Medicare Compliance & Reimbursement

Adding preferred provider organizations to Medicare, as the White House strongly advocates, won't significantly improve the program's long-term solvency, according to a Centers for Medicare & Medicaid Services actuarial projection released by the administration June 2. With PPOs operating in a competitive Medicare environment optimally suited to extracting savings, the program would save $22 billion over ten years, a savings CMS Administrator Tom Scully termed "marginal" at a June 2 press briefing.

Medicare as constructed under current law is expected to cost about $3.8 trillion dollars over the next decade. That means the projected savings from incorporating PPOs amount to about half a percent of spending and would extend program solvency by about three weeks. The administration released the analysis to head off the Congressional Budget Office's rumored conclusion that adding PPOs to Medicare actually will result in the program's spending more money over ten years. The CMS actuaries' analysis is based heavily on information gleaned from the young PPO demonstration project that began late last year.

To get even the marginal savings actuaries predict, the program would have to be "structured correctly," said Scully. "How you do it matters."

An ideally structured PPO program would limit health plan participation to three winning bidders per region, according to Scully. Limiting the number of winners would encourage plans to bid aggressively, thus producing the most savings for the program. Beneficiaries would share in the savings from choosing a more efficient plan, and the government would share risk with plans, thus allowing plans to bid more aggressively.

All plans in the demo have significantly higher administrative costs than does fee-for-service Medicare. Those with lower costs than FFS gain their savings from negotiating lower provider prices and controlling enrollee utilization.

Of the 31 plans in the demo, seven were deemed to cover too-small regions, suggesting that they might have cherry-picked service areas to ensure strong revenues. CMS analyzed adjusted community rating data from the 24 remaining plans, which all serve regions somewhat comparable in size to the large multistate areas that plans would serve under the administration's Medicare drug proposal.

The 24 plans were divided into three groups ranked by cost efficiency, with each group covering a roughly equal share of the total population. As proxies for the three winning plan bids in a Medicare PPO region under the Bush plan, actuaries took the weighted average efficiency of each of the three groups.

The most efficient group did 2.3 percent better than Medicare FFS. In other words, the most efficient plans have the potential to beat Medicare costs by 2.3 percent. The average efficiency group performed 0.7 percent worse than FFS, and the least efficient group had 4.6 percent lower efficiency than FFS.

Based on these bid proxies in a model system with three winning plans per region, and assuming that beneficiaries would take incentives to move to the most cost-efficient plans, the actuaries calculated the $22 billion in savings.

If little savings are to be had, should a PPO option be introduced at all? Scully says yes, for two main reasons. First, having a beneficiary get all of his or her coverage through a single PPO rather than from a hodgepodge of government coverage, a private drug-only plan, and a private Medicare supplemental plan - as would be true under some other Medicare drug plans on the table - is bound to deliver better medicine more efficiently.

Second, unlike government-run Medicare, private plans have the valuable freedom to pay different providers in the same region different prices for the same service, based on any number of criteria, Scully says.