HMOs continue to wage an uphill battle to win recognition from federal policymakers for their ability to achieve savings in delivering care to some 45 million Americans, including 2.5 million Medicare enrollees.
The latest salvo against the managed-care industry came late in December, when HCFA administrator Bruce Vladeck said in an interview with the New York Times that his agency would not encourage seniors eligible for Medicare to enroll in HMOs because the plans weren't saving any money.
Previous administrations sought to increase the number of Medicare beneficiaries enrolled in HMOs on a prepaid basis, known as risk contracting. Mr. Vladeck's remarks were an unexpected slap at HMOs, which have been trying for years to get HCFA to boost reimbursement so that more HMOs would enter the Medicare arena.
Mr. Vladeck based his criticism of HMOs on a study by Mathematica Policy Research in Washington, which found that costs were 5.7% higher than they would have been under fee-for-service because enrollees were healthier than average and would have required fewer services. That meant payment rates to HMOs, which are set at 95% of HCFA's projected cost for enrollees, were too high by an average of 11%.
Despite that difference, the study also found that only half of 117 health plans with more than 1,000 Medicare enrollees posted a profit in the program between 1987 and 1990. During that period, 44% of the plans left Medicare, largely because their reimbursement levels didn't cover operating costs.
HCFA's rate formula results in uneven reimbursement levels in different parts of the country. That's because it grants higher price increases to HMOs in areas with the greatest cost inflation, tending to penalize health plans in areas where high HMO penetration has helped curb healthcare costs.
For example, in fiscal 1994, HMOs operating in Dade County, Fla., which includes the Miami area where HMOs are not yet predominant providers, will receive nearly $575 per member per month, compared with $325 per member for HMOs offering similar benefits to enrollees in Multnomah County, Ore., which includes the Portland area.
Despite the reimbursement controversy, Medicare enrollment in 104 risk plans continues to rise. So far this year another 21 HMOs have applied for new risk contracts, and 12 more plans are seeking to expand their service areas. Even so, the number of Medicare HMO enrollees is a fraction of the 36 million Americans eligible for the program.
"HCFA is winning big time with Medicare risk plans," said Craig Schub, president of Secure Horizons USA, a unit of Cypress, Calif.-based PacifiCare Health Systems that provides management services to Medicare HMOs. As HMOs gain market share, there's a continuous reduction of Medicare fee-for-service payments in the areas where they operate, he said.
To prove the point, the HMO industry trumpeted a report by KPMG Peat Marwick. According to the study, from 1988 to 1993 commercial HMO premiums increased 40% less than fee-for-service rates (See chart). The survey was commissioned to rebut accusations that savings from HMOs occur only on a "one-time" basis when consumers are first enrolled.
"The promotion of HMOs can significantly reduce national healthcare expenditures over the long term," said Jon Gabel, the study's author.
In addition, unlike fee-for-service coverage, most HMOs offer a package of benefits including preventive services such as physicals. Few HMOs refuse to cover enrollees with pre-existing conditions, a practice common in fee-for-service programs that discourages employees from switching plans and denies benefits for a specified period of time, Mr. Gabel said.
By the same token, in a Medicare HMO, "seniors are getting more benefits for less money and (care that is) equal to fee-for-service," Mr. Schub said.
Because of the premium shortfalls, however, many HMOs still are reluctant to launch costly marketing programs that may yield too few Medicare enrollees.
For example, PacifiCare, which covers 285,000 seniors in four states, saw 1994 rate increases ranging from 6.8% in Texas to less than 1% in Oregon, for an average of 2.5%
Mr. Vladeck has acknowledged that HCFA's rate mechanism is flawed, but it may take at least three years to implement changes in the system.
Late last year, HealthPartners, a large Minneapolis-based HMO, forced a showdown with HCFA over the reimbursement issue. HCFA agreed to boost the HMO's rate by 2.5% and share any losses equally up to 105% of the comparable fee-for-service reimbursement (Oct. 11, 1993, p. 14).
Companies with superior marketing capabilities such as PacifiCare are willing to risk the rate uncertainties and enter new markets through new ventures.
Mr. Schub's company recently formed an alliance with Waltham, Mass.-based Tufts Associated Health Plan to develop and operate a Medicare risk program in New England.
This year's Medicare reimbursement rate for Worcester County in central Massachusetts increased nearly 10.5% over last year.
Through such ventures, PacifiCare wants to take advantage of regions with above-average rate increases while expanding its Medicare business.