Thomas A. Scully, Esq.
Colin T. Roskey, Esq.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 makes regional, open network plans a reality.

At a Glance: 

The new Medicare Prescription Drug, Improvement, and Modernization Act of 2003 offers the most sweeping reforms to the Medicare program since its inception. The managed care benefit formerly offered by Medicare+Choice is greatly improved under Medicare Advantage. Now the nation's senior citizens in urban and rural areas alike can participate in PPOs that provide care-management programs and protection against catastrophic costs. They also receive the same kind of private health insurance options that have been available to the nation's work force. 

Much ink has already been spilled extolling the perceived virtues-and vices-of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) in general and of private delivery in particular. Most of the rhetoric, infected with tones of drug industry disdain, misses the main point. If implemented consistent with Congressional intent, the MMA will offer beneficiaries vibrant new coverage options that more closely resemble coverage available to active workers.

On a voluntary basis, beneficiaries in 2006 will be able to access integrated medical and drug benefits on open-panel networks that provide care-management programs and protection against catastrophic costs. Unlike the Medicare+Choice program and the risk-contracting program that preceded it, plans will be offered on a broader, regional basis not pegged to a specified county or discrete service area. Seniors in all areas of the country, urban and rural, will have access to Medicare Advantage (MA) preferred provider organizations (PPOs).

In some instances, a new beneficiary may simply stay in an employer-sponsored PPO in a seamless transition from active employment to retirement. The primary payers would switch when the worker turns 65, but his or her physicians and assistive care providers would remain the same-an outcome made impossible by the "cliff" faced by new beneficiaries who move into episodic, fee-for-service Medicare after a lifetime of integrated "lightly managed" care.

To accomplish this goal, the MMA makes significant payment increases for current Medicare+Choice organizations in 2004 and 2005, paving the way for enhanced payments and regulatory reductions for a new generation of plan options in 2006. By 2006, the MA program will subsume the Medicare+Choice program and will house both local (county-based) HMO and private fee-for-service plans, as well as the new, regional PPOs. As a general rule, both local and regional plans will be required to offer qualified prescription drug coverage or qualified prescription drug coverage with supplemental drug coverage.

The overarching Congressional goal was to give seniors the same kind of private health insurance options enjoyed by active workers today, including an integrated benefit package, care-management services, catastrophic protection, and access to prescription drugs. While Congress has flirted with "modernized" managed care models for Medicare in the past, it got serious last year. If anticipated deficit-reduction legislation in the coming months holds these new options harmless, Medicare managed care will be off on a new, never-before-charted direction that will improve the lives of seniors and the long-term solvency of the program.

Regional Plan Basics

The offering of regional MA plans is the single most novel policy development in the MMA. An MA regional plan must cover a service area of one or more regions, have a network of contracted providers, and provide for payment of all covered services, regardless of whether network or non-network providers offered the services. The HHS Secretary will designate no fewer than 10, but no more than 50, regions. MA plans must offer limitation on out-of-pocket expenses and a unified deductible. MA plans will be required to carry an insurance license in at least one of the states for each region they intend to cover.


Unlike the current payment methodology for Medicare managed care plans, whose rates are constrained by statutory limits, payments for regional MA plans will be based on a competitive bidding system in which a benchmark for each region will be calculated using a statutory formula that includes a blend of local fee-for-service costs and a weighted average of plan bids for the region. Plans with bids below the benchmark must return savings to the beneficiaries in the form of premium reductions and benefit enhancements.

The government stands to benefit under this equation, especially for highly efficient plans, since the savings are shared, 75 percent/25 percent between the government and the beneficiary. Plans with bids above the benchmark must charge a beneficiary premium that reflects the full amount by which the bid exceeds the benchmark. (Although the competitive bidding concept itself is not new, its application across a whole payment system-as opposed to single aspects of one-is significant. Starting in 2006, all payments to MA plans will be made pursuant to the competitive model.)

Beginning in 2010, the MMA authorizes a demonstration project-a "comparative cost adjustment"-that forces the traditional fee-for-service Medicare program to compete on the basis of benefits, quality, and cost against MA plans in six metropolitan areas. Plans would essentially be paid against a benchmark that includes their bids, unaffected by fee-for-service costs. Beneficiary protections are built into the demonstration, which could result in premium increases in traditional Medicare if MA plans prove to be more efficient. The demonstration project faces substantial political opposition. A similar demonstration was approved in the Balanced Budget Act of 1997, but was quickly repealed in a subsequent bill.


In recognition of the difficulty MA plans may face in taking on new risk on a regional basis, the MMA authorizes an array of risk-abatement tools designed to entice plans to participate and to stabilize and secure plan participation beyond 2006.

The MMA establishes a stabilization fund for this purpose, funded at $10 billion over 10 years, from which the secretary may disburse amounts to recruit and retain selected plans based on requirements in the act. Specified rules constrain the secretary's discretion. For instance, the MMA allows for a national bonus payment to an MA regional plan that offers coverage in every MA region (nationwide) in one year, but only if there was no national plan in the previous year.

Funding increases for plan retention purposes may not exceed the greater of 3 percent of the applicable benchmark in the region or a ratio of regional per capita costs, adjusted for risk, and a weighted average of nationwide benchmark amounts adjusted for risk. In no case may increased payments from the stabilization fund exceed two consecutive years.

During 2006 and 2007, the secretary will also share risk with MA regional plans if plan costs rise above or fall below a specified risk corridor. (If the secretary determines a regional MA plan's allowable costs are over 103 percent of a specified target amount, the plan will receive a payment adjustment resulting in an increase; if a plan's allowable costs are under 92 percent of the specified target amount, a payment adjustment resulting in a reduction will be made.) Neither risk corridors nor stabilization funding incentives are available to local MA plans under the act.

Other Plans

The act offers several additional plans that provide special benefits to beneficiaries.

Special needs. The act establishes specialized MA plans for special-needs beneficiaries. These plans must be narrowly tailored to specifically serve beneficiaries who are institutionalized or entitled to Medicaid, or who have severe and disabling conditions that the secretary deems would benefit from a specialized MA plan.

Cost contracts. The act also extends reasonable-cost health plan contracts indefinitely. (Current law was scheduled to sunset these contracts in 2004.) The act permits cost plans to continue unless two other MA plans of the same type (e.g., two local or two regional) that meet specified enrollment standards operate in the same area. (The logic of tying the life of reasonable-cost contracts to the livelihood of regional MA plans is based on a competitive "level playing field" concept embraced by Congress and captured in the Conference Report language. See H.R. Conf. Rep. No. 108-391, at 559 [2003].)

State Pharmacy Assistance Programs (SPAPs). The act anticipates the continuation of SPAPs that assist low-income individuals with drug costs by making Medicare the primary payer and allowing SPAPs to supplement Part D coverage. The act also clarifies that SPAP contributions are counted toward the annual out-of-pocket cap under Part D. The cap is met when the beneficiary's incurred out-of-pocket costs meet $3,600. Costs are considered incurred only if they are incurred for the deductible, cost-sharing, or benefits not paid because a formulary is applied. Costs are treated as incurred costs only if they are paid by the beneficiary or a family member on his or her behalf, paid on behalf of a low-income beneficiary under designated subsidy provisions, or under an SPAP.

Employer-sponsored plans. Employers that offer qualified prescription drug coverage or its actuarial equivalent are eligible to receive a direct subsidy worth 28 percent of prescription drug spending between $250 and $5,000. Moreover, the subsidy is excludable from taxation. Employers may also coordinate with Medicare to "wrap around" the Part D drug benefit design.

Sweeping Reform

Taken together or apart, the MMA's changes to the Medicare managed care environment are the most sweeping reforms in the mammoth legislation after the introduction of outpatient drug benefits. And although no new regional coverage choices will be available until 2006, the landscape has already been well seeded by the financial investments Congress made earlier this year. Congress should be vigilant as the MA program takes shape this year and next to ensure that this important policy option creates the kinds of good, comprehensive coverage that it envisioned in the fall of 2003 and that seniors deserve.

Thomas A. Scully, Esq., is senior counsel at Alston & Bird LLP, Washington, D.C., where he focuses on healthcare regulatory and legislative matters and advises clients on health policy and strategies for healthcare delivery. As a senior adviser at Welsh, Carson, Anderson and Stowe, he supports the firm's broad base of health investments and develops and evaluates new investment opportunities. In 2001, President George W. Bush appointed Scully the administrator of CMS, where he was noted for his role in passing Medicare reform and initiating the first public reports and disclosures for comparative quality among hospitals, nursing homes, and other healthcare centers. Before his appointment to CMS, he served as president and CEO of the Federation of American Hospitals, which represents 1,700 privately owned and managed community hospitals and health systems throughout the nation.

Colin T. Roskey, Esq., is counsel at Alston & Bird LLP, Washington, D.C., where he offers a range of policy expertise and strategic advice on statutory and regulatory issues affecting the provision of healthcare services. Previously, he served as the health policy adviser and counsel to the Senate Finance Committee. His team was responsible for Medicare and Medicaid policy development that culminated in passage of the MMA. He managed the committee's initiatives on healthcare coverage for the uninsured, which led to passage of expanded Health Savings Accounts in 2003 and the health insurance tax credit in 2002. He has also advised committee chairman Chuck Grassley (R-Iowa) on federal fraud and abuse enforcement policy, and Medicare payment policies affected by, among others, physicians, hospital outpatient departments, dialysis facilities, and ambulatory surgery centers.

Some Background on Medicare Advantage

Under current law, beneficiaries may elect to receive their benefits from an HMO under the Medicare+Choice program, to the extent available. Medicare+Choice plans integrate benefits under Parts A and B in exchange for a monthly per capita payment amount for each enrollee. The per capita payment rate is set at the highest of one of three amounts: (1) a minimum, or "floor," payment rate; (2) a blend of the area-specific and national rates, adjusted for budget neutrality; and (3) a rate reflecting a minimum increase from the previous year's rate (currently 2 percent). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 adds a fourth payment prong that is equal to 100 percent of local fee-for-service costs, starting in 2004, removes the budget neutrality adjustment in the blended rate, and modifies the minimum percentage increase to be the greater of 2 percent or the national per capita Medicare Advantage (MA) growth percentage rate.

MA plans cannot provide prescription drug coverage to a beneficiary enrolled in an MA medical savings account plan or another plan unless that coverage is qualified drug coverage. The operative effect of these provisions is that MA plans essentially become PDPs themselves. Hence, they are designated as MA-PDPs under the act. MA-PDPs are eligible for the same Part D subsidies available to standalone PDPs.

The HHS Secretary has authority to waive program insurance licensure requirements, which may be applied only where an MA regional plan submits a multistate bid but carries a license in just one state. In the states in which the plan has no license, the plan has to demonstrate that it has filed the necessary application to meet the requirements. Only then can the secretary waive such requirements for a period the secretary deems appropriate for the timely processing of the license.

Publication Date: Saturday, May 01, 2004

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