The dark side of going private

Business & Health, Nov, 1998 by Julie Rovner

When Medicare was created in 1965, Congress worried that the incipient new federal health program would be strangled in its crib by providers' unwillingness to participate. The American Medical Association had worked tirelessly to stop the creation of what its leaders referred to as "socialized medicine." To put doctors more at ease, Medicare's architects designed the program to look as much like private insurance as they could, right down to having private contractors process and pay the claims. And they created "usual, customary, and reasonable" payment rules to entice providers to participate.

In 1984, Medicare took another turn toward the private sector when Congress created the "Medicare risk" program to entice capitated plans to limit the program's heretofore unlimited exposure for its elderly and disabled clientele, paying them 95 percent of the "average" cost for an enrollee in that county. But with mostly younger, healthier beneficiaries signing up, many Medicare-risk plans found the program to be a cash cow.

By 1997, Medicare was going broke. Rapidly. The Republican-led Congress decided the best way to fix the program was to make it even more private-sector oriented, leading to the creation of the now infamous Medicare Choice. But in order to meet budget targets, the 1997 Balanced Budget Act cut payments for virtually every Medicare provider. Now Congress is reaping the whirlwind of that reliance on the private sector.

The first problem, which is triggering a cascade of other difficulties, is the challenge of preparing for the new millennium. In July, the Health Care Financing Administration announced that ongoing work on Medicare's Y2K problems would prevent it from meeting statutory deadlines for new payment systems for home health and hospital outpatient care, among other things.

In press releases and at hearings, angry members of Congress heaped scorn on HCFA. But what they forgot - or never knew - is that most of the computers in question aren't HCFA's to fix. Sixty private contractors process more than a billion claims per year from nearly a million providers. HHS Deputy Secretary Kevin Thurm told the Senate that preparing Medicare for the year 2000 will require "renovation" of more than 49 million lines of computer code.

The computer problems led to the next headache: the revolt of the home health providers. They're unhappy with the "interim" payment system that was supposed to be replaced with a new prospective payment system on Oct. 1, 1999, but won't be because of the Y2K work. Payment inequities and new limits have caused some agencies to close and others to reject high-cost patients.

When a rally on Capitol Hill featured a petition two-and-a-half miles long with signatures, Congress knew it had to act. After developing very different proposals to address the problem, House and Senate negotiators Oct. 16 reached agreement on a $1.7 billion infusion of funds into the home health program. But at presstime, it was unclear if the White House would accept the proposed funding mechanism.

Even more serious is the revolt of the HMOs. Congress hoped reducing payments in high-cost counties and boosting them elsewhere would encourage managed care plans to set up shop in previously unserved areas. But that's not the way it's working. As of Oct. 7, HCFA had received applications from only a handful of new plans for Medicare Choice. At the same time, 43 HMOs are dropping out of Medicare and another 52 are reducing their service areas, forcing some 414,000 beneficiaries to switch plans and leaving nearly 50,000 with no managed care options.

The American Association of Health Plans used the drop-outs to call for "mid-course corrections" in Medicare Choice regs and to agitate for higher payments. Too many plans, AAHP President Karen Ignagni told reporters last month, "were left with an inability to cover costs and compensate providers." But the president, among others, was not buying what health plans were selling. Defending HCFA's decision not to allow plans to refile their applications to increase costs and reduce benefits, Clinton declared, "We were not going to allow Medicare to be held hostage to unreasonable demands."

But whether the plans are truly facing payments too low to sustain coverage or trying to extort more money from Medicare is beside the point. What lawmakers have to face is that as long as they depend on the private sector to carry out Medicare, they are going to be beholden to private interests. And when private companies are no longer willing to play, in the end it will be public officials, not the private sector, left holding what could be an empty bag.