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Early Effects of the Medicare Modernization Act: Benefits, Cost Sharing, and Premiums of Medicare Advantage Plans, 2005

The Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003 changed the playing field for private plans participating in the Medicare program by substantially raising monthly payment rates in 2004 and 2005 in an effort to stabilize the market and reverse the decline in benefit generosity. In 2004, Medicare Advantage (MA) plans generally used the new funds to reduce premiums and restore brand-name drug coverage.

In 2005, the share of MA enrollees with any drug coverage rose to 74 percent (from 71 percent in 2004), and the share with brand-name drug coverage rose to 36 percent (from 33 percent in 2004) as MA plans continued to use a portion of their extra payments to enhance plan benefits. HMOs are still more likely to offer prescription drug coverage than is any other type of MA plan.

Although health maintenance organizations (HMOs) still dominate the MA market, new types of health plans-particularly private fee-for-service (PFFS) and preferred provider organization (PPO) plans-have emerged in the last few years. These plans offer beneficiaries broader access to providers than do traditional HMOs, although generally at a higher cost.

The findings reported in this AARP Public Policy Institute Issue Paper indicate that the Medicare Advantage program is beginning to reverse its course from the premium increases and benefit reductions that marked the period 2000 - 2003. Average monthly premiums in MA plans declined from $25 to $22 between 2004 and 2005; however, premium levels in 2005 are still substantially higher than they were in 1999. As in previous years, premiums for HMO benefit packages are typically lower than for benefit packages offered by PPO or PFFS plans. This, combined with a significant number of new MA plan entries into the program over the past two years, indicates that the 2004 and 2005 MA plan payment increases have accomplished the goal of providing much-needed stability to MA markets, at least in the short term. (43 pages)