A Taxpayer Refund: Return Private Fee for Service

In a prior post I suggested that about 3 million of the current 10 million Medicare Advantage (MA) enrollees might lose access to MA plans if taxpayer-funded payments to those plans are cut to the extent proposed in current health reform legislation. Most of those losing such access are enrolled in a plan-type known as private fee for service (PFFS). My recent work with Steve Pizer and Roger Feldman suggests that PFFS plans will be virtually wiped out by such a payment cut, sending their roughly 2.3 million beneficiaries elsewhere for coverage.

PFFS plans do almost nothing the MA program was designed to do. They do not manage care. They do not control costs. Because they do not establish networks, as HMOs do, they do not serve as a counterweight to provider consolidation. They are not required to offer an option that includes a drug benefit, as MA HMOs are. They pay providers the same rates as traditional FFS Medicare. The extra benefits they offer are less generous than those available from HMOs. In short, they are paid handsomely, well above average FFS costs, to serve as enhanced FFS products. In effect, they are subsidized Medigap. MedPAC has repeatedly recommended, and CBO has scored, cuts in payments to PFFS plans, as would occur under health reform.

Who decided to craft a subsidized Medigap-like product in the form of PFFS, and when? The push began in 1997 by the National Right to Life Committee, which was concerned that Medicare HMOs would ration care. Then, in the final hours of the 109th Congress, outgoing Speaker Dennis Hastert slipped a provision into a 2006 tax and trade bill that favored PFFS plans over others. The provision permitted beneficiaries to preferentially switch coverage into PFFS plans long after the open enrollment period expired. Hastert’s efforts were applauded by Aon, whose subsidiary Sterling Life was the first carrier to market PFFS plans. Subsequently, PFFS plan enrollment took off.

Though a few special interest groups strongly supported the growth of PFFS plans, there was no deliberative debate about whether they make sense and deserve the degree of taxpayer largess and relative freedom from MA requirements they enjoy. John McCain’s recent proposal to strip the MA cuts from the Senate’s health reform bill renews the debate over MA payment cuts. This is, finally, a debate over PFFS in disguise. Cutting payments to MA plans would nearly eliminate the PFFS plan type, but have a considerably smaller (though greater than zero) effect on enrollees of MA HMOs.

Taxpayers didn’t order PFFS plans, and they cost a fortune. They’re like an expensive “gift” that keeps on taking. “Returning” them and using the “refund” for other purposes makes eminent sense.

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