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Contact Us Fall 2000; Volume 1, Number 1
In Focus

Medicare HMOs: Will They Survive?
Andrea Magyera
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In 1965, President Johnson proposed Medicare, and Congress enacted it. Medicare is a public program designed to help the aged and the disabled with their medical care expenditures, consisting of two parts, A and B. Part A covers inpatient hospital care, a limited amount of home care, and a limited number of days of skilled nursing care. Part B covers outpatient care, physician services, lab services, and additional home care.1 Medicare covers neither the cost of pharmaceuticals nor that of long-term nursing care for its beneficiaries, and therefore fails to protect the elderly against large bills for these items.

Even though Medicare is the United States' most popular social welfare program, it is facing serious problems with funding. The population has bigger and more extensive health needs with age. There are 39 million beneficiaries currently enrolled in the Medicare system. One in seven Americans gets health coverage from this public source. Twelve percent (12%) of Medicare beneficiaries are under the age of 65 and are disabled, leaving 34 million beneficiaries over the age of 65, with eleven percent (11%) of them over the age of 85.2 As the population ages, it also is facing having less income and personal wealth. This leads to problems with financing medical expenses for seniors' large health bills. Medicare HMOs are a potential solution to these problems and could lead Medicare to a strong and efficient future as the Baby Boom population continues to age.

Medicare Managed Care was introduced in 1985. It was created as an option for Medicare beneficiaries to gain additional benefits and aid outside of traditional Medicare. In the past few years, Medicare HMOs have been made highly visible for dropping seniors from their coverage. This paper will attempt to explain possible reasons for this dropping of coverage, and will also examine how Medicare HMOs could be a success for the future of our elderly population.

The goal of Medicare HMOs is to reduce waste in the system by trying to eliminate unnecessary and inappropriate care, while giving providers incentives to use cost-efficient care.3 In this combination, the HMO acts as the insurer, controlling the providers, their services and their payment rate. The HMO attempts to provide care in the least expensive and most appropriate way. The main objectives of combining Medicare with an HMO plan are to reduce costs and to be more efficient in health care delivery, while upholding and improving the quality of care given.4 Some judge the outcomes of Medicare HMOs to be positive; Medicare HMOs emphasize preventive and coordinated care, lower out-of-pocket costs to their enrollees, and keep costs down by limiting care.

Medicare HMOs have shown in recent years that they may be the direction of the future in providing health care at a less expensive rate for our elderly population. It has been shown that enrollment in Medicare HMOs has increased by about fifty percent (50%) between 1994 and 1997.5 In 1994, the rate of enrollment growth for Medicare HMOs was more than double the enrollment in HMOs for those under age 65. Between 1995 and 1996, enrollment in traditional plans remained unchanged because most of the members were enrolled through employee benefits. In comparison, the enrollment for Medicare HMOs grew by twenty-five percent (25%).6 In July of 1997, the total number of beneficiaries enrolled in Medicare HMOs was 4.8 million.7

Preventive medicine is a key aspect of the Medicare HMO plans. Compared to traditional Medicare beneficiaries, those in a Medicare HMO were more likely to receive preventive procedures such as a flu shot last winter (66 percent vs. 58 percent) and a mammogram in the past year (62 percent vs. 39 percent).8 The incentive of the Medicare HMO is to reduce the number of patient visits in order to limit costs, while encouraging enrollees to receive preventive care in order to guard against larger costs in the future.9 Despite the positive outcomes of preventive care, it has been found that Medicare HMOs have gaps in the quality, accessibility, and amount of care given to vulnerable beneficiaries, particularly the frail and the sick elderly. In order for the Medicare HMOs to continue to succeed, they will need to address this problem, and the needs of their most vulnerable beneficiaries, more efficiently and effectively.10

From 1985, when Medicare first joined with managed care plans, until 1997, before the Balanced Budget Act, capitation was the means of payment to the Medicare HMO plans. The payments were set using an Adjusted Average Per Capita Cost (AAPCC) method.11 The AAPCC method assigned varying amounts of money to each of the different counties of the United States depending on the costs of living there and their average cost experience with fee-for-service Medicare. Under this payment method, HMO plans received ninety-five percent (95%) of the traditional Medicare payments. The five percent (5%) reduction took place since the managed care plans are supposed to practice more efficiently by providing preventive care and coordinating care to a higher degree. This payment schedule was profitable only if the Medicare enrollees were healthy, since they would not use up the ninety-five percent (95%) of allotted care. However, if an HMO suffered from adverse selection it would lose money.

Since the Medicare HMOs seemed to be recruiting healthier patients, it was not surprising for the auditors of the Department of Health and Human Services to find that Medicare had overpaid an estimated $23 billion in 1996.12 These high figures were strongly reproached by politicians and the general public, and so, during the Balanced Budget Act of 1997, several revisions were made to Medicare and its link with managed care organizations.

Until 1997, Medicare had not been revised much from its original 1965 form. Changes were needed both on the financial and organizational levels in order for the Medicare system to function properly in the 21st century. The Balanced Budget Act of 1997 (BBA of 1997) set out to accomplish these goals, and as a result it produced more changes in the Medicare system than had been made in its previous thirty years. As a result of the BBA of 1997, an estimated $115 billion will be saved over five years. The savings are a result of limiting care given and emphasizing prevention. This amount would otherwise have been spent on traditional Medicare spending. New preventive care benefits were also offered, and more Medicare replacement programs were made available to seniors. Also because of the BBA of 1997, a modification in the calculation of capitation rates occurred to reduce variation among counties, physician fee schedules were recalibrated, and there was a shift of funding from Part A to B for home care visits.13

The change in the relationship between traditional Medicare and Medicare plus supplemental care for seniors changed dramatically after this act. These supplemental care plans became known as Medicare+Choice. The additions to regular Medicare HMOs were made in 1997 and still are in place in 2000: Medicare Preferred Provider Organizations (PPO), a private fee-for-service plan, a Provider Sponsored Organization (PSO), and a Medical Savings Account (MSA). Beginning in January of 1999, 390,000 Medicare recipients had the option to enroll in an MSA.14 All of these plans vary in the additional benefits that they offer, and the option of choice leads to competition in the insurance market. The minimum enrollment requirements for plans that are in urban areas are as follows: 5000 for HMOs, PPOs, and FFS plans, and 1500 for PSOs. For plans that are in rural areas, the minimum is 1500 for HMOs, PPOs and FFS and 500 for PSOs.15 In order to allow the plans to develop, these requirements have not been put into practice until the year 2000. For some plans, the new enrollment minimums may be problematic. Realistically, it will be difficult for all of these plans to adapt to the strict guidelines. However, it is possible that there will be a significant increase in the number of beneficiaries enrolled in some form of Medicare+Choice plan.

As of January 1, 1998, plans under the Medicare+Choice were no longer paid in the old AAPCC format because payments between counties were varying significantly, and it was considered to be unfair. The new capitation rates were composed of the adjusted national rate and an area-specific calculated rate, all of which were adjusted by the budget neutrality factor.16 The new area-specific aspect of the calculation was devised by studying both prices and practice patterns in the various regions.17 As with other aspects of living such as real estate or food prices, costs differed by geographical location. To reduce the differences in the payments that were given to the plans, the BBA of 1997 placed a payment floor of $367 per senior per month. Prior to this change, payments could have dropped as low as $225 per senior per month.18 Strict regulations were implemented on how plans and physicians were to be paid, covering at least the same services as traditional Medicare. Congress also claimed that it would implement a two percent (2%) per year rate increase for each county.19

Another restriction placed on the Medicare+Choice plans was that the plans must provide a clear and accurate information sheet for their beneficiaries. The information is to include the plan's service area, its benefits, providers, coverage provisions when out of the area, emergency coverage, and appeals program. The plans are also to provide a form of comparative literature showing the number of grievances that have occurred, the plan's utilization rates, and an explanation of the compensation rates for physicians.20

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Fall 2000, Volume 1, Number 1
Table of Contents
Editor's Note
Features: Election 2000
Health Highlights
In Focus
Glossary of Health Care Terms

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