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Tough times as Medicare HMOs fold

Physicians, patients weigh their options as the market shakes out

From the February 1999 ACP-ASIM Observer, copyright 1999 by the American College of Physicians-American Society of Internal Medicine.

By Edward Martin

Rural Florida may be far removed from the political wrangling in Washington over how much Medicare HMOs should be paid, but many of the seniors in this state—and in other parts of the country—are feeling the effects of the debate firsthand.

Since the fall, 96 of the country's 347 Medicare HMOs have pulled out of local markets, affecting nearly half a million beneficiaries, or roughly 7% of the 6.5 million beneficiaries in Medicare HMOs. About 45,000 of those patients have no other managed care choices and have returned to fee-for-service Medicare and its significantly higher out-of-pocket costs.

Health plans argue that Medicare reimbursements that vary drastically from region to region are forcing them out of some Medicare markets. Critics counter that Medicare gives its HMOs a fair rate, and that health plans' costly tactics to attract patients, not governmental payment policies, are putting them out of business.

Caught in the middle are seniors—and their physicians—trying to cope with the changes that Medicare's move to managed care are producing.

In Florida, for example, nine rural counties have watched their only Medicare HMOs shut down, automatically forcing 18,000 seniors back into fee-for-service Medicare. (Another 34,000 Florida seniors were also dropped from Medicare HMOs, but had other managed care options.) While enrollees are not in danger of losing coverage altogether, many are nonetheless finding the experience painful.

In Lakeland, part of the citrus farming area east of Tampa, Walter and Faye Welshans are struggling with the financial repercussions of the loss of their Medicare HMO. The Welshans, who are both 66 and have multiple health problems, can't afford the extra coverage that is nearly a necessity with fee-for-service Medicare. As a result, they are selling the retirement home they bought five years ago and will move to an area where managed care is still available.

"Two of our neighbors have already moved to counties that still have Medicare HMOs," explained Mr. Welshans, who has undergone heart bypass surgery and has had a stroke. While he recently took a part-time job to help pay for his health care, the couple still cannot afford $246 a month in Medigap insurance premiums and $500 a month for their prescription drugs. The Welshans receive $1,500 a month in Social Security payments.

The Florida Insurance Commission estimates the typical senior reverting to original Medicare will pay an additional $2,700 to $3,000 in Medigap premiums, plus a number of other costs such as prescription drug charges and higher co-payments, per year. Many HMOs eliminated co-pays to entice seniors to join their plans.

While the nation's 65-plus population copes with Medicare HMO pullouts, physicians are working through issues of their own. Many are on the panels of more than one Medicare HMO, and will see little change, or, patients will continue with them under fee-for-service Medicare. But doctors under contract to only a departing HMO may lose significant numbers of patients. Many physicians already report being stiffed for outstanding payments.

And there may be more lasting consequences. In addition to stranding patients and doctors, the pullouts by HMOs raise serious questions about the union of private business and public health care for seniors.

Not long ago, the idea of moving Medicare patients into managed care health plans seemed like a match made in heaven. Managed care companies facing saturated commercial markets saw vast potential for profit in the nation's 39 million Medicare beneficiaries, according to Joyce DuBow, a public policy analyst for the American Association of Retired Persons in Washington. "With 85% of the conventional population already in some form of managed care, but only 16% of the available Medicare population," she said, "it is their last frontier."

Many seniors liked what they saw. Patients who paid average Medigap premiums of $104 per month (not including prescriptions) received enticing offers from HMOs trying to win their business. Incentives often included pharmacy benefits, eye and dental care, all for little or no cost.

In Atascadero, Calif., for example, Frank Fertschneider, 72, a retired school administrator, joined the nation's largest Medicare HMO, Secure Horizons, a plan created by PacifiCare Health Systems Inc. When other HMOs began courting seniors in the area, the deals got even better. "Secure Horizons originally charged a $15 a month premium," Mr. Fertschneider said. "Then they lowered it to $5, and the next thing I knew, zero."

Seniors in Salt Lake City encountered a similar situation when PacifiCare and Utah-based Intermountain Health Care Corp. locked horns. Both plans sent representatives to seniors' homes to recruit Medicare beneficiaries, and Intermountain offered total care, including up to six months in a nursing home, $10 co-pays and $2,000 a year in prescriptions, all for a $65 premium.

Despite such early enthusiasm by health plans, the bottom quickly fell out. By October, the deadline HCFA set for plans to announce their intentions for 1999, Medicare HMOs pulled out of markets in 28 states and the District of Columbia.

According to HCFA analysts, Utah was hardest hit. It had only two Medicare HMOs, and in June, both PacifiCare and Intermountain announced plans to drop their programs in the state. That left 20,000 Medicare HMO members with no alternative but original Medicare. Utah has 200,000 Medicare beneficiaries in all.

Recipe for disaster?

What led to the rash of Medicare HMO pullouts? HMO officials and industry analysts point to reimbursement rates that fluctuate widely according to the region and efforts by Congress to rein in Medicare costs.

Health plans say the stage was set in 1997, when Congress mandated $115 billion in Medicare cuts over five years as part of the 1997 Balanced Budget Act. Susan Pisano, vice president of communications for the American Association of Health Plans, said that to accomplish that goal, HCFA is capping raises in Medicare reimbursements at about 2% a year in most areas. That comes at a time when medical inflation is rising at 6% a year. In addition, she said, HCFA is having HMO health plans pay for certain features of the new Medicare+Choice program such as the $95 million consumer education program. In 1998, Medicare saw its smallest spending increase ever.

Health plans' biggest criticism of HCFA, though, is that the agency uses an outdated formula that bases its rate on Medicare costs from the mid-1980s, when Congress first approved Medicare HMOs. According to critics, the use of these formulas produces huge regional disparities, with areas like the rural Midwest and South locked into the bottom of the scale. Reimbursements to health plans range from as little as $379.84 per member per month to a high of $780.81.

In Minnesota, for example, one of the nation's healthiest states, Allina's per member per month reimbursement of $414 is 21% below the national average. Judith Shank, MD, a Plymouth dermatologist who is president of the Minnesota Medical Association and a member of the Allina board, said that the plan has lost $35 million on its Medicare HMO. She blamed the statewide average reimbursement rate, which is only slightly more than half the rate for urban areas such as New York.

In Utah, Susan Whyte Simon, spokeswoman for Santa Ana, Calif.-based PacifiCare, said that while the HMO was spending $415 per member per month, it was paid only $325 after adjustments mandated by so-called budget neutrality provisions in the 1997 Balanced Budget Act. "At that rate," Ms. Simon said, "doctors or the plan are going to have to make decisions not in the best interest of the patient."

And in states like Florida, there are extreme contrasts in how much Medicare HMOs are paid. Health plans in Miami and surrounding Dade County, for example, receive $763.10 per member per month, while plans in Gilchrist County, just west of Gainesville, are paid $390.

A spokeswoman for AvMed Health Plan Inc. in Gainesville, which closed its plan in rural Marion County, said AvMed received $417.76 per member per month there, compared to the state average of $490.72 for Medicare HMO members.

The 'healthy wealthy'

Many physicians and government officials, however, insist there is a side to the pullouts HMOs aren't telling. HCFA officials say that because the payment formula includes billions for efforts to detect fraud and abuse that apply only to fee-for-service Medicare, HCFA is actually overpaying its HMOs. Michael Hash, deputy director of HCFA, cited a Congressional Budget Office estimate that plans will receive excess payments of $31 billion in the next decade, even after Balanced Budget Act provisions.

Critics also point out that the plans typically target younger, healthy seniors in urban areas who use fewer services—and result in increased profits for health plans. Mr. Hash, for example, accused HMOs of what he called "cherry picking," a claim supported by a study published in the Nov. 10, 1998, issue of Health Affairs by Timothy McBride, a University of Missouri economics professor. That study found that although HCFA pays the highest rates in major urban areas based on the assumption that costs are also highest there, HMOs compete hardest in those areas for members, showering them with generous benefits and zero-premium plans.

Other critics make similar arguments, saying that it was the plans' own cutthroat rates, along with faulty calculations, that led to huge losses. Some Florida doctors, for example, contend that plans focused on "the healthy wealthy" and then dropped out of rural areas when they discovered that patients were older and sicker than their urban counterparts.

Patients who have seen these tactics at work are angry. "Why doesn't the government say, 'If you people can't take care of the whole state, get out, the whole bunch of you?'" asked Don Aloisio, 72, a resident of Lakeland, Fla., who is selling his home to move to a county that offers an HMO. The former Marine, who has had lung and bladder cancer, has applied for care at a Veterans Administration hospital 90 minutes away in Tampa. But because his illnesses are not service related, he is on a waiting list.

The Florida attorney general has launched unfair trade practice investigations of seven HMOs that terminated Medicare health plans after a recruiting blitz that began about four years ago. "HMOs came in, put together jackleg affairs and sold a bill of goods to patients," said Glenn Bryan, MD, president of the Florida Medical Association and an orthopedic surgeon in Melbourne.

Robert A. Berenson, FACP, director of the HCFA Center for Health Plans and Providers, acknowledged that Medicare HMOs should ideally serve entire areas. He noted that HCFA is launching a demonstration project to put wide geographic territories up for bid, rather than merely allowing competing HMOs to move into—and out of—individual counties at will. But he added that the project has its own set of risks. "If we require a plan to serve an entire area," he said, "there is a risk the health plans will simply pull out altogether, and nobody's interest will be served."

Some fear, however, that the pullouts will trigger a backlash that will permanently damage the government's Medicare initiative. The terminations "are emotional for seniors, who have a sense of being sold a bill of goods and abandoned," said Judith Stein, director of the Center for Medicare Advocacy in Mansfield, Conn. Her office was flooded with calls when Oxford, Aetna U.S. Healthcare and others closed their Medicare HMOs in rural Connecticut.

Effects on doctors

While patients are clearly bearing the brunt of Medicare terminations, they are not alone. Some physicians are facing delays in payments from departing HMOs, and confronting tough questions about how to treat longtime patients without violating HCFA regulations.

In rural Marion County, Fla., radiologist Mark Yap, MD, is writing off thousands of dollars in procedures ranging from $15 chest X-rays to $1,500 arteriograms because of the departure of Medicare health plans. "These folks are pulling out, owing everybody a bunch of money," he said. "In radiology, we provide the care before we know what the billing information will be, so the patient is well on the way to recovery before we know if [the HMOs] are going to pay or reject the claim."

Lewis J. Barton, ACP-ASIM Member, a Salt Lake City internist, said that he expects to lose a significant number of his Medicare patients, who account for roughly half of his practice. Both Utah Medicare HMOs—PacifiCare and Intermountain—made arrangements (as required by HCFA) to help their Medicare HMO members obtain Medigap insurance, but Intermountain also coordinated a plan providing its former HMO members drug benefits at substantially higher premiums. The catch: To get those benefits, patients must visit an Intermountain-owned clinic, and Dr. Barton is not a member of its physician panel.

Dr. Barton worries that he will also lose patients because some will simply be unable to pay. And while he is reluctant to turn away former HMO patients who are now unable to pay conventional Medicare co-pays and other fees, he feels he has no choice. "I've been seeing some of those people for 20 years," he said. "A lot are on fixed incomes and can't afford $1,000 a month for drugs and Medigap. But if I don't bill them for deductibles and co-pays, I'll get fined."

Some physicians are pressuring the AMA to lobby HCFA to suspend rules that prohibit waiving charges. "We want the right to step up to the plate and say, 'Listen, if you've been deserted by greedy HMOs, we'll take care of you until this mess is worked out,'" said Dr. Bryan from Florida. "Right now, we're breaking the law if we do that."

However, Dr. Yap, the radiologist from Florida, fears such a course of action would open the door to unscrupulous recruiting of confused and worried HMO patients. "I'd hate to see this become a marketing tool whereby some doctors would hang 60-by-30-foot billboards on the highway reading 'Now open for business: free care!' "

Long-term issues

The Medicare HMO pullouts are focusing attention on an even more bedrock issue: Can managed care, whose cost-control successes have come largely during a decade of low medical and overall inflation, succeed now that medical costs are once again on the rise?

"HMOs are having difficulty across the board, not just in Medicare," Dr. Berenson pointed out. "They're having significant premium increases for commercial populations too, which focuses on the very issue of whether some HMOs can manage risk."

While he takes the pullouts seriously, Dr. Berenson said it's too early to tell if they spell serious trouble for managed care Medicare. For one thing, 70,000 new enrollees are pouring into Medicare HMOs every month, and HCFA holds 73 applications from HMOs to start new plans or expand existing plans. Those applications include plans in areas where other plans have recently pulled out. "It's obviously a setback," Dr. Berenson said of the pullouts, "but the program is basically proceeding."

If reimbursement rates are unfair, why are new plans entering markets even as others are departing? Like Dr. Berenson, Laurence D. Wellikson, FACP, a College Regent and a principal in the consulting firm of MedQuest Partners of Irvine, said that some HMOs are simply more adept at managing risk. In addition, large, well-capitalized HMOs are willing to sustain losses in a market so they can build market share and then later raise their rates. "This is basically a power play," he said.

Others are not so sure. "The Medicare pullouts have had a chilling effect on new entrants," said Patsy Riley, vice president of government programs for Allina in Minneapolis. "Also, consumers are reluctant to select a Medicare+Choice program after the HMO pullouts. Seniors can't stand instability in two things: banking and health care."

One likely casualty of the pullouts, though, is the Congressional Budget Office's timetable that calls for a quarter of all Medicare enrollees to be in managed care plans by 2002. And more immediately, pullouts are slowing Medicare+Choice, which Congress created in the 1997 Balanced Budget Act to accelerate Medicare privatization. The program offers six new options such as preferred provider organizations, point-of-service plans and medical savings accounts, and most are managed-care based.

After initially downplaying the pullouts and rejecting HMO demands to scale back benefits and increase charges, the Clinton administration launched an effort in late 1998 to entice new HMOs into the breech, ordering HCFA to accelerate the application process. But the year ahead could produce major confrontations among Congress, insurers and regulators.

One volatile issue will be blending, which is a plan to close gaps between rural and urban reimbursement rates incrementally until 2003, when all rates would be 50% local and 50% national. Blending was supposed to have started in 1998, but was delayed until the year 2000 because of Balanced Budget Act provisions.

Another issue will be HCFA's plan to implement risk adjustment in the year 2000. (See "At press time," page 1.) HCFA currently pays HMOs the same per patient per month rate in a given area, whether the patient is sick or healthy. While current formulas pay HMOs in Kings County, N.Y., a flat $747 a month for a 76-year-old man, a risk-adjusted formula based on medical history could pay $621 if the man were healthy or as much as $2,317 if he had lung cancer.

Dr. Berenson also believes that many Medicare HMO problems are a matter of fine-tuning Medicare+Choice and Balanced Budget Act provisions that kicked in too late for 1998 to have been a true test. "Last year was a mess," he said, "but this year should be a lot better."

One thing is certain: Virtually all Medicare HMO patients will see benefits like prescription plans scaled back in the coming year. Caps will typically drop from $1,000 a year or more to as little as $500 and there will be fewer zero-premium plans. Equally certain is the return of the issue to Capitol Hill. "We want to go back to the legislature and administration and work out some mid-course corrections, both on the legislative and regulatory side," said Ms. Pisano from the American Association of Health Plans. "If not, what you saw in 1998 could be just the tip of the iceberg."

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