Medicare HMO Shakeout.

HMOs are leaving areas where Medicare reimbursements won't cover costs.

As Wisconsin and Minnesota sue the federal government over what they say are unfair reimbursements for Medicare-risk health maintenance organizations, many are questioning how Medicare HMOs can remain healthy.

Cost-effective states have largely been hurt by the federal reimbursement formula, said Jim Haney, a spokesman for Wisconsin Attorney General James Doyle, who filed a lawsuit in federal court asking the court to rule the federal government's reimbursement formula for Medicare HMOs unconstitutional.

Medicare-risk HMOs, also called Medicare+Choice, offer benefits such as prescription-drug and dental coverage beyond what is offered under the traditional Medicare program. Like most managed care, Medicare HMOs are profitable if they can negotiate contracts with providers and control costs so they spend less than they are paid. But how much the federal government pays HMOs varies widely depending on where the members live.

While the average monthly reimbursement per member nationally was $488.45 in 1999, it varied from $676.64 in Broward County, Fla., to $394.42 in Dakota County, Minn.

In areas where reimbursement rates are high, HMOs can offer extra benefits without charging a premium.

In Broward County, a member of a Medicare HMO pays no annual premium, plus no fee for doctor visits, prescription drugs, outpatient mental-health treatments and emergency medical services.

But a senior in Dakota County paid an average annual premium of: $1,137 and still faced additional costs, including: a $10 copay for a doctor's visit; out-of-pocket expenses for almost all prescription drugs; $15 to $30 for each mental-health session; and $30 for emergency-room treatment, according to Minnesota Attorney General Mike Hatch.

Bailing Out

This discrepancy is part of the reason dozens of HMOs have bailed Out in the past two years.

According to the Health Care Financing Administration, Medicare-risk HMOs dropped 327,000 people, or 5% of all enrollees, effective in January. It is unknown how many of those people have enrolled in another Medicare-risk HMO.

Forty-one of the 305 Medicare-risk HMOs said in July they would leave the Medicare market entirely this year, and another 58 planned to reduce their service areas. While some companies are leaving, 35 new plans entered the program or expanded their service areas, HCFA said.

In 1999,43 Medicare-risk HMOs left and 52 reduced service areas, dropping about 400,000 beneficiaries. Many HMOs that stayed raised premiums or cut benefits, including prescription benefits.

The extra benefits have made Medicare+Choice plans attractive to members. Membership in Medicare HMOs has quadrupled nationally, to 6.2 million in May 1999 from 1.8 million in December 1995, according to a study by the Kaiser Family Foundation. That growth might be leveling off, as membership dropped slightly for the first time in March 2000.

"The law typically sets the methodology that Medicare uses to determine how providers are paid, taking into account geographic differences in costs that providers face' HCFA said in a statement. "We consistently work within those laws and with Congress to ensure that Medicare beneficiaries can receive quality care in all regions of the country and that Medicare pays appropriately for their care."

Reimbursement rates tend to be lower in rural areas, which has led many HMOs to flee or never establish operations in those areas. Also, it is difficult to establish network providers in rural areas, HCFA said. While 86% of urban beneficiaries have access to a plan offering prescription coverage, only 23% of beneficiaries in rural areas have that same access, HCFA said.

Haney said states such as Wisconsin are hurt two ways: Many Medicare recipients don't have the option of joining an HMO, and those that do have access to an HMO often won't receive the same benefits at the same price as they would in another state.

"Our intention is not to take away anyone s benefit," said Haney of the Wisconsin lawsuit. "But we want to see equal benefits provided to senior citizens in other states ."

A Change in Plans

Several states--Arkansas, Missouri, Montana, North Dakota, South Dakota, Utah, Vermont and Wyoming--did not have access to a single Medicare LIMO plan in 1999 or 2000, according to HCFA. South Carolina joined the ranks of those without a Medicare HMO option in 2000. Sixteen other areas saw the number of residents without Medicare HMO access increase in 2000.

Health plans can't just pull out of the Medicare HMO program. They must notify HGFA of any changes to their plans by July 1 of the year before the changes are to take effect. It's too early for most companies to say what they plan to do next year, but several are indicating that they might put the brakes on.

Earlier this month, Aetna Inc.'s new chief executive officer, William H. Donaldson, said the company might be looking to exit the Medicare market. Also, Sierra Health Service Inc. has stopped marketing its Medicare HMOs in Texas.

"It's a very expensive program to run," said Peter O'Neill, a spokesman for Sierra. "Reimbursement rates are always an issue, as is handling a sicker and older population."

While reimbursements in Texas are higher than in Nevada, the company's Medicare HMO in Nevada is thriving, he said. "It's less expensive to operate in this market," O'Neill said. "Texas is highly regulated and more expensive."

Also, with 50% of the health-care market in Nevada, Sierra is in a better position than it is in Texas, where it's been in the market for about a year.

A spokesman for HCFA said the federal government has an eye on companies like Aetna and Sierra, which may be shying away from the program, but said it's too early to predict what will happen July 1.

PacifiCare Health Systems Inc., the largest Medicare HMO, also left counties in several states in 1999 and 2000, but remains committed to the program, said Lisa Boyette, a company spokeswoman.

She said Medicare--both the traditional programs and HMOs--represents 40% of the health-care market and is likely to grow as the baby boomers age. "We're still very optimistic that we'll be able to make adjustments so we'll be able to compete," Boyette said. The company dropped 26,000 of its 1 million members in six states in 1999, but it gained about 13,000 new members from other HMOs leaving areas where PacifiCare remained.

In 2000, PacifiCare dropped another 16,000 of its 991,000 Medicare HMO members.

The problem with HCFA's reimbursement formula is that Medicare HMOs aren't able to keep up with medical inflation in some areas, and they're also lagging behind traditional Medicare fee-for-service plans, said Steve Wojcik, manager of government relations for PacifiCare.

The formula used to be 5% less than the estimated cost of treating a patient under a traditional fee-for-service Medicare plan in a specific area. That changed under the Balanced Budget Act of 1997, which established a complicated reimbursement formula. Under the budget act, most payments to Medicare HMOs were based on 1997 rates, with an annual increase of 2%.

"We've maintained that since the Balanced Budget Act was passed that the reimbursement rates have not been adequate," said Dick Brown, a spokesman for Humana, which dropped out of 31 counties and left 10%, or 46,000, of its members in 2000.

                           HMO Participation
      Health-plan participation in the Medicare-risk program has been
             volatile, with 84 plans dropping out since 1998.
       Contracting Health Plans
4/85              32
12/85             87
12/86            149
12/87            161
12/88            154
12/89            131
12/90             96
12/91             93
12/92             96
12/93            110
12/94            148
12/95            181
12/96            241
12/97            307
12/98            346
12/99            309
3/2000           262
Source: Health Care Financing Administration