CBO Issues a Major Report on Medicare Advantage Plans--Pours More Fuel on the Private Fee For Service Fire

Yesterday, the Congressional Budget Office (CBO) issued a very comprehensive report on Medicare Advantage plans.

I found the following to be an especially important finding:

"In 2007, CBO estimates the average payments to such plans [MA] is 12% above traditional FFS costs. The difference is larger for private fee-for-service plans: According to estimates by the Medicare Payment Advisory Commission (MedPAC), the payments to those plans in 2006 averaged 19% above FFS costs. Of that difference, 10 percentage points' worth went to beneficiaries in the form of extra rebates. In contrast, payments to HMOs averaged 10 percent above FFS costs, MedPAC estimates. On average, HMOs offered extra benefits and rebates equal to 13% of FFS costs; those additional benefits and rebates reflected the difference between the benchmark (which averaged 10 percent above FFS costs) and the plans bids (which averaged 3% below FFS costs).

This report is very damaging for the Private Fee For Service Medicare product, BUT, it does a lot to make the core HMO Medicare Advantage product look better.

As I have said before, I believe the best chance the industry has in defending Medicare Advantage is to defend it as a multi-year experiment to determine if the private sector can better manage Medicare costs. By affirming that Medicare HMO plans have bid 97% of the cost of traditional Medicare, I will suggest this report helps that argument.

Even though the HMO plans gave the seniors 13 points back in higher benefits, it is clear in this report that these extra payments are not something the Medicare program can afford long-term. Therefore, I will suggest, the best way to defend these payments is as the transitionary scheme they were always intended to be.

However, this report just pours more gasoline on the Private Fee For Service (PFFS) fire--they got 19% more and gave back 10% to seniors. That looks pretty bad.

I continue to believe that the HMO industry needs to cut Private Fee For Service loose--especially in light of all of the marketing abuses being reported. If it does not, it will put in jeopardy defending this very important experiment to prove the private market has a place in the long-term solution for Medicare's funding problems.

MedPAC has suggested freezing Private Fee For Service payments. That may be the best deal for the HMO industry to take.

The debate over what to do with Medicare Advantage payments continues in the Senate Finance Committee where the State Children's Health Insurance Plan (S-CHIP) reauthorization debate continues. That debate is more bogged down over just how big to make S-CHIP right now than how to pay for it. That discussion is a day-to-day process with no decisions yet.