Medicare Risk Contracting: Market Dynamics Across Twelve Communities | HSC | HSChange

Robert E. Hurley, Joy M. Grossman, and Bradley C. Strunk

Published in Health Services Research, Volume 38, Number 1, Part II, February 2003

Overview and Objectives

This study examined the trajectory of the Medicare HMO program from 1996 through 2001 across 12 nationally representative urban markets. It investigated how government policy directives, health plan strategic goals, and operational experience interacted to shape the availability of managed care options for Medicare beneficiaries. The research employed qualitative data gathered through extensive interviews in these 12 communities -- each with populations exceeding 200,000 -- along with quantitative information from the Centers for Medicare and Medicaid Services (CMS) and other sources.

Policymakers had promoted HMO enrollment among Medicare beneficiaries during the 1990s, but the effort proved to be a fraught experience for all parties. Over the course of the decade, health plans, policymakers, and beneficiaries underwent a dramatic cycle: from initial enthusiasm and rapid growth, through an abrupt reassessment following the Balanced Budget Act of 1997, to widespread retrenchment and disenchantment by the early 2000s. This research used detailed interview protocols from the multiyear Community Tracking Study (CTS) of the Center for Studying Health System Change, conducting three rounds of interviews in 1996, 1998, and 2000-2001 with health plan executives and providers across the study markets.

Background: Medicare Risk Contracting and Its Growth

Medicare risk contracting with HMOs began in the early 1980s. Because payment rates were tied to historical Medicare fee-for-service spending at the county level, a distinctive geographic concentration of Medicare HMO enrollment in high-payment counties emerged rapidly. Plan participation in Medicare risk contracting surged to 161 plans by 1987 before falling sharply to 93 by 1991. During the mid-1990s, payment rates to plans grew faster than commercial rates, prompting health plans to view Medicare as an attractive opportunity. By decade's end, the number of participating plans had tripled from its early-1990s trough.

Some policymakers saw competition among Medicare HMOs as a way to enhance benefits or reduce beneficiary out-of-pocket costs. Skeptics, however, questioned whether HMOs could deliver cost savings comparable to those achieved in commercial markets. Critics of Medicare's administered pricing system contended that genuine competition -- through competitive bidding, for instance -- was needed to realize meaningful savings. Despite this ambivalence, some projections suggested that HMO enrollment could encompass 25 to 30 percent of Medicare beneficiaries by 2000.

The Balanced Budget Act and Medicare+Choice

Broader concerns about federal deficits and Medicare solvency, combined with expectations about managed care's potential, converged in the Balanced Budget Act of 1997 (BBA) -- a landmark piece of Medicare reform. The law created Medicare+Choice (M+C), a program designed to offer beneficiaries the same variety of health plan options available in employer-sponsored coverage. Under this framework, CMS was authorized to contract with HMOs, preferred provider organizations (PPOs), provider-sponsored organizations (PSOs), and other entities. The underlying policy rationale was that competition among private contractors would expand beneficiary choices while allowing the federal government to obtain greater value from its spending.

The actual consequences of the BBA diverged sharply from proponents' expectations. Following its enactment, the number of participating plans, markets served, and beneficiaries enrolled in Medicare+Choice declined steadily through four successive waves of plan withdrawals. Beneficiaries and policymakers treated plan departures as acts of abandonment, while many providers -- who had feared that HMO growth would erode their patient base -- viewed the pullback as welcome relief. By the end of the study period, roughly 15 percent of Medicare beneficiaries nationally remained enrolled in Medicare+Choice, with the figure exceeding 40 percent in several markets. Congress attempted to counteract adverse BBA effects through the Balanced Budget Refinement Act of 1999 and the Beneficiary Improvement and Protection Act of 2000.

Study Methodology

The study drew on the Community Tracking Study, a longitudinal project monitoring health system changes across 60 randomly selected, nationally representative markets. In-depth case studies were conducted in 12 of these communities, each with more than 200,000 residents. Research teams visited each community in 1996, 1998, and 2000-2001, conducting extensive telephone and in-person interviews with purchasers, providers, health plans, and policymakers. A total of 210 health plan informants were interviewed across the sites. The 12 communities spanned the full spectrum of Medicare HMO penetration, from high-penetration markets (Orange County, Phoenix, Miami) through moderate markets (Seattle, Boston, Cleveland) and limited markets (Lansing, Little Rock, Northern New Jersey) to minimal-penetration markets (Indianapolis, Greenville, Syracuse).

Key Findings: From Enthusiasm to Retrenchment

During the first round of site visits in 1996, health plan interest in Medicare was growing across all 12 markets. High-penetration markets had rates above 35 percent, and even markets with little or no Medicare HMO enrollment saw plans laying groundwork for new products. Competition was intense, with six or more plans present in seven of the twelve markets. Payment rates were generally correlated with penetration levels. Plans pursued membership growth aggressively, viewing Medicare as a largely untapped market, often at the expense of near-term profitability.

The financial dynamics shifted dramatically between the mid-1990s and early 2000s. In the mid-1990s, Medicare payment growth exceeded both commercial premium increases and health care cost growth. By the late 1990s, this relationship reversed: medical costs and commercial premiums began rising sharply while Medicare payment growth was constrained by BBA provisions. Plans that had entered Medicare expecting favorable financial conditions found themselves caught between escalating costs and capped revenues. Four waves of plan withdrawals followed between 1998 and 2001, each triggered by updated payment rate announcements and enrollment deadlines.

Market-level variation was considerable. In high-penetration markets, overall Medicare HMO enrollment held relatively steady because remaining plans absorbed members from exiting ones. In moderate and limited-penetration markets, experiences were mixed -- some saw declines while others experienced modest growth from very low starting points. In most markets, high overall HMO penetration correlated with high Medicare HMO enrollment, but exceptions such as Lansing (high commercial HMO penetration, low Medicare HMO enrollment) demonstrated that commercial managed care success does not automatically translate to the Medicare segment.

Conclusions

The Medicare HMO program underwent a substantial reversal of fortune during the study period, raising serious questions about whether its downward trajectory could be reversed. Analysis at the market level revealed that virtually all momentum built during the mid-1990s had dissipated, with enrollment shrinking back toward levels and locations characteristic of the program's early years. A central lesson of the research is that public policy objectives that depend on the participation of private organizations -- each with their own strategic and financial imperatives -- introduce layers of complexity and unpredictability that can frustrate policy intent. National policy initiatives in health care are extraordinarily dependent on local market conditions, as the wide variation in outcomes across the 12 study communities makes clear.

For additional HSC research on Medicare managed care, visit the HSC archives at hschange.com