Duluth health system’s decision to drop ‘Advantage’ private free-for-service plans show need for program overhaul.   9/23/2008 by Wayne Nelson

St. Mary’s/Duluth Clinic (SMDC) Health System notified about 5,000 patients last month they will have to move to different Medicare supplemental insurance plans during the open-enrollment period that begins on Nov. 15 for 2009 coverage, or find a new provider.

It’s a bold step that carries some risk for the Duluth-based health system, the region’s largest.

The decision also reveals a program flaw that Medicare won’t close until 2010. Meanwhile, some independent agents say elements of their industry have exploited the program, aggressively marketing these Medicare Advantage “private fee-for-service” plans to seniors as low-cost, or even free, a true statement only if they don’t get sick.

SMDC will continue to accept more than a dozen Medicare Advantage HMO (health maintenance organization) and PPO (preferred provider organization) plans in 2009. The vast majority of SMDC’s Medicare patients, about 86 percent, are covered by those replacement plans for traditional Medicare. But after Dec. 31 it no longer will accept 50 private fee-for-service Advantage plans offered by 14 insurers in this market, including United Healthcare, HealthPartners, Medica, Blue Cross Blue Shield of Minnesota and Anthem Blue Cross.

Advantage fee-for-service plans offer low — some even no — monthly premiums, which have fueled their popularity with seniors. “These products are growing,” said John Smylie, SMDC’s chief administrative officer. “If someone has few or no claims, the fee-for-service plans may be a better option,” he said.

Widely misunderstood

But the fee-for-service plans are widely misunderstood by many seniors, and that’s contributing to providers’ collection problems. The flip side of the low or no premium feature can be very high out-of-pocket costs when a Medicare patient becomes seriously ill.

The fee-for-service plans pay lower benefits and offer neither care coordination nor defined networks. As a result, some seniors have been shocked to receive large medical bills for services they were told were covered by their Medigap plan.

“Some seniors with zero premium plans have told me they thought the coverage was free,” said Dan Conrad, a Medicare plans specialist at Sauter Fairchild Insurance, the independent agency based in Superior.

The fee-for-service plans came on the market in 2006, and SMDC began to see related collection problems in its fiscal year that ended June 30, 2007. “We thought about dropping (the fee-for-service plans) a year ago, but ran out of time before the open enrollment period,” Smylie said.

He said SMDC is pursuing “several hundred thousand” dollars of delinquent payments from insurance companies and seniors who bought these policies.

That group represents about 14 percent of SMDC’s Medicare patients. During open enrollment they will have three choices: switch to an approved contracted Medicare plan, many offered by the same private insurers; cancel their replacement plan and pay their annual deductibles and co-payments out-of-pocket; or switch to another health system accepting the private fee-for service plans.

The St. Luke’s health system — SMDC’s principal competitor in Northeastern Minnesota and Northwest Wisconsin — and Superior Health Center clinics in Proctor, Duluth, Two Harbors and Silver Bay have decided to accept those fee for-service plans through 2009.

James Wuellner, St. Luke’s chief financial officer, said his system is experiencing some of the same collection problems that drove SMDC’s decision. He said Medicare patient business with the fee-for-service supplemental coverage at St. Luke’s has doubled in the last two years.

“It’s grown to 9 percent of our Medicare business,” he said. “Our payment discrepancies from these plans also are growing, from $600,000 last year to a projected $1.4 million in 2008. But we think we can manage it,” Wuellner said. SMDC is the third provider system in Minnesota to drop the Advantage private fee-for-service plans, following the lead of Regions Hospital in St. Paul and Park Nicollet Health Services Methodist Hospital in St. Louis Park. Ironically, Regions is owned by HealthPartners, which developed Liberty, one of the fee-for service plans SMDC is dropping.

These decisions underscore growing disenchantment among health providers with the private fee-for-service supplemental insurance experiment that Medicare launched in 2006 in its continuing search for ways to hold down healthcare costs.

“It’s a Medicare experiment . . . and most experiments fail,” said Conrad of Sauter Fairchild.

Medicare history

Conrad, other independent agents, and providers blame flaws in Medicare’s design of the private fee-for-service plans, as well as insufficient oversight by the government program.

The federal Centers for Medicare and Medicaid manage Medicare Part (hospitalization) and Part B (physicians) coverage. Part A has its roots in President Franklin Roosevelt’s New Deal. The Johnson administration dramatically expanded Medicare coverage in the 1960s, adding Part B covering most outpatient physician and laboratory charges.

Part C was added during the single term of President George H.W. Bush to help seniors meet the annual deductible and co-payment requirements of Parts A and B, ushering in Health Savings Accounts and Medicare Advantage. For the first time with creation of Part C, responsibility for actual plan administration shifted to providers and insurers, with Medicare’s role limited to general program oversight and providing a monthly capitated subsidy to insurers and providers for administration.

That monthly subsidy Medicare pays for the HMO and PPO plans is higher than for the private fee-for-service plans, which helps finance the network and care coordination features of the managed plans. Along with that management component comes higher premiums.

But providers and insurers alike said the price discounts that come with care networks, and the wellness programs and chronic disease management that come with care coordination produce healthier patients and reduce overall healthcare costs.

Network contracts between insurers and providers also clearly spell out charges that seniors can expect with the Medigap HMO and PPO plans, and facilitate collections for providers, said

Rhonda Hendrickson, a Medicare plans specialist with Reliable Insurance Agency in Cloquet.

The absence of networks and plan-provider contracts in the 2006 launch of the private fee-for-service plans was an immediate red flag, she said.

“I have (unhappy) relatives with the fee-for-service plans, but they didn’t buy them from me.

I’ve never sold one. When you assign your Medicare rights to a plan (with no network) and the provider won’t accept the payment, you are stuck with the bill. A lot of seniors were misled about that,” she said.

Reflecting the problem, Medicare has served notice that the private fee-for service plans must be part of a network beginning in 2010. “That will relive a lot of the problem,” she said.

Conrad agrees. While the Advantage fee-for-service plans have worked for healthy seniors, he speculates the network requirement well may start their phase out.

“There was a lot of room for things not to go right,” he said.

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