Medicare Compliance & Reimbursement

Revamp features Rx benefit, increased managed care presence and much, much more funding.

Congress Nov. 25 completed passage of the most dramatic overhaul of the Medicare program since its inception.

Under the terms of the legislation, which President George Bush is expected to sign, in 2004 seniors would get a discount drug card, which the Bush administration predicts will provide savings of 15 to 25 percent. A full-scale drug benefit would kick in on Jan. 1, 2006, as would a framework for preferred provider organizations to provide coverage in 10 to 50 regions across the country.

In addition to prescription drugs, the bill also revamps Medicare to give health plans a more significant role and includes a host of measures relating to provider reimbursement.

The Congressional Budget Office estimates that spending under the legislation, HR 1, would be nearly $410 billion over its first 10 years; with the effect of money-saving provisions included, the proposal would cost $15 billion less, bringing it in within the $400 billion provided for in the fiscal year 2003 budget resolution. The most notable savings - $13.3 billion - would come from charging seniors with higher incomes bigger premiums for Medicare Part B, which pays for physician and hospital outpatient services.

Compromise on Premium Support 

The conference agreement was made possible by a compromise on the issue of premium support, the House bill's head-to-head competition between private plans and traditional Medicare. When talks appeared to bog down, Senate Majority Leader Bill Frist (R-TN) and House Speaker Dennis Hastert (R-IL) stepped in and negotiated a compromise premium support demonstration program with Democratic Sens. Max Baucus (MT) and John Breaux (LA), the only two Democratic conferees conference chair Rep. Bill Thomas (R-CA) allowed to participate in conference deliberations.

The premium demonstration would run for six years, beginning in 2010, in up to six metropolitan statistical areas with at least 25 percent Medicare private plan penetration. Medicare would subsidize each beneficiary based on a benchmark composed of a combination of fee-for-service costs and plan bids, so that if plans bid lower than traditional Medicare, premiums could go up for beneficiaries who chose to remain with their FFS coverage.

Among other objections, Sen. Tom Daschle (D-SD), Ted Kennedy (D-MA), and many other Democrats see even a demonstration of premium support as the beginning of the end of Medicare's universal entitlement, arguing that such competition would entice younger and healthier seniors to join private plans, raising costs all the more for the older and sicker beneficiaries left in traditional Medicare.

Proponents of premium support respond that payments would be risk-adjusted. However, in a recent conference call sponsored by the liberal-leaning Center on Budget and Policy Priorities, Henry Aaron of the Brookings Institution - who first proposed the idea of premium support a decade ago but opposes its current incarnation in the Medicare bill - argued that current risk-adjustment techniques only account for a small fraction of the variation in health care costs.

Not all analysts are as pessimistic as Aaron about the ability of risk-adjustment techniques to prevent adverse selection. And in any case, the bill's demo contains some significant safeguards to protect particularly the most vulnerable beneficiaries against large cost increases. Premiums could not increase for beneficiaries with incomes below 150 percent of the federal poverty level, and premium changes for all other beneficiaries could not increase more than 5 percent each year as a result of the demonstration.

Moreover, quite a few opponents of premium support anticipate, and many supporters fear, that the demonstration would actually never occur. Earlier demonstrations of competitive bidding among Medicare managed care plans were scuttled when members of Congress from the affected areas - Baltimore, Denver, Phoenix, and Kansas City, MO - protested. And lo and behold, when the agreement on the new demonstration was announced, exactly the same sorts of objections surfaced.

Republicans Arlen Specter of Pennsylvania, Gordon Smith of Oregon, Ben Campbell and Wayne Allard of Colorado, and Jon Kyl of Arizona all protested the inclusion of their constituents in the program. The conference agreement even contains language, reportedly inserted as part of a successful effort to gain Kyl's support, instructing the Health and Human Services Secretary to favor areas for the new demo that were not selected for previous competition demos - even though the earlier demos never occurred.