Some of managed care's biggest players are pulling out of the Medicare managed-care business, blaming financial losses and negligible profits. The bailouts leave physicians wondering if provider-led HMOs -- or provider-sponsored organizations -- will be able to pull off what some of the nation's biggest managed-care companies cannot.
Oct. 1, the renewal date for Medicare risk contracts, came and went with at least 29 nonrenewals. Such powerhouses as Aetna U.S. Healthcare, Humana, Oxford Health Plans and United HealthCare Corp. withdrew from either all or some of their Medicare risk markets. The companies blamed their losses on low reimbursement rates from HCFA.
Medicare reimbursement rates vary by county and are calculated using a complex formula based on historical payment rates in that market. The minimum capitated payment is $367 per enrollee per month, but reimbursement rates in New York, for example, can go almost as high as $780.
Despite the exodus from the Medicare risk business, providers shouldn't throw in the PSO towel, say a number of PSO consultants. In fact, there's still money to be made in Medicare HMOs, as evidenced by more than 50 new Medicare risk applications submitted by both managed-care companies and provider organizations, says John Gorman, president of Washington-based Managed Care Compliance Solutions. The total number of Medicare risk contracts is about 455, according to HCFA.
"There are still plenty of people out there who have taken a good, hard look at their market and think they can still make money on this program," he says.
The companies pulling out of Medicare managed care may not have looked closely enough at their markets before entering them. The success of Medicare risk contracting varies by market, and it simply won't work in some, says Cecilia Montalvo, executive vice president of the Medicare Plus Choice division at Brown & Toland Medical Group in San Francisco. The 1,200-physician group is among the 50 new applicants for a Medicare HMO license.
"For the most part, few of these companies are getting out entirely," she says. "They are terminating markets where they see no potential for profitability, which identifies one of the critical risk factors for Medicare risk products: Whether it's a PSO or anything, it needs to operate in a market where capitation revenues are sufficient to sustain the product."
Michael Barrett, president of Winter Park, Fla.-based Advanced Managed Care Solutions, says the minimum per-enrollee per-month capitation rate must be $450 for a PSO to make it. He says the market must also possess "existing managed-care penetration of less than 30% and some geographic characteristics that will lead to geographic segmentation, such as a river or lake because people typically won't cross geographic boundaries. Then the provider community can really focus their efforts on a smaller number (of people) in a smaller geography, and that lends itself to efficient management of care."
Gorman adds that high brand-name loyalty to a local, well-respected provider group is also important.
Once providers find a suitable market, they have an immediate advantage over the companies that are currently withdrawing: Namely, they don't have to answer to Wall Street.
Medicare risk contracting doesn't turn a profit immediately, and investors in publicly traded companies don't have the patience to wait it out, says Simon Jones, PSO consultant with healthcare consulting firm Schwab, Bennett and Associates in Los Angeles.
"Those entities that have a short earnings cycle timeframe -- such as these large for-profit publicly held HMOs -- they can't hang in there for the long haul," he says.
"Look carefully at the reasons the HMO is leaving. Is it really a question of 'they can't make a go of it,' or is it a question of the plan not producing the returns on Wall Street?" Bennett says. "The returns expected on Wall Street can be very, very different from the returns expected by a health plan or a Catholic hospital that's sponsoring a health plan for really different reasons than a Wall Street-backed firm."
Barrett adds that physicians can stomach flat profits longer than investor-owned health plans. "There's a difference between hanging in there at break-even, which a physician can do because the physician is not motivated by increasing stock price, and flat earnings which mean the stock won't go up in value."