Medicare+Choice: Failure, success, future

By ELLEN BECK, United Press International   |   Sept. 11, 2003 at 12:02 PM

This is the third in a series of UPI articles giving context and background as Congress debates expansion and reform of the U.S. Medicare program.

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WASHINGTON (UPI) -- Medicare's managed care option, since 1997 called Medicare+Choice, is both a success and a failure, experts say, but remains a building block of proposals now before lawmakers to reform the senior health care program.

Medicare provides health care for some 41 million people -- mostly those over age 65, but about 6 million disabled as well. Of those 35 million seniors, about 5 million participate in Medicare+Choice's HMO option, which was created through the Balanced Budget Act of 1997.

Initially the government hoped at least 34 percent of seniors in Medicare would choose the HMO option, which allows health plans to offer services beyond traditional Medicare's benefits -- including catastrophic coverage, prescription drugs, better management of chronic illness and preventive screenings and procedures.

In the six years since Medicare+Choice was established, some 1,200 health plans and more than 24 million Medicare beneficiaries have participated at some point, said Dr. Brian Biles of The George Washington University in Washington.

In the first year, 1997, 307 health plans joined up, increasing to 346 in 1998. Plans began pulling out, though, dropping to 309 in 1999 and only 149 by 2002, Biles told a Medicare briefing sponsored by the Alliance for Health Reform.

Plan pullouts affected millions of beneficiaries, who sometimes were stranded without another HMO option available and were forced to return to traditional Medicare. Pullouts created confusion and unhappiness for seniors and instability for the program.

A study by the Commonwealth Fund in New York City reported enrollment -- about 8 percent of Medicare beneficiaries in private plans in 1995 before Medicare+Choice -- increased to 14 percent in 1997 when the program began, and peaked at 16 percent from 1998 to 2000. It dropped to 14 percent in 2001, 12 percent in 2002 and 11 percent in 2003 -- although the Centers for Medicare and Medicaid, known as CMS, puts the figure at 15 percent.

The most critical problem facing the program was its funding formula.

In testimony in May before the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations, Judith Berek of the Department of Health and Human Services, which oversees CMS, said Congress authorized Medicare in the 1970s to contract with risk-bearing private health plans.

"Under that program, HMOs contracted with Medicare to provide the full range of Medicare benefits in return for monthly 'per person' or 'capitated' payment rates," she testified. "In the Balanced Budget Act of 1997 Congress created the Medicare+Choice program to correct perceived flaws in the risk contracting program, including payment differences."

Since then, Congress has used the Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid, and Benefits Improvement and Protection Act of 2000 to tweak the program.

"What happened in 1997 is Congress tried to fix this thing and it backfired," Tom Scully, CMS administrator, told United Press International. Scully said in 1997 rural lawmakers were unhappy HMO plans in their states were being paid less than plans in urban areas.

Plans prior to 1997 were paid 95 percent of the adjusted average per capita cost -- the average cost per person of providing care for fee-for-service Medicare beneficiaries living in each county in each state.

"The theory was that private plans would be less than fee-for-service Medicare," Biles said.

The government had expected that the efficiencies and cost savings managed care plans had shown would be enough to offset the 5 percent reduction and still allow plans to make money. Payment rates, though, varied widely from county to county and from region to region -- and generally were lower in rural areas.

The Balanced Budget Act changed the risk contract formula and tried to bring rural and urban payments closer to the national average payment rate. It required rates be adjusted for the health of beneficiaries -- called risk adjustment. The government then made the mistake of capping payment increases in large, urban areas at 2 percent annually to put more money into rural areas.

"In Miami, L.A., New York and the big cities, with 6 to 10 percent increases in costs, they couldn't make it at 2 percent," Scully said.

Plans began to pull out because they could not make enough money. While traditional Medicare has an overhead of some 3 percent annually -- making it an extremely efficient program -- private health plans have non-benefit expenses, Biles said, up to 23.7 percent for for-profit insurers, 13 percent for non-profit Blue Cross Blue Shield plans and 7.5 percent for Kaiser Permanente.

Regular tinkering with the payment formulas also irritated the health plans, which were required to make annual cost projections that would lock them into a payment rate. The government-required paperwork and administration became so burdensome Medicare was branded a bad business partner and the plans grew skeptical about participating.

In rural areas, the plans simply did not show up, claiming it was too difficult to develop networks of health care providers. Also, many rural physicians refused to give up Medicare's higher fee-for-service payments to contract with plans that would pay them less. With so few providers in rural areas, the doctors found they had a captive audience -- patients who had to come to them whether they joined managed care plans or not.

In 2002, only 5 percent of rural beneficiaries in areas not adjacent to urban areas even had a choice of managed care plans. Some states -- such as Montana and Iowa -- had no plans at all.

In 2003, only six states -- California, Oregon, Arizona, Pennsylvania, Colorado and Rhode Island -- had more than 20 percent of Medicare beneficiaries in Medicare+Choice plans. California, among the highest, had 33 percent enrolled. Nineteen states reported less than 1 percent enrollment.

Medicare+Choice has not saved the government money. On average, plan payments are running about 4 percent higher than traditional Medicare -- far higher some areas -- and seniors are facing rising costs.

Biles said average annual out-of-pocket costs jumped from $976 in 1999 to $1,964 this year. For those with chronic illnesses and in poor health, out-of-pocket costs run now from $2,133 in Los Angeles to $3,732 on Long Island, N.Y., to $4,993 in Seattle.

Though only about one-third of Medicare+Choice enrollees do not receive prescription drug coverage, Biles noted, of those who do, 29 percent have coverage for generic drugs only. Co-pays and deductibles are rising for this option as well.

Despite this, Scully called Medicare+Choice a good program and a "booming success" for poor people and minorities. These groups have been able to obtain broader coverage than traditional Medicare and have not needed to purchase expensive Medigap supplemental coverage, which runs about $2,200 per year.

Alexander Shekhdar, manager of government relations and policy for Oxford Health Plans in Trumbull, Conn., which serves some 72,000 Medicare+Choice beneficiaries and operates in states along the East Coast, told the Medicare update forum Medicare+Choice still is a better financial bet for seniors than the traditional program.

"... my plan has experienced that and (American Association of Health Plans) studies and Blue Cross/Blue Shield Association studies have shown that low income populations as well as minority populations are fairly attracted and retain Medicare+Choice options, especially in settings like my plan -- which is New York, New Jersey and Connecticut suburban/urban areas -- and obviously that speaks a little bit to the geographic disparities where our plans are located, but that's a population we find," Shekhdar said. "We call them 'Gap with Concern' -- those that can't afford Medigap policies and are attracted to Medicare+Choice because of the lower cost sharing and the better benefits that we provide whether it be prescription drugs, dental, whatever."

Changes in 2003 are designed to stabilize and bring more seniors into Medicare+Choice. Private, fee-for-service plans now are participating, giving 79 percent of Medicare beneficiaries an option other than traditional Medicare, according to CMS. A demonstration project using preferred provider organizations -- a loose-knit network of physicians, hospitals and other providers -- also is under way.

Part of Medicare reform proposals passed by the House and Senate in June, and now being crafted into one final bill in a conference committee, create a prescription drug benefit by 2006, and part proposes to rename Medicare+Choice and increase options to allow preferred provider organizations to participate. A part of the House bill would financially tie traditional fee-for-service Medicare payments to the private plan bids in 2010.

Democrats are staunchly opposed to the House measure but many seem willing to accept the PPO inclusion in the Senate bill. Republicans are hanging their hat on the so-called "premium support" provision that would require fee-for-service Medicare beneficiaries to pay more -- or receive rebates -- depending on what the private plans were bidding in their geographic are.

Many lawmakers, in particular those in rural states, are fearful private plans will not participate in either the Senate or House versions of Medicare reform, or will join up for a year and then pull out if they cannot meet their financial bottom lines.

One large fear for lawmakers is confusion among seniors -- which occurred when Medicare+Choice plans began to leave the program -- could lead to a backlash that could hurt them at the ballot box.

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Next: A major criticism of Medicare has been its lack of a prescription drug benefit, but new attempts by Congress to remedy the problem have serious shortcomings. The most critical: a huge coverage gap that would force seniors to pay up to $2,500 for their medications even after premiums and deductibles.

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