HMOs Persist in Medicare Pullback

The Bush administration announced Wednesday that HMOs serving Medicare patients will drop coverage for several hundred thousand beneficiaries next year, and said it will change the rules for health plans to try to prevent even greater losses.

Keeping the HMOs in their current markets is important to low- and moderate-income seniors because the health plans offer them low-cost prescription drug coverage, which is not available under the traditional Medicare system.

In California, 40% of Medicare beneficiaries are enrolled in HMOs, compared with just 15% of the program’s 40 million enrollees nationwide.

Individuals will not know if their HMO is leaving the market until after Sept. 17, the deadline for health plans to notify the federal government whether they will accept Medicare patients in certain markets. HMOs complain that the government does not pay them enough to treat Medicare patients.

A hemorrhage of coverage has been underway for several years and peaked at the start of this year, when HMOs dropped more than 900,000 Medicare enrollees.

The effect for 2002 won’t be as drastic, but HMOs will drop several hundred thousand people, Tom Scully, administrator of the federal Center for Medicare and Medicaid Services, said at a news conference Wednesday.

“It could have been a lot worse,” Scully said, adding that he could not be more specific about the numbers until the health plans report to the government.

The continued decline in the number of Medicare beneficiaries enrolled in HMOs is the latest short-term problem to afflict a program beset by long-term difficulties. In 1997, Congress looked to HMOs to control the growth in Medicare spending and projected that 30% of Medicare beneficiaries would belong to HMOs by 2002. Instead, the number is 15% and falling.

The decline could increase pressure on Congress and the administration to find ways to control Medicare costs, even as they consider adding a prescription drug benefit to the program that could cost at least $300 billion over 10 years. The budgetary pressures will increase further in 2011, when the first of the baby boomers become eligible for Medicare benefits.

For now, Scully has focused his efforts on trying to persuade HMO executives to remain in the Medicare business and had dissuaded major plans in Massachusetts and Maryland from departing.

“Seniors are angry” because Medicare HMOs are leaving, he said. “We’re trying to stabilize the program. We’re trying to turn this thing around.”

Scully said a major regulatory change will now allow HMOs for the first time to select specific Medicare markets to retain in a county while dropping Medicare patients in other cities and communities. Before, if an HMO wanted to stop serving Medicare beneficiaries in a city where it could not assemble an effective network of doctors and hospitals, it would have to abandon the entire county, including areas where it could operate profitably.

Medicare HMOs also will be permitted to negotiate contracts with businesses to provide a smooth link between Medicare and a company’s health coverage for its employees and retirees who are eligible for Medicare. The HMOs will be allowed to develop special benefit packages for companies and for groups of employers, another departure from traditional policy.

Under the traditional Medicare system, which covers people 65 and older and the disabled of all ages, beneficiaries can use any doctor or hospital participating in the system. But they face a series of co-payments and deductibles, including a 20% co-payment for doctors’ services.

In Medicare HMOs, patients pay smaller co-payments and deductibles, but they must stay within the health plan’s network of doctors and hospitals. In some markets, notably California, Medicare HMOs also offer the important bonus of coverage for prescription drugs.

HMOs that serve Medicare patients in high-cost urban markets such as Los Angeles, New York, and Philadelphia have been hard-pressed financially since 1997. A new federal law restricted the growth in their reimbursement rates from the government while providing expanded payments for HMOs operating in rural areas, according to Scully.

The Medicare payments to HMOs in urban areas will increase 14% from 1997 through 2002. That is compared with a 21% increase in government spending for traditional Medicare and a 49% increase in the reimbursement rate for Medicare HMOs in rural counties, according to federal figures.

Rural areas got the promise of higher reimbursement payments but very few Medicare customers, since the HMOs couldn’t assemble effective networks of doctors and hospitals, Scully said. Meanwhile, the urban areas, with customers who liked HMOs, didn’t have enough money.

“Congress needs to come back and tweak the formula and put the money where the program is popular,” Scully said. “The money is in the budget for this. It just needs to be allocated in a different way.”

But he acknowledged it would be hard to get Congress to change the payment formula, especially in the Senate, where rural states are as well represented as urban states.

The Bush administration plans to work with private firms to encourage new health plans to enter the Medicare HMO business. Currently, the only Medicare options are HMOs with strict network rules.

In the regular private insurance market for people younger than 65, the increasingly popular model is the point-of-service plan. Customers can remain within the HMO network or select a doctor outside the network for a somewhat higher payment. These more flexible plans should be available to Medicare beneficiaries as well, Scully said.

Medicare HMO enrollment has declined to 5.6 million from a peak of more than 6 million three years ago, and choices for beneficiaries are narrowing dramatically. In 1998, 61% of the Medicare population lived in areas where they could choose among five or more HMOs. This year, only 22% have this degree of choice, and the percentage could shrink more when the final numbers are tallied next month.