Medicare+Choice: Facing an Uncertain Future

Healthcare Financial Management, July, 2001 by Jeanne Schulte Scott

"Congress tried to give and take at the same time, hoping to save money and have more Medicare managed care plans."

--Former HCFA Administrator NancyAnn DeParle, on the troubled Medicare Choice program.

"In Medicare, providers don't believe what you say anymore because they don't believe that's what's going to happen."

--Rep. Nancy Johnson (R-CT), chair of the House Ways and Means Committee health subcommittee, on the confidence gap between providers and the Medicare Choice program.

There are problems in HMOland. Under the Medicare Choice program, which Congress passed as part of the 1997 Balanced Budget Act, lawmakers had hoped to encourage more beneficiaries to join plans and to expand the types of plans members could join. At the same time that lawmakers were promoting Medicare Choice, they also modified the payment system, prompting dozens of health plans to exit the Medicare market or reduce benefits that made Medicare HMOs competitive, such as prescription drug coverage. Many plans have been forced to reduce dramatically or drop prescription drug coverage as prescription drug costs have skyrocketed while government payments stagnated.

Recent reports show a downward trend in the fortunes of the managed care industry. Although the Bush Administration is placing great emphasis on competitive Medicare models based in large part on managed care to save Medicare for the baby-boomer and succeeding generations, dark clouds are gathering. Healthcare financial managers need to better understand the dynamics and the issues they will face over the next couple of years.

The Negative Impact of Adverse Selection

Medicare HMOs long have touted their ability to save Medicare money and provide senior citizens with additional benefits, but a growing number of studies suggest that the Medicare Choice program has cost taxpayers billions of dollars more for basic benefits because payments were not adjusted to reflect patient risk. [a] The research has drawn little public attention, but it goes to the heart of a raging debate that challenges the view that HMOs are an answer to Medicare's spiraling costs. The research especially raises issues regarding President Bush's proposal to reform Medicare by transforming the program into a premiumsupport, competitive-market system that relies heavily on HMOs and other managed care models.

According to both government and private studies, taxpayers have "overpaid" many private HMOs. It seems that these HMOs have mastered the art of avoiding adverse selection, enrolling predominately healthier senior citizens and leaving those who are chronically sick or suffering from debilitating illnesses to run up the costs of traditional Medicare. Combating this adverse-selection problem was one of the major initiatives that so complicated the abortive Clinton health plan of 1993.

Because HMOs receive monthly payments from Medicare based mainly on the average cost of providing benefits to the program's fee-for-service beneficiaries, HMOs that enroll healthier senior citizens can spin the averages in their favor, resulting in overpayments in the range of 5 to 10 percent, according to studies. Last summer, a General Accounting Office study of 800,000 Medicare beneficiaries who enrolled in 210 HMOs revealed that the health plans enrolled patients who were 13.2 percent healthier than those in traditional Medicare and thus received $3.2 billion in overpayments from Medicare.

Who Manages Managed Care?

But adverse selection is only one of the problems for the Federal government's Medicare Choice program. Its problems reflect the volatile political fortunes of the nation's ongoing HMO experiment. Although managed care now dominates health care in the United States, it has an uncertain future. The right of patients to take their HMO grievances to court is not the issue obstructing the pending patients' rights legislation in Congress; rather, the issue is whether the physician or the health plan will control access to patient care.

Belatedly, the managed care industry is beginning to address complaints that it has placed cost concerns ahead of patient care and superseded physicians in determining the proper level of treatment. Medical group practices seem to be assuming a stronger stance in their negotiations with managed care organizations, winning more concessions and reducing friction between the two groups. Employers, as well as the Federal and many state governments, are becoming more sophisticated in the use of measurements to promote and reward high-quality care.

In addition, many insurers have reacted to these complaints by eliminating administrative practices that restrict patients' choices and emphasizing preventive treatment and other measures that improve the coordination of care. The administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996, when implemented, will reduce greatly the administrative burdens that have contributed so much to the negative image of managed care.