MedPAC Proposes Incentives for Choosing Lowest-cost Medicare Plans

April 10, 2015 10:05 am Michael Laff Washington, D.C. –

Health care policymakers want to encourage more Medicare beneficiaries to join accountable care organizations (ACOs) and Medicare Advantage plans, yet those plans sometimes are more expensive than fee-for-service.

[Doctor having conversation with female patient in his office]

Members of the Medicare Payment Advisory Commission (MedPAC) recently discussed( policy options that would offer incentives for Medicare beneficiaries to choose the most efficient and least costly health plan option in their local markets.

At the heart of the debate is whether Medicare beneficiaries in a market such as Miami, where costs are high, should pay more than those in Portland, Ore., or Columbus, Ohio, where costs and utilization rates are much lower. In short, commissioners discussed the prospect of adjusting premiums based on geographic location.

Where use of medical services is high, Medicare Advantage and ACOs report lower spending, but fee-for-service costs less than Medicare Advantage in areas where services are used less frequently.

In Portland, for example, Medicare beneficiaries number about 283,000, and the average monthly cost in fee-for-service spending is $626 per patient. Miami, on the other hand, has 419,000 Medicare enrollees, and the average fee-for-service spending is $1,151 per patient each month. Medicare Advantage costs significantly more than traditional fee-for-service plans in Portland but not in Columbus or Miami.

Three Possible Options

Commission staff prepared three policy options designed to eliminate the premium disparity among geographic regions. Each option would allow beneficiaries to choose fee-for-service or Medicare Advantage. Portland, Columbus and Miami were used as examples.

In the first option, a single, nationwide premium would be established for all fee-for-service plans, and beneficiaries who choose Medicare Advantage would receive incentives. This option proposes a large rebate for Miami residents who choose Medicare Advantage but would require considerable federal subsidies.

The second option would create a national premium for fee-for-service or Medicare Advantage with Medicare paying for the least expensive of those choices.

A third option calls for premium prices to be set locally, Medicare paying for the least expensive choice: fee-for-service or Medicare Advantage. A beneficiary who wanted a more expensive option would have to pay the difference in premiums.

The idea of payment adjustments based on geography triggered debate among commission members.

"I'm not comfortable paying a higher price for the same bundle of drugs just because of where I live," said Commissioner Jack Hoadley, Ph.D.

"Isn't that what happens in the rest of America?" responded Glenn Hackbarth, J.D., the commission chairman.

But Medicare is not in the same category as housing or food costs, another commission member pointed out.

"If I live in New York, San Francisco or Miami, is it my responsibility to pay more for medicine when I put in the same amount of money (to Medicare) over my career as everyone else did?" asked Commissioner Jay Crosson, M.D.

Offering lower monthly premiums, a smaller network of physicians and more requirements such as prior authorization for select procedures, Medicare Advantage operates largely like a managed care insurer. However, moving away from fee-for-service should remain a priority, said several commission members.

"Medicare Advantage should cost less than fee-for-service," said Commissioner Scott Armstrong, M.B.A. "We should be moving in that direction."

Hackbarth said that Medicare Advantage has difficulty operating at low cost in rural areas because of the limited number of physicians and networks. In some markets, Medicare is paying more for Medicare Advantage than it would for fee-for-service.

"In a level playing field, it's hard for Medicare Advantage to succeed," he said. "It succeeds because of the subsidies."

Future of Medicare

With his term on the commission expiring this month, Hackbarth made an impassioned speech about the state of Medicare in his final meeting as chairman. Noting that he is approaching the age of Medicare eligibility, he said insurance options are limited for the rest of the population who participate in a plan with a high deductible or are part of an employer-sponsored defined contribution plan.

Hackbarth compared his choices with those of his two daughters, who are in their 20s and may not enjoy the same range of options.

"It's really people like me who are getting an entitlement," he said. "I get free choice of providers. I get to stay in that, even if there are dramatically lower-cost options in my community, and my kids pay for it, and that's not what they've got."

He questioned whether policymakers should begin debating the future of the program.

"The likelihood that my kids will enjoy the same benefits is very low," he said. "When it's their turn, the rules will likely be very different."

Hackbarth did not suggest immediate changes to the program but intimated that such a discussion should be undertaken.

"I worry about Medicare beneficiaries," he said. "I've devoted much of my career to the Medicare program because I care about it, and I care about social insurance, but I really worry that the system is antiquated, and it doesn't work for the rest of the country. It's not really fair to the rest of the country."

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