Medicare Compliance & Reimbursement

Incentives will burn a hole in feds' pockets.

Medicare will spend as much as $60 billion over a decade to entice preferred provider organizations to offer coverage to 4 million new beneficiaries in areas that managed care plans don't currently serve, concluded the authors of a recent analysis.

An Aug. 23 Health Affairs article stated that under the terms of the Medicare Prescription Drug, Improvement, and Modernization Act, private insurance plans began submitting bids in June 2005 to the Centers for Medicare and Medicaid Services to provide coverage to new Medicare beneficiaries.
 
The study predicts that because PPOs will compete to serve Medicare beneficiaries on a regional basis, they will avoid competing with existing local Medicare HMOs.

Although MMA has the potential to work as intended, a key inconsistency in the legislation threatens the viability of plans in rural areas, potentially leaving little accomplished at great cost.
 
MMA requires new plans to participate in Medicare on a regional basis but permits existing HMOs to continue to operate locally (county by county).

As a result, established local HMOs will have a competitive advantage over new regional PPOs in the areas where these HMOs operate.

According to the analysis, regional PPOs will enter only 11 out of the 26 regions nationwide where they can make a profit. The unintended effect of the Medicare law is that PPOs will have to attract Medicare enrollees by offering a less costly, but less generous, benefit package, the report noted.

And by marketing less generous benefit packages, the PPOs will be able to take advantage of incentive payments that Medicare offers to plans that propose regional premiums under a benchmark set by competitive bids and average fee-for-service costs.

Though uneven application of regional bidding requirements will place the new PPOs at a competitive disadvantage relative to established HMOs, a little-noticed section of the regulations offsets this disadvantage and gives PPOs a strong incentive to bid in some regions. But costs to the taxpayer will be high - up to $1,600 for each enrollee.

The report suggests that the MMA's inconsistent approach to regional competition makes regional PPOs unsustainable in many areas without large overpayments (relative to local historical costs) from the Medicare Trust Funds. The report's authors question whether policymakers will actually maintain these overpayments once they understand their real cost.