Overview: Since 1993, the number of Medicare beneficiaries enrolled in managed care plans has grown tremendously. The Health Care Financing Administration (HCFA), the federal agency that administers Medicare and Medicaid, is now the largest purchaser of managed care in the country. More than 6 million beneficiaries are enrolled in Medicare HMOs. The Balanced Budget Act of 1997(BBA) created the Medicare+Choice program, which allows new types of health plans to provide health care services to Medicare beneficiaries. As of January 1, 1999, any HMOs that operated under the prior law and wanted to continue Medicare participation had to contract under the new Medicare+Choice program. Under both the older law and the new Medicare+Choice program, Medicare HMOs make annual business decisions about whether or not to participate in the Medicare program. A number of published reports have shown that Medicare pays too much for basic Medicare benefits delivered through managed care. In the BBA, Congress outlined a payment formula based on a combination of national and local health care rates with an annual minimum percentage increase. Beginning in 2000, payments will be determined by blending a percentage of local and national rates and adjusting for the relative health status of Medicare managed care enrollees.

Managed care in Medicare

As of January 1999, more than 6 million of the nearly 40 million Medicare beneficiaries were enrolled in 300 Medicare+Choice plans. The Medicare+Choice regulations program is designed to provide Medicare beneficiaries with a wide variety of health care options including health maintenance organizations, provider-sponsored organizations, preferred-provider organizations, medical savings accounts and fee-for-service. All plans receive a monthly payment from Medicare that varies by county, according to the formula set by law.

In 1998, plans covering about 400,000 beneficiaries -- less than 6.5 percent of the beneficiaries enrolled in Medicare risk plans -- notified HCFA that, as of January 1999, they were "non-renewing" all or part of their Medicare contracts. The President's fiscal year 2000 budget proposes steps to protect beneficiaries from this kind of disruption in the future, requiring plans to notify beneficiaries earlier and broader access to Medigap coverage. In addition, HCFA will propose moving the Medicare+Choice provider enrollment deadline from May to July 1999 to help ensure that plans enter the Medicare market based on sound market decisions. Other initiatives will reduce administrative burdens on health plans by easing various reporting requirements.

Paying for Medicare managed care

In January 2000, HCFA will begin implementing, on a phased-in basis, payments to Medicare+Choice providers based on the health of beneficiaries. Required by the BBA, the risk adjustment payment method will be phased in over five years, increasing payments to plans that care for the sickest beneficiaries. Medicare currently pays HMOs and other managed care plans a fixed monthly amount per beneficiary, creating market incentives for plans to seek out and enroll the healthiest beneficiaries. Risk adjustment will help ensure that all beneficiaries have access to coordinated care, while recognizing that a phased-in approach fosters greater market stability.

Newly-implemented BBA provisions will also reallocate HMO payments in rural and urban areas. Before BBA, HMO rates were based entirely on fee-for-service costs in their local area. This meant that HMOs in lower-cost rural areas received lower payments than those in higher-cost urban areas. Under the BBA, plan rates will be based on a combination -- or "blend" -- of local and national rates. This budget neutral "blend" will help encourage the development of managed care plans by increasing rates in lower cost or rural areas where many Medicare enrollees have limited managed care choices.

The following studies document the need for changes in the payment system for the Medicare managed care program:

Physician Payment Review Commission. In its 1997 annual report to Congress, the Commission estimated Medicare could save up to $2 billion a year in excess payments to managed care plans. This congressional advisory body, replaced by the Medicare Payment Advisory Commission, said that, unlike the private sector where managed care has slowed health care cost growth, managed care is actually increasing Medicare program outlays. Also, the PPRC's 1996 annual report found that those who enroll in managed care tend to be healthy and those who disenroll tend to be unhealthy, exacerbating Medicare losses.

Mathematica Policy Research. Mathematica, based in Princeton, NJ, conducted several studies on Medicare HMOs in 1993 that indicate care of Medicare beneficiaries in HMOs costs only 85 percent as much as care for those who remain in traditional fee-for-service Medicare.

Congressional Budget Office. The CBO said managed care plans could offer Medicare benefits for 87 percent of Medicare fee-for-service costs, even though they were paid 95 percent (CBO: Predicting How Changes in Medicare's Payment Rates Would Affect Risk-Sector Enrollment and Costs, March 1997). In addition, because the Balanced Budget Act did not allow HCFA to adjust 1998 rates for errors in projections upon which 1997 rates were based, those rates were overstated by nearly 3 percent, which means that the base for all future Medicare+Choice rates will be permanently overstated by 3 percent. CBO indicated this means that Medicare will overpay plans about $8.7 billion over the next five years, and $31 billion over the next 10 years.

Department of Health and Human Services Inspector General. A 1998 IG report indicated that Medicare HMOs overstated anticipated administrative costs in 1994, 1995 and 1996 by as much as $2 billion. The IG also reported that payments to plans are inflated because they include traditional Medicare's fraud and abuse costs, which managed care plans should be able to avoid. The IG says including fraud and abuse costs in plan payments will result in another $5 billion in excess payments to plans in 2002 and another $10 billion in 2007.

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Last Updated Feb. 19, 1999