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Introduction Since Its Introduction In

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Since its introduction in 1965, Medicare’s most sweeping changes came about with theMedicare Prescription Drug Improvement and Modernization Act of 2003, otherwise known as MMA 2003. MMA 2003 greatly expanded Medicare, providing individuals with more choices and options for the delivery of their Medicare services. Most notably, MMA 2003 expanded Part C of the program (renaming it Medicare Advantage) and created Medicare Part D—Prescription Drug coverage.

MMA 2003 did not solve all the problems, but it did provide a way for the elderly to pay for prescription medication in a time when rising drug prices were running far ahead of inflation. Those on fixed incomes were faced with a choice of paying for day-to-day necessities and going without necessary but expensive drugs, or paying for the drugs and getting further behind with living expenses. Through Part D, Medicare beneficiaries have broad access to prescription drug coverage.

This benefit notwithstanding, the act was not without its critics. Both the renaming of Medicare+Choice to Medicare Advantage and the nature of the Part D program itself were criticized for a variety of reasons. Medicare Part C established alternatives to the traditional Medicare+Choice programs and the coordinated care approaches of health maintenance organizations (HMOs) and preferred provider organizations (PPOs). Private fee-for-service (PFFS) plans were also introduced. Making the general public uneasy was the fact that Medicare Advantage and Part D were introduced nearly at the same time, and they were also implemented within a relatively short time (two years). Many people were confused about the benefits of Part D and were dissatisfied with the marketing methods of Part C. The confusion and unease has subsided, however, and today, both programs have become standard fixtures in national health care. As such, both programs will continue to be revised and revamped.

In July 2008, Congress enacted the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA 2008). This act provided for general improvements in the Medicare program but more particularly addressed changes to Medicare Advantage and Medicare Part D problems that had surfaced after MMA 2003. Most of the changes dealt with low-income subsidy qualification, private fee-for-service plan restructuring, special needs plans redefinition, physician payments, and Medicare Advantage plan payment reductions. These changes will be discussed briefly in this course.

A significant portion of MIPPA 2008 was dedicated to defining required marketing practices and standards for Medicare Advantage and Medicare Part D plans. The directives that had been passed down from the Centers for Medicare and Medicaid Service (CMS) to Medicare Advantage companies, to Medicare Advantage prescription drug companies, and to “stand-alone” prescription drug plan companies (and their producers) were elevated to legal status, thus increasing the ability for CMS to rely on laws and statutes to prevent marketing problems in MA and Part D solicitations.

Even though MIPPA 2008 corrected much of the marketing abuse problem, CMS distributed further “guidances” during 2008 and 2009. One was the creation of a “Scope of Appointment” form, which all MA and Part D providers and their representatives are required to complete before having any sales meeting or appointment with a prospect. (Scope of Appointment forms are discussed further in Chapter 4, “Medicare Advantage Marketing Guidelines.”) Another important development was the way referrals must now be treated by Medicare Advantage producers. No longer can a representative simply call a referral. The referral must contact the agent, and then a Scope of Appointment form must be completed before the appointment can begin.

Centers for Medicare and Medicaid Service has continued to pass down to Medicare Advantage and Prescription Drug Plan companies additional marketing rules through 2013 and will undoubtedly continue to provide guidances throughout the existence of the two programs. Many of these provisions will be discussed throughout the course.

In March 2010, Congress passed a comprehensive (and, some would say, confusing) piece of legislation titled the Patient Protection and Affordable Care Act (PPACA). Several small changes were made in the Medicare program, with much of the change involving Medicare Advantage and Medicare Part D. Throughout this course, the changes brought about by PPACA as they relate to Medicare will be discussed. One of the more significant changes was the expansion of the star rating system that CMS instituted with regard to Medicare Advantage and Medicare Part D plans effective January 1, 2012. Under the star system, MA and PD plans are assigned one to five stars, based on specific performance measures: five stars represent the highest ranking (“excellent”); one star signifies the lowest rating (“poor”). The purpose is to help consumers in their search for health care plans and options that best suit their needs. Providers that offer five-star plans may market and sell these plans throughout the year, and consumers can opt to make a once-a-year switch to a five-star plan at any time during the year. Plans rated lower than five stars can be sold only during the initial enrollment period or during the annual election period (open enrollment) of October 15 through December 7 in any year.




Course Objectives

The purpose of this course is to offer the professional producer a thorough orientation to Medicare Advantage and Medicare Part D Prescription Drug coverage. The course provides a general background of Medicare and covers the specific components of the Medicare Advantage and Part D programs. Knowing and understanding the background of the Original Medicare program will allow you to better understand the programs of MMA 2003. In addition, this course will cover current program law and will identify accepted as well as unaccepted ways of marketing each program.

Upon conclusion of this course, you will be able to

  • understand the history, purpose, and evolution of the Medicare program;
  • explain the benefits and limits of the Medicare program;
  • describe how Medicare Advantage and Medicare Part D plans operate and the benefits they offer;
  • understand the sales and marketing issues associated with the introduction of Medicare Advantage and Medicare Part D; and
  • describe how to properly present, explain, and represent a Medicare Advantage and/or Medicare Part D plan.



1.1 - History of Medicare

We lay the foundation of Medicare programs in general and Medicare Advantage and Medicare Part D in particular through a brief historical sketch. With this information, you will understand why a program such as Medicare was needed to help the poor and elderly obtain critical health services, which previously had been unaffordable for many.

Upon conclusion of this chapter, you will be able to

  • identify the major pieces of national legislation that created and formed the current Medicare system;
  • understand the naming and renaming of several parts of the program;
  • understand the creation of Medicare Part C—Medicare Advantage—and Part D—Prescription Drug—plans;
  • explain the foundation of MMA 2003; and
  • explain new marketing mandates for those who represent Medicare Advantage and Part D plans.



1.2 - How It All Came About

With each decade that passes, Americans are living longer. Increased longevity became the norm around the first decade of the twentieth century. World War I, the Great Depression, and World War II all had an impact on the country’s population patterns. Nobody could have predicted the tremendous surge in population after WWII. Even though we would later identify a demographic group known as “the baby boomers,” major increases in population and longevity were already underway by 1945. An increase in the number of poor citizens and an expanding older population accompanied this growth.

In 1945, President Harry S. Truman recognized a condition common to the poor and the elderly—the inability to obtain medical care—and asked Congress to write a plan of national health insurance legislation. He was unsuccessful in his attempt, but the move was underway. Social Security had been established and was fully operational by the late 1930s. Social Security administrators had begun thinking of adding a medical insurance program to Social Security.

In 1960, John F. Kennedy made the idea a central campaign issue. Upon becoming President, he and Congress moved forward with a package to create a national health insurance program for the elderly under Social Security. Upon his death, his successor, Lyndon B. Johnson, continued with the idea as a part of his “Great Society” program. By 1965, the foundations of Medicare were secured in response to America’s poor and elderly health care needs.

1.3 - A Brief History of Medicare

On July 30, 1965, President Johnson signed into law the Social Security Amendments of 1965. This new law established the Medicare and Medicaid programs to deliver health care benefits to the elderly and the poor. The original Medicare program was initially aimed at providing benefits for those age 65 and older and their dependents. (The plan’s first recipient was Harry S. Truman, whose benefits began on July 1, 1966.) A few years later, through the Social Security Amendments of 1972, the program was extended to those under age 65 who had been disabled for two years and to those with end-stage renal disease. The act’s companion plan, Medicaid, was created to provide health care benefits and assistance to people of low income, regardless of age or disability.

The Original Plan: Parts A and B

When it was created, Medicare consisted of two parts: Part A and Part B. Part A was designed to cover the costs associated with hospitalization. Part B was intended to cover medical expenses, such as physician fees and other outpatient costs. Part A was and remains cost free to qualified recipients. Part B then and now is optional and requires the payment of a monthly premium.

Part A of Medicare was designed as a “pay ahead” program, as was Social Security. Consequently, a hospital insurance (HI) trust fund was set up to be funded through American taxpayer contributions in the form of payroll deductions. Part B would be paid for by those who elected to participate in this aspect of the program through monthly premiums and general tax revenues.

Medicare Based on Fee-for-Service Concept

As originally designed, Medicare was a fee-for-service plan. Under this approach, recipients receive care from any provider they choose who accepts Medicare’s payments, according to a set fee schedule determined by Medicare. The plan was designed to pay only the greater portion of a recipient’s needs; it was never intended to cover the full cost of one’s care. As a result, the plan included various deductibles and coinsurance provisions, which were then (and are today) to be paid for by the Medicare recipient. In addition, other coverage “gaps” existed with Medicare, prompting private insurance companies to design insurance plans to help fill the “gaps.” Thus, the termMedigap was born. This term, still in use today, refers to the same product that insurance companies and producers know as Medicare supplement insurance (or simply “Med supp” insurance). Medicare supplement insurance covers some of the costs that Medicare does not cover, including, for example, coinsurance, co-payments, deductibles, and some preventive care.

Managed Care

The delivery of health care began to change in the early 1970s. Health maintenance organizations, or HMOs, became common. These organizations provide health care services through networks of hospitals, physicians, and care providers. Individuals “join” the HMO as members or enrollees by paying pre-set monthly premiums. As a general rule, enrollees are not charged separately for the cost of services when those services are provided; instead, they “cost share” by paying a co-payment for the services they receive. In addition, enrollees are required to receive services from health care providers who are associated with the network. This approach to delivering and funding health care services soon became known as managed care. Managed care embraces the concept of coordinating all health care services an individual receives to maximize benefits and minimize costs.

The Health Maintenance Organization (HMO) Act of 1973 authorized federal Medicare payments to HMOs. In 1982, the Tax Equity and Fiscal Responsibility Act created a more meaningful alliance with Medicare, making it more attractive for HMOs to contract with Medicare. Although the HMO arrangement was originally related to specific HMO hospitals, networks of those hospitals began to emerge in specific geographical areas. Thus, Medicare recipients were now allowed to receive their medical care from a private company rather than through traditional Medicare fee-for-service. Medicare agreed to pay a fixed monthly per-person payment to the private HMO plan. Unlike the fee-for-service approach, where providers bill Medicare directly, providers who operate within an HMO bill the HMO sponsor, which then pays the bills using the funds it receives monthly from Medicare.

Prospective Payment Concept

In 1983, Medicare revised its fee-for-service payment method for hospitals from “reasonable costs” to a prospective payment system. Under this new prospective payment system, Medicare reimbursement rates to hospitals are set and based on a system of diagnostic related groups (DRGs) for inpatient hospital care. This procedure eliminated the handling of millions of paper bills and thousands of man-hours needed to sort out how much to pay. Under the prospective payment system, Medicare pays hospitals based on DRG codes, which correspond to the reasons recipients enter a hospital. In 2008, Medicare revised and expanded the list to include over 700 DRG codes. By 2011, the list had grown to 14,000 codes, and by 2014, the number of codes will be more than 110,000.1

Introduction of Medicare Part C

The Balanced Budget Act of 1997 authorized additional managed care choices for Medicare recipients with the introduction of a new Medicare Part C program (originally Medicare+Choice). The act divided the Medicare program into a number of financing and delivery systems—the “choice” in Medicare+Choice. In addition to HMOs, Medicare Part C plans could include:

  • preferred provider organizations (PPOs)
  • private fee-for-service plans (PFFS)
  • provider-sponsored organizations (PSOs)
  • high-deductible medical savings accounts (MSAs)
  • fraternal plans

Choices for managed and coordinated care became common. Individuals now had a wide variety of options for receipt of Medicare-covered services, in addition to the traditional approach of fee-for-service under Parts A and B. The range of plans under “Plus Choice” began to flourish. Plans were allowed to incorporate additional benefits but had to comply with the basic coverages offered through Part A and Part B. In other words, a Medicare+Choice plan had to equal or better the benefits available through Original Medicare.

The Medicare payment procedure for most of these plans was similar to that created by the entry of HMOs into the Medicare arena: payment was made by Medicare to the plan on a monthly per-person basis. Within a few years, enrollment in Plus Choice programs soared to 6 million people. However, cutbacks in payments to the plans caused many of them to go bankrupt or terminate their contracts with Medicare. Nearly 1.5 million people were forced to return to the traditional Medicare program and, if they so chose, Medicare supplement coverage.

In 2001, the administrative name of the Medicare program was changed from the Health Care Financing Administration (HCFA) to Centers for Medicare and Medicaid Services (CMS). You will see references to CMS from that date forward. CMS operates under the Department of Health and Human Services of the U.S. government.

1 The increase in the number of DRGs has had significant impact on hospitals and the many employees involved with properly coding hospital services to ensure compliance with CMS regulations. The problem with proper coding for “admitted” versus “observational” status caused over 1 million people in 2009 to lose the Medicare extended care benefits for skilled care in a Medicare-approved skilled care facility, because they had not been “admitted” to the hospital.

1.4 - Advent of Medicare Advantage and Medicare Part D

By far, the most sweeping changes in nearly 40 years of Medicare came in the form of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA 2003).

In addition to significant material changes affecting the program and its structure, a number of minor adjustments were made to the nomenclature:

  • The traditional fee-for-service Medicare program, comprised of Parts A and B, was renamed Original Medicare.
  • The Medicare Part C program, Medicare+Choice, was renamed Medicare Advantage. Medicare Advantage is commonly referred to as MA.
  • A new name, Medicare Part D, for prescription drug coverage, was introduced.
  • More new acronyms were introduced, such as “MAPD,” which stands for Medicare Advantage plans that include prescription drug coverage, and “PDP,” which refers to stand-alone prescription drug plans that are sold outside of Medicare Advantage programs.

These nomenclature changes are important to both producers and Medicare clients, because understanding the names and titles is necessary when producers and clients are discussing Medicare. Too many producers of Medicare Advantage products have already been accused of improper marketing techniques, simply because they didn’t know, understand, or use the correct terminology when discussing sales proposals with the public.

Another naming convention to be aware of is Medicare Insurance, which CMS now uses to refer to Medicare Advantage programs. This term reflects the fact that these plans are intended to deliver, at a minimum, all of the benefits that Original Medicare delivers. This terminology distinguishes MA plans from Medicare supplement insurance (Medigap), which supplements Original Medicare.

The Import of MMA 2003

More important than revising the nomenclature, MMA 2003 brought about several major changes. The most significant was the introduction of Medicare Part D, the voluntary prescription drug benefit plan. With Medicare Part D, Americans have a government-sponsored means to help them pay for the cost of their prescription medicines.

Another substantial change as a result of MMA 2003 was to, in effect, “privatize” Medicare to a greater extent than ever before. For the consumer, MMA 2003 and Medicare Advantage created a new Medicare marketplace by expanding the choices for access to covered services and care. This is in line with a primary objective of MMA 2003, which is to move more Medicare recipients into managed care plans.

An important provision of MMA 2003 was the creation of regional preferred provider organizations (RPPOs) and their inclusion in the Medicare Advantage plan arena. Regional PPOs are similar to ordinary PPOs but are designed to enable people in rural areas (some as large as eight-state regions) to have access to PPO programs similar to their counterparts in localized, urban areas. Before MMA 2003, Medicare Advantage plans were concentrated primarily in urban communities; those in rural areas often did not have access to managed care options.

Another major change came about with a financial incentive for MA companies in the form of increased “benchmark” payments from Medicare, as compared to the payments Medicare would pay under its own fee-for-service formula. Some critics estimate these increases as anywhere from 7 to 12 to 19 percent. By the summer of 2007, the issue had created considerable discussion in Congress, with some members seeking to reduce the payment to MA companies. Private fee-for-service MA companies have been the primary target of this concern.

Another change was the introduction of financial incentives for the nation’s employers to maintain retiree medical plans for those over 65, particularly in the form of prescription drug benefits. The concern that employers would drop retirees from their group medical plans once “stand-alone” prescription drug plans became available was identified early on. Therefore, MMA 2003 included significant financial incentives for employers to continue to provide group coverage, including prescription drugs, to their age-65-and-over retirees. Among these incentives was a 28 percent rebate from Medicare toward the cost of drug coverage; however, the Patient Protection and Affordable Care Act of 2010 eliminated this rebate starting in 2012.

Also with MMA 2003, “voluntary” prescription drug plans and their implementation became a significant aspect of Medicare. Medicare prescription drug plans are sold as either stand-alone plans by prescription drug plan companies or as part of a Medicare Advantage plan. (Part D benefits through a stand-alone plan or as part of a Medicare Advantage plan will be discussed in detail later in this course.) MMA 2003 placed prescription drugs solely in the realm of Part D. Therefore, all benefits relating to prescription drugs were removed from Medicare supplement plans.

A Smorgasbord of Options

As you can see, the Medicare landscape changed dramatically with MMA 2003. Individuals now have a variety of options for how their Medicare services are covered and delivered. The following graphic, derived from the educational booklet “Medicare and You” published every year by CMS, illustrates these choices:


Medicare Improvements for Patients and Providers Act of 2008

In July 2008, Congress passed comprehensive legislation designed to correct some deficiencies in MMA 2003. While some aspects of this act made headlines—notably with respect to problems that had surfaced in congressional hearings in 2006 through 2008 regarding Medicare Advantage overpayments and marketing problems—the legislation called for a number of changes in the Medicare program itself. For example:

  • Low-income Medicare recipients now have greater and easier access to the various Medicare and Medicaid programs designed for them. The act made it easier to qualify for the low-income subsidy (Extra Help) program for Part D prescription drugs and eased the asset test for Medicare Savings Programs that help low-income individuals pay for various out-of-pocket costs not covered by Medicare.
  • The act extended the authority of special needs plans (SNPs) and called for a moratorium on new SNPs through December 2010. In addition, this legislation made it more difficult for individuals to qualify for SNPs throughout the remainder of the SNP program period and, by extension, made it more difficult for producers to write SNP applications. Starting in 2011, patients had to meet eligibility requirements for a particular SNP. For instance, with a chronic care SNP, the patient must have been medically diagnosed with the chronic condition to enroll. To be eligible for a dual eligible SNP, the patient must have both Medicare and Medicaid. If the patient’s conditions improve, he or she can be disenrolled from the SNP.
  • The act required implementation of modifications made by the NAIC to standard Medicare supplement policies. This involved restructuring the current policy offerings and their benefits. This new series of Medicare supplement policies was introduced June 1, 2010.
  • The act required Medicare Advantage private fee-for-service (PFFS) plans to create provider networks for plan year 2011 and beyond and to implement the same quality improvement programs as local PPOs in plan year 2010. This means that a client in an MA PFFS plan can go to any provider who accepts Medicare and accepts the plan’s terms of payment.
  • The act provided for a graduated higher Medicare payment schedule for mental health benefits.
  • The act delayed for 18 months a competitive bidding program involving medical supplies and durable medical equipment.

As a practical matter for Medicare Advantage and Part D producers, the effect of the 2008 act was to correct some deficiencies of MMA 2003 regarding the sale and marketing of these plans. Changes that affect MA and Part D marketing are noted in Chapter 4.

The Patient Protection and Affordable Care Act of 2010

The Patient Protection and Affordable Care Act of 2010 (PPACA) made significant changes to the way medical care is to be delivered in the United States. While most of the legislation deals with myriad health care delivery and payment changes, provisions affecting Medicare were also included. Most of the Medicare changes deal with Medicare Advantage and Medicare Part D. These include the following:

  • Medicare Advantage payments from Centers for Medicare and Medicaid to Medicare Advantage providers will be lowered.
  • A new payment structure for MA companies will provide an increase of up to 5 percent for plans that receive four or more stars in the CMS star rating system.
  • Starting in 2014, MA plans must maintain a medical loss ratio (MLR) of 85 percent (meaning that 85 percent of premium revenue must go toward enrollee benefits).
  • Starting in the fall of 2011, the open enrollment period for Medicare Advantage and Medicare Part D changed. Previously, this period ran from November 15 through December 30 of every year. Now the period runs from October 15 through December 7 of every year. This open enrollment period is called the “Annual Coordinated Election Period.”
  • Also starting in 2011, an individual who enrolls in an MA plan may return to Original Medicare and a Part D plan during the first 45 days of the year. This period, previously referred to as the “open enrollment period,” is now called the “Medicare Advantage Disenrollment Period.”
  • In 2010, Part D enrollees who reached the “donut hole,” or coverage gap, were given a $250 rebate. Beginning in 2011, the Part D donut hole coverage gap will gradually decrease each year until 2020, at which time it will be eliminated. At that point, a straight payment structure of 25 percent coinsurance by the enrollee and 75 percent payment by Medicare will be the standard. Part D enrollees also receive a discount on their drugs while in the coverage gap: as of 2013, the discount is 52.5 percent on brand-name drugs and 21 percent on generic drugs. The full retail price of the drugs will still be applied to the amount enrollees are responsible for paying while in the donut hole, which will move them through the gap more quickly.
  • Starting in 2011, high-income beneficiaries became subject to a higher premium for Medicare Part D, similar to the way that the Medicare Part B premium for high-income beneficiaries has been in force.

We will cover these and other Medicare provisions of PPACA 2010 in greater detail in later chapters. A chart that itemizes future changes to Medicare due to PPACA is included in the Appendix.

1.5 - Summary

This brief history of Medicare will help you understand why and how this important American program developed as a necessary entitlement program for the poor and elderly. The term “Medicare” can be considered an umbrella, under which are a number of different and distinct programs: Original Medicare (Parts A and B), Medicare Advantage (Part C) and Prescription Drugs (Part D). Each of these programs is a part of the continuum of the needs of American citizens as our population grows older and as extended longevity becomes an even more important part of the American health care scene.




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