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CBO's Analysis of Regional Preferred
Provider Organizations Under the
Medicare Modernization Act
  October 2004  


Cover Graphic
© Royalty-free/BXP35466/Brand X Pictures






                
Preface

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) made many changes to the Medicare program, including changes that increased the incentives for preferred provider organizations (PPOs) to serve broad regions of the country. About 13 percent of Medicare's 42 million beneficiaries currently are enrolled in private health plans; nearly all of those beneficiaries are in health maintenance organizations that primarily serve metropolitan areas. The service areas of regional PPOs generally would be larger than those of private plans that currently participate in Medicare and would include many areas that are not served by those plans.

This paper describes how the Congressional Budget Office (CBO) analyzed the likely effects of the MMA's provisions for regional PPOs. In accordance with CBO's mandate to provide objective, impartial analysis, this paper makes no recommendations.

Lyle Nelson of CBO's Health and Human Resources Division prepared the paper, with contributions from Shawn Bishop, under the general supervision of Steve Lieberman (formerly of CBO). Todd Anderson provided assistance with data and tabulations, and Meenakshi Fernandes fact-checked the paper. James Baumgardner, Tom Bradley, Philip Ellis, Arlene Holen, David Moore, Sven Sinclair, and Bruce Vavrichek, all of CBO, provided thoughtful comments on drafts, as did Joseph Antos of the American Enterprise Institute and William Scanlon, an independent consultant. (The assistance of external reviewers implies no responsibility for the final product, which rests solely with CBO.)

Christine Bogusz edited the paper, and John Skeen and Loretta Lettner proofread it. Maureen Costantino prepared the paper for publication and designed the cover. Lenny Skutnik produced the printed copies of the report, and Annette Kalicki produced the electronic versions for CBO's Web site.

Douglas Holtz-Eakin
Director
October 2004




CONTENTS
 
Summary and Introduction
      Medicare's Experience with Private Health Plans
      Provisions of the MMA Affecting Private Health Plans
      CBO's Analysis of the Regional PPO Program
 
Medicare's Experience with Private Health Plans
      The Medicare Risk Program
      The Medicare+Choice Program
 
The MMA's Regional PPO Program
 
Analyzing the Regional PPO Program
      The Costs of Medicare+Choice Plans
      Variation in M+C Plans' Costs
      Estimating the Costs of Medicare PPOs
      Projecting the Bids of Regional PPOs
 
Appendix: Technical Aspects of the Analysis

Tables
   
1.  Changes in the Percentage of Medicare Beneficiaries Enrolled in Private Plans and Increases in Payment Rates, 1997 to 2003
2.  Costs per Enrollee of Medicare+Choice Plans Based on County-Level Estimates, 2002
3.  Estimated Costs That PPOs Would Have Incurred if They Had Entered the Medicare+Choice Program, 2002
4.  Comparison of the Characteristics of Counties With and Without Medicare+Choice Plans, 2002
5.  Projected Bids of Regional PPOs Relative to per Capita Fee-for-Service Expenditures and Benchmarks Under Alternative Approaches to Defining Regions, 2006
A-1.  Costs per Enrollee of Medicare+Choice Plans Based on Plan-Level Estimates, 2002
A-2.  Estimated Parameters of Sample Selection Model of Medicare+Choice Plans' Costs
   
Figure
   
1.  Enrollment in Medicare Risk/Medicare+Choice Plans, 1985 to 2003
   
Box
   
1.  The Medicare PPO Demonstration
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