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May 15, 2007
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Christopher Fleming

Growth In Private Fee-For-Service Plans Accounts For Much Of The Increase In Choice Among Medicare Advantage Plans

Researcher Says Proliferation Of PFFS Plans Is Driven By Payment Rate Differentials And Could Add To Medicare’s Fiscal Burden

Bethesda, MD -- The Medicare Modernization Act (MMA) has succeeded in providing seniors with more “choice” among Medicare Advantage (MA) private health insurance plans. However, particularly in rural areas, much of the increased choice stems from a proliferation of private fee-for-service (PFFS) plans, which mimic traditional Medicare’s fee-for-service structure but receive reimbursements that exceed spending in the traditional program. PFFS plans are paid at the county level. They must provide both Part A and Part B services, and many provide Part D prescription drug coverage as well.

In a Health Affairs Web Exclusive published today, Marsha Gold documents the increase in PFFS plans and suggests that these new plans are not worth the cost. “The additional PFFS plan choices essentially allow firms to ‘piggyback’ on Medicare’s existing investment and policies and do relatively little to improve care management,” says Gold, a senior fellow at Mathematica Policy Research, an independent, nonpartisan research firm. “To the extent that PFFS enrollment grows, Medicare’s risk pool is fragmented, and the program’s purchasing power with providers is diluted.” Gold is a nationally recognized expert on MA who has been analyzing the program and its predecessor, Medicare+Choice, for more than a decade.

MMA has greatly increased the availability of MA plans. Virtually all Medicare beneficiaries now have at least one such plan available to them, notes Gold . Local HMO and PPO choices have increased, but mostly in areas where HMOs were already offered. In 2007, 91 percent of urban beneficiaries have a local coordinated care plan available, but only 42 percent of rural beneficiaries do.

Growth In PFFS Plan Offerings And Enrollment
Outstrips Growth In Other MA Options

In contrast, almost all beneficiaries have a choice of regional PPOs (R-PPOs) or PFFS plans. In 2006, the first year R-PPOs were offered, they were available to 88 percent of urban beneficiaries and 84 percent of rural beneficiaries. PFFS plans were available in 2006 to 76 percent of urban beneficiaries (up from 38 percent in 2005) and 91 percent of rural beneficiaries (up from 51 percent in 2005).

In 2007, R-PPO availability has remained at 2006 levels, but PFFS plans have continued to grow, reaching all urban beneficiaries and 94 percent of rural beneficiaries. Just over half -- 52 percent -- of all beneficiaries have PFFS options available from six or more sponsors, while at most two sponsors offer R-PPOs in any one of Medicare’s regions. In interviews conducted for this study, representatives of firms active in the MA market said that they were wary of establishing R-PPOs for a number of reasons, including the difficulty of establishing provider networks across wide areas and competing with local plans that are able to tailor their benefits to individual counties.

Enrollment in PFFS plans reached 1.5 million in April 2007, out of a total pool of 8.5 million MA enrollees. This represents almost a twentyfold increase from March 2005 and almost a sixtyfold increase from the 26,000 beneficiaries who were enrolled in PFFS plans at the end of 2003, when MMA was enacted. In contrast, April 2007 enrollment in R-PPOs was just under 136,000. HMOs still dominate the MA market, but they are growing at a slower rate than other MA products.

Payment Rate Differentials, Not Care Management,
Drive PFFS Plan Growth

PFFS plan sponsors told Gold that they gave “strong consideration to the [MA payment] rates in each county in deciding which markets to enter.” Gold’s analysis confirms this: PFFS plans, which offer little potential for savings through care management, were far more likely to be offered, and enrollment in these plans was highest, in “floor” counties “where the gap between traditional Medicare and MA rates is highest, than in other counties. Gold notes MedPAC’s finding that “while PFFS plans were paid at 119 percent of Medicare, it cost the plan 110 percent of Medicare to provide Medicare Parts A and B benefits. In contrast, HMOs were paid 110 percent of Medicare rates, but they could provide Medicare Parts A and B benefits at 97 percent of what Medicare spends on Parts A and B services in the traditional program.” Despite these differentials, Gold’s analysis shows that PFFS plans offer less comprehensive benefits than do HMOs. For example, the out-of-pocket costs of hospital and physician services for a beneficiary with extensive care needs would average $2,254 annually in a PFFS plan, compared with $1,488 in an HMO.

“Perspectives on current MA trends are largely in the eye -- and orientation -- of the beholder,” Gold observes. Reviewing the pros and cons of PFFS, she asks whether the benefits exceed the risks and suggests that “the answer would well be negative. She points out that “beneficiaries as a whole may be harmed if higher payments add to the fiscal stress on Medicare, making the program less viable in the long run.”

At a minimum, Gold says, “current trends demand . . . attention to issues of protecting and educating beneficiaries.” For example, beneficiaries who choose PFFS plans “need to be aware that . . . cost sharing could be substantial if they are sick. They must also understand that the absence of a network a network does not mean that they will not face other restrictions on access.” Ultimately, she concludes, “MA firms stand to lose as much as other stakeholders if [firms’] practices erode beneficiary trust.”

You can read the article by Gold at http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.4.w445


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.


©2007 Project HOPE–The People-to-People Health Foundation, Inc.