Medicare Compliance & Reimbursement

The administration has put its weight behind a Medicare private-plan structure that would offer comprehensive coverage through three preferred provider plans per region.

The provision might be expected to please proponents of a private-market transformation for Medicare. However, a surprising number of Republicans and insurance-industry representatives criticize the White House's favored setup. Because the mechanism would permit only a limited number of the lowest-bidding health plans to enter Medicare, it would in fact constrain market forces and forfeit much of the value of health-plan competitive bidding, critics say.

But according to Centers for Medicare & Medicaid Services Administrator Tom Scully, that criticism misses the main point, which is to hold down costs.

Scully argued at a June 18 forum in Washington that a system in which a limited number of the lowest-bidding private health plans participate in Medicare would be one of the most efficient ways to accomplish significant cost cutting.

Case in point, he said: For four years Medicare overpaid hospitals by around $2 billion annually for so-called outlier cases. Traditional Medicare must wait for Congress to act or else pick its way through a hotly contested rulemaking process in order to fix something as damaging to the taxpayer's pocketbook as a provider-payment incentive that encourages inefficient utilization.

By contrast, no private insurer would leave such a situation unchanged for years, as long as it had sufficient market clout to bargain with providers for a more cost-efficient deal, he said.

But with Medicare providing about 50 percent of hospital revenues, insurers seldom have the market power to force efficiency improvements through tough contracting as quickly as they'd like, said Scully. Encouraging Medicare beneficiaries to enter a limited number of private health plans in each region would shift market clout to some big insurers, who could then use their greater nimbleness at seeing and remedying payment problems to head off high spending, he said.

Limiting participation to just three PPOs per region - rather than offering a place in the Medicare program to all plans that want to participate - would give each private player more market-share-moving clout, explained Scully. As an additional benefit, the three-plan approach also would force the big, desirable players, such as Blue Cross Blue Shield plans and Aetna, to bid low to ensure their places. "They won't want to lose all that volume if they don't go in," he said.