Medicare Managed Care Before the BBA

Before the BBA, numerous studies by us, the Physician Payment Review Commission—which has been incorporated into the Medicare Payment Advisory Commission—HCFA, and others demonstrated that the Medicare program spent hundreds of millions more on beneficiaries enrolled in health plans than it would have spent if the same individuals had remained in traditional FFS Medicare.This occurred because Medicare payments were based on the estimated cost of FFS beneficiaries with average health and were not adequately adjusted to reflect the fact that plans tended to enroll beneficiaries in better-than-average health who had lower health care costs—a phenomenon known as favorable selection. Plans more frequently withdrew from counties they had entered more recently, where they had attracted fewer enrollees, or where they faced larger competitors. All affected enrollees have to choose a new plan (if a plan accepting new enrollees is available in their county) or switch to FFS. Plan withdrawals in both years disproportionately affect beneficiaries living in small urban, fringe, and rural counties.In 2000, approximately 65 percent of the 328,000 beneficiaries affected by the withdrawals lived in one of these types of counties even though these areas accounted for less than 33 percent of Medicare's managed care enrollees. A small number of plans accounted for a substantial portion of the affected enrollees in both years—the 10 largest withdrawing plans accounting for 45 percent in 2000 and 37 percent in 2001. (See tables 2 and 3.) 2.) However, Sterling Option I does not offer prescription drug coverage. The withdrawals in 2000 followed a pattern that is similar to the pattern of withdrawals in FEHBP, as well as the pattern we found in our prior analysis of the 1999 Medicare plan withdrawals.Nearly all of the plans that terminated their Medicare contracts for 2000 or reduced their service areas were relatively new entrants in their respective markets, had attracted few beneficiaries, or had only a small share of the local Medicare managed care market. The plan withdrawals for 2001 deviate somewhat from this pattern in that some older, more established plans are terminating. 3.) In 2001, for example, FEHBP plan withdrawals are expected to affect about 1 percent of enrollees, compared to Medicare+Choice withdrawals affecting 15 percent of enrollees. In 2000, Most Terminating Plans Were Recent Entrants With Relatively Low Enrollments; Pattern Less Evident in 2001

The vast majority of Medicare+Choice plans that terminated their Medicare contracts in 2000, as opposed to reducing the number of counties they served, were recent entrants into urban areas that already had substantial plan participation. 4.) 5.) However, since the BBA was enacted the increase in Medicare+Choice payment rates has exceeded the growth in per capita FFS spending. Moreover, although industry representatives have called for higher payment rates, the extent to which rate increases would affect plans' decisions to participate in Medicare is unclear. Relationship Between Payment Rates and Plan Withdrawals Difficult to Interpret

The effect of payment rates on Medicare+Choice plan participation is ambiguous. Because of contract terminations and service area reductions, by January 2001 more than 1.6 million beneficiaries will have had to switch to a different plan or the traditional fee-for-service program since 1999. In July 1999, HCFA provided us with a list of plans that had announced they were withdrawing from the program or reducing their service areas as of January 1, 2000, and the counties and number of enrollees affected.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed health care plans' withdrawal from the Medicare Choice program, focusing on the: (1) geographic distribution and the distribution among plans of enrollees affected by the recent plan withdrawals; (2) factors associated with plans that terminated or reduced their participation in the program; and (3) likely role of payment rates in affecting plans' decisions.

What GAO Found

GAO noted that: (1) of 309 plans serving Medicare beneficiaries at the end of 1999, 99 plans terminated their contracts or reduced the number of counties they served for the 2000 contract year, and 118 have announced they will terminate their contracts or reduce service areas for the 2001 contract year; (2) these withdrawals affected about 328,000 enrollees in 2000 and will affect almost 1 million enrollees in 2001; (3) the number of enrollees affected accounts for about 5 percent of Medicare Choice enrollees in 2000 and about 15 percent in 2001; (4) a disproportionate number of affected enrollees live outside of major urban areas; (5) a portion of these enrollees, approximately 79,000 in 2000 and 159,000 in 2001, will have no other Medicare managed care option available in their area and must either switch to a non-managed care option, if one is available in their area, or return to traditional fee-for-service (FFS) Medicare; (6) while a new private FFS plan has begun to offer services in many of the affected areas as an alternative to the traditional public FFS Health Care Financing Administration does not offer a prescription drug benefit; (7) in January 2000, Medicare Choice plans tended to withdraw from more difficult to serve rural counties or large urban areas that they had entered more recently or where they failed to attract sufficient enrollment; (8) in 2001, the trend is essentially the same for the service area reductions but somewhat different for the contract terminations, which involve some older, more established plans; (9) the pattern of Medicare Choice withdrawals shares common elements with plan participation in the similarly choice-based health insurance program for federal employees; (10) industry representatives contend that the Balanced Budget Act's (BBA) payment rate changes were too severe and that low Medicare payment rates are largely responsible for the plan withdrawals; (11) however, since the BBA was enacted, Medicare Choice payment rates have risen faster than per capita FFS spending; (12) in addition, many plans have attracted beneficiaries who have lower-than-average expected health care costs, while Medicare Choice payments are largely based on the expected cost of beneficiaries with average health care needs; and (13) it is unclear whether Medicare Choice payment rate increases would affect plans' participation decisions.