Performance Improvement 2008. How Has Beneficiary Enrollment in Preferred Provider Organizations Affected Medicare Expenditures?


This study estimated the Medicare Preferred Provider Organization (PPO) Demonstration´s first year impact on total Medicare expenditures. The demonstration had sought to increase the number and variety of health plan choices available to Medicare beneficiaries, offering 33 new Medicare Advantage PPO plans from 2003 through 2005. This study examined the impact of enhanced payment and risk-sharing arrangements between the CMS and the plans on the range of options and benefits available to beneficiaries. Researchers identified cost impact contributions of different types of payments, enrollees, and plans. They analyzed PPO enrollment selection bias.

The demonstration was modeled after commercial market PPO coverage. Although all plans were required to offer out-of-network benefits, fewer specific requirements were applied to the benefit design than for most other Medicare Advantage plans. Different cost sharing requirements in and out of network were intended to encourage cost-effective enrollee use of services but not discourage pursuit of appropriate care. The PPO demonstration included two changes to the standard payment system to entice plans to enter the demonstration. The first allowed PPO plans to be paid the higher of the Medicare Advantage base county payment rate, or 99 percent of the fee for service average expenditure. The second included a risk sharing option to protect plans against higher than expected medical costs.

Researchers estimated that Medicare paid more for the 89,334 beneficiaries enrolled in PPO Demonstration plans than it would have otherwise. The estimated additional cost, $41 million -- $457 per PPO enrollee – was 9.3 percent more than it would have been without the demonstration. Extra expenditures under the demonstration were the result of its design, enrolling beneficiary characteristics, and the Medicare program design.

Report Title: Medicare Preferred Provider Organization Demonstration: Cost Impact and Biased Selection in Year One (2003).
Agency Sponsor
: CMS-ORDI, Office of Research, Development, and Information
Federal Contact: Penny Mohr, 410-786-6502
Research Triangle Institute International

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