In the nation's epic battle against the rising costs of Medicare and other health programs, it was conventional wisdom that only the marketplace could save us. Entice seniors and other Americans into health-maintenance organizations and other private-sector plans, and the invisible hand of competition would tame health-care inflation. It seemed to work for much of the 1990s. As managed care spread, health-care spending moderated, and the elderly flocked to private plans that offered extra benefits, such as prescription-drug coverage, and still cost taxpayers less than traditional Medicare.
But now, the marketplace doesn't seem so smart. Health-care costs are nearing double-digit annual growth again. And in the latest evidence that long-term savings from managed care are illusory, health-care insurers with so-called Medicare+Choice plans are dropping seniors in droves, claiming they can't make money on the business. In late June and early July, Aetna U.S. Healthcare, Humana, UnitedHealthcare, PacifiCare Health Systems, and others announced that they will cut loose an estimated 750,000 seniors at the end of the year. Others, including Kaiser Permanente, are raising premiums. "Medicare+Choice is an astounding failure at the moment," says health policy expert Jonathan B. Oberlander at the University of North Carolina. "There just isn't as much savings as people thought."
"NO SURPRISE." Indeed, insurance industry execs say they desperately need more money. Historically, Medicare HMOs were paid per person at a rate of about 95% of the average spent on fee-for-service. That changed with the Balanced Budget Act of 1997. Worried that plans were being overcompensated, Congress limited annual reimbursement increases to 2% in many counties. Now, the cost of delivering care is rising at 6% to 8%. Given the disparity between costs and payments in many localities, "these departures should come as no surprise," observes Charles N. Kahn III, president of the Health Insurance Assn. of America.
In Chester County, Pa., for instance, Aetna figures each Medicare enrollee costs the insurer $442 per month. That's less than the government reimbursement of $476, so the company turns a profit. But in nearby York County, the company pays $482 per month per patient--and gets only $361 from Uncle Sam. "The only thing we can call it is screwy," says Aetna spokeswoman Joyce A. Oberdorf. So now the industry is lobbying for--and will probably get--5% more, Capitol Hill staffers say.
While that would allow insurers to continue coverage, it hardly repairs managed care. If companies get higher reimbursements, seniors in private plans could cost taxpayers more than those in traditional Medicare, especially after Congress has been trimming the old-style program.
So what went wrong with the managed-care dream? "It's a case of exaggerated expectations both by the industry and policymakers," says UNC's Oberlander. In the early-to-mid-'90s, everything looked rosy for HMOs. They were enrolling healthy seniors in their Medicare plans, negotiating big discounts with hospitals and providers, and benefiting from rising Medicare reimbursements, explains Stuart H. Altman, professor of health policy at Brandeis University. Now, patients are older and costlier, providers are battling discounts, and government payments haven't kept pace with expenses--especially with soaring prescription drug costs. And because patients and the press have been protesting when companies withhold services, Altman says, "we are preventing managed care from actually managing care."
Other experts point out that a natural business cycle is at work. To make their business profitable, "health plans aggressively tried to capture market share," usually by offering attractive rate, explains Bruce M. Fried, a former Medicare official at the Health Care Financing Administration. Now, those that didn't attract a critical mass of patients in a local market are pruning operations. This is true for managed care in general and not just for companies with Medicare plans. Indeed, premiums are soaring in the Federal Employees Health Benefit Program, once considered a model of how private-sector competition can keep prices in check.
The inevitable outlook? "Major increases in health-care inflation and Medicare inflation over time," predicts Altman. The Medicare exodus is just one sign that the U.S. is heading back into another era of runaway prices. And this time, competition may find its invisible hands tied.