Chairman Bilirakis, Congressman Brown, distinguished
Subcommittee members, thank you for inviting me here today to
discuss the Medicare+Choice program.
Currently some six million Medicare beneficiaries receive their
benefits through managed care organizations. The Medicare+Choice
program builds on this experience by:
- offering beneficiaries the possibility of new options such as
provider sponsored organizations (PSOs) and preferred
provider organization (PPOs);
- initiating a five-year transition to a new payment methodology
designed to address flaws in the previous adjusted average per
capita cost (AAPCC) system;
- creating a coordinated open enrollment process and an
educational program to help beneficiaries make informed
choices among their options; and
- raising the bar on quality and protections for both beneficiaries
The regulation implementing the Medicare+Choice program was
published in June, and the comment period closed on September 24,
1998. We are carefully evaluating this valuable input. We also are
meeting regularly with industry representatives, including the
American Association of Health Plans, the Blue Cross and Blue
Shield Association, and others to discuss ways to improve the
program. We already are making refinements based on these
comments and discussions.
Yesterday we announced changes that will help plans meet quality
improvement requirements called for in the Balanced Budget Act. We
also announced that plans will have an additional year to implement
compliance plans and complete contracts that incorporate new
requirements with their current providers.
We have given careful consideration to industry suggestions that we
reopen the process for determining plan premium and benefit
structures, and have concluded that it would not be in the best
interests of beneficiaries. We are not convinced that it would be in the
best interest of beneficiaries to allow almost all HMOs to increase
costs and decrease benefits to their Medicare enrollees. While we are
taking this position, we remain committed to continue working with
Congress and the industry to discuss potential improvements in the
process for future years.
Successful implementation of Medicare+Choice is a high priority for
us. We have accomplished a great deal, including release of all
Balanced Budget Act-mandated Medicare+Choice regulations.
- In September 1997, we issued 1998 plan payment rates based
on the new BBA methodology. In March, we issued the 1999
plan payment rates.
- In April, we published a regulation establishing the definition
of a PSO. In May, we published PSO solvency standard
regulations that were developed through a negotiated rule-making process with a wide range of interested parties. We
also published regulations on the process to apply for a federal
waiver from state licensure.
- In May, we held the first meeting of the Medicare Competitive
Pricing Advisory Commission. The Commission, which is
chaired by General Motors Health Care Initiative Executive
Director James Cubbin, met last week to decide on
recommendations regarding key design features of the
competitive pricing demonstration. The Commission will meet
again later this month to select possible sites for the project.
- In June, we published the remaining Medicare+Choice
regulations which detail requirements for plans and
incorporate protections for beneficiaries and providers.
- In July, we began a "train-the-trainers" program for 700
individuals across the country in our education partner
organizations. The goal is for them to teach others in their
organizations and communities how to help beneficiaries
understand their new options.
- As part of our eight-point National Medicare Education
Program, we launched a consumer-friendly Internet site,
Medicare.gov, where beneficiaries can find direct comparisons
of the benefits and costs of plans available in their community.
We have several additional steps scheduled, as well.
- This November, we will mail Medicare+Choice information to
beneficiaries, open a toll-free call center, and provide other
services to help beneficiaries understand the program.
- Also in November, we will provide training for plans on the
new adjusted community rate (ACR) process which is used to
review and approve plan benefit, premium and copayment
structures. This new process addresses criticisms raised by the
General Accounting Office and the HHS Inspector General
and should reduce payment errors.
- By March 1999, we expect to formally report to Congress our
method for "risk adjusting" payments to account for
beneficiaries' health status, which we expect to implement on
schedule in 2000. Risk adjustment will begin to address flaws
in the payment system that have been documented by us,
several Congressional agencies, and many other researchers. It
also will ensure that plans have adequate resources to
coordinate care for enrollees with serious health problems.
- We are working with beneficiary advocates and health plans to
standardize plan summaries of benefits before the first annual
coordinated open enrollment period in November 1999.
MEDICARE+CHOICE BENEFICIARY EDUCATION
Among the most important facets in implementing the
Medicare+Choice program is helping beneficiaries understand their
options so they can make informed decisions. Based on advice from
the Institute of Medicine and our own work with over 30 beneficiary
focus group sessions, we are phasing in our national educational
campaign in order to refine efforts before the first full-scale education
campaign and mailing mandated by the Balanced Budget Act in
November 1999. We have an eight-point plan which we began this
summer that includes:
- beneficiary mailings;
- toll-free telephone services;
- Internet activities;
- a national train-the-trainer program;
- a national publicity campaign;
- state and community-based special information campaigns;
- enhanced beneficiary counseling from State Health Insurance
Assistance Programs; and
- targeted and comprehensive assessment of our education
We are first testing the whole system in five states -- Arizona, Florida,
Ohio, Oregon and Washington. The handbooks in these states include
detailed information on Medicare+Choice options in general, as well
as information specifically tailored to each market with side-by-side
comparisons of costs and benefits for local plans. The call center will
have personnel to answer specific questions. We plan to phase in call
center access, with full nationwide service by August 1999. This
phased approach allows us to gain experience with this new service,
learn what kind of help beneficiaries want most, and determine how
many customer service representatives will be needed. Outside these
five states we will send beneficiaries a bulletin outlining
Medicare+Choice options and other useful information about
assistance for low-income beneficiaries, new preventive benefits, and
how to obtain comparison data on plans in local markets. A national
version of the full handbook will be sent to newly eligible
beneficiaries and to any beneficiaries who request it; it is also already
available on the Internet. The costs of beneficiary education are
ongoing. Due to uncertainty about the demands for Medicare+Choice
information, we may need to review funding levels to ensure that
beneficiaries are able to make informed decisions.
OUTREACH TO PLANS
We also making a concerted effort to help plans learn about the new
program. We have had many informal meetings with industry
representatives, which are ongoing. We also have had several formal
meetings to help plans understand how to participate in the program.
- An outreach session held July 13-14 in Baltimore had
approximately 350 attendees.
- An outreach session held July 21-22 in Chicago had more than
- An outreach session held July 28-29 in Los Angeles had more
than 400 attendees.
- A special outreach session held July 15 for those interested in
offering Medical Savings Account plans was attended by
representatives from 11 organizations.
- An outreach session on Medicare+Choice quality
improvement requirements was held August 3-4 in Baltimore
with 400 attendees.
- An outreach session on Medicare+Choice encounter data
collection and risk adjustment methodologies was held
September 17 in Baltimore with 200 attendees.
As of September 28th, we have 48 applications pending for new
Medicare+Choice contracts and 25 pending applications for service
area expansions from existing risk contractors. We have had only one
entity withdraw its application following publication of the
Medicare+Choice regulation. The applications we have received are
for the most part from HMOs for coordinated care contracts, rather
than the newer options authorized under the BBA. This is not
surprising, given that the regulation was just published in June, and
the time new plans need to develop networks, contracts, and business
We have four applications pending from PSOs. Three have state
licences, and one obtained a federal waiver from state solvency
standards. Two additional PSO waiver requests are pending. The
extent to which provider groups will take advantage of this new
option remains to be seen, but we are encouraged by the interest
shown to date.
We have so far received only one PPO application. However, our
revised quality improvement policy clarifies how standards apply to
PPOs and should encourage more such plans to apply.
To date, we have no applications for MSA plans, which is not
surprising given the cautious response to MSAs in the private sector.
Insurers may show more interest in Medicare MSAs once they have
more experience with MSAs in the private sector. Discussions with
the industry lead us to believe that we will receive applications next
We also have no applications for private fee-for-service plans. This
also is not surprising given that such plans would offer virtually
unfettered access to services without medical review activities that
insurers widely use to control costs. Such plans are now very rare in
the private sector.
The BBA includes important quality provisions for Medicare+Choice.
It raises the bar by requiring most plans to not only monitor quality
but also to improve quality. The new requirements will be phased in
over the next several years.
This way beneficiaries can compare plans based on quality, and we
can utilize Medicare's substantial market leverage to be a prudent
purchaser and promote competition based on quality. We are actively
working to incorporate quality assessment and improvement into
traditional fee-for-service Medicare, as well, so beneficiaries will be
able to make truly informed choices about all their options.
All Medicare+Choice plans must report objective, standardized
measurements of how well they provide care and services. They will
use HEDIS, the Health Plan Employer Data and Information Set.
HEDIS is the industry standard for measuring health plan
performance, and it has been tailored specifically for the Medicare
program. We have required Medicare HMOs to report HEDIS data
since 1997. As a result of our experience with the initial round of
HEDIS reporting, Medicare+Choice plans must now have HEDIS
data audited before submission to ensure accuracy. We are
disappointed that some plans have been unable to report reliable data
on HEDIS measures despite substantial advance notice, and will work
with plans to improve the quality of their reporting. We also will use
CAHPS, the Consumer Assessment of Health Plans Survey, to
objectively measure beneficiary satisfaction with plan care and
service. We began requiring Medicare HMOs to conduct CAHPS
surveys this year. The results of both HEDIS and CAHPS will be
formatted so beneficiaries can make direct, apples-to-apples
comparisons among their plan options.
Plans with provider networks must conduct performance
improvement projects and over time achieve demonstrable and
sustained improvement. Eventually these plans, except for network-based Medical Savings Account plans, will have to meet minimum
performance standards. Establishing minimum performance standards
is important because data now starting to come in from the objective
HEDIS performance measures show wide variation in how well plans
provide care. For example, according to HEDIS data from existing
Medicare managed care plans, 90 percent of women in some plans get
yearly mammograms, while less than 50 percent get this essential
screening service in other plans. Also, the latest National Committee
on Quality Assurance State of Managed Care Quality report shows
that, despite the promise and capacity of managed care to improve
quality, the managed care industry's overall performance on HEDIS
measures was "essentially unchanged" from 1996 to 1997.
That same National Committee on Quality Assurance report
documents the potential of managed care to improve quality and save
lives. The percentage of plan physicians that gave advice to quit
smoking rose industry wide from 61 percent to 64 percent. The
Centers for Disease Control calculates that this one improvement in
health care quality alone will save 1,520 lives. We must proceed with
Medicare+Choice quality improvement requirements in order for the
promise of managed care to be met across the board.
HELPING PLANS COMPLY
We recognize that it takes time for plans to adapt to the quality
improvement requirements, and that a learning curve is involved.
Therefore, we are making several changes from our draft proposal to
help plans comply.
- We are reducing the number of performance improvement
projects that plans must conduct to just two per year. This
workload is comparable to standards imposed by private sector
accrediting organizations. Plans can choose projects that they
believe will target their enrollees' specific concerns.
- We are permitting waivers of mandatory participation in a
national project each year, and allowing plans to substitute
any related ongoing projects of their own. In 1999, the
national HCFA-sponsored project will focus on diabetes, but
plans with existing diabetes projects can instead continue these
projects without obtaining pre-approval from HCFA.
- We are phasing in quality improvement requirements by
giving plans three years before they must achieve
demonstrable improvement. In the first contract year, plans
need only select a topic, establish performance indicators, and
collect baseline data.
- We are clarifying the schedule for compliance with minimum
performance level requirements. We intend to establish these
levels in 1999, first measure compliance in 2000, and require
plans to have achieved demonstrable improvement in 2001.
- We are giving plans discretion as to where they conduct site
visits for provider credentialing, rather than mandating site
visits to each provider location. Plans also have discretion in
developing criteria for site visits, and they may delegate these
- We are increasing flexibility in coordinating care by allowing
primary care providers, a team of providers, or an employee
who is a health care professional to conduct this function.
Phasing in enforcement is a normal and prudent course of business
when implementing new programs or rules. The Medicare+Choice
quality improvement requirements remain similar to those in the
private sector. We are simply making sure plans have sufficient time
to come into compliance.
Plans that do not have defined provider networks, such as non-network MSA plans and private fee-for-service plans, must report the
same standardized performance measures as all other plans. These
non-network plans also must evaluate the continuity and coordination
of care that enrollees receive. However, the BBA excludes them from
the quality improvement requirements.
Appropriate flexibility will be provided so plans with networks that
are less structured than traditional HMOs, such as PPOs, can meet
these requirements. The regulation preamble makes clear that we are
not adopting a "one size fits all" approach. Our quality improvement
systems will be sensitive to different plan structures and their different
abilities to affect provider behavior.
Beneficiary and Provider Protections
Other provisions in Medicare+Choice address common complaints
about health plans, both by consumers and providers.
Time frames for appeals are significantly tightened for decisions to
deny care. Plans must issue initial decisions within 14 days, down
from a previous maximum of 60 days. If a beneficiary appeals the
initial decision, the plan must issue a ruling within 30 days, also down
from 60 days. Plans must rule within 72 hours on denial-of-care
decisions, including terminations of care, that could jeopardize the
life, health or ability of the enrollee to regain maximum function. For
all service-related decisions, extensions of up to 14 days may be
permitted if the organization justifies a need and explains how the
delay is in the enrollee's interest. The rules also set the same 72 hour
and 30 day limits on Medicare's independent appeal body, where
appeals are automatically forwarded when a plan denies a beneficiary
Emergency room visit copayments can be no higher than $50. Plans
must cover emergency room visits for situations that a "prudent
layperson" would consider an emergency. And they must pay for any
services needed to stabilize a patient until discharge, a plan physician
arrives, or an emergency room physician agrees with a plan physician
on transfer of the patient to another facility. They must return
emergency room calls seeking care authorizations for post-stabilization care within one hour.
Plans also are prohibited from having "gag rules" that limit what
providers can tell patients about treatment options. They may not
discourage enrollment or deny, limit or condition the coverage
because of medical history, genetic information, mental or physical
illness, disability, or prior use of services. They must provide direct
access to specialists without a new primary care referral for each
consultation in a given treatment plan for patients with complex or
serious medical problems. And they must provide women access
without primary care referrals to women's health specialists in plan
networks for women's routine and preventive care, such as Pap
smears and breast exams.
There are also important protections for providers. Plans must explain
decisions to cancel or refuse to sign contracts with physicians and
other health professionals, and let providers request plan review of
decisions to remove them from networks. Plans also are prohibited
from discriminating against any class of providers.
The BBA put in place a new payment system which addresses many
of the problems with the previous adjusted average per capita cost
payment system. Once fully implemented it will:
- break the link between local fee-for-service costs and county
payment, thus dramatically reducing disparities in rates across
- replace unpredictable fluctuations in the individual county
rates with a more predictable national update factor; and
- eliminate overpayments that were estimated to cost Medicare
up to $2 billion a year.
Under the BBA system, a rate for a particular county is the greater of
three possible rates: a new minimum or "floor" payment; a minimum
2 percent increase over the previous year's rate, or a blend of the
county rate and an input priced adjusted national rate. The new system
is phased in over five years, and therefore has several different
moving parts. Medical education costs, which had been included in
HMO payments under the old system, are carved out of county rates
over the five-year transition and paid instead directly to teaching
hospitals. The blend of county and national rates phases up to a 50/50
balance over the same five years. The national rate, local rates and
the minimum payment amount are annually updated based on per
capita Medicare growth. On top of these moving parts, the BBA
mandates budget neutrality so total payments under the new system
equal what total payments would have been if payment were based on
county rates. In order to protect the floor payment and a minimum 2
percent increase, the law stipulates that the budget neutrality
adjustment is applied only to the blended rates.
For 1998, the HCFA Actuary's initial projection of payments under
this new system before the budget neutrality provision was applied
was $250 million above what payments would have been if payment
were based on county rates. For 1999 it was $300 million above what
payments would have been if payment were based on county rates.
Because the budget neutrality provision is applied only to the blended
rates, payment for counties that would have received the blended rate
by law had to be decreased to make up that difference. For 1998 and
1999, this process decreased blended rates to the point that they were
below either the floor payment or the minimum 2 percent increase in
all cases. Since payments are the greater of either the floor, the
minimum increase, or the blend, no county rate is based on the blend.
Furthermore, because the statute stipulates that the budget neutrality
provision can be applied only to blend payments, total payments to
plans based on the floor payment or the minimum 2 percent increase
exceed budget neutrality by $95 million in 1998 and $80 million in
1999. We have no authority to address this.
We are disappointed that the blended rates cannot be applied in 1998
and 1999, as the blend rate is expected to encourage Medicare+Choice
offerings in rural and other low cost areas. However, it is important to
keep in mind that the budget neutrality adjustment affects blended
rates only in the year in which it is applied. So, with the blend rising
to a 50/50 mix of national and local rates by 2002, counties that have
been receiving rates that are low but higher than the new floor will
eventually receive a significant increase from the blend. At this point,
we project that payments based on the blend will survive the budget
neutrality provision and be implemented in 2000.
In the Year 2000, we also will begin to incorporate risk adjustment for
enrollee health status into our plan payments. Plans will no longer be
paid the same for a healthy beneficiary with minimal health care
needs as for one with chronic conditions and substantial health care
needs. Payment is now adjusted only for age, sex, and whether the
beneficiary is in an institution or also enrolled in Medicaid. For
example, in Kings County, NY, we now pay the same $747 for any
76-year-old male beneficiary, regardless of whether they have a
serious heart condition or no medical problems at all. Based on the
recently proposed methodology for risk adjustment, payment in Kings
County for a 76-year-old, male beneficiary with no health problems
would be $621, while payment for a 76-year-old male with coronary
artery disease hospitalized for a heart attack would increase
substantially to $1208, and payment for a 76-year-old male
hospitalized for lung cancer would increase to $2317. Thus, plans will
have an incentive to enroll beneficiaries with serious health problems
who may be most able to benefit from the care coordination services
plans promise to provide.
The risk adjustment system we will implement will use inpatient data
that plans can readily produce. As plans improve their capacity to
provide more detailed data, we will move to a more sensitive risk
adjustment methodology that includes outpatient data and non-hospitalized beneficiaries with serious chronic conditions such as
diabetes or rheumatoid arthritis. We will provide each plan with an
estimate of risk adjustment's impact on their payments early next
year. In implementing risk adjustment, we will consider impacts on
plan benefits and premium packages. We will fully inform the
Subcommittee of our plans when final impact analyses are completed
later this year.
Risk adjustment will do two important things. First, it will reduce the
incentive for "cherry picking," or enrolling healthy seniors while
avoiding enrollment of higher cost beneficiaries. Secondly, it will
help end overpayments due to plan cherry picking and thus reduce
total overpayment to plans.
OVERPAYMENT TO PLANS
There is considerable evidence that we have overpaid plans and
continue to overpay plans, in part because payments are not adjusted
for risk, and for other reasons as well.
- The Physician Payment Review Commission, in its 1997
Annual Report to Congress, estimated that Medicare has been
making up to $2 billion a year in excess payments to managed
care plans. This Congressional advisory body notes that,
unlike the private sector where managed care has slowed
health care cost growth, managed care has increased Medicare
program outlays. The Commission's 1996 Report found that
those who enroll in managed care tend to be healthy and those
who disenroll tend to be unhealthy, exacerbating Medicare
- Mathematica Policy Research, which has conducted several
studies on Medicare HMOs, says care of Medicare
beneficiaries in HMOs costs only 85 percent as much as care
for those who remain in traditional fee-for-service Medicare.
That is 10 percent less than the 95 percent of the average fee-for-service costs plans were being paid.
- The Congressional Budget Office has said managed care plans
could offer Medicare benefits for 87 percent of Medicare fee-for-service costs, even though they were paid 95 percent.
- The HHS Inspector General, in a recent report, indicated that
Medicare HMOs overstated their anticipated administrative
costs in 1994, 1995 and 1996 by as much as $2 billion.
- The HHS Inspector General also recently reported that
payments to plans are inflated because they include traditional
Medicare's fraud and abuse costs, which managed care plans
should be able to avoid. The IG says inclusion of fraud and
abuse costs in plan payments will result in another $5 billion
in excess payment to plans in 2002, and another $10 billion in
- As described above, the payment methodology stipulated in
the BBA, in spite of its own budget neutrality provision,
results in total payments that exceed budget neutrality by $95
million in 1998 and $80 million in 1999.
- The BBA also did not allow us to adjust 1998 rates for errors
in projections upon which 1997 plan rates were based. Since
the 1997 rates were overstated by nearly 3 percent, the base for
all future M+C rates will be permanently overstated by 3
percent. The Congressional Budget Office says that, because
of this, Medicare will overpay plans about $8.7 billion over
the next five years, and $31 billion over the next 10 years.
Given such extensive evidence of overpayment, there can be no doubt
that what we are paying plans is adequate.
SERVICE AREA REDUCTIONS
We are concerned about the recent trend among plans to withdraw
from counties that have somewhat lower payment rates than adjacent
counties. As of September 30, 33 of the 347 risk plans currently in
Medicare had announced that they are not renewing their Medicare
contracts, affecting a total of 195,087 beneficiaries. Another 31 plans
are reducing service areas, affecting 43,729 beneficiaries. These
terminations and service area reductions affect 318 counties, and we
are working to help affected beneficiaries move into other plans
available to them. However, in 63 of these counties there are no other
Medicare HMOs, leaving 27,850 beneficiaries with no options other
than to go back to traditional Medicare. These plan business decisions
may cause significant disruptions to beneficiaries. While we are
working through our regional offices to help beneficiaries transition to
other plans or back to traditional Medicare, we are particularly
concerned about the impact on disabled beneficiaries and those who
have relied on prescription drug benefits that they may no longer be
able to receive.
These widely publicized withdrawals can be misleading, though. The
overall trend is for expansion, as more beneficiaries and more
counties will have managed care options in 1999 than in 1998. We
now have 48 new plan applications and 25 service area expansion
Average payment to plans nationwide is $471. Payment in counties
where plans are withdrawing averages $467.10 and ranges from the
floor payment of $379.84 to $795.35. Payment in counties where
withdrawing plans leave beneficiaries with no managed care options
averages $435.03 and ranges from the floor payment of $379.84 to
As stated above, we have given careful consideration to industry
suggestions that we reopen the process for determining plan premium
and benefit structures, and concluded that it would not be in the best
interests of beneficiaries. We have no assurances from plans that
reopening the process would result in reversals of any decisions to
reduce service areas or not renew contracts. We do know that such
revisions are likely to adversely affect the millions of enrollees
outside of the counties in question by reducing benefits and increasing
premiums and cost-sharing. We see little benefit in allowing almost
all HMOs to increase costs and decrease benefits to their Medicare
enrollees. Reopening the process for all the plans and plan options in
Medicare, which total more than 900, would require a rushed process
in which we would essentially be forced to rubber-stamp plan
proposals to increase costs or reduce benefits. This would be unfair to
beneficiaries and undermine the integrity of the process for
establishing premium and benefit packages. It also could pose
problems for our beneficiary education efforts this fall, since changes
could make materials describing plan benefits and costs that have
already been produced incorrect.
Furthermore, suggestions that payment rates may be inadequate
contradict abundant evidence that plans continue to be substantially
overpaid. Risk adjustment provisions have not yet been implemented
to address overpayments based on enrollee health. There is substantial
evidence that we have overpaid and continue to overpay plans,
including the Congressional Budget Office estimate that plans will be
overpaid $31 billion over the next 10 years because the BBA does not
allow adjustments for errors in the projections upon which 1997 plan
rates were based. Again, there can be no doubt that what we are
paying plans is adequate.
It is unfortunate that this question was raised at such a late date. We
are puzzled by the fact that cost trends that were included by plans in
their submissions to the Federal Employee Health Benefits Program
in late May were not included by the same plans in their submission
to us that same month. We would like to continue working with
Congress and the industry to discuss potential improvements in the
process for future years that would be allow us to produce accurate
and timely educational materials for the November open enrollment
We are making substantial progress in implementing the
Medicare+Choice regulation. We are responding to comments on our
regulations with changes that will help the industry participate
without compromising Congressional intent that Medicare promote
quality and be a prudent purchaser. We are disturbed by the spate of
withdrawals by plans from certain counties and are considering
options to ameliorate the disruption these business decisions by plans
cause beneficiaries. We are also concerned about the message sent to
beneficiaries about the reliability of managed care plans. However,
more plans continue to come into the program, more beneficiaries
continue to sign up, and growth overall should continue at a
substantial rate. I would be happy to answer any questions you might