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Confronting Urgent Realities: A PIVOTAL ROLE FOR HMOs AND PPOs

Private health plans, namely Medicare health maintenance organizations (HMOs) and preferred provider organizations (PPOs), in assuming responsibility for all medical costs of their enrollees, do offer real opportunities for savings. That potential is leveraged by the fact that more than 80% of Medicare’s costs are incurred by the sickest 20% of enrollees,6 a popula­tion whose costs have been successfully managed by HMOs for a decade with the use of Disease State Management (DSM) Programs. Traditional Medicare, in contrast, began experimenting only two years ago with small DSM demonstration projects that it hopes will duplicate this success.

In the meantime, HMOs have also been stymied by a dysfunctional traditional Medicare reimbursement method that ignores an enrollee’s health status and that is determined mainly by the enrollee’s age, sex, and county of residence. The latter is a perverse incentive because it is linked to Medicare’s fee-for-service costs in each county; these costs vary almost two-fold nationally and even within individual states.
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As an example, an HMO is paid $869 a month for an average enrollee in Dade County, Florida, and only $535 a month for an enrollee in several other Florida counties where physicians and hospitals historically have delivered less costly health care. Now both of these inequitable methodologies are changing.

Before 2003, for instance, Medicare paid an HMO the same amount for a 65-year-old Boston marathoner as for a 65-year-old Boston diabetic patient with congestive heart failure following a heart attack. In 2003, however, Medicare began the key transformation of paying HMOs based on each enrollee’s health history. By 2007, therefore, the Medicare HMO will receive 2.5 times as much for the patient with diabetes or, conversely, only 40% as much for the marathoner. This six-fold difference in payment more accurately reflects the actual costs of caring for the sicker enrollee. Furthermore, by 2007, those payments will not vary by geographic region.

The MMA also improves overall HMO rates, which were limited by the Balanced Budget Act of 1997 to 2% yearly increases between 1998 and 2002 while Medicare’s fee-for-service per capita costs rose by 18% over the same period. The combined incentives will stimulate HMOs’ courtship of elderly citizens who will join up, because contrary to popular rhetoric, senior members are rather fond of their HMOs. In fact, in 2001, more than 87% of 4.5 million Medicare HMO members who were given the choice decided to re-enroll.
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Two contentious provisions of the MMA address drug costs. The bill stipulates that Medicare should rely upon private PBMs, as does the federal government for its nine million employees and retirees. The three largest national PBMs covering more than 200 million lives have sophisticated information systems that provide important quality features for accuracy and surveillance for overutilization and under-utilization and adverse drug interactions. Opponents, in controls.

A practical middle ground would be to emulate the Department of Veterans Affairs, the Department of Defense, and many state Medicaid programs by requiring individual PBMs to use their own enormous market influence to offer Medicare a variation of their “best price.” Such a mechanism would mandate that the Medicare price for any given drug be equal to or less than the best price offered by any of a PBM’s groups.

Second, the bill prohibits re-importation of drugs from other countries whose government-controlled prices are lower. Arguing that prices in the U.S. are too high, opponents favor re-importation, a short-term fix that begs the real issue: that Americans are in reality subsidizing Canadian and European prices, which are too low. The ultimate solution involves modifying trade policy rather than using the temporary solution of a re-importation scheme. Because U.S. companies account for half the world’s branded pharmaceutical industry, an export tariff on drugs sent to developed countries would help to ensure that they pay their fair share of the costs of developing, producing, and distributing drugs.

The MMA also falls short in two other key areas. It is vague about the specifics of a Medicare formulary (which is crucial to its cost-effectiveness), and it is silent on defining standards for the entry of new drugs—standards that will need to be rigorous to maintain Medicare’s long-term fiscal integrity.

Four elements of reform are integral to strengthening Medicare’s financial position while providing a broad-based drug benefit for today’s beneficiaries:

  • retaining traditional Medicare as a core benefit package
  • continuing risk-based payments to new and existing private Medicare HMOs and preferred provider organizations (PPOs), which offer richer benefits, including, at a minimum, a core drug benefit
  • converting to a defined-contribution (i.e., Premium Support) model, which encourages choice among those health plans as affordable alternatives to basic Medicare
  • setting best price drug cost standards for all such plans.

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