COLUMN-A quiet experiment is testing broader privatization of U.S. Medicare

(The opinions expressed here are those of the author, a columnist for Reuters.)

Jan 14 (Reuters) - Millions of retirees have opted out of traditional Medicare over the past two decades, choosing to join a privatized, managed-care version of the program. But the choice might not be in their hands much longer.

The U.S. government has quietly launched a large-scale test of a new model for traditional fee-for-service Medicare that critics argue could transform it into another type of privatized managed care. Under the model, Medicare contracts with healthcare provider groups that receive a flat annual payment to provide care for enrollees in the traditional program. Some current fee-for-service Medicare enrollees are being placed in these so-called Direct Contracting Entities (DCEs) in 38 states where the pilot test is under way.

DCEs are groups of doctors, hospitals, or other healthcare providers that work as teams, with the stated goal of improving quality of care and the patient experience. But they all have one thing in common with Medicare Advantage, the fast-growing managed care offering that already serves 42% of Medicare enrollees. Like Advantage plans - which usually are HMOs or PPO plans - DCEs create networks of preferred healthcare providers, and they can retain as profit the portion of the annual per-patient payments that are not spent on healthcare.

The Centers for Medicare & Medicaid Services (CMS) describes DCEs as part of a broader strategy to improve traditional Medicare through innovative accountable care organization (ACO) models, and emphasizes that it is a test.

“CMS recognizes that better health care outcomes and coordination can be achieved through many different approaches,” Dr. Liz Fowler, CMS deputy administrator and director of the CMS Innovation Center, said via email in response to questions I submitted. “The Direct Contracting Entity is simply one approach that we believe will help achieve this goal.”

Supporters argue that DCEs will improve traditional Medicare by creating financial incentives for providers to coordinate patient care and focus on overall improvements in their health.

“This is a move from a fragmented fee-for-service model with higher costs to a prepaid system that becomes a healthcare system and not a sick system,” said Don Crane, CEO of America’s Physician Groups, a trade group that promotes capitated payment models for healthcare. “It’s a system where physicians work together to keep patients healthy.”

But the pilot test is setting off alarm bells among consumer advocacy groups and some members of Congress, who are raising questions about how DCEs will impact patient care. They also worry about an influx of investor-led entries into the business that point to further privatization of Medicare. Perhaps most importantly, they argue that such an important change in the structure of Medicare should require the approval of Congress, rather than rulemaking by CMS.

While the DCE program is in an early phase, this much is clear: if you are enrolled in traditional Medicare and live in an area where a DCE operates, you can be assigned to one without your consent. CMS does this by reviewing your claim history and “aligning” you to a DCE that your physician participates in (or if you choose to join). You will receive a letter informing you that your health care provider is part of a DCE.

Opting out would require shifting to a doctor who is not part of a DCE. And Medicare officials are on the record stating that all traditional Medicare beneficiaries will be in “a care relationship with accountability for quality and total cost of care” by 2030. Fifty-three DCEs are operating currently.

Being aligned with a DCE does not change the set of Medicare benefits that you are entitled to, but it can use the techniques of managed care already prevalent in Medicare Advantage to limit access to services it deems unnecessary, and to use financial incentives to encourage use of in-network providers.


The Affordable Care Act empowers CMS to approve innovative healthcare models like DCEs - so long as they will improve the quality of care to patients and potentially reduce costs. But there is good reason to question whether DCEs will achieve those goals.

Critics of Medicare Advantage point to research documenting problems with denial of care. A 2018 report by investigators in the U.S. Department of Health and Human Services found a “widespread and persistent” pattern of inappropriate denial of patient claims. The report also concluded that the Advantage capitation payment model may be incentivizing plans “to deny preauthorization of services for beneficiaries, and payments to providers, in order to increase profits.”

In theory, competition among health plans paid by capitation can lead to improvements in the quality and efficiency of care, and save money for the federal government. But studies have concluded that Advantage plans are receiving billions of dollars in overpayments because of the way they are permitted to charge Medicare for sicker patients in their care. One recent study estimated that Medicare overpaid Advantage plans by more than $106 billion from 2010 through 2019 due to improper risk adjustments.

“Advantage plans are finding and reporting more diagnoses for their members than are reported for beneficiaries in traditional Medicare,” said Richard Kronick, a professor at the University of California-San Diego and author of the study. “Medicare is supposed to adjust payments downwards to reflect differences in how diagnoses are reported in the two programs, but it has not fully done so,” he added. “As a result plans are getting paid too much.”

Medpac, an independent congressional agency charged with advising lawmakers on Medicare, has consistently found that Medicare pays more for beneficiaries enrolled in Medicare Advantage compared with similar beneficiaries enrolled in the fee-for-service program.

The pilot program for DCEs has been moving forward without much public attention, but that is beginning to change. Last week, more than 50 Democratic members of Congress urged the Biden administration to end the DCE pilot test. Physicians for a National Health Plan and other advocates for single-payor healthcare also are working to stop the program.

“Under good old-fashioned traditional Medicare, you can go wherever you want in the entire network,” said Dr. Ed Weisbart, chair of the Missouri chapter of Physicians for a National Health Program, an advocacy group for single payor health plans that opposes DCEs. “We know that Medicare Advantage companies make the most money when they either gently or solidly direct you towards their preferred providers.” (Writing by Mark Miller Editing by Matthew Lewis)