Private FFS Medicare plan overpayments to total $2.5B in 2008

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Private fee-for-service (PFFS) Medicare Advantage plans will be paid an average 16.6 percent more in 2008 compared to what the same enrollees would have cost in the traditional Medicare FFS program, according to a report from the Commonwealth Fund.

Although Congress made revisions to policies that affect how PFFS plans operate in 2011 and thereafter, the legislation is expected to slow enrollment in PFFS plans but not stop the overpayment for each enrollee, the report said.

"The legislation passed this year does not adequately address the overpayment problem in private fee-for-service Medicare Advantage plans," said Commonwealth Fund President Karen Davis. "While new requirements will eliminate some of the higher payments to plans and strengthen reporting requirements, we need to determine whether these plans are the best use of limited Medicare dollars."

The study follows an August report which found that private Medicare Advantage (MA) plans were paid 12.4 percent more per enrollee in 2008, compared to what the same enrollee would have cost in the traditional Medicare FFS program, with total extra payments of $8.5 billion in 2008.

In the new report, Brian Biles, professor of health policy at George Washington University in Washington, D.C., and colleagues estimated that extra payments to PFFS plans will amount to $1,248 per beneficiary over traditional Medicare costs for each of about two million Medicare beneficiaries enrolled in PFFS plans, for a total of more than $2.5 billion in 2008.

Since PFFS plans tend to locate in areas where MA payments are high relative to costs in traditional Medicare, extra payments to PFFS plans average five percent more than for other MA plans—equivalent to $310 more per enrollee.

The bulk of the extra payments have resulted from rapid growth in PFFS enrollment—from 220,000 enrollees in December 2005 to nearly two million in February this year. Also, the number of payors offering Medicare PFFS plans grew from four firms in 2004 to 70 in 2008.

Created by the Balanced Budget Act of 1997, PFFS plans currently receive preferential treatment over other MA plans. For example, unlike other MA plans, PFFS plans are not required to have a contract or other network arrangement with physicians, hospitals and other providers. Instead, PFFS plans are allowed to pay providers with which they have no contracts at Medicare FFS rates, called “deeming authority.”

Additionally, PFFS plans are currently exempt from quality reporting and disclosure requirements and they are not subject to bid review or negotiation with Medicare.

The new legislation will eliminate deeming authority and require PFFS plans in certain areas to offer provider networks in 2011. PFFS plans will also have the same reporting requirements as other MA plans, the report said.