    Medicare+Choice: Plan Withdrawals Indicate Difficulty of Providing Choice
    While Achieving Savings (Letter Report, 09/07/2000, GAO/HEHS-00-183).

    Pursuant to a congressional request, GAO reviewed health care plans'
    withdrawal from the Medicare Choice program, focusing on the: (1)
    geographic distribution and the distribution among plans of enrollees
    affected by the recent plan withdrawals; (2) factors associated with
    plans that terminated or reduced their participation in the program; and
    (3) likely role of payment rates in affecting plans' decisions.

    GAO noted that: (1) of 309 plans serving Medicare beneficiaries at the
    end of 1999, 99 plans terminated their contracts or reduced the number
    of counties they served for the 2000 contract year, and 118 have
    announced they will terminate their contracts or reduce service areas
    for the 2001 contract year; (2) these withdrawals affected about 328,000
    enrollees in 2000 and will affect almost 1 million enrollees in 2001;
    (3) the number of enrollees affected accounts for about 5 percent of
    Medicare Choice enrollees in 2000 and about 15 percent in 2001; (4) a
    disproportionate number of affected enrollees live outside of major
    urban areas; (5) a portion of these enrollees, approximately 79,000 in
    2000 and 159,000 in 2001, will have no other Medicare managed care
    option available in their area and must either switch to a non-managed
    care option, if one is available in their area, or return to traditional
    fee-for-service (FFS) Medicare; (6) while a new private FFS plan has
    begun to offer services in many of the affected areas as an alternative
    to the traditional public FFS  Health Care Financing Administration
    (HCFA) manages, does not offer a prescription drug benefit; (7) in
    January 2000, Medicare Choice plans tended to withdraw from more
    difficult to serve rural counties or large urban areas that they had
    entered more recently or where they failed to attract sufficient
    enrollment; (8) in 2001, the trend is essentially the same for the
    service area reductions but somewhat different for the contract
    terminations, which involve some older, more established plans; (9) the
    pattern of Medicare Choice withdrawals shares common elements with plan
    participation in the similarly choice-based health insurance program for
    federal employees; (10) industry representatives contend that the
    Balanced Budget Act's (BBA) payment rate changes were too severe and
    that low Medicare payment rates are largely responsible for the plan
    withdrawals; (11) however, since the BBA was enacted, Medicare Choice
    payment rates have risen faster than per capita FFS spending; (12) in
    addition, many plans have attracted beneficiaries who have
    lower-than-average expected health care costs, while Medicare Choice
    payments are largely based on the expected cost of beneficiaries with
    average health care needs; and (13) it is unclear whether Medicare
    Choice payment rate increases would affect plans' participation
    decisions.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  HEHS-00-183
         TITLE:  Medicare+Choice: Plan Withdrawals Indicate Difficulty of
    	     Providing Choice While Achieving Savings
          DATE:  09/07/2000
       SUBJECT:  Health care programs
    	     Managed health care
    	     Health insurance cost control
    	     Health resources utilization
    	     Medical services rates
    	     Health insurance
    IDENTIFIER:  Medicare Choice Program
    	     Federal Employees Health Benefits Program

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    GAO/HEHS-00-183
    Appendix I: Scope, Methodology, and Data Sources

    44

    Appendix II: Plans Withdrawing From Medicare+Choice,
    January 2000

    47

    Appendix III: Plans Withdrawing From Medicare+Choice,
    January 2001

    51

    Appendix IV: Comments From the Health Care Financing
    Administration

    56

    Appendix V: Comments From the American Association of
    Health Plans

    57

    Appendix VI: Comments From the BlueCross BlueShield
    Association

    61

    Appendix VII: Comments From the Health Insurance Association
    of America

    64

    Table 1: Medicare Managed Care Enrollment and Geographic
    Impact of the 2000 Withdrawals 13

    Table 2: Largest Withdrawing Medicare+Choice Plans, January 2000 14

    Table 3: Largest Withdrawing Medicare+Choice Plans, January 2001 15

    Table 4: Key Characteristics of Plans That Terminated Their
    Medicare Contracts in 2000 and 2001 21

    Table 5: Average Annual Amount Spent per Enrollee on
    Non-Medicare Benefits, 1999 and 2000 34

    Table 6: Counties With Medicare+Choice Plans in July 1999
    Affected by 2000 Withdrawals, by Year 2000 Payment Rates 36

    Table 7: Counties With Medicare+Choice Plans in March 2000
    Affected by 2001 Withdrawals, by Year 2001 Payment Rates 36

    Table 8: Counties With Medicare Plans in July 1999 Affected by Withdrawals,
    by Percentage Increase in 2000 Payment Rates 38

    Figure 1: Proportion of Medicare+Choice and Affected Enrollees
    in Rural, Fringe/Small Urban, and Large Urban Areas 12

    Figure 2: Areas Where Sterling Option I Is Available, 2000 17

    Figure 3: Plan Participation in Medicare and FEHBP, 1994-2000 19

    Figure 4: Humana's Participation in Texas, 1986-2001 24

    Figure 5: Plan Participation in Maryland, 1986-2001 28

    Figure 6: Cumulative Increase in Average Medicare+Choice
    County Rates and per Capita FFS Spending, 1997-2001 31

    AAHP American Association of Health Plans

    BBA Balanced Budget Act of 1997

    BBRA Balanced Budget Refinement Act of 1999

    BCBSA BlueCross BlueShield Association

    CBO Congressional Budget Office

    ESRD end-stage renal disease

    FEHBP Federal Employees Health Benefits Program

    FFS fee-for-service

    GME graduate medical education

    HCFA Health Care Financing Administration

    HHS Department of Health and Human Services

    HIAA Health Insurance Association of America

    HMO health maintenance organization

    OIG Office of Inspector General

    Health, Education, and
    Human Services Division

    B-293906

    September 7, 2000

    Congressional Requesters

    Through most of the 1990s, enrollment in Medicare managed care plans grew
    rapidly.1 The number of beneficiaries enrolled in these plans increased from
    almost 2 million in 1993 to over 6 million in 1998 (16 percent of all
    Medicare beneficiaries), and the number of participating plans more than
    tripled. Many beneficiaries were attracted to managed care plans because
    they typically offered services not covered under Medicare's traditional
    fee-for-service (FFS) program--such as routine physical examinations and
    outpatient prescription drugs--and because members generally paid less out
    of pocket than they would in FFS. However, many areas of the country were
    not served by these plans. About 30 percent of the nation's 39 million
    Medicare beneficiaries--particularly those living in rural areas--had no
    alternative to the FFS program. A second problem was that Medicare was not
    realizing the expected savings from managed care. A number of studies by
    GAO, other government agencies, and researchers had concluded that plan
    payments were not adequately adjusted to reflect the fact that plans tended
    to attract beneficiaries with lower-than-average health costs.

    In the Balanced Budget Act of 1997 (BBA), the Congress sought to address
    some of these concerns by creating the Medicare+Choice program. To expand
    Medicare beneficiaries' health plan options, the BBA included payment and
    other changes to encourage the wider availability of health maintenance
    organizations and permitted other types of health plans, such as preferred
    provider organizations, to participate. Medicare+Choice was also expected to
    improve Medicare's financial posture by better controlling spending.
    Accordingly, the BBA contained provisions to temporarily slow the growth of
    plan payment rates relative to FFS spending and required that future
    payments better reflect the expected health care utilization of Medicare
    beneficiaries enrolled in plans.

    Following the implementation of Medicare+Choice, nearly 100 plans either
    terminated their contracts and fully withdrew from the program or partially
    withdrew by reducing the geographic areas they served for the 1999 contract
    year. We previously reported that these plans tended to be recent market
    entrants, had low enrollment, or faced competition from larger plans, and
    that the withdrawals may have largely resulted from competitive market
    forces.2 Since then, more plans have either withdrawn for the 2000 contract
    year or announced that they will withdraw for the 2001 contract year.
    Because of your continuing interest in the Medicare+Choice program, you
    asked us to (1) determine the geographic distribution and the distribution
    among plans of enrollees affected by the recent plan withdrawals, (2)
    identify the factors associated with plans that terminated or reduced their
    participation in the program, and (3) examine the likely role of payment
    rates in affecting plans' decisions. (Requesters are listed at the end of
    this letter.) To answer these questions, we analyzed enrollment and plan
    participation data from the Health Care Financing Administration (HCFA) and
    synthesized findings from our previous reports. Appendix I presents the
    details of our methodology. Our work was done from August 1999 to September
    2000 in accordance with generally accepted government auditing standards.

    Of 309 plans serving Medicare beneficiaries at the end of 1999, 99 plans
    terminated their contracts or reduced the number of counties they served for
    the 2000 contract year, and 118 have announced they will terminate their
    contracts or reduce service areas for the 2001 contract year. These
    withdrawals affected about 328,000 enrollees in 2000 and will affect almost
    1 million enrollees in 2001. The number of enrollees affected accounts for
    about 5 percent of Medicare+Choice enrollees in 2000 and about 15 percent in
    2001. A disproportionate number of affected enrollees live outside of major
    urban areas. A portion of these enrollees, approximately 79,000 in 2000 and
    159,000 in 2001, will have no other Medicare managed care option available
    in their area and must either switch to a non-managed care option, if one is
    available in their area, or return to traditional FFS Medicare. These
    withdrawals can mean higher out-of-pocket costs and be disruptive for those
    beneficiaries who lose access to relatively inexpensive prescription drug
    benefits or must switch health care providers. While a new private FFS plan
    has begun to offer services in many of the affected areas as an alternative
    to the traditional public FFS HCFA manages, it does not offer a prescription
    drug benefit.

    Some factors are common to plan withdrawals occurring in 2000 and 2001, but
    there are some differences. In January 2000, Medicare+Choice plans tended to
    withdraw from more difficult to serve rural counties or large urban areas
    that they had entered more recently or where they failed to attract
    sufficient enrollment. In 2001, the trend is essentially the same for the
    service area reductions but somewhat different for the contract
    terminations, which involve some older, more established plans. The pattern
    of Medicare+Choice withdrawals shares common elements with plan
    participation in the similarly choice-based health insurance program for
    federal employees. That program also experienced a period of rapid expansion
    between 1994 and 1997 followed by the withdrawal of newer, relatively small
    plans. In both 2000 and 2001, other factors, such as problems contracting
    with health care providers, may also have contributed to the Medicare plan
    withdrawals.

    Industry representatives contend that the BBA's payment rate changes were
    too severe and that low Medicare payment rates are largely responsible for
    the plan withdrawals. However, since the BBA was enacted, Medicare+Choice
    payment rates have risen faster than per capita FFS spending. In addition,
    many plans have attracted beneficiaries who have lower-than-average expected
    health care costs, while Medicare+Choice payments are largely based on the
    expected cost of beneficiaries with average health care needs. The result is
    that Medicare can pay more for a beneficiary who enrolls in a plan than if
    the beneficiary had remained in FFS. As we recently reported, these
    additional payments amounted to $5.2 billion, or 21 percent, more in 1998
    than the FFS program would have spent to provide Medicare-covered benefits
    to plans' enrollees.3 Similarly, many of the withdrawing plans reported that
    Medicare's payment rates substantially exceeded their own estimated costs
    (including allowed profits) of providing Medicare-covered benefits. On
    average, plans that terminated their contracts in 2000 or 2001 reported
    spending 22 percent of their Medicare payments, or about $1,200 per
    beneficiary, on benefits that are not available in the FFS program--such as
    routine physical examinations or prescription drugs.

    Although industry representatives have called for Medicare+Choice payment
    rate increases, it is unclear whether increases would affect plans'
    participation decisions. In 2000, 7 percent of the counties with a
    Medicare+Choice plan in 1999 received a payment rate increase of 10 percent
    or more. Nonetheless, nearly 40 percent of these counties experienced a plan
    withdrawal. This suggests that the magnitude of rate increases needed to
    make participating in Medicare a sufficiently attractive business option for
    some plans may not be reasonable in light of countervailing pressures to
    make the Medicare program financially sustainable for the long term.

    As of July 2000, about 6.2 million people--or approximately 16 percent of
    Medicare's 39 million beneficiaries--were enrolled in Medicare+Choice plans.
    These plans receive a fixed monthly payment for each beneficiary, regardless
    of what an individual enrollee's care actually costs. Higher costs reduce a
    plan's profits or result in losses, while lower costs can enable it to offer
    additional benefits that help it to retain existing enrollees and attract
    new enrollees. Because managed care plans have a financial incentive to
    provide care efficiently, policymakers have long looked to them to curb
    unnecessary spending and produce savings for Medicare. Among BBA's major
    reforms to contain Medicare spending was the creation of Medicare+Choice,
    which was also designed to increase the plan options available to Medicare
    beneficiaries.

    Before the BBA, numerous studies by us, the Physician Payment Review
    Commission--which has been incorporated into the Medicare Payment Advisory
    Commission--HCFA, and others demonstrated that the Medicare program spent
    hundreds of millions more on beneficiaries enrolled in health plans than it
    would have spent if the same individuals had remained in traditional FFS
    Medicare.4 This occurred because Medicare payments were based on the
    estimated cost of FFS beneficiaries with average health and were not
    adequately adjusted to reflect the fact that plans tended to enroll
    beneficiaries in better-than-average health who had lower health care
    costs--a phenomenon known as favorable selection.

    Before 1998, base payment rates to plans in each county were set at 95
    percent of the estimated FFS cost of the average beneficiary. The wide
    variation in local FFS expenditures, caused by local differences in both the
    prices of medical services and in beneficiaries' use of services, led to
    corresponding variation in these base rates. This variation may have
    accounted for some of the unevenness in plan availability across the
    country. Other factors, such as the higher concentration of Medicare
    beneficiaries, may have prompted plans to serve primarily urban areas.
    Beneficiaries in most rural areas lacked access to plans.

    Beginning in 1998, the BBA substantially changed the method used to set plan
    payment rates. The new method involves paying the highest of three
    alternative rates: a minimum amount, or "floor"; a minimum increase over the
    previous year's payment rate; or a blend of historical FFS spending in a
    county and national average costs adjusted for local price levels. Some of
    the new payment provisions were designed to reduce excess payments, while
    others were designed for different purposes--such as increasing plan
    participation in geographic areas that had low payment rates.

    The BBA aims to reduce the excess in Medicare's health plan payments
    primarily by holding down per capita payment increases for 5 years and by
    mandating a new health-based risk adjustment system. In January 2000, HCFA
    implemented a method for adjusting plan payments based on beneficiary health
    status, as required by the BBA. The new method, to be phased in over time,
    will pay plans more for serving Medicare beneficiaries with serious health
    problems and less for serving relatively healthy ones.

    The BBA also contains provisions to gradually remove graduate medical
    education (GME) payments from plan payments and provide for teaching
    hospitals to receive these payments directly from Medicare.5 Because GME
    spending is concentrated in high-payment-rate counties, its removal is
    expected to slow payment rate growth more in those areas.

    Another BBA objective is to reduce the geographic disparity in payment
    rates. A methodological approach known as "blending" will, over time, move
    all rates closer to the national average by providing for larger payment
    increases in low-rate counties and smaller payment increases in high-rate
    counties. In addition, the BBA established a minimum payment rate, known as
    a "floor," to encourage plans to offer services in areas that historically
    had low payment rates and few participating plans--primarily rural counties.
    The BBA also eliminated the requirement that no more than 50 percent of a
    plan's enrollment may consist of Medicare and Medicaid beneficiaries. This
    means that Medicare plans can now serve areas without first building a
    commercial base.

    In 1999, 45 of the 346 plans that participated in 1998 terminated their
    Medicare contracts and 54 others reduced the number of counties they served.
    These withdrawal decisions affected about 407,000 enrollees (7 percent of
    the managed care population) who had to choose a new plan (if one was
    available in their county) or switch to FFS. About 61,000 of these
    enrollees, or 1 percent of the total Medicare managed care population, lived
    in counties in which no other plan was offered. Even if another plan was
    available, the approximately 450 beneficiaries affected by the withdrawals
    who had end-stage renal disease (ESRD) had to return to FFS.6 Medicare
    prohibits beneficiaries with ESRD from joining a health plan, although they
    may stay in one if they develop the disease while enrolled.

    Plan withdrawals can be disruptive and costly for affected beneficiaries.
    Although many affected beneficiaries can enroll in another plan, this option
    may require them to switch health care providers and accept different
    benefit coverage. Those who return to FFS may be able to retain their
    providers, but typically face out-of-pocket costs that are higher than they
    incurred as managed care enrollees. For example, most plan enrollees receive
    some coverage for outpatient prescription drugs, a benefit not offered in
    the FFS program. Although the BBA guarantees beneficiaries affected by plan
    withdrawals the right to purchase certain supplemental insurance policies
    (known as Medigap), none of the guaranteed policies cover prescription
    drugs.

    Officials from organizations representing plans reported that the BBA
    changes to the payment rates and the increased administrative burden of the
    new regulations were largely responsible for the plan withdrawals. According
    to the officials, Medicare payment rate increases did not keep pace with
    plans' costs or medical inflation.

    Our analysis indicated that a combination of market factors may have
    influenced plans' participation decisions. Plans more frequently withdrew
    from counties they had entered more recently, where they had attracted fewer
    enrollees, or where they faced larger competitors. Some plans indicated that
    they withdrew from areas where they were unsuccessful in establishing
    sufficient provider networks. The effect of Medicare's payment rates on
    withdrawals was much less obvious. For example, about 90 percent of
    high-payment-rate counties experienced a plan withdrawal compared with only
    34 percent of low-payment counties. Taken as a whole, these findings
    suggested that a portion of the withdrawals may have been the result of
    plans that were less able to compete effectively in certain areas.

    In November 1999, the Congress passed the Balanced Budget Refinement Act of
    1999 (BBRA). The BBRA contains provisions designed to encourage plan
    participation in Medicare+Choice. Among other changes, the BBRA provides a
    new entry bonus to plans that begin serving currently unserved areas. It
    also increases plans' flexibility to vary benefits within a geographic area
    and reduces some administrative requirements. In addition, the act slows the
    phase-in of the new risk adjustment methodology, reducing the short-term
    effect of the new methodology on plan payments. The BBRA also reduces the
    length of time that a plan has to wait to reenter the program after
    terminating its Medicare contract. The effect of these provisions on future
    plan participation is uncertain.

    Smaller Urban Areas

    In 2000, 41 of 309 participating plans terminated their Medicare+Choice
    contracts and another 58 plans reduced the number of counties they serve.
    This pattern will continue in 2001, when 65 of 261 plans currently
    participating in Medicare+Choice have announced they will terminate and
    another 53 plans will change their service areas. Combined, these plan
    withdrawals directly affect about 1.3 million Medicare+Choice enrollees. The
    2001 withdrawals affect a much larger percentage of enrollees, approximately
    15 percent, compared with the 2000 withdrawals that affected about 5 percent
    of all enrollees. All affected enrollees have to choose a new plan (if a
    plan accepting new enrollees is available in their county) or switch to FFS.
    By 2001, almost 75 percent of the counties that had a Medicare+Choice plan
    in 1999 will have been affected.7 About 238,000, or approximately 19
    percent, of the affected enrollees live in counties in which no other
    managed care plan is being offered. Some of these beneficiaries may have the
    option of enrolling in a new private FFS plan, but the remainder will have
    no alternative to the traditional FFS program. The 1,940 beneficiaries in
    withdrawing plans who have ESRD must return to FFS.

    Plan withdrawals in both years disproportionately affect beneficiaries
    living in small urban, fringe, and rural counties.8 In 2000, approximately
    65 percent of the 328,000 beneficiaries affected by the withdrawals lived in
    one of these types of counties even though these areas accounted for less
    than 33 percent of Medicare's managed care enrollees. (See fig. 1.) In
    contrast, the effects of the 2001 withdrawals will be more widespread and
    more representative of the distribution of Medicare+Choice enrollees. In
    both years, beneficiaries living in less densely populated areas were also
    likelier to be left only with the FFS alternative compared to affected
    beneficiaries in major urban areas. (See table 1.)

    A small number of plans accounted for a substantial portion of the affected
    enrollees in both years--the 10 largest withdrawing plans accounting for 45
    percent in 2000 and 37 percent in 2001. (See tables 2 and 3.) Whereas the
    largest plans that withdrew in 2000 were concentrated in small urban,
    fringe, and rural counties, the largest withdrawing plans in 2001 are more
    uniformly distributed among these and major urban areas. Also, the
    withdrawing plans in 2001 tend to have significantly larger enrollments than
    the withdrawing plans in 2000.

    Note: Approximately 8,400 of the affected enrollees for 2001 live outside of
    the withdrawing plans' service areas. These enrollees are excluded from this
    analysis.

    Source: Medicare Compare Database, 1999 and 2000; Medicare Managed Care
    Market Penetration State/County/Plan Data Files, July 1999 and Mar. 2000,
    www.hcfa.gov/medicare/; Bureau of Health Professions, Area Resource File,
    Feb. 1999; and files of contract terminations and service area reductions
    from the Center for Health Plans and Providers at HCFA.

                                           Small
                              Rural        urban/      Major urban  Nationwide
                              counties     fringe      areas
                                           counties
     1999
     Medicare+Choice
     enrollment               219,000      1,774,000   4,198,000    6,191,000
     Percentage of total      3.5          28.7        67.8         100
     2000
     Enrollees affected by
     withdrawals              42,000       169,000     117,000      328,000
     Percentage of total      12.7         51.7        35.6         100
     Affected enrollees with
     no other managed care    30,000       35,000      14,000       79,000
     option
     Percentage of total      37.5         44.7        17.8         100
     2001
     Enrollees affected by
     withdrawals              69,000       363,000     493,000      925,000
     Percentage of total      7.5          39.2        53.3         100
     Affected enrollees with
     no other managed care    44,000       93,000      22,000       159,000
     option
     Percentage of total      27.5         58.6        13.9         100

    Note: Approximately 8,400 of the affected enrollees for 2001 live outside of
    the withdrawing plans' service areas. These enrollees are excluded from this
    analysis.

    Source: Medicare Compare Database, 1999 and 2000; Medicare Managed Care
    Market Penetration State/County/Plan Data Files, July 1999 and Mar. 2000,
    www.hcfa.gov/medicare/; Bureau of Health Professions, Area Resource File,
    Feb. 1999; and files of contract terminations and service area reductions
    from the Center for Health Plans and Providers at HCFA.

                               Number of          Percentage of affected
     Plan name                 enrollees          enrollees in rural, fringe,
                               affected           or small urban counties
     Humana HP of Texasa       23,500             39
     Ochsner Health Plana
     (La.)                     17,000             100
     United Health Care of
     Louisiana                 17,000             64
     Florida Health Choice,
     Inc.                      14,700             88
     Free State Health Plana
     (Md.)                     14,700             100
     Blue Cross/Shield of
     Arizona                   14,500             28
     Optima Health Plan (Va.)  13,800             2
     Healthsource New
     Hampshire                 13,400             100
     Capital Area Community HP
     (N.Y.)                    9,700              100
     Humana Health Plan, Inc.
     (Nev.)                    9,500              100
     Affected enrollees in 10
     plans                     147,800            69
     Affected enrollees in 89
     other withdrawing plans   180,200            61

    aPlan remained in Medicare but reduced the number of counties served.

    Sources: Medicare Compare Database, 1999; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    and files of contract terminations and service area reductions from the
    Center for Health Plans and Providers at HCFA.

                                                Percent of affected enrollees
     Plan name              Total number of     in rural, fringe, or small
                            enrollees affected
                                                urban counties
     NYLCare Health Plans
     (Tex.)                 71,600              42
     NYLCare Health Plans
     (Tex.)                 56,200              21
     Aetna U.S. Healthcare
     (N.Y.)a                34,900              22
     Free State Health Plan
     (Md.)                  31,400              0
     HMO of Northeastern PA 30,700              100
     Aetna U.S. Healthcare
     (Ohio)                 27,800              30
     Humana Medical Plan
     (Fla.)a                25,600              64
     Anthem Health Plans
     (Conn.)                23,500              50
     Humana HP of Texasa    20,500              12
     Aetna U.S. Healthcare
     (Pa.)a                 18,100              100
     Affected enrollees in
     10 plans               340,300             40
     Affected enrollees in
     108 other
                            585,000             50
     withdrawing plans

    Note: Approximately 8,400 of the affected enrollees for 2001 live outside of
    the withdrawing plans' service areas. These enrollees are excluded from this
    analysis.

    aPlan will remain in Medicare but reduce the number of counties served.

    Sources: Medicare Compare Database, 2000; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, Mar. 2000, www.hcfa.gov/medicare/;
    and files of contract terminations and service area reductions from the
    Center for Health Plans and Providers at HCFA.

    Although some plans continue to submit applications to enter the
    Medicare+Choice program or expand their service areas, the volume of
    applications has decreased from 30 in 1999 to 10 in 2000. HCFA has already
    approved many of the applications submitted since July 1998, including one
    for a private FFS plan called Sterling Option I that initially will serve
    1,221 counties in 17 states.9 The new plan's service area encompasses 940
    counties, including many rural counties, previously not served by a
    Medicare+Choice plan. Since the initial offering, Sterling has added 8 more
    states to its service area.10 (See fig. 2.) Beneficiaries who enroll in
    Sterling will pay a $55 monthly premium (in addition to the Medicare part B
    premium) in exchange for reduced out-of-pocket costs for many services and
    extended coverage for hospitalizations, among other benefits. However,
    Sterling Option I does not offer prescription drug coverage.

    Source: HCFA press release, May 2000.

    in 2000; This Pattern Less Evident in 2001

    Plan participation in Medicare managed care increased rapidly after 1993,
    peaked in 1998, and began declining in 1999. This experience is not unique
    to Medicare and, in fact, closely tracks plan participation in the Federal
    Employees Health Benefits Program (FEHBP), another large program offering
    multiple health plan choices. The withdrawals in 2000 followed a pattern
    that is similar to the pattern of withdrawals in FEHBP, as well as the
    pattern we found in our prior analysis of the 1999 Medicare plan
    withdrawals.11 Nearly all of the plans that terminated their Medicare
    contracts for 2000 or reduced their service areas were relatively new
    entrants in their respective markets, had attracted few beneficiaries, or
    had only a small share of the local Medicare managed care market. The plan
    withdrawals for 2001 deviate somewhat from this pattern in that some older,
    more established plans are terminating. However, the service area reductions
    in 2000 and 2001 are consistent with the 1999 pattern of withdrawals. In
    both years, other factors--such as plans' inability to establish sufficient
    provider networks--are often evident.

    Withdrawals From Medicare and FEHBP

    Between 1993 and 1998, the Medicare managed care program grew rapidly and
    the number of plans more than tripled--from about 110 plans to 350 plans.12
    Since 1998, however, 151 plans have terminated their Medicare contracts or
    announced that they will, and few new plans have joined the program. Despite
    the drop in plan participation, enrollment has continued to
    increase--although at a slower pace--with the result that the total number
    of Medicare managed care enrollees has remained approximately the same or
    even increased slightly over the past 2 years. However, the substantial
    decline in plan participation next year may cause total enrollment to fall.

    FEHBP experienced a similar rapid rise in the number of participating plans
    followed by a decline.13 (See fig. 3.) Between 1994 and 1997, the number of
    plans participating in FEHBP increased from 369 to 470. Since then, the
    number of FEHBP plans has declined steadily and may fall to approximately
    240 next year. This roughly 50 percent decline in the number of FEHBP plans
    is similar to the approximately 57 percent decline experienced in Medicare
    over the same period. However, the percentage of FEHBP enrollees affected is
    substantially smaller than the percentage of Medicare+Choice enrollees
    affected. In 2001, for example, FEHBP plan withdrawals are expected to
    affect about 1 percent of enrollees, compared to Medicare+Choice withdrawals
    affecting 15 percent of enrollees.

    Source: GAO analysis of HCFA and Office of Personnel Management data.

    At the same time new plans were joining the Medicare program, many existing
    plans expanded their geographic service areas. Some plans entered previously
    unserved rural counties while others entered urban counties with one or more
    existing Medicare plans. As a result, the percentage of rural beneficiaries
    with access to Medicare managed care increased from about 10 percent in 1993
    to over 31 percent in 1998. Because of recent plan withdrawals, however, the
    percentage of beneficiaries in rural areas with access to a Medicare managed
    care plan has fallen to about 21 percent in 2000.

    Urban beneficiaries, nearly all of whom already had access to at least one
    plan in 1993, had a wider choice of plan options. In recent years, however,
    even large urban areas have seen a decline in plan participation. The
    percentage of beneficiaries living in large urban areas with access to at
    least one plan has declined from 99 percent in 1999 to 97 percent in 2000
    and is expected to fall again in 2001.

    Low Enrollments; Pattern Less Evident in 2001

    The vast majority of Medicare+Choice plans that terminated their Medicare
    contracts in 2000, as opposed to reducing the number of counties they
    served, were recent entrants into urban areas that already had substantial
    plan participation. Many terminating plans had few beneficiaries or a
    relatively small share of the local Medicare managed care enrollment. These
    factors are the same ones that were associated with the 1999 withdrawals. In
    2000, 38 of the 41 terminating plans were either recent entrants, had
    attracted fewer than 200 enrollees, or had less than a 15 percent share of
    the local Medicare plan market in each of the counties they served.14 (See
    table 4.) Plans that terminated their participation in FEHBP had similar
    characteristics: 42 percent of the terminating plans had fewer than 300
    enrollees and many of those were recent entrants.

    The pattern of plan withdrawals is different in 2001 in that some older,
    larger, and more established plans are also terminating their Medicare
    contracts. For example, almost 43 percent of terminating plans entered the
    market before 1996 and 29 percent had total plan enrollments that exceeded
    10,000 enrollees.

                         Number of plans
     Key
     characteristics     Participating  Terminated  Participating  Terminating
                         in July 1999   in 2000     in March 2000  in 2001
     Year of entry
     Before 1996         160            8 (20%)     136            28 (43%)
     In 1996/97          84             15 (37%)    57             24 (37%)
     Since 1998          55             18 (44%)    39             13 (20%)
     Enrollment
     Fewer than 1,000
     enrollees           27             11 (27%)    13             3 (5%)
     Between 1,000 and
     10,000 enrollees    136            25 (61%)    102            43 (66%)
     More than 10,000
     enrollees           136            5 (12%)     117            19 (29%)
     Market share
     Less than 15%       82             22 (54%)    52             21 (32%)
     More than 15%       217            19 (46%)    180            44 (68%)
     Total               299a           41          232b           65

    aMedicare+Choice plans as of July 1999.

    bMedicare+Choice plans as of Mar. 2000.

    Sources: Medicare Compare Database, 1999 and 2000; Medicare Managed Care
    Market Penetration State/County/Plan Data Files, July 1999 and Mar. 2000,
    www.hcfa.gov/medicare/; and files of contract terminations and service area
    reductions for 2000 and 2001 from the Center for Health Plans and Providers
    at HCFA.

    Relatively Low-Enrollment Counties in 2000 and 2001

    Although the patterns of contract terminations in 2000 and 2001 appear to be
    somewhat different, the patterns of service area reductions in the 2 years
    are similar. In both years, plans that withdrew from only a portion of the
    counties they served tended to pull out of counties that they had more
    recently entered or where they had relatively low enrollment. In the
    majority of cases--92 percent in 2000 and 79 percent in 2001--plans withdrew
    from counties where they had recently entered, where they enrolled fewer
    than 200 beneficiaries, or where they enrolled fewer than 15 percent of the
    Medicare managed care enrollees. This pattern was more pronounced in 2000
    than in 2001, but the 2001 service area reductions still follow the same
    general trend. In some cases, plans consolidated into one or more core areas
    where they were most strongly established.

    Service area reductions have been more concentrated in rural areas. Despite
    the floor payment rates, enacted in BBA, which make payments to plans
    considerably higher than FFS costs in many rural counties, the challenge of
    providing managed care in rural areas may be a significant contributing
    factor. The sparseness of both beneficiaries and providers may present
    difficulties for plans. Without sufficient beneficiary populations, plans
    say they cannot enroll enough individuals to spread risk and cover fixed
    operating costs.15 In addition, plans may have difficulty obtaining
    discounts and negotiating contracts with physicians and hospitals when an
    area has few competing providers.

    Consolidation Behavior

    Humana Health Plan of Texas, the plan with the single largest number of
    affected enrollees in 2000, illustrates the consolidation behavior exhibited
    by a number of the plans that reduced their service areas. Humana started
    serving Medicare beneficiaries in areas around Corpus Christi, Texas, in
    1986 and added San Antonio in 1988. It more recently expanded its service
    area by adding a total of 23 counties in 1995, 1997, and 1999. (See fig. 4.)
    In 2000, the plan withdrew from 16 of the counties, both urban and rural, it
    entered in 1997 and 1999, as well as a few it entered in 1995. The plan
    remained in the central counties encompassing San Antonio and Houston, both
    urban areas where the plan had by far its largest concentration of
    enrollment, and the Corpus Christi area. Humana remained in San Antonio
    despite the fact that the county's monthly payment rate for 2000 was, on
    average, $26 lower than payments in the four urban counties it dropped. The
    10 counties it retained in 2000 accounted for 70 percent of its Medicare
    managed care enrollees in Texas.

    In 2001, Humana will consolidate even further, serving only the San Antonio
    and Corpus Christi areas. This time, the 2001 monthly payment rate in San
    Antonio is, on average, $147 lower than the six counties the plan is
    dropping. Humana recently stated that it incurred pre-tax losses exceeding
    $26 million during 1999 in the counties it will leave in 2001. However, only
    a fraction of these losses may be due to providing Medicare covered
    benefits. The plan is currently offering, at no additional charge, an
    unlimited generic prescription drug benefit and a brand name benefit up to
    $1,400 per year, in addition to some coverage for physical exams and vision
    services, to the beneficiaries in these Texas counties.

    Sources: Medicare Compare Database, 1999; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    Historical Service Area File, Feb. 1999; and files of contract terminations
    and service area reductions from the Center for Health Plans and Providers
    at HCFA.

    Example of Plan Consolidations

    The Medicare managed care experience in Maryland illustrates both the
    service area reductions that occurred in 2000 and the trend toward larger,
    more established plans terminating their contracts in 2001. In 2000, plans
    withdrew from recently entered rural counties while continuing to serve more
    heavily populated urban areas. In 2001, these plans are continuing the
    exodus from Medicare by withdrawing from these urban areas and terminating
    their contracts.

    Between 1986 and 1993, only one plan, Freestate Health Plan--sponsored by
    Blue Cross?operated in Maryland. Its service area included only 6 of
    Maryland's 24 counties, all located in Maryland's major metropolitan
    area--the areas surrounding Baltimore and Washington, D.C. Over time, new
    plans began operation in the state, mostly in the same Baltimore-Washington
    corridor. (See fig. 5.) One plan, Optimum Choice, began offering service
    statewide in 1994, followed by 2 more statewide plans in 1996. Between 1997
    and 1999, however, these 3 plans reduced their service areas until, by 1999,
    only Freestate continued to serve Maryland's rural counties. In 2000,
    Freestate reduced its service area to the Baltimore-Washington area--its
    historical core service area. Rural Maryland beneficiaries, who had a
    managed care option between 1994 and 1999, were left with no alternative to
    traditional FFS Medicare.16

    The difficulty of serving sparsely populated rural areas may have been an
    important factor in the Maryland plans' withdrawal decisions for 2000.
    Freestate Health Plan, for example, withdrew from rural Caroline County
    where it faced no competition and enrolled nearly one in five of the
    county's beneficiaries despite charging a $75 per month enrollee premium.
    However, the plan's relatively large market share in the county amounted to
    only 895 enrollees. In contrast, the plan's 2 percent market share in urban
    Montgomery County, an area it continued to serve, resulted in more than
    2,000 enrollees. In addition, Medicare payment rates were increasing faster
    in the rural counties the plan left because of the floor and the blend
    provisions in the BBA.

    Freestate has announced it will terminate its contract in Maryland for 2001,
    leaving Kaiser Health Plan as the only remaining Medicare plan serving the
    state. Freestate has said that it expects to incur losses of $7.5 million by
    the end of 2000.

    Sources: Medicare Compare Database, 1999; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    Historical Service Area File, Feb. 1999; and files of contract terminations
    and service area reductions from the Center for Health Plans and Providers
    at HCFA.

    Contributed to Plan Withdrawals

    Although recent entry, low enrollment, or low market share are
    characteristics of most withdrawing plans, in some cases plan withdrawals
    appear to have little to do with these factors. In one case, a merger caused
    a plan to change operations to avoid anti-trust violations and subsequently
    resulted in termination of selected contracts. In other cases, plans
    terminated all operations--Medicare, Medicaid, and commercial--in an area.
    Finally, some plans have reported that providers in some areas are becoming
    increasingly resistant to contracting with them, making it more difficult
    for plans to assemble viable provider networks in certain areas. The
    following examples illustrate other factors that may have contributed to
    plan withdrawals.

    � Aetna U.S. Healthcare acquired NYLCare Health Plans in July 1998, and
    later purchased Prudential Health Care in August 1999. Because Texas
    officials were concerned that Aetna would have too large a share of the
    state's market after it acquired Prudential, they agreed to the purchase
    under the condition that Aetna sell its NYLCare business in the state.
    However, under special agreement, Aetna was allowed to continue managing the
    Medicare component. Aetna subsequently terminated this contract.

    � Capital Area Community Health Plan of Albany, NY, was affiliated with
    Kaiser Permanente, which withdrew from all of its operations in the entire
    northeast region in 2000.

    � Humana terminated all of its business--commercial and Medicare--in Nevada.

    � United Health Care of Louisiana was one of the first national plans to buy
    out local plans in Louisiana. Local providers, who preferred dealing with
    the local plans, resisted contracting with United. The plan eventually
    withdrew from these areas.

    � Oxford Health Plans of NY had trouble assembling a viable provider network
    in one of the large counties it served, so it withdrew from that county.

    Industry representatives have stated that low Medicare payments, resulting
    from BBA provisions designed to control program spending, are primarily to
    blame for the recent plan withdrawals. The American Association of Health
    Plans contends that the BBA created a "fairness gap" by decreasing payments
    to health plans relative to spending on beneficiaries in the FFS program.
    However, since the BBA was enacted the increase in Medicare+Choice payment
    rates has exceeded the growth in per capita FFS spending. Furthermore, our
    recent study of plan payments found that Medicare paid plans $5.2 billion
    (or about 21 percent) more than it would have spent in 1998 if plan
    enrollees had received standard Medicare covered services through the
    traditional FFS program. According to reports that plans submit to HCFA,
    Medicare's payments are also substantially higher than the average plan's
    projected costs of providing Medicare-covered benefits. Moreover, although
    industry representatives have called for higher payment rates, the extent to
    which rate increases would affect plans' decisions to participate in
    Medicare is unclear. In 2000 and 2001, withdrawals have not been confined to
    counties where payment rate increases, or payment rates, were low.

    Increase

    Between 1997--the year the BBA was enacted--and 1999, Medicare+Choice
    payment rates increased on average by about 4.2 percent.17 (See fig. 6.)
    Furthermore, the payment rate increase was applied to 1997 rates that HCFA
    now estimates were inflated by about 3 percent because of an error in the
    spending forecast used to set the rates.18 In contrast, per capita FFS
    spending fell 1.7 percent during the same period.

    Note: Medicare+Choice payment rate increases were calculated as the change
    in county payment rates for aged beneficiaries, weighted by the number of
    aged beneficiaries in each county in 1997. Medicare+Choice payment rates for
    2001 were announced in Mar. 2000. Per capita FFS spending for 2000 and 2001
    is based on HCFA projections.

    Source: 2001 Medicare+Choice County Payment Rate Calculation Worksheet,
    www.hcfa.gov/medicare/.

    HCFA estimates that between 1999 and 2001, per capita FFS spending will grow
    faster than Medicare+Choice payment rates. If these estimates prove
    accurate, the cumulative increase in Medicare+Choice payment rates between
    1997 and 2000 will still exceed the growth in per capita FFS spending, but
    the gap will be much narrower. By 2001, HCFA's current projections indicate
    that average spending in the traditional program will have increased 11.9
    percent, while plan payment rates will have increased 10.7 percent.

    Traditional FFS Program

    Recently, we reported that Medicare+Choice plan payments likely exceed the
    amount that beneficiaries enrolled in plans would cost in the traditional
    FFS program.19 In 1998, aggregate payments exceeded enrollees' estimated FFS
    costs by about 21 percent--or approximately $5.2 billion. On a per enrollee
    basis, Medicare paid plans about $1,000 more than the FFS program would have
    spent to provide Medicare-covered benefits.

    A portion of the estimated $5.2 billion in annual excess plan payments may
    diminish over time. Approximately $2 billion of these excess payments
    resulted from FFS spending forecast errors built into the 1997 county
    payment rates due to the BBA provisions that based future county rates on
    the 1997 rates and guaranteed 2 percent minimum annual rate increases. The
    effect of the 1997 forecast error will largely be mitigated by the BBA
    provision that slows Medicare+Choice rate increases relative to the growth
    in FFS spending between 1998 and 2002.

    The bulk of the excess payments we estimated for 1998 ($3.2 billion) will
    persist each year until payments on behalf of individual enrollees better
    match their expected health care costs. Medicare+Choice plans attracted a
    disproportionate selection of healthier and less-expensive beneficiaries
    relative to traditional FFS Medicare (a phenomenon known as favorable
    selection), while payment rates largely continued to reflect the expected
    FFS costs of beneficiaries in average health. Consequently, we estimate that
    the program spent about 13.2 percent more on plan enrollees than if they had
    received services through the traditional FFS program. This year, HCFA
    implemented a new methodology to adjust payments for beneficiary health
    status. However, our results suggest that this new methodology, which will
    be phased in over several years, may ultimately remove less than half of the
    excess payments caused by favorable selection.20 HCFA expects to introduce a
    more refined methodology in 2004 that may better adjust payments to reflect
    enrollees' expected health care costs.

    Benefits

    Medicare+Choice payment rates not only surpass what the FFS program would
    spend to provide Medicare-covered benefits to plans' enrollees, but data
    submitted by plans show that rates also generally exceed plans' estimated
    costs to provide those same benefits. As part of the annual contracting
    process, each Medicare+Choice plan is required to project its per enrollee
    cost of providing Medicare-covered benefits.21 If estimated Medicare
    payments exceed a plan's projected costs, the plan must use the difference
    to provide additional benefits during the contract year or contribute to an
    escrow account and use the funds to provide benefits in future years. To
    fulfill Medicare's requirement, plans choose to provide additional
    benefits--such as routine vision care, dental care, and coverage for
    outpatient prescription drugs--that are not covered in the traditional FFS
    program.

    In their 1999 contract submissions, the average plan--including plans that
    withdrew in 2000--projected that its costs would be substantially less than
    its Medicare payment. On average, plans estimated that they could provide
    Medicare-covered services for about 89 percent of Medicare's payment.22
    Plans indicated that they would provide additional benefits to make up the
    difference. Most plans' benefit packages exceeded the minimum requirements.
    Consequently, the average plan in 1999 estimated it would spend about $1,300
    per enrollee, an amount equal to about 22.5 percent of its Medicare payment,
    on benefits that are not covered in the FFS program. Among plans that
    terminated their contracts or reduced their service areas in 2000, the
    average annual amount spent on additional benefits was slightly lower--about
    $1,100, or 21.6 percent of Medicare's payment. (See table 5.)

    Plans' contract submissions for 2000 exhibited a similar pattern of
    additional benefits.23 Plans that will terminate their contracts in 2001
    projected that they would spend an average of about $1,200 per enrollee, or
    22 percent of their Medicare payment, on additional benefits in 2000. Plans
    that will reduce their service areas projected they would spend slightly
    less, about $1,000 or 18 percent of their Medicare payment, on additional
    benefits. In contrast, spending on additional benefits was estimated at
    nearly $1,500 per enrollee, or about 25 percent of 2000 Medicare payments,
    for plans that will remain in the program in 2001.

                                                 Amount spent per enrollee

                                                 1999          2000
     Plans remaining in Medicare+Choice for 2001 1,308         1,259
     Plans terminating their contracts for 2001  1,164         1,202
     Plans reducing their service areas for 2001 1,080         1,010

    Note: The number of enrollees in each plan was used to compute the weighted
    average.

    Source: 1999 and 2000 Adjusted Community Rate Proposals submitted by
    Medicare+Choice plans.

    Interpret

    The effect of payment rates on Medicare+Choice plan participation is
    ambiguous. While changes in payment rates are an important influence on
    plans' participation decisions, we found that plan withdrawals were not
    limited to counties with low payment rates.

    On the one hand, plan withdrawals appear to be more extensive in the 2 years
    with lower payment rate increases. In both 1999 and 2001, county rates
    increased by an average of 2 percent. In 1999, plan withdrawals affected 42
    percent of counties that previously had a managed care plan, and in 2001
    plan withdrawals will affect 58 percent of such counties. In contrast, a
    smaller proportion of counties--approximately 37 percent--were affected in
    2000 when rates increased by about 4 percent. The extensiveness of plan
    withdrawals may also be related to the gap between average county rate
    increases and the change in expected per capita FFS spending. For example,
    the projected increase in per capita FFS spending is much higher for 2001
    than it was for 1999 and withdrawals will be more extensive.24 Therefore,
    withdrawals may moderate after 2002 when payment rate increases will mirror
    expected increases in per capita FFS spending except for adjustments to
    correct prior spending forecast errors.

    The relationship across counties between plan participation and payment
    rates, and rate increases, is not clear. Both high-payment rate and
    low-payment rate counties are affected by the 2000 and 2001 plan
    withdrawals, although the relationship between payment rates and withdrawals
    is somewhat different in the two years. In 2000, approximately 39 percent of
    the non-floor counties that had at least one plan in 1999--those with
    payment rates set above the minimum payment of $402--were affected by a plan
    withdrawal. A slightly higher proportion of counties in the middle payment
    categories were affected compared to the proportion of affected counties in
    the highest rate category and the rate category just above the floor. (See
    table 6.) In 2001, about 80 to 90 percent of counties in the higher payment
    ranges, but less than two-thirds of the counties in the lower payment ranges
    will be affected. (See table 7.) The 2001 withdrawal pattern is similar to
    the one that occurred in 1999 in that a disproportionate number of high
    payment rate counties were affected by withdrawals. In both 2000 and 2001,
    floor counties that previously had a Medicare+Choice plan will be
    proportionately less affected by the withdrawals compared to counties that
    receive payment rates above the floor. However, the difference between floor
    and nonfloor counties is less pronounced in the 2001 withdrawals.

                 Year 2000 payment ratesa
                 $402
                                                                                       Total
                 (floor $402−$505 $505−$608 $608−$711$711−$814
                 rate)
     Counties
     with plan(s)
     affected by 8      187             109             22             3               329
     2000
     withdrawals
     Counties
     with plan(s)64     522             243             48             10              887
     in July 1999
     Percentage
     of all
     counties
     with plan(s)13%    36%             45%             46%            30%             37%
     in July 1999
     affected by
     withdrawals

    Notes: Only Medicare+Choice plans are used for this analysis. Payment rates
    are rounded to the nearest dollar. The actual categories are $401.61,
    $401.62-$504.78, $504.79-$607.96, $607.97-$711.14, and $711.15-$814.32.

    a Payment rate categories were determined by dividing the range into 4 equal
    intervals (with a payment range of approximately $103). The floor rate is
    the fifth category.

    Sources: Medicare Compare Database, 1999; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    and files of contract terminations and service area reductions from the
    Center for Health Plans and Providers at HCFA.

                 Year 2001 payment ratesa

                 $415                                                                   Total
                 (floor  $415−$519 $519−$623 $623−$727$727−$831
                 rate)
     Counties
     with plan(s)
     affected by 39      242             139             36             9               465
     2001
     withdrawals
     Counties
     with plan(s)
     in March    90      444             217             45             10              806
     2000
     Percentage
     of all
     counties
     with plan(s)
     in March    43%     55%             64%             80%            90%             58%
     2000
     affected by
     withdrawals

    Notes: Only Medicare+Choice plans are used for this analysis. Payment rates
    are rounded to the nearest dollar. The actual categories are $415.01,
    $415.02-$518.91, $518.92-$622.81, $622.82-$726.71, and $726.72-$830.61.

    aPayment rate categories were determined by creating four equal rate
    categories (with a payment range of approximately $104). The floor rate is
    the fifth category.

    Sources: Medicare Compare Database, 2000; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, Mar. 2000, www.hcfa.gov/medicare/;
    and files of contract terminations and service area reductions from the
    Center for Health Plans and Providers at HCFA.

    The relationship between payment rate increases and plan participation in a
    particular county is unclear. In 2000 and 2001 floor counties may have been
    less affected by the withdrawals because the BBA substantially increased
    payment rates in those counties, and those rates remain considerably above
    the average cost of Medicare benefits in the traditional FFS program.
    Between 1997 and 2001, payment rates in floor counties increased by 27
    percent. In contrast, payment rate increases have been more modest in
    nonfloor counties, around 11 percent.25 However, the pattern of plan
    withdrawals in 2000 suggests that even relatively large payment rate
    increases may not be enough to keep some plans in certain counties. While
    county payment rates increased by an average of 4 percent in 2000, the BBA's
    rate "blending" provision increased rates by 10 percent or more in certain
    counties.26 Nonetheless, 40 percent of these counties with large increases
    were affected by plan withdrawals in 2000--about the same as the percentage
    of affected counties among those that received the lowest (2 percent) rate
    increase.27 (See table 8.) Some areas may have too few beneficiaries or
    providers to support multiple plans, or even a single plan. Moreover, plans
    that fail to attract a sufficient number of enrollees will not realize their
    revenue goals even if payments are adequate on a per capita basis.

                                       Percentage change in payment
                                       rates, 1999-2000
                                                                         Total
                                       2%   2-5%a   5-10%a    More than
                                                              10%
     Number of counties affected by
     2000 withdrawals                  72   96      137       24         329
     Number of counties with plan(s)
     in 1999                           179  213     435       60         887
     Percentage of counties with
     plan(s) in 1999 affected by the   40%  45%     31%       40%        37%
     withdrawals

    aThe range for each of these categories begins slightly above the lower
    number and includes the higher number.

    Sources: Medicare Risk Monthly Payment Rates, 2000, www.hcfa.gov/; Medicare
    Compare Database, 1999, www.hcfa.gov/; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    and files of contract nonrenewals and service area reductions from the
    Center for Health Plans and Providers at HCFA.

    Medicare+Choice is at a crossroads. Because of contract terminations and
    service area reductions, by January 2001 more than 1.6 million beneficiaries
    will have had to switch to a different plan or the traditional
    fee-for-service program since 1999. Industry representatives contend that
    payment rate increases are necessary to keep the program viable.

    However, the Medicare+Choice program has already been expensive for
    taxpayers. As our work on payment rates shows, the vast majority of plans
    have gotten paid more for their Medicare enrollees than the government would
    have paid had these enrollees remained in the traditional fee-for-service
    program. Raising payment rates to a level sufficient to retain the plans
    leaving Medicare would mean increasing the excess that currently exists in
    payments for plan enrollees relative to their expected fee-for-service
    costs. In areas of the country where there are few beneficiaries and
    providers are in short supply, no reasonable payment rate increase is likely
    to entice plans to participate in Medicare. Thus, a trade-off exists between
    the significant additional costs that would be needed to keep more plans in
    the program and the benefits of providing more beneficiaries with options
    for accessing Medicare covered services. Such a trade-off raises questions
    about the equity of providing a greater array of benefits to a fraction of
    the Medicare beneficiary population. In our view, efforts to protect the
    viability of Medicare+Choice plans come at the expense of ensuring
    Medicare's financial sustainability over the long term.

    In commenting on our report, HCFA stated that our findings confirmed its own
    analysis of Medicare+Choice plan withdrawals. HCFA noted that the pattern of
    withdrawals, analyzed at the corporation level instead of at the individual
    plan level, reinforces our finding that factors besides payment rates likely
    influenced plans' participation decisions. For example, HCFA said that in
    2001, 54 percent of Aetna's Medicare+Choice enrollees and 69 percent of
    Cigna's enrollees will be affected by plan withdrawals, but less than 2
    percent of Pacificare's enrollees and only 0.1 percent of Kaiser's enrollees
    will be affected. The agency contends that these differences provide
    evidence that the withdrawals reflect corporations' strategic business
    decisions that go beyond Medicare payment adequacy. HCFA also said that it
    believes the Administration's proposal to provide a prescription drug
    benefit to all enrollees would both reduce inequities in benefit
    availability and increase payments to Medicare+Choice plans that cover
    prescription drugs. (HCFA's comments appear in app. IV.)

    We also provided representatives of the American Association of Health Plans
    (AAHP), the BlueCross BlueShield Association (BCBSA), and the Health
    Insurance Association of America (HIAA) an opportunity to comment on the
    report. All three groups disagreed with our conclusions and stated that our
    report did not touch on important issues relevant to plan withdrawals. They
    also said that withdrawals can be costly for beneficiaries because
    Medicare+Choice plans typically provide preventive care services and other
    benefits that are not covered in the traditional FFS program. (AAHP's,
    BCBSA's, and HIAA's comments appear in apps. V, VI, and VII.)

    AAHP, BCBSA, and HIAA believe that inadequate Medicare+Choice payment rates
    are a principal cause of plan withdrawals. BCBSA stated that many plans
    could not afford to continue providing sufficient additional benefits
    (beyond those covered in FFS) to attract beneficiaries. All three industry
    groups stated that it is inappropriate to compare Medicare+Choice payment
    rate increases with changes in per capita FFS spending (as we did in fig. 6)
    because plans' costs have been growing faster than per capita FFS spending.
    HIAA said that FFS spending slowed only as a result of BBA's unprecedented
    reductions in Medicare reimbursements and that the Congress began correcting
    these reductions with the enactment of BBRA in 1999. BCBSA commented that
    the comparison is unfair because the traditional program can control costs
    in ways that are unavailable to plans. In our report, we acknowledge that
    plans typically provide benefits that are not available in the FFS program.
    However, we found that Medicare+Choice payments substantially exceeded
    plans' projected costs (including normal profits) of providing
    Medicare-covered benefits and that plans contracted with Medicare to use the
    difference to provide benefits that are not available in the FFS program.
    Furthermore, the contention that plans' costs have grown more rapidly than
    per capita FFS spending, or that plans have a limited ability to control
    their own cost increases, does not alter our finding that Medicare+Choice
    payments exceed the estimated amount that the traditional program would
    spend on the individuals enrolled in plans.

    AAHP and HIAA stated that our methodology for estimating the FFS costs of
    plan enrollees, based on enrollees' prior use of services in the FFS
    program, underestimates the health care costs of plan enrollees and
    therefore overestimates excess payments to plans. In developing our
    methodology, however, we employed assumptions that would tend to
    underestimate excess payments.28 Therefore, we believe our findings likely
    represent a lower bound on the estimated excess payments plans receive and
    the potential savings from improved risk adjustment. HIAA stated that
    services are overutilized in the FFS program and that by using FFS spending
    as a comparison we overestimated the degree of favorable selection and the
    extent of excess payments to plans. In our analysis, we did not attempt to
    quantify an appropriate level of care. If services are overutilized in the
    FFS program, a comparison of plan payments with a more efficient delivery
    system might indicate less favorable selection, but it would not alter our
    finding that current Medicare+Choice payment rates--largely based on FFS
    spending patterns--exceed the estimated cost of providing Medicare-covered
    benefits in the FFS program.

    AAHP, BCBSA, and HIAA said that we did not address the issue of regulatory
    burden in our report. They believe that recent regulations have increased
    plans' administrative costs and discouraged plan participation. Because many
    of the recent regulations resulted from provisions in BBA designed to
    increase plan accountability, facilitate informed choice and plan
    comparisons, protect beneficiary rights, or foster quality improvement
    efforts, a comprehensive analysis of this issue would require an assessment
    of the regulations' benefits as well as their costs. Such an analysis was
    beyond the scope of our report.

    Finally, AAHP and BCBSA stressed that plans typically provide benefits not
    covered in the traditional FFS program and that plan withdrawals are not
    only disruptive for beneficiaries but can also result in beneficiaries
    having to pay more in out-of-pocket costs. Although we agree, and did
    discuss this issue in the report, it was not the focus of our study.29

    We are sending copies of this report to the Honorable Nancy-Ann Min DeParle,
    Administrator of the Health Care Financing Administration, and other
    interested parties who request them.

    If you or your staffs have any questions about this report, please call me
    on (202) 512-7114 or Laura A. Dummit, Associate Director, on (202) 512-7119.
    Other major contributors included George Duncan, Beverly Ross, and Susanne
    Seagrave under the direction of James C. Cosgrove.
    William J. Scanlon
    Director, Health Financing and
    Public Health Issues

    List of Requesters

    The Honorable Charles E. Grassley
    Chairman
    The Honorable John B. Breaux
    Ranking Minority Member
    Special Committee on Aging
    United States Senate

    The Honorable William V. Roth, Jr.
    Chairman
    The Honorable Daniel Patrick Moynihan
    Ranking Minority Member
    Committee on Finance
    United States Senate

    The Honorable John D. Dingell
    Ranking Minority Member
    Committee on Commerce
    House of Representatives

    The Honorable William M. Thomas
    Chairman
    The Honorable Pete Stark
    Ranking Minority Member
    Subcommittee on Health
    Committee on Ways and Means
    House of Representatives

    Scope, Methodology, and Data Sources

    We reviewed pertinent laws, regulations, HCFA policies, and research by
    others to obtain information on the Medicare+Choice program, including
    revisions to the payment methodologies. To obtain different perspectives on
    why plans withdrew or reduced their service areas, we interviewed officials
    at HCFA's regional offices and representatives from the American Association
    of Health Plans and Blue Cross/Blue Shield of Maryland, one of the plans
    that withdrew. To do our analysis, we obtained data files from HCFA, which
    the agency uses to compute Medicare+Choice plan payments and which are
    widely used by researchers.

    To identify counties with a plan in 1999, we used HCFA's 1999 Medicare
    Compare Database combined with HCFA's July 1999 Medicare Managed Care Market
    Penetration for All Medicare Plan Contractors?Quarterly State/County/Plan
    Data Files. We excluded cost, demonstration, and health care prepayment
    plans from our analysis and used only those plans identified as
    Medicare+Choice. We concluded that a plan was offered in a particular county
    only if both databases agreed. The count of enrollees by plan by county in a
    plan's service area as of July 1999 was obtained from the State/County/Plan
    Penetration Files, except in four cases where plans reduced their service
    areas and withdrew from only part of a county. In these cases, we obtained
    the actual number of enrollees affected from HCFA's Center for Health Plans
    and Providers.

    Similarly, we identified counties with a plan in 2000 using HCFA's 2000
    Medicare Compare Database combined with HCFA's March 2000 Medicare Managed
    Care Market Penetration for All Medicare Plan Contractors?Quarterly
    State/County/Plan Data Files. Again, we excluded cost, demonstration, and
    health care prepayment plans from our analysis and used only those plans
    identified as Medicare+Choice. We concluded that a plan was offered in a
    particular county only if both databases agreed. HCFA's Center for Health
    Plans and Providers gave us a list of contract consolidations that occurred
    in 2000, and we adjusted our information accordingly. The count of enrollees
    by plan by county in a plan's service area as of March 2000 was obtained
    from the State/County/Plan Penetration Files.

    To analyze the changes in plan participation in the Medicare+Choice program
    in 2000 and 2001, we used HCFA data on Medicare+Choice plan contracts. In
    July 1999, HCFA provided us with a list of plans that had announced they
    were withdrawing from the program or reducing their service areas as of
    January 1, 2000, and the counties and number of enrollees affected. In July
    2000, HCFA provided us with the same information for plans that had
    announced changes for 2001.

    We excluded Guam, Puerto Rico, and the Virgin Islands from all county-level
    analyses. In some of the analyses, the same counties are defined as separate
    entities if plans can contract with them separately. For example, Los
    Angeles County, California, is divided into Los Angeles-1 and Los Angeles-2;
    they are counted separately because plans may contract with them separately.
    The independent cities of Virginia are also counted as separate counties
    because their payment rates differ from those of their counties, and plans
    contract to serve these areas as if they were independent counties.

    We classified counties as urban, rural, or small urban/fringe using the
    rural/urban continuum codes in the February 1999 Area Resource File, which
    we obtained from the Bureau of Health Professions, Health Resources and
    Services Administration of the Department of Health and Human Services. We
    defined urban counties as the central counties of metropolitan areas of 1
    million population or more and rural counties as all nonmetropolitan
    counties. Finally, included in the small urban/fringe counties are counties
    in metropolitan areas of less than 1 million population and fringe counties
    of metropolitan areas of 1 million population or more. The February 1999
    Area Resource File combines the Virginia independent cities into their
    original counties and does not report separate rural/urban continuum codes
    for these. We kept these cities separate in keeping with the HCFA data, and
    we assigned these cities the same rural/urban continuum codes as their
    original counties.

    To analyze geographic differences in beneficiaries' access to a plan from
    1993 to 1998, we used the December 1993-1998 State/County/Plan Penetration
    Files and deleted all plan/county combinations where a plan enrolled fewer
    than 10 enrollees. Because we were not able to obtain actual contract
    information on plan service areas before 1997, this provided an
    approximation of plans' service areas. We then used the same urban, rural,
    and small urban/fringe county designations as before from the February 1999
    Area Resource File to determine the percentage of beneficiaries with access
    to a Medicare+Choice plan in these different areas.

    We obtained county-level payment rate information for 1997 through 2001 for
    Medicare risk plans and Medicare+Choice plans, including payment reductions
    resulting from the removal of graduate medical education (GME) spending,
    from HCFA's Web site. In addition, we used a February 1999 file from HCFA's
    Office of Information Systems containing historical county-level information
    on the year that plans first entered individual counties.

    Plans Withdrawing From Medicare+Choice, January 2000

    (Continued From Previous Page)

                       Plan name                     Total number of enrollees
                                                             affected
     Arkansas
     Healthsource, Arkansas, Inc.                  2,100
     United Healthcare of Arkansas, Inc.a          200
     Arizona
     Blue Cross/Shield of Arizona                  14,500
     United Healthcare of Arizonaa                 5,200
     Premier Healthcare, Inc.a                     4,500
     Humana Health Plan, Inc.a                     3,900
     Health Plan of Nevada, Inc.a                  3,200
     California
     Blue Cross of Californiaa                     3,600
     Cigna Healthcare of Californiaa               3,400
     Pacificare of California, Inc.a               3,100
     United Healthcare of California               1,600
     National Med, Inc.a                           1,400
     Aetna U.S. Healthcare of Californiaa          900
     Health Neta                                   200
     Health Neta                                   0
     Colorado
     Cigna Healthcare of Colorado, Inc.            6,000
     Qual-Med, Inc., Denver                        5,000
     HMO Colorado, Inc.a                           2,700
     Qual-Med, Inc., Pueblo                        500
     Qual-Med, Inc., Colorado Springs              200
     Connecticut
     Kaiser Foundation Health Plan of Connecticut  3,400
     Physicians Health Service of Connecticut,
     Inc.a                                         3,100
     Connecticare, Inc.a                           2,100
     Florida
     Florida Health Choice, Inc.                   14,700
     Community Health Care Systems, Inc.           3,200
     Humana Medical Plan, Inc.a                    3,000
     HIP Health Plan of Florida, Inc.              2,600
     Cigna Healthcare of Florida, Inc.a            2,100
     Av-Med Health Plan, Inc.a                     1,900
     Av-Med Health Plan, Inc.a                     1,600
     Health Options, Inc.a                         20
     Georgia
     United Healthcare of Georgia, Inc.a           600
     Kaiser Foundation Health Plan of Georgia,
     Inc.a                                         600
     Iowa
     Exclusive Healthcare, Inc.                    1,500
     Illinois
     Humana Health Plan, Inc.a                     1,300
     Accord Health Plan                            700
     Kansas
     Humana Kansas City, Inc.a                     700
     United Healthcare of the Midwest, Inc.        500
     Cigna Healthcare of Kansas/Missouri           300
     Louisiana
     Ochsner Health Plana                          17,000
     United Health Care of Louisiana               17,000
     Massachusetts
     Harvard Pilgrim Health Carea                  3,400
     United Health Plans of New Englanda           2,100
     Maryland
     Free State Health Plana                       14,700
     United Healthcare of the Mid-Atlantica        600
     Minnesota
     Medicaa                                       2,800
     Missouri
     Cigna Healthcare of Kansas/Missouri           1,200
     United Healthcare of the Midwest, Inc.        800
     Nebraska
     Exclusive Healthcare, Inc.                    5,500
     New Hampshire
     Healthsource New Hampshire, Inc.              13,400
     New Jersey
     United Healthcare of New Jersey, Inc.         2,300
     Physicians Health Services of New Jersey,
     Inc.                                          2,200
     Cigna Healthcare of New Jersey, Inc.a         1,400
     Cigna Healthcare of New Jersey, Inc.          40
     New Mexico
     Presbyterian Health Plana                     20
     Nevada
     Humana Health Plan, Inc.                      9,500
     New York
     Capital Area Community Health Plan            9,700
     Oxford Health Plans (New York) Inc.a          9,100
     Capital Area Community Health Plan            7,800
     Physicians Health Service of New York, Inc.a  4,200
     United Healthcare of New York, Inc.a          3,400
     Capital Area Community Health Plan            2,500
     Vytra Healthcare                              900
     Cigna Healthcare of New Yorka                 800
     Hum/Healthcare Systems, Inc.a                 300
     Ohio
     Pacificare of Ohio, Inc.a                     4,200
     Cigna Healthcare of Ohio, Inc.                3,700
     Summacare, Inc.a                              1,700
     Community Health Plan of Ohio a               1,400
     Qualchoice Health Plan a                      1,300
     Aetna U.S. Healthcare, Inc. a                 600
     Health Alliance Plan of Michigan a            0
     Family Health Plan, Inc. a                    0
     Oklahoma
     Bluelincs HMO, Inc. a                         1,200
     Oregon
     Pacificare of Oregon II                       1,400
     Pacificare of Oregon, Inc. a                  1,000
     Providence Health Plan a                      700
     Pennsylvania
     Healthamerica of Central Pennsylvaniaa        800
     Cigna Healthcare of Pennsylvania, Inc.        0
     Rhode Island
     United Health Plans of New England, Inc. a    2,100
     South Carolina
     Companion Healthcare Corporation              1,100
     Tennessee
     United Healthcare of Tennessee, Inc.          500
     United Healthcare of Tennessee, Inc.          100
     Tennessee Health Care Network, Inc. a         40
     United Healthcare of Tennessee, Inc.          20
     Texas
     Humana Health Plan of Texas a                 23,500
     Healthcare Partners Plans, Inc.               4,400
     Cigna Healthcare of Texas, Inc.               2,700
     HMO Blue, Northeast Texas                     1,300
     Humana Health Plan of Texas a                 300
     United Healthcare of Texas, Inc.              80
     Virginia
     Optima Health Plan                            13,800
     Healthkeepers, Inc.                           2,900
     Washington
     Pacificare of Washington, Inc. a              6,000
     Group Health Cooperative of Puget Sound       3,300
     Healthplus a                                  1,400
     Group Health Cooperative of Puget Sound a     900
     Options Health Care, Inc. a                   90
     First Choice Health Plan a                    10
     Wisconsin
     Humana Wisconsin Health Organization
     Insurance Corporation                         4,200
     Primecare Health Plan, Inc.a                  2,600
     West Virginia
     Carelink                                      0

    aPlan remained in Medicare but reduced the number of counties served.

    Sources: Medicare Compare Database, 1999; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, July 1999, www.hcfa.gov/medicare/;
    Bureau of Health Professions, Area Resource File, Feb. 1999; and files of
    contract nonrenewals and service area reductions from the Center for Health
    Plans and Providers at HCFA.

    Plans Withdrawing From Medicare+Choice, January 2001

    (Continued From Previous Page)

                     Plan name                     Total number of enrollees
                                                           affected
     Alabama
     Health Partners of Alabama, Inc.a          2,500
     Arkansas
     HMO Partnersa                              300
     Arizona
     United Healthcare of Arizona               12,300
     Intergroup Prepaid Health Service of
     Arizonaa                                   7,500
     Cigna Healthcare of Arizona, Inc.a         4,300
     Pacificare of Arizona, Inc.a               200
     California
     Cigna Healthcare of California             16,400
     Aetna U.S. Healthcare of California        14,500
     Blue Cross of Californiaa                  5,500
     National Med, Inc.a                        5,200
     California Physicians Servicesa            4,300
     Health Neta                                3,100
     Maxicare, A California Corporationa        3,000
     Blue Cross of California                   400
     Colorado
     Pacificare of Colorado, Inc.a              4,000
     Mutual of Omaha of Colorado, Inc.          500
     Connecticut
     Anthem Health Plans, Inc. (CT)             23,500
     Aetna U.S. Healthcare, Inc.                14,500
     Cigna Healthcare of Connecticut, Inc.      10,500
     Physicians Health Service of Connecticuta  2,700
     District of Columbia
     Free State Health Plan                     700
     Cigna Healthcare Mid-Atlantic, Inc.        200
     Delaware
     Cigna Healthcare of Delaware, Inc.         3,600
     Florida
     Humana Medical Plan, Inc.a                 25,600
     Prudential Health Care Plan, Inc.          10,200
     Cigna Healthcare of Florida, Inc.          8,600
     Prudential Health Care Plan, Inc.          8,300
     Cigna Healthcare of Florida, Inc.          7,300
     Prudential Health Care Plan, Inc.          7,200
     United Healthcare of Florida, Inc.a        7,000
     Aetna U.S. Healthcare, Inc.                6,900
     Prudential Health Care Plan, Inc.          5,200
     Av-Med Health Plan, Inc.a                  900
     Physicians Healthcare Plans, Inc.a         300
     Preferred Medical Plan, Inc.               200
     Georgia
     Cigna Healthcare of Georgia, Inc.          10,000
     Aetna U.S. Healthcare of Georgia, Inc.     6,700
     United Healthcare of Georgia, Inc.         2,800
     HMO Georgia, Inc.a                         300
     Illinois
     Humana Health Plan, Inc.a                  7,200
     Aetna Health Plan of Illinois, Inc.        6,400
     United Healthcare of the Midwest, Inc.a    4,200
     Mercy Health Plans of Missouria            400
     Indiana
     MaxiCare Indiana, Inc.                     6,100
     Anthem Insurance Companies, Inc.           2,500
     Aetna Health Plan of Illinois, Inc.        500
     Kentucky
     Aetna U.S. Healthcare, Inc.                3,800
     Pacificare of Ohio, Inc.                   2,700
     Humana Health Plan of Ohio, Inc.           2,700
     Louisiana
     HMO Louisiana, Inc.                        9,400
     Ochsner Health Plana                       5,900
     Aetna U.S. Healthcare, Inc.                5,200
     Gulf South Health Plans, Inc.a             4,600
     Maxicare Louisiana, Inc.a                  0
     Massachusetts
     Harvard Pilgrim Health Carea               10,800
     United Health Plans of New England, Inc.a  10,100
     Fallon Community Health Plan, Inc.a        900
     Maryland
     Free State Health Plan                     30,700
     United Healthcare of the Mid-Atlantic      15,100
     Cigna Healthcare Mid-Atlantic, Inc.        7,300
     Maine
     NYLCare Health Plans of Maine, Inc.        1,600
     Michigan
     Care Choices HMOa                          100
     Minnesota
     Medica Health Plans                        14,300
     Missouri
     HMO Missouri, Inc.                         4,800
     Group Health Plan, Inc.a                   3,500
     Humana Kansas City, Inc.a                  1,800
     North Carolina
     Wellpath Select, Inc.                      3,800
     Qualchoice of North Carolina, Inc.a        80
     New Hampshire
     Harvard Pilgrim Health Care of New
     Hampshirea                                 500
     New Jersey
     Oxford Health Plans (New Jersey), Inc.a    7,000
     Cigna Healthcare of New Jersey, Inc.       4,400
     Amerihealth HMO, Inc.a                     800
     Qualmed Plans for Health, Inc.a            200
     New Mexico
     Lovelace Health Plan, Inc.a                5,800
     St. Joseph Healthcare PSO, Inc.            5,600
     Presbyterian Health Plana                  2,400
     Qualmed, New Mexico                        2,100
     New York
     Aetna U.S. Healthcare, Inc.a               34,900
     HIP of Greater New Yorka                   11,300
     Cigna Healthcare of New York               7,200
     MDNY Healthcare, Inc.                      6,500
     Health Services Medical Corps Central New
     York                                       2,300
     Physicians Health Service of New York,
     Inc.a                                      2,100
     Ohio
     Aetna U.S. Healthcare, Inc.                27,800
     Prudential Health Care Plan of Northern
     Ohio                                       14,400
     Humana Health Plan of Ohio, Inc.           8,500
     Aetna U.S. Healthcare, Inc.                5,600
     Pacificare of Ohio, Inc.                   2,900
     Paramount Care, Inc.a                      2,900
     Community Health of Ohioa                  2,400
     Kaiser Foundation HP of Ohioa              700
     Summacare, Inc.a                           600
     Oklahoma
     Bluelincs HMO, Inc.                        3,600
     Community Care HMO, Inc.a                  3,600
     Oregon
     Providence Health Plana                    5,800
     Pennsylvania
     HMO of Northeastern Pennsylvania, Inc.     30,700
     Aetna U.S. Healthcarea                     18,100
     Penn State Geisinger Health Plana          16,600
     Keystone Health Plan Central, Inc.a        6,100
     Healthcentral, Inc.                        5,900
     Healthguard of Lancaster, Inc.             5,200
     Healthamerica of Central Pennsylvaniaa     3,400
     Qualmed Plans for Health, Western
     Pennsylvania                               3,000
     Qualmed Plans for Health, Inc.a            500
     Rhode Island
     United Health Plans of New England, Inc.a  1,700
     Tennessee
     Health 1*2*3                               13,700
     Tennessee Health Care Network, Inc.        3,300
     Healthsource Tennessee, Inc.               2,900
     Texas
     NYLCare Health Plans, Inc.                 71,600
     NYLCare Health Plans, Inc.                 56,200
     Humana HP of Texasa                        20,500
     Prudential Health Care Plan, Inc.          6,500
     Seton Health Plan                          6,100
     Presbyterian Health Plan, Inc.             5,400
     Methodistcare, Inc.                        5,100
     Pacificare of Texas, Inc.a                 5,000
     Cigna Healthcare of Texas, Inc.            2,500
     Texas Health Choice, L.C.a                 1,500
     Prudential Health Care Plan, Inc., San
     Antonio                                    333
     Virginia
     Cigna Healthcare of Virginia, Inc.         13,700
     Cigna Healthcare Mid-Atlantic, Inc.        1,000
     Washington
     Aetna U.S. Healthcare, Inc.                10,600
     Regencecare                                7,900
     Healthplus                                 7,100
     First Choice Health Plan                   3,600
     Providence Health Plana                    1,600
     Pacificare of Washington, Inc.a            1,400
     Wisconsin
     Network Health Plan of Wisconsin, Inc.     1,400

    Note: Approximately 8,400 of the affected enrollees for 2001 live outside of
    the withdrawing plans' service areas. These enrollees are excluded from this
    analysis.

    aPlan remained in Medicare but reduced the number of counties served.

    Sources: Medicare Compare Database, 2000; Medicare Managed Care Market
    Penetration State/County/Plan Data Files, Mar. 2000, www.hcfa.gov/medicare/;
    and files of contract terminations and service area reductions from the
    Center for Health Plans and Providers at HCFA.

    Comments From the Health Care Financing Administration

    Comments From the American Association of Health Plans

    Comments From the BlueCross BlueShield Association

    Comments From the Health Insurance Association of America

    (101850)

    Table 1: Medicare Managed Care Enrollment and Geographic
    Impact of the 2000 Withdrawals 13

    Table 2: Largest Withdrawing Medicare+Choice Plans, January 2000 14

    Table 3: Largest Withdrawing Medicare+Choice Plans, January 2001 15

    Table 4: Key Characteristics of Plans That Terminated Their
    Medicare Contracts in 2000 and 2001 21

    Table 5: Average Annual Amount Spent per Enrollee on
    Non-Medicare Benefits, 1999 and 2000 34

    Table 6: Counties With Medicare+Choice Plans in July 1999
    Affected by 2000 Withdrawals, by Year 2000 Payment Rates 36

    Table 7: Counties With Medicare+Choice Plans in March 2000
    Affected by 2001 Withdrawals, by Year 2001 Payment Rates 36

    Table 8: Counties With Medicare Plans in July 1999 Affected by Withdrawals,
    by Percentage Increase in 2000 Payment Rates 38

    Figure 1: Proportion of Medicare+Choice and Affected Enrollees
    in Rural, Fringe/Small Urban, and Large Urban Areas 12

    Figure 2: Areas Where Sterling Option I Is Available, 2000 17

    Figure 3: Plan Participation in Medicare and FEHBP, 1994-2000 19

    Figure 4: Humana's Participation in Texas, 1986-2001 24

    Figure 5: Plan Participation in Maryland, 1986-2001 28

    Figure 6: Cumulative Increase in Average Medicare+Choice
    County Rates and per Capita FFS Spending, 1997-2001 31

    1. Prior to 1998, Medicare managed care plans that were paid a fixed amount
    per enrollee were known as risk plans. Other types of Medicare plans
    included cost contract and health care prepayment plans, which differed
    substantially from risk plans both in how they operated and how Medicare
    paid them. Nonrisk plans are being phased out. Risk plans, along with new
    types of plans authorized by the Balanced Budget Act of 1997, are now known
    as Medicare+Choice plans. When we refer to a "plan" in this report, we mean
    either a risk plan or a Medicare+Choice plan.

    2. Medicare Managed Care Plans: Many Factors Contribute to Recent
    Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27, 1999).

    3. Medicare+Choice: Payments Exceed Cost of Benefits in Fee-for-Service,
    Adding Billions to Spending (GAO/HEHS-00-161, Aug. 23, 2000).

    4. Our studies include Medicare Plans: HCFA Can Promptly Eliminate Hundreds
    of Millions in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997). Other
    studies include G. Riley, C. Tudor, Y. Chiang, and M. Ingber, "Health Status
    of Medicare Enrollees in HMOs and Fee-for-Service in 1994," Health Care
    Financing Review, Vol. 17, No. 4 (Summer 1996), pp. 65-76 and Physician
    Payment Review Commission, "Risk Selection and Risk Adjustment in Medicare,"
    Annual Report to Congress, ch. 15 (Washington, D.C.: Physician Payment
    Review Commission, 1996).

    5. Medicare FFS payments include payments to teaching hospitals for
    Medicare's share of the costs of providing GME, such as resident and faculty
    salaries and overhead costs related to teaching activities.

    6. ESRD is the stage of kidney impairment that is considered irreversible
    and requires either regular dialysis treatments or a kidney transplant to
    maintain life. It is an uncommon but expensive disease.

    7. Of the approximately 3,100 counties in the United States, about 28
    percent had a plan in 1999. In total, 644 counties are affected by the 2000
    and 2001 withdrawals.

    8. Small urban counties are defined as those counties located in urban areas
    with populations under 1 million. Fringe counties are nonurban counties
    adjacent to metropolitan areas.

    9. A private FFS plan is an insurance plan under contract to HCFA that pays
    providers for each covered service they deliver and allows enrollees to
    obtain health care services from any provider willing to accept the plan's
    payments (which are based on the Medicare FFS payment schedule). Medicare
    pays the plan a fixed amount per enrollee. The plan may collect a monthly
    premium from enrollees and require cost-sharing.

    10. As of Sept. 1, 2000, fewer than half of the enrollees affected by recent
    plan withdrawals will have this option available in their areas.

    11. Medicare Managed Care Plans: Many Factors Contribute to Recent
    Withdrawals; Plan Interest Continues (GAO/HEHS-99-91, Apr. 27, 1999).

    12. Plan participation in Medicare has grown substantially, but not
    consistently, since the risk contract program began in 1985. There was a
    rapid increase in the number of participating plans between 1985 and 1987,
    from about 100 to 165. By 1991, the number of plans had fallen to 93.

    13. Federal Employees Health Program: Reasons Health Maintenance
    Organizations Withdrew in 1999 and 2000 (GAO/GGD-00-100, May 2, 2000).

    14. We define a plan's market share as its percentage of total
    Medicare+Choice enrollment in an area.

    15. Because plans are paid a fixed amount per enrollee, they rely on a large
    enrollment population to spread the costs of the relatively few very costly
    enrollees.

    16. Plan mergers and contract terminations have reduced to four the number
    of plans serving Maryland in 2000.

    17. Calculated as the change in county payment rates for aged beneficiaries,
    weighted by the number of aged beneficiaries in each county in 1997.

    18. See GAO/HEHS-00-161 for a discussion of the forecast error and its
    consequences.

    19. Medicare+Choice: Payments Exceed Cost of Fee-for-Service Benefits,
    Adding Billions to Spending (Aug. 23, 2000, GAO/HEHS-00-161).

    20. Based on the first year of plan-submitted data, HCFA estimates that the
    new methodology would reduce average payments by 5.9 percent if fully
    implemented. In 2000, only 10 percent of plan payments were adjusted using
    the new method. Consequently, plan payments were reduced by less than 1
    percent. In 2002, the portion of plan payments adjusted by the new
    methodology will rise to 20 percent.

    21. These projections are included in each plan's adjusted community rate
    proposal. Costs are calculated on the basis of how much a plan would charge
    a commercial customer to provide the same benefit package if its members had
    the same expected use of services as Medicare beneficiaries, and therefore
    these "costs" include expected profits from commercial customers.

    22. According to the Department of Health and Human Services (HHS) Office of
    Inspector General (OIG), the difference may be even greater. In several plan
    audits, the OIG concluded that the plans had overstated their Medicare
    costs. HHS OIG, Administrative Costs Submitted by Risk-Based Health
    Maintenance Organizations on the Adjusted Community Rate Proposals Are
    Highly Inflated, A-14-97-00202 (July 1998).

    23. Plans' adjusted community rate proposals for 2001 have not yet been
    approved. Although an analysis of these proposals would provide updated
    information on plans' projected costs, this information will be available
    only for those plans that will participate in Medicare+Choice next year.

    24. When the 1999 county rates were established in 1998 (and plans made
    their 1999 participation decisions) per capita FFS spending was expected to
    increase.

    25. Floor counties are defined as those counties assigned the minimum rate
    of $415 in 2001. The average increase is computed for those counties with
    Medicare plans in 1997, weighted by total plan enrollment in 1997.
    County-level data on FFS spending since 1997 are not available.

    26. In 2001, rates in about 31 percent of counties will equal the floor
    payment rate of $415. The remaining county rates will equal the minimum 2
    percent increase over the 2000 rates. The blended rate will not be paid in
    any county. The BBA included a budget neutrality requirement that specifies
    that total payments based on the minimum increase, the floor rate, and the
    blended rates must equal the aggregate payments that would have been made if
    payments were based on area specific rates only. Only blended rates may be
    adjusted to fulfill the budget neutrality requirement. In 2001, funding the
    minimum increase and floor amounts will push aggregate spending above the
    budget neutrality amount. Therefore, the blended rates cannot be funded.

    27. Among counties that had a Medicare+Choice plan in 1999.

    28. Our methodology for estimating these costs is described in
    Medicare+Choice: Payments Exceed Cost of FFS Benefits, Adding Billions to
    Spending (GAO/HEHS-00-161, Aug. 23, 2000).

    29. A recent report by the Department of Health and Human Services Office of
    Inspector General, HMO Withdrawals: Impact on Medicare Beneficiaries,
    OEI-04-00-00390 (Aug. 2000), addresses this issue directly and contains the
    results of surveys of beneficiaries affected by the 2000 withdrawals.
    *** End of document. ***