By Spencer Rich
Washington Post Staff Writer
Tuesday, October 21, 1997; Page Z21

Medicare is undergoing major surgery. The balanced budget bill signed in August by President Clinton makes huge structural changes in the federal health plan for the elderly and disabled that will directly affect beneficiaries for years to come.

One block of changes adds lifesaving preventive benefits, including new or improved screening for breast, vaginal, cervical, prostate and colorectal cancer.

Another gives Medicare enrollees a much wider choice in types of coverage if they opt out of the traditional fee-for-service system.

About 4.4 million of Medicare's 38 million enrollees have already joined a private health maintenance organization (HMO). Starting in 1999, seniors will be able to join a private health plan and Medicare will pay the premium. And they will not be permanently locked in, but can switch to another option or traditional Medicare later.

The new options include preferred provider organizations (PPOs), which are networks of private physicians; provider-sponsored organizations (PSOs), which are networks controlled by doctors and hospitals; medical savings accounts (MSAs), which are individual catastrophic medical funds; and private fee-for-service plans, which are more costly health plans.

The bill also allows a "private contracting" arrangement between a patient and an individual doctor in which the doctor agrees to provide a specific service, such as an operation, and both the doctor and the patient agree to forgo Medicare payment. Medicare pays nothing, the normal Medicare limits on charges do not apply, and the patient is responsible for the total bill.

The patient is still covered by Medicare for other services. However, a doctor who accepts even one patient for one treatment under such an arrangement will be ineligible to bill Medicare for two years for any treatment for any patient. This provision is seen as a way to accommodate a person who wants to obtain a specific doctor for, say, surgery, but finds the doctor does not take Medicare patients.

The option of private contracts, backed by the American Medical Association and sponsored by Sen. Jon Kyl (R-Ariz.), is highly controversial. Opponents, including the administration, say it could allow a doctor to tell a patient he would not treat him under Medicare payment rules but would take him as a private patient if he was willing to pay more than Medicare allowed. Critics say it would allow doctors, in effect, to gouge patients and nullify hard-won limits on doctor's charges.

But few doctors are likely to be able to forgo all Medicare payments for all patients for two years; this sharply limits the potential use of such contracts. Supporters insist that private contracts are the only way to guarantee a person desperately needing some treatment or desiring to use a specific doctor the right to do so, even if at a price. Many Republicans say they will try to repeal the two-year feature.

Republicans strongly favor creating new plan options in Medicare on the theory that competition among rival plans for customers would help keep costs low and quality high.

But health policy analysts such as Marilyn Moon of the Urban Institute, a public trustee of Medicare and Social Security, and Democrats including Rep. Pete Stark (Calif.) and White House advisers, have a different view. They fear seniors may enroll in options that look good but turn out to cost them more than they can afford. And they say some of the new private plans could drain off the healthier elders from traditional Medicare, as private health plans seek to sign up the seniors that will cost them the least to care for.

These are people who would cost traditional Medicare little or nothing in health bills, but for whom the government would now have to pay premiums to private plans. That would leave the traditional Medicare fee-for-service system with too high a share of the sicker, more costly seniors – but with less money to pay for them.

Of most concern are the private fee-for-service plans. Stark, Moon and others say that this option would allow well-to-do seniors to sign up for "boutique" plans. The patient could choose any doctor, including those who don't take Medicare patients because of fee limits, and would face no waiting lines. Critics say this would foster two-tier medicine.

Other critics say they fear some not-so-well-to-do patients, hoping for free choice of doctors, would sign up for these plans only to find they couldn't afford the fees.

Another danger, Moon has said, is that in areas with relatively few doctors, those in practice might join a private fee-for-service plan to escape Medicare fee limits. Patients could be left with no other option.

An even larger threat often mentioned by Moon is that the private fee-for-service option could transform Medicare from a system in which the government guarantees and pays for a full set of benefits into what health officials call a defined contribution system.

In the latter, the government can pay a fixed amount, whatever it chooses, as a premium; if it is not enough to guarantee all benefits, the patient must ante up additional money. The private fee-for-service plan provides the framework for such a system, which could easily be expanded in the future.

However, analysts like Gail R. Wilensky, Medicare administrator under former president Bush, and former Congressional Budget Office chief Robert Reischauer say these fears appear exaggerated. In their view, few people are likely to use the three provisions most feared by critics: private fee-for-service plans, MSAs and private contracts.

Wilensky said that whatever one thinks of the concept of private fee-for-service Medicare plans, there are some barriers to their growth. For one thing, the bill sets some limits on how much the patient could be required to pay in co-payments and deductibles. For another, doctors could not charge a patient more than a certain amount above the insurer's standard fee for a given service. While the amount would exceed the 15 percent extra that doctors are allowed to charge beyond Medicare's standard fee, when treating patients in the traditional Medicare program, the patient would still be protected from extremely high extra charges. These limits, Wilensky said, would probably constrain many insurers and doctors from participating in such plans. Besides, patients who find the additional costs onerous can always switch out of the plan, she said.

MSAs are also controversial. Republicans strongly pressed for this option, arguing that it would save on health care spending by spurring people to be careful consumers, not overutilizing health care or overpaying. But Stark said the risk to many elderly would be excessive. "The only people who will find this attractive are the healthier, and the wealthier, probably, who will use this as a savings mechanism," says Moon. The bill allows only 390,000 Medicare patients to open MSAs in an experiment to see how they will work, Wilensky said, so there is no possibility that large numbers can join.

The private contracts sponsored by Kyl and authorized by the bill could easily be abused, Moon said. "If you want to go to a doctor who wants to charge more than Medicare allows, he can force you to pay more by saying, `I'll treat you, but I won't treat you under the Medicare program,' " she said. "If Medicare would have paid $40 and he wants $80, the individual is on the hook for the full $80."

But doctors depend so heavily on Medicare for income that few would be willing to forgo all Medicare payments for two years, Wilensky and others said.

Moon and others fear that both MSAs and private fee-for-service plans could undermine traditional Medicare by leading to adverse selection. The well-to-do and healthier people would be the most likely participants in such plans, they believe. When a disproportionate share of the healthy with few costs leave, Medicare must use money that it would not have spent on them to pay for their premiums in the private plans, draining off funds needed for the sick people who remain.

But if Reischauer and Wilensky are correct, relatively few people will sign up for these options.

New Medicare Options

Under the changes in Medicare, seniors will have at least four new options in addition to HMOs if they wish to quit the traditional Medicare fee-for-service plan. In all cases Medicare will pay the outside plan a premium, based on local health care costs and adjusted for the age of the patient. The premiums differ sharply across the country, but on average they have been projected to cost about $5,500 in 1999.

• PPOs. Insurers are authorized to set up private preferred provider organizations – networks of private physicians – for beneficiaries. The insurer could not charge an added premium to the enrollee unless benefits were added to the required Medicare package. In these plans, the beneficiaries could use doctors of their own choice but would pay smaller out-of-pocket charges if they used doctors from the insurers' network.

• PSOs. The bill authorizes hospitals and doctors to form networks and set up their own health plans, which are not controlled by insurance companies. Like HMOs and PPOs, these provider-sponsored organizations (PSOs) would offer a wide range of benefits and perhaps extra services at little or no out-of-pocket cost to the patient. And they could not charge the patient beyond the Medicare premium unless they provided extra benefits.

  Doctors and hospitals favor this option. By controlling the plan, they could keep some of the funds that would otherwise go to the insurance companies as profits.

  However, the organizations may not have enough financial reserves to meet state standards. In a key provision of the legislation, a proposed PSO that has not received a state license within three months of applying because of solvency problems could obtain a special license from the secretary of Health and Human Services. Such a license would be good for three years. The idea is to give PSOs a chance to get established.

• Private fee-for-service plans. Insurers could set up private health plans and charge additional premiums, even if the plan did not provide more than the standard Medicare benefit package. The extra premium would come out of the patient's pocket. In addition, doctors in such plans would not be subject to the normal Medicare rules on charges, such as the limit on charging a patient more than 15 percent above the Medicare- recommended fee for a service. At the same time, there would be some limits on extra charges.

• MSAs. In a medical savings account, the beneficiary eligible for a Medicare private-plan premium of $5,500 would use perhaps $4,000 of it to buy a high-deductible (catastrophic) private policy covering most major health costs above $6,000. (That's the maximum deductible Congress felt would be appropriate. The deductible could be less.) The remaining $1,500 could be put into a tax-free medical savings account to pay for services the individual incurred below $6,000.

  If the individual didn't get sick and spend very much on health care, a substantial amount might be left over and carried forward into the next year's MSA. If the person remained healthy the sum could accumulate each year and go to heirs at death. But a person who got seriously ill and had bills over $1,500 would have to pay them out of pocket until the catastrophic policy kicked in.

• Annual mammograms to screen for breast cancer for women on Medicare aged 40 and over. The normal Medicare deductible of $100 a year would be waived for such mammograms. Effective 1998.

• Annual Pap smears and pelvic examinations for high-risk women on Medicare to detect cervical and vaginal cancer with deductible waived; every three years for non-high-risk. Effective 1998.

• Colorectal screening for those 50 and over at frequencies to be established by the secretary of Health and Human Services. Effective 1998.

• Training through dietary and other lifestyle changes to help patients protect themselves against the side effects of diabetes. Effective 1998.

  Bone mass measurements for women at high risk of osteoporosis. Effective 1998.

• Annual prostate screening (several methods could be used) for men over 50 on Medicare. Effective in 2000.