Implications of President Clinton's Plan to Modernize the Traditional Fee-for-Service Medicare Program

Overview

In his Medicare Reform plan, President Clinton proposes to make the traditional, fee-for-service (FFS) Medicare program "more competitive and efficient" by authorizing the Health Care Financing Administration (HCFA) to "adopt best practices from the private sector to improve quality and constrain cost growth." Specifically, the President calls for establishing practices that:

• give beneficiaries incentives, such as reduced cost-sharing, to use providers who have agreed to accept discounted payments from Medicare;
• improve care for beneficiaries with chronic conditions through care management; and
• achieve savings by purchasing items and services through competition, selective contracting, and negotiated payment rates.

The Administration has been exploring the use of some of these "tools" for a number of years through demonstrations. Most of these proposals are not new; they have been proposed in Administration budgets and, for the most part, have been rejected by the Congress.

General Observation

Under the Clinton approach, HCFA would seek to use as leverage the considerable market share of the Medicare program to extract additional discounts from Medicare-administered prices. These proposals borrow from strategies used by private sector managed care plans to reduce utilization and purchase health care services at discounted rates. Unlike the federal government, however, private sector plans use negotiation because the plans do not have the authority to dictate prices.

The Clinton proposal rhetorically describes these proposals as improving quality of care. However, rewarding designated "high-quality" providers with lower payments seems counterintuitive. Furthermore, the Administration indicates that if Medicare program savings cannot be achieved, the arrangements would not be pursued.

These approaches require staff experienced in negotiation techniques and will impose significant additional administrative expenses at a time when HCFA already says it is underfunded. HCFA's limited experience with demonstrations of these approaches does not foster confidence in its ability to be successful. The agency has been able to implement only limited demonstrations with existing authority. In the past, the Congressional Budget Office has not attributed much in savings from any of these proposals, unless the proposal stated that if the negotiating was unsuccessful in obtaining savings, certain across-the-board cuts in Medicare prices would go into effect.

HCFA's authority to negotiate directly with providers in any of these proposals would bypass the regulatory process. Subsequently, it may be difficult to assess the impact of these policies or to intervene if problems develop.

Finally, it is essential that there be an element of fairness in public programs. Given HCFA's market share, the extent to which it is authorized to selectively contract with providers could cause large shifts in patient volumes among providers, resulting in the potential for significant financial losses, closures, and other changes in the delivery system. The financial losers would look to Congress for new protections. This is one of the reasons that Congress has not been eager to grant HCFA broad new authorities.

Summary/History/Implications

1. Medicare Preferred Provider Option (PPO)

   Medicare would establish Medicare PPO networks, but it is unclear whether these include existing networks. On the one hand the proposal states "rather than developing her own networks, the Secretary would contract with existing organizations with PPOs that demonstrate their ability to meet quality and utilization management standards." This implies the Secretary would pay organizations such as Blue Cross plans to "lease" their PPO networks. However, the proposal goes on to say that "practitioners' and providers' claims history and quality information would be assessed" and that "only those applicants with a demonstrated history of cost-effective medical practice patterns would be selected as preferred providers." This implies construction of a unique Medicare PPO network. Medicare PPO participating providers would be given "administrative advantages, such as faster claims payment and alternative administrative and related procedures."

   Beneficiaries would have an incentive to use the PPO because they would incur less cost-sharing and would "have a strong assurance about the quality of the provider." Providers would have to agree to charge less to beneficiaries in cost-sharing as well as offer Medicare a discount from Medicare payment rates in exchange for anticipated increases in patient volume resulting from designation as a network provider.

   History - The possibility of creating a Medicare PPO has been under consideration at HCFA for some time. Some demonstrations of physician-only PPOs were conducted in the early 1990s.

   Implications for beneficiaries, hospitals, and other providers - For such a proposal to result in savings to the Medicare program, providers would need to discount their rates and beneficiaries would have to select the PPO. There are a number of outstanding questions about the PPO proposal:

   • Entities (insurers, etc.) that "lease" their networks to Medicare would have to renegotiate their contracts with providers to include the Medicare discount. Some providers in their networks may not be willing to accept the discounted Medicare rates. To what extent, then, might the entity pressure providers to participate in Medicare as a condition for remaining in the network for their commercial business?
   • What happens to PPO contracted fees if Congress further reduces FFS Medicare payment rates?
   • Beneficiaries would theoretically have access to preferred providers with reduced out-of-pocket costs or Medigap premiums. Because the networks would not be nationwide, many Medicare beneficiaries, especially those in rural areas, would not have access to the lower cost-sharing advantages.
   • Given that most beneficiaries have secondary insurance to cover cost-sharing, would lower cost-sharing through the PPO attract beneficiaries? Would it attach only the sickest and relatively poorer beneficiaries?
   • How many preferred provider networks is HCFA going to work with? Will HCFA contract with only a few PPOs to maximize its market clout, or will it contract with a broader group of PPOs to encourage both choice and competition? If Medicare contracts with a few, savings will be insignificant. If Medicare contracts with many, providers will be less willing to participate because increased volume cannot be promised.
   • Which types of organizations will HCFA work with? Provider networks are often organized and operated by providers themselves, who then contract with health plans offering a PPO-type insurance product. It is unclear whether HCFA will be willing to contract directly with provider networks or whether it will concentrate on contracting with large insurers who already have PPO insurance products.
   • How is this option different from the PPO coordinated care plan option under Medicare+Choice? Presumably, this new proposal would follow the traditional PPO model in the private sector where providers agree to discounts and utilization review is conducted, but there is no gatekeeper or other "coordination" of care. The Medicare+Choice PPO option requires coordination of care and the assumption of full insurance risk for enrolled beneficiaries.
2. "Centers of Excellence" Program

   The President proposes to establish a Centers of Excellence (COE) program. Under this program, HCFA will designate some facilities as Centers of Excellence for procedures such as coronary artery bypass grafts (CABGs), cataract surgery, hip replacements, etc., if they meet certain quality criteria and if they are willing to accept global payment for all the hospital and physician care provided, at discounted rates. The proposal says facilities would be "competitively selected," implying that not all facilities in a community meeting the quality and price criteria could get the designation.

   Beneficiaries would not be required to receive services at COEs, but the law would allow COEs to provide incentives such as reduced cost-sharing, free private rooms, or paying for travel and lodging expenses to attract beneficiaries (incentives that other facilities cannot legally offer). COEs could also use the "Center of Excellence" imprimatur in marketing. Facilities would retain the COE designation for a three-year period, as long as they continued to meet these quality standards.

   History - The Centers of Excellence program grew out of two prior demonstrations implemented in 1991: the Medicare Participating Heart Bypass Center Demonstration and the Cataract Alternative Payment Demonstration. Both of these projects involved negotiating all-inclusive prices covering physician and facility services and supplies for the respective procedures. Although providers are theoretically receiving discounts in return for increased volume, the results of the CABG demonstration were mixed, with some centers improving market share and others not. Some savings for Medicare were attributed to the demonstrations.

   Implications for beneficiaries, hospitals and other providers - To receive the designation as a Center of Excellence, a facility not only has to meet certain quality criteria but also has to agree to global payments at discounted rates. The proposal raises several issues:

   • The COE designation may lead patients to conclude that facilities lacking the designation offer lower quality care, when in fact they may provide higher quality care but not agree to the discount. If two or more facilities in a community provide comparable quality and agree to similar discounts, it is not clear how HCFA would select the winning facility. It is also difficult to imagine that politics will not enter into the decision-making process, which would defeat the purpose of the Centers of Excellence approach.
   • Receiving the government's imprimatur as a COE may have implications for a provider's ability to contract with commercial plans and Medicaid as well as Medicare. In a worst-case scenario, designation as a COE could eliminate competition from other facilities in a community, with all the attendant consequences.
   • For hospitals, it might be difficult to maintain specific programs, such as orthopedics, if the high-volume procedures are pulled into the designated centers.
   • If too many procedures were pulled into the centers, the result might be a general inability to maintain services at other hospitals in the area.
   • Are provider incentives sufficient to fund compliance with additional standards, given the arbitrary cap on negotiated rates?
   • Once the initial COE contract period was over, a facility that was unwilling to accept the discounted rate would lose its designation, even if its quality remained the same or improved.
3. Competitive Bidding

   The Administration's proposal would authorize HCFA to use competitive bidding and price negotiations to set payment rates for Part B items and services (except for physician services). HCFA would select both the items and services, as well as the geographic areas, to be included in a bidding or negotiation process. Bids would be accepted only if providers/suppliers met specified quality and customer service standards. The process would not be a "winner take all for the best price" approach, but neither would all the current suppliers be retained. Rather, HCFA would selectively contract with providers who accept negotiated or bid prices (e.g., the average) and other contractual terms. In general, this approach is likely to be mandatory for all the suppliers in an area while the others, such as Centers of Excellence, are likely to be voluntary.

   History - The Balanced Budget Act of 1997 authorized HCFA to conduct demonstration projects of competitive procurement of Medicare Part B services and items. HCFA has discretion in determining the items and services. The demonstrations may be expanded to other geographic areas if they prove to generate savings with no effect on access, quality, or diversity of product selection. The authority expires on December 31, 2002. HCFA is in the process of implementing competitive pricing for five types of products in Polk County, Florida. The five categories are: oxygen and oxygen equipment, hospital beds and accessories, enteral nutrition products, urological supplies, and surgical dressings. HCFA recently announced that the bids will result in savings of between 13 percent and 31 percent on certain items. Winning bidders are to be announced in August, 1999.

   Implications for beneficiaries, hospitals and other providers - This proposal most directly affects suppliers, including hospitals currently operating as DME suppliers, of items such as durable medical equipment or oxygen covered under Part B. It could disrupt outpatient hospital and physician operations if items that are currently provided on site, such as crutches, take-home surgical dressings, or oxygen, must be obtained from other suppliers at another site.

   Moreover, previous Administration proposals have included such items as MRI tests and CAT scans as well as laboratory tests in the list of items that would be subject to competitive bidding. Thus, competitive bidding could have an even larger effect on providers to the extent that it limits or prohibits facilities from providing patient care services themselves.

4. Improved Negotiating Authority

   HCFA would be authorized to negotiate "alternative flexible administrative arrangements" with providers and suppliers who: (1) agree to provide price discounts to Medicare, and (2) demonstrate better performance and higher quality. The arrangements could include simplifying claims processing, reducing claims processing time, and alternative claims and cost settlement processing. These arrangements could be targeted to areas where there is market competition and discount arrangements are common.

   History - No known previous HCFA proposals.

   Implications for beneficiaries, hospitals and other providers - The "improved negotiating authority" proposal is very broad and apparently unlimited. Following are some questions about this proposal:

   • To the extent that favorable administrative arrangements are provided to providers who agree to discounts, do other providers experience less efficient handling of their claims?
   • Will any provider agreeing to a discount be eligible or would providers be selected based on a competitive process?
5. Bonus Payments for Physician Group Practices

   Large physician group practices would be offered bonus payments if they reduce excessive use and demonstrate positive medical outcomes for their Medicare patients. Qualifying organizations would be given an annual per capita target based on its own historical experience (e.g., average total Part A and Part B expenditures for the Medicare FFS beneficiaries seen by the practice in a base year). A bonus could be paid to the organization if actual total per capita expenditures are lower than the target. A portion of Medicare savings - separate from the bonus payment - could be set aside each year and paid based on process and outcome improvements. Medicare would expand the program nationwide if it proved successful.

   History - When Medicare implemented the resource-based relative value service (RBRVS) fee schedule with its update determined by volume targets, some group practices argued that they should be able to have their own targets and receive higher annual updates if they were successful in limiting the volume of physician services.

   Implications for beneficiaries, hospitals, and other providers - The concept has a number of serious flaws:

   • Providing financial incentives to physicians to reduce all Part A and Part B utilization, not only physician services, could result in patients being denied referrals for needed care or care in the most appropriate setting (e.g., more care might be moved out of the hospital outpatient department and into physicians' offices than would be appropriate).
   • Finally, HCFA has been very concerned with the issue of physician risk-sharing by managed care plans, yet would implement this provision with perhaps less direct oversight and appeals processes than exist in managed care.