Medicare managed care plans have been available since the 1970s, were paid on a capitated basis using the Adjusted Average Per Capita Cost [AAPCC] model. Managed care options were expanded in 1997 with the Balanced Budget Act, and the CMS developed a payment system that better reflects beneficiary health status with Hierarchical Condition Categories [HCCs] that has been phased in during the 2000s. The Medicare Modernization Act further expanded the available options and modified the way Medicare Advantage plans are paid.
Under Medicare Advantage, enrollees can choose from among five different types of health plan arrangements [Centers for Medicare and Medicaid Services 2006b]:
1. A health maintenance organization [HMO] that typically has a closed panel of providers but may have a point-of-service option.
2. A preferred provider organization [PPO] that typically allows enrollees to use nonplan providers for an extra copay.
3. A Private Fee-for-Service [PFFS] plan in which enrollees can typically go to any physician or hospital that agrees to accept the plan's payment terms.
4. A Medicare medical savings account [MSA], similar to a health savings account [HSA], in which the beneficiary has a high deductible and an HMO, PPO, or PFFS, together with an account into which Medicare deposits money.
5. A Special Needs Plan [SNP] designed for those who may live in a nursing home, are dually eligible for Medicaid, or who have specific chronic or disabling conditions.
The plans typically provide Part D drug coverage along with the other services they cover, although they are not required to do so.
Since the Medicare Modernization Act, Medicare Advantage plans now enter into a bidding process with Medicare. The CMS establishes a benchmark payment level per beneficiary in each county or region to provide the full range of Medicare Part A and Part B services. If the Medicare Advantage plan submits a bid below the benchmark, the CMS will keep 25% of the difference and rebate the other 75% back to the plan.
The plan must return this rebate to its Medicare subscribers in the form of additional services, lower copays, and/or lower Medicare Part B or Part D premiums. If the plan's bid is above the benchmark, it can charge the Medicare subscriber for the difference. In addition, once the plan enrolls subscribers, Medicare will adjust the actual payment for each based on the HCC methodology.
The Medicare Payment Advisory Commission reported that approximately 95% of Medicare Advantage plans provided bids that were below the benchmark. The average monthly rebates in 2006 averaged $80 for HMOs, $30 to $50 for PPOs [depending on whether they were regional or local], and $40 for PFFS plans. In 2006, Medicare Advantage plans used the largest proportion of their rebates to reduce Part A and Part B cost sharing, followed by the provision of additional benefits.
The Kaiser Family Foundation reported that the vast majority [95%] of Medicare Advantage enrollees in 2005 were enrolled in an HMO. PFFS plans had 1% of enrollment, and PPOs had the remainder. Medicare MSAs were not available until 2007.
Enrollment in Medicare managed care plans has varied widely over time and across the country. Enrollment peaked in 1998 with approximately 17% of beneficiaries enrolled; it declined to 11% in 2004 and had reached 13% by 2005 [Kaiser Family Foundation 2005].
The Kaiser Family Foundation further reported that enrollment projections varied widely, with the Department of Health and Human Services estimating that 30% of beneficiaries would be in a Medicare Advantage plan by 2013, while the Congressional Budget Office estimated that only 16% would do so.
Medicare Advantage is also a regionalized phenomenon. As of 2005, fewer than 1% of Medicare beneficiaries were enrolled in an HMO or PPO in 17 states, but at least 20% were enrolled in six states: Arizona, California, Colorado, Oregon, Pennsylvania, and Rhode Island. One-fourth of Medicare Advantage enrollees lived in California [Kaiser Family Foundation 2005].
Enrollment in Medicare Advantage obviously depends in part on an additional premium that may be assessed.
There has been no published work on this topic that incorporates the changes brought about by the Medicare Modernization Act. However, Atherly and colleagues used 1998 Medicare Current Beneficiary Survey data to examine the effects of extra Medicare Advantage premiums on plan choice. They found that a typical Medicare HMO would lose about .62%age points of market share with a $10 increase in its monthly premium. [The consumer perspective elasticity of plan choice was - 0.13, and the insurer perspective elasticity was - 4.57.] The study team also found that beneficiaries were responsive to plan characteristics, particularly having coverage for prescription drugs.
Thus, where the CMS sets the benchmark payment level and the ability of plans to provide prescription drug coverage appear to be key to how dramatically Medicare Advantage plan enrollment grows.
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