When HCFA releases its capitation rates next month for 2000, expect more managed-care companies to bail out of the Medicare business, according to industry analysts and the health plans themselves.
Last year, more than 100 health plans scaled back or eliminated their Medicare risk products. Managed-care companies say low reimbursements and annual rate increases as well as burdensome regulations are forcing them to exit the Medicare business.
Such managed-care powerhouses as Aetna U.S. Healthcare, NYLCare, PacifiCare Health Systems and United HealthCare Corp. pulled out of certain rural Medicare markets last year, affecting 500,000 Medicare beneficiaries enrolled in managed-care plans. Some advocates of Medicare managed care say those departures are just growing pains and do not signal the beginning of the end. Providers and health plans, however, say unless HCFA revamps its reimbursement methodology, many more departures will follow.
"I think that we have seen only the first wave of the HMO exodus from Medicare," says Gene Smith, director of government programs at Salt Lake City-based Intermountain Health Care. Intermountain, which insures about 450,000 people in Idaho, Utah and Wyoming, pulled the plug on its entire Utah Medicare program, affecting about 7,500 beneficiaries. "If Congress really intends to make Medicare choices available to seniors, they must address the 2% (annual rate) increases and the (reimbursement) methodology," Smith says.
Currently, about 6 million, or 18%, of the nation's 37 million Medicare beneficiaries are enrolled in HMOs, up from 4.7 million in 1996.
The landmark Balanced Budget Act of 1997, which rewrote who can offer Medicare risk programs and how, also revised the reimbursement methodology.
Medicare reimbursement rates vary by county and are calculated using a formula based on historical payment rates in that market. Before the Balanced Budget Act, HCFA paid HMOs 95% of the Medicare fee-for-service rate for that county. To eliminate some of the geographic payment disparities, the law mandated that health plans be paid one of three ways, whichever is the greatest: a minimum capitation rate of $367 per enrollee per month in 1998 and $381 this year, a rate calculated by blending local and national rates, or a rate reflecting a minimum 2% increase from the previous year.
While HCFA pitched the new payment methodology as a more equitable way to reimburse HMOs, health plans haven't seen it that way. The Balanced Budget Act also stated that the blended rate cannot be used if it exceeds what plans would have been paid under the traditional method, which was the case in 1998 and 1999. The majority of plans this year received a 2% increase. Expenses, meanwhile, increased between 6% and 10%, health plans say. In the past, HCFA payments rose about 6% annually.
Minneapolis-based Allina Health System, which owns Medica Health Plans, has lost more than $35 million since the inception of its Medicare risk program in 1984, according to Patsy Riley, vice president of government programs. Allina lost $3.6 million in 1997 alone, she says. Last year Allina pulled its Medicare risk program out of four Minnesota counties, affecting about 10,000 of its 35,000 Medicare enrollees.
"That 2% increase per year is nowhere close to keeping up with medical inflation," Riley says. "What we were seeing was a widening gap between revenue we were receiving from the federal government and the medical expenses being incurred by a continuously aging population."
Adding insult to injury, she says, is Minnesota's capitation rate per enrollee per month, which is considerably lower than in other parts of the country. The 1999 rate in Hennepin County, Minn., for example, is $422, compared with $778 in Dade County, Fla.
Pat Taillefer, administrator of the Quello Clinic, a multispecialty primary-care group in the Minneapolis area, says the payment rates forced the clinic to drop out of all Medicare managed-care programs, including Allina's. Taillefer says Quello's eight clinics were losing about $2 million a year on the program. "When you look at reimbursements in Minnesota, it's atrocious," he says. "There's no way you can do it with the sicker population. Providers are pulling out because there's no way they can survive. It will wipe out a practice in no time."
In Salt Lake City, the 1999 capitation rate is a comparably low $381. "The money is so tight that if you make errors in judgment (about) the level of health risk you accept, you've got to live with that. . . . But the regulations prohibit health screening or cherry-picking," Smith says. Intermountain lost $11.5 million on the program from its inception in 1996 through 1997.
Even PacifiCare, the nation's largest Medicare HMO, pulled out of some 24 counties in six states, including Utah. The move affected about 2% of its 1 million Medicare enrollees.
"The reason was really very simple," says spokeswoman Susan Whyte-Simon. "The cost of care was about 25% higher than the reimbursement rate in those markets."
Whyte-Simon also says provider dissatisfaction with reimbursement rates led PacifiCare to pull out of some California markets.
While some providers are eschewing managed care for traditional Medicare fee-for-service plans, Ernst & Young managed-care analyst Peter Kongstvedt, M.D., says they shouldn't pin their hopes on fee-for-service.
"Anyone who thinks Medicare fee-for-service is going to give them generous increases in payments is dreaming," Kongstvedt says. "The government is determined to continue to not only control costs, but lower costs in Medicare.
If they can't do it through managed care, they will do it the old-fashioned way -- through fees. At the moment, they're going to get better reimbursement under fee-for-service, but I feel pretty secure in saying the time will come when Medicare capitation will yield a better financial result than fee-for-service."
Whyte-Simon says PacifiCare also believes Medicare managed care will survive. She stresses that three ingredients are key to a successful risk program: the participation of large, multispecialty medical groups; a big enough patient population to absorb the risk; and a high reimbursement rate.
Providers and health plans now find themselves in the unlikely role of allies as they fight HCFA for higher reimbursement rates. "You can't blame the insurance carriers; you can't blame anybody but the politicians," Smith says. "What they've done is over-regulate the reimbursement."
Because reimbursement rates were set by Congress in the Balanced Budget Act, a HCFA spokesman says the agency's hands are tied. Any change to the methodology would involve an amendment to the act.
Health plans are encouraging physicians to lend their support and voices to the fight. "Physicians have enormous credibility and influence on this debate," Riley says. They should become involved in the debate and exert their influence at the federal level "because that is who can and will control the destiny of this program."