Executive Summary: How Not to Reform Medicare: Lessons From the Medicare+Choice Experiment

Report Health Care Reform

Executive Summary: How Not to Reform Medicare: Lessons From the Medicare+Choice Experiment

September 15, 1999 4 min read Download Report
Sandra Mahkorn

Medicare, the huge and financially troubled health program that covers almost 40 million elderly and disabled citizens, is in desperate need of reform. A growing number of Members of Congress agree with recommendations put forth by a majority of the members of the National Bipartisan Commission on the Future of Medicare. These recommendations--which include a "premium support" mechanism to enable Medicare patients to select from a variety of superior private plans--provide a good starting point for serious Medicare reform.

Legislators should realize, however, that if they do not draft their reform proposals correctly, or if they shift too much of the responsibility for getting the crucial details right to the Health Care Financing Administration (HCFA), the powerful regulatory agency that runs Medicare, their efforts to create a new system with real patient choice and genuine market competition could be undone. An excellent example of how a reform initiative could be thwarted is the existing "Medicare+Choice" program (Medicare Part C), which today is drowning in a congressionally created sea of red tape and bureaucratic micromanagement.

Medicare+Choice, the health policy centerpiece of the Balanced Budget Act (BBA) of 1997, was touted originally as a major reform of Medicare that would increase options for beneficiaries. Instead, it expanded HCFA's regulatory power and reduced the number of options available to Medicare beneficiaries. Since the inception of the program, over 100 health maintenance organizations (HMOs) serving more than half a million voluntarily enrolled Medicare patients either have left the areas they served or have retreated from parts of those regions.

Both Democrats and Republicans hailed the BBA as proof of Congress's fiscal responsibility. Its sponsors projected that its Medicare "reforms" would save $116 billion between 1998 and 2002, with the bulk of these "savings" to be generated by reductions in payments to health plans for medical services. Plans participating in Medicare's HMO program were expected to provide a greater array of services at increasingly lower prices. Today, the HMOs expect $33 billion of the projected $116 billion in "savings" to come from their programs by 2003 as a result of the complicated new and lower reimbursement formula.

In general, the effects of the BBA on Medicare beneficiaries include:

  • Fewer HMO choices.
    According to the U.S. General Accounting Office, HMO plans were more likely to vacate areas they had served since 1992. Some plans left even though the per capita reimbursement would be high.

  • Fewer participating health plans.
    Twenty other health plans did not renew their HCFA contracts. Nearly 500,000 Medicare patients in 29 states found themselves with fewer options. According to the Medicare Payment Advisory Commission, senior citizens in 71 percent of all counties now have no Medicare managed care option, compared with 68 percent in 1998.

  • More seniors need Medigap coverage.
    About 50,000 Medicare HMO patients reportedly had to return to the traditional Medicare plan and find affordable Medigap insurance.

  • Fewer applications from provider sponsored organizations (PSOs).
    Although it anticipated 50 applications from PSOs, HCFA received only four by October 1998 and approved one.

  • No private fee-for-service plans or medical savings accounts (MSAs).
    There were no takers for medical savings account plans or other fee-for-service insurance.

  • Benefit cuts.
    Faced with rate cuts and the cost of complying with HCFA regulations, the remaining HMOs dropped important benefits. For example, 21 percent of Medicare enrollees lost coverage for glasses, and 12 percent lost coverage for hearing aids.

Half a million seniors who thought they had solid private health care coverage were surprised by this turn of events at the end of 1998. The combination of HCFA micromanagement and unwise congressional mandates demonstrated once again that Washington was "out of sync" with the best practices of private-sector health care delivery.

And the bad news continues. HCFA recently announced that, in 2000, 99 Medicare contracts are not being renewed by the companies or else the companies are reducing their service areas. According to a recent report in American Medical News, over a quarter of a million more Medicare patients will lose their health plan coverage in 2000 because of the plan withdrawals, and almost all other enrollees will experience a reduction in benefits, an increase in payments, or both.

Real Medicare Reform.
Real Medicare reform should not be based on outdated regulatory policy that achieves such poor results. Congress should ensure that senior citizens and the disabled have access to solid private-sector health plans and, at the very least, have the same range of superior health care options Members themselves enjoy in the Federal Employees Health Benefits Program (FEHBP). That exemplary "premium support" program--which offers federal employees, maintenance workers at the White House, federal retirees, congressional staff, and their families a variety of affordable choices--is governed by a minimum of regulation.

In considering how to improve the Medicare system, Members of Congress should learn three lessons from the Medicare+Choice fiasco:

  • Don't tinker with Medicare; reform it.

  • Base Medicare reform on real patient choice and market competition.

  • Don't expand HCFA's regulatory powers; restrain them.

Sandra Mahkorn, M.D., M.P.H., M.S., is Visiting Fellow in Health Policy at The Heritage Foundation.


Sandra Mahkorn