the Balanced Budget Act of 1997, established during the period 1999-2002 in Florida and Texas.  The pilot programs demonstrated the ability of competitive bidding to reduce the costs of DMEPOS by an average 19.1%—saving the federal government $7.5 million, and $1.9 million in reduced beneficiary co-payments—while maintaining beneficiary access to required items.[3]

In addition to a program of competitive bidding for DMEPOS, the MMA also established a new accreditation process for suppliers designed to review suppliers’ financial records and other related documentation to establish their status as bona fide health equipment suppliers.  A November 2007 CMS estimate indicated that 10.3% of payments to medical equipment suppliers were improper—a rate of questionable payments more than double those of other Medicare providers.[4]  Coupled with the new competitive bidding program, the accreditation mechanism was intended to eliminate “fly-by-night” DMEPOS suppliers from operating within the Medicare program, and thus was included in the anti-fraud title of MMA.

Implementation:  CMS previously announced that, pursuant to the Section 302 requirements, Round 1 of the DMEPOS competitive bidding process would begin on July 1, 2008 in ten Metropolitan Statistical Areas (MSAs): Charlotte, Cincinnati, Cleveland, Dallas, Kansas City, Miami, Orlando, Pittsburgh, Riverside, and San Juan.  A further 70 MSAs will be included in the program in 2009, with more expected to be included in subsequent years.

The three-year bids for the first round of MSA sites were submitted in September 2007; CMS notified winning bidders, and accepted contracts from winning bidders, earlier this spring.  Based on the Round 1 bids, CMS has indicated that the Medicare program and beneficiaries will save an average of 26% in the 10 categories of DMEPOS open to competitive bidding—ranging from a 14% savings on negative pressure wound therapy pumps and supplies to 43% savings on mail-order diabetic supplies.  When fully implemented, CMS estimates that competitive bidding will save the Medicare program approximately $1 billion per year.

Concerns Raised:  The introduction of DMEPOS competitive bidding has not been without controversy, and concerns raised by suppliers and other interested parties have generally fallen into two categories.  Some suppliers have raised specific concerns about the way in which CMS’ contractor conducted the Round 1 bidding process.  Many of these concerns have focused on a lack of communication from the contractor to the suppliers, resulting in some suppliers’ bids being rejected for lack of proper financial documentation without the suppliers having an opportunity to provide further information or clarification.  CMS has indicated that approximately 16% of all bids submitted were rejected solely due to a failure to meet proper qualification criteria; by contrast, 61% of all bids submitted were priced outside the winning range.

In response to the concerns raised regarding qualification criteria, CMS has utilized a twin-stage process of review for Round 1 suppliers who raised protests about the way the contractor conducted the bid process.  Both the contractor and CMS have taken steps to re-examine the documentation submitted during the review process, and in some cases, CMS has allowed those suppliers with winning bids who failed to meet accreditation or related requirements due to a lack of communication from the contractor to participate in the Round 1 location areas.  In addition, CMS has extended the accreditation deadline for suppliers participating in Round 2 bidding, and will also seek input from the Program Oversight and Advisory Committee established under the MMA for ways to refine and improve the DMEPOS competitive bidding process for subsequent bidding rounds.

The second group of concerns are broader in scope, and go to the heart of the competitive bidding program itself.  Concerns in this line include the potential impact on suppliers, particularly small businesses, who were not successful on pricing grounds.  Some policy-makers have also questioned the lack of scrutiny given to subcontractors not subject to the same accreditation requirements as DMEPOS contractors.  Lastly, other groups have questioned whether competitive bidding will lead to the sale of lower quality supplies and equipment to beneficiaries, as well as whether beneficiaries will be able to obtain access to DMEPOS equipment in instances where the winning bidders in an MSA had not previously serviced the area in question.

Some conservatives may question the need to delay the competitive bidding process on these grounds.  CMS provided specific opportunities for small businesses to participate in the DMEPOS competitive bidding process, resulting in approximately half of firms who accepted winning bids having revenues of less than $3.5 million.  These small business opportunities occurred in the context of a market-oriented bidding mechanism that, when fully implemented, will save taxpayers approximately $1 billion annually—and will provide additional savings to Medicare beneficiaries in the form of reduced co-payments.  In addition, the accreditation mechanism established by Section 302 of MMA provides a quality check previously lacking for DMEPOS purchases and suppliers.

While transitioning to a new system can create logistical difficulties, the staged implementation process will ensure that beneficiaries in a limited number of areas—only one-quarter of whom receive DMEPOS supplies in a given year—will experience the transition to a competitively bid environment this year.  This phased-in approach stands in contrast to the January 1, 2006 implementation of the Medicare Part D prescription drug benefit, where tens of millions of beneficiaries received new coverage at a single point in time—with logistical obstacles, though significant, relatively minor on a percentage basis.

Legislative Status:  On June 12, 2008, House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced H.R. 6252, the Medicare DMEPOS Competitive Acquisition Reform Act.  The legislation would terminate all Round 1 contracts made pursuant to the round of competitive bidding completed this spring, and would direct CMS to re-bid Round 1 at some point during 2009.  Future rounds of competitive bidding would also be delayed, with Round 2 (featuring an additional 70 MSAs) taking place during 2011, and competitive bidding in rural areas and smaller MSAs being delayed until 2015.  The estimated $3 billion cost of the delay would be paid for by an across-the-board reduction of 9.5% for all DMEPOS scheduled to be subjected to competitive bidding.  In addition, the bill would require the CMS contractor to notify suppliers missing financial documentation related to their bids, extend disclosure and accreditation requirements to DMEPOS sub-contractors, and establish an ombudsman within CMS to respond to complaints from suppliers and individuals about the DMEPOS competitive bidding process.

While competitive bidding language was not included in the Medicare legislative package (S. 3101) on which the Senate failed to achieve cloture last week, Finance Committee Chairman Baucus and Ranking Member Grassley have discussed incorporating language delaying the competitive bidding process into their competing packages covering an adjustment to Medicare physician reimbursement levels.

Implications of Delay:  Despite the contracting problems that have led some contractors to raise legitimate process concerns about the implementation of the first bidding round, some conservatives may still be concerned about the implications of the proposed legislative delay, particularly if coupled with a mandate that CMS re-bid the first round of DMEPOS bidding.  Re-opening the bidding process could prejudice entities who won their bids earlier this year, while potentially reducing savings to the federal government by allowing suppliers to bid more strategically, having had experience with the winning range of bids during the initial round.

In addition, some conservatives may be concerned that a delay of more than a few months would result in a new Administration being charged with implementation of competitive bidding, which could allow for further opportunities to undermine the program through the regulatory process.  Chairman Stark has indicated his desire to abolish the competitive bidding program altogether, paid for by the across-the-board cut in DMEPOS reimbursement levels currently being contemplated—so it is entirely possible that a new Administration and a future Congress could decide to make the “temporary” delay permanent and abolish competitive bidding outright.

Conclusion:  The debate surrounding DMEPOS competitive bidding finds many medical suppliers—some with understandable concerns about a lack of communication from the bidding contractor, others merely disappointed in not achieving a winning price for their bid—seeking redress from Congress for a bidding mechanism Congress established with the intent of creating arm’s-length transactions between the agency purchasing goods (i.e. CMS) and private suppliers.  Yet the alternative to a competitive bidding system where markets set prices for DMEPOS involves arbitrary reductions to inherently arbitrary fee schedules enacted by policy-makers with little proficiency in the minutiae of the myriad health care services for which the federal government acts as a payer.  As Senate Finance Committee Chairman Baucus conceded at a health care summit: “How in the world am I supposed to know what the proper reimbursement should be for a particular procedure?”[5]

For this reason, some conservatives may object to Congress’ frequent attempts to litigate these types of disputes, and may view the controversy surrounding DMEPOS competitive bidding as emblematic of larger problems with the current entitlement system.  In the myriad debates which it is perpetually pressured to referee—from the sustainable growth mechanism (SGR) to reimbursement levels for hospitals and nursing homes to the levels of epogen provided to kidney dialysis patients—Congress’ firsthand expertise is as limited as its jurisdiction is absolute.  The end result has frequently been an imbalance of attention paid to various reimbursement “crises,” with only secondary consideration given to the longer-term health and solvency of the underlying entitlement programs (i.e. Medicare and Medicaid) in question.

Some conservatives may believe that the lesson from these past and current controversies is that Congress has a poor track record in adjudicating provider-related disputes.  Many may find a better solution in a premium support mechanism that would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  In addition to ensuring long-term fiscal stability by confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, a premium support mechanism would result in reimbursement decisions being made by private insurance carriers, obviating the need for Congress to micro-manage provider payment levels.  Such a solution would provide a meaningful reform to the underlying problems that have erupted most recently in the DMEPOS competitive bidding controversy, by saving providers from the whims of Congress—and saving Congress from itself.

 

[1] Cited in Government Accountability Office, “Medicare: Competitive Bidding for Medical Equipment and Supplies Could Reduce Program Payments, but Adequate Oversight Is Critical,” (Washington, Report GAO-08-767T), available online at http://www.gao.gov/new.items/d08767t.pdf (accessed June 9, 2008), p. 3.

[2] Testimony of Janet Rehnquist, Inspector General of the Department of Health and Human Services, before Senate Appropriations Subcommittee on Labor, HHS, and Education, June 12, 2002 hearing, available online at http://www.oig.hhs.gov/testimony/docs/2002/020611fin.pdf (accessed June 16, 2008).

[3] Testimony of Thomas Hoerger, Senior Fellow, Research Triangle Institute International, before House Ways and Means Subcommittee on Health, May 6, 2008 hearing on Durable Medical Equipment Competitive Bidding, available online at http://waysandmeans.house.gov/hearings.asp?formmode=printfriendly&id=6906 (accessed June 9, 2008).

[4] Cited in Government Accountability Office, “Medicare Competitive Bidding,” pp. 10-11.

[5] Quoted in Anna Edney, “Bernanke: Health Care Reform Will Require Higher Spending,” CongressDailyPM June 16, 2008, available online at http://www.nationaljournal.com/congressdaily/cdp_20080616_8602.php (accessed June 16, 2008).

Weekly Newsletter: June 16, 2008

Durable Medical Equipment Legislation Introduced

Last Thursday, several House Members led by Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) and Ranking Member Dave Camp (R-MI) introduced legislation (H.R. 6252) to delay implementation of competitive bidding for durable medical equipment. The legislation would nullify contracts which suppliers signed with Medicare earlier this spring and delay implementation of the first round of bidding by at least six months, with the second round delayed by over a year.

In recent years, some conservatives have raised concerns that the prices on the Medicare fee schedule for durable medical equipment were in excess of market prices. In 2002, testimony by the Department of Health and Human Services Inspector General revealed that the prices paid by Medicare for 16 selected items of durable medical equipment were higher than prices paid by Medicaid, the Federal Employee Health Benefits (FEHB) plans, and consumers purchasing directly from retailers. The Inspector General projected that using the lower prices by other payers for these 16 common items alone would have saved Medicare more than $100 million annually.

While there have been logistical difficulties associated with the first round of competitive bidding, some conservatives may still be concerned about the implications of a delay to a program that will save the federal government—and Medicare beneficiaries—billions of dollars by aligning the prices paid by Medicare for medical equipment and supplies with those in the private sector. Delays of the type contemplated by the legislation would delay competitive bidding’s implementation to a future Administration, and could enable a future President and future Congresses to take legislative action to eliminate the program altogether.

The RSC has prepared a Policy Brief on this issue, available here.

“Underinsured” Study’s Findings Subject to Interpretation

Last week several researchers associated with the Commonwealth Fund released a new study claiming that the number of “underinsured Americans” has risen sharply in recent years. According to the authors’ measure of “underinsurance”—medical expenses exceeding 10% of income (5% for low-income populations) or an insurance deductible of 5% of income—the number of “underinsured” Americans rose 60% from 2003 to 2007. This survey follows on the heels of a similar 60 Minutes broadcast on health
insurance that termed an individual receiving free care from an outreach clinic as “underinsured” due to his $500 annual deductible.

Some conservatives may have concerns both with the methodology of the study as well as its underlying rationale. The article releasing the study’s findings did not cite a recent Congressional Budget Office report noting that the percentage of out-of-pocket costs paid directly by individuals—as opposed to a third party insurance carrier or government program—declined from 31% to 13% of all health expenditures from 1975 to 2005. In addition, the survey’s authors did not assess the extent of private savings— whether in a Health Savings Account (HSA) or other vehicle—that could be drawn on by “underinsured” individuals to pay for medical expenses.

More fundamentally, the survey did not consider whether the subject individuals knowingly chose to select a plan with higher deductible exposure in order to receive lower premiums. Some conservatives may believe that implicit in the survey methodology are two questionable premises—the first that no rational person would choose to become “underinsured” according to the study’s definition of the term, and the second that policy-makers, particularly the federal government, should craft “solutions” to respond to this perceived problem. Instead, some conservatives may believe that additional reforms to create a true market in health care have the potential to slow the overall growth in health care costs, which may ultimately make the debate over “underinsurance” moot.

Article of Note: Switzerland in Massachusetts?

Last Friday’s monthly Health Matters column in CongressDaily highlighted the recent budgetary difficulties that the rising cost of health care has created for reformers in Massachusetts, which has seen the estimated cost of its comprehensive plan soar in the two years since its creation. Author Julie Rovner notes that both in its construction and its newfound financial obstacles, the Massachusetts plan looks surprisingly similar to a health reform model first adopted in Switzerland in 1994. While the Swiss model has several characteristics that conservatives may applaud—a wide choice of comprehensive plans, including those with higher deductibles that can yield savings on insurance premiums—as a model of consumer-directed health care, it also includes several forms of regulation—a mandate to purchase insurance coverage, guaranteed issue and community rating restrictions, and a prohibition on profit by carriers selling the standard benefit policy—which some conservatives may argue undermine the savings generated from a more open and transparent health system.

Whether in Switzerland, Massachusetts, or all 50 states, many conservatives have argued that health care needs more competition, not less—not just greater choice among policies for individuals and broader access to information about the price and quality of care, but a streamlining of the bureaucratic regulations that have raised the cost of health insurance. With health care costs continuing to rise at a rate that likely could make reforms like the Massachusetts experiment unsustainable, conservatives may argue that a dose of competition is just the novel concept needed to slow their unrestrained growth.

Weekly Newsletter: June 9, 2008

Committees Continue to Spar over Tobacco Tax Legislation

Congress’ return last week brought no end to a simmering jurisdictional dispute that has delayed consideration of legislation (H.R. 1108) designed to regulate tobacco products under the auspices of the Food and Drug Administration (FDA). In April, House Ways and Means Committee Chairman Rangel wrote to Speaker Pelosi requesting a sequential referral of the bill, on the grounds that the “user fee” assessed on tobacco companies in the legislation exceeds the funds directed from that fee to tobacco enforcement activities at FDA, making the legislation a general revenue raising (i.e. tax) bill under Ways and Means’ jurisdiction.

Many conservatives will view Chairman Rangel’s letter as confirmation that, notwithstanding the statements of Energy and Commerce Committee Democrats and a finding within the bill text of H.R. 1108, the proposed “user fee” is in fact an excise tax on tobacco companies to offset the expected loss of revenue resulting from FDA regulation. Some conservatives may view this tax increase as one of several concerns associated with H.R. 1108, which would impose onerous regulatory restrictions—including those on tobacco companies’ free speech rights to market and advertise their products—in the interest of protecting the public health. Some conservatives may question the wisdom of legislation requiring the FDA to regulate tobacco, particularly given the concerns raised by Congressional Democrats themselves about the FDA’s inability properly to regulate products currently within the agency’s remit.

The RSC will weigh in with conservative concerns on the tax and other issues as the legislation moves forward.

Revised Wyden Bill a Perpetual Tax-Raising Machine

Last month, the Congressional Budget Office (CBO) released a letter that could have a significant impact on any potential discussion of health care reform in the 111th Congress. In it, CBO gave a preliminary opinion that comprehensive health legislation introduced by Sen. Ron Wyden (D-OR), the Healthy Americans Act (S. 334), could be scored as budget-neutral, subject to certain conditions. In general, the bill would replace the current system of employer-provided health insurance with a “managed competition” model, whereby insurance coverage meeting a series of regulatory standards is provided through state-based pools, with a mandate on all individuals to purchase coverage and subsidies for low-income individuals and families.

Many of the bill’s potential funding sources—including a tax on all employers to pay for their employees’ insurance costs—have been well-publicized. Less advertised however were the revised bill specifications which CBO took into account when scoring the Wyden proposals. Specifically, the bill proposed to mandate coverage at least as good as that currently provided in the Blue Cross Blue Shield Standard option in the Federal Employee Health Benefits Program (FEHBP)—a generous benefit package 15% higher than the average cost of all employer-sponsored plans—with the amount of the mandate rising in future years to reflect economic growth in the gross domestic product (GDP). However, the revised specifications also note that the tax subsidy for purchasing health insurance will be indexed in future years to growth in the Consumer Price Index (CPI). Thus, under the Wyden plan, if future economic growth exceeds inflation—as it has in every year since 1992—Americans would be forced to buy more insurance but would not receive an equivalent tax subsidy to purchase that richer benefit package, leading to tax increases that would spiral over time.

On top of the many existing problems with the Wyden bill—a mandatory tax on employers, an individual mandate to purchase coverage that could prove problematic to enforce, increased regulation on insurers, and the requirement that all carriers provide coverage for abortion procedures—some conservatives may find this new perpetual tax increase most objectionable of all. While many conservatives support measures designed to control the currently uncapped tax expenditure for employer-sponsored health care as a way to slow the growth of health care costs, many of these same conservatives may have concerns about the implications of an individual mandate to purchase insurance—particularly one that could lead to automatic tax increases in future years for millions of Americans.

An RSC Policy Brief on the implications of an individual mandate can be found here.

Articles of Note: Health Insurance in Massachusetts a Fine Thing

A study on the influential Massachusetts health plan released last week indicated that beneath the political harmony that yielded a statewide “universal coverage” law two years ago, fissures loom. While health insurance coverage has increased significantly, the biggest growth in new coverage has come from low-income individuals accepting free or heavily subsidized plans provided by the Commonwealth. On the other hand, nearly 100,000 individuals paid a fine on their 2007 taxes for lacking health insurance in spite of the new mandate to purchase coverage.

Many conservatives may not be surprised by the study’s findings, particularly given the unnecessarily high cost of health insurance premiums in Massachusetts due to over-regulation. Faced with a penalty for non-compliance of $219 in 2007 and an average monthly premiums in excess of that amount, some individuals may make a rational choice to pay a fine of several hundred dollars per year rather than purchase coverage costing several thousand dollars—particularly because Massachusetts state regulations allow individuals applying for insurance after contracting an illness to receive the same premiums as those who applied when healthy. Conservatives would view the Massachusetts data as symptomatic of the problems associated with both enforcing an individual mandate and the high cost of health insurance derived from over-regulating insurance markets.

In addition, some conservatives may be concerned by a quote in The Washington Post from the head of a group that advocated for passage of the Massachusetts law: “Nobody knew what this was going to cost in the beginning.” At a time when the federal government faces unfunded obligations of nearly $86 trillion associated with the Medicare program alone, many conservatives may consider it unwise for the federal government to follow Massachusetts’ lead in enacting another expansive government entitlement without solving the underlying problems associated with the growth of health care spending.

Read the articles here.

Medicare Advantage

History and Background:  For several decades, Medicare has utilized private insurers as one option for beneficiaries to receive health care coverage.  In 1997, the Balanced Budget Act (BBA) created a new Medicare+Choice program intended to control the growth of health care costs and eliminate regional variations in payment and spending levels.  In 2003, the Medicare Modernization Act (MMA) converted the Medicare+Choice program into its current form as Medicare Advantage (MA).

Bids and Benchmarks:  The MMA made several changes to the bidding and payment structure for private Medicare Advantage plans to deliver health care to beneficiaries.  As currently constructed, plans receive capitated monthly payments that are subject to risk adjustment—so that plans caring for older, sicker beneficiaries receive higher payments than those with healthier populations.  In order to determine the capitated payment amount, plans submit annual bids to the Centers for Medicare and Medicaid Services (CMS).  The bids are compared against a benchmark established by a detailed formula—but the comparison against the benchmark does not directly allow plans to compete against each other, or against traditional Medicare, when CMS evaluates plan bids.

In the event a plan’s bid is below the annual benchmark, 75% of the savings is returned to the beneficiary in the form of lower cost-sharing (i.e. premiums, co-payments, etc.) or better benefits, with the remaining 25% returned to the federal government.  If a plan’s bid is above the benchmark, beneficiaries pay the full amount of any marginal costs above the benchmark threshold.

Benefits and Services Provided:  Most Medicare Advantage plans use rebates provided when bidding below the benchmark to cover additional services over and above those provided by traditional Medicare, and in so doing reduce beneficiaries’ exposure to out-of-pocket costs.  A Government Accountability Office (GAO) report released in February 2008 documented that in most cases, beneficiaries receive better benefits under Medicare Advantage than they would under traditional Medicare.  The GAO study found that beneficiary cost-sharing would be 42% of the amounts anticipated under traditional Medicare, with beneficiaries saving an average of $67 per month, or $804 annually.[1]  These savings to MA beneficiaries occurred because plans dedicated 89% of their rebates from low bids to reduced cost-sharing or lower premiums.  The remaining 11% of rebates were used to finance additional benefits, such as vision, dental, and hearing coverage, along with various health education, wellness, and preventive benefits.[2]  Due in part to the increased benefits which Medicare Advantage plans have provided, enrollment in MA plans is estimated to rise to 22.3% of all Medicare beneficiaries in 2008, up from 12.1% in 2004.[3]

Medicare Advantage “Overpayments”:  Some independent studies have suggested that Medicare Advantage plans incur higher costs than the average annual cost of providing coverage through traditional Medicare, though estimates vary as to the disparity between the two forms of coverage.  However, to the extent that MA plans in fact receive payments in excess of the costs of traditional Medicare, this discrepancy remains inextricably linked to two features of the Medicare Advantage program—the increased benefits for beneficiaries, and the complexity of the MA plan bidding mechanism.  Because of the problems inherent in the statutory benchmark design, plans have little incentive to submit bids less than the cost of traditional Medicare, as plans that bid above the costs of traditional Medicare but below the benchmark receive the difference between traditional Medicare costs and the plan bid as an extra payment to the plan.[4]

Last July, House Democrats attempted to “fix” the MA overpayments by passing H.R. 3162, the Children’s Health and Medicare Protection (CHAMP) Act.  Section 401 of the legislation proposed to set Medicare Advantage payments at 100% of the costs of traditional Medicare.  Despite the flaws in the bidding process discussed above, many conservatives opposed the Democrats’ proposal as an attempt to restrict beneficiary choice to private health insurance options by placing arbitrary restrictions on Medicare Advantage plans.  The Senate has not taken up the measure, which President Bush threatened to veto.

Some conservatives would also argue that a discussion focused solely on Medicare Advantage “overpayments” ignores the significant benefits that MA plans provide to key underserved beneficiary populations.  Medicare Advantage plans have expanded access to coverage in rural areas.  Moreover, the disproportionate share of low-income and minority populations who have chosen the MA option suggests that the comprehensive benefits provided are well-suited to beneficiaries among vulnerable populations.  Data from the Medicare Current Beneficiary Survey demonstrate that almost half (49%) of Medicare Advantage beneficiaries have incomes less than $20,000, and that 70% of Hispanic and African-American Medicare Advantage enrollees had incomes below the $20,000 level.[5]  For this reason, both the National Association for the Advancement of Colored People and the League of United Latin American Citizens opposed the cuts proposed by House Democrats as part of H.R. 3162.[6]

Reform Options:  To the extent that private plans are paid more than traditional Medicare for beneficiary care, some conservatives would argue that this concern is a symptom of the larger problems in Medicare Advantage bidding procedures—where more competition, not government-imposed price controls that arbitrarily reduce “overpayments,” would provide the most effective route to reforming Medicare.

Prime among the reform options would be a pure premium support model—one that would allow Medicare Advantage plans to bid against each other (as they do in the Part D prescription drug benefit), and against traditional Medicare.  This model would convert Medicare into a system similar to the Federal Employees Benefit Health Plan (FEHBP), in which beneficiaries would receive a defined contribution from Medicare to purchase a health plan of their choosing.  Previously incorporated into alternative RSC budget proposals, a premium support plan would provide a level playing field between traditional Medicare and private insurance plans, providing comprehensive reform, while confining the growth of Medicare spending to the annual statutory raise in the defined contribution limit, thus ensuring long-term fiscal stability.

Additional policy changes to improve Medicare Advantage could eliminate the inbuilt bias towards traditional Medicare by reforming the beneficiary enrollment model and expanding consumer-driven Medicare Advantage plans.  Current law provides an inherent bias towards traditional Medicare, by automatically enrolling beneficiaries in the government-run plan; beneficiaries must take an affirmative measure to enroll in an alternative Medicare Advantage plan.  However, some conservatives may support measures that would auto-enroll beneficiaries in randomly assigned plans—both traditional Medicare and private Medicare Advantage plans—below a certain cost threshold, as occurs for dual-eligible beneficiaries randomly assigned to Part D prescription drug plans.  Some conservatives may also support reforms to Medicare Medical Savings Accounts (MSAs) that would make them more attractive to beneficiaries, providing additional incentives for seniors to become more cost-conscious when considering health care treatment options.

Conclusion: The Medicare funding warning issued by the trustees last year, and again this year, provides an opportunity to re-assess the program’s structure and finance.  These two consecutive warnings—coupled with the trustees’ estimate that the Medicare trust fund will be exhausted in just over a decade’s time—should prompt Congress to consider ways to reduce the growth of overall Medicare costs, particularly those which utilize competition and consumer empowerment to create a more efficient and cost-effective Medicare program.

Over and above the significant benefits which Medicare Advantage plans have provided to millions of beneficiaries, some conservatives may believe that private MA plans have the potential to reform Medicare and ultimately slow its overall spending levels.  Although introduction of a prescription drug benefit has significantly increased Medicare’s unfunded obligations in absolute terms, the fact that competition among Part D participants has slowed the growth of its costs suggests that similar efforts to inject competition into traditional Medicare could comprise one element of comprehensive entitlement reform.  As a result, many conservatives would oppose attempts by the Democrat majority to eliminate private MA plans from their important role in delivering Medicare benefits, and would instead support further reforms to streamline the MA bidding process and improve the opportunities for savings generated by competitive forces.

 

[1] Government Accountability Office, “Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs,” (Washington, Report GAO-08-359, February 2008), available online at http://www.gao.gov/new.items/d08359.pdf (accessed May 19, 2008), p. 23.

[2] Ibid., pp. 17-20.

[3] Department of Health and Human Services, “HHS Budget in Brief: Fiscal Year 2009,” available online at http://www.hhs.gov/budget/09budget/2009BudgetInBrief.pdf (accessed May 19, 2008), p. 58.

[4] The Medicare Payment Advisory Commission (MedPAC) has alleged that the formula-driven benchmarks themselves exceed the cost of traditional Medicare.  See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington, DC, March 2008), available online at http://www.medpac.gov/documents/Mar08_EntireReport.pdf (accessed May 9, 2008), Table 3-3, p. 247.

[5] America’s Health Insurance Plans, “Low Income and Minority Beneficiaries in Medicare Advantage Plans,” (Washington, DC, AHIP Center for Policy and Research, February 2007), available online at http://www.ahipresearch.org/PDFs/FullReportAHIPMALowIncomeandMinorityFeb2007.pdf (accessed May 19, 2008), p. 3.

[6] “Minority Groups Oppose Proposed Reduction in Funds for Medicare Advantage Plans,” Kaiser Daily Health Policy Report March 16, 2007 (Washington, DC: Henry J. Kaiser Family Foundation), available online at http://www.kaisernetwork.org/daily_reports/rep_index.cfm?DR_ID=43645 (accessed May 9, 2008).

Weekly Newsletter: June 2, 2008

Health Centers Bill Would Authorize Significant Spending Increase

This week, the House is expected to take up under suspension of the rules legislation (HR 1343) reauthorizing the community health center program. The bill authorizes $14 billion in spending over the next five fiscal years, subject to annual appropriations. In addition, the bill would expand the scope of an existing government program to extend federal liability protection to volunteer medical practitioners working at community health centers.

Some conservatives may be concerned that the amount of spending contemplated by this legislation—a 40% increase in funding over a bill the House passed in 2006—may be inappropriate as a matter of fiscal policy, and further should not be considered under expedited House procedures. Some conservatives may also be concerned that the legislation’s stated goal of doubling the number of patients treated at community health centers by 2015 may be used as a justification for further spending increases in future years. Lastly, some conservatives may be concerned with a proposed expansion of a federal liability program for health center workers that has its roots in the flaws of the current medical liability system. Some conservatives may instead champion the comprehensive liability reform that all medical practitioners—private and public, volunteer and paid—need in order to restore the integrity of the doctor-patient relationship and reduce the amount of harmful litigation.

The Outlook Ahead

As Congress returns from its Memorial Day recess, several health care items remain ripe for legislative activity in the coming weeks. Democrat leaders have advised that a final version of mental health parity legislation may be voted on by both chambers, and recent reports indicate that negotiations in the Senate on health IT may yield activity prior to the August recess. In addition, legislative provisions repealing Medicaid fiscal integrity regulations, providing incentives for states to expand the State Children’s Health Insurance Program (SCHIP) to wealthier families, and imposing restrictions on physician-owned specialty hospitals remain under consideration as part of the wartime supplemental appropriations measure. The RSC has weighed in with conservative concerns on several aspects of these proposals, and will continue to do so as the process moves forward.

However, the most prominent health debate will center on the scheduled July 1 reduction in Medicare physician reimbursements under the sustainable growth rate (SGR) mechanism, and any action Congress may take to forestall such reductions. In anticipation of the debate on the Medicare legislative package, the RSC has prepared two Policy Briefs providing background on comparative effectiveness research and the Medicare Advantage program.

Articles of Note: A Tale of Two States

Last Thursday’s Wall Street Journal contained two editorials on the diverging status of health insurance markets across the 50 states. One article highlighted several key reforms enacted by Gov. Charlie Crist (R-FL) and the legislature to reform Florida’s insurance market. With the legislation’s passage, Florida became the largest of a growing number of states that are permitting carriers to offer comprehensive, lowcost insurance policies free from onerous state benefit mandates. Supporters of the concept believe that such a reform could reduce health insurance premiums by permitting carriers to create innovative insurance products and consumers to buy the plan that most suits their needs—allowing, for instance, a 20-something single male to decline maternity coverage in exchange for a lower insurance rate.

Meanwhile, a Republican Assemblyman in New Jersey introduced legislation permitting Garden State residents to purchase health insurance policies offered in other states. The initiative closely resembles federal legislation (HR 4460) offered by Congressman John Shadegg (R-AZ), and would, like the Florida legislation, attempt to reduce health insurance premiums by circumventing costly state regulations and increasing the options for consumers to find affordable coverage. Such a proposal could have significant implications in New Jersey, where guaranteed issue regulations—which encourage individuals to wait to purchase health insurance until they become sick—have raised premiums to nearly twice the national average, pricing many younger New Jerseyans out of purchasing coverage.

Many conservatives may support both these efforts, and hope that the success of Florida’s experiment provides the incentive for New Jersey and other states to follow its lead. The Journal editorial notes that the plans created by the Florida measure are “not a cure-all,” but conservatives may believe that these and similar efforts to create a more consumer-friendly health care environment could play a significant role in reducing the growth of health care costs over time.

Read the articles here: “The Florida Revelation…
…And Escape from New Jersey

Comparative Effectiveness Research

Background:  The debate about the growth of health care costs has in recent years begun to focus on disparities in health spending and treatment.  A recent Congressional Budget Office study demonstrated that regional spending on health care varies widely, yet improved care cannot be assumed by higher levels of expenditures.

Amidst rapidly growing health spending and inconsistent levels of care, policy-makers have begun to discuss the development of a research institute to study the comparative effectiveness of medical treatment programs, either by synthesizing and analyzing existing medical data or by conducting firsthand clinical trials to gauge treatments’ efficacy.  Advocates believe that such a center, by generating comprehensive data about the clinical and cost-effectiveness of courses of action for various diseases, could reduce health care cost growth by targeting patients with the most effective treatments and discouraging the use of costly but unproven medical techniques and methods.  While many stakeholders agree that such research should be undertaken, there is less agreement on the composition and funding of the entity that would be empowered to research clinical effectiveness options.

Legislative History:  Last July, the House passed—but the Senate has not considered—health legislation that included the creation of a comparative effectiveness institute.  Section 904 of the Children’s Health and Medicare Protection (CHAMP) Act (H.R. 3162) would create a “Center for Comparative Effectiveness Research” within the Department of Health and Human Services’ Agency for Healthcare Research and Quality (AHRQ).  The center would be tasked with researching “outcomes, effectiveness, and appropriateness of health care services and procedures in order to identify the manner in which diseases, disorders, and other health conditions can most effectively and appropriately be prevented, diagnosed, treated, and managed clinically.”

The Center would be financed through the establishment of a Health Care Comparative Effectiveness Research Trust Fund within the U.S. Treasury.  The Fund would receive transfers from the Medicare Trust Funds to finance the research program for fiscal years 2008-2010.  Beginning in fiscal year 2011, funding would continue to flow from the Medicare Trust Funds, but it would be supplemented by a new tax on healthcare insurance policies.  The tax would be imposed on most health insurance policies (except for workers’ compensation, tort liabilities, property, credit insurance, or Medicare supplemental coverage) at a per capita amount needed to generate $375 million annually, in conjunction with resources from the Medicare Trust Funds.  The Secretary of the HHS would determine the “fair share” per capita amount, but the bill’s provisions are expected to generate at least $2 billion over ten years.  While H.R. 3162 states that insurance carriers (or the sponsors of self-insured policies) will pay this new tax, it does not (and cannot) account for the fact that this tax will likely be passed along to consumers, raising premium costs and potentially increasing the number of Americans who cannot afford private health insurance.

H.R. 3162 would also draw down substantial funds from the Medicare Trust Funds over time, $300 million over the first three fiscal years and up to $90 million each fiscal year thereafter.  Medicare Part A (hospital services) is financed by payroll taxes, and according to the nonpartisan Medicare Trustees, it is scheduled for bankruptcy in 2019—thus committing its resources for additional research will further expedite its bankruptcy.  In addition, Medicare Part B (supplementary services) is financed in part from beneficiary premiums that rise as the cost of the program rises—thus tapping these funds for research amounts to a tax on every senior enrolled in Medicare Part B.

Future Outlook:  Because provisions unrelated to comparative effectiveness make action on the CHAMP Act unlikely in the Senate, lawmakers and various stakeholder groups continue to engage in discussions about the way to create a research institute.  Senate Finance Committee Chairman Max Baucus (D-MT) and Budget Committee Chairman Kent Conrad (D-ND) have discussed introducing stand-alone legislation on this topic; news reports indicate that their bill would fund a comparative effectiveness research institute solely from federal coffers, while House Ways and Means Health Subcommittee Chairman Pete Stark (D-CA) believes that a premium tax should help to fund the institute, so that private insurance carriers would have a financial stake in its work product.

With the current Medicare physician payment “fix” scheduled to expire June 30, and lawmakers on both sides of the aisle promising legislative action to address physician reimbursements, it is entirely possible that some form of comparative effectiveness center could be established as part of such legislation.

Implications of Comparative Effectiveness:  Apart from the concerns some conservatives may have regarding any new federal taxes to finance a comparative effectiveness institute, the research undertaken by such a center could well have significant repercussions for the role of the federal government in health care.  Any research undertaken would likely have an impact on the number and types of services covered by Medicare and Medicaid, as well as the treatment options and techniques utilized by physicians desiring reimbursement.  Congressional Budget Office Director Peter Orszag recently admitted that “the big kick” in savings associated with comparative effectiveness research would stem from insurers—and likely the federal government—implementing “changes in financial incentives tied to the research.”[1]  Although the CHAMP Act did not include provisions altering reimbursement levels to reflect comparative effectiveness research, or empowering the ostensibly non-partisan institute to do the same, such legislative measures would be a likely outcome from creation of an effectiveness center.

In addition, examples of comparative effectiveness institutes established overseas have raised concerns about whether such an approach would lead to delays in obtaining care and/or rationing of services.  In the United Kingdom, Sarah Anderson, an ophthalmologist working in Britain’s National Health Service (NHS), recently published an article criticizing the NHS for inhibiting access to care for her critically ill father.  Her father’s kidney tumor could be treated by a new drug—but while the pharmaceutical has been approved for use in Europe for two years, Britain’s National Institute for Clinical Effectiveness (NICE) will not complete its assessment of the drug’s usefulness until January.  Until then, local NHS branches can refuse to provide the drug, leaving Anderson’s family to pay for their father’s treatment on their own, or face the inevitable consequences that will follow if he cannot obtain it.  Anderson’s ultimate verdict on her family’s dilemma is a sobering one: “If Dad should lose his life to cancer, it would be devastating—but to lose his life to bureaucracy would be far, far worse.”

Some conservatives may find these overseas examples of the delays resulting from a publicly-run comparative effectiveness institute a cautionary tale for those who would establish a similar institute under the aegis of the federal government.  Conservatives may not only believe that such an approach would put bureaucrats, and not doctors and patients, at the center of medical policy, but would also result in the types of costly delays and care rationing that put lives at stake.

Conclusion:  While the goals of a comparative effectiveness institute are certainly commendable in an era of rapidly rising health spending, some conservatives may be concerned at both the means of financing an institute and its impact on the federal role in health care.  Although an institute voluntarily created and funded by private insurance or other groups could be useful, a public-private entity financed by premium taxes may only encourage lawmakers to enact additional legislative measures designed to micro-manage the doctor-patient relationship and expand an already considerable bureaucracy within the Centers for Medicare and Medicaid Services.  In short, some conservatives may be concerned that comparative effectiveness research done by the public sector could become a euphemism for government-rationed health care.

If the federal government wishes to slow the growth of Medicare spending, some conservatives might find a better solution in comprehensive Medicare reform that transforms the current program into a system similar to that under the Federal Employee Health Benefits Program (FEHBP), whereby beneficiaries would receive a defined contribution from Medicare to select a health plan of their own choosing.  These health plans could employ the results of comparative effectiveness research in their reimbursement policies, and consumers could use those criteria—as well as any “Consumer Reports”-type publications released by private entities—in evaluating both a health plan to purchase and treatment options for a particular medical condition.

 

[1] Quoted in Fawn Johnson, “Bills Pushed to Gauge Effectiveness of Medical Treatments,” CongressDaily 17 March 2008, available online at http://nationaljournal.com/pubs/congressdaily/dj080317.htm#5 (accessed March 18, 2008).