The exodus is afoot as plans abandon cash-poor Medicare risk products
Trend isn’t necessarily bad news for practices
What a difference a year makes. Last year’s box office superstar can be this year’s dud in a world of fickle moviegoers, just as one season’s must-have outfit can elicit yawns among the fashion-conscious six months later.
The same holds true for many HMOs, which are finding that the Medicare risk market isn’t the growth opportunity it was cracked up to be. In the past month alone, at least half a dozen payers have announced plans to pull out of the Medicare risk business in selected geographic markets.
Here are just a few of the most recent announcements:
• Prudential Healthcare, based in Roseland, NJ, announced plans to pull its Medicare risk product in New Jersey, California, Maryland, New York, and parts of Florida, affecting some 25,000 customers of its SeniorCare product.
• Woodland Hills, CA-based Foundation Health Systems announced it will not renew Medicare risk contracts in 18 counties in California, Colorado, New Mexico, and Washington, affecting approximately 7,000 enrollees. Combined with exits Foundation announced this summer in northern California, Connecticut, and New Jersey, about 22,700 enrollees will be affected by Foundation’s action.
• Oxford Health Plans of Norwalk, CT, recently announced plans to cut its Medicare risk customer base by 17% (about 26,500 individuals) by ceasing Medicare operations in 24 counties in Connecticut, New Jersey, New York, and Pennsylvania.
• In an interesting twist, Cincinnati-based Anthem may be reconsidering plans to exit the Medicare risk business in six of the 22 Ohio counties it serves, following a class-action lawsuit filed by Medicare beneficiaries and appeals from state legislators who say Anthem’s Medicare risk customers in six counties have no other Medicare managed care options.
How could all this be happening when as recently as last year, payers and HMO industry groups such as the Washington, DC-based American Association of Health Plans were lauding Medicare risk as the next big growth industry? For the same reason marriages and business partnerships bust up every year: money.
"I think the [Medicare risk] products are priced too competitively. I don’t think that in Orlando, FL, you can provide benefits for the revenue [HCFA provides]," says Richard Reiner, president of Orlando’s Florida Hospital Healthcare System.
Most of the plans are exiting because they simply could not make a profit on Medicare risk markets, echoes Todd Rodriguez, an attorney and consultant for The Health Care Group in Plymouth Meeting, PA. Intense market competition in some areas has pressured payers to institute competitive benefit packages—for example, $5 copays for prescription drugs or hearing aids. Unfortunately, the costs of providing these services outweighed the potential returns in many geographic markets based on the amount at which payers are reimbursed for services provided to Medicare risk customers.
Reimbursement varies by county
The rates at which HMOs are reimbursed for Medicare risk patients can vary widely from market to market because HCFA determines reimbursement using county-level capitation rates calculated yearly at 95% of each county’s fee-for-service adjusted average per capita costs (AAPCCs). The monthly capitation rate for HMOs is then risk-adjusted for the expected costs of its various types of enrollees.
The often wide variation in AAPCC rates reflects variation in such factors as wage levels and the cost of supplies, as well as different usage patterns for medical services.
Although a few carriers pulled out of the Medicare risk business as early as 1997 (specifically Healthpartners Health Plans and Intergroup, which withdrew from the Medicare risk business in Arizona), there has been a flurry of activity in the last six months. One contributing factor is language included in this summer’s Balanced Budget Act, which affects administrative costs and member communications for plans participating in HCFA’s Medicare + Choice demonstration project, Rodriguez says.
The act required all carriers participating in the Medicare + Choice program to notify patients of any benefit changes by Nov. 1. That follows a May 1 application deadline that plans had to meet to submit applications to HCFA for their proposed reimbursement rate (reimbursement for the Medicare + Choice program is not solely determined by the AAPCC rate).
And here’s the kicker: In June, shortly after the May 1 application deadline, new Medicare + Choice regulations were released that increased the administrative burden on participating health plans—and increased the likelihood of additional administrative costs.
Earlier this fall, the American Association of Health Plans asked HCFA to allow the plans to amend their reimbursement proposals submitted in May because many health plans had underestimated their administrative costs, Rodriguez says. HCFA denied the request.
Reiner, whose hospital participated in the demonstration project, says he learned that physicians must have incentives to reduce utilization and costs for the Medicare risk concept to work.
"Our product was operated by a PHO [physician-hospital organization] which was primarily hospital-owned. The physicians didn’t own the PHO, so they weren’t at risk from a capital standpoint," he explains. "Unless there is a good plan totally approved by the majority of the participants that will reduce historical fee-for-service costs by approximately 30%, it will be very challenging to make Medicare risk work."
Florida Hospital Healthcare System plans to continue participating in the three Medicare risk contracts in Orlando sponsored by payers, Reiner says.
So what is the impact on physicians? Very little, from a financial standpoint. Customers of a Medicare risk plan whose carrier pulls out of the market can either convert back to traditional Medicare or sign up with another Medicare risk carrier, explains Robert Westergan, MD, medical director for Jewett Orthopaedic Clinic in Orlando, which participates in the Medicare + Choice project with Florida Hospital.
"If [patients] go back to traditional Medicare reimbursement, it would be to our benefit, assuming we can effectively collect the copay," he says.
Physicians who have patients in this situation can expect to field questions from confused patients, Westergan adds. When United Healthcare recently decided to exit the Medicare risk market in Orlando, many of Jewett’s physicians faced questions from patients who were seeking advice on what to do next.
"We don’t have a good answer to that," he says. "We direct them back to their HMO for education about their options."
Will the shrinking profit margins on Medicare risk mean that payers who remain in the market will try to ratchet down reimbursement rates to physicians and hospitals even further? Rodriguez says that is unlikely.
"The decision to pull out of these markets was partly driven by the fact that they [payers] can’t cover costs to providers, and the margin is already pretty slim."
But it does help practices to be aware of likely shifts among payers they contract with. As in any other subject within the managed care arena, it pays to know the plans of the payers in your market. Read your contracts carefully and strategically position your practice to be a player in managed care.