Overview

To expand the role of private managed care plans in Medicare, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provided Medicare Advantage plans with significant increases in monthly payment rates, beginning March 2004. About one-half of the payment increases were used by plans to reduce enrollee premiums and cost-sharing and enhance benefits; providers received most of the rest. Premiums had already begun to decrease in the Medicare Advantage program in early 2004 for the first time in several years, but the payment increases led to further declines—average monthly premiums dropped from $34 to $25 after the increases. The payment rate increases also slowed the trend toward generic-only drug coverage. Overall, average out-of-pocket costs declined to 2003 levels, although managed care enrollees in good health experienced a higher percentage reduction in out-of-pocket spending than those in poor health.

Executive Summary

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) made significant changes to expand the role of private managed care plans in Medicare. MMA increased payments to these plans—formerly known as Medicare+Choice, now called Medicare Advantage (MA)—substantially, as of March 2004. In 2006, other changes will include the addition of regional preferred provider organizations (PPOs) and a new method of paying plans to include a component based on competitive bidding. This issue brief examines trends in MA benefits and premiums in 2004, paying particular attention to the impact of the payment increases. On average, these payments rose 10.9 percent (weighted by plan enrollment) over 2003 levels and 7.4 percent over the originally slated 2004 payment schedule. Highlights of the findings include:

• Overall, about one-half of the 2004 MMA increase was used by plans to reduce enrollee premiums and other cost sharing or to enhance benefits. Most of those benefit changes were used to reduce plan premiums, which dropped an average of $9 per month.
• Average out-of-pocket costs declined to the 2003 level. Although all managed care enrollees received the same dollar benefit, healthier managed care enrollees experienced a higher percentage reduction in out-of-pocket spending than did those in poor health.
• The portion of plans offering prescription drug coverage remained about the same. However, among those plans that offer drug coverage, a higher proportion now cover brand name drugs, as opposed to only generics.
• Coinsurance for physician services was reduced slightly; the share of plans with any cost-sharing for hospital services remained about the same.
• The availability of coverage for services not covered by Medicare—dental, vision, hearing—increased slightly.

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