HMOs Move to Dump 700,000 Medicare Patients


Health maintenance organizations, complaining that payments from the federal government are inadequate, say that they will cancel coverage next year for more than 700,000 people enrolled in Medicare HMOs.

Many of these older Americans will lose the extra benefits provided by the HMOs, including low-cost coverage for prescription drugs, which are not included in the regular Medicare program.

Aetna U.S. Healthcare will make the biggest cutbacks, it said Thursday, canceling coverage for more than 355,000 people in 14 states. The company is leaving seven Northern California counties where 15,280 people are enrolled in its Medicare HMO. Two other firms also announced cutbacks Thursday. Foundation Health Systems will jettison 19,000 members, including 3,200 people in central and Northern California. And Oxford Health Plans, which serves New York, Connecticut and New Jersey, will exit eight mostly suburban counties and drop 7,200 members.

Earlier this month, Cigna Corp. announced that it was leaving several markets nationwide affecting more than 100,000 enrollees, including 17,000 in Los Angeles and Orange counties.


The changes would take effect Jan. 1. Beneficiaries whose HMOs pull out of Medicare would not lose insurance coverage. They could select another HMO if one is available in their county, or return to the traditional Medicare system.

“From the beneficiary’s standpoint, the real concern is volatility,” said Tricia Smith, senior health policy coordinator for AARP (formerly the American Assn. of Retired Persons). “You elect to go into a health plan this year and then you are not sure if it will be there next year.”

The projection that more than 700,000 people will lose coverage was made in an industry survey released Thursday. The review of what HMOs plan to do next year is an indication that many executives in the managed care industry no longer believe they can make profits in the Medicare business. And it is a disappointment for members of Congress and health policy analysts, who have hoped that HMOs could restrain the growth in spending for Medicare, which covers 40 million people 65 and older and the disabled of all ages.

The HMO industry is hoping that complaints from beneficiaries angry about the possible disruptions in care will convince Congress to use some of the growing budget surplus to boost the government’s payments for Medicare HMOs.


The industry survey did not identify specific companies, but Aetna and the other firms made their own announcements in anticipation of a July 1 deadline to inform the federal government of their plans for next year.

At Santa Ana-based PacifiCare Health Systems, whose Secure Horizons plan covers 1.1 million Medicare beneficiaries--600,000 of them in California--a company source said that last-minute negotiations with the federal government had persuaded them not to pull out of any markets in California.

Tyler Mason, a PacifiCare spokesman, said the firm is still considering dropping coverage in other areas but has not yet made a decision. Earlier this month, the company announced small reductions in services in the Midwest.

Even seniors who do not lose their HMO coverage in January are likely to face increased costs and changes in benefits next year. Foundation Health plans to raise co-payments for prescription drugs and office visits and Aetna also said that it may change premiums and benefits. With drug costs rising at least 10% a year, the HMOs are limiting the amount of drugs they will pay for, or imposing higher charges for brand-name products.


The hope that HMOs would restrain growth in spending for Medicare was based on the theory that beneficiaries would be enticed to leave the regular Medicare program, which allows them to select virtually any doctor or hospital but requires them to make co-payments for office visits.

Medicare does not cover expenses such as prescription drugs, dental care and vision care. In return for joining HMOs, the beneficiaries would promise to stay within the HMO’s restricted networks of doctors and hospitals but they would get extra benefits.

About 16% of the nation’s 40 million Medicare beneficiaries are enrolled in HMOs, but the market share is much higher in California, where the enrollment rate is 35%.

But the industry may be on a downward slide. For the first time since Medicare HMOs began their operations in 1985, the number of people enrolled nationwide is declining: 6.2 million people belonged to Medicare HMOs in June, a decline of more than 100,000 from the previous year.


“It’s both financially a disaster and a disaster for the future health of the elderly,” said Helen Schauffler, director of the Center for Health and Public Policy Studies at UC Berkeley.

Schauffler, a frequent critic of for-profit HMOs, put the blame on Congress and the Clinton administration. Not only is the Medicare HMO program underfunded, she said, but the old fee-for-service Medicare to which hundreds of thousands of seniors must now return is outdated and expensive.

The biggest gap in the traditional system--lack of coverage for prescription drugs--is emerging as one of the hottest issues of the political season, with Republicans and Democrats offering competing plans. The House approved a GOP plan Wednesday that would begin coverage in 2003 on a voluntary basis, but President Clinton is threatening a veto.

HMOs will stay away from Medicare until they are convinced that they no longer will lose money by participating, Schauffler predicted.


“It’s horrible that health care has come down to a matter of economics, but that’s the way it is,” Schauffler said. “You can’t blame them. It’s a business decision. It has nothing to do with health care.”

The industry, which will receive payments of $280 billion from the government over the next five years, needs an additional $15 billion to operate profitably and prevent further cancellations of service, said Karen Ignagni, president of the American Assn. of Health Plans, which prepared the industry survey. Medicare HMOs have been “overregulated and underpaid,” she said at a news conference.

The HMO industry and the regulators at the Health Care Financing Administration, which oversees Medicare, have had a long-running argument over whether the government pays the HMOs a sufficient amount for taking care of Medicare enrollees.

Health care analyst Sheryl Skolnick said, when HMOs raise premiums and co-payments, they are also trying to drive the sickest, most expensive patients out of the system.


“If they leave, then the average cost to provide care goes down,” said Skolnick, a managing director at Banc Boston Robertson Stephens in New York.

PacifiCare, which has more than half of its Medicare business in California, and other health plans are staying in the state because they have a stronger economic position compared with HMOs in the rest of the country. Spending in the regular Medicare program is higher in Southern California, enabling HMOs to collect more from the government for each beneficiary they enroll. The additional money means that they can offer a richer package of benefits and attract more members--increasing their power to negotiate lower payments with doctors and hospitals.

“Many health care costs are relatively lower in California . . . in large part because of managed care,” said Peter Lee, president of the Pacific Business Group on Health, a coalition of employers that negotiates with health plans for its members. That means the Medicare HMOs can offer a richer package of benefits in California.

Investors responded favorably to the news, pushing up HMO stock prices across the board, with Aetna closing up $1.57, to $64.56, and Foundation Health gaining 31 cents to close at $14.31. Both trade on the New York Stock Exchange.


“By doing what they’re doing, the managements are showing financial discipline,” said Todd Richter, a health care analyst with Banc of America Securities. “It’s real nice providing prescription drug coverage and vision care coverage for grandma, but if you can’t make a fair return on it, there’s no reason to do it. They don’t have an obligation to take care of grandma at a loss.”