Tuesday, July 22, 2008

The End of Medicare Private Fee-For-Service--the Questions to Ask the Health Plans During Earnings Season

Now that we know private fee-for-service (PFFS) is dead on January 1, 2011 in all but the most rural markets, how will the health plans who have significant PFFS business respond?

UnitedHealth is the first health plan to report earnings this quarter and I thought they had the right answer. From their earnings call transcript (Ovations CEO commenting):
We have had a strategy of deliberately positioning ourselves in favor of network based Medicare Advantage rather than private fee-for-service over the years, because we think we can unleash more value from Medicare that way and because of what we perceive to be a slow burn risk, if not a risk that is now crystallized, in the new law.

So the direct impact on us is minimal, because only around 7% of our Medicare Advantage membership is in private fee-for-service and all those 100,000 or so members 3/4 live in areas either unaffected by the law or where we already have network based alternatives. [The growth opportunities are great for us] because obviously the end of deeming will mean that perhaps 80% of the private fee-for-service market will now over the next two years have to migrate to a network -based product and that’s something that we’ve been critically positioning ourselves for.

Potentially 1.7 million private fee-for-service members are going to be triggered into shopping and as the largest operator of network based Medicare Advantage...we hope to be able to capitalize on that opportunity.

It is also notable that UnitedHealth sees the entire Medicare Advantage program as a "slow burn risk." Presumably, they mean that it is clear to them that the days of higher Medicare Advantage payments are limited and the only defense is being able to manage the program more efficiently than government-run Medicare.

Analysts worried about the impact of the new Medicare law on PFFS players need to be asking for specific information:
  1. How much of your PFFS business is in rural markets that was not eliminated by the new law?
  2. Of your PFFS business, how much of it is in market concentrations that enable you to develop a Medicare network--likely at least 10,000 members in an SMSA--or where you already have a Medicare network?
  3. What do you intend to do with your PFFS business where you cannot build a network?
  4. How do these changes impact your pro forma going forward?
  5. When Congress finishes the job of equalizing public and private Medicare payments how can you be sure your business model will be viable?
  6. How much lower are your Medicare costs today, including overhead, than the public Medicare program?
Some of the first comments by some PFFS players exuding a confidence there is a plan in place just don't cut it. Either they will have enough members in a market to build a network, then be able to build a network (capital and expertise), or they will have to try to sell off the members to someone who can.

In 30 months about all of the PFFS income stream goes away without some pretty significant capital and labor intensive efforts.

As the UnitedHealth management said, 1.7 million members are on the block.

The days of people arbitraging the Medicare payment system are now clearly numbered.

Analysts need to ask some tough questions about the strategy going forward.
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