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Many HMOs are pulling out of Medicare+Choice. What should you do?

Medicare managed-care plans have been available in some areas since 1982. However, escalating healthcare costs forced Congress to reorganize Medicare managed care in the Balanced Budget Act of 1997 (BBA), resulting in the Medicare+Choice program.

Medicare+Choice is administered by the Health Care Financing Administration (HCFA), a federal agency. Under Medicare+Choice, private health maintenance organizations (HMOs) offer coverage to Medicare beneficiaries. These companies cover all Medicare services plus additional ones (e.g., prescription drugs and vision).

Medicare+Choice HMOs provide coverage on a county-by-county basis. Payment is based on a complex formula of local and national health costs. Each contract is negotiated for one year.

This past summer, 65 Medicare+ Choice HMOs chose not to renew their Medicare+Choice contracts, and 53 reduced their service areas. These actions affect more than 934,000 Medicare beneficiaries across 34 states. Of these, about 775,000 have another Medicare HMO available in their counties. However, it is unclear how many of the remaining HMOs will accept new members. Approximately 17% (or 159,000) of affected beneficiaries will have no Medicare+Choice HMO options available to them.

All beneficiaries affected by these nonrenewals and service-area reductions may return to original fee-for-service Medicare.


Medicare beneficiaries want to know why so many HMOs are pulling out of Medicare+Choice. The simplest answer is that leaving makes financial sense for those plans.

Medicare+Choice relies on contracts with private HMOs. Annually, these companies must make business decisions about whether participating in Medicare+Choice will be profitable. This year, Medicare+Choice plans had to notify HCFA by July 3, 2000, if they would renew their existing contracts for the upcoming year.

Many HMOs said HCFA didn't pay enough for Medicare+Choice contracts to be profitable. In fact, the decisions of two companies--Aetna and Cigna--to withdraw from the Medicare+Choice market accounted for almost half of the nearly 1 million beneficiaries affected.

So, if the plans are not making enough money, why doesn't HCFA just pay them more? HCFA does not set the payment rate, Congress does. The rate is based on a complex calculation that guarantees the plans a minimum payment increase each year, even when overall Medicare fee-for-service spending declines. The calculation also includes a risk adjustment that pays plans more money for treating sicker beneficiaries. BBA established this payment rate.

Prior to BBA, Medicare HMOs received a "fixed rate" per person enrolled. This rate was set for each county at 95% of the average of the amount HCFA paid for traditional fee-for-service Medicare beneficiaries.

Under the old fixed-rate system, payments varied widely from county to county. For example, the 1997 capitation rate ranged from a low of $220.92 in Arthur County, Neb., to a high of $767.35 in Richmond County, N.Y. Since the county rate was based on actual fee-for-service costs, it depended entirely on the market's utilization patterns and cost structures.

The current system mandates that the county payment rate is the greatest of the following:

* Minimum 2% increase over the prior year's rates. This guarantees that plans will always be paid more each year.

* Minimum or "floor" amount. This sets an absolute floor that payments cannot go below. It is intended to attract HMOs to areas that were under-served because they had low rates. It is adjusted annually based on overall Medicare spending. In 2000, it is $415 per month.

* Blended amount. This blends county and national rates, increasing those in historically lower-rate counties while reducing them in historically higher ones. Each year, from 1998 to 2003, a greater percentage is based on the national rate until a 50/50 blend is reached. The blend percentage for 2000 was 74% county and 26% national.

These payment protections have actually made operating in some counties profitable for Medicare HMOs. The $415 floor in historically lower-rate counties in some cases is so much higher than the average cost of care for Medicare beneficiaries that plans find these areas desirable for their profit potential.


HCFA has attempted to improve its relationship with Medicare+Choice HMOs. In response to the plans' concerns about the impact of risk-adjustment on their payment, HCFA agreed to slow down the phase-in of risk-adjustment in the payment calculation.

Many HMOs say they need to learn all plan requirements before they sign contracts with HCFA, in order to know what they are bidding on. In response, HCFA announced it would no longer change plan requirements midyear.

Congress is also working to fix the problems HMOs have with Medicare+Choice. Plans' concerns with BBA 97 implementation prompted Congress to pass the Balanced Budget Refinement Act of 1999 (BBRA), which provided more money for plans contracting with HCFA.

Congress is considering several proposals to solve continuing problems, including (1) the President's plan that would make a voluntary, affordable prescription-drug benefit available to all 39 million Medicare beneficiaries and (2) the Republican proposal that includes an additional $15 million over the current budget for Medicare+Choice plans.


Medicare beneficiaries affected by these nonrenewals and service-area reductions received two letters. The first one, from HCFA last summer, described what is happening and what other options may be available. The second letter, sent directly from the HMO around October 1, 2000, includes similar information and instructions.

If you are one of the people affected, what action should you take? It is critical that affected beneficiaries do not disenroll from their HMOs without learning about their rights. Plans not renewing their contracts still must provide services to enrolled members through December 31, 2000.

Medicare beneficiaries whose HMOs are withdrawing from the market are eligible for a Special Election Period beginning October 1, 2000. During this time, they can sign up for another Medicare+Choice HMO, if one is available in their area and if that plan has not exceeded its enrollment capacity limit.

Two Medigap Guaranteed Issue periods guarantee affected Medicare+Choice beneficiaries the ability to purchase a Medigap policy (categories A, B, C, and F only)--without conditions, regardless of current or past health status. The first Guaranteed Issue period begins October 2 and ends December 4, 2000; the second runs from January 1 through March 4, 2001.

People under age 65 who qualify for Medicare because of disability do not have the same federal protections to purchase a Medigap policy. Their rights vary from state to state.

About half of the affected states have a "voluntary market" in which companies may sell Medigap policies to Medicare beneficiaries with disabilities. The remaining states have a "compulsory market" in which companies selling Medigap policies to any Medicare beneficiaries with disabilities must do so to all affected individuals.

Medicare beneficiaries in the program for less than 12 months have different rights, so they may want to disenroll sooner to take advantage of their unique opportunities. HCFA will send these individuals a letter informing them of their rights.

Affected beneficiaries' rights will vary a great deal based on the length of time the individuals have been in the program, the counties they live in, and their ages. They will receive mail from HCFA and their HMO specific to their individual situations.

Additional Medicare information and counseling is available toll-free at (800) MEDICARE (633-4227). Counselors at this number can also provide the phone number for your state's State Health Insurance Assistance Program (SHIP). SHIPs can advise you on rights unique to your state.

Jennifer Podulka is a Paralyzed Veterans of America Health Policy Department health policy analyst. The PVA National Office is located in Washington, D.C. (800) 424-8200 / (202) 872-1300.
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Title Annotation:health plan management information; HMO's are dropping out of Medicare+Choice
Author:Podulka, Jennifer R.
Publication:PN - Paraplegia News
Geographic Code:1USA
Date:Oct 1, 2000
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