No Medicare Scare—Yet

Health and medicine explained.
Oct. 23 1998 3:30 AM

No Medicare Scare—Yet

The system's real problem isn't the flight of a few HMOs.

Who'd have thought seniors would be clamoring to Congress, "Please don't take my HMO away"? Only a year ago, politicians were being castigated for "herding the elderly into HMOs." But now, as health maintenance organizations are suddenly pulling out of dozens of Medicare markets, 400,000 elderly customers are scrambling to find insurance coverage beyond the end of the year and demanding that Congress do something about it. News reports raise the specter of an HMO stampede to the door that could unravel the entire 6 million member Medicare HMO system.

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The HMOs say it's all because the government pays too little. The government has fired back, saying that if anything, HMOs are paid too much. The Health Care Financing Administration has refused to renegotiate rates or to allow the HMOs to drop benefits on established contracts. And politicians, including the president, are pounding the HMOs for "breaking their promises" of coverage for the elderly. Sen. Chris Dodd, D-Conn., has announced that he will introduce legislation that will block the HMOs from dropping out for six months.

Health policy debates tend to be eye-glazing, but there are two reasons why casual observers should care about what's going on here.

First, the Medicare HMO program is a critical test case for Clintonian "Third Way" thinking. Under policy changes passed last year, Medicare has been transformed into an enormous voucher system. It is the prototype of a still new and controversial idea: Government should finance a generous safety net, but competing, private organizations should do the work. The government now allocates to each senior in Medicare a fixed amount of money that will buy coverage from either a private HMO or the traditional government-run Medicare program--thus fostering competition. If HMOs refuse to participate, however, the whole reform plan is dead.

Second, Medicare savings are supposed to provide the major part of the much-heralded deficit reduction projected for the next few years--$102 billion out of a total $127 billion from 1998 through 2002. And $50 billion of that is to come from savings expected in the Medicare HMO program. If the HMO program fails, it will be an economic as well as a social disaster.

All signs, however, suggest that the immediate problems in the program have been exaggerated.

More HMOs are seeking to enter Medicare markets than are seeking to withdraw. The pullouts affect just 400,000 of 6 million Medicare HMO customers. Industry observers and HMO officials say that only a few more HMOs are expected to leave the program.

Withdrawals are not proof that HMO payments are too low, as the HMOs claim. In fact, if next year's payment rates were high enough to keep all the 450 contracting HMOs profitable, then Medicare would clearly be paying too much. As Harvard economist Joseph Newhouse points out, the optimal rate of exit is unlikely to be zero. Presumably, at least some of the plans are inefficient. We don't know precisely what an optimal rate would be, but the anticipated withdrawal rate among HMOs (plans covering about 7 percent of enrollees) is probably not unreasonable.

HMO payments have, in fact, been too high. The HMO pullouts seemed so unexpected because until recently HMOs were pushing to expand their Medicare business. The reason was simple: The government was overpaying them. Before this year, under a formula that even the HMO industry admits was "rather robust," HMO payments were derived from the traditional Medicare program, which had a much sicker population and costs that rose 10 percent a year. The overpayment was estimated to be 8 percent, so last year Congress put in a new formula that essentially cut the increase for 1999 to 2 percent. Given the tightened payments and a major downturn in HMO stocks, some marginal markets--especially rural areas--started to look unprofitable. HMOs were allowed to drop them up to this month. So with the deadline looming, a bunch did.

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Nearly 90 percent of dropped enrollees are in areas where they can choose another HMO, according to the Department of Health and Human Services. So the effects of the announced withdrawals will be limited.

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