Private health plans are entities that contract with Medicare to provide services to enrollees. The term includes managed care plans and other models, such as private fee-for-service plans. Private health plans have been available in Medicare almost since the program began. When Congress first authorized private plans in Medicare, its intent was to contain the growth in spending and improve the payment method for certain providers. It also sought to provide beneficiaries, including those residing in rural areas, with more choices and enhanced benefits. These objectives remain relevant.
Medicare Advantage (MA), also known as Medicare Part C, is Medicare’s private plan program. MA plans must cover all Medicare benefits and may also provide additional benefits. Most MA plans offer Part D drug coverage as well. MA enrollees may save money through additional benefits or lower out-of-pocket costs.
To be eligible for an MA plan, a Medicare beneficiary must have Medicare Parts A and B. All MA plans are required to establish enrollee out-of-pocket spending limits that do not exceed annual maximums established by CMS. Maximums vary by plan type, and CMS sets a voluntary and a mandatory cap; the former is lower. CMS permits MA plans greater flexibility in establishing cost-sharing for Parts A and B services if they use the lower, voluntary limit. For 2017 a typical voluntary annual limit can be no higher than $3,400, while the mandatory maximum may not exceed $6,700 for in-network services.
MA consists of several plan types:
- Health maintenance organizations (HMOs)—an HMO may also offer a point-of-service (POS) option that allows an enrollee to obtain services out of network for higher out-of-pocket costs. MA HMOs may include different models of HMOs including staff model, group model, or network model HMOs.
- Provider-sponsored organizations (PSOs)—similar to HMOs, PSOs are organized and operated by physicians and hospitals. They provide most services within their organized network.
- Preferred-provider organizations (PPOs)—PPOs are networks of physicians and hospitals that have agreed to discount their rates for plan members. Enrollees may obtain services from non-network health professionals but must pay higher out-of-pocket costs if they do.
- Regional PPO plans—similar to local PPOs, regional PPOs cover a larger service area. They feature a single deductible for Part A and Part B services, and an out-of-pocket limit for in-network care and expenditures for benefits that are also offered by traditional Medicare.
- Special-needs plans (SNPs)—SNPs focus on the needs of individuals who are institutionalized, are dually eligible for Medicare and Medicaid, or have severe or disabling chronic conditions. Most SNPs are HMOs.
- Private fee-for-service (PFFS) plans—PFFS plans are risk-based plans that closely resemble traditional Medicare but are operated by private insurance companies. They permit enrollees to go to any Medicare-approved doctor or hospital willing to accept the plan’s payment. Unlike other MA options, physicians in PFFS plans may balance-bill 15 percent above the plan’s fee schedule. This and other PFFS plan features have the potential to cause confusion for Medicare beneficiaries and make it difficult for them to distinguish this option from traditional Medicare.
- Medical savings accounts (MSAs)—MSAs have two components. The first is an MA plan with a high yearly deductible (which varies by plan) with premiums paid by Medicare; the plan pays for covered benefits once the deductible has been met. The second is a tax-free savings account to which both Medicare and beneficiaries contribute. It may be used to cover deductibles and coinsurance charges or to pay for health services that Medicare does not cover. Beneficiaries who choose the MSA option may not have Medicare Supplement Insurance (Medigap).
Private health plans in the Medicare program pose both opportunities and risks for the program and beneficiaries. On one hand, a wide array of private health plan options gives beneficiaries greater opportunity to find plans that meet their needs and preferences, possibly with additional benefits, and a range of cost-sharing arrangements. On the other hand, giving beneficiaries more choices makes the task of selecting coverage more complicated and may be so confusing for some that it leads to inertia or poor decisions. This concern is supported by behavioral economics research findings that indicate greater choice does not necessarily lead to better decisions. Although consumers value choice, it is necessary to balance the desirability of a wide range of complex choices with the cognitive burden of having to select from among too many. Experts advise that one strategy for improving consumer decisionmaking is to reduce cognitive burden by limiting the number of choices and by creating accessible and easy-to-interpret materials that allow clear comparisons of various choices.
Another problem is that many beneficiaries may not be aware that MA plans may terminate their relationship with Medicare in any given year; may change the premiums, cost-sharing charges, or benefits they offer from year to year (including drug coverage); or may drop physicians from their networks during the year. Beneficiaries may also not be aware that if they want to voluntarily leave an MA plan and return to traditional fee-for-service Medicare, except in certain situations they are likely to be subject to medical underwriting for a Medicare supplement (Medigap) policy. This underwriting may result in their being refused a policy or being required to pay higher rates for it.
The Medicare risk pool is segmented by the inclusion of multiple coverage options. There is some evidence that the healthiest beneficiaries are likely to enroll in an MA option, leaving the sicker, more expensive beneficiaries in the traditional Medicare program. Among the MA plan options, PFFS and MSA plans are likely to attract the healthiest beneficiaries of all.
The tendency of healthy beneficiaries to join MA plans underscores the importance of risk-adjusting Medicare payments to these plans. An accurate risk-adjustment mechanism can help to mitigate the effects of risk segmentation by increasing payments to health plans for high-cost or high-risk enrollees and reducing payments to plans with healthier enrollees. Without these corrections, Medicare will overpay providers with a larger proportion of healthier beneficiaries and underpay those with a larger proportion of sicker beneficiaries.
MA plans are an important alternative for many Medicare beneficiaries, especially those with low income. Data from the 2013 Medicare Current Beneficiary Survey indicate that:
- 33 percent of African American beneficiaries and 45 percent of Hispanic beneficiaries were in MA plans, and
- 37 percent of beneficiaries in MA plans had incomes of $20,000 or less (compared with 33 percent of all Medicare beneficiaries).
Medicare Advantage: Policy
Choice of Medicare coverage options
Medicare beneficiaries should have a genuine choice among Medicare coverage options and private health plans. The traditional Medicare program should remain a viable and affordable option, while a reasonable number of private health plan options such as HMOs, PPOs, PSOs, and POS plans also should be available.
CMS should actively monitor private plan performance and report on comparisons by plan type that examine beneficiary access, out-of-pocket spending, and the impact on total Medicare spending.
AARP does not support MSAs or PFFS plans as Medicare coverage options. Congress should consider whether PFFS plans and MSAs provide added value in the Medicare program, particularly whether these plan types attract healthier enrollees than others or prove costly for the Medicare program to sustain. The value of offering an excessively large number of plan choices should also be assessed.
When private health plans significantly increase their premium or cost-sharing charges, Congress and states should protect beneficiaries by evaluating the reasonableness of those increases. Congress should also facilitate switching from one Medicare coverage option to another and ensure access to Medigap policies for beneficiaries seeking to change their enrollment from an MA plan to the traditional Medicare program.
In managed care models that contract with multiple medical groups, enrollees should be allowed to select providers from among all participating medical groups. If this is not feasible, beneficiaries enrolled in health plans offering multiple medical groups must be fully informed about limitations on access to providers in other groups. Plan enrollees should be permitted to change providers whenever they choose.
To ensure that Medicare beneficiaries understand the implications of enrolling in any of the options offered, Congress should provide CMS with adequate funding and other necessary resources (including trained personnel) to conduct public education and outreach programs. These programs should advise beneficiaries about a private health plan’s rights to terminate its relationship with Medicare on an annual basis, to annually change the benefits (including drug coverage) it offers or the premiums and cost-sharing it charges, and to drop providers during the contract year. Beneficiary education also should include information comparing the benefits, cost, and quality of available coverage options.
Consumers should have access to an independent, nonprofit ombudsman program that has a sufficient number of personnel and resources to meet the need, and one that receives federal and/or state funding. Ombudsman programs would:
- assist consumers in understanding a plan’s marketing materials and coverage provisions,
- educate members about their rights within health plans,
- help identify and investigate enrollee complaints,
- assist enrollees in filing formal grievances and appeals,
- operate and staff a telephone hotline, and
- report to and advocate before appropriate regulatory bodies on issues of concern to consumers.
Health plans should be required to cooperate with such programs.