An official from a congressional watchdog agency today reminded lawmakers that the “traditional Medicare” program relies heavily on help from private companies.

Kathleen King and James Cosgrove, directors for health care at the U.S. Government Accountability Office (GAO), talked about the role of private insurers and private plan administration companies at a House Energy & Commerce health subcommittee hearing on Medicare program management.

The traditional Medicare program affects the commercial health insurance and employee benefits markets by shaping provider pay rates; changing reimbursement rates for its enrollees in ways that change costs for enrollees in commercial insurance programs; and affecting private insurers’ appetite for commercial business, by causing big, sudden shifts in profitability at some private carriers’ Medicare administration units.

Private insurers play a big, highly visible role in selling alternatives to the traditional Medicare program through the Medicare Advantage program.

The Centers for Medicare & Medicaid Services (CMS) has been making less visible use of private insurers and administration companies to run the traditional Medicare program since the program came to life in 1965, Cosgrove said, according to a written version of his testimony posted on the committee website.

Congress required Medicare to use health insurers or other private companies as the claims administrators because health care providers were afraid letting the Medicare program itself handle claims would give the government too much control over health care, King and Cosgrove said.

CMS started asking for permission to consolidate Medicare administration contracting in the 1980s, and Congress gave it permission to do so in 2003.

CMS then cut the number of administrative regions to 17, from 51, and it picked four durable medical equipment “Medicare administrative contractors” (MACs). Managers continued to push for more consolidation.

Bidder protests slowed the consolidation, but CMS now has 12 regional MACs and four medical equipment MACs. The agency is on track to cut the number of regional MACs to 10, King and Cosgrove said.

The list of companies with MAC contracts includes affiliates of WellPoint Inc. (NYSE:WLP) and BlueCross & Blue Shield of South Carolina and Noridian, the parent of Blue Cross Blue Shield of North Dakota. The list also includes companies that are less well known in the health insurance industry outside the Medicare market, such as CGS Administrators LLC, Wisconsin Physicians Service Insurance Corp., and units of Diversified Service Options Inc. 

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