Opting out: as more insurers leave the Medicare+Choice marketplace because of low reimbursement rates, a new option for the federal program will be pilot tested. (Life/Health).

As insurers continue to exit the Medicare+Choice program, the federal government is being urged by the industry to make the program more financially palatable.

"Certainly, there is a crisis that needs to be addressed," said Susan Pisano, a spokeswoman for the American Association of Health Plans, an industry trade group. "There's a flaw in the program that no one intended. It needs to be fixed."

About 215,000 enrollees in Medicare health maintenance organizations will be affected this year by HMOs leaving the program, the fourth year in a row that the Medicare+Choice program has seen a negative enrollment change and the fifth consecutive year that insurers have pulled back from participating. Enrollment had already fallen to 5 million members in September 2002, down from 5.4 million at the end of 2001 and 6.2 million members at the end of 2000. About 5 million members participate in Medicare+Choice, or about 12% of Medicare beneficiaries, at September 2002.

While Medicare+Choice HMO plans are dwindling, the federal government is pilot testing a new preferred provider organization option in 2003. A total of 33 health plans will offer the PPOs in 23 states, and will be open to 11 million, or 30% of all of Medicare's beneficiaries. The plans are likely to cost more than Medicare HMOs, but less than traditional Medicare, while providing less restrictive coverage than HMOs. For instance, PPO members will be allowed to see a doctor outside of the plan's network for an additional fee. Under HMOs, that wouldn't be a covered expense.

The PPOs are being funded by a combination of reimbursement rates plus cost-sharing between the government and the health-care plans.

"The major difference between the PPOs and the HMOs is the risk sharing," Pisano said. "Neither the government nor the health plan is at full risk for estimates of spending that are off one way or another. That's the the thing that makes participation in the program possible in areas where it's not possible in the Medicare+Choice programs."

The Medicare+Choice program--which is intended to save money for both the government and consumer, while providing better care--is worth saving, both Pisano and Dr. Donald Young, president of the Health Insurance Association of America, said.

"This is a good example of a wonderful idea that's gone awry," Young said.

Medicate+Choice Program

Established in 1965, Medicare is the federal health insurance program that now covers 34 million people age 65 and older and nearly 6 million younger adults with a permanent disability, according to the Henry J. Kaiser Family Foundation, a nonprofit foundation that provides information and analysis of health issues. Medicare serves all eligible beneficiaries no matter what their income or medical history and is administered by the Centers for Medicare and Medicaid Services, formerly known as the Health Care Financing Administration.

Medicare beneficiaries have several options for obtaining care. The traditional Medicare program has two parts: Part A covers hospital care and Part B covers medical care. Most people get Part A automatically when they turn 65 and do not have to pay an additional premium for it because they--or their spouse--paid Medicare taxes while they worked. Part B covers doctors visits and tests, and costs $58.73 per month in 2003. It's usually taken out of a senior's Social Security check.

The traditional program covers basic costs, but does not cover things such as prescriptions, eye and dental care, nor preventative measures such as physicals and disease management that have become the hallmark of managed care. Medicare recipients can buy supplemental, or Medigap, insurance for those additional perks, but the plans tend to be more expensive and are an additional cost to the traditional Medicare program.

By launching the Medicare+Choice program, also called Medicare Part C, the federal government gave Medicare recipients the option of joining a managed care plan with more benefits than the traditional Medicare fee-for-service plan, but at a lower price. The lure to beneficiaries was simple: while HMO participants were often required to stay within a network of doctors and get permission from a primary care doctor, or "gatekeeper," before seeing a specialist, they received extra benefits, such as coverage for eye exams, prescription drugs, dental work and hearing aids. Participating HMOs are funded by the Centers for Medicare and Medicaid Services through a set monthly reimbursement fee per member, regardless of the actual costs of claims. Originally, it had been more affordable than the traditional program, while often offering wider benefits. HMOs made a profit at the program by making sure they didn't spend more on medical costs than they received in the capitated fees.

A Flaw in the Ointment

Medicare+Choice flourished and grew rapidly for several years as HMOs and beneficiaries flocked to participate. Then funding for the program faltered.

"There are a number of reasons why it's had problems, but the central one is that payment updates haven't kept pace with the cost of inflation," Young said.

Enrollment in Medicare+Choice plans grew from 1.6 million members in 1992 to 6.3 million membersat its peak in 1999 as the number of Medicare HMOs mushroomed from 96 plans in 1990 to 346 in 1998. However, since 1999, insurance companies have re-evaluated their commitment to the program, citing low reimbursements as the main reason to leave. The number of plans to participate in Medicate+Choice has fallen consistently over the past few years to 309 in 1999; 266 in 2000; 179 in 2001 and 155 in 2002, according to the AAHP.

This year, nine plans will leave the program altogether and another 24- including Health Net Inc., Humana Inc., Aetna Inc. and PacifiCare Health Systems Inc.--will reduce their service area.

The number of health-care plans in the program began to dwindle after the 1997 Balanced Budget Act was implemented. The act, which capped reimbursement increases to 2% annually, failed to allow reimbursement rates to keep up with medical cost inflation, industry experts said.

Prescription medication costs are increasing at 20% a year and spending on hospital care rose 12% in 2001, said Tyler Mason, vice president of PacifiCare Health Systems, which offers Secure Horizons, one of the largest Medicare+Choice insurers.

"Health-care costs are rising 10% to 15% a year, and reimbursement rates are rising 2%. You cannot sustain a program with that kind of arithmetic," Pisano said.

Fixes That Fell Flat

Congress has tried to remedy the program with the Balanced Budget Refinement Act of 1999 and the Benefits Improvement and Protection Act of 2000. Both increased payments to Medicare+Choice plans, but the industry said the improvements weren't broad enough. Among the 2000 act's key components was an increase in the payments for 2001, but the annual increases returned to 2% in 2002.

"I think what we need in this program is for there to be a long-term funding mechanism that matches payment more to the actual cost of providing care," Pisano said. "You cannot go years at a time with cost increases outstripping payment increases. That's fundamental."

Complicating the problem is how the Centers of Medicare and Medicaid Services estimates costs by using geography. The administrators try to reflect the actual costs of providing medical care, and have individual reimbursement rates for every county in the country. In an attempt to factor in a theory that rural and suburban areas are often less expensive than major urban areas, major urban areas tend to have higher reimbursement rates. For instance, the 2002 Medicare+Choice reimbursement rate for Richmond County, N.Y., is about $872 per person per month, or 58% higher than the $550 per person per month fee for Yakima County, Wash.

"There's a big discrepancy county by county in what fee the service pays. In Miami, the payment is very high compared to Kansas City or payment in rural areas. The government needs to smooth out the differences in geographical areas," Young said.

Rural areas don't necessarily have less expensive medical costs, because a lower population has its own costs, and loses economy of scale. "With fewer physicians and hospitals in rural regions, consumer choice is limited, and so is an HMO's ability to negotiate favorable provider rates," according to the A.M. Best Co. special report, "Medicare+Choice: A Viable Option for Aging America?" (The report, which was published in BestWeek in June 2002, is available online at www bestweek.com.)

The Benefits Improvement and Protection Act of 2000 raised the floor of reimbursements for rural areas with fewer than 250,000 people to $475 a month and to $525 a month for plans in more populated areas. But there are still severe discrepancies in reimbursement rates around the country, a spokesman for the Centers for Medicare and Medicaid Services said. "And a 2% increase on $700 a month is a lot more than a 2% increase on $500 a month," the spokesman said.

This is one of the reasons cited by Oxford Health Plans Inc. for its decision to withdraw from the Medicare+Choice market in all but one county in New Jersey, one county in Connecticut, and the five boroughs of New York City.

When a Medicare+Choice plan leaves an area, its members have the option of joining another Medicare HMO or returning to the traditional Medicare program. However, many members no longer have the option of joining an HMO. For instance, in 2003, 86% of the 215,000 members whose HMO is leaving the program will have the option of joining another HMO, but 14% will not.

Dealing With a Dollar Short

Besides exiting unprofitable areas, Medicare+Choice plans have reacted to the inadequate funding by cutting benefits, such as prescription drug coverage, and raising premiums and copayments. In 1999, 80% of Medicare+Choice beneficiaries did not pay a premium at all. But by 2002, that number had fallen to 40%, according to Kaiser.

Also, plans that do ask for premiums have raised them. The average Medicare+Choice monthly premium rose to $54.06 in 2002 from $32.11 in 1999. For instance, Highmark Inc. said it would raise its monthly Medicare+Choice premiums in Pennsylvania. For its basic plan, which doesn't include prescription drug coverage, monthly premiums would more than triple to $36 from $10. For the deluxe plan, premiums would increase 44% to $105 from $73 a month.

PacifiCare said it would both reduce benefits in 2003 and increase premiums for a majority of its beneficiaries in eight states. More than half of Secure Horizons members will pay higher monthly premiums, and more than a quarter also will experience hospital copayment increases.

"We are asking our members to cover more of the costs of their health care so we can maintain Secure Horizons' M+C plan as an affordable choice for Medicare customers," Mason said. "With increased member cost-sharing, we can offer Secure Horizons' Medicare+Choice plan to as many people as possible and remain an alternative to traditional Medicare." To save money PacifiCare will also continue to emphasize generic drugs, Mason said.

Young said that while the 2003 pullout is less severe than the drop in participation in other years, the beneficiaries will continue to leave if the existing plans continue to cut back on benefits. "If the benefits to joining an HMO aren't as rich, then there is less incentive to join. When you cut back on the benefits, the program is not worth offering, because there's so little interest in it," Young said.

Managed care companies have devised innovative ways to save money, such as disease management programs. The programs tailor care to patients with specific medical conditions, such as heart problems, diabetes and asthma. The program works by increasing supervision on those patients to make sure they are receiving the proper medication, while also receiving education or encouragement to follow proper diets and exercise programs. The goal is to prevent the disease from getting worse, to keep the patient out of the hospital.

"If you can invest a few dollars to make sure they get their prescriptions filled, you can prevent a hospital stay," Young said. "It benefits everyone. People are healthier and the program saves money."

Traditional Medicare is learning lessons from such programs. For instance, PacifiCare, along with QMed Inc. and Mere Medical Inc.--which operate jointly as HeartPartners--have been selected to participate in a disease management demonstration program. The project will begin in early 2003, and include services and a prescription drug plan for up to 15,000 fee-for-service members suffering from congestive heart failure.

Meanwhile, the debate on how to improve the Medicare+Choice program is likely to continue in 2003. President Bush had asked for a 6.5% increase in 2002, but Congress failed to act on the bill.

"If nothing is done, the crisis will continue," Pisano said. "But we are optimists here. I think there has been growing support for the program, and we are continuing to work very hard and urge members of Congress to fix this problem."

By the Numbers:

Medicare+Choice plan membership continually shrinking

[down arrow] 2000-6.2 million members

[down arrow] 2001-5.4 million members

[down arrow] September 2002-5 million members

Source: American Association of Health Plans

Medicare+Choice Plan Contract Participation Drops.

Cumulatively since 1999, almost 2.4 million Medicare beneficiaries have
been affected by Medicare+Choice plan withdrawals and service area
reductions. Reasons for discontinuing service include rising medical
costs plus inadequate payments and regulatory issues.

           Number of Contracts

1996               241
1997               307
1998               346
1999               309
2000               266
2001               179
2002 Aug.          155

Source: American Association of Health Plans

Note: Table made from bar graph