FREE NEJM E-TOC    HOME   |   SUBSCRIBE   |   CURRENT ISSUE   |   PAST ISSUES   |   COLLECTIONS   |   Search Term  Advanced Search

Sign in | Get NEJM's E-Mail Table of Contents — Free | Subscribe

Previous Volume 360:2048-2050 May 14, 2009 Number 20 Next

PDF PDA Full Text Add to Personal Archive Add to Citation Manager Notify a Friend E-mail When Cited E-mail When Letters Appear PubMed Citation

Twenty-five years after the introduction of health maintenance organizations (HMOs) as an alternative to fee-for-service Medicare, the promise of these private plans — that competition among them would lead to improvements in the quality and efficiency of health care delivery — remains largely unfulfilled. Some analysts see this failure as a reason to scrap them. However, given the inherent limitations of fee for service, a better solution would be for the new administration and Congress to make one more attempt to extract value from private health plans by holding them accountable for the quality and cost of the care they provide. Establishing accountability is the central challenge of Medicare reform.

Part of the difficulty in reaping rewards from competition among private health plans is that the federal government pays these plans too much. As a result of legislation enacted in 2003 by a Republican Congress enamored of private plans, HMOs and other health plans in the Medicare Advantage program are paid substantially more than Medicare would spend on similar beneficiaries under fee for service (see graph). The Medicare Payment Advisory Commission (MedPAC) has estimated that the overpayment is 14%,¹ or approximately $10 billion in 2008.² But the overpayment is almost certainly larger, since this estimate does not take into account health plans' successful efforts to raise their risk-adjusted payment amounts by increasing the number and severity of the diagnoses that they report.³

View larger version (23K): [in this window] [in a new window]   Average Payments to Medicare Advantage Plans Relative to Traditional Fee-for-Service Medicare in 2007. HMO denotes health maintenance organization, and PPO preferred provider organization. Data are from the Kaiser Family Foundation.

 
President Barack Obama has strongly advocated reducing payment rates to Medicare Advantage plans, echoing calls made by Democratic congressional leaders and recommendations made by MedPAC. Especially in the context of the looming insolvency of the Part A Trust Fund and the desire to fund health care reform, it is difficult to construct a convincing rationale for paying private plans more than would be paid to fee-for-service providers for care of the same patients.

The Centers for Medicare and Medicaid Services (CMS) has begun the process of reducing payments to Medicare Advantage plans. Rates for 2010 will average 4.0 to 4.5% lower, in nominal dollars, than rates for 2009, reflecting a 3.4% adjustment for diagnostic coding intensity, an assumption that fee-for-service Medicare expenditures will increase by only 0.8% from 2009 to 2010, and other technical adjustments in the rate-setting process.⁴

In a sharp departure from the government-administered pricing systems that Medicare has traditionally used, and belying concerns that Obama is a closet socialist, the president's budget proposes to use a competitive bidding system to determine payment rates to Medicare Advantage plans starting in 2012. The budget provides no details about how such a system would work, but in broad outline it is similar to proposals made by market-oriented economists. If it is well designed, a competitive bidding approach can establish a stable and effective mechanism for paying health plans, as well as attenuate some of the geographic inequities in an administered pricing system that is based on fee-for-service expenditure levels.⁵

If the overpayment is substantially reduced, the most rapidly growing part of Medicare Advantage — private fee-for-service plans — will almost surely undergo a rapid reversal of fortune. These plans add almost no value to care delivery: they do not use a network of providers, nor do they engage in substantial utilization management or quality improvement. They are popular largely because the extra payments lavished on them by the federal government allow them to provide additional benefits to enrollees. It would be difficult to find a well-respected policy analyst to defend the existence of these plans.

There remains substantial debate about why competition among HMOs has not produced the benefits hypothesized by private-market advocates and about the future role of HMOs in Medicare. Some analysts assert that private plans inevitably create large increases in administrative costs, siphon off valuable resources for executive salaries and profits, create hassles for patients and physicians, and cannot be held accountable by patients or the public. In this view, there is no constructive role for health plans as intermediaries between the government and health care providers.

Arguments on the other side start with a recitation of the ills of the fee-for-service system — perverse incentives, lack of accountability, difficulty in providing coordinated care for people with chronic illness, overpayment for high technology, decisions regarding coverage of new technology in which politics sometimes trumps evidence, and the inability to create an environment in which physicians and administrators can work cooperatively to figure out how many and what type of health care resources are needed to take care of an enrolled population. According to proponents of these arguments, competition among private plans might cure some of the ills of the fee-for-service payment system, because private health plans could work more flexibly and cooperatively with physicians and hospitals than can the federal government to figure out how best to use health care resources to improve patients' health.

Health plans, however, can prosper much more easily by getting Congress or the CMS to enact favorable payment rules than by working to transform the delivery system. And if they are unsuccessful in lobbying for such rules, they can always fall back on the tried-and-true methods of attracting favorable risks and discouraging enrollment of people who are most in need of care. The CMS's risk-adjusted payment methods reduce but do not eliminate the rewards of "cherry picking" and "lemon dropping." With a few exceptions, such as the integrated Kaiser Permanente Health Plan and a few large, multispecialty medical groups paid by capitation, it is hard to point to substantial progress made by health plans in reorganizing the delivery system for quality and efficiency.

If there is any chance of improving quality and efficiency through competition among health plans, the government must do much more than simply level the payment playing field. It must also hold plans accountable for the care they provide and minimize plans' ability to prosper through favorable risk selection. Although it remains unclear exactly how to create an environment in which competition will produce value, the kinds of actions needed include requiring that plans provide encounter-level information on the content and cost of health care services, defining quality-improvement goals and evaluating success in achieving them, requiring that plans demonstrate that health care providers see them at least in part as facilitators of the health care delivery process rather than adversaries to be outwitted, and requiring that plans demonstrate that they have implemented processes for end-of-life care that lead to improvements in physician–patient communication and ensure that patients' preferences are respected. The CMS must also invest heavily in the development of the technology for measuring and reporting health plan performance, including the development of information on the cost and quality of care provided under fee-for-service Medicare.

Accountability is the holy grail in health care purchasing. It is nearly impossible for the government to hold the nation's hundreds of thousands of physicians and thousands of hospitals individually accountable for health care quality and efficiency. It is certainly very difficult, but perhaps not completely impossible, for some combination of the government (through active management) and beneficiaries (through their choice of coverage) to hold health plans accountable for the care they provide.

To do so, the CMS would need to actively manage competition among plans, armed with a flexible set of rewards and sanctions to encourage plans to perform well. It is not clear whether Congress would be comfortable providing the CMS with the discretion or administrative resources needed to create greater accountability, nor is it clear whether effectively managed competition would produce value for beneficiaries and taxpayers. However, it is clear that as long as the CMS lacks the mandate, resources, and flexibility to hold private health plans accountable, these plans will not add value to the Medicare program. And given the intrinsic difficulties in improving quality and efficiency under fee for service, attempting to nurture the development of accountable health plans is a sensible approach.

No potential conflict of interest relevant to this article was reported.

Source Information

Dr. Kronick is a professor and chief of the Division of Health Care Sciences, Department of Family and Preventive Medicine, University of California, San Diego, School of Medicine, La Jolla.

References

1. MedPAC. Report to the Congress: Medicare payment policy. Washington, DC: Medicare Payment Advisory Commission, March 2009. (Accessed April 24, 2009, at http://www.medpac.gov/documents/Mar09_EntireReport.pdf.) 
2. Medicare Advantage. In: MedPAC. A data book: healthcare spending and the Medicare program. Washington, DC: Medicare Payment Advisory Commission, June 2008:125-57. (Accessed April 24, 2009, at http://www.medpac.gov/documents/Jun08DataBook_Entire_report.pdf.)
3. Advance notice of methodological changes for calendar year (CY) 2010 for Medicare Advantage (MA) capitation rates and Part C and Part D payment policies. Baltimore: Centers for Medicare & Medicaid Services, February 20, 2009. (Accessed April 24, 2009, at http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/Downloads/Advance2010.pdf.)
4. Announcement of calendar year (CY) 2010 Medicare Advantage capitation rates and Medicare Advantage and Part D payment policies. Baltimore: Centers for Medicare & Medicaid Services. (Accessed April 29, 2009, at http://www.cms.hhs.gov/MedicareAdvtgSpecRateStats/AD/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=descending&itemID=CMS1221580&intNumPerPage=10.)
5. Berenson RA, Dowd BE. Medicare advantage plans at a crossroads -- yet again. Health Aff (Millwood) 2009;28:w29-w40. [Free Full Text]

PDF PDA Full Text Add to Personal Archive Add to Citation Manager Notify a Friend E-mail When Cited E-mail When Letters Appear PubMed Citation