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The House Ways and Means Committee has recently reported out the Medicare Modernization and Prescription Drug Act of 2003 (H.R. 2473). The bill establishes a universal, but voluntary, drug benefit as an entitlement in the Medicare program. The bill also makes changes in traditional Medicare and creates a new competitive system for Medicare that will take effect in 2010.

This analysis focuses on the drug benefit provisions of the House Ways and Means Committee bill; the transitional changes in the Medicare+Choice program and the creation of the competitive system; the transition to an FEHBP-style Medicare competitive program in 2010; the miscellaneous changes in traditional Medicare, including changes in Parts A and B; and regulatory relief provisions for doctors and hospitals and other medical professionals who serve the Medicare population. This analysis does not include either amendments made to the House Ways and Means Committee bill or the Medicare provisions adopted by the House Energy and Commerce Committee.

The Medicare Drug Benefit. The House, like the Senate, creates a voluntary stand-alone drug benefit under a new Medicare Part D. The structure of the benefit is different from the Senate bill, with differences in deductibles, cost sharing and stop-loss, and out-of-pocket spending limits. The House bill would also add new means-testing arrangements to the drug benefit. Overall, there are significant differences between the House and Senate bills on the structure and administration of the prescription drug benefit.

The Creation of a Competitive System. The House bill provides for a transition to genuine competition in the Medicare program. Beginning in 2010, the House bill provides for the transition to a genuinely competitive system that resembles the popular and successful Federal Employees Health Benefits Program (FEHBP). From the standpoint of serious Medicare reform, this is the most important provision in the entire House bill.

Like the Senate bill, the House bill replaces the Medicare+Choice program with the Medicare Advantage system, and it increases the payments to these plans beginning in 2004. In improving the payment system for private plans, the authors of the House bill intend to stabilize the damaged Medicare+Choice program. The House bill also introduces a bidding process for private plans for the purpose of setting the government payment.

With provisions broadly similar to the Senate bill, the House bill creates a Medicare Part E for the new Enhanced Fee-for-Service (EFFS) Plans. These plans would offer enhanced benefits and would compete on a regional basis. Also like the Senate Bill's preferred provider organization (PPO) option, the competition would be limited to three plans per region. Like the Senate provisions, this is a provision in sharp contrast to the principles of consumer choice and market competition. In a real competitive system, there should be as many plans participating as consumers will support.

Unlike the Senate bill, however, the House bill creates a competitive system for future Medicare retirees in 2010. The model for the new system is the popular and successful Federal Employees Health Benefits Program. As noted, this provision creates a competitive government contribution, broadly similar in some respects to the government contribution system that exists in the FEHBP. In the new system, Medicare beneficiaries would be able to keep 75 percent of any cost savings from picking a plan that is below the government's benchmark payment. Moreover, in 2010, the government's competitive contribution system would include the traditional Medicare program.

In many respects this provision of the House bill resembles in broad outline the Medicare reform proposals that emerged from the 1999 National Bipartisan Commission on the Future of Medicare (Breaux-Thomas Commission). There is a major time difference between the Breaux-Thomas transition and the transition period in the House Bill. The Breaux-Thomas transition was scheduled to take four years (1999-2003). Under the House bill, the new competitive system would also take effect four years after enactment. The effective date of the House bill is 2006.

Miscellaneous Provisions and Regulatory Relief. Titles III-IX of the House legislation address additional reforms and changes in the Medicare system. Especially significant are provisions in Title IX, which seek to provide regulatory relief to beneficiaries and Medicare contractors alike.

These titles, however, contain several provisions that threaten to expand the size of an already burgeoning Medicare entitlement. For example, Title IV seeks to "improve" rural health care, but is actually a costly part of the legislation.

Title I: Drug Provisions in the House Bill

While the overall design of the drug benefit provisions in the House bill is similar to that in the Senate bill, the House bill is better crafted, noticeably less regulatory, and omits the most unworkable and dangerous elements of the Senate bill. However, the House bill still creates a new, unconstrained universal prescription drug entitlement and relies on the assumption that private entities will come forward and offer a new type of insurance product (prescription drug-only plans) designed by congressional committee and not otherwise found in normal health insurance markets.

The House bill avoids the most egregiously harmful provisions of the Senate bill. Specifically, the House bill:

1. Does not include the "fallback" drug plan provisions of the Senate bill that would create cost-plus financed plans (administered by PBMs), with Medicare bearing the full price and volume risk for the coverage, and have the effect of crowding out "risk-bearing" plans.
2. Does not contain the regulatory requirements in the Senate bill that would result in Medicare's collecting price and volume data on all drugs purchased by all the plans, and thus put in place the preconditions for price and access controls on drugs.
3. Does not include the particularly dangerous provisions in the Senate bill for determining the "average negotiated price" for each specific drug and then reducing risk corridor and reinsurance payments to plans that "overpaid" for specific drugs. Those provisions in the Senate bill create disincentives for smaller and regional plans to participate. They would also set in motion a political dynamic that would quickly result in price and access controls in the guise of "cost control."
4. Does not contain the provisions in the Senate bill for establishing plan claims cost targets, risk corridors, reinsurance for the excess drug expenditures of individual high-risk beneficiaries, or complex payment adjustments based on the risk corridors and reinsurance provisions. The effect of those provisions in the Senate bill would be to have Medicare micromanage the private plans, including any employer-sponsored retiree plans that became "qualified" plans.

Section 1860D-2: Requirements for Prescription Drug Coverage

Standard Coverage. The House bill establishes a standard for prescription drug coverage in 2006 of a $250 a year deductible, 20 percent coinsurance on drug purchases up to an initial coverage limit of $2,000, and a beneficiary out-of-pocket limit of $3,700 per year. The deductible, initial coverage limit, and out-of-pocket limit are indexed for years beyond 2006 (1860D-2 (b)). This section further stipulates a formula by which the $3,700 annual out-of-pocket limit is to be set higher for upper-income beneficiaries (a provision not found in the Senate bill) (1860D-2(b)(4)(D)).

Analysis: This benefit structure leaves a "doughnut hole" gap in coverage of $3,100. This means that beneficiaries must pay 100 percent of the costs of drugs between $2,000 and $5,100. This is a larger coverage gap than that in the Senate bill. Like the Senate bill, it is a strange coverage structure, unlike any that would be found in a normal market. It can be explained only as the result that occurs when an insurance program (which by definition would provide the greatest benefits to a small number of the neediest individuals) is contorted to achieve the political objective of providing at least some benefit to each of a large number of constituents while still maintaining some limits on the cost of the program.

The provision to vary the out-of-pocket limit for higher-income beneficiaries so that the higher a beneficiary's income, the greater the out-of-pocket expenses he or she incurs is, from an insurance perspective, not just strange, but bizarre. In a normal insurance market, more affluent customers can simply elect to retain more of the financial risk the insurance guards against by electing less front-end coverage (i.e., a higher deductible). Thus, if one were to income-relate any aspect of the coverage design, it should be the plan deductible. From a government program perspective, while income-relating the program's benefits makes sense, the better way would be to reduce the level of subsidy for participating in the program (i.e., have the more affluent pay most, or even all, of the premium for participating in the program).

The lack of a provision in the Senate bill income relating the out-of-pocket limit is one of the very few cases where the Senate bill's design is superior. That aside, the House bill does make the out-off-pocket limit a true stop-loss when it is reached. In contrast, under the Senate bill, beneficiaries would continue indefinitely to pay 10 percent of all drug costs above the so-called out-of-pocket limit.

Actuarial Equivalence. The House bill's definition of "actuarial equivalence" (1860D-(2)(c)), for purposes of determining what are acceptable alternatives to the standard coverage plan, is less rigid than the definition in the Senate bill.

Analysis: While the Senate bill overly defines actuarial equivalence to the point that it becomes indistinguishable from the standard plan (e.g., specifying that an actuarially equivalent plan must have the same deductible as the standard plan), the House bill relies on a more appropriate definition of actuarial equivalence that permits a more reasonable range of variation in plan design. This makes it more likely that, under the House bill, private insurers will be willing to offer plans under the new program; it also makes it easier for existing employer-sponsored drug plans to meet the "qualified coverage" requirement.

1860D-5: Process for Beneficiaries to Select Qualified Prescription Drug Coverage

Medicare Assumption of Risk. Subsection (d) of Section 1860D-5 provides the Administrator with the authority to allow Medicare to increase the share of risk born by the taxpayers to induce private plans to offer prescription drug coverage in regions with fewer than two competing plans.

Analysis: While this provision is superior to the "fallback" plan provisions in the Senate bill as a mechanism for addressing the possibility that private plans may not come forward, it still establishes the premise that the taxpayers will assume the risk if the legislation fails to induce private entities to offer the novel drug-only insurance plans. The better approach would be to continue the availability of the drug discount card program (Section 105) in areas that did not have at least two competing drug plans.

Section 102: Offering of Qualified Prescription Drug Coverage Under Medicare Advantage and Enhanced Fee-for-Service (EFFS) Program

Single Premium. For the new Medicare Advantage and Enhanced Fee-for-Service plans, the House bill combines Parts A, B, and the new Part D of Medicare into a single premium for those plans (Section 102 (a)(6)).

Analysis: This provision simply streamlines premium payment.

Section 104: Medigap Transition

Changes in Medigap. Unlike the Senate bill, the House bill does not completely eliminate the existing Medigap plans with prescription drug coverage. Rather, it closes those existing plans to new enrollees and creates two new standardized Medigap plans that provide partial cost sharing for the new Part D benefit offered through other private plans.

Analysis: This approach is superior to that in the Senate bill. It allows current Medicare beneficiaries who have purchased some drug coverage to keep that coverage and allows future beneficiaries to purchase insurance that partially fills the gaps in the new standard coverage.

Title II: Medicare Enhanced Fee-for-Service and Medicare Advantage Programs; Medicare Competition

Section 201: Establishment of Enhanced Fee-for-Service (EFFS) Program Under Medicare

EFFS Regions. The language provides for the Administrator to divide the country into 10 regions for EFFS plans to participate. The Administrator would take into consideration a market survey and analyses of existing insurance markets, and would develop regions to maximize full access to coverage, especially in rural areas.

Analysis: This provision gives the Administrator the authority to determine "marketable" regions for providing coverage. The Administrator's discretion will be key to this process. Ideally, the Administrator's oversight, with the ability to accept or reject regional bids by insurers, would ensure the broadest possible access without micromanaging regional plan operations.

Enhanced Fee-for-Service (EFFS) Plan. The language stipulates that an EFFS qualifies only if it provides for coverage either through fee-for-service or through a preferred provider network.

Analysis: The language unnecessarily limits the types of plans that could qualify as an EFFS. The purpose of allowing private plans to compete for Medicare beneficiaries is to encourage both innovation in delivery systems and the widest array of available private plans. As plans evolve over time, this strict definition of what constitutes fee-for-service or preferred provider plans may be outdated. The language should be broadened to allow more flexibility within the definition to accommodate the evolution of private-sector plan development.

Deductibles for All EFFS Beneficiaries in the Entire Region. The language requires a uniform, single deductible for benefits under Part A and Part B that includes a catastrophic limit on out-of-pocket expenditures and a drug benefit (if applicable).

Analysis: The creation of one uniform plan with one single deductible is a good way to simplify the Medicare payment system and prepare it for a true premium-support model for Medicare.

The Administrator's Acceptance and Negotiation of Bid Amounts. The Administrator would have authority similar to that exercised by the Director of the Office of Personnel Management (OPM) "with respect to health benefit plans under chapter 89 of title 5, United States Code."

Analysis: Establishing the Administrator's negotiating ability based on OPM's experience and operational efficiency is a sound policy. It is a first step to ensure that the new Medicare bidding process functions as it does in the FEHBP. In that program, in sharp contrast to the Medicare+Choice program, the relationship between the government and private plans is a business relationship instead of a regulatory one.

Administrator's Contract Authority. The Administrator has the authority "to enter into contracts for the offering of up to 3 EFFS plans in any region."

Analysis: The Administrator should not be limited to contracting with only three plans. This is incompatible with a Medicare reform based on consumer choice and competition. There should be the widest possible variety of plans competing for enrollees. Instead of the government's being allowed to determine "winners" and "losers," enrollees should be choosing or not choosing from among a variety of competing plans.

Beneficiary Rebate Rule. If the benchmark payment to a competing a plan exceeds the plan's bid, beneficiaries would receive a 75 percent rebate equal to the average per capita savings. Rebates are determined by a risk-adjusted monthly benchmark and a risk-adjusted monthly bid.

Analysis: The rebate is a good way to reward cost-conscious seniors. It will provide an incentive to look for cost-effective plans. The provision could be improved by giving the beneficiaries a 100 percent rebate.

Computation of EFFS Region-Specific Non-Drug Monthly Benchmark Amount. This amount would be equal to 1/12 of the average (weighted by the number of EFFS-eligible individuals in each payment area described in Section 1853 (d)) of the annual capitation rate as calculated under Section 1853 (c)(1).

Analysis: Historically, Medicare payment has not reflected accurate market-based prices. Medicare fee-for-service, for example, has traditionally kept its costs low because of below-market payments. While this provision is intended to improve the payment structures for Medicare+Choice ("Medicare Advantage"), the benchmark payment provisions ideally should reflect the most accurate representation of market-based price.

Payment of Plans Based on Bid Amounts. For plans with bids below the benchmark, plans would receive the monthly bid amount, adjusted for demographic risk (age, disability, gender, institutional status, health status, and other factors) and geographic factors, plus any computed rebate amount. For plans with bids above the benchmark, plans would receive the monthly benchmark plan, adjusted for demographic risk and geographic factors.

Analysis: These provisions begin to establish a system by which plans are able to submit bids based on actual market-based assessments to compete for enrollees instead of being paid at an arbitrary, non-market based price for specific goods and services.

Prohibition on Coverage of Deductible and Certain Cost-Sharing Imposed Under EFFS Plans. The language would make a significant change. No Medigap plan, except for the two new types outlined in previous sections, "may provide coverage of the single deductible or more than 50 percent of other cost-sharing imposed under an EFFS plan under part E."

Analysis: This is a significant change in Medigap policy. See comments in Part D analysis.

Subtitle B: Medicare Advantage Program

Section 212: Medicare Advantage Improvements

Equalizing Payments with Fee-for-Service/Revising the National Blend/Increasing Minimum Percentage Increase to National Growth Rate.In 2004, the legislation would begin adjusting the payment for the new Medicare Advantage plans to equal 100 percent of fee-for-service costs. It would revise the blend calculation to reflect the average number of Medicare beneficiaries "who are enrolled in a Medicare+Choice plan." Finally, starting in 2004, it would increase the minimum percentage increase to the national growth rate by depending on the greater of the following: (1) 102 percent of the annual Medicare Advantage capitation rate for the previous year for the area or (2) the annual Medicare Advantage capitation rate for the area the previous year, increased by the national per capita Medicare Advantage growth percentage.

Analysis: This is a slight improvement over current law. Current Medicare+Choice payments are based on flawed formulas. Medicare fee-for-service levels are still not market payments. Moreover, compared to traditional Medicare fee-for-service, private plans tend to offer more value per dollar.

Implementation of Competition Program

Section 221: Competition Program Beginning in 2006. Under the language (similar to provisions for the EFFS program), mechanisms would be established for consolidating premiums for enrollees in Medicare Advantage and Part D.

Analysis: The payment consolidation would make the system simpler. The language constitutes a positive step in the preparation for the transition to a competitive FEHBP model for the Medicare program.

Section 234: Medicare Savings Accounts (MSAs) and Balanced Billing Limitations. The language exempts MSA reporting requirements on enrollee encounters. It repeals the "demonstration" designation for MSAs in current law, thus making it permanent, and lifts the 390,000 cap on enrollment. The MSA language also includes "limitations" on balanced billing.

Analysis: The reporting exemptions, making the offerings permanent and lifting the cap on enrollment, are all desirable provisions.

The application of balanced billing limitations, however, is a concern. Billing requirements in Medicare, as well as employer-based health insurance, are accoutrements of third-party payment transactions. But the MSA relationship is a two-party transaction in a free market: doctors and patients. It is not clear why there would be any such provision in what is supposed to be a voluntary free market financial relationship between doctors and patients.

In traditional Medicare, balanced billing limitations prohibit a physician who is treating a Medicare patient from charging above the Medicare fee schedule amounts, which traditionally have been below market value. If patients choose to spend more for better-quality care, they should be able to do so without government interference.

Subtitle C: Application of FEHBP-Style Competitive Reforms

Section 241: Beginning of the FEHBP-Style System, Starting in 2010. Under the language of the bill, the Medicare Benefits Administrator will have the authority to create competitive regions for the Enhanced Fee-for-Service system. Each region of the country must have at least two competing plans, offered by different organizations, and each of the plans must meet minimum enrollment requirements.

The benchmark for (non-drug) payment to the plans is based the sum of two components: the Enhanced FFS and the FFS component. For the EFFS, the Administrator is to calculate the annual weighted average bids of the plans in the region, adjusted for the FFS market share. For the FFS component, the Administrator calculates the adjusted average per capita cost of individuals enrolled in Medicare Parts A and B.

In 2010, the Administrator will also have the authority to determine a competitive Medicare Advantage (MA) "area," including a metropolitan statistical area or other area with a "substantial number" of Medicare Advantage enrollees. In each area, there must be at least two MA plans in addition to the traditional Medicare fee-for-service program. These plans must each be offered by different organizations that meet minimum enrollment requirements. In determining payment, the Administrator must likewise compute the sum of the MA component and the FFS component in the area. The MA component is based on the weighted average of competing plans in the area, and the FFS component is based on average adjusted per capita cost for services under Medicare Parts A and B.

In 2010, the benchmark payment for the competing plans would be adjusted for risk, demography, the health status of the enrollees, and other factors. For plans in regions or areas that have not seen previous competition, the payments will be phased in according to a formula. Beneficiaries enrolling in plans with bids above the area government benchmark payment would pay the difference. Beneficiaries enrolling in plans that bid below the government benchmark payment would get a rebate of 75 percent of the savings for picking a plan below the government payment.

Beginning on January 1, 2010, beyond determining and paying the competing plans, the Administrator will transmit the beneficiary's name, Social Security number, and premium adjustment to the Social Security Administration.

Analysis: This provision apparently sets up a "premium support" program. It appears to be broadly similar to that envisioned under the majority proposal of the National Bipartisan Commission on the Future of Medicare (Breaux-Thomas Commission). This proposal is thus compatible with real Medicare reform based on consumer choice and market competition.

While this provision would set regional and area wide benchmarks, under the Bipartisan Commission proposal, payment for plans would have been based on a national formula: the national weighted average price of the plans. For plans with prices above the national weighted average, the beneficiary would be responsible for the additional cost; for plans below the national norm, the beneficiary would pay no premium.

Under this provision, Medicare would compete directly with private plans. Under the Breaux-Thomas proposal, the Medicare fee-for-service would likewise be treated the same as competing private health plans in a new premium support system.

The model for the premium support approach is, and has been, the Federal Employees Health Benefits Program. Under the FEHBP, as authorized under Chapter 89 of Title V, the government payment is also based on the weighted average premium of plans participating in the program. The FEHBP formula includes, however, a limit of 75 percent on the government contribution to the premium of any plan chosen by an FEHBP enrollee. The formula also includes a cap on the dollar amount of any government contribution for single or family coverage.

From the standpoint of the Medicare beneficiary, the House provision is superior to the FEHBP formula, for the Medicare beneficiary can secure 75 percent of any difference between the plan bid and the benchmark payment. In the FEHBP, there is no rebate system at all. If one were to improve upon this provision, one could fill the "savings gap" by giving Medicare beneficiaries 100 percent of the difference between the plan bid and the benchmark payment.

Title III: Combating Waste, Fraud, and Abuse

Section 302: Provisions to Reduce Waste, Fraud, and Abuse.Title III of the House legislation takes several measures to introduce competition into and reduce wasteful spending within the Medicare program. For example, Section 302 creates a program providing for the competitive acquisition of durable medical equipment, medical supplies, and items used in infusion, drugs and supplies used in conjunction with durable medical equipment, parental nutrition, and off-the-shelf orthotics. Instead of paying for these items and services through a set of established local (or state) fee schedules, the House legislation would pay providers of these items and services on a competitive basis. A similar competitive payment program is established by the legislation for outpatient medical services and non-self-administered prescription drugs currently covered by Medicare.

To combat waste and fraud, Title III of the legislation clarifies the ability of the Secretary of Health and Human Services to recover amounts owing to the government in situations where Medicare is the secondary payer of services. It also creates a demonstration project for the use of recovery audit contractors, who would be hired to identify underpayments and overpayments in the Medicare program and reclaim any overpayments made to providers.

Analysis:Title III's provisions focus on the acquisition of supplies and services under traditional Medicare and are designed to lower the costs of the program and save taxpayer dollars.

Title IV: Rural Health Care Improvements

Sections 401-410: Medicare Rural Payments. Title IV of the House legislation is focused on increasing Medicare payments to rural hospitals and health care providers and improving the operation of traditional Medicare in rural areas. It would, for example:

• Increase Disproportionate Share Hospital (DSH) payments to hospitals with fewer than 100 beds (Section 401);
• Increase the standardized amount paid to acute hospitals for inpatient services in rural areas so that it is equivalent to the amount paid to acute hospitals in urban areas (Section 402);
• Establish an "essential rural hospital" classification for hospitals whose closure would significantly diminish the ability of beneficiaries to obtain essential health care services, allowing these hospitals 102 percent reimbursement of reasonable costs for inpatient and outpatient services provided (Section 403);
• Make improvements in the Critical Access Hospital (CAH) program (Section 405);
• Exclude certain rural health clinic and federal qualified health center services from the Prospective Payment System (PPS) for Skilled Nursing Facilities (Section 408); and
• Increase payments to retain emergency capacity for ambulance services in rural areas (Section 410).

Analysis:Title IV of the House legislation increases spending to subsidize Medicare payments in rural areas.

Title V: Provisions Relating to Medicare Part A

Sections 511-512: Medicare Part A Payment. Title V relates strictly to changes in payment and payment structure to hospitals and skilled nursing facilities under Part A of Medicare. This part of the legislation, for example, increases by 128 percent the per diem payment made to skilled nursing facilities for care of an AIDS patient (Section 511). The legislation also expands coverage for beneficiaries under Part A to include certain hospice consultation services (Section 512).

Analysis:Rather than general reforms of the Medicare program, the changes proposed in Title V of the House legislation are targeted at particular constituencies. Much as with Title IV, Title V includes a number of provisions that are likely to increase the cost of the entitlement as a whole.

Title VI: Provisions Relating to Medicare Part B

Payments to Medicare Part B.The outpatient benefits received by Medicare beneficiaries have changed little since the program's inception in 1965. Title VI of the House legislation makes some important changes in Medicare Part B, which covers the outpatient physician visits made by Medicare beneficiaries. Subtitle B of Title VI updates the Medicare benefits package to include a number of preventive services for beneficiaries.

Section 611 covers an initial preventive physical exam for Medicare beneficiaries within six months of their decision to elect coverage under Part B of the program. The exam would include items and services (but not laboratory tests) consistent with the recommendations of the United States Preventive Services Task Force and at the discretion of the Secretary of Health and Human Services. The Part B deductible and coinsurance would be waived for the initial preventive physical exam.

Other modifications in the benefits package made by Title VI include coverage of cholesterol and blood lipid screening, waiver of the deductible for colorectal cancer screening tests, and improved payment for certain mammography services.

Since 1991, the Part B premium has been set at $100. To help offset the costs of these changes in the benefit package, Section 628 of the House legislation indexes the Part B premium so that annual increases will grow at the same rate as expenditures per capita for Part B services.

Analysis:Title VI of the House legislation modernizes the benefits provided by traditional Medicare and adds some important preventive care features to the program. The manner in which these features are added is somewhat prescriptive (e.g., the government will dictate which services will be covered and in what manner). This is an inherent weakness of a system that is based on traditional government central planning as opposed to a system that is responsive to the dynamism of market forces.

Title VII: Provisions Relating to Medicare Parts A & B

Payments for Home Health and Chronic Care.Title VII of the House legislation makes changes that affect home health services and chronic care provided under Medicare. For example, Section 702 establishes reduced co-payments for a home health service episode of care. Currently, the home health benefit does not carry any cost-sharing requirement. The amount of the co-payment would be 1.5 percent of the national average payment per episode of home health service and would be set at $40 for 2004.

Section 721 introduces elements of competitive bidding into the provision of chronic care improvement programs for Medicare beneficiaries who have certain chronic conditions (such as congestive heart failure, diabetes, or stroke). Providers of chronic care, which can be disease improvement organizations, health insurers, provider organizations, a group of physicians, or any other legal entity deemed appropriate, would be selected based on their ability to achieve improved health outcomes for beneficiaries while controlling costs.

Analysis: As Medicare beneficiaries are living longer, the importance of chronic care has increased. The provisions in Title VII are intended to improve the provision of chronic care while helping to control cost increases in the Medicare program.

Title VIII: Medicare Benefits Administration

The Creation of a Medicare Benefits Administration.This part of the House legislation establishes a new Medicare Benefits Administration (MBA) within the Department of Health and Human Services, which would be charged with overseeing Parts C, D, and E of Medicare. At the head of the MBA is its Administrator, who would be required to negotiate, enter into, and enforce contracts with newly created Medicare Advantage plans, Enhanced Fee-for-Service (EFFS) plans, and prescription drug plan sponsors for Medicare prescription drug plans. The MBA Administrator would be prohibited from requiring a particular formulary or instituting a price structure for the reimbursement of covered drugs. In fact, the bill prohibits the Administrator of the MBA from interfering with the competitive nature of providing prescription drug coverage through private organizations such as Medicare Advantage and EFFS plans.

Analysis:It is highly significant that Title VIII of the House legislation explicitly prohibits the Administrator of the newly created Medicare Benefits Administration from interfering with the competition that will occur between plans under the newly created prescription drug benefit in Title I. By barring the Administrator from mandating a particular formulary or setting prices on prescription medicines, Title VIII recognizes the important role that market-based principles will play in a more effective and less wasteful Medicare system.

Title IX: Regulatory Relief

Regulatory Reform in Traditional Medicare. The overarching goal of Title IX of the House legislation is to reform the regulatory regime under which Medicare operates. It makes a series of changes that aim to provide regulatory relief and contracting reform, improve education and outreach to providers and contractors, clarify the appeals and recovery process, and make other improvements in Medicare.

A prime example of regulatory reform is in Section 903 of the House legislation, which explicitly bars retroactive substantive changes in any regulation, manual instruction, interpretive rule, statement of policy, or guideline under the Medicare system.

Subtitle B of Title IX is focused on giving the Secretary of Health and Human Services increased flexibility in the administration of the Medicare program. Section 911 would loosen the restrictions placed on the Secretary in contracting with entities by allowing him or her to contract competitively with any eligible entity to serve as a Medicare contractor. Medicare contractors would also be required to implement a contractor-wide information security program to ensure the security and privacy of beneficiary information.

Subtitle C of Title IX introduces incentives to improve contractor performance and allocates additional monies to contractors to assist them in the education and training of their providers. It also requires that the Secretary and all Medicare contractors maintain Internet sites to answer questions and provide published materials beginning on October 1, 2004. Subtitle C also creates a Medicare Provider Ombudsman, whose job it is to provide confidential assistance to providers and suppliers regarding complaints, grievances, requests for information, and resolution of unclear or conflicting guidance about Medicare.

Subtitle D addresses appeals and recovery. More specifically, it seeks to streamline the process through which Medicare beneficiaries may make administrative appeals and revise the Medicare appeals process. For example, Section 933 requires providers and suppliers to present all evidence at the beginning of an appeals process rather than at any stage (as current law permits) and mandates that notices of, and decisions from, the appeals process are written in a manner that is understandable to a beneficiary.

Analysis:Title IX of the bill institutes a number of important regulatory reforms in the Medicare system and is an important step toward real reform of traditional Medicare. In addition to streamlining the appeals process for beneficiaries, Title IX institutes reforms that will make it easier for market-based competitive bidding between contractors to make its way into Medicare. The significance of technical reforms such as those presented in Title IX cannot be overstated. If there is to be fundamental change in the way that traditional Medicare procures and provides medical services, regulatory relief must come first. Title IX goes a long way toward providing that necessary relief.

[1]Lanhee J. Chen is Visiting Fellow, Center for Health Policy Studies, The Heritage Foundation; Edmund F. Haislmaier is Visiting Research Fellow, Center for Health Policy Studies, The Heritage Foundation; Robert E. Moffit is Director, Center for Health Policy Studies, The Heritage Foundation; and Nina Owcharenko is Senior Policy Analyst, Center for Health Policy Studies, The Heritage Foundation.