Medicare HMO Members Get Savings for 2005

Many members of Medicare HMOs in California will get some pleasant financial surprises when they make their first monthly premium payment this year or visit the drugstore to fill a prescription. The federal government is boosting payments to Medicare HMOs for the second consecutive year, and the HMOs are required to pass this through to members as expanded benefits.

The financial largesse comes as a result of the Medicare prescription drug legislation enacted in 2003. The Bush administration and Congress aimed to enroll more Medicare beneficiaries in HMOs, and the law provided a big dollar sweetener to do so.

Medicare HMOs can be a particular help for seniors of moderate and low incomes because they include extra benefits, such as prescription drugs, which have not traditionally been part of the regular Medicare offering. Prescription drug coverage will be included for the first time next year as Medicare Part D.

There is a lot at stake. About 87% of Medicare’s 40 million beneficiaries are enrolled in the traditional form of the program, meaning that they are free to seek care from any doctor or hospital participating in Medicare. By contrast, most U.S. residents under 65 with health insurance receive care through a more restrictive managed care model that allows them to seek treatment from a limited list of health care providers.

The policy question raised by the new law is whether Medicare can be converted to look more like the rest of the country’s health system.

The theory is that HMOs can save money in the long run by moderating health care services. That’s the theory, anyway. But government and independent studies have suggested repeatedly that the HMOs are not necessarily more efficient than “traditional” Medicare.

Various studies have suggested that Medicare HMOs get 108% of what would have been spent under the traditional Medicare program to care for a typical beneficiary, according to a report by Robert S. Berenson of the Urban Institute, a Washington think tank. On top of this, the Medicare law added another 2.3% in payments for 2004 and 4% for 2005.

“The Bush administration has created a tremendous financial incentive for HMOs,” Ed Kaplan — head of the national health care practice for the Segal Co., a benefits consulting firm — said. “The ultimate question is whether HMOs can really manage costs. Can they really make diabetics healthier? Or is the HMO just another way to pay medical claims?”

Flush financial times for health insurers’ Medicare HMO plans offer a particular boon for California, which has a disproportionate share of the Medicare HMO market. Of the five million people enrolled in Medicare HMOs in the United States, about one million live in California. California is the most competitive Medicare HMO market, with the most generous benefits in part because, although California has just 12% of the total national population of Medicare beneficiaries, it has a hefty 20% of all those enrolled in HMOs serving senior citizens.

Part of California’s high enrollment in HMOs can be attributed to a historical acceptance of a system in which health care services are provided within a strictly controlled network of doctors and hospitals. The HMO model has been familiar to state residents since World War II when Henry J. Kaiser was building ships in California for the Navy. War-time price controls prevented him from offering higher wages to recruit scarce labor. So he provided health care benefits, through Kaiser’s network of hospitals, clinics and doctors who worked exclusively for the Kaiser system.

As a result, two generations of California residents have grown up with Kaiser and other HMOs and have received HMO coverage as an employer-sponsored benefit. More than half the people in California with employer-sponsored health coverage are enrolled in HMOs, about twice the national rate. For many, it seems like a natural extension to join an HMO after retirement.

Although increased federal spending for Medicare HMOs is welcome as it boosts benefits for California residents, there is an underlying concern that this could be another ride on the roller-coaster of benefit gains and losses that have troubled such HMOs before.

The Medicare HMOs had boom times in the early and mid-1990s as enrollment soared from one million to seven million. Benefits for the Medicare HMOs also increased: dental care, vision care, unlimited brand-name prescription drugs in some cases and no monthly premiums in the most competitive markets.

Then Congress decided to tinker with the formula that links Medicare HMO payments to the average cost of care in the county for a person in traditional Medicare, arguing that the difference in reimbursement rates between urban and rural counties was unfairly large. Thus, Congress increased payments for lightly populated areas and reduced them for large urban markets, such as San Francisco, Los Angeles and Orange County.

The resulting squeeze held down payment increases to 2% annually during a period of sharply rising medical costs.

Medicare HMOs responded by leaving many markets and reducing benefits significantly in places where they remained in business. Enrollment in Medicare HMOs decreased to five million from seven million.

The Medicare drug bill of 2003 changed things radically, rewriting the reimbursement formula and providing a big infusion of new money for both 2004 and 2005.

“This doesn’t bring us back to the time when payments were at their highest, but it does help,” Kaiser Permanente spokesperson Jim Anderson said.

In addition, the Medicare HMOs have been particularly popular among seniors with annual incomes between $25,000 and $30,000, Lisa Rubino, senior vice president and chief executive of the individual and government business unit at Blue Shield of California, said. For 2005, “we made really significant improvements to the core benefits, the benefits seniors place a particularly high value on,” including reduced premiums and expanded drug coverage, she noted.

The Urban Institute’s Berenson, who was an official in the Medicare program during the Clinton administration, said in his report that the 2003 legislation gives a “clear preference” to HMOs in hope that they will take a bigger share of the Medicare market. However, he questions whether Congress will maintain the flow of money to Medicare HMOs now that legislators are grappling with budget deficits in excess of $400 billion a year.

Berenson wrote, “The question remains whether Congress will maintain overpayments to private plans when faced with the pressure to reduce budget deficits.”

Advocates for senior citizens, members of Medicare HMOs, and HMO company executives all are worried that if Congress decided to take a whack at the Medicare budget because of the federal budget deficit, the payment to HMOs would seem like a good target. And then there could be a repeat of the exodus from some markets by HMOs and a reduction of the benefit restorations that Medicare HMOs offered for 2004 and 2005.

This could be a roller coaster for California Medicare HMO beneficiaries, raising the possibility that some of the benefits HMOs expanded over the past two years could be sliced away again.