For at least five years, insurers have been steadily bolting from the Medicare+Choice program, citing government reimbursement that they say is far from adequate while medical costs continue to soar. Starting next year, a new Medicare managed-care option, as well as a proposed pay raise for HMOs, could help stop the slide--at least temporarily.
This month, more than a quarter of the nation's 40 million Medicare beneficiaries will be able to enroll in a more flexible type of health plan for the first time: a Medicare PPO that allows members to see providers outside their network for an additional fee, something Medicare HMOs don't allow.
Thirty-three health plans in 23 states have elected to test-drive the new Medicare model under a demonstration program created by the Centers for Medicare and Medicaid Services. Benefits will vary depending on the market, but most will provide prescription drug benefits in addition to the basic coverage.
The PPO pilot--and other Medicare demonstrations under way--are among the latest efforts by the Bush administration to jump-start Medicare+Choice and stanch the continued flood of both health plans and enrollees from the program. The administration also has proposed a 6.5% annual pay increase for HMOs to prevent further defections, but Congress has yet to adopt the plan.
Whether these efforts will be enough to shore up, let alone revitalize, Medicare+Choice is still far from certain. Yet most healthcare experts and insurers agree the ailing program is in dire need of an overhaul.
"Despite having the best of intentions, the (Balanced Budget Act of 1997) has done more to strangle the Medicare+Choice program than to enhance it," says CMS Administrator Thomas Scully.
In critical condition
In the early 1990s, as a result of new government regulations, HMOs aggressively began courting Medicare beneficiaries by providing rich benefits, such as unlimited drug benefits, often with no annual premium. The insurers believed they could profit by providing care for less than the amount the federal government was willing to pay them for covering seniors who opted out of traditional Medicare coverage.
But since the balanced-budget law, major insurers such as UnitedHealth Group and Aetna have been fleeing the program, arguing that federal rate increases of 2% to 3% per year have failed to keep pace with soaring medical costs, thereby making Medicare+Choice a money-losing venture. Other insurers that remain in the program have begun to scale back their benefit packages or charge higher monthly premiums, annual deductibles and copayments for such things as doctor visits, hospitalization and prescription drugs.
Nationally, the average monthly premium for a Medicare HMO has risen 28% to $32 this year from $25 in 2001, while beneficiaries' annual out-of-pocket costs increased an average of 24% to $1,786 in the same period, according to a report released last month by the Commonwealth Fund, New York.
Meanwhile, the percentage of seniors enrolled in a Medicare+Choice plan that requires hospital cost-sharing rose to 78% this year from 33% in 2001. And according to the CMS, 50% of seniors now have access to a Medicare+Choice plan with drug coverage, down from 65% in 1999.
"In the current environment, health plans are having to make difficult decisions in order to remain committed to Medicare+Choice," says Susan Pisano, spokeswoman for the American Association of Health Plans, Chicago.
This confluence of factors has confounded not only individual beneficiaries but also employers that have sought to cut their benefit costs by shifting retirees into Medicare HMOs. In past years, many businesses had found it less costly to pay for the enhanced benefits offered by Medicare HMOs than to provide comparable coverage in their own plans. But with more and more plans quitting the Medicare market and reducing benefits, relying on Medicare+Choice as a cost-cutting strategy has been put in jeopardy.
As a result, Medicare+Choice has fallen far short of its creators' initial vision, which included 30% of all Medicare beneficiaries being enrolled in HMOs by 2005. Today, only 5 million, or about 12.5%, of the nation's 40 million Medicare beneficiaries belong to HMOs, down from a peak of 6.3 million, or 16% in 1999, according to the CMS. And some experts have predicted that number could shrink to 4 million by 2005.
Indeed, the parade of HMOs leaving Medicare nationwide has become an annual event. Next year, nearly 200,000 seniors will be forced to seek new coverage as 33 health plans either exit the program entirely or reduce their service areas by Dec. 31, according to the CMS. That number is on top of the total 1.5 million seniors who were dropped by their Medicare HMOs in 2001 and 2002 and brings to 2.4 million the number who have seen their Medicare plans fall by the wayside since 1999.
And although next year's round of pullouts will affect far fewer Medicare beneficiaries than in previous years--about 4%, compared with 14.7% in 2001 and 9.6% this year--it is still cause for concern, says Joyce Dubou, senior policy adviser for AARP.
"Clearly we consider it an improvement when you have fewer beneficiaries affected, but there's no question that the program is still highly unstable," Dubou says. "Two hundred thousand is still a lot of beneficiaries, and we can't assume the numbers won't rise again next year."
A new option
As legislators consider ways to financially fortify Medicare+Choice, the CMS has been looking for new opportunities to keep health plans from leaving the fold. And many believe the three-year PPO demonstration will serve as a good stopgap.
"The first round of demos will counteract the downward slide the program is on," says John Gorman, president and chief executive officer of Washington-based Gorman Health Group, which has conducted feasibility studies for several insurers considering Medicare PPOs. "About 200,000 seniors are being affected by HMO pullouts this year, but the new PPOs are expected to pick up at least that amount in membership."
The reason: Medicare PPOs most closely resemble the way most Americans with employer-paid health insurance are covered, Scully says. Because many employees have complained over the years that their plans have restricted access to specialists and certain therapies, most insurers now offer a PPO option that allows members to use out-of-network providers but at a higher cost.
More than 111 million Americans are enrolled in PPOs, according to the American Association of Preferred Provider Organizations, Jeffersonville, Ind. Yet, until now, Medicare beneficiaries generally could only choose between fee-for-service coverage or an HMO. "The fact that seniors don't have the same option is crazy," Scully says.
Health plans have been allowed to operate Medicare PPOs since 1997, but most chose not to do so. That's because many struggling HMOs were gun-shy about trying out a new product, especially one with fewer built-in cost controls. "The PPO option never really had a lot of pickup," Dubou says.
The PPO pilot, however, has a lot of new appeal for insurers--even those scrambling to leave the Medicare HMO market--because it promises to help them reach the growing senior population more profitably. According to the CMS, participating plans were allowed to apply for up to $100,000 in financial assistance for startup costs and also to propose new payment arrangements to ease the potential costs associated with out-of-network care.
Insurers will be reimbursed at either 99% of Medicare's fee-for-service rate or at their local Medicare+Choice rate, whichever is higher. For plans in some counties where reimbursements are particularly low, the 99% fee-for-service rate would be an increase in payment.
The program also has a risk-sharing component, in which the CMS will pay half of any cost that exceeds the amount negotiated with the insurer. Should costs be less than the negotiated amount, the insurer will share the savings with the government. The aim is to limit PPOs' uncertainty about annual costs, a factor that has prevented most network-based plans from serving Medicare patients.
In choosing which health plans would take part in the demonstration, the CMS gave higher priority to insurers with an existing commercial PPO network. It also frowned on plans that intended to launch a PPO in place of an existing Medicare HMO. "We wanted to discourage plans from viewing the PPO option as a replacement rather than a product addition," Scully says.
Such incentives proved to be the deciding factor for Horizon Blue Cross and Blue Shield of New Jersey. The Newark-based insurer had contemplated closing its 63,000-member Medicare HMO next year, but ultimately opted to supplement the HMO with a Medicare PPO instead.
"It would have been a very difficult decision for us this year" if the PPO project had not been an option, says Robert Meehan, vice president of consumer and commercial markets at Horizon, one of two insurers selected to offer a Medicare PPO in New Jersey. "To be honest, the PPO reimbursement schedule provided more money, so it seemed like a better deal for both us and the consumer."
Horizon traditionally has provided both a basic, no-frills Medicare HMO and a high-option Medicare HMO with richer benefits, such as drug coverage. Next year, it will provide only the basic HMO, plus both basic and high-option Medicare PPO packages, the latter of which provides prescription drug coverage. The 50,000 members now enrolled in the high-option Medicare HMO will have the choice of switching into either Horizon's new PPO or its low-option HMO, finding a new carrier or reverting to traditional Medicare.
PacifiCare Health Systems, Thousand Oaks, Calif., also has chosen to test the new PPO option in two Southern California counties where it has its largest number of Medicare HMO members. PacifiCare spokes-man Tyler Mason says the new option could help commercial members who are now enrolled in a PPO to transition into a Medicare product with similar benefits when they retire.
Offering a Medicare PPO "fits with our business strategy of expanding past our traditional Medicare HMO," Mason says. "We introduced our Medicare supplements last year ... and a PPO seemed to fit nicely with this suite of product offerings."
Other insurers have taken a more cautious approach. Woodland Hills, Calif.-based Health Net, for instance, decided not to market a Medicare PPO in its home state, where it covers 103,000 Medicare HMO members. Rather, it has chosen to first roll out Medicare PPO products in Arizona, Oregon and one Washington county, areas where it provides only commercial plans or supplemental policies.
"It didn't make much sense for us to be in counties with two products, essentially competing against ourselves," says Health Net spokeswoman Lisa Haines.
But Gorman says the PPOs could prove a boon for struggling Medicare+Choice players because they are designed to attract the "more profitable" beneficiaries who tend to favor Medigap supplemental coverage over HMOs.
As Medicare HMOs have continued to cut benefits and raise premiums, their younger, healthier and more affluent members have begun to leave the plans. That, in turn, has left the HMOs with a progressively larger share of sick, low-income members, who typically cost 50% more to manage than the average beneficiary, Gorman says.
The PPOs, though, present a new competitive opportunity. They are expected to be priced about $100 to $135 per month--higher than many Medicare HMOs but much lower than top-of-the-line Medigap policies with drug coverage, which carry an average monthly premium of $256, according to Weiss Ratings. The Medigap market is three times larger than the Medicare HMO market.
"The higher-income beneficiaries are saying, `If I have to pay more to get less from a Medicare HMO, I'll just get a supplement instead,' " Gorman says. "But in every focus group we've done, one in three people who are currently purchasing supplements said they would choose a PPO on the spot."
One of Gorman's clients, Independence Blue Cross, Philadelphia, was among the first insurers to test a Medicare PPO. The company launched the plan under a demonstration program in 1997, after employer groups began showing interest in making retiree benefits comparable to those for active employees. In January 2000, the PPO signed a direct contract with the CMS and became a Medicare+Choice plan. It returned to demonstration status this year so that it could explore alternative funding methods with the CMS.
Enrollment in the Medicare PPO has climbed by 4,000 to 5,000 members annually, and now tops 22,000, says William Haggett, Independence's senior vice president of government programs. The members, he says, tend to be a year or two younger than enrollees in its 144,000-member HMO, called Keystone 65, and can afford to pay $80 to $100 more in monthly premiums.
The PPO's bottom line has fluctuated from year to year depending on medical costs and patient utilization rates, Haggett says. The plan turned its first profit in the third year of operation. It remained in the black in 2000 but lost money in 2001. Only 3% of care is now rendered out of network, but the use of specialists is rising.
Nonetheless, "Five years from now, we're confident that we will look back and have a positive story to tell," Haggett says.
Many consumer advocates, however, caution that the Medicare PPO option is still a major gamble--both for insurers and patients. The plans may prove too costly for most seniors, and beneficiaries burned by Medicare HMOs may stay away. The attractive benefits could dwindle over time, while budget concerns may make the more generous reimbursement rates disappear. And the entire program may not last past the pilot stage.
Skeptics point to the history of Medi-care+Choice as a worrisome precedent. Amanda McCloskey, director of health policy at Families USA, Washington, notes that when first offered, Medicare HMOs were hailed for providing extra benefits at no additional charge. But as medical costs exploded and federal reimbursements fell, the HMOs imposed premiums, curtailed benefits and, in many cases, pulled out of the market altogether.
"There's been a lack of predictability by Medicare+Choice plans from year to year," McCloskey says. "I don't see why we would expect anything different from the new PPO option."
Though the new cost-sharing aspect of the PPO pilot may moderate this risk, some industry analysts say that if healthcare costs continue to soar, the government may decide it can't afford its share of cost increases.
Others point out that the new PPO option may not even be available in regions that perhaps need them the most. According to the CMS, the percentage of seniors with access to at least one Medicare+Choice plan has fallen from 74% in 1998 to 60.5% this year.
Although some of next year's new Medicare PPOs will enter areas largely abandoned by other Medicare+Choice plans, many have chosen to serve areas that already have plenty of viable options. The greater New York metropolitan area, for example, will be served by five new Medicare PPOs, including plans launched by Aetna, Horizon and UnitedHealth, all of which still offer Medicare HMOs in the market. And Philadelphia will have two Medicare PPOs, Aetna and Independence, in addition to at least five existing Medicare HMOs.
Meanwhile, some beleaguered areas, such as Houston, won't see any Medicare PPO next year.
In September, PacifiCare announced its decision to close Secure Horizons HMO in Houston--the area's largest Medicare HMO with 25,000 members--by year-end, after the plan posted a second-quarter statewide loss of $13.5 million. PacifiCare spokesman Mason says the company fell victim to inadequate federal reimbursement rates coupled with difficulty reaching cost-friendly contracts with providers.
That same dilemma has chased no fewer than seven other Medicare HMOs out of Houston since 2000 and cut total membership in these plans by about half during the same period. Of Houston's 290,000 Medicare beneficiaries, only 38,000, or 13%, are enrolled in HMOs, with the vast majority in Secure Horizons.
Besides PacifiCare, only three managed Medicare plans remain in Houston. They include SelectCare of Texas, which has frozen new enrollment; Evercare of Texas, which provides no drug benefit and caters to the frail elderly; and AmCare Health Plans, which was taken over by state regulators in September because of mounting financial woes (Sept. 2, p. 14). The Renaissance, an 850-physician group in Houston, has made a bid to buy AmCare's 7,400 Medicare members.
"Medicare+Choice has always had great difficulty attracting plans to certain areas, and I don't know if the PPOs are going to change that," McCloskey says. "We throw the term `choice' around, but how much choice are most seniors really getting?"
Scully admits that the PPO pilot will not fully plug all the holes left by departing Medicare HMOs. But he says that if next year's PPOs are successful, insurers in other states will likely try them out in following years.
The CMS has been so heartened by the potential of Medicare PPOs that it is now exploring other demonstration projects, such as disease management for chronically ill beneficiaries. The agency plans to launch a three-year demonstration project next year to test whether providing coordinated disease management--together with prescription drug coverage--can help patients with advanced-stage congestive heart failure, diabetes or coronary heart disease stay healthier without costing more money.
"I'm happy to say the PPO demonstration isn't the end. It's frankly the beginning," David Kreiss, special assistant to Scully, said in September at a Medicare conference held by the AAHP in Washington.
Medicare spends 50% of its funds on the sickest 5% of seniors. These patients typically receive fragmented care across multiple providers and they often require repeated, costly hospitalizations or emergency room visits. A slight improvement in their health could result in billions of dollars saved, CMS officials say.