Managed Care's Unexpected Response
Medicare HMOs have been available to some
seniors for decades. Kaiser Permanente and United Healthcare, for
example, started enrolling Medicare patients in 1977 and 1982,
Medicare managed care plans enrolled as many as 85,000 new
enrollees a month. Five years ago, 7
percent of Medicare's population had enrolled in a managed care
plan; by 1998, that number had grown to 17 percent, or 6.5 million
of the 39 million beneficiaries. HMOs are popular
in states such as California and Minnesota, where commercial
membership in managed care plans is high and members of the
commercial plans who retire can stay in the plans. This option has
enabled many of these retirees to escape the discontinuity of care
experienced by working Americans with employer-based health
Surveys of senior HMO enrollees
demonstrate high levels of satisfaction with their managed care
plans. In fact, 96 percent of HMO Medicare enrollees rated their
overall health care as "good" to "excellent." According to one
recent study, chronically ill Medicare HMO enrollees were as
satisfied as or more satisfied than their counterparts in
traditional Medicare or Medicare supplemental plans--a finding that
should dispel the simplistic perception that HMO Medicare enrollees
are more satisfied only because they have fewer medical problems.
Despite such anecdotal evidence,
Washington's approach to health care for seniors is based on a
presumption that Medicare patients need the federal
government to interpret the medical world and make their medical
choices for them. But Medicare patients, like most seniors, are
proving to be smart shoppers, as demonstrated by the numbers who
stayed with the plans they had during their working years.
Moreover, the cost-benefit differential--or "medigap"--between
managed care plans and supplemental insurance influences their
decisions regarding Medicare HMO enrollment. Studies indicate that
Medicare patients most often choose managed care options when that
differential is the greatest.
of October 1997, more than two-thirds of Medicare's managed care
plans did not charge a supplemental monthly premium. Medicare managed
care plans also are able to provide services not available in
traditional Medicare. For example, over two-thirds cover
prescription drugs, 83 percent pay for routine eye exams, 72
percent cover ear exams, and almost all cover routine physicals. These added
benefits are usually provided at little or no extra cost to
beneficiaries. On average, Medicare HMO enrollees receive more
benefits for far less in out-of-pocket expenses than if they had
purchased a Medicare supplemental (medigap) package.
Until recently, Medicare HMO enrollees
could quit an HMO and join another plan at any time (commercial
arrangements may require a one-year lock-in period). Disenrollments
were relatively infrequent, amounting to 14.2 percent in one
study. The same study
found that HMO disenrollees returned to traditional fee-for-service
Medicare in only 5.4 percent of cases. Some disenrollees
from fee-for-service plans (25 percent in one study ) had moved out of
their HMO's service area and thus were no longer eligible for plan
membership. Other research shows large variations in disenrollment
rates among HMOs in large urban areas, where competition among
plans is more likely.
Although HMOs may be criticized for
disenrollment rates, a better interpretation of the disenrollment
data is that market forces are working. Seniors leave their HMOs to
find better health care bargains. The HMOs do not make money on
disenrollments, which in fact can be quite costly. Depending on the
market, "attracting an enrollee can cost $700 to $1,300 so high
attrition is costly to health plans."
most measures, then, Medicare HMOs have been a success. It is
therefore not surprising that the expected congressional expansion
of Medicare options through new managed care plans in
Medicare+Choice was greeted with optimism by analysts in industry
and government, as well as among health care professionals. For
example, the Congressional Budget Office (CBO) and officials at
HCFA predicted a 20 percent growth rate for Medicare risk-based
plans. The American
Hospital Association reported that 33 percent of its members (1,500
hospitals) planned to initiate point-of-service (POS) plans. With
such an initial response, HCFA predicted 50 POS applications in
the repercussions of the Balanced Budget Act of 1997 did not bear
out this initial optimism. Whatever Congress's intent in enacting
the health policy changes, the effect was to enable HCFA to reverse
Medicare's steady progress in managed care.
Medicare HMOs serving more than 6 million
patients were repackaged under Medicare+Choice. HCFA's overly
optimistic and erroneous assumptions led many analysts to expect
that the new program would allow beneficiaries to participate in
popular plans already available to privately insured working
Americans--such as preferred provider organizations (PPOs),
provider sponsored organizations (PSOs), and new HMOs with
point-of-service options. Over half of the 70 million Americans
enrolled in Blue Cross/Blue Shield's managed care plans chose to
participate in PPOs rather than traditional HMOs. Medicare patients
generally remained locked in more traditional HMO models, with
Medicare Parts A and B covering most inpatient and many outpatient
services. As of January 1, 1999, Medicare+Choice was scheduled to
make popular private-sector options available as well--including
medical savings accounts (MSAs), PSOs, POS options, and new
fee-for-service insurance plans.
Unfortunately, the initial response was
disheartening. Just before the August 31, 1998, deadline for
private plan participation in the new program, HCFA announced that
only three private plans had submitted applications. Nor did Medicare
HMOs jump on board. In late October 1998, almost 100 HMOs had
exited the program in some part.
system quickly unraveled. Instead of holiday shopping at the end of
1998, hundreds of thousands of seniors faced a last-minute search
to find alternative health plan coverage. Fifty thousand had no
choice but to return to traditional Medicare. Not only did
existing HMOs withdraw from the program in the first year, but no
new options such as PSOs, fee-for-service plans, or MSAs became
general, the BBA's Medicare mandates resulted in:
By the end of 1998, many HMOs that had serviced Medicare patients
for years had withdrawn altogether or partially from their service
regions. An HMO plan was more likely to vacate areas it had served
since 1992. The number of
withdrawals was also unprecedented (in previous years, only two or
three plans quit the system). But the expected
cuts in payments were not the only reason for their flight.
Although the average per capita Medicare payment was projected to
be $413 across all U.S. counties at the time, the average payment
rate in the 72 counties with plan withdrawals was $434. Health
plans even left counties that had payment rates as high as $721 per
member per month.
Fewer participating plans.
In addition to HMO withdrawals, 20 other health plans, including
15 health care prepayment plans (Part B only), did not renew their
contracts with HCFA. Instead of finding themselves
with expanded choice, nearly 500,000 Medicare patients in 29 states
found themselves with fewer options.
More counties with no Medicare managed
Senior citizens in 71 percent of all counties now have no Medicare
managed care option, compared with 68 percent in 1998.
More seniors needing medigap
About 50,000 Medicare HMO patients were forced to return to
traditional Medicare and find affordable medigap insurance.
Fewer applications from PSOs.
Rather than the 50 applications HCFA expected from provider
sponsored organizations, only four applications came in by October
1998, and HCFA approved only one.
No private fee-for-service plans or
medical savings accounts (MSAs).
There were no takers for medical savings account plans or other
Faced with rate cuts and the compliance costs, 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. Fewer plans offered prescription drug coverage in
repercussions of the Balanced Budget Act of 1997 surprised half a
million seniors who thought they had solid private health care
coverage. Perhaps HCFA officials assumed that HMOs' complaints
about the effects of the cuts and regulations were exaggerated. But
the deadly combination of HCFA micromanagement and overly broad
congressional mandates demonstrated once again how Washington was
"out of sync" with the best practices of private-sector health care
the bad news continues. HCFA recently announced that, for the year
2000, 99 Medicare contracts are not being renewed or else the
companies are reducing service areas covered. 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 program plan withdrawals, and almost all other
enrollees will experience a reduction in benefits, an increase in
payments, or both.