Payment policy and competition in the Medicare+Choice Program

Health Care Financing Review, Fall, 2002 by Steven D. Pizer, Austin B. Frakt

INTRODUCTION

The M+C Program currently provides health insurance coverage to 5 million Medicare beneficiaries through privately operated managed care plans (Centers for Medicare & Medicaid Services, 2002b). In exchange for accepting some limits on utilization and choice of provider, M+C enrollees typically receive more extensive coverage than they would under traditional fee-for-service Medicare. Until recently, a substantial fraction of M+C enrollees received outpatient prescription drug coverage and paid either nothing or a small additional premium for their coverage. However, the program has experienced profound changes as plans have withdrawn from a substantial number of markets, leaving enrollees to search for coverage elsewhere. (1) In January 2001, more than 150,000 Medicare beneficiaries previously enrolled in M+C were left with no M+C plans doing business in their counties (Health Care Financing Administration, 2000). In addition to the market withdrawals, plans began to increase premiums and reduce benefits in their remaining markets (Gold, 2001). Throughout this period, plans argued that changes in payment rates brought about by the Balanced Budget Act of 1997 and subsequent legislation combined with rapidly increasing costs to make these decisions unavoidable (American Association of Health Plans, 2000; Fried and Ziegler, 2000).

In this article we investigate plan behavior with respect to premiums and benefits, ultimately separating the influences of payment rates, the intensity of interplan competition, and the underlying cost of providing health insurance coverage. The relative importance of each of these factors should help to determine the composition of an appropriate policy response to the recent turmoil in the M+C Program. Furthermore, it is particularly important to develop a deeper understanding of plan behavior now, as Congress and the Bush administration consider alternative methods of providing outpatient prescription drug benefits to Medicare beneficiaries. The M+C Program is seen (particularly by the administration) as a model of how Medicare benefits should be modernized in the future.

Although other studies have attempted to describe recent changes in premiums and benefits in M+C plans (Gold, 2001; Medicare Payment Advisory Commission, 2000; U.S. General Accounting Office, 2000), this article differs in two ways. First, we use multivariate methods over time to produce more precise results than previous work, and second, we take advantage of the passage of the Benefits Improvement and Protection Act (BIPA) of 2000, which created a natural experiment

Since BIPA passed in December 2000, plans had already established their premium and benefit structures for 2001 in response to expected costs and the payment rates in force prior to BIPA. These levels were reported in the January 2001 Medicare Compare database. With the passage of BIPA, plans were permitted to change their premium and benefit levels to reflect the newly increased payment rates. The new levels were reported in the March 2001 Medicare Compare data. Since expected costs should not have changed substantially between January and March, a comparison of premiums and benefits from these 2 months should reveal effects of payment rate changes that are almost entirely free of the influence of unobserved intertemporal changes in cost. This is valuable because a principal obstacle to understanding the relationship between payments and plan behavior is the fact that the true costs of benefits are unobservable. It is impossible to evaluate whether payments are adequate to cover costs when costs are unobservable. Similarly, one cannot attribute observed changes in benefits or premiums to observed changes in payment rates or the intensity of competition if costs might be changing at the same time, but cannot be observed. At a time when the cost of health care generally and prescription drugs in particular have been escalating rapidly, the fortuitous, last-minute change in payment rates brought about by BIPA allowed us to overcome these problems by revealing how plans responded to changes in payments implemented on an unusually compressed schedule. (Although the compressed schedule permits a natural experiment with respect to cost, it also may have induced plans to translate less of the payment changes into benefit and premium adjustments than they would have otherwise. Researchers have found that more plans reported using the additional funds from BIPA to stabilize access to providers than to improve the benefit package (U.S. General Accounting Office, 2001; Centers for Medicare & Medicaid Services, 2002a). This included unprecedented deposits into stabilization funds in 2001, which were mostly withdrawn during 2002 (Zarabozo, 2002). If benefit and premium adjustments were muted by the schedule, we would expect our quantitative estimates to be affected accordingly, but qualitative relationships to stay approximately the same.)

Our principal finding is that the effects of competition are comparable in importance to the effects of payment rates. The finding that more intense competition increases benefits and reduces premiums, although predictable from a theoretical standpoint, empirically confirms that it is possible for the Medicare Program to increase benefits without increasing spending or shifting additional costs to beneficiaries. Conversely, reduced competition would have the reverse effect We acknowledge that competition and spending are related by the fact that lower payments can be expected to induce plan exit, thereby undermining competition. Nevertheless, this research shows that the Federal Government has a strong institutional interest in safeguarding and promoting interplan competition in the M+C Program, independent of its policy on payment rates.