Can the HMO-Medicare marriage work?

The aim is straightforward enough: Enable more seniors under Medicare to get their healthcare services through cost-effective HMOs.

The advantages of such a goal are far-reaching: Not only would it expand choices and levels of service for patients, but it also would likely save US taxpayers billions of dollars in Medicare costs.

Even so, it's something of an understatement to say that the goal will be difficult to attain - even though the federal government is dutifully striving to achieve it.

The reason? In recent years, health maintenance organizations (HMOs) have been cutting services to clients - or pulling out of the federal Medicare program altogether. They say they are losing too much money by serving Medicare beneficiaries.

The rub is how to attract HMOs back to Medicare - and still allow American taxpayers and healthcare patients to save money.

By any measure, Medicare represents a huge cost to the federal government: $237.8 billion is the forecast for this fiscal year. The 36-year-old program finances healthcare for 40 million Americans who are 65 and older or are judged disabled by physicians. The program's costs are covered by the federal government (using tax revenues) and by its participants (who share the costs in various ways).

Medicare's wills and won'ts

Although Medicare is commonly assumed to pay all costs of medical care for its participants, in fact there are great gaps in the coverage that the program provides its participants. It does not pay for eyeglasses, nor for most dental services. Neither does it pay the cost of prescription drugs - except for people in hospitals and other medical institutions, or in a small number of special circumstances. These cost millions of Americans well over $1,000 a year. And Medicare pays hardly anything for the cost of most long-term care in nursing homes.

People who participate in Medicare - called beneficiaries - often pay these costs out of their own pockets. Others buy private insurance - so-called "medigap" insurance - that fills in some of the gaps, and then pay the insurance costs. One way or the other, on average, beneficiaries pay a large percentage of their health costs themselves - close to half the costs, some analysts say.

Enter, HMOs

To provide healthcare that filled in these gaps, Medicare nearly two decades ago began allowing private industry - mostly insurance companies - to offer a limited number of Medicare beneficiaries medical plans through HMOs.

The plans typically established networks of physicians and hospitals that agreed to provide care for below-market rates, enabling them to offer more benefits at low cost to Medicare beneficiaries who used their services. Medicare paid HMOs a flat rate each year to keep each beneficiary healthy, regardless of the actual cost. If it cost an HMO less, it got to keep the extra money.

Besides the usual Medicare benefits, many HMOs also covered the cost of eyeglasses, dental care, and some or all of prescription-drug costs. As a result, Medicare beneficiaries flocked to HMOs. By 1999, more than 6.3 million received Medicare services via HMOs, up from 440,000 in 1985.

Exit, HMOs

But in 1997, Congress, concerned about the soaring cost of Medicare, clamped down on the amount of money it would pay HMOs for providing care to Medicare beneficiaries. To keep their financial bottom lines healthy, HMOs began withdrawing benefits, or charging their members for them - moves that reduced the advantage of belonging.

Moreover, in many parts of the country, HMOs began pulling out of the Medicare program, leaving their members scrambling to find another HMO. If they couldn't, they returned to the more expensive traditional type of Medicare, in which the government pays doctors and hospitals for each medical service performed. As these HMOs went out of the Medicare business, they dropped more than 400,000 people from their rolls at the end of 1998, another 300,000 a year later, and over 900,000 at the end of last year.

"Their costs went up faster than their revenues," says Bruce Vladeck, head of Medicare during the first part of the Clinton presidency.

Because other HMOs signed up more participants, the total number of people enrolled in HMOs across the nation did not drop by these amounts, however. Nevertheless, withdrawal from Medicare of so many HMOs has made many Medicare beneficiaries wary of signing up with HMOs now.

Within government, meanwhile, there has been "a sense of distress" that the HMO growth has reversed, says Gail Wilensky, who ran the Medicare program during the first Bush presidency.

The new head of Medicare, Thomas Scully, wants to stem the slide and make HMOs available as an option to more Medicare participants.

Mr. Scully - administrator of the Health Care Financing Administration, which runs Medicare - would like to see 30 percent of Medicare's beneficiaries ultimately receive their medical assistance through HMOs, as has been Medicare's goal since 1997. Currently, 14 percent do.

To persuade Medicare participants to join HMOs, there must be more stability among HMOs, "not here one year and gone the next," says Tricia Smith, chief healthcare lobbyist for the American Association of Retired Persons.

It's a point everyone agrees with. But how to raise the number of HMOs in the Medicare business?

Solutions at hand?

As a practical matter, says Mr. Vladeck, Scully probably can't succeed "unless the government is prepared to spend a whole lot of money by raising the rates" it pays HMOs.

HMOs would be delighted. They have pleaded for more funding since 1997, when Congress cut their payments. Congress has since provided additional funding. Although HMOs say that has been inadequate, Congress is unlikely to approve another broad-based increase this year.

Besides, notes one analyst, raising the amount of money paid HMOs didn't produce stability - HMOs kept pulling out of the Medicare program anyway.

What Congress is considering, however, is paying more to HMOs in rural areas, where a large percentage of the HMO pullouts have occurred.

"There has been a significant interest in Congress in raising the minimum payment" in rural areas, says Mike Hash, who was Medicare's second-in-command during the Clinton presidency.

But for rural HMOs, as important as money is the difficulty of establishing a network of physicians and hospitals that can provide comprehensive care. Few medical professionals are available in sparsely populated areas, and many analysts doubt that HMOs can be viable there.

Congress is also gnashing out another issue that would benefit not only HMOs, but also all individuals who participate in Medicare: paying some of the costs of prescription drugs for all Medicare beneficiaries.

"There's no question" such a step would help HMOs greatly, says Mr. Hash, by reimbursing them for an increasingly important cost.

The paperwork blizzard

Finally, several analysts say, Scully might start by taking a relatively easy step: reviewing the reporting requirements that the federal government puts on HMOs to make sure they're as simple as possible.

"Regulations and paperwork cost money," says Grace-Marie Hunter, president of the Alexandria, Va.-based Galen Institute, a research organization. "There's no bureaucracy like the federal government."

Reducing paperwork would have another effect, says Ms. Wilensky. It would tell Medicare beneficiaries that "there is something we can do now" to make HMOs more attractive.

"If people believe there are more [HMO] plans available, they will choose them."

(c) Copyright 2001. The Christian Science Monitor