Medicare: The President's Reform Proposal
CRS Report for Congress
Medicare: The President’s Reform Proposal
Updated August 30, 1999
Jennifer O’Sullivan, Madeleine Smith, and Sibyl Tilson
Specialists in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
On June 29, 1999, President Clinton announced the President’s Plan to Modernize andst
Strengthen Medicare for the 21 Century. There was no accompanying legislation
incorporating the President’s proposal. Administration representatives indicated that they
expected to work with the Congress in drafting bill language.
The President’s plan contained several key components. It would establish a new optional
outpatient prescription drug benefit under a newly established Medicare Part D. It would
create a new competitive defined benefit (CDB) program that would change the way
Medicare+Choice managed care plans are paid. The plan would also make some benefit
modifications and provide for the modification and extension of certain policies incorporated
in the Balanced Budget Act of 1997 (BBA 97). Further, the proposal would incorporate a
number of changes in the traditional fee-for-service (FFS) program which are designed to
make the program more efficient. This report provides a summary of the President’s plan. It
will be updated as additional information becomes available.
Medicare: The President’s Reform Proposal
On June 29, 1999, President Clinton announced the President’s Plan to
Modernize and Strengthen Medicare for the 21 Century. On July 2, 1999, thest
White House issued a detailed description of this plan prepared by the National
Economic Council and the Domestic Policy Council. There was no accompanying
legislation incorporating the President’s proposal. Administration representatives
indicated that they expected to work with the Congress in drafting bill language.
The President’s plan contains several key components. It would establish a new
optional outpatient prescription drug benefit under a newly established Medicare Part
D. In general, all therapeutic classes of drugs would be covered. There would be no
Part D deductible. The plan would pay 50% of drug costs beginning with the first
prescription filled, up to a specified maximum. Beneficiaries would be liable for the
remaining 50%. The program would be phased in over the 2002-2008 period. In
2002, the federal government would pay up to a maximum of $1,000 per person per
year (accounting for the first $2,000 in spending). In 2008, it would pay up to $2,500
(accounting for $5,000 in spending). Beneficiaries would pay a premium equal to
The Administration estimates that the premium for 2002 would be $24 per month,
rising to $44 per month in 2008.
The President’s proposal would create a new competitive defined benefit (CDB)
program that would change the way Medicare+Choice managed care plans are paid.
Instead of receiving a fixed payment, and varying benefits so that payments equal
costs, the new program would fix benefits and allow costs to vary. Each plan would
determine its cost of providing coverage for a defined set of Medicare benefits,
including the subsidized prescription drug coverage. Medicare beneficiaries would
then select among plans based on cost and quality. Beneficiary premiums for Medicare
coverage could vary. If a beneficiary chose a managed care plan with a price lower
than average traditional Medicare costs (including the cost of drugs if the beneficiary
has elected coverage of drugs under the new Part D), the beneficiary's premium
obligation would be reduced. If the beneficiary chose a plan with a price that was
higher than traditional Medicare costs, the beneficiary's premium would be higher.
If a beneficiary chose a managed care plan with a price about equal to the average
traditional program costs, the beneficiary's current premium would remain unchanged.
The President’s plan would make a number of additional changes. It would make
some benefit modifications and provide for the modification and extension of certain
policies incorporated in the Balanced Budget Act of 1997 (BBA 97). Further, the
proposal would incorporate a number of changes in the traditional program which are
designed to make the program more efficient. According to the Administration, the
net 10-year (FY2000-FY2009) cost of its plan is $45.7 billion. CBO estimates the net
10-year cost at $111.1 billion. The major difference between the two estimates is the
cost of the prescription drug proposal; the Administration estimate is $118.8 billion;
the CBO estimate is $168.2 billion. This report provides a summary of the President’s
plan based on the July 2, 1999 document. It will be updated as additional information
about the President’s plan becomes available.
Introduction ................................................... 1
Medicare Benefit Expansions.......................................2
Prescription Drug Benefit.....................................2
Financing .............................................. 3
Enrollment ............................................. 3
Management, Payments, Beneficiary Protections................3
Assistance for Low Income................................4
Incentives to Retain Employer-Provided Drug Benefits...........4
Improving Preventive Benefits..................................5
Eliminating Preventive Services Cost-Sharing...................5
Information Campaign on Prevention.........................5
U.S. Preventive Services Task Force Study....................5
Demonstration of Smoking Cessation and Counseling............5
Changes in Cost-Sharing and Medigap............................5
Coinsurance for Clinical Laboratory Services...................5
Part B Deductible........................................6
Updating and Expanding Medigap Options.....................6
Report on Policy Options for Supplemental Coverage............6
Access to Medigap.......................................6
Medicare Buy-In for Certain People Ages 55-64....................7
Medicare Buy-In for Persons Ages 62-64......................7
Medicare Buy-In for Displaced Workers Ages 55-62.............7
Access to Coverage for Retirees Whose Employers
Competitive Defined Benefit.......................................7
Beneficiary Premiums Based on Choice of Managed Care Plan.........8
Government Payments Based on Plan Prices.......................9
Risk and Geographic Adjustment...........................10
Modification and Extension of Policies Incorporated in the Balanced Budget Act of
1997 (BBA 97)............................................11
Modifying Balanced Budget Act Policies.........................12
Quality Assurance Fund..................................12
Disproportionate Share Payments...........................13
Constraining Medicare Spending/Extend BBA Provisions............13
Hospitals ............................................. 13
Ambulance, Prosthetics and Orthotics, and Hospice Services......14
Ambulatory Surgical Centers..............................14
Clinical Laboratory Services, Durable Medical Equipment and Parenteral
and Enteral Items...................................14
Program Management Improvements................................15
Private Sector Purchasing and Quality Improvement Tools...........15
Promoting Use of High-Quality, Cost-effective Providers.........15
Information and Coordination of Care for Medicare/Medicaid Dual
Eligibles .......................................... 16
Purchasing Tools and Contracting Reform....................16
Changing Medicare’s Management Structure and Personnel Practices...17
Public/Private Advisory Boards............................17
Increasing Personnel Flexibility............................18
Extending Life of the Part A Trust Fund.........................18
Financing the Prescription Drug Benefit..........................18
List of Tables
Table 1. Example of Beneficiary Premiums and Government Payments .....10
Table 2. Comparison of the Administration’s and CBO’s 10-Year
Estimate of the President’s Reform Proposal......................19
Table A1. Example of Beneficiary Premiums and Government Payments ....23
Table A2. Example of Beneficiary Premiums and Government Payments in Low-Cost*
Table A3. Example of Beneficiary Premiums and Government Payments in High-Cost
Area .................................................... 24*
Medicare: The President’s Reform Proposal
Medicare is a nationwide health insurance program for 39 million aged and
disabled persons. Total program outlays in FY1999 are estimated at $216.1 billion;
net outlays (after deduction of beneficiary premiums) are estimated at $194.6 billion.
The program consists of two distinct parts - Part A (Hospital Insurance program) and
Part B (Supplementary Medical Insurance program). Part A is financed by payroll
taxes paid by current workers and their employers. Part B is financed by a
combination of monthly premiums levied on current beneficiaries and federal general
revenues; beneficiary premiums account for 25% of Part B costs.
Medicare Part A provides coverage for hospital services, post-hospital skilled
nursing facility services, and home health care. Part B provides coverage for
physicians services, laboratory services, durable medical equipment, and other medical
services. Benefits are generally provided under the “traditional Medicare” program
(sometimes known as “fee-for-service Medicare”). Under this program, beneficiaries
obtain covered services through the providers of their choice and Medicare makes
payments for each service rendered (i.e. fee-for-service). The amount of payment per
service is generally subject to certain limits. In recent years, the program has been
modified a number of times to expand the types of services paid on a prospective
rather than fee-for-service basis. Under a prospective payment methodology, a
predetermined payment is made for each episode of care, regardless of the scope and
mix of services used in each individual case.
Medicare beneficiaries (who are enrolled in both Parts A and B) may elect to
receive their Medicare services through a managed care arrangement under the
Medicare+Choice program, rather than through the “traditional Medicare” program.
Under Medicare+Choice (also known as Medicare Part C), beneficiaries voluntarily
enroll with an entity (typically a health maintenance organization) which has agreed
to assume the risk for providing all of Medicare’s covered services for each enrolled
beneficiary. In return, Medicare makes a monthly predetermined payment to the plan;
this predetermined payment is fixed and does not vary by the amount of resources
Over its 33-year history, Medicare has provided important protections for
millions of Americans. However, the program is facing a number of problems. One
of the most pressing concerns is the fact that Medicare’s financing structure will be
unable to sustain it in the long run. Many are also concerned that the program’s
structure, which in large measure reflects both the health care delivery system as well
as political considerations in effect at the time of enactment, has failed to keep pace
with the changes in the health system as a whole. A related concern is whether the
benefit’s structure adequately responds to the health care needs of today’s aged and
disabled populations. One of the most notable coverage gaps, is the absence of
coverage for most outpatient prescription drugs.
In response to these concerns, a number of observers have recommended
significant reforms to the current Medicare program. On June 29, 1999, President
Clinton announced the President’s Plan to Modernize and Strengthen Medicare for
the 21 Century. On July 2, 1999, the White House issued a detailed description ofst
this plan prepared by the National Economic Council and the Domestic Policy
Council. There is no legislation incorporating the President’s proposal.
Administration representatives have indicated that they expect to work with the
Congress in drafting bill language.
The President’s plan contains several key components. It would establish a new
prescription drug benefit and make a number of other benefit modifications. It would
also create a new competitive defined benefit program that would change the way
Medicare+Choice managed care plans are paid. It would provide for the modification
and extension of certain policies incorporated in the Balanced Budget Act of 1997
(BBA 97). Further, the proposal would incorporate a number of changes in the
traditional fee-for-service (FFS) program which are designed to make the program
more efficient. The following is a summary of the President’s plan based on the July
At the conclusion of this report are the cost estimates of the President’s proposal
made by the Administration and by the Congressional Budget Office (CBO).
According to the Administration, the net 10-year (FY2000-FY2009) cost of its plan
is $45.7 billion. CBO estimates the net 10-year cost at $111.1 billion. The major
difference between the two estimates is the cost of the prescription drug proposal.
The Administration estimate is $118.8 billion; the CBO estimate is $168.2 billion.
The proposal also includes a financing provision which is not linked to the
reform package. It would dedicate a portion of the budget surplus ($328 billion over
10 years) to Medicare solvency. The Administration estimates this would extend the
solvency of the Part A trust fund from 2015 to 2027.
Medicare Benefit Expansions
Prescription Drug Benefit1
Benefit Design. Medicare currently has a very limited outpatient prescription
drug benefit. The proposal would establish a new optional outpatient prescription
drug benefit under a newly established Part D. In general, all therapeutic classes of
drugs would be covered. (Drugs currently covered under Part B would continue to
be paid under the Part B program.) There would be no Part D deductible. The plan
For further discussion of this issue, see: CRS Report RL30147, Medicare: Prescription1
Drug Coverage for Beneficiaries, by Jennifer O’Sullivan, and CRS Report RL30250,
Medicare: Prescription Drug Proposals, by Jennifer O’Sullivan.
would pay 50% of drug costs beginning with the first prescription filled, up to a
specified maximum. Beneficiaries would be liable for the remaining 50%.
The program would be phased in over the 2002-2008 period. In 2002 and
2003, the federal government would pay up to a maximum of $1,000 per person per
year (accounting for the first $2,000 in spending). In 2004 and 2005, the government
would pay up to $1,500 (accounting for $3,000 in spending). In 2006 and 2007, it
would pay up to $2,000 (accounting for $4,000 in spending). In 2008, it would pay
up to $2,500 (accounting for $5,000 in spending). Beginning in 2009, the limit would
be increased by the increase in the consumer price index. The Administration
estimates that 90% of beneficiaries would not reach the cap when the program was
Financing. Beneficiaries would pay a premium equal to 50% of program costs;
the remaining 50% would be paid by the federal government. The Administration
estimates that the premium for 2002 would be $24 per month, rising to $44 per month
in 2008. CBO, which has estimated a higher overall cost for the drug benefit
estimates that the monthly premium would be $25.20 per month in 2002, rising to
$52.90 per month in 2008. Premiums would be collected in the same way as Part B
premiums; for most persons this is a deduction from monthly social security checks.
Enrollment. Coverage would be extended to all persons, otherwise eligible for
Medicare, who enroll in Part D. Persons would only have one chance to enroll. For
current beneficiaries, there would be an open enrollment period for the first year the
program is in effect (2002). For other persons, the enrollment opportunity would
generally occur when an individual first becomes eligible for Medicare. There would
be two exceptions. Beneficiaries who are covered by their employer while still
working (or by an employer of a working spouse) would have a one-time enrollment
opportunity after retirement (or after retirement or death of the working spouse).
Beneficiaries covered under a retiree health plan would have a one-time enrollment
opportunity if the former employer drops retiree drug coverage.
Management, Payments, Beneficiary Protections. The Secretary would
contract with private entities who would competitively bid to administer the new drug
benefit in a geographic region; only one contract would be awarded in each region.
Entities that could compete for the contract include pharmacy benefit managers
(PBMs), retail drug chains, health plans or insurers, states (through mechanisms
established for Medicaid) or multiple entities in collaboration (such as alliances of
pharmacies) provided the collaboration is not anti-competitive. The entity
administering a benefit for an area would negotiate prices, process claims, and
implement drug utilization review programs. All PBMs or similar entities would be
required to meet access and quality standards established by the Secretary.
Under the proposal, Medicare would not set prices for drugs. Prices would be
determined through negotiations between the benefit managers for an area and drug
manufacturers. It is expected that this process would result in discounts. The proposal
would require that beneficiaries would continue to have access to prices established
by the benefit manager even after they had exceeded the cap.
Benefit managers could use various cost containment tools in administering the
program, subject to limitations and guidelines set in the contract. They would be
permitted to use formularies; these are lists of drugs preferred by a plan’s sponsor, in
part on the basis of costs. However, beneficiaries would be guaranteed access to off-
formulary drugs when medically necessary and have appeal rights when coverage was
denied. Private benefit managers would also be authorized to create appropriate
incentives for generic substitution.
Benefit managers would be required to enter into contracts with pharmacies that
meet a set of qualifications, including having necessary information systems to process
electronic point-of-sale transactions and create utilization records. Negotiated
dispensing fees would have to be high enough to assure participation by most
The government rather than the benefit manager would bear most of the risk for
cost and utilization of services under the benefit. The benefit manager would be paid
a fee for managing the benefit, and would have some contractual incentives to control
costs and utilization.
Enrollees in managed care plans would receive their benefit through the
Medicare+Choice plans; for the first time these plans would be paid directly for
providing drug coverage.
Assistance for Low Income. Under current law, Medicare beneficiaries with
incomes below 100% of poverty have their Medicare cost-sharing and Part B
premium charges paid by the Medicaid program (with the federal and state
governments sharing in the costs). These persons are known as Qualified Medicare
Beneficiaries (QMBs). Persons with incomes between 100% and 120% of poverty
have their Part B premium charges paid by Medicaid under the Specified Low-Income
Medicare Beneficiary (SLIMB) program. In certain cases, persons below 135% of
poverty can qualify for payment of their Part B premiums. Some of these persons
may also be entitled to full Medicaid coverage; all states provide prescription drug
coverage to persons entitled to full Medicaid benefits. Medicaid prescription drug
coverage is not available for the QMB-only or SLIMB-only populations.
The proposal would make available Part D protection for all beneficiaries,
including the low income. Medicare would therefore pick up some costs currently
paid by Medicaid. Under the proposal, Medicaid would pay the Part D drug
premiums and cost sharing charges for beneficiaries up to 100% of poverty, using the
current federal/state matching rate. Beneficiaries with incomes between 100% and
135% of poverty would have their Part D cost sharing and premium charges paid
of poverty would pay a partial sliding scale premium based on income; full federal
funding would be provided for the remaining cost sharing.
Incentives to Retain Employer-Provided Drug Benefits. The proposal would
provide a partial drug premium subsidy to employers whose retiree health coverage
for drugs is at least as good as the Part D benefit. The subsidy would equal 67% of
the amount that would otherwise be provided to the private benefit manager for
Medicare Part D enrollees. The Health Care Financing Administration (HCFA, the
agency that administers Medicare) would make these premium subsidy payments to
the health plan or PBM used by the employer.
Improving Preventive Benefits
Eliminating Preventive Services Cost-Sharing. Most services covered under
Medicare Part B are subject to a $100 deductible and 20% coinsurance. Some
preventive services are exempt from either or both of these requirements. The
proposal would extend the waiver of the Part B deductible and 20% coinsurance to
all preventive services. Therefore, the deductible would be waived for: hepatitis B
vaccinations, colorectal cancer screening, bone mass measurements, prostate cancer
screening and diabetes self-management benefits. Coinsurance would be waived for
screening mammography, pelvic examinations, hepatitis B vaccinations, colorectal
cancer screening, bone mass measurements, prostate cancer screening and diabetes
Information Campaign on Prevention. The proposal would provide for the
DHHS to launch a 2-year nationwide education campaign beginning in 2001 to
promote the preventive use of health services by older Americans and people with
disabilities. The campaign would consist of three parts. First, the public and private
sector would combine public service and print media campaigns to educate all
Americans 50 and over and disabled persons about the importance of preventive care.
Second, the campaign would provide Medicare beneficiaries with information about
the importance of using Medicare’s preventive benefits. This would be done in
several ways including distributing comprehensive information to all beneficiaries and
developing a health status self-assessment tool for beneficiaries. Third, DHHS would
launch a campaign to prevent falls in the elderly in order to reduce the incidence of
U.S. Preventive Services Task Force Study. The proposal would require the
Secretary of DHHS to direct the U.S. Preventive Services Task Force to conduct a
series of new studies. These studies would identify preventive interventions that can
be safely delivered in the primary care setting that are most valuable to older
Demonstration of Smoking Cessation and Counseling. HCFA would launch
a demonstration project to evaluate the most successful and cost-effective means of
providing smoking cessation services to beneficiaries.
Changes in Cost-Sharing and Medigap
Coinsurance for Clinical Laboratory Services. As noted above, most services
covered under Medicare Part B are subject to a $100 deductible and 20%
coinsurance. However, there are no cost-sharing charges for clinical laboratory
services. The proposal would apply the 20% coinsurance requirement to all clinical
laboratory services except those which are also preventive services (e.g., pap smears).
The requirement would apply beginning in 2002.
Part B Deductible. The Part B deductible is $100. When the program began
in 1965, the deductible was $50. It was raised to $60 in 1973, $75 in 1982, and $100
in 1991. The proposal would provide for an annual inflation adjustment beginning in
Updating and Expanding Medigap Options. Beneficiaries can obtain private
insurance to supplement Medicare’s benefits; these individually purchased policies are
known as “Medigap.” Beneficiaries with Medigap insurance typically have coverage
for Medicare’s deductibles and coinsurance; they may also have coverage for some
items and services not covered by Medicare. Individuals generally select from 1 of
10 standardized plans (known as “Plan A” through “Plan J”), though not all 10 plans
are offered in all states. Only 3 of the 10 plans (Plans H, I and J) offer some coverage
for prescription drugs. BBA 97 added two high deductible plans to the list of 10
standard plans. With the exception of the high deductible feature, the benefit package
under the high deductible plan will be the same as Plan F or Plan J.2
The proposal would request the National Association of Insurance
Commissioners (NAIC) to create a Medigap plan option which would make
beneficiaries themselves (rather than Medigap) liable for some of Medicare’s cost-
sharing charges; at the same time the policy would protect them against catastrophic
costs. The proposal would also authorize a review of the 10 standardized policies;
particularly the drug benefit provisions.
Report on Policy Options for Supplemental Coverage. The proposal would
require the Secretary to prepare a detailed report to Congress on policy options for
improving supplemental coverage.
Access to Medigap. The proposal would improve access to Medigap policies
(1)Open Enrollment for the Aged and Disabled. Current law establishes an
open enrollment period for the aged. All Medigap insurers are required to
offer open enrollment for 6 months from the date a person first enrolls in
Part B (generally when an individual turns 65). There is no guaranteed open
enrollment period for the non-aged disabled population. The proposal
would extend the 6-month guaranteed open enrollment requirement to new
disabled and end stage renal disease (ESRD) beneficiaries.
(2)Special Open Enrollment Period for Certain Beneficiaries. BBA 97
provided a 63-day open enrollment period for beneficiaries in managed care
plans that terminate their Medicare contracts or reduce their service areas.
Application of the open enrollment period was first triggered in January
1999; however, not all insurers were able to provide the necessary
information to beneficiaries. The proposal would establish a special 90-day
open enrollment period for persons who were affected by the January 1,
For a further discussion of Medigap see: CRS Report RL30094, Medicare: Supplementary2
“Medigap” Coverage, by Jennifer O’Sullivan.
(3)Expanding Choice of Medigap Plans During Special Enrollment Periods.
BBA 97 established special open enrollment periods for Medigap under
certain circumstances (including cases where the enrollee’s managed care
plan terminates the contract). Beneficiaries in these situations are
guaranteed enrollment only in plans “A,” “B,” “C,” and “F;” none of these
offers prescription drug coverage. The proposal would expand the
requirement to include access to all Medigap options.
(4)Increase in Penalty for Violation of Open Enrollment Requirement.
Currently, issuers who violate the open enrollment requirement are subject
to a civil monetary penalty (CMP) of $5,000 for each violation. The
proposal would increase the amount to $50,000 plus $5,000 per day per
Medicare Buy-In for Certain People Ages 55-64
Medicare Buy-In for Persons Ages 62-64. Medicare coverage is currently
limited to persons who are age 65 and over and persons who are permanently and
totally disabled. The proposal would permit persons ages 62-64 (without access to
employer-sponsored insurance) to buy into Medicare. They would pay for this early
coverage in part during the period they were receiving the early coverage and in part
after they turned age 65. Individuals would pay a base premium during the time they
received early coverage prior to age 65. This premium is estimated at $300 per
month. When they turned age 65 they would no longer pay the base premium. They
would, however, pay a premium estimated at $10 to $20 per month for each year of
early participation. This premium would be added to the regular Part B premium
(which is currently $45.50 per month).
Medicare Buy-In for Displaced Workers Ages 55-62. The proposal would
offer coverage to persons who involuntarily lose their jobs and health care coverage.
Individuals choosing this option would be required to pay the full premium at the time
they were receiving early coverage.
Access to Coverage for Retirees Whose Employers Terminate Coverage.
The proposal would permit retirees age 55 and older whose employers terminate
health insurance coverage to extend COBRA coverage until the Medicare eligibility
age of 65. (The COBRA law requires employers to allow certain former employees
to buy into the employer-sponsored health plan for up to 36 months.)
Competitive Defined Benefit
Most Medicare beneficiaries obtain covered health services through the original
FFS program (also known as “traditional Medicare”). Under the FFS program,
beneficiaries obtain covered services through providers of their choice and Medicare
pays for each service or package of services rendered. Some Medicare beneficiaries
elect to obtain their Medicare services through a managed care arrangement (such as
a health maintenance organization) instead of through the FFS program. Managed
care arrangements providing services to Medicare beneficiaries are known as
Medicare+Choice plans. These plans receive a monthly capitation payment from
Medicare; in return they have agreed to assume the risk for paying for all of
Medicare’s covered services for each enrolled beneficiary.
The Administration proposal would create a new competitive defined benefit
(CDB) program that would change the way Medicare+Choice (M+C) plans are paid.
Under the current M+C program, plans receive payments that are based on a formula
contained in BBA 97. Payments are set by county, and equal the maximum of a floor
amount, a minimum update amount, or a blended amount, subject to a budget
neutrality provision. If the M+C payment rate exceeds the plan's estimated costs of
providing Medicare covered services to enrollees, the plan must increase benefits or
decrease cost-sharing to cover the difference.3
The CDB program would alter the payment mechanism to inject price and
quality competition among managed care plans into Medicare. Instead of receiving
a fixed payment, and varying benefits so that payments equal costs, the new program
would fix benefits and allow costs to vary. Each plan would determine its cost of
providing coverage for a defined set of Medicare benefits, including the subsidized
prescription drug coverage (described above). Medicare beneficiaries would then
select among plans based on cost and quality. Beneficiaries would have the option
to choose plans that can offer coverage with no or a lower premium than the
traditional Part B premium. According to the Administration, the CDB program
would help make beneficiaries more price sensitive, and would encourage them to
choose the highest quality, most efficient health plan option that suits their needs.
Beneficiaries would select plans during an open enrollment period each year.
Note that government payments to medical savings account (MSA) plans and private
FFS plans would remain the same as under current law for the first few years of the
Beneficiary Premiums Based on Choice of Managed Care Plan
Currently, all Medicare beneficiaries, including those who enroll in M+C plans,
pay the same Part B premium. Under the CDB program that would be effective in
2003, beneficiary premiums for Medicare coverage could vary. If a beneficiary chose
a managed care plan with a price lower than average traditional Medicare costs
(including the cost of drugs if the beneficiary has elected coverage of drugs under the
new Part D), the beneficiary's Part B premium would be reduced. If the beneficiary
chose a plan with a price that was higher than traditional Medicare costs, the
beneficiary's Part B premium would be higher. If a beneficiary chose a managed care
plan with a price about equal to the average traditional program costs, the
beneficiary's Part B premium would remain unchanged. Beneficiaries choosing to stay
in traditional Medicare would pay their Part B premium as they do under current law.
For a discussion of the method used to calculate M+C payment rates, see CRS Report 97-3
859 EPW. Medicare: Payments to HMOs and Other Private Plans Under the
Medicare+Choice Program, by Madeleine Smith.
Assuming a beneficiary opts for managed care, the amount he or she pays in Part
B premiums would depend on the plan's price relative to the costs of traditional
Medicare. The Part D premium for prescription drugs would also be included in this
calculation for participating beneficiaries. Beneficiaries choosing a managed care plan4
with a price equal to 96% of traditional Medicare would pay the same, current law
Part B premium (and Part D premium if applicable). Beneficiaries choosing a plan
that is more costly than 96% of traditional Medicare would pay the Part B premium
plus the full amount of the difference between the plan's price and 96% of the costs
of traditional Medicare. Beneficiaries choosing a plan that is less costly than 96% of
traditional Medicare could keep 75% of the savings; the government would retain the
remaining 25%. The Administration estimates that beneficiaries choosing a plan that
is at or below about 80% of the costs of traditional Medicare would pay no Part B
premium. It should be noted that the beneficiary premium is affected by a geographic
adjustment as discussed below.
Government Payments Based on Plan Prices
Government payments to managed care plans would be determined in two steps.
First, private plans meeting Medicare participation criteria would bid on Medicare's
defined set of benefits, including the new prescription drug and prevention benefits.
Plans could alter slightly the defined benefits. They could reduce or eliminate cost
sharing for Medicare benefits, so long as the value of this reduction does not exceed
10% of the value of the defined Medicare benefits package. They could offer
supplemental benefits and charge an additional supplemental premium for these
benefits, as is permitted under M+C today. While this practice could continue, the
supplements would not count towards the price used to establish the government
payment, and thus would not be subsidized.
Second, the plan price would be compared to the cost of traditional Medicare
for an average beneficiary. The government payment level would reach its maximum
for a plan whose price is equal to 96% of the cost of traditional Medicare. The
government contribution would stay at this maximum for plans with prices equal to
or greater than 96% of the cost of traditional Medicare. For plans with costs below
96% of traditional Medicare, the government payment would be reduced, by 25% of
the difference between the cost of the plan and 96% of the costs of traditional
The government's contribution would vary as a percent of total plan price. For
plans whose price is below about 80% of the costs of traditional Medicare, the
government would pay 100% of the price, and beneficiaries would pay nothing to
enroll in the plan. For plans whose price falls between 80% and 96% of the costs of
traditional Medicare, the dollar amount of the government contribution would
Under current law, managed care plans would receive about 96% of traditional Medicare4
costs in 2003. This 4% discount is based on the traditional 5% reduction for managed care
savings, the mandatory reductions in the national M+C growth percentage of -.008 percentage
points in 1998 and -.05 percentage points each year from 1999 through 2002, and an
approximate 4% increase due to lack of re-adjustment for overestimation of cost increases for
increase as plan prices increase, but the government contribution would fall as a
percent of the total price; beneficiary premiums would increase as well. The
government contribution would be capped for plans whose prices are at or above 96%
of the costs of traditional Medicare. Increased beneficiary premiums would fund the
difference between plan price and 96% of traditional Medicare costs for these high-
cost plans. For these higher cost plans, the percent of the price funded by the
government would fall as plan prices rise.
Table 1 illustrates beneficiary and government payments for managed care and
FFS plans in an area with costs comparable to those nationwide. In this example,
beneficiaries who enroll in the FFS plan pay the Part B premium ($720, or 12% of
total costs) and the government pays the remainder ($5,280). Beneficiaries who5
select a managed care plan with a total cost that is equal to 96% of the FFS costs
($5,760) would also pay the Part B premium of $720; the government would pay the
remainder ($5,040). Beneficiaries who elect managed care plans with total costs
below $5,760 would pay lower Part B premiums, and the government contribution
would be lower than $5,040. Those in managed care plans with total costs above
$5,760 would pay Part B premiums above $720, but the government contribution
would remain at the cap of $5,040. Note that under this program, beneficiaries
enrolling in a managed care plan with costs of $5,900, which are lower than FFS
costs, would pay $860 in Part B premiums, which are higher than the FFS Part B
premium. This result stems from the 4% government discount built into the payment
structure and the cap on government contributions (i.e., $5,040 in Table 1).
Table 1. Example of Beneficiary Premiums and Government Payments
Plan cost FFSpremiumsharecontributionshare
FFS $6,000 100% $720 12.0% $5,280 88%
Source: Table prepared by CRS.
Risk and Geographic Adjustment. The CDB program would not alter the
current risk-adjustment mechanism, which is scheduled for full implementation by
2004. However, it would include a new geographic cost adjustment procedure that
is intended to adjust the prices of managed care plans to reflect geographic cost
differences which affect plan operations and costs in specific geographic locations.
This adjustment procedure has the effect of transforming the local managed care plan
Part B premiums are expected to represent about 12% of total costs for Parts A and B in5
prices into national rates, as illustrated below. This adjusted price is used to
determine beneficiary premiums.
Geographic adjustment of government payments helps protect beneficiaries and
promotes competition, according to the Administration. Currently, the Part B
premium is set nationwide; all beneficiaries pay the same premium regardless of where
they reside. Under the CDB program, beneficiary premiums for managed care would
vary based on plan prices. Since plan prices would reflect local variations in the costs
of delivering care, if the government did not pay for these variations, the plan would
pass them along to the beneficiary. Consequently, in high-cost areas, beneficiary
premiums for managed care would most likely be much higher than the costs of
traditional Medicare, and few beneficiaries would elect managed care coverage. Full
geographic adjustment of government payments in high-cost areas was included in the
Administration's proposal to make competition between the traditional program and
managed care programs equitable, according to the Administration. The
Administration's geographic adjustment would retain the current partial adjustment
system for low-cost areas, by maintaining the provisions included in the BBA to
encourage private plans to enter rural areas.
Thus, the geographic adjustment procedure would vary between high-cost and
low-cost areas. High-cost areas would have the costs of managed care plans adjusted
to reflect full local costs. Under the BBA, high-cost areas have seen lower rates of
increase in M+C payments over time, due to blending of local and national rates, and
to minimum updates. The CDB program would use local rates, instead of the BBA
provisions, as benchmarks in these high-cost areas. This would produce lower values
for the adjusted (nationally based) costs of managed care in these areas, and lower
beneficiary payments to managed care plans, other things being equal.
Low-cost areas would have the geographic adjustments that were implemented
under the BBA maintained. The BBA's blending of local and national rates, and
establishment of floor payments, has increased relative M+C payments in these areas
to amounts above the actual local costs. The goal of this increase was to encourage
managed care plans to serve beneficiaries in these areas. Appendix A provides a
more detailed discussion of the geographic adjustment proposal.
The Secretary of the Department of Health and Human Services (DHHS)would
study this two-part geographic adjustment system in its first several years to assure
that it produces its intended effect.
Modification and Extension of Policies Incorporated in
the Balanced Budget Act of 1997 (BBA 97)
BBA 97 included provisions which were designed to constrain Medicare
program growth. At the time of enactment, CBO estimated that Medicare spending
would be reduced by $116 billion over 5 years and $394 billion over 10 years. Since
then, CBO has revised its total spending projections for Medicare, lowering them
from what had been projected at the time of enactment of BBA 97. Most recently,
in March 1999, CBO further lowered its Medicare projections by $80 billion over the
next 5 years and $229 billion over 10 years. The revised spending projections are
attributable to a number of factors including an improved economic forecast,
heightened anti-fraud and abuse initiatives, slowing payments to providers and lower
projected enrollment growth in the Medicare+Choice. A number of provider groups6
contend that the BBA 97 has had a bigger impact than originally anticipated; they
have recommended revisions in the legislation to bring spending more in line with the
Modifying Balanced Budget Act Policies
Quality Assurance Fund. Under the President’s plan, a total of $7.5 billion
between FY2000 and FY2009 would be used to address BBA 97 policies that have
caused either major access problems for beneficiaries or excessive difficulties for
providers. The Administration states that it will work with Congress to develop
fiscally prudent policies that would pay targeted providers additional money to resolve
specific problems that have impeded beneficiary access to care.
Administrative Actions. HCFA will provide administrative relief in the
following four areas:
(1)As mandated by BBA 97, HCFA has implemented a reduction in payments
to hospitals when patients in any of 10 diagnoses are transferred to another
hospital or hospital unit that is not a prospective payment system (PPS)
hospital, skilled nursing facility or home health agency for care. HCFA7
was authorized to extend the transfer policy to additional diagnoses after
October 1, 2000. HCFA will postpone extension of the hospital transfer
policy to additional diagnoses for 2 years, to October 1, 2002.
(2)HCFA has proposed a PPS for outpatient hospital care as mandated by
BBA and is considering three options that may increase payments to
providers that might otherwise suffer large payment reductions under this
new payment system. HCFA’s proposed outpatient PPS includes a variety
of options for controlling the volume of outpatient services. HCFA may
delay the implementation of the volume control mechanism to allow
affected providers to adjust to the new reimbursement system. HCFA may
also adopt the inpatient hospital wage index for its outpatient PPS which
For a discussion of Medicare spending since BBA 97, see CRS Report RS20238, Trends in6
Medicare Spending After the Balanced Budget Act, by Hinda Ripps Chaikind.
Medicare’s PPS for acute care hospitals has always distinguished between discharges in7
which a patient leaves an acute care hospital after completing treatment and transfers in which
a patient is moved (transferred) to another acute care hospital for related or continued
treatment. With some exceptions, the hospital receiving the transfer case is paid a pro-rated
amount based on the inpatient days of care provided and total Medicare payment is not to
exceed the amount that would have been made if the patient had been discharged without
being transferred. BBA 97 provides that qualified discharges from one of 10 diagnostic
related groups (DRGs) that are sent to post acute providers will be treated as transfers
beginning October 1, 1998. The specific DRGs will be selected by the Secretary based on the
disproportionate use of post discharge services.
would increase Medicare payments for outpatient services to reclassified
and redesignated hospitals. Finally HCFA may consider implementation of
a budget neutral, 3-year transition period to hospitals, such as low-volume
hospitals, teaching hospitals and cancer hospitals, that would suffer from
large payment reductions.
(3)HCFA will implement an administrative change that will enable more
hospitals to be reclassified to a higher wage area and receive additional
Medicare payments. Currently, facilities can be reclassified if their average
wage is at least 108% of the average wage in their rural area and at least
84% of the average wage in the nearby urban area. HCFA will change
(4)HCFA is implementing the following changes to help home health agencies
adapt to the new interim payment system: (a) extend the repayment period
for agencies that have received related overpayments from 1 to 3 years,
with interest; (b) postpone the surety bond requirement until October 1,
2000; (c) require agencies to obtain $50,000 surety bonds regardless of the
amount of Medicare revenues -- not 15% of the agency’s annual Medicare
revenues, as originally proposed; and (d) phase in the requirement to report
services in 15-minute increments to enable home health agencies to
accommodate the competing demands of ensuring Y2K compliance.
HCFA has already eliminated the sequential billing rule as of July 1, 1999.
(The sequential billing rule meant that claims had to be paid in the same
order in which services were provided. Thus, in instances where a claim
was held for further documentation or review, no subsequent claims for
that beneficiary could be paid until the claim being held was resolved.)
Disproportionate Share Payments. Presently, additional payments are made
to hospitals that serve a disproportionate share of low-income Medicare or Medicaid
patients. HCFA would be authorized to remove disproportionate share payments that
are built into the Medicare+Choice rate beginning in FY2001; these payments would
be made directly to eligible hospitals based on the services provided to Medicare
+Choice enrollees. This budget-neutral change would be similar to the treatment of
graduate medical education reimbursement enacted in BBA 97.
Constraining Medicare Spending/Extend BBA Provisions
Most of the BBA 97 provisions affecting provider payments are effective
Hospitals. PPS payment rates are increased each year by an update factor,
which is determined in part, by the projected increase in hospital costs as specified in
the hospital market basket index. BBA 97 reduced the market basket update for
operating costs in all hospitals (both urban and rural) by 2.8% in FY1998; 1.9% in
FY1999; 1.8% in FY2000; and 1.1% in FY2001 and FY2002. The President’s
proposal would amend reimbursement policy as follows:
(1)Medicare’s PPS reimbursement to urban hospitals for operating cost
would be increased by the hospital market basket minus 1.1% from FY2003
(2)The PPS update for inpatient hospital services in rural hospitals would be
the hospital market basket minus .5% in FY2003 with an increasing
reduction of .1% each year until the same update applies for both rural and
urban hospitals. Thus, the update for rural hospital inpatient services
would be the market basket minus .6% in FY2004; market basket minus
.7% in FY2005; market basket minus .8% in FY2006; market basket minus
.9% in FY2007; market basket minus 1.0% in FY2008 and market basket
minus 1.1% in FY2009.
(3) Medicare’s PPS reimbursement to acute care hospitals for capital costs
would be reduced by 2.1% from FY2003 to FY2009. This continues the
existing BBA 97 policy.
(4)The national cost limits and reductions in rate increases for PPS-exempt
hospitals established in BBA 97 would be extended from FY2003 to
FY2009. Additionally, the 15% reduction in reimbursement for capital
costs in PPS-exempt facilities would be extended from FY2003 to FY2009.
This continues BBA 97 policies.
Ambulance, Prosthetics and Orthotics, and Hospice Services. Under the
proposal, Medicare reimbursement policy would be amended as follows:
(1)Ambulance: BBA 97 specifies that the reasonable cost and charge limits
will apply through 1999, with annual increases equal to the consumer price
index for urban consumers (CPI-U) minus 1%. A fee schedule is to be
implemented in January 1, 2000 with annual updates equaling the CPI-U
increase, except that in 2001 and 2002 there will be a 1% reduction in the
update factor. This proposal includes a payment update for ambulance
services of the CPI-U minus 1% from FY2003 to FY2009.
(2)Prosthetics and orthotics: BBA 97 limited the update to the fee schedule
to 1% for each of the years FY1998 through FY2002. This proposal
includes a payment update for prosthetics and orthotics of the CPI-U minus
(3)Hospice care. BBA 97 reduces the hospice payment update to the market
basket minus 1% from FY1998 through FY2002. This proposal includes
a payment update for hospice services as the hospital market basket minus
Ambulatory Surgical Centers. BBA 97 includes a payment update for these
services of CPI-U minus 2% in FY2002. The proposed payment update for
ambulatory surgical centers would be the CPI-U minus 1% from FY2003 to FY2009.
Clinical Laboratory Services, Durable Medical Equipment and Parenteral
and Enteral Items. BBA 97 eliminated payment updates for these services from
FY1998 through FY2002. The proposed payment update for these services would
be the CPI-U minus 1% from FY2003 to FY2009.
Program Management Improvements
Private Sector Purchasing and Quality Improvement Tools
Promoting Use of High-Quality, Cost-effective Providers. This proposal
encompasses two components:
(1)The Health Care Financing Administration (HCFA) would be authorized
to contract with existing preferred provider organizations (PPOs) that
meet specified quality and utilization management standards as established
by the Secretary. Medicare PPOs would be given advantages such as
expedited claims payment and alternative administrative procedures (see
subsequent discussion of alternative administrative procedures under
Purchasing Tools and Contracting Reform). Beneficiaries who selected
preferred providers in the Medicare PPOs would benefit from lower cost
(2)HCFA would be authorized to contract with Centers of Excellence. These
are competitively selected facilities that would receive a global payment for
some or all associated services related to a specific surgical procedure; this
all-inclusive payment would represent a discount to Medicare. The single
fee would cover all of the facility, diagnostic and physician services for
designated procedures such as coronary artery by-pass grafts (CABG) and
other heart procedures as well as knee and hip replacements. Beneficiaries
would not be required to use the facilities, but could be provided incentives
by the facility such as reduced cost sharing, private rooms, and
reimbursement for travel expenses. This proposal adopts the payment
arrangement tested in a generally successful demonstration project that was
in place between 1991 and 1998 where four, seven, and finally six
participating hospitals received bundled payments for CABGs.
Primary Care Case Management and Disease Management. This proposal
has two components:
(1)HCFA would be given the authority to contract with physicians to
implement primary care case management (PCCM) activities that would
address patterns of inappropriate utilization or uncoordinated care.
Physicians would get case management fees (in addition to FFS payments)
and also would receive the PCCM designation to induce participation.
Moreover, PCCMs would be marketed to encourage beneficiary
participation. Beneficiaries enrolled in a PCCM would receive additional
benefits or lower cost sharing in exchange for remaining with the PCCM
for a given period of time and receiving all their health care from, or
through referral by, the PCCM. HCFA has tested three different case
management approaches in demonstration projects that were in place
between 1993 and 1995.
(2)HCFA would be given the authority to contract with and competitively pay
entities to provide physician-directed, nurse-mediated disease management
services to beneficiaries with certain high-cost, chronic health conditions.
These services could encompass patient screening and assessment, patient
education, medication review, telephone consultations, physician
interaction, home nursing visits, and surveillance and reporting for
conditions such as congestive heart failure and diabetes.
Information and Coordination of Care for Medicare/Medicaid Dual
Eligibles. This proposal has two components:
(1)HCFA would work with states to design and distribute an orientation
package to all new, dually eligible beneficiaries that would provide
information on their special status, the Medicare and Medicaid programs,
and how to obtain further information from HCFA, other state agencies and
(2)HCFA would be authorized to implement a demonstration project to test
coordination models for dually eligible Medicare beneficiaries who
remain in the FFS sector. Participating beneficiaries would receive an initial
clinical assessment of their acute and long term care needs. Those
beneficiaries with significant health care needs would qualify for the care
coordination benefit provided by a team of clinicians, including a
geriatrician, social worker, and nurse. This team would provide general
primary care services and would advise beneficiaries about Medicare and
Purchasing Tools and Contracting Reform. This proposal has five
components as follows:
(1)HCFA would be authorized to use competitive bidding and price
negotiations to set payment rates for Part B items and services (except for
physician services). The services and geographic areas to be included in a
bidding or negotiation process would be subject to HCFA’s discretion,
based on the availability of qualified providers and the associated savings
potential. However, HCFA would not necessarily select the best price
offered, but would be restricted, in some fashion, to accepting the median
price offered. Other selection restrictions would include using multiple
suppliers, rather than sole source contracts or a winner take all strategy.
Other protections for beneficiaries in rural areas would be established as
well. HCFA would be given the authority to contract selectively with
providers who accept negotiated or bid prices.
(2)HCFA would be allowed to negotiate alternative flexible administrative
arrangements with providers and suppliers who (a) agree to discount
prices for Medicare and (b) demonstrate better performance/higher quality.
The administrative arrangements could include simplified claims processing,
faster claims payments, and alternative cost settlement processing.
(3)HCFA would be authorized to provide a single, bundled payment to
combinations of practitioners, providers and suppliers for all care delivered
at a specific facility or site of care. (See also earlier discussion of Centers
of Excellence.) For example, the hospital payment related to a Medicare
admission for a given DRG would be combined with all payments for the
surgeon, anesthesiologist, attending physician, and physician consultants
and paid to one entity. The combined amount is intended to provide
incentives for the physicians and hospital to work together and associated
cost efficiencies would be shared with Medicare.
(4)HCFA would be authorized to implement a demonstration project where
bonus payments could be provided to qualified group practices that
reduce excessive use and document improved patient outcomes. Qualified
group practices are those that: meet or exceed certain size and scope
criteria; submit acceptable clinical and administrative practice plans;
implement acceptable quality improvement plans; submit required
performance data; and distribute at least a portion of the bonus payments
based on quality performance. Qualified group practices would be given
an annual per capita target based on their historic cost experience
(combining both Part A and Part B expenditures for Medicare beneficiaries
seen by the practice in a base year). Bonus payments could be paid when
actual per capita expenditures are lower than the target amount. A
separate payment, based on process and outcome improvements, could also
(5)HCFA would be authorized to use entities other than insurance companies
as its fiscal agents, would be allowed to use competition to select
Medicare’s fiscal intermediaries and carriers, and would have greater
contract flexibility in determining which functions should be performed.
Changing Medicare’s Management Structure and Personnel
This part of the plan would encompass the following two components:
Public/Private Advisory Boards. HCFA plans to establish three advisory
(1)HCFA would establish a Management Advisory Council comprised of
public and private sector experts who would identify relevant innovations
in customer service, purchasing, and management and assist HCFA in their
adaptation and implementation.
(2)HCFA would establish a Medicare Coverage Advisory Committee
comprised of experts in medicine and science, consumer advocates, and
industry representatives who would assist in determining whether new
treatments and devices should be covered by Medicare.
(3)HCFA would establish a Citizens Advisory Panel on Medicare Education
comprised of experts in medicine, health policy, and consumer education
who would assist in shaping Medicare’s beneficiary education program to
ensure that beneficiaries are sent timely and useful program information.
Increasing Personnel Flexibility. HCFA seeks the authority to implement the
staffing changes that were recommended by the independent experts hired to evaluate
Extending Life of the Part A Trust Fund
The proposal includes a financing provision which is not linked to financing the
reform package. This proposal would dedicate a portion of the budget surplus to
Medicare solvency. The contribution would be $328 billion over 10 years; this action
(together with other Part A savings) is estimated by the Administration to extend the
trust fund solvency from 2015 to 2027. For the amount transferred, the Treasury
would buy down the debt and convey to the trust fund special purpose bonds. A
Medicare “Lock Box” would prevent these funds from being used for other purposes.
Financing the Prescription Drug Benefit
The federal cost of the proposed drug benefit is estimated by the Administration
to be about $119 billion over 10 years. A portion of the costs ($45 billion over 10
years) would be offset from the surplus.
Both the Administration and the Congressional Budget Office (CBO) have
provided estimates of the President’s Medicare reform proposal. According to the
Administration, the plan, excluding the prescription drug benefit is estimated to save
$73 billion over 10 years (FY2000-FY2009). Federal costs for the prescription drug
benefits are estimated at $119 billion over 10 years. (See Table 2.)
On July 22, 1999, the Director of the CBO testified before the Senate Finance
Committee on the President’s reform plan. Included in the statement was an estimate
of the President’s reform proposal. CBO’s estimate of the 10-year cost of the
prescription drug benefit is about $49 billion or 42% higher than the Administration’s
estimate. Its estimate of savings achieved through changes in the fee-for-service
(FFS) program are $16 billion or 22% lower than those made by the Administration.
CBO’s statement said that its estimates of changes attributable to provider payment
changes are in line with those made by the Administration. It had not yet completed
its review of the combined benefit proposal. (See Table 2.)
Table 2. Comparison of the Administration’s and CBO’s 10-Year
Estimate of the President’s Reform Proposal
(In billions of dollars)
Administration estimateCBO estimate
Prescription Drug Benefit118.8168.2
Changes to FFS Medicare-64.2-48.2
Competitive Defined Benefit**-8.9-8.9
Subtotal 45.7 111.1
Transfers from the General Fund***327.7327.7
Source: Testimony by Dan Crippen, Director of CBO, before Senate Finance Committee, July 22,
* Includes effect on Medicaid.
** Administration estimate.
*** This is the amount of the actual transfer. Over the 10-year period, cumulative interest would
increase this amount to $374 billion (the total of the transfer amount cited in the President’s
summary). Of this amount, $45.5 billion would be used to finance a portion of the drug benefit.
Tables A1, A2 and A3 illustrate the effects of geographical adjustment on
payments to managed care plans under the President’s proposal. Table A1 represents
a geographic area with costs comparable to those nationwide. It assumes that the
average cost of treating a Medicare FFS beneficiary in this area is the same as the
average cost nationwide -- $6,000. Geographic adjustment would not alter the total
local costs of private plans in this area.
Table A2 represents a low-cost area. Private plans operating in low-cost areas
are able to offer coverage of defined benefits for lower costs than they would be able
to offer if they operated in areas with higher input prices. Therefore, in order to
compare costs bid by plans in a low-cost area to nationwide FFS costs, the private
plan costs must be inflated. Table A2 assumes that the average cost of treating a
Medicare FFS beneficiary in this area is 10% (i.e., $600) below the national average,
so the average cost of a FFS beneficiary in this area would be $5,400 (i.e., $6,000
minus $600). Geographic adjustment would increase the "local" costs of private
plans by 10% of the national FFS cost ($600), in order to make "local" plan costs
comparable to "nationwide" FFS costs. The "local" costs are the costs bid by the
private plans, and represent what the plan would be paid through beneficiary and
government contributions. The geographically adjusted costs are calculated only for
the purpose of computing the beneficiary premium. Plans would not be paid
geographically adjusted costs.
Table A3 represents a high-cost area. Private plans in high-cost areas offer
coverage at costs that reflect their relatively high input prices. In order to compare
costs bid by plans in a high-cost area to nationwide FFS costs, these private plan local
costs must be deflated. Table A3 assumes that costs in this area are 10% higher than
the national average, so that the average cost of a FFS beneficiary in this area would
be $6,600 (i.e., $6,000 plus $600). Geographic adjustment would decrease the local
costs of private plans by 10% of national FFS costs ($600) for comparison with
nationwide FFS costs.
Comparisons of beneficiary premiums and government contributions for private
plans across the three tables illustrate the effect of geographic adjustments, and the
changing relationships of private plans to FFS depending on actual local costs. For8
example, the first plan in each of the three tables bids $4,700 in its geographic area;
$4,700 is the plan's local cost. When computing the beneficiary premium, the local
cost of plan 1 is unaltered in Table A1, because costs in this area are assumed to
equal the average nationwide. Private plan A's total local cost is increased by $600,
to $5,300, in its low-cost area (Table A2), and private plan a's local costs are
decreased by $600, to $4,100, in its high-cost area (Table A3). When the CDB
program rules for beneficiary premiums are applied to the geographically adjusted
costs, private plans 1 and a have a $0 beneficiary premium in their average and high-
cost areas, respectively (Tables A1 and A3), but private plan A has a beneficiary
premium of $375 in its low-cost area (Table A2). The government contribution for
Note that plans operating in the area represented by Table A1 are not the same plans as in8
tables A2 or A3.
each plan would be the difference between the beneficiary premium and the
unadjusted cost bid by the plan.
These comparisons illustrate the potentially significant effect of geographic
adjustment on beneficiary premiums. With geographic adjustments, a plan offering
coverage for $4,700 in a low-cost area is shown to be less efficient than a plan
offering coverage for $4,700 in a high-cost area. For example, plan A's
geographically adjusted cost in a low-cost area becomes $5,300, and plan a's adjusted
cost in a high-cost area becomes $4,100. Since beneficiary premiums are based on
the geographically adjusted costs, they may vary for plans with identical premiums
prior to geographic adjustment.
Another way to think about the effects of geographic adjustment is to consider
how costs of private plans would vary if they operated in different areas. For
example, if private plan A from the low-cost area represented by Table A2 were to
move to an average cost area represented by Table A1, private plan A would increase
its bid to $5,300. Similarly, private plan a moving from the high-cost area
represented by Table A3 would decrease its bid to $4,100 if it were to move to an
average cost area. Private plan 1, located in an average cost area, would decrease its
costs by $600, to $4,100, if it were to move to the low-cost area represented by
Table A2, and would increase its costs by $600, to $5,300, if it were to move to the
high-cost area represented by Table A3.
The relationship between the current M+C payment rates and the
Administration's proposed CDB program is complex, and would vary depending upon
classification of the geographic area as "high-cost" or "low-cost." The Administration
proposes that geographic adjustment in high-cost areas would reflect full local costs.
In the example shown here, this policy implies that the high-cost area represented by
Table A3 would have local costs decreased by $600 for purposes of computing
beneficiary premiums. Under the BBA formula, payments in high-cost areas are
limited by the blending of local and national rates; the effect of blending is mitigated
by the minimum update provision, which guarantees that M+C payment rates will
increase by at least 2% per year. Under the Administration's proposal, restrictions on
rate growth in high-cost areas resulting from the blend would be removed. Other
things being equal, payments to high-cost areas would increase over BBA amounts.
On the other hand, the Administration proposes that BBA provisions resulting
in higher payments to low-cost areas would be retained. The BBA provides for
payments that exceed local costs in low-cost areas, again through blending of local
and national rates when computing M+C payment rates. Moreover, the BBA's floor
payment rate provision increases M+C rates in the lowest cost areas even more than
the blend provision. The Administration's proposal implies that local costs in Table
A2, which represents a low-cost area, would not be inflated by the full $600. Instead,
the BBA provisions would be used to calculate a lower adjustment, perhaps equal to
$500. This would make each plan less expensive for beneficiaries and more expensive
for the government than would be the case if full geographic adjustment were used.
However, other things being equal, payments to low-cost areas would be equal to
Table A1. Example of Beneficiary Premiums and Government
local adjusted% ofGovernment
Plan costcostFFSBeneficiary premiumcontribution
FFS $6,000 $6,000 100% $720 12.0% $5,280 88%
Source: Table prepared by CRS.
Table A2. Example of Beneficiary Premiums and Government
Payments in Low-Cost Area *
local adjusted% ofGovernment
Plan costcostFFSBeneficiary premiumcontribution
FFS $5,400 $6,000 100% $720 12.0% $5,280 88%
Source: Table prepared by CRS.
*Assumes geographic adjustment would increase relative FFS costs by 10% ($600). Makes no
allowance for increases in government payments in low-cost areas included in the BBA.
Table A3. Example of Beneficiary Premiums and Government
Payments in High-Cost Area*
Plan costcost FFSBeneficiary premium contribution
FFS $6,600 $6,000 100% $720 12.0% $5,280 88%
Source: Table prepared by CRS.
*Assumes geographic adjustment would decrease relative costs of FFS care by 10% ($600).