Fact Sheet

Background: On July 23, 2001, President George W. Bush outlined his framework to strengthen Medicare, the federal program that currently insures nearly 40 million older Americans and certain Americans with disabilities. Medicare's promise of health care security for people with Medicare can be achieved through improved benefits, including a prescription drug benefit modeled after modern health insurance plans.

One part of the President's reform of Medicare is to continue to improve and strengthen the Medicare+Choice program, which was created by Congress in the Balanced Budget Act (BBA) of 1997 to expand existing Medicare private plan choice options. Beginning January 1, 1999, most managed care contracts with the federal Centers for Medicare & Medicaid Services (CMS) have operated under the Medicare+Choice program. (A Medicare+Choice plan typically provides health care coverage that exceeds the coverage of original, fee-for-service Medicare.)

When the Balanced Budget Act was passed, Congress intended to give beneficiaries access to a range of reliable private-sector options. That goal will not be met. Most Medicare beneficiaries do not have access to a range of reliable choices that mirror private sector choices. The policies in the 1997 bill may have unintentionally caused the program to deteriorate, not to grow. Currently, of nearly 40 million Americans in Medicare, about 5.6 million (15 percent of all beneficiaries) have chosen to be in a Medicare+Choice managed care plan and another 18,000 have chosen to enroll in a private fee-for-service plan offered under Medicare+Choice. In 1998, 74 percent of Medicare beneficiaries resided in an area where there was at least one Medicare+Choice coordinated care plan (other than a private fee-for-service plan). In 2001, only 63 percent of beneficiaries live in a county that has a Medicare+Choice plan.

A goal of the Bush Administration, the Department of Health and Human Services, and CMS is to reverse the decline in Medicare+Choice HMO participation and enrollment and to stabilize the program. To help achieve this goal, HHS Secretary Tommy Thompson has announced a number of improvements to reduce administrative burdens on health plans, to make it easier for employers to contract with Medicare+Choice plans for their retirees' health care, and to enable plans to develop innovative products.

The President's principles for reforming the Medicare program include using fair competition to give Medicare beneficiaries the kind of reliable health plan options that Federal employees and other workers enjoy. Although legislation is essential for providing reliable options for seniors, the critical first step is to stabilize private plan options in the Medicare program. Health plans point to two factors that influence their decision to leave Medicare: 1) unstable payments that do not reflect the realities of the marketplace; and 2) administrative burdens. Health and Human Services Secretary Tommy Thompson and CMS Administrator Tom Scully have taken steps to reduce the administrative burdens on plans and to create more flexibility for plans to offer innovative options that are consistent with beneficiary desires. Each of these steps is discussed in more detail below. Before this discussion, however, this document reviews the current market situation.

In areas where private plan choices exist, there is overwhelming evidence that Medicare beneficiaries like those choices. Surveys of Medicare enrollees of private plans indicate that they are very satisfied with the benefits and care they receive. Beneficiaries like private plan choices, particularly coordinated care options, because these options allow them to:

• Obtain additional benefits;
  
  
• Reduce their out-of-pocket costs;
  
  
• Receive better coordinated care; and
  
  
• Benefit from quality improvement programs.
  

Where Medicare+Choice coordinated care plans are available, nearly one in four beneficiaries chooses to join a Medicare+Choice plan. In some counties of the United States over half the Medicare beneficiaries are enrolled in a Medicare+Choice coordinated care plan. Survey data also show a trend of longer enrollment in private plans among Medicare beneficiaries. The average duration of enrollment exceeds three years.

Making Medicare's private health plan choices widely and reliably available is important to beneficiaries. Unfortunately, over the last few years Medicare beneficiaries have experienced significant disruption in their care and benefits as plans have reduced their benefits or exited Medicare.

The Balanced Budget Act of 1997 sought to reform the Medicare program and was intended to provide Medicare beneficiaries with broader private plan choices. However, the Medicare+Choice program has not lived up to these expectations; in fact, there has not been a significant increase in the number of plan choices or in the types of plan choices (e.g., PPOs) available to beneficiaries. During the past three years, many health plans have reduced their level of participation in Medicare or withdrawn entirely.

Trends in the Medicare Program

• · The number of organizations with Medicare+Choice contracts has declined significantly in the last several years:
  
  

  • In 1998 there were 346 contracts, declining to 310 in 1999, to 267 in 2000, and to 179 contracts in 2001.

• Choices have declined significantly in the Medicare+Choice market:

  • In 1998, 74% of Medicare beneficiaries resided in an area in which there was at least one Medicare+Choice coordinated care plan (other than a private fee-for-service plan). In 2001, only 63% of beneficiaries reside in such counties.

In 1998, 61% of the Medicare population with access to at least one Medicare+Choice coordinated care plan lived in an area in which there were five or more choices available. In 2001, this number has fallen to 22% of the Medicare population.

In 1998, 75% of Medicare beneficiaries with a coordinated care plan available had more than two choices of organizations available; in 2001, this number has fallen to only 34% of beneficiaries.

• Pull-outs have affected large numbers of Medicare+Choice enrollees and forced increasing numbers of beneficiaries to return to original, fee-for-service Medicare where no Medicare+Choice coordinated care plans (CCP) remain available:
  
  

• Overall enrollment in Medicare+Choice has been on the decline in the last several months, after several years of significant growth month-to-month and year-to-year:

• • Enrollment in Medicare+Choice coordinated care plans in December 2000 was 6.26 million, a decline from 6.35 million in December of 1999. With the year 2000 withdrawals, enrollment as of January 2001 declined to 5.6 million and as of August 2001 remains at about the same level (5.6 million) — a 12% decline from December 1999.

• Benefit offerings have become less generous:

  • In 1999, 78% of Medicare enrollees in Medicare+Choice plans were in zero premium plans that included coverage of outpatient drugs. In 2001, only 35% of enrollees have such coverage.

Significant pushback from healthcare providers has made it increasingly difficult for Medicare+Choice organizations to maintain a stable provider network.

• Bargaining power in the healthcare marketplace has shifted from health plans to providers. Medicare+Choice organizations consistently report difficulty maintaining existing provider networks for their Medicare+Choice products because of this pushback. More providers are demanding payments comparable to fee-for-service payments which, in counties with the highest Medicare+Choice enrollment, are projected to outpace Medicare+Choice payment increases under the current formulas:

Source:   CMS, Office of the Actuary

*Note: All increases were calculated from data sheets from corresponding rate books and were weighted using total enrollment in the county as weights. All increases represent the average increase for the group. In particular, the increase for a floor county in 1998 and 2001 can vary substantially from the average. Increases in 2001 payment rates are the weighted average of increases from the Jan-Feb rate book and the Mar-Dec rate book.

Trends in the Overall Marketplace

• · According to an August 6, 2001 report from Weiss Ratings: "for the first time since 1996, the nation's HMO industry turned a profit last year." However, the organizations that are the principal participants in the Medicare+Choice program continue to face financial pressures.
  
  
• · "Exposure" in the Medicare sector continues to be a red flag for market analysts who evaluate the financial position of HMOs. They point to the need for frequent and unpredictable legislative intervention and rising costs.
  
  
• Health plan premiums have risen dramatically across all sectors in the past several years.

  • According to the Towers Perrin 2001 Health Care Cost Survey, the premium increases for 2001 are "the largest annual change since Towers Perrin began surveying employers about health care costs more than a decade ago." It should be noted that some of those increases can be attributed to cyclical cost and pricing trends in the insurance market. That is, insurance products are now being priced to achieve higher profitability after several years of reduced profits or losses.

• The recent premium increases have been attributed to a number of factors, including:

- Provider pushback (providers receiving higher payments and refusing to
- accept capitation and other risk-based arrangements);
- Consumer preference for broader, open networks and greater choice of
- providers;
- Aging of the covered population; and
- Continuing escalation of costs for drug coverage.

Conclusions

Under the current Medicare+Choice payment structure, plans are claiming that Medicare+Choice payment increases in high enrollment areas are not keeping pace with the continuing escalation of health care costs. If organizations choose to continue to participate in the Medicare+Choice program, the shortfall in revenue will be made up through further reductions in benefits and increased premium payments (or other cost sharing) from Medicare beneficiaries. The President's call for Medicare reform based on a competitive, market-based approach would remove plans from the current, inefficient system of administered prices.

Current market conditions cause Medicare to be viewed as an unsustainable line of business, but this can be improved by exiting particular market areas, if not exiting entirely from the Medicare+Choice program.

Based on current conditions and trends, we anticipate a significant number of plan withdrawals. We hope to be able to stem the withdrawals through administrative actions but we also need legislation based on the President's Medicare reform principles.

A key element of the Centers for Medicare & Medicaid Services' administrative reform initiative involves reducing the burdens on Medicare+Choice organizations to make participation in the program as attractive as possible. Reducing administrative burden on Medicare+Choice plans will result in more choices and better health care for beneficiaries because plans can then focus on providing care, not on filling out paperwork. The Secretary of the Department of Health and Human Services (HHS) and the CMS Administrator have taken a number of steps (described below) to reduce burdens on private plans and to invigorate the Medicare+Choice program. These administrative reforms reflect an effort to conduct business more like other private sector health care purchasers. These steps include the following:

• Consolidation of private plan functions. As part of the reorganization of the former Health Care Financing Administration, CMS has brought together the various private plan functions that previously resided in three different components into one component, the new Center for Beneficiary Choices (CBC). This step, consistent with the President's principles on improving Medicare, prepares CMS for the evolution of CBC into a separate office within HHS to make it more responsive to the plans that provide care to Medicare beneficiaries.
  
  
• A later ACR date. The Adjusted Community Rate (ACR) proposal is filed every year by Medicare+Choice plans to describe their benefit packages and premium structures for the coming year. The Secretary and the Administrator moved the deadline for filing the ACR proposal from July 1 to September 17. This is allowing Medicare+Choice organizations to use later data in estimating their costs for the contract year, giving them a better basis on which to evaluate continuing participation in the program and a better timeframe in which to design their products for beneficiaries. Many plans had indicated that they would drop out if forced to make a decision based on July 1 information.
  
  
• Re-evaluation of risk adjustment system. The Secretary and the Administrator suspended encounter data collection and will re-evaluate data collection and models used for risk adjustment, including implementing less burdensome methods to adjust payment based on expected costs of plan enrollees. The goal of HHS and CMS is to develop a system that will encourage innovation in providing care without creating incentives to use particular services. Private plans have consistently pointed to the cost and burden of an "encounter-based" risk-adjustment system.
  
  
• Streamlined marketing review process. Consistent with the Benefits Improvement and Protection Act of 2000, CMS shortened the period for review of most health plan marketing materials and is focusing its review on problem areas. This will enable beneficiaries to receive information about their health plans more quickly. CMS continues to evaluate other ways to improve our review of marketing materials so plans can get information to beneficiaries fast.
  
  
• Enhanced quality improvement requirements. CMS continues to stress the need for quality improvement by ensuring that quality requirements for Medicare+Choice plans reflect the best practices of the private sector. Specifically, CMS made its requirement for demonstrating quality improvement conform to the private sector's requirement of "maintaining sustained improvement." CMS has also exempted plans with high-level mammography coverage from having to participate in the National Mammography Quality Improvement Project. Finally, CMS allowed quality improvement projects that were created for private plans and Medicaid to be used for Medicare.
  
  
• Emphasis on better results for beneficiaries. Rather than conducting audits based solely on calendar-driven cycles, CMS will move toward targeted results-based performance assessment audits. By moving toward targeted audits, we can better use our existing resources to target "bad actors" and reward organizations that demonstrate quality performance. These "good actors" can then spend more time providing quality care to beneficiaries and less time preparing audit materials that do not affect quality of care.
  
  
• Reformed approach to policy changes. CMS is coordinating policy changes to coincide with contracting cycles. Instead of issuing guidance sporadically, CMS will use a more systematic process by publishing a manual that is updated quarterly. Guidance is shared with participating insurers and beneficiary groups for their comments prior to publication to be sure it can be implemented in the most workable manner.
  
  
• Fall advertising campaign. In addition to the actions described above, CMS is vastly expanding its fall advertising campaign to educate beneficiaries about the full range of options open to them -- traditional Medicare, Medicare+Choice, and Medigap supplemental insurance plans. Over $30 million will be put into TV, radio, and print ads to educate seniors and invite them to ask more questions about their program. The media campaign will direct seniors and beneficiaries to call our toll free telephone help line, 1-800-MEDICARE (1-800-633-4227), and to use our web site, www.medicare.gov.
  

The telephone help line is being expanded to a 24-hours-per-day, seven-days-per- week service. Fully 1000 customer service representatives will be added to current personnel. These representatives can tailor information to individualized questions and mail a hard copy of customized information on health plan choices to a beneficiary immediately after his/her phone call. Greater information will be available to telephone customer service representatives, including local plan information. The web site has a "Medicare Personal Plan Finder" tool to help beneficiaries make informed health care choices.

Better Employer-Based Medicare Options for Beneficiaries

HHS recently announced new program waivers to facilitate the enrollment of Medicare beneficiaries in employer-sponsored health plans. Many Medicare beneficiaries have been enrolled in employer-based plans that effectively met their needs prior to becoming eligible for Medicare. These beneficiaries are satisfied with the low out-of-pocket costs and quality of their employer-sponsored coverage and should not lose coverage or have limited choices because they become eligible for Medicare. Congress indicated its strong bipartisan support of this view in the Benefits Improvement and Protection Act of 2000 (BIPA) by giving the Secretary broad waiver authority. The Secretary has used this authority in a common sense way to remove barriers to giving beneficiaries the option of continuing employer coverage. In the past, a 64-year-old employee, happy with his employer's health care insurance, could be forced to leave the company program when he reached 65 in order to receive Medicare coverage. There will now be a much smoother transition for members of employer group plans as they become Medicare beneficiaries. And employers can more easily design "wrap around" programs consistent with existing employer coverage.

This is just the beginning of improvements to the employer-based plan option for Medicare beneficiaries. We have worked with our Medicare+Choice partners to develop the first set of waivers. CMS continues its review of additional waivers to further facilitate health care options with employer-based plans. As we develop these waivers we will be working with all partners concerned about making the Medicare+Choice program a viable option for their constituents -- beneficiaries, employers, unions, and plans. The first set of waivers include:

• Employer-Only Plans: Medicare+Choice organizations can now offer employer-only plans - plans that do not have to be made available to all individual beneficiaries in that market. In addition, a Medicare+Choice organization can establish a tailored service area for its employer-only plan. Because the benefit packages and open season campaigns for employer plans are tailored for each employer and occur at different times, CMS will no longer require pre-approval of marketing material for employer-only plans. However, these plans must fully inform beneficiaries of benefit limitations, out-of-pocket costs, and other cost and benefit information. Employers provide timely information to their employees and retirees, and beneficiaries are fully informed.
  
  
• Employer-only plans provide tremendous flexibility for Medicare beneficiaries to enjoy private plan choices like those available to many Americans under age 65. For example, under current law, if a company's health plan wanted to offer a Medicare retiree benefit plan to supplement Medicare, it would have to offer the same plan to all area seniors. Now, a specific plan could be tailored to reflect the particular desires of the company's retirees as they reach 65, making the plan as consistent as possible with their pre-65 employer coverage. The expectation is for a seamless conversion to Medicare coverage.
  
  
• Actuarial Substitutions: CMS will allow Medicare+Choice organizations to substitute additional benefits of approximately equal value in place of benefits that are not part of the Medicare benefit package in the individual (non-employer) Medicare+Choice market. This will facilitate the design of Medicare packages that mimic existing pre-65 employer coverage. Actuarial substitution pertains only to additional benefits; plans would still be required to offer all Part A and Part B benefits.
  
  
• Actuarial Equivalence: CMS will allow Medicare+Choice organizations to tailor benefit packages for employer groups using actuarial equivalence. For example, a Medicare+Choice organization may offer a Medicare+Choice plan with a $500 drug benefit and $5 co-pay to Medicare beneficiaries. However, the employer may prefer an unlimited drug benefit but charge a $10 co-pay consistent with the employer's plan for its active workers. CMS will now allow an actuarial equivalence waiver without restriction for both Medicare-covered benefits and additional benefits. This will allow Medicare "wrap arounds" to be consistent with employer plans.
  

These changes will allow plans to develop products that are seamless as the working population transitions to Medicare. These policies increase the likelihood that beneficiaries will keep the same benefits through the same health plans they had as employees. As CMS continues to develop these waivers, the agency will work with all its partners to keep the Medicare+Choice program a viable option for seniors who would like to maintain coverage consistent with their pre-Medicare plans.

Flexibility to Offer Health Plan Designs Consistent with the Private Market

CMS intends to re-invigorate the Medicare+Choice program by encouraging the private sector to offer modernized plan choices to Medicare beneficiaries. CMS will work with the private sector health plans, employers and beneficiary groups to generate ideas that would encourage entry of new managed care models into the Medicare marketplace.

With enactment of the Balanced Budget Act of 1997 came the expectation that the Medicare+Choice program would continue to grow and offer additional choices to beneficiaries. Unfortunately, the program has contracted. Options currently available in the Medicare+Choice program are largely limited to "closed panel" HMOs and do not reflect plan choices that are popular in the under-65 market --PPOs and POS models -- that better meet beneficiaries' needs. One problem is that the current Medicare+Choice program's payment and administrative structure forces plans to operate as capitated closed-network models. Health plans are unwilling to provide more popular models under the existing program design. Currently there are only two PPOs operating in Medicare.

Beneficiaries' only choice should not be between capitated, closed-network models and original fee-for-service Medicare, plus Medigap. Beneficiaries want to have the option to choose care outside a managed care network while remaining in a health plan. Medicare+Choice plans should be able to offer competitive choices relative to the traditional fee-for-service plus Medigap market to meet beneficiaries' needs. But the options that have seen expanding demand in the last decade, PPOs and POS plans, have not developed in Medicare, while the "closed panel" HMO that is fast disappearing in the under-65 market is the only choice available.

CMS will revitalize the Medicare program in 2002 to encourage experienced organizations to offer innovative products as a Medicare option. Starting in September, CMS will work with the private sector to explore successful models that would encourage organizations to increase options available to Medicare beneficiaries. CMS is identifying innovators and experts in the industry to generate ideas.

These changes will allow plans to develop products that are seamless as the working population transitions to Medicare. These policies increase the likelihood that beneficiaries will keep the same benefits through the same health plans they had as employees. As CMS continues to develop these waivers, the agency will work with all its partners to keep the Medicare+Choice program a viable option for seniors who would like to maintain coverage consistent with their pre-Medicare plans.

Flexibility to Offer Health Plan Designs Consistent with the Private Market

CMS intends to re-invigorate the Medicare+Choice program by encouraging the private sector to offer modernized plan choices to Medicare beneficiaries. CMS will work with the private sector health plans, employers and beneficiary groups to generate ideas that would encourage entry of new managed care models into the Medicare marketplace.

With enactment of the Balanced Budget Act of 1997 came the expectation that the Medicare+Choice program would continue to grow and offer additional choices to beneficiaries. Unfortunately, the program has contracted. Options currently available in the Medicare+Choice program are largely limited to "closed panel" HMOs and do not reflect plan choices that are popular in the under-65 market --PPOs and POS models -- that better meet beneficiaries' needs. One problem is that the current Medicare+Choice program's payment and administrative structure forces plans to operate as capitated closed-network models. Health plans are unwilling to provide more popular models under the existing program design. Currently there are only two PPOs operating in Medicare.

Beneficiaries' only choice should not be between capitated, closed-network models and original fee-for-service Medicare, plus Medigap. Beneficiaries want to have the option to choose care outside a managed care network while remaining in a health plan. Medicare+Choice plans should be able to offer competitive choices relative to the traditional fee-for-service plus Medigap market to meet beneficiaries' needs. But the options that have seen expanding demand in the last decade, PPOs and POS plans, have not developed in Medicare, while the "closed panel" HMO that is fast disappearing in the under-65 market is the only choice available.

CMS will revitalize the Medicare program in 2002 to encourage experienced organizations to offer innovative products as a Medicare option. Starting in September, CMS will work with the private sector to explore successful models that would encourage organizations to increase options available to Medicare beneficiaries. CMS is identifying innovators and experts in the industry to generate ideas.