DEPARTMENT OF HEALTH & HUMAN SERVICES

Centers for Medicare & Medicaid Services

7500 Security Boulevard, Mail Stop N3-01-21

Baltimore, Maryland 21244-1850

DATE: June 26, 2003

FROM: Richard S. Foster

      Office of the Actuary

TO:   Representative Charles B. Rangel

      Ranking Member

      House Committee on Ways and Means

SUBJECT:      Estimated Impact of H.R. 1 on Premiums for Fee-for-Service Beneficiaries in 2010 and Later

Under H.R. 1, the “Medicare Prescription Drug and Modernization Act of 2003,” premiums paid by beneficiaries in traditional fee-for-service Medicare would not be affected by the operations of private health plans prior to 2010. Beginning in 2010, the determination of such premiums for beneficiaries residing in “competitive” areas would be affected by the level of fee-for-service costs in the area compared to private plan costs. (In other areas —- that is, those not meeting the criteria defining competitive areas —- there would be no change in fee-for-service premiums.) A transition rule would limit year-to-year changes in fee-for-service premiums. This memorandum presents estimates of the changes in fee-for-service premiums under H.R. 1 in 2010 and later, for beneficiaries residing in “competitive Medicare Advantage areas” and “competitive Enhanced Fee-for-Service regions.”1

It is important to understand that the impact of H.R. 1 on premiums for fee-for-service beneficiaries would vary substantially depending on such factors as:

• The cost of private EFFS and MA health plans relative to fee-for-service cost levels;

• The percentage of Medicare beneficiaries enrolled in traditional fee-for-service, EFFS plans, and MA plans, both for regions and for the nation overall; and

• The number of consecutive years that an area was “competitive,” as defined in the bill.

As described below, we generally estimate that premiums for fee-for-service beneficiaries in competitive MA areas or EFFS regions would exceed those under current law. There are plausible situations, however, in which such premiums in some areas could instead be slightly lower than current-law levels.

For areas in their fifth consecutive year as competitive MA areas or competitive EFFS regions (which would occur in 2014 at the earliest), the fee-for-service premium adjustment would be fully phased in, and we estimate that:

• For fee-for-service beneficiaries in competitive MA areas, premiums would be roughly 5 to 25 percent greater than under current law. This estimate is sensitive to the average cost of MA plans in the area and to the beneficiary enrollments in fee-for-service versus private plans.2

• For fee-for-service beneficiaries in competitive EFFS regions who are not also in competitive MA areas, monthly premiums would be slightly greater than under current law (for example, about 2 to 4 percent greater in 2014). This result is sensitive to the average level of private EFFS plan costs in the region and to the proportion of beneficiaries in fee-for-service compared to private plans.3

The transition provision would phase in any adjustments to fee-for-service premiums, based on the consecutive number of years that the area had been competitive. One-fifth of the full adjustment would be applied in the first such year, two-fifths in the second consecutive year, three-fifths in the third year, etc.4 Consequently, the estimated ultimate premium impacts described above would be proportionally smaller during the initial transition (which would be 2010 through 2014 for many areas) or any later period involving fewer than 5 consecutive years as a competitive area. In addition, there is a possibility that, in some competitive MA areas during the transition, fee-for-service premiums would be adjusted downward rather than upward. This situation could occur if the average cost of HMOs in that area were greater than the fee-for-service cost level. By the final year of the transition, however, after the higher payment benchmarks for private plan premium determinations had phased out, we would expect any such areas to revert to non-competitive status. In this case, fee-for-service premiums would not be affected.

As noted above, these estimates apply only to Medicare beneficiaries residing in competitive MA or EFFS areas. Under H.R. 1, not all areas would meet the competitive criteria, in which case premiums for fee-for-service beneficiaries would not be affected. We have not yet estimated the proportions of beneficiaries who would enroll in fee-for-service Medicare versus MA or EFFS private health plans in 2010 and later. Prior to 2010, we estimate that roughly 57 percent of beneficiaries would remain in the fee-for-service program, with a total of roughly 43 percent in MA and EFFS plans.5

As suggested by the foregoing discussion, the impact of the post-2010 competition provisions on fee-for-service premiums is complex. In addition, the estimates shown in this memorandum reflect considerable uncertainty due to (i) lack of robust data on private plan costs, (ii) possible changes in beneficiary enrollments in reaction to the premium changes after 2010, (iii) ambiguity in certain of the draft legislative provisions, and (iv) the limited time available for preparation of these estimates, which necessitated simplified estimation methods. Consequently, while we believe that these estimates provide a reasonable indication of future fee-for-service premium levels under the draft legislation, they should be considered preliminary and used only with full awareness of their limitations.

Richard S. Foster, F.S.A.

Chief Actuary

1 The beneficiary premium provisions in H.R. 1 for 2010 and later are complex, and a summary of these provisions exceeds the scope of this memorandum. Reference should be made to section 241 of the legislation for the specific definitions, rules, and formulas.

2 With relatively high private plan enrollment, as we estimate, fee-for-service premium increases would be at the upper end of our estimated 5-25 percent range. With relatively low private enrollment, as estimated by the Congressional Budget Office, the fee-for-service premium increase would tend to be at the lower end of this range.

3 We estimate that, by 2014, the average cost of the three winning PPO plans in most EFFS regions would be slightly less than the region’s fee-for-service cost. If PPO costs were instead significantly greater, as estimated by CBO, then fee-for-service premiums in competitive EFFS regions would tend to be slightly less than current law, depending on the proportion of beneficiaries in the region enrolled in private plans.

4 If a region or area that had been competitive subsequently became non-competitive, then fee-for-service premiums would revert to their normal, unadjusted level. If in later years the area again became competitive, then the transition would start over and fee-for-service premiums would again follow the pattern described above.