In The Cost of Privatization: Extra Payments to Medicare Advantage Plans, Brian Biles and Lauren Hersch Nicholas of George Washington University, and Barbara S. Cooper of The Commonwealth Fund note that while the objective of higher payment rates to private plans in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) is to save Medicare money in the long term, the payments will add to Medicare's costs in 2004. The total extra payments are calculated based on enrollment at December 2003 levels of approximately 5 million Medicare enrollees in managed care plans, or 11.8 percent of total Medicare beneficiaries.
"The experience of private health plans in Medicare has not been promising, as plans have dropped coverage where it hasn't been profitable. Beneficiaries who lose their coverage in this manner often face disruption in their care as they seek coverage through another plan or Medigap--or pay more out of pocket with Medicare-only coverage," said Commonwealth Fund President Karen Davis. "The policy of increasing payments to private managed care plans needs to be carefully monitored to determine if it is achieving its objectives and is making the best use of funds for Medicare beneficiaries."
"New 2005 rates for private health plans announced by Medicare last week indicate that the policy of extra payments to private plans will continue," said Biles, professor of health services management and policy at George Washington University.
Rural plans have higher extra payments than urban plans--16% over local fee-for-service costs--but the total of additional payments to rural plans is relatively small at $232 million. Urban plans have extra payments of 8% but more enrollees, so their extra payments total more than $2.5 billion.
While part of the extra $2.75 billion in payments will result in additional benefits for Medicare Advantage enrollees, these will not be distributed equally. More than 40 percent of Medicare beneficiaries, particularly those living in rural areas, do not have access to a Medicare Advantage plan, and urban beneficiaries may have physicians who are not in plan networks.
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