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The trouble with Medicare HMOs

Health plans say money is the key, but critics see bigger problems

From the December 2000 ACP-ASIM Observer, copyright © 2000 by the American College of Physicians-American Society of Internal Medicine.

By William Hoffman

When Congress in 1997 authorized health plans to care for Medicare beneficiaries, the idea was simple: Health plans could give seniors a wider range of services more cost-efficiently than the federal government.

As Medicare+Choice finishes its third year, however, analysts say that the program is on shaky ground. While Medicare+Choice has enrolled millions of seniors in HMOs, roughly 1 million beneficiaries have seen their health plans abandon the Medicare market, forcing them back to the higher co-pays and the limited benefits of traditional fee-for-service Medicare. And the cost savings that the program was supposed to produce have yet to materialize.

Congress spent much of last fall's legislative session searching for solutions to re-energize Medicare+Choice and stop the flight of health plans. While many legislators agreed that the government needs to restore some key Medicare cuts to shore up the program, they could not agree who should receive how much of that money.

Some legislators sided with health plans, who blame Medicare HMOs' problems on inadequate reimbursements from HCFA. Other legislators, however, argued that health plans are already adequately paid and that any increase in Medicare reimbursement should primarily benefit providers.

The battle became so acrimonious that Congress could not resolve the issue before election day. While legislators are expected to debate whether Medicare HMOs should receive more than an immediate pay raise in early December, a much bigger issue is at stake: How much taxpayer funding should go to Medicare+ Choice, and who should receive the funding increases?

A good start

Medicare+Choice is not HCFA's first experience with HMOs. Back in 1985, Congress directed the agency to expand what was then a limited HMO program. Within two years, the number of private Medicare managed care providers had reached 152. By 1991, however, the number had dropped to 86. At the time, analysts said that the pioneers lacked the experience and resources, utilization management and cost-efficient systems necessary to serve Medicare's senior population.

By the mid-'90s, however, with medical costs rising and the future solvency of Medicare in doubt, Congress was ready to give Medicare HMOs another try, in part to help rein in health care costs. The Balanced Budget Act (BBA) of 1997 greatly expanded the selection of managed care options, establishing not only HMOs, but also preferred provider organizations, provider-sponsored organizations and medical savings accounts.

Medicare HMOs initially rushed to enroll seniors in programs that included prescription drugs and other benefits traditional fee-for-service Medicare does not provide. Health care inflation, which was averaging 10% a year in 1996, shrank below 4% within a couple of years. Cuts in federal subsidies to hospitals and other health care providers, as well as tight controls on overall Medicare spending, helped bring the government's budget into balance for the first time in decades.

The good times did not last, however. Medical inflation roared back, in part because of advances in pharmaceutical research. The rising cost of drugs put direct pressure on the popular prescription drug benefits offered by many Medicare HMOs. At roughly the same time, Medicare cuts from the BBA began to take effect, putting a financial squeeze on many in health care.

As the millennium drew to a close, the wheels started coming off Medicare+ Choice. In 1998 and 1999, 41 private plans declined to renew their Medicare contracts, according to the Health Insurance Association of America (HIAA), and 58 other plans reduced their service areas. More than 400,000 beneficiaries—about 7% of all Medicare+ Choice enrollees—were forced to find new coverage. In many instances, that meant returning to fee-for-service Medicare.

By 2000, as many as 1 million of the estimated 6.5 million current Medicare+Choice enrollees had been abandoned in managed care's retreat—the vast majority by Medicare HMOs.

Inadequate reimbursements?

Health plans have blamed their financial troubles on low Medicare payments, arguing that inadequate federal reimbursements made health plans' retrenchment inevitable. "The program hasn't been working because it hasn't been funded properly," said Richard Coorsh, HIAA spokesman.

When health care inflation returned to double-digit levels in 1999 and 2000, Mr. Coorsh said, the government had already capped its reimbursement rates for most Medicare+Choice expenditures at 2% annually. That 2%, he added, did not include the cost of government-imposed administrative obligations.

This year, health plans and insurers began lobbying Congress to fund Medicare+ Choice at the rate of medical inflation, which translates to annual increases of roughly 8% for general expenses and up to 15% for prescription drug costs. The industry also pushed Congress to reduce HCFA's administrative and regulatory obligations.

Not everyone, however, agrees that Medicare reimbursements have forced HMOs out of the Medicare market. Robert B. Doherty, the College's Senior Vice President for Governmental Affairs and Public Policy, said that studies by the General Accounting Office and HHS suggest that private Medicare health plans already receive adequate reimbursement to cover costs and turn a profit.

Critics say that poor strategic planning by Medicare HMOs contributed to their crunch. At the start of the Medicare+Choice land-rush, "it was growth, growth, growth," explained John P. DuMoulin, the College's Director of Managed Care and Regulatory Affairs. Health plans enticed seniors with generous benefits like prescription drug coverage that Medicare Part B could not offer. When the plans switched from capturing markets to focusing on the bottom line, Mr. DuMoulin said, many changed their strategy and started to exit markets that were not as profitable as they had predicted.

Critics are also quick to point out that Medicare HMOs faced more than just financial problems. While data from the Kaiser Family Foundation showed that some elderly patients reported earlier diagnoses under Medicare HMOs than similar populations in Medicare Part B, the same study found that HMO enrollees with chronic or multiple illnesses also told researchers they had more trouble accessing specialists, home health services and rehabilitation than beneficiaries in fee-for-service Medicare. These sicker enrollees also reported poorer outcomes.

Problems beyond HMOs

While Medicare HMOs and their financial troubles have received the lion's share of press coverage, they have not been the only Medicare+Choice organization to face serious problems. Provider-sponsored organizations (PSOs), another part of the Medicare+Choice program, are a prime example.

PSOs were supposed to allow hospitals and physicians to contract directly with HCFA and assume risk for Medicare patients. Optimists thought that this new breed of health plan would allow providers to cut out the middleman—health plans and insurers—and funnel health care dollars directly to physicians. Provider groups would sink or swim based on their ability to manage risk.

That model, however, has not worked out as planned. St. Joseph Healthcare in Albuquerque, N.M., for example, one of Medicare+ Choice's earliest adopters of the PSO model, has pulled the plug on its efforts.

In July, St. Joseph notified HCFA that its MedicarePlus PSO would cease operations on Jan. 1, 2001. The decision means that 7,200 MedicarePlus enrollees will have to transfer by Dec. 31 to other plans—or back to fee-for-service Medicare.

St. Joseph officials say the problem was simple: inadequate reimbursements. They claim that the Medicare payments were so low that even when the government raised reimbursements last January, the PSO still lost $50 to $100 per member per month.

The PSO model was exciting because it offered doctors and hospital managers more latitude in patient care decision-making than HMOs. "It was innovative at the time," said St. Joseph spokesperson Janet Blair. "The physicians particularly were very interested to see if it would work." What many discovered, though, was that running the business side of a health plan isn't as easy as it looks.

"They found out that the middleman does a lot more and makes a lot less than they thought," said Peter R. Kongstvedt, FACP, leader in the managed health care practice at the Washington office of Cap Gemini, Ernst & Young, LLP. Lower than expected savings, plus higher than anticipated risks and costs, he said, have reduced interest in the PSO model.

Flawed model?

Analysts say that the difficulty that PSOs like St. Joseph experienced trying to make Medicare+Choice work has been emblematic of overall problems with the program. Medicare HMOs thought that by squeezing efficiency out of the system, they could improve Medicare benefits. But many have not been able to make Medicare+ Choice work.

While health plans still insist that they can do better if they receive more money, many industry experts aren't so sure. While experts acknowledge that reimbursement is a central part of the discussion about the fate of Medicare+Choice, they say that solving the program's woes is not simply a matter of determining how much money goes to health plans vs. hospitals.

Even in flush economic times, analysts say, the Medicare program has a limited pool of funding. Lawmakers and federal health care bureaucrats face "a classic problem of a single-payer system," Dr. Kongstvedt explained. "There's only so much money, and nobody feels they're getting their fair share of it. There's no way to make everyone happy."

He added that there are limits to what the government can spend administering even programs as important as Medicare. "Any entitlement program has limits," Dr. Kongstvedt added. "Medicare, as big as it is and as much money as it has, can't grow forever."

Even with a new president about to take office, many think the future of the Medicare+Choice program will not be settled soon. Analysts interviewed for this story said that Congress, not the president, is more likely to shape the future of Medicare's managed care component. With neither party firmly controlling the House or Senate, they say, negotiations are expected to be long and drawn out. In addition, some experts predicted that with the pressure of the elections gone, the issue could even be left for the next session of Congress.

Many analysts remain doubtful about the program's prospects. "There is bipartisan pessimism about Medicare+Choice because across the country so many beneficiaries are being affected by pullouts," said Jason Hill, manager of federal affairs at the American Medical Group Association in Alexandria, Va.

Some even question whether more money will really help revitalize Medicare+ Choice and improve the care that seniors receive. "It's not clear that increased payments are going to produce benefits for the people actually enrolled in Medicare+Choice programs," said Joyce Dubow, senior policy advisor at the Public Policy Institute of the 34-million member AARP. Even if all of the insurers' and health plans' demands are met, she said, there is no guarantee that health plans won't be back in a few years demanding more.

There are even more basic questions about the Medicare+Choice program. Robert A. Berenson, FACP, director of HCFA's Center for Health Plans and Providers, said that the driving philosophy behind Medicare+Choice has helped feed the current crisis. "The Republicans feel that the future of the Medicare program is in competition among private entities, and that they need to prop up private HMOs and insurers so that they will be there when Republican reforms pass," he said. "It is an ideological commitment much more than something that is justified by an actuarial assessment."

Despite its problems, the health care industry will probably have to learn to live with Medicare+Choice. Analysts say any proposal to overhaul Medicare completely would upset beneficiaries so much that it would be political suicide. "It would not be possible for any politician to survive the destructive attacks that would occur for attempting to tinker with Medicare to any significant degree," Dr. Kongstvedt said.

William Hoffman is a freelance writer in Fairfax, Va.

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