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Private Plans Serving Medicare Beneficiaries

Beneficiaries have another option under the Medicare program: they can choose to enroll in a participating private plan and agree to get all of their Medicare-covered services from that plan. This plan—usually a health maintenance organization (HMO)—agrees to provide care to Medicare beneficiaries in a given geographical area for a fixed monthly payment. When this HMO option was established in 1983, it was intended to save money for Medicare by paying plans at a rate of 95 percent of the costs of average enrollees. The new Part C of Medicare, called Medicare+Choice, established by the BBA renamed and modified the managed-care option. The intent of this change was to move Medicare further away from its traditional role as insurer and expand its role as a purchaser of private insurance. Additional types of plans, such as private fee-for-service plans and physician- or hospital-led insurance, are now also allowed to participate in Medicare+Choice, although so far only a few such plans have been offered to Medicare beneficiaries.

Initially, when the HMO option began, private plans attracted only a very small share of Medicare beneficiaries, because HMOs require beneficiaries to use only plan-approved doctors and hospitals as a condition of coverage. Medicare has lagged behind the rest of the health care system in part because beneficiaries can choose to remain in traditional fee-for-service Medicare and use services at will with no penalties attached. To be more competitive with fee-for-service, many HMOs offer beneficiaries services in addition to those covered by Medicare, such as prescription drug coverage—a strategy that became more successful as the cost of supplemental insurance elsewhere in the system rose rapidly. Many of the HMOs offering further benefits do so in those parts of the country where Medicare's monthly contribution to HMOs is high. Plans are able to offer more benefits in part because beneficiaries agree to abide by a stricter set of rules for participation, such as using only doctors, hospitals, and other health care providers who are on a prescribed list. In exchange, beneficiaries usually face lower cost-sharing requirements, and they sometimes have access to benefits such as prescription drug coverage or dental care.

Most studies of the private-plan option have suggested that payments are more generous than what it actually costs to provide services, so that Medicare's monthly payments to plans effectively subsidize additional benefits for those in private plans—and the option therefore fails to save money for the government. Changes made under the BBA were intended to reduce these overpayments, but these changes have been controversial and have contributed to a number of plans withdrawing from the Medicare+Choice system. BBA clearly did not accelerate the move to more private coverage of Medicare beneficiaries. Some of the BBA changes were modified in 1999, but HMOs remain critical of the severity of the BBA cutbacks. Although plans may still be overpaid, both HMOs and their enrollees argue that they should not be subject to slower rates of growth in payments over time, as this restricts their ability to continue offering extra benefits. On the other hand, beneficiaries in fee-for-service Medicare do not receive subsidies for extra benefits, and higher payments to HMOs may increase the gap in funding levels between these two sources.

In early 2001, about 5.6 million beneficiaries participated in Medicare+Choice plans. While still representing only about 14 percent of all beneficiaries, this portion of Medicare has grown rapidly since the early 1990s, though growth slowed between 1998 and 2001. The viability of the Medicare+Choice plan remains one of the most important problems facing Medicare, and also raises concerns about some of the broader reform options now under consideration.

Additional topics

Medicine EncyclopediaAging Healthy - Part 3Medicare - A Brief History And Overview, Changes In Payment Policies, Other Medicare Policies Affecting Health Care Delivery