Reversal of Fortune: Medicare+Choice Collides with Market Forces
Issue Brief No. 52
rivate health plans? participation in Medicare was envisioned as a way to save taxpayers money and offer Medicare beneficiaries more choices and benefits. As enrollment grew, there were concerns about overpayments to some private health plans and wide geographic variation in plan payments. The Balanced Budget Act of 1997 (BBA) introduced significant payment changes and regulatory requirements for plans participating in the newly named Medicare+Choice (M+C) program. Since January 1999, scores of plans have reduced or ended their participation, disrupting coverage for more than two million seniors. While the BBA often is blamed for this turnabout, research by the Center for Studying Health System Change (HSC) indicates private market forces also played a key role in M+C?s growing instability.
The Rise and Fall of Medicare+Choice
eginning in 1985, Medicare has allowed beneficiaries to
enroll voluntarily in private managed care health plans, usually health maintenance
organizations, which receive a fixed monthly payment for each beneficiary. Since
1996, HSC has tracked developments in Medicare managed care through site visits
every two years in 12 nationally representative U.S. communities (see
Three market factors stand out as major contributors to M+C's initial rise and eventual fall:
Not ?N Sync: Dissonance Between Payments, Costs
ealth care costs grew slowly in the mid-1990s (see Figure 1), thanks, in part, to the growth in managed care.1 Cost trends accelerated in the latter part of the decade, especially spending on prescription drugs. Yet M+C payment trends followed the opposite patternrising quickly in the mid-1990s, when cost growth was low, and slowing significantly just as the rate of cost growth was increasing.
Under Medicare's administered pricing system, M+C payment growth for individual US counties is determined by a formula that ties annual payment rate increases to increases in spending in the traditional fee-for-service Medicare program.2 In the late 1990s, for example, large reductions in the rate of growth of provider payments under the BBA and a crackdown on Medicare fraud and abuse slowed trends in traditional program spending, which, in turn, reduced increases in M+C payment rates. Since 1998, plans in the counties with the greatest number of M+C enrollees typically have received annual increases well below cost trends.3
M+C payment rate increases also failed to account for rapidly rising spending for outpatient prescription drugs in the late 1990s. While traditional Medicare does not cover most outpatient drugsthus, those costs are not figured into its annual growth estimatesmany M+C plans offered outpatient drug coverage to attract enrollees.
These out-of-sync cost and payment trends suggest substantial variation in the profitability of M+C plans. In 1996-97, when Medicare payment growth was outstripping underlying cost growth, plans in the 12 communities studied reported M+C was attractive because of the potential for profits as payment rates grew and more Medicare beneficiaries moved into private plans. By 2000-01, however, nearly all plans in the 12 sites had seen M+C profitability decline dramatically, and some plans reported losing money.
Trends in M+C Spending, Commercial Premiums and Commercial Health Care Costs, 1994-2001
1 Premiums are for large firms with 200+ employees.
2 The 2001 estimate is for January through March, compared with corresponding months in 2000.
3 Calculated as total payments divided by total enrollment for coordinated care plans in December of each year.
Sources: PremiumsKaiser/Health Research and Educational Trust Employer Health Benefits Survey for 1998-2001 and the KPMG survey for 1991-97; health care costsMilliman USA Health Cost Index ($0 deductible); M+C spending?Centers for Medicare and Medicaid Services, Medicare Managed Care Contract Plans Monthly Summary Report
Riding the Underwriting Cycle
ommercial insurance premium trends tend to be higher than health care cost trends for several years and then lower than cost trends for several years, following a predictable cyclical pattern known as the insurance underwriting cycle. As profits rise and competition heats up, plans try to increase market share by holding down premium increases, often causing profits to shrink. Plans then raise premiums to restore profitability. A new phase of the commercial insurance underwriting cycle began in the early 1990s, when health costs increased more slowly than expected, improving profitability and attracting new plans. By 1996-97, as competition in the commercial market intensified, many plans in HSC markets shifted their focus to expanding market share, and some plans reported setting premiums below expected costs to capture new business.
Many plans viewed M+C participation as an attractive strategy to grow market share. In the three HSC markets with the highest M+C penetration (see Table 1), plans reported they were able to offset declining profit margins on their commercial lines of business with comfortable M+C profit margins. While M+C plans typically had offered lower beneficiary cost sharing than traditional Medicare, many plans in these markets offered additional benefits, such as outpatient prescription drug coverage, for little or no extra premium, which also attracted more enrollees.
Even in communities where plans viewed M+C products as less profitable at the time and M+C penetration was lower, Medicare represented an untapped opportunity to expand market share. Opportunities for expansion and the prospect of rapidly growing M+C payment rates helped to drive both national and local plans to enter M+C in the moderate penetration sites. National plans introduced zero-premium products with enhanced benefits in these markets. Meanwhile, local plans in most of the limited and minimal penetration sites were poised to begin offering M+C products, in part to thwart anticipated entry by national plans.
By 1999, with the BBA changes fully implemented, the health plan industry's overall financial condition had weakened. Many plans had suffered several years of significant losses as fierce price competition in the commercial market kept premium growth below newly accelerating cost trends. To address ailing profit margins, plans switched their focus from growing market share to restoring profitability across their entire range of products. In the commercial market, plans raised premiumsaided by employers' willingness to absorb most of these increases for their employeesreduced benefits, closed unprofitable product lines and exited certain markets.
Since plans had no control over M+C payments and believed they were limited in what they could charge beneficiaries and remain competitive, they were more constrained in their ability to address declining M+C profits. Many plans in the moderate and limited penetration markets froze enrollment, retreated from selected counties or left the program altogether. In Seattle, for example, four of six plans left M+C as of Jan. 1, 2001. Some of the moderate and limited penetration markets did receive higher payments under provisions of the Benefits Improvement and Protection Act of 2000 (BIPA), but those increases did not prevent the remaining plans in Lansing and Little Rock from withdrawing from M+C in 2002. Meanwhile, in the three markets with minimal M+C penetration, the higher payments provided by Congress under BIPA have not yet attracted new plans.
Plans that continued to offer M+C products scaled back extra benefits, particularly outpatient prescription drug coverage. They also raised premiums, although some plans chose to trim benefits to shed some less-healthy enrollees rather than raise premiums and risk losing healthier members.
In 2002, plans began to alter the last major feature that had distinguished M+C from traditional Medicare: the absence of significant cost sharing. Plans now are imposing cost sharing on basic Medicare benefits at levels that approach those of traditional Medicare. In HSC's 12 sites, only plans in Miamiwhere M+C payment rates remain highhave continued to offer more generous benefits.Table 1
M+C Penetration in 12 HSC Sites
Waxing and Waning: Providers? Interest in M+C
roviders' willingness to participate in M+C plans also made an about-face in the late 1990s. In 1996-97, providers were eager to join Medicare managed care networks to ensure they did not lose patients or revenue as beneficiaries moved into managed care. Plan and provider interest in risk-contracting arrangements increased, and these arrangements were more likely to cover Medicare beneficiaries than those who were privately insured. By 2000-01, however, some plans had a hard time forming and sustaining M+C provider networks. In most markets, providers said they no longer felt pressure to accept contracts for M+C enrollees as fewer beneficiaries enrolled in the program. Some providers, primarily dominant hospital systems and specialist groups, found their negotiating clout strengthened, thus fueling provider pushback against plans.
To keep providers, many plans were forced to pay higher rates. Stung by several years of flat payments and rising costs, many providers who had managed care risk contracts with plans were particularly eager to renegotiate terms or end contracts for both M+C and commercial enrollees. With providers demanding higher payments and better contract terms, some plansincluding those in Cleveland, Indianapolis and Seattlestruggled to keep M+C networks intact while maintaining profitability.
A Bumpy Road Aheadhe slowdown in M+C payment growth could not have come at a worse time. The collision of public policy and private market forces resulted in substantial instability in the M+C program. Many plans concluded that participating in M+C did not fit into their business strategy, leading to four straight years of plan exits and significant beneficiary disruption. For those beneficiaries who still have M+C options available in their community, the distinction with traditional Medicare has blurred as benefits deteriorate and premiums and cost sharing rise.
The near-term outlook for Medicare's ability to retain and attract plans appears bleak with the 2003 M+C payment increase set at 2 percent for virtually all US counties and no sign of a slowdown in cost growth.4
Calls for stabilization of M+C come from many sources and include proposals for short-term measures to increase plan payments through so-called givebacks. If policy makers wish to preserve Medicare's relationship with private health plans over the longer term, however, they need to consider reforms that would make M+C payment rates more responsive to changing marketplace conditions to ensure that beneficiaries have stable and affordable choices.
Long-term M+C reform proposals include:
Under any of the options, policy makers would need to protect Medicare beneficiaries from undesirable fluctuations in costs, benefits and provider networks as private plans respond to changes in payments in the context of broader market forces. Even with more stable plan participation, some plans still would decide to exit the program, and safeguards would be needed to reduce beneficiary disruptions.
SC interviews community leaders about how the health system is changing in the following 12 sites: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. Site visits were conducted in 1996-97, 1998-99 and 2000-01.
Web-Exclusive Data Tables for Issue Brief No. 52
ISSUE BRIEFS are published by the Center for Studying Health System Change.
President: Paul B. Ginsburg
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