The Future of Private Plan Contracting in Medicare

the Policy and Strategy Group at AARP. One of the missions of the Institute is to foster research and analysis on public policy issues of importance to mid-life and older Americans. This publication represents part of that effort. The views expressed herein are for information, debate, and discussion, and do not necessarily represent official policies of AARP. i Foreword Medicare has contracted with private health plans to provide services to enrolled beneficiaries almost from its inception. Most typically, these plans have been health maintenance organizations (HMOs), although since the enactment of the Balanced Budget Act of 1997, Congress has signaled its desire for a broader range of private plan options, including preferred provider organizations (PPOs), private fee-for-service plans, and medical savings accounts (MSAs). Therefore, it is likely that private health plans will continue to play a role in providing services to a portion of the beneficiary population in the future. Private health plans are presently offered through the Medicare+Choice (M+C), a program that is generally considered by beneficiaries and participating health plans as unstable and flawed: beneficiaries face higher out-of-pocket costs in the form of higher premiums and greater cost sharing and have lost important benefits, particularly prescription drug coverage; health plans have seen profits decline and have faced several years of annual payment increases of only 2 percent. Many hold the current M+C payment methodology responsible, at least in part, for these situations. Therefore, if, indeed, there is a future for private health plan contracting in Medicare, it will be essential to address these issues by finding a method that pays health plans fairly at a level that will encourage their participation while, at the same time, making prudent use of Medicare resources. Because most proposals to restructure the Medicare program include private health plans as alternatives to the traditional program, we asked Robert Berenson and Brian Dowd to review the various approaches that could be taken to pay private health plans in Medicare. This paper, intended to inform the debate that is now occurring, is a balanced and objective examination of the most frequently cited payment options. It is organized to facilitate easy reference of the particular options, and we hope that it will serve to enhance understanding of the implications of the options now being considered.