Thursday, Aug.23, 2005, 12:01 a.m. ET

Jon Gardner
(301) 347-3930



New Analysis Shows That PPO Incentives Will Cost Medicare $60 Billion Over Ten Years

Plans Will Avoid Direct Competition With Existing HMOs,
Gravitate Toward High-Paying, Underserved Regions

BETHESDA, MD — Medicare will spend as much as $60 billion over a decade to entice newly sanctioned preferred provider organizations (PPOs) to offer coverage to beneficiaries in areas not now served by managed care plans, according to an article published today on the Health Affairs Web site.

The analysis of likely Medicare PPO behavior anticipates that the PPOs, which in 2006 under the terms of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) will bid competitively to serve Medicare beneficiaries on a regional basis, will avoid competing with existing local Medicare HMOs. The local Medicare HMOs are authorized under previous laws.

By avoiding the markets that have existing HMOs, PPOs will be able to attract Medicare enrollees by offering a less generous, but less costly, benefit package, according to Steven Pizer, health economist at the Department of Veterans Affairs Boston Health Care System and an assistant professor of health services at the Boston University School of Public Health, and two colleagues.

By marketing less generous benefit packages, the PPOs will be able to take advantage of incentive payments offered to those plans that propose regional premiums under a benchmark set by competitive bids and average fee-for-service costs, Pizer says.

“Our findings indicate that regional PPOs will avoid competing with HMOs, focusing instead of traditionally underserved areas that will be profitable only because of overpayments,” Pizer says. “We estimate that these overpayments could support enrollment in PPOs of up to four million Medicare beneficiaries per year. However, that enrollment will be very costly to the taxpayers—reducing the Medicare Trust Funds by approximately $60 billion (in 2001 dollars) over ten years.”

According to the analysis, regional PPOs will only enter eleven of twenty-six regions nationwide because they can make a profit in those regions. Among them are New York, Florida, Michigan, Arizona, Nevada. and California.Pizer’s coauthors are Roger Feldman, a professor at the University of Minnesota School of Public Health, and Austin Frakt, a health systems research scientist at the VA Boston Health Care System.

The article can be read at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.w5.399.

Health Affairs , published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org. The full text of each Health Affairs Web Exclusive is available free of charge to all Web site visitors for a two-week period following posting, after which it will switch to pay-per-view for nonsubscribers. The abstracts of all articles are free in perpetuity. Web Exclusives are supported in part by a grant from the Commonwealth Fund.

©2005 Project HOPE–The People-to-People Health Foundation, Inc.