AHA Policy Forum

President Clinton's Plan to Reform Medicare

Overview
On June 29, 1999, President Clinton unveiled his Medicare reform plan. The plan has five key components: 1) application of private sector purchasing techniques to the traditional fee-for-service program; 2) interjection of price competition for Medicare managed care plans; 3) creation of a new prescription drug benefit; 4) establishment of a Medicare buy-in for workers between the ages of 55 and 62; and 5) reduction of Medicare trust fund outlays. It stretches the solvency of the Medicare program through a combination of spending reductions and program changes, and taps into the federal budget surplus.

There are four key concerns regarding the President's reform plan from the perspective of hospitals and health systems: 1) the plan's lack of detail raises more questions than it answers; 2) the plan does not make clear when a policy is mandatory and when it is voluntary for providers and beneficiaries; 3) the plan increases, to a disquieting level, the Health Care Financing Administration's (HCFA) authority over which providers or plans can participate in the Medicare program; and 4) the plan, in general, would pay providers less than the already too-low levels set by the Balanced Budget Act of 1997 (BBA). The President's reform plan claims to introduce new management techniques that, if properly implemented, can better coordinate care for Medicare beneficiaries.

The following is a detailed review of the President's plan.

Summary and Critical Questions and Issues

1. Modernizing Medicare Traditional Fee-for-Service

The proposal authorizes HCFA's use of contemporary private sector purchasing techniques. They include preferred provider networks, selective contracting, incentives to use centers of excellence, case management (primary care and disease management), care coordination for the dually eligible, competitive pricing for non-physician Part B services, negotiated rates, package pricing, and a demonstration of incentive payments to physician group practices. In general, however, there is an absence of practical information about how each technique would be employed under such a large program as Medicare fee-for-service (FFS). It is unclear whether beneficiaries and providers would be free to choose whether to participate in at least some (but not likely all) of the arrangements that HCFA would be authorized to use. Further detail is needed.

Critical Issues and Questions:

Which, if any, of these alternative payment methods would mandate beneficiary and/or provider participation? In authorizing these market-based techniques, it may be important to ensure that participation is always voluntary for both beneficiaries and providers. Given the size of the Medicare FFS program, beneficiaries and providers will need to be able to decline participation in approaches that are unworkable in their market, providing some check and balance on Medicare's market power. Without safeguards, the new market power granted the Medicare program could result in coercive behavior to drive down provider costs.

Medicare Preferred Provider Option (PPO): The proposal would allow Medicare to contract with preferred provider networks under the FFS program, and would provide incentives to beneficiaries to use network providers. It appears that the program would not develop its own network, but instead would establish relationships with organizations that have networks with a proven quality and utilization management track record. Provider incentives would be based on retention/expansion of market share and a promise of administrative "perks" such as faster claims payment.

Critical Issues and Questions:

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? And which types of organizations will it 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 they 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.

Centers of Excellence: HCFA would expand its current demonstration project on coronary artery bypass grafts (CABGs) to other high-volume procedures, including but not limited to other heart procedures, knee replacement surgery, and hip replacement surgery. A single, package price would be negotiated for the procedure or admission and all related services. Incentives would be used to draw beneficiaries to the centers. Providers would have to meet specific quality standards, but price seems to be the driving force in selection. HCFA intends to ensure program savings by requiring that the price not exceed what Medicare would otherwise have paid.

Critical Issues and Questions:

Are provider incentives sufficient to fund compliance with additional standards, given the arbitrary cap on negotiated rates?

The Medicare Participating Heart Bypass Center Demonstration and the Cataract Alternative Payment Demonstration involved negotiating all-inclusive prices covering physician and facility services and supplies for the respective procedures. The results of the CABG demonstration were mixed, with some centers improving market share and others not -- even though providers are theoretically receiving discounts in return for increased volume. Some savings for Medicare were attributed to the demonstrations.
As the number of procedures is expanded to include other widely performed procedures (e.g., hip replacements), there will be significant changes in where services are performed. This could make it difficult to maintain specific programs (e.g., orthopedics) if the high-volume procedures are pulled to designated centers or to maintain access to general hospital services in some communities if too many types of common procedures are pulled to designated centers. The outcome of this issue is likely to depend on the number of entities designated and the resulting concentration of access to a more limited group of providers.

Increased Authority for Different Payment Arrangements to Providers: HCFA would be given legislative authority to introduce new payment methods that are projected to result in payments that would be $25 billion lower than payments under current fee schedules.

Competitive pricing -- HCFA would create a bidding or negotiation process for selected non-physician Part B services and items, such as oxygen.
Improved negotiating authority -- HCFA would discount payments to providers or contract with providers with higher quality and lower utilization. In return, HCFA would provide administrative improvements such as simplifying claims processing, reducing accounts receivable, and alternative claims and cost settlement processes.
Bundled payments -- HCFA would contract for a single payment per case to combinations of practitioners, providers, and suppliers for all care delivered at one setting. For instance, all payments for the surgeon, anesthesiologist, and attending physician and the hospital payment would be combined and paid to one entity.
Bonus payments -- HCFA would offer bonus payments to qualifying group practices if they reduced excessive use and demonstrated improved medical outcomes.

Critical Issues and Questions

The new payment policies are untested with the exception of a more limited version of the bundled payment demonstration. In general, it is not clear how HCFA would identify appropriate providers or suppliers to contract with on a national scale. For instance, in the bundled payment arrangement, would the government contract with the hospital, the Physician Hospital Organization (PHO), or the physician group? How would solvency, quality, or other factors be assessed and evaluated by HCFA?
The new payment policies would have a substantial administrative cost. The HCFA administrative budget is already underfunded, so implementing these new policies would require moving administrative dollars from other functions. HCFA has been dealing with the current administrative shortfalls by slowing provider payments, offering less provider education, and cutting back on provider information assistance and the dissemination of policies.
The "improved negotiating authority" proposal is very broad and apparently unlimited. However, provider participation is voluntary. Providers may not be interested in participating because Medicare is still more timely and has better billing processes than other payers.
The competitive pricing policy, if implemented as in the durable medical equipment (DME) demonstration cited in the proposal, is not voluntary for either providers or beneficiaries. Moreover, competitive bidding for some services, such as laboratory work, would be opposed by hospitals and health systems.
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.

Care Management Initiatives: Modeled after private insurer and Medicaid initiatives, the President's plan would give Medicare the flexibility to use alternative payment methods under the FFS program that would require coordinating care for certain beneficiaries with specific health needs. Savings would be expected to result from reduced utilization. The major tools Medicare would adopt are primary care case management, disease management, and improved care coordination and information for Medicare-Medicaid dual eligibles.

Primary Care Case Management (PCCM): Medicare would selectively contract for PCCM services with primary care physicians meeting certain performance and other criteria. Physician case managers would be paid on a regular fee-for-service basis, but would also receive case management fees. Beneficiaries who voluntarily enroll would receive all their health care either directly from, or through referral by, their case manager. Beneficiary enrollment incentives could include such things as additional benefits or lower cost sharing. The Administration expects that the costs for these incentives would be offset by reductions in certain services, such as avoidable hospitalization.

Critical Issues and Questions:

What performance standards or other criteria would be used to select PCCMs?
What incentives would physicians have to reduce program use? Would participating physicians share in financial risk? If physicians are not placed at least at a minimum level of risk, it is unlikely that the program would generate the level of savings expected. If physicians bear too much risk, access to and quality of care could suffer.
Disease Management: The Secretary would have the authority to competitively pay qualified entities who provide (or subcontract to provide) disease management services targeted to certain high-cost health conditions -- such as congestive heart failure or diabetes. These special coordinated delivery systems would provide services including: patient screening and assessment, review of medications, patient education, telephone consultations, physician interaction, home nursing visits, surveillance, and reporting. Payment arrangements would be designed to achieve savings for the given diagnoses for participating beneficiaries. Beneficiary participation would be voluntary.

Critical Issues and Questions:

What incentive would there be for providers to participate?
vThe proposal notes that payment arrangements would be designed to achieve savings. What kind of payment arrangements would Medicare establish, and would payment levels be adequate?
Would the Medicare payment arrangements be adequate for health care systems that are already engaged in disease management programs, or would it only result in reduced reimbursement for existing programs?
Care coordination and improved information for Medicare-Medicaid dual eligibles: This part of the proposal is designed to test different care coordination models with respect to whether outcomes are improved and whether savings can be achieved. Provider groups (specifically including grass-roots organizations as well as larger health care organizations) could apply under the demonstration, but applicants would have to demonstrate agreement by their state to fully cooperate. The information campaign for dual eligibles would be designed to improve understanding about how the two programs relate.

Critical Issues and Questions:

Could the demonstrations also include approaches to condensing and reconciling federal and state administrative or regulatory requirements? Could they include rationalization of how the two benefit packages are knit together?

Eliminating All Preventive Services Cost Sharing: In order to address the underutilization of Medicare preventive services, the proposal would waive the Part B deductible and the 20 percent coinsurance rate for all Medicare covered preventive services for which cost sharing is not already waived under current law.

The Secretary would also launch a two-year, nationwide education campaign to promote the use of preventive health services for seniors and the disabled. This would include a public/private campaign to address the importance of preventive health care; distribution of comprehensive information on Medicare preventive benefits and the development of a health status assessment tool; and an education and awareness campaign to prevent falls. In addition, the U.S. Preventive Services Task Force would conduct a series of studies to identify effective new preventive interventions for seniors, and HCFA would launch a demonstration project on smoking cessation programs.

Clinical Laboratory Coinsurance: About 24 million Medicare beneficiaries used diagnostic laboratory services in 1997, at a rate of about 14 services per user and an annual cost of $200 per user. Beginning in 2002, all clinical laboratory services would be subject to a new 20 percent coinsurance. An exception would be made for lab services, which are also preventive services, such as Pap smears and colorectal cancer screening tests. This proposal is meant to reduce over-use and fraud and bring consistency to Part B cost-sharing requirements.

Critical Issues and Questions:

Since, in most cases, Medicare beneficiaries do not decide when to order laboratory tests, which tests to order, or where testing will be done, how would imposing copayment obligations on beneficiaries curtail utilization?
This proposal would result in laboratories producing two claims - one to the Medicare program and one to the beneficiary. To what extent would this proposal increase the administrative/billing costs of hospital-based laboratories? How will it impact hospital bad debt? What is the likely impact of such a cost increase on these laboratories?

2. Price Competition for Medicare Managed Care Plans

Competitive Defined Benefit Under Medicare+Choice (M+C). Beginning in 2003, capitated payments to M+C plans would shift from being based on the current administratively set price to one that is based on competitive prices for the basic benefit package. Additional benefits would be handled and priced separately, thereby shifting competition to price rather than benefits. An amount calculated to represent the average beneficiary's expenses under FFS, adjusted for geographic cost differences, would act as a benchmark for determining the federal premium contribution for each beneficiary. A beneficiary's choice of plan could require an additional premium for a high-cost plan, just the current Part B and the proposed Part D (prescription coverage) premiums for an average-priced plan, or reduced Part B premiums reflecting 75 percent of the savings generated by selecting a low-cost plan. Medicare would claim the other 25 percent of the savings, in addition to any savings that exceed the full premium for Part B.

This approach differs from the premium support proposal discussed by the National Bipartisan Commission on the Future of Medicare. It is described as a defined benefit. Beneficiaries would be able to stay in the FFS program without paying a Part A premium (standard Part B and Part D premiums would apply if those coverages were selected by the beneficiary). It sets the government's contribution toward seniors' health care coverage at 96 percent of the average FFS expense, not on the national weighted average price of plans (including Medicare FFS) used under the premium support approach. Consequently, Medicare can share in additional savings when beneficiaries choose lower-cost plans.

The proposal appears to eliminate "blended" national/county health plan payment rates, except for low-cost areas where they (and presumably the minimum floor) are retained as an inducement to offer plans in those areas. The proposal otherwise moves to an adjustment for the geographic cost differences that affect plan operations and costs. Payments would be risk adjusted consistent with HCFA's currently planned phase-in.

Critical Issues and Questions:

How will HCFA define "high" and "low" cost areas?
The proposal assumes that some plans will offer the current Medicare benefit package at less than what the government pays for that package of benefits. Is it realistic to assume plans could afford to do so to the degree needed to create beneficiary incentives given the tie to average fee-for-service per capita expenditures (constrained by the BBA) and the degree to which recent rates are resulting in decreased additional benefits and increased supplemental premiums under the Medicare+Choice program?

Medicare Disproportionate Share Hospitals (DSH) Payment under Medicare+Choice: Beginning in 2001, DSH payments associated with managed care enrollees would be removed from Medicare+Choice payments and would be paid directly to hospitals. This proposal would be budget neutral. When the competitive managed care system is implemented, DSH and graduate medical education would not be included in the calculation of the average traditional program costs used to set the federal government's share of the plan price.

Medigap Reforms: The proposal would make several changes. It would ensure that any beneficiary returning to Medicare FFS after being dropped by a terminating M+C plan would have guaranteed access to a Medigap policy, including outpatient drug coverage. It also asks the National Association of Insurance Commissioners and HHS to review and update the standardized Medigap benefit packages to include, for example, less first dollar coverage, outpatient drug benefits, and a low-cost catastrophic plan. It directs the HHS secretary to report to Congress on policy options for supplemental coverage, including the feasibility of a direct, federally offered, Medigap-like plan.

Critical Issues and Questions:

What effect would this proposal have on hospital bad debt payments? A push to avoid first dollar coverage could increase bad debt exposure, as would also be the case if insurers withdraw from the Medigap market. The Health Insurance Association of America and the Blue Cross and Blue Shield Association claim that these types of reforms would result in higher premiums or withdrawal from the market.

3. Prescription Drug Benefit

Currently, about 15 million, or 38 percent, of Medicare's 39 million elderly and disabled beneficiaries have no drug coverage at all. The balance has some level of coverage through retiree health benefits, Medigap policies, Medicare+Choice plans, or Medicaid.

The President's proposal would create a new Medicare "Part D" outpatient Medicare prescription drug benefit. Private sector benefit managers, who would negotiate lower drug prices for beneficiaries who voluntarily enroll, would administer the plan. Pharmacy benefit manager (PBM) companies, which evolved from insurance claim-processing and mail-order prescription companies, use purchasing techniques such as pharmacy networks, negotiated discounts and rebates, formularies, and on-line utilization review to enhance payers' ability to contend with pharmaceutical prices, physician prescribing practices, and rising drug expenditures.

The new drug benefit is estimated by the Administration to cost $118 billion over 10 years, beginning in 2002. Sixty percent of this cost would be financed through Medicare cuts and savings from competition efficiencies, and 40 percent (about $45.5 billion over 10 years) would be obtained through the surplus.

Benefit Design: The design features of the drug benefit include: no deductible; price discounts for drugs obtained through the private sector benefit manager's negotiations (discounts available even after the benefit limit is reached); beneficiary coinsurance set at 50 percent of the negotiated prescription price; and a benefit limit of $5,000 ($2,500 in Medicare payments) when fully implemented in 2008. The plan estimates that less than 10 percent of beneficiaries would exceed the fully implemented cap. The limit would be phased-in beginning at $2,000 ($1,000 in Medicare payments) for years 2002-2003; $3,000 for 2004-2005; and $4,000 for 2006-2007. In 2009 and beyond, the limit would be increased by the consumer price index (CPI). Drugs currently covered under Medicare Part A or B would remain under current arrangements and would not be counted against the Part D benefit limit.

All therapeutic classes of drugs would be covered, with the exception of those excluded under Medicaid (primarily over-the-counter drugs and drugs for cosmetic purposes). Although Medicare would establish no national formulary, private benefit managers would be permitted to establish formularies. Beneficiaries could obtain off-formulary drugs if medically necessary and would have basic appeal rights in the event that coverage is denied. Benefit managers would be able to establish utilization review programs and incentives for generic substitution.

Financing: Beneficiaries and government would equally split the cost of the Part D benefit. Beneficiaries would pay a premium set at 50 percent of the cost of the program, estimated at $24 per month in 2002, rising to $44 per month in 2008, when the benefit is fully phased in.

Enrollment: In general, beneficiaries would have a one-time opportunity to enroll for the drug benefit, in either the first year the benefit is offered (2002) or their first year of Medicare eligibility. Two exceptions apply: Beneficiaries who are covered by their employer while still working have a one-time opportunity to enroll after their retirement; and a one-time opportunity to enroll is provided if the beneficiary's former employer drops coverage of prescription drugs for all its retirees.

Management, Payments, and Beneficiary Protections: The benefit would be administered through competitively bid contracts with private sector entities such as pharmacy benefit managers, retail drug chains, health plans or insurers, states (through Medicaid), or multiple entities in collaboration. Beneficiaries in traditional fee-for-service Medicare would get their benefits through the private benefit manager serving their geographic area. Medicare+Choice plans would be required to provide a prescription drug benefit for all enrollees who have elected to participate in Part D, and the government would explicitly subsidize this coverage. All PBMs or other entities would be required to meet certain access, quality, and beneficiary protection standards established by the Secretary.

In order to mirror market practices and ensure participation by PBMs, Medicare would share only limited risk in its contracts. PBMs would be paid a fee for managing the benefit and would have some contractual incentives to control cost and utilization (e.g., bonuses, withholds). Drug prices would not be set by Medicare but would be determined through negotiations between the private benefit administrators and drug manufacturers.

Expanded Assistance for Low-Income Beneficiaries: Medicaid would pay for drug premiums and cost sharing for beneficiaries up to 100 percent of poverty, as in the qualified Medicare beneficiary (QMB) program, using each state's current Medicaid matching rate. States would also be obligated to offer expanded drug coverage for beneficiaries with incomes between 100 and 135 percent of poverty, with the federal government providing full assistance for drug premiums and cost sharing. Beneficiaries with incomes between 135 and 150 percent of poverty would pay a partial, sliding-scale premium based on their income.

Incentives to Develop and Retain Employer-Provided Retiree Drug Coverage: Medicare would provide a partial drug premium subsidy to employers whose retiree coverage is at least as good as the Medicare benefit. The Medicare contribution for each beneficiary would be 67 percent of the subsidy that it would otherwise provide for Medicare Part D enrollees, and would go to the health plan or PBM that administers an employer's drug benefit.

Critical Issues and Questions:

The proposal would give all beneficiaries coverage for prescription drugs. A more logical starting point would be to target the drug benefit to those most in need.
The benefit limit in the proposal does not protect against catastrophic costs for beneficiaries who have inordinately large drug expenses. Nor is it necessarily a good deal, due to premium and copay requirements, for the majority of beneficiaries with modest drug expenses. So, who will choose to enroll in Part D?
Once enrolled in Part D, can beneficiaries disenroll? If so, will adverse selection become a problem?
What impact would the Part D program have on enrollment in Medicare+Choice plans, employer-based coverage for retirees, and enrollment in Medigap plans?
How would hospital-based pharmacies fare under this proposal? What qualifications would pharmacies be required to meet in order to negotiate with PBMs? How would dispensing fees be determined and would these fees be adequate for hospital-based pharmacies?
What mechanisms would be established to control dramatically increasing drug costs for Part D? Is the government's plan to share only limited risk with PBMs adequate to keep costs in check? Would increasing costs of Part D over time lead inevitably to additional reductions in Medicare provider payments in the future?
There has been an increase in the number of PBMs that are owned by drug companies. These PBMs presumably have an incentive to influence the choice of drugs on the PBM formulary and their price. How will this trend affect cost and availability of drugs for Part D enrollees?

4. Medicare Buy-In

A Medicare buy-in would be available for people ages 62-64 without access to employer-sponsored insurance, who would pay both a base premium of about $300 per month and a marginal additional monthly payment once they enter Medicare at age 65 (estimated to be self-financing over time). It also would be available to workers between ages 55 and 62 without health coverage due to a job loss, who would pay the entire premium (about $400 per month). As adverse selection is likely for these displaced workers, some federal cost is expected.

Finally, the proposal would allow retirees whose employers dropped promised retiree health benefits to buy into their former employers' health plan through age 65 by extending the availability of COBRA coverage to these families. The premium would be comparable to that of other COBRA participants.

Critical Issues and Questions:

Are the financing components of the buy-in option for 62- to 64-year-olds (up-front monthly premium, back-loaded additional monthly premium once fully Medicare eligible) actuarially sound? Are claims that this provision is self-financing viable?
What level of adverse selection is likely for the displaced worker buy-in option? How will this impact the solvency of the Medicare program?
Does it make sense, from the perspective of the provider, to expand coverage into a program that currently pays below the cost of providing care?

5. Reducing Trust Fund Outlays

The solvency of the Trust Fund is addressed through a combination of reductions in spending through new policies and program changes and use of the federal budget surplus. Of great concern to providers are the reductions in the updates and cuts in capital payments. The plan proposes reductions in updates and capital payments of $44.7 billion from FY 2003 to FY 2009, with about 90 percent coming from payments to hospitals. In total, provider cuts, which include new payment policies such as competitive bidding, are $73 billion.

Payment Reductions

The update for urban hospitals would be reduced by 1.1 percentage points. The update for rural hospitals initially would be reduced by 0.5 percentage point with future reductions increased by of 0.1 percentage point each year until the update is reduced by 1.1 percentage points.
The inpatient capital payment would be reduced by 2.1 percent.
The PPS exempt update would be reduced and capital payments would be reduced by 15 percent.
The updates for ambulance, prosthetics and orthotics, hospice services, ambulatory surgery centers, laboratory services, durable medical equipment, and parenteral and enteral items would be reduced by 1 percentage point.

Reducing Unintended Consequences of the BBA

The President would set aside $7.5 billion in a quality assurance fund to resolve specific problems with beneficiary access to quality care. In addition, the President proposes the following policies:

Delay from FY 2001 to FY 2003 the extension of transfers from 10 DRGs

Policy Changes	FY 2000 to 2009 President's Reform Plan Estimates (billions)	FY 2000 to 2009 Congressional Budget Office Estimates (billions)
Changes in Fee-for-Service (Competitive bidding, etc.)	-$ 8	-$ 8.9
Competitive Bidding for Managed Care	-$25	-$ 3.5
Spending Cuts for Providers Reduce Hospital Update (Urban -1.1/Rural -.5)* Reduce Capital by 2.1 percent* Reduced Updates and Capital for TEFRA Reduce Ambulance, Orthotics, ASC, Lab, DME*	-$44.7 -$35 -$ 2 -$ 3 -$ 4.7	-$35.8 -$ ? -$ ? -$ ? -$ ?
Premium Offset	+$ 5.7	+$ 4
HMO/Medicaid Interactions	$ ?	-$15.2
Reducing Unintended Consequences of BBA Quality Assurance Fund Delay of Transfers to All DRGs by 2 Years Outpatient PPS Floors Potential Delay of Volume Expenditure Target Rural Hospital Reclassification Home Health Changes Direct Payments to DSH Hospitals	+$ 7.5 +$ 7.5 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0	+ $7.5 +$ 7.5 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Part D Drug Benefit	+$118	+$168.2
Beneficiary Changes in Fee-for-Service Elimination of Cost Sharing for Preventive Care Lab Copay and Index Part B Deductible	-$ 8 +$ 3 -$11	-$ 5.3 $ ? $ ?
Medicare Buy-In**	+$ 1.4 (over 5 years)	+$ ?

* American Hospital Association assumptions.
** All estimates are over 10 years except the Medicare buy-in estimate, which is over 5 years.