Competition in the Medicare Program
Presented to the
Chairman Roth, members of the Committee, thank you for the opportunity to comment on how changes in the Medicare program can improve access to services for rural beneficiaries. My testimony reflects the work of the Rural Health Panel of the Rural Policy Research Institute (RUPRI),1 and is consistent with the policy positions taken by the National Rural Health Association (NRHA). The specific words are my own.
I want to begin by commending this Committee and the authors of proposals to redesign the Medicare program. Improving Medicare to more fully achieve the goal of universal and meaningful insurance coverage for beneficiaries is an important goal for public policy. The sponsors of S. 1895, with leadership from Senators Breaux and Frist, are to be complimented for challenging current policy assumptions and forcing all of us to think of alternative possibilities. I want to extend a personal thanks to Nebraska Senators Kerrey and Hagel for their leadership in this debate. Regardless of what actions are taken, including the possibility of strengthening the Medicare program without structural change, we are now in the early stages of an incredibly important policy dialogue.
Any major changes in the Medicare program have to balance the need to keep the program fiscally sound with the policy goal of assuring our senior citizens (including ourselves) that health care services necessary to maintain an appropriate quality of life will be affordable and available. From a rural perspective, access to benefits and services must be comparable (not equivalent) to what is available to urban beneficiaries. Achieving comparability, or equity, is a constant struggle in Medicare policy, as evidenced in the debates surrounding the Balanced Budget Act of 1997 and the subsequent Refinement Act of 1999. Proposals to reform the program, including S. 1895 and the President’s proposal, will need to recognize the special problems inherent in assuring equity for rural beneficiaries, and to their credit, the authors of those proposals have recognized this imperative. This testimony is intended to strengthen those efforts, particularly in the context of the specific legislative proposal before you, S. 1895, and the President’s proposal included in the FY 2001 budget document.
Before turning to specific comments, I need to state an important caveat to this testimony. In focusing on impacts of proposals on rural beneficiaries, I am setting aside for now an equally important policy objective, assuring the fiscal health of the program. Modifications to address rural concerns will have little impact on aggregate expenditures in Medicare.
Affects on Beneficiaries
Medicare beneficiaries in rural areas are disadvantaged vis a vis most of their urban counterparts because there are very few managed care plans available to them. Despite the best efforts of Congress to level the playing field between urban and rural areas, prospects for rural beneficiaries have not brightened since the BBA of 1997, and in many places they have dimmed because of withdrawals of health plans from rural markets. Rural beneficiaries are not, in large numbers, benefiting from retirement plans that supplement Medicare benefits, with exceptions such as in the Bend, Oregon area. In short, if there is a prototypical Medicare beneficiary to keep in mind when trying to improve this program, that person lives in a rural community.
Medigap policies that defray the costs of deductibles and copayments in the Medicare program are more accessible to rural beneficiaries than policies that include a prescription drug benefit. Plans that would include a prescription drug benefit are quite expensive.
Aspirations to Improve
The Medicare Preservation and Improvement Act of 1999 (S. 1895) replaces the current fixed payments to Medicare+Choice plans with a system of allowing plans to set their own premiums and compete for beneficiary enrollment. There is an implicit assumption that multiple plans, some of which would parallel current managed care plans that offer expanded benefits at affordable prices, would be available to all beneficiaries. The experience of the Federal Employee Health Benefits Plan (FEHBP) demonstrates that there would be choices available in most areas, but the choices in rural areas would not include managed care plans. Remote areas such as Rushville, Nebraska have not attracted managed care plans, and in such places there may even be only one national insurer that includes local providers in its panel (BCBS Service Benefit Plan in Rushville). When a plan includes a community in its service area, but none of the local providers are included in its preferred provider panel, it is not a viable option for most elderly residents of the community. In brief, competition is not coming anytime soon to such areas.
In lieu of not having competition, S. 1895 does provide a “high option” benefit in all places by requiring that the new government-sponsored Medicare plan include both a basic benefit plan and an optional high option alternative that includes prescription drugs and a stop loss provision. Given how the premium payments are determined, this high option plan, in the future, could be costly to the beneficiaries. This possibility is recognized in the legislation and provisions are made to limit beneficiary liability when only the government-sponsored plan is offered in the local area. The difficulty with this assurance, though, is that it is void if only one other plan is offered in the area, even one that has no local physicians in its panel (for example the GEHA plan in Rushville with doctors more than 20 miles away).
The President’s proposal takes a similar approach, but in a context of savings for the beneficiary and the Medicare program. The savings assume competing health plans and beneficiary choices of low cost plans. Again, the experience of the FEHBP indicates this would not occur in rural areas.
In both S. 1895 and the President’s proposal, the presumption of competing plans lowering premium costs for the beneficiary is not likely to prevail in rural areas, at least not without other investment in the development of rural plans.
The two plans differ on the cost of prescription drugs, because the benefits set different annual limits; $800 initially in S. 1895 and $2,000 in the President’s proposal. However, the President’s proposal sets a monthly premium of $26 whereas S. 1895 allows for market determination of the premium and provides at least a 25% discount from that charge for beneficiaries. The President’s proposal also claims an ability to ensure beneficiaries a price discount on each prescription purchased.
If the assumption of competing plans lowering costs is true, and if the government-sponsored plan is unable to compete effectively, rural beneficiaries could eventually see increased out of pocket costs for premiums, for two reasons. First, unless the guarantee of 12% of the weighted national average premium is completely effective, beneficiaries will pay more for the government-sponsored plan. Second, since the premium for the core benefit plan is set as a single national premium, beneficiaries in low cost areas (rural) will be subsidizing those in high cost areas (urban).2 Neither scenario would exist if beneficiaries enrolled in competing local plans, but such is highly unlikely to occur in many rural areas.
S. 1895 includes a stop loss provision, set at $2,000 on core benefits (does not include prescription drugs, as that is a benefit in addition to the core). This would lessen the need to purchase additional insurance coverage and result in savings for the beneficiary.
Suggestions for Improving the Prospects for Choice Among Plans
1. Recognize the difficulties of establishing competing insurance plans with different benefits and premiums. The assurance to beneficiaries regarding personal liability for premiums should be based on presence of competing plans using local providers, not simply any competing plan.
2. Plans most likely to be responsive to the local needs and also likely to continue are those based in local areas (such as in Bend, Oregon and Rugby, South Dakota). Starting such plans has been difficult because of initial “spikes” in utilization by beneficiaries who had previously delayed some treatments (such as cataract surgery). A potential remedy is to invest in locally based plans by allowing for an initially higher government contribution that would phase out within 18 months.
3. The government-sponsored fee-for-service plan should vary premiums by region of the country rather than having a single national premium. This approach would be more consistent with allowing the new government plan to be more competitive within the service areas of other plans, and would have the effect of more accurately pricing premiums in rural areas.
Rural health care providers have spent the past 2 years trying to cope with the payment restrictions enacted in the BBA of 1997. They were granted some relief in the Refinement Act of 1999. The difficulties that arose as a result of changes in payment for inpatient care, outpatient care, home health, skilled nursing services, payment for bad debt, payment for cases transferred to other facilities, and hospice services are evidence of the fiscal fragility of many of our essential rural providers. Medicare payment policies have dealt with this reality through special payments and through classifying certain rural providers as distinct types of providers (such as Critical Access Hospitals) for the purposes of determining payment.
Rural providers have shown interest in the new options in the Medicare+Choice program, but there have been few takers for approaches such as provider sponsored organizations (PSOs). While new capitation payments may appear to be much higher than previous Medicare spending, especially in counties using the new “floor” payment, there are costs included in the Medicare+Choice options that were not paid through Medicare fee-for-service: developing and maintaining a cash reserve, providing benefits beyond the core benefits of the Medicare program, marketing health plans, administering health plans, handling member grievances, developing quality assurance programs, and calculating the premiums to charge beneficiaries. Given those expenses, combined with experiences of some rural health plans vis a vis initial service use by beneficiaries, the enthusiasm to develop locally based Medicare+Choice plans chilled quickly.
Changes in the New Proposals
Both S. 1895 and the President’s proposal would have private health plans determine payment to rural health care providers. Both also propose allowing the government-sponsored health plan to use purchasing strategies more commonly used by private health plans, including establishing preferred provider organizations and centers of excellence in the President’s proposal and use of pharmacy benefit managers in both proposals. S. 1895 would put the HCFA sponsored program at risk for offering all services within the price of its premium, creating an incentive for an aggressive business plan, which would require Congressional approval, to purchase services at the lowest possible price.
New, aggressive purchasing behavior by all health plans servicing Medicare beneficiaries could pose problems for delivery of services in rural areas, for the following reasons:
1. Provider panels may not include the local providers, forcing beneficiaries to travel further for primary care and other services and undermining the economic well being of local providers. Distances as close as 20 to 40 miles could create burdens when the elderly have difficulties securing transportation and when local terrain and climate make any travel difficult. Any further distance for routine services would be intolerable for most rural beneficiaries.
2. Providers included in a panel one year may not be included in the next. This could occur within a local community, or within a broader service area. For rural beneficiaries there is a greater likelihood of the latter.
3. Payment to providers may be reduced such that their financial future is threatened; health plans may have the “upper hand” in negotiations.
4. Current special payments and classifications of rural providers may not continue:
The President’s proposal creates additional risks for rural providers because it continues several of the “savings” from the BBA beyond their current time frame.
S. 1895 changes payment for health plans, which could be meaningful for rural providers and others who have considered developing plans to offer to rural beneficiaries. The legislation contains insufficient detail to assess the impact of the changes. In particular, the geographic adjustment based on the true costs of inputs could be beneficial to rural plans and hopefully therefore to providers, if it is an accurate reflection of differences that reduces current disparities and ends the effects of using an imperfect wage index in current payment formulas. The methodology for risk adjustment is also not specified in the legislation. The provision that high risk beneficiaries could be spread among health plans may not be a viable approach in rural areas where both the number of plans and the number of beneficiaries will be small. None of the plans may be able to absorb the costs of high risk beneficiaries, without additional payment.
Suggestions for Assuring Adequate Payment for Rural Providers
1. Health plans should be required to contract with local providers in remote rural areas, perhaps based on previous Medicare payments to those providers. A range of acceptable variation from historic Medicare payments could be established. Since the majority of costs are not incurred locally, this is an inexpensive assurance.
2. Health plans could be required to continue all current special payments and classifications affecting rural providers, or Medicare revenues could be used to pay special subsidies directly. Precedent for the latter approach is established in the S. 1895 provision to pay DSH payments separately.
3. The government-sponsored plan could be required to continue special payments, subsidized by the government and not reflected in health plan premiums. This levels the playing field among plans and provides for an option that could be promoted as keeping care local.
4. Government policy could set a minimum price structure below which no health plan would be able to negotiate payment to providers.
5. Medicare payment could be used to invest in locally-based health plans by offering bonus payments during the early months of enrollment of beneficiaries, offsetting the costs of initial utilization and assisting in developing reserves. The justification for doing so is that local plans are more likely to continue using local providers and contributing to the rural health infrastructure, and are more committed to service to the beneficiaries in the community.
Closing Comments: Much To Do
I have not addressed a number of specific questions that arise from a review of these proposals:
I described other details that will need to be addressed, including risk and geographic adjustments. And, as I said earlier, I have not addressed more general issues of concern. I want to close by pledging ongoing assistance from the Rural Health Panel of the Rural Policy Research Institute, and other rural health researchers and analysts, to this Committee as you continue considering changes to the Medicare program. Our Panel has worked extensively to examine the rural implications of Medicare+Choice, analysis of the effects of the BBA and now the BBRA, and changes in rural health care delivery related to changes in the health care marketplace. You can see some of our work on the web sites given on the title page of this testimony. Again, I commend the Committee’s effort to improve the Medicare program.
1“A Rural Perspective on Medicare Policy: An Initial Assessment of the Premium Support Approach.” P99-7. June 16, 1999. RUPRI Health Panel, Keith Mueller Principal Author. Available from RUPRI, U of Missouri, 200 Mumford Hall, Columbia, MO 65211; or in pdf format from http://www.rupri.org
2For detailed analysis supporting this argument, please see pages 7-8 of “A Rural Perspective on Medicare Policy: An Initial Assessment of the Premium Support Approach,” June 16, 1999, RUPRI Rural Health Panel, located in Programs, Rural Health Panel at the web site: http://www.rupri.org
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