HMO ripoff - health maintenance organizations

Washington Monthly, May, 1997 by Elizabeth Austin

Depending on your point of view. HMOs arc either rite greatest advance since sliced whole-grain bread or the worst threat to human health since smallpox. But everyone agrees on one basic point: HMOs, with their enforced efficiencies anti limited-access approach to specialized care, are a terrific means to cut health care costs. It takes the U.S. government, through the antiquated Medicare system, to actually lose money hen beneficiaries switch over to HMOs.

The basic problem is simple. Medicare is reimbursing HMOs at too high a rate. Essentially, the system works like this: For each Medicare beneficiary they treat. HMOs receive a flat fee, called capitation, based on the average cost of Medicare's fee-for-service patients within the same geographic area. Currently, that fee is set at 95 percent of fee-for-service patients' costs. Using simple arithmetic. that ought to translate into a 5 percent savings every time a Medicare beneficiary signs up with a local HMO-which, multiplied by the 38 million people now covered by Medicare, could mean an annual savings of $10 billion. Unfortunately, the government's 5 percent solution fails to take into account one important fact: Medicare beneficiaries who opt for HMOs tend to be healthier than average. That's because enrolling in a managed care plan usually means switching primary-care doctors. an unattractive prospect for chronically or critically ill patients who have longtime relation ships with their physicians. That means the HMO option appeals primarily to the healthy elderly, who are less interested in doctor choice than in avoiding the 20 percent co-payment demanded under Medicare's fee-for-service system. "They're the Centrum Sliver crowd," says Mark V. Pauly, professor of healthcare systems at the University of Pennsylvania's Wharton School.

So, instead of saving 5 percent on these HMO enrollees, the government actually spends 5.7 percent more on these healthy oldsters than if they had received exactly the same medical care under the fee-for-service plan. And some economists estimate that the 95 percent reimbursement race may be 36 percent higher than the HMO's actual cost of providing care to those hale seniors.

The HMOs, recognizing the potential silver mine in the Medicare population, are using some of those bonus dollars to offer healthy elderly patients enticing extra benefits, such as free prescription drugs and discount eyeglasses. That's great for the HMO patients, whose out-of-pocket costs are kept to a minimum. But it's hardly fair to ask the rest of the Medicare population--especially those whose high-risk medical histories make them unattractive re HMOs and or those who live in underserved rural areas--to pay full price for their expensive cardiac drugs while HMO enrollees get them for free, it's also not fair to taxpayers, who are funding benefits for HMO enrollees far beyond Medicare's original intentions. That probably isn't what taxpayers would say they want to do, to help our healthy old people and not sick old people," Partly says. "I guess I'm in Favor of evening things up."