Reversal of Fortune: Medicare+Choice Collides with Market Forces

Private health plans' participation in Medicare was designed to save taxpayers money and offer beneficiaries more choices and benefits. As enrollment grew, however, concerns surfaced about overpayments to certain plans and wide geographic variation in reimbursement. The Balanced Budget Act of 1997 (BBA) introduced significant payment changes and regulatory requirements for plans in the renamed Medicare+Choice (M+C) program. Beginning in January 1999, dozens of plans scaled back or withdrew from the program, disrupting coverage for more than two million seniors. While the BBA was frequently blamed for this reversal, research by the Center for Studying Health System Change (HSC) indicated that private market forces played an equally important role in M+C's growing instability.

The Rise and Fall of Medicare+Choice

Medicare managed care enrollment peaked at approximately 6.3 million beneficiaries in 1999, representing about 16 percent of all Medicare enrollees. The program's appeal was straightforward: plans offered lower out-of-pocket costs and additional benefits like prescription drug coverage and dental care that traditional fee-for-service Medicare did not include. For many seniors, particularly in markets with robust managed care penetration, M+C plans provided a more comprehensive and affordable coverage option.

The BBA, however, reduced the rate of payment growth for M+C plans in an effort to slow Medicare spending and reduce geographic payment disparities. Plans that had been receiving generous payments -- particularly those in high-cost urban areas -- saw their revenue growth constrained. At the same time, the BBA imposed new regulatory requirements that increased administrative costs and reduced plans' operational flexibility.

Market Forces Behind the Withdrawal

HSC's research identified several private market dynamics that compounded the BBA's effects. Rising medical costs, driven by increased utilization, higher provider payment rates, and the end of favorable managed care discounts, squeezed plans' margins. As the broader managed care industry moved away from tightly managed HMO products toward more open-network PPO arrangements, the tools plans had used to control Medicare costs became less effective.

Provider consolidation strengthened hospitals' and physicians' bargaining position, pushing up the rates plans paid for services. Plans that had initially entered Medicare markets with competitive provider contracts found those contracts becoming more expensive as providers gained leverage. The managed care backlash also reduced plans' ability to impose utilization controls, further driving up costs.

Insurance industry underwriting cycles also played a role. Plans had entered M+C markets aggressively during a period of low medical costs and aggressive growth strategies. As costs rose and profit margins shrank, plans reassessed the viability of their Medicare business. Some concluded that even with higher government payments, the Medicare population's medical needs and utilization patterns made the program unprofitable in certain markets.

Impact on Beneficiaries and the Road Ahead

Plan withdrawals and benefit reductions created significant disruption for Medicare beneficiaries, many of whom had come to rely on M+C plans for prescription drug coverage and lower cost sharing. Seniors forced back into traditional Medicare often faced higher out-of-pocket costs and the loss of benefits they had come to expect. The disruption was particularly acute in markets where a dominant plan withdrew, leaving beneficiaries with few or no managed care alternatives.

Congress responded with legislation increasing M+C payments, but the program's fundamental structural challenges persisted. The tension between controlling Medicare costs and maintaining an attractive managed care option for beneficiaries remained unresolved. The experience highlighted the difficulty of relying on private plans to serve a population with high medical needs while simultaneously achieving savings for the Medicare program.

Sources and Further Reading

Based on HSC Community Tracking Study site visits to 12 nationally representative metropolitan communities and analysis of Medicare+Choice enrollment and plan participation data.