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Harvard Pilgrim Health Care, one of the nation’s leading private health plans, has announced that it will drop its Medicare Advantage health insurance program at the end of the year.  The headlines, bashing Obama and blaming health care reform legislation, were predictable.

• “Obamacare victims” ( Boston Herald.com, Sept. 30, 2010)
• “No, You Can’t Keep Your Current Health Coverage” (The American Spectator, Sept. 30, 2010)
• “The Obamacare Nightmare Begins: 22,000 Seniors Lose Their Current Coverage,” (Las Vegas ReviewJounral.com, September 28, 2010)
• “22,000 lose their health insurance due to Obamacare,” (examiner .com, September 29, 2010) 
• “The Heavy Hand of Kathleen Sebelius,” (Forbes, September 30)

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But the headlines were not just predictable--they were dead wrong.

Pilgrim did not decide to “cancel its Medicare Advantage coverage specifically because of new regulations imposed by Obama's health care law,” as the American Spectator, like so many others, suggested.
Another law, the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), passed two years before health reform legislation,  drove Harvard Pilgrim’s decision to shut down its “First Seniority Freedom Plan” says Harvard Pilgrim CEO Eric Schultz. 

 In a phone interview this afternoon, Schultz explained: “First Seniority” is a “private fee-for-service plan" (PFFSP) and the 2008 law said that as of 2011, Medicare Advantage insurers could no longer offer “fee-for-service” plans. If we wanted to continue with First Seniority, we would have turn it into an HMO with a "network" of physicians, and negotiate contracts with them. Rather than paying fees for each service, we would begin paying providers a fixed lump sum to care for patients over the course of a year.” Patients could no longer go to any doctor that they chose—they would have to see providers that were in the network. (Many thanks to the Incidental Economists’s Austin Frakt for pointing out the major factor behind Pilgrim’s decision.  His is a blog that everyone should read. )

To satisfy the 2008 legislation, Pilgrim would be required to completely restructure its Medicare Advantage plan. Not only would this mean creating networks of hospitals and doctors,  Pilgrim would have report on the quality of care they offered, and  provide a prescription drug benefit in the three states where it operates. All of this would be challenging, costly and time-consuming.  It’s not easy to manage a network of doctors and hospitals in the Northeast—particularly in Massachusetts where many providers have king-size reputations, and market clout to match. Moreover, as one insider noted, seniors who live in Massachusetts scatter in the winter to Florida and Arizona. In order to provide coverage in the winter months, Harvard Pilgrim might need networks in at least one or two other states.

It is true that, under the reform legislation, Medicare will freeze its very generous payments to all Medicare Advantage plans this year, and cut over-payments in the years that follow (unless insurers can show that they are providing good value for Medicare dollars). But  this was not the major factor behind Pilgrim’s decision, says Schultz. “Certainly it was a factor, but if we could continue with fee-for-service, I doubt that we would have gotten out the Advantage business--definitely not this year.” 

It’s worth noting that most insurers are not giving up on Advantage —nor will there be a mass exodus in future years, the Urban Institute’s Robert Berenson said in a recent phone interview. Under reform, the former Medicare official expects that most  Medicare Avantage plans will survive: "They will modestly reduce their benefits and learn how to live with lower reimbursements,” he explained.

The crux of the problem for Pilgrim was this: it was operating a very popular and lucrative private fee-for-service plan that, like other PFFSPs  cost taxpayers a fortune.  Under the PFFSP rules, patients can see whomever they like—they don’t have to stay “in network.”  And referrals are not required before making an appointment with a specialist. Patients appreciate the freedom: this is one reason Pilgrim was so popular. But for Medicare (i.e. taxpayers) the end result is costly. Patients see more specialists—even when a primary care physician might be able to diagnose their problem.  Too often, when patients self-diagnose, they see two or three specialists before finding the right one. Moreover, when physicians are paid fee-for-service, the incentives encourage “doing more”—more tests and more treatments. This is not to say that physicians make a conscious decision to call for more tests in order to make more money. But when financial incentives are aligned in one direction, most human beings respond to them.

By contrast, physicians working for Medicare HMOs receive a fixed annual payment for every beneficiary. These HMOs "bid" for patients, telling Medicare how much they think they will need to care for the average patient in a given year. It's up to the HMO to figure out how to use that money to keep patients healthy. If doctors fail, the cost of patient care may exceed the yearly payment. This encourages efficient, high quality care.

The Incidental Economist’s  Austin Frakt sums up the problem with PFFSPs: “They  do almost nothing the Medicare Advantage program was designed to do.  They do not manage care. They do not control costs. . . . They are not expected to report on quality . . .  Because they do not establish networks, as HMOs do, they do not serve as a counterweight to provider consolidation.”  The insurer cannot tell a hospital:  “if you don’t provide high quality, safe and efficient care, we won’t include you in our network.”  Meanwhile, Frakt reports, “they have been the fastest growing type of plan, responsible for most of the recent increase in cost of the MA program.”

According to the Commonwealth Fund, enrollment in PFFSPs grew from 220,000 enrollees in December 2005 to nearly 2 million in February 2008. Meanwhile, the number of health insurance firms offering Medicare grew from four firms in 2004 to 70 in 2008.   Commonwealth also complains that PPFFS plans are exempt  form disclosure requirements to which other plans are subject, and are not subject to bid review or negotiation with Medicare.

PFFSPs Cost 16.6 percent More than Traditional Medicare

All Medicare Advantage plans cost Medicare more than it would spend if it cared for the patients itself. This is in part because Medicare’s administrative costs are lower, in part because Medicare Advantage plans offer some extras that are not included in traditional Medicare.   But PFFSPs p are super-expensive. The Commonwealth Fund observes that while the average MA plant costs 11. 6 percent more per beneficiary, a private fee for service MA plans costs 16.6 percent more.

Harvard Pilgrim’s First Seniority Freedom plan did offer some freebies  not available with traditional Medicare, such as coverage for yearly routine physical exams, routine eye exams and $100 to $200 toward eyeglasses. But this is not enough to justify the 16.6 percent premium that Medicare hands over to the average PFFS. Keep in mind that PFFS plans are not required to offer an option that includes a drug benefit, and, as Frakt notes, “the extra benefits they do offer are “generally less generous than those available from HMOs.”

This is why, in 2008, Congress passed the Medicare Improvements for Patients and Providers Act (MIPPA), legislation which decreed that,  as of 2011, PFFs plans would no longer be  exempt from the requirement that MA plans create networks and provide a prescription benefit. President Bush vetoed the bill, but in July (before President Obama was elected) Congress over-rode the veto.  

Pilgrim Patients Will Not Lose Their Doctors

Contrary to some media reports, there is no reason to believe that former Pilgrim patients will be forced to give up the physiicans that they know.  Some will choose another Advantage plan, picking an Advantage HMO that their favorite doctor has chosen. Many will probably decide to switch back to traditional Medicare, and buy a MediGap policy to fill in the holes.  (Pilgrim will be offering MediGap plans to seniors, and will make it easy as possible for them to make the transition. ) Under traditional Medicare, a senior can go to any doctor who takes the governement's  insurance--and most do. It is important to recognize that Pilgrim, like other PFFSPs, pays physicians exactly the same fees that Medicare pays. Thus, there is no reason that a doctor who accepted Pilgrim would reject Medicare. 

Opponents of reform like to pretend that reform legislation calls for wholesale cuts in payments to Medicare physicians, and that, thanks to "Obamacare, " doctors will begin shunning seniors. This is not true. In fact the Affordable Care Act  (ACA) calls for higher fees for primary care doctors and other physicians who provide preventive care. The ACA also provides bonuses for those who create medical homes or join "Accountable Care Organizations."

When physicians talk about worries that Medicare will slash fees, they are referring to the  “Sustainable Growth Rate” (SGR) rule, which threatened a 20% across the board cut in physicians’ fees some months ago. But the SGR was not created by the Affordable Care ACt; it is part of a separate piece of legislation, passed in the late 1990s when GDP growth was much higher.  At the time no one thought it would ever be used. (The SGR formula is tied to GDP growth).  The SGR is a crude tool; no one in the Obama administration supports it and Congress has made it clear that it will not implement the SGR law.  Year after year, legislators have voted against implementatoin. When President Obama sent his first budget to Congress, he did not include savings from the SGR legislation in his budget. Yet, conservatives refuse to repeal the rule because they hope that the public—and some physicians—will confuse the SGR legislation with the reform legislation that President Obama signed in March.

Harvard Pilgrims's Customers Will Miss Their Medicare Advantage Plan, But  . . .

Of course, none one of this means that seniors who enjoyed Harvard Pilgrim’s Advantage coverage are not disappointed.  The treasured the freedom it gave them.  Though it is worth noting that  medical research does not show that such freedom leads to better care --or better health. According to the Medicare Payment Advisory Comission (MedPAC) the Medicare Advantage plans that lead to the the best outcomes tend to be well-established HMOs. These HMOs select excellent doctors and hospitals for their networks, and provide the incentives and the support needed to encourage coordinated, patient-centered care.

Nevertheless the demise of Harvard Pilgrim will be “disruptive to beneficiaries,” Frakt acknowledges.  “But one shouldn’t blame the Accountable Care Act, the current Congress [or President Obama] for it.  Blame the MIPPA Medicare Improvements for Patients and Providers Act of 2008 and the prior [Congress]. Or thank them. They’re saving taxpayers a lot of money, $47.5 billion over 2009-2018 according to Peter Orszag. I wish we could save a lot of money and cut a lot of waste out of the health system without inconveniencing people, but we can’t.”

In part 2 of this post, I’ll explain why Congress created the pricey fee-for-service Medicare Advantage option in the first place. (Hint: politics played a role.) I’ll also discuss why seniors should be glad that reform legislation will cut over-payments to Medicare Advantage programs—even those who now enjoy low co-pays under MA programs. Finally, I’ll talk about complaints about Medicare Advantage palsn—and where seniors are likely to find the best plans.

Read More: http://www.healthbeatblog.com/2010/10/harvard-pilgrim-ceo-eric-schultz-explains-why-the-insurer-is-cancelling-its-medicare-advantage-plan-.html