In January 2003, the Centers for Medicare and Medicaid Services (CMS) launched a pilot project to determine if preferred provider organizations (PPOs) would be a viable option for providing health care to older adults and people with disabilities.

PPOs—which have networks of “preferred providers” but cover care outside that network for higher patient out-of-pocket costs—are the type of health insurance most common with people under 65. The Government Accountability Office (GAO) released a report evaluating the Medicare PPO Demonstration Project. The report reveals that PPOs are not a cost-effective means of providing health care, and that CMS overpays the private health plans at the expense of the American taxpayer. These excess expenses, the GAO reports, provide no tangible improvements in health care benefits for older adults and people with disabilities.

A troubling finding in the report is that as of January 2005, the 33 PPO plans in the demonstration project, 29 did not cover health services received out of network, even though they were required to do so by law. Even more troubling is that CMS exceeded its legal authority by allowing these PPOs to deny coverage for out-of-network services. CMS not only gave PPOs significant financial incentives to participate in the pilot (costing Medicare an estimated $100 million more over two years, by CMS’s own estimate), but also tacitly allowed PPOs to save thousands of dollars by refusing to pay for out-of-network claims. The pilot is proving to be financially feasible for the PPOs, if no one else.

Maybe if PPOs proved popular and effective at providing good health care at affordable prices for people with Medicare, CMS could justify such high expenditures for the pilot. But this is not the case. Less than 1 percent of the 10.1 million people eligible for the PPO option, enrolled, and those who did faced high out-of-pocket costs resulting from out-of-network care.

The program provides seniors another alternative and mirrors many plans available in the private insurance market.

The lesson from CMS’s PPO Demonstration is clear: making Medicare attractive enough for private plans to participate raises costs for the American taxpayer without cutting costs or improving benefits for people with Medicare. But was a $100 million pilot to understand that insuring older adults and people with disabilities is not an attractive proposition to companies looking to turn a profit? People with Medicare are the costliest people to insure. Insurers motivated by profits understandably shy away from this high-risk group, which is why Medicare was created in the first place, 40 years ago. With the release of the GAO’s report, it becomes difficult to justify Medicare’s millions of dollars in overpayments to private plans.

Findings from the GAO report:

1. PPO pilot costly for American taxpayer. CMS estimated that the PPO Demonstration Project would cost the program an additional $100 million dollars over two years. CMS also estimated that Medicare would spend on average $652 more per year per person enrolled in a Medicare PPO than it would on a person in Original Medicare. Given the low enrollment, the actual amount Medicare is spending additionally per Medicare PPO enrollee is actually much higher.
2. PPOs don’t play by the rules; Medicare looks the other way. “CMS…exceeded its authority when it allowed 29 of the 33 plans in the…Medicare PPO Demonstration to cover certain services, such as skilled nursing, home health, and routine physical examinations, only if beneficiaries obtained them from the plans’ network providers.”
3. PPOs haven’t attracted many members. Less than 1 percent of the 10.1 million people eligible for the PPO option enrolled. Of those, 90 percent were enrolled in two out of the 33 available PPO plans.
4. Medicare PPOs did not attract many from Original Medicare. Of the 98,000 people enrolled in a PPO plan, 74 percent came from a Medicare HMO plan, even though a stated goal of the PPO Demonstration was to “provide a health plan option that would attract beneficiaries from FFS [fee-for-service, aka Original Medicare] and Medigap plans.”
5. PPO Demonstration does not meet goal of “extending beneficiary access to private health plans.” In October 2003, of the 214 counties in which PPOs operated, 205 had some form of private health plan, such as a Medicare HMO plan, available.

Enrollment in other Medicare private plans is also low. Of the 41 million Americans with Medicare, 11 percent were enrolled in a private plan in 2004. Projections show that enrollment will continue to stagnate at approximately 12 percent for the next five years (despite the implementation of the new Medicare law in 2006).