WASHINGTON - A major obstacle to the success of the new Medicare law has emerged in recent weeks: Private insurers have told the Bush administration that they will not expand their role in Medicare if they have to serve large multistate regions, as the White House wants.
Congress sharply increased payments to private health plans last year in the hope that they would serve many more Medicare beneficiaries.
But the Blue Cross and Blue Shield plans, the backbone of the nation's private health insurance system, and other insurers said it was not feasible for them to establish networks of doctors and hospitals spanning large regions like New England or the Midwest.
They want the government to designate 50 regions, one for each state. That is the preference stated emphatically, in separate letters to the Bush administration, by the Blue Cross and Blue Shield Association and by America's Health Insurance Plans, the chief lobby for the health insurance industry.
A White House document describing President Bush's ideas for overhauling Medicare in March 2003 proposed "large multistate regions," and it included a map showing 10 sample regions.
Large regions would force health plans to serve rural areas that they have historically shunned, administration officials say. Under this logic, if a health plan wanted lucrative Medicare business in Chicago and its suburbs, it would have to serve rural Illinois and Iowa and perhaps Nebraska as well.
But Alissa Fox, policy director for the Blue Cross and Blue Shield Association, said, "The only way to assure vibrant competition and expand choices for beneficiaries is to establish 50 state-based regions."
If the administration insists on multistate regions, Fox said, "it will be virtually impossible for most private plans to be ready for 2006," when drug benefits and new insurance options are supposed to become available. The level of financial risk increases with the size of a region, she said, so insurers will need more capital and larger reserves to operate in a multistate region.
Diana C. Dennett, executive vice president of America's Health Insurance Plans, said that her group also "strongly supports establishment of 50 regions."
Private plans will be discouraged from participating in Medicare if they have to get insurance licenses and sign contracts with doctors and hospitals in nearby states where they have never done business, Dennett said.
"In many rural areas," she said, "providers are unwilling to contract with Medicare managed-care plans," even at the rates paid by the traditional fee-for-service Medicare program.
The new Medicare law envisions a huge role for private plans, starting in 2006. If beneficiaries stay in traditional Medicare, they can get subsidized drug coverage by buying private insurance policies that cover prescription drugs and nothing else. Alternatively, they can join a preferred-provider organization or a health maintenance organization that covers drugs along with doctors' services and hospital care.
The government must decide by Jan. 1 how to define the regions. Insurers say the configuration of regions will have a major effect on whether they participate.
John C. Rother, policy director of AARP, the advocacy group for older Americans, said the debate over regional boundaries highlighted "a clash between economic theory and the tradition of state-based insurance." Some economists say large regions will maximize competition among health plans, driving costs down. Insurers disagree.
Under the law, prescription drug plans and preferred-provider organizations must charge the same premiums to all beneficiaries in a region. One purpose of this requirement is to prevent insurers from discriminating against sicker patients. But insurers say it is unrealistic because costs vary widely in large multistate regions.