Medicare Managed Care Plans: Many Factors Contribute to Recent
Withdrawals; Plan Interest Continues (Letter Report, 04/27/99,
GAO/HEHS-99-91).

Pursuant to a congressional request, GAO provided information on managed
care plans' decisions to leave the Medicare program or to reduce the
geographic areas that they serve, focusing on: (1) plans that receive
capitated payments; (2) the patterns of plan and beneficiary
participation in managed care; (3) factors associated with plans'
decisions to enter or leave the Medicare Choice program; and (4) changes
in plans' benefit packages and premiums.

GAO noted that: (1) although an unusually large number of managed care
plans left the Medicare program, a number of new plans have demonstrated
their interest in serving beneficiaries by applying to enter the program
or expanding the areas in which they offer services; (2) last fall,
shortly before Medicare Choice was implemented, 45 plans announced they
would not renew their Medicare contracts and 54 others announced they
would reduce the geographic areas in which they provided services; (3)
about 407,000 enrollees had to choose a new managed care plan or switch
to fee-for-service; (4) at the same time, however, several new plans
applied to enter the program; (5) thus far, the Health Care Financing
Administration has approved 10 new plans for 1999 and is reviewing 30
additional plan applications; (6) some of the pending plan applications
are for counties that previously had few or no managed care plans; (7)
plan withdrawals cannot be traced to a single cause; a variety of
factors appear to be associated with plans' participation decisions; (8)
payment level is one factor that influences where plans offer services,
but withdrawals were not limited to counties with low payments; (9) when
a plan reduced its service area, however, GAO found that counties with
low payment rates relative to payments in the rest of a plan's service
area were more likely to experience a withdrawal than counties with
higher payment rates; (10) a review of other factors suggests that a
portion of the withdrawals may have been the result of plans deciding
that they were unable to compete effectively in certain areas; (11) some
plans have indicated that they withdrew from areas where they were
unsuccessful in establishing sufficient provider networks; (12) a broad
comparison of plan benefit packages from 1997 and 1999 indicates modest
reductions in the inclusion of certain benefits; (13) in 1999, a
slightly greater percentage of beneficiaries can join a plan that offers
prescription drug coverage, while a slightly smaller percentage of
beneficiaries have access to a plan offering dental care, hearing exams,
and foot care; (14) beneficiaries living in the lowest-payment-rate
areas experienced greater decreases in access than the average
beneficiary; and (15) those living in the lowest payment areas
experienced a decrease in access to plans offering prescription drug
benefits, while beneficiaries in higher payment areas saw an increase in
access to plans offering drug benefits.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-99-91
     TITLE:  Medicare Managed Care Plans: Many Factors Contribute to
	     Recent Withdrawals; Plan Interest Continues
      DATE:  04/27/99
   SUBJECT:  Health care programs
	     Managed health care
	     Claims settlement
	     Health insurance
	     Health maintenance organizations
	     Surveys
IDENTIFIER:  Medicare Choice Program
	     Medicare Program
	     Medicare Fee-for-Service Program

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MEDICARE MANAGED CARE PLANS: Many Factors Contribute to Recent
Withdrawals; Plan Interest Continues GAO/HEHS-99-91 United States
General Accounting Office

GAO Report to Congressional Requesters

April 1999 MEDICARE MANAGED CARE PLANS Many Factors Contribute to
Recent Withdrawals; Plan Interest Continues

GAO/HEHS-99-91

  GAO/HEHS-99-91

GAO United States General Accounting Office

Washington, D. C. 20548 Health, Education, and Human Services
Division

B-282017 April 27, 1999 Congressional Requesters In 1998, nearly 7
million Medicare beneficiaries (approximately 17 percent of all
Medicare beneficiaries) were enrolled in health plans offered by
managed care organizations (MCO). 1 Most were members of health
maintenance organizations (HMO) that received a fixed (or
capitated) monthly fee per enrollee regardless of the number and
mix of services they provided. 2 These plans typically offered
services not covered under the traditional fee- for- service (FFS)
Medicare program such as routine physical examinations and
outpatient prescription drugs and members generally paid less out
of pocket than they would in FFS. Not all beneficiaries, however,
had access to a managed care plan because HMOs were not available
in all areas.

The Balanced Budget Act of 1997 (BBA) created the Medicare+ Choice
program to expand beneficiaries' managed care options, both by
encouraging the wider availability of HMOs and by permitting other
types of health plans to participate in Medicare. The BBA also
contained provisions to slow the growth of Medicare spending. The
Congressional Budget Office estimated that these provisions will
result in net Medicare savings of $116 billion between 1998 and
2002. Changes to the method for calculating payments to managed
care plans, along with slowed growth in Medicare FFS spending
(upon which managed care payments are partially based), account
for approximately $22.5 billion of these projected savings. These
changes followed a decade in which studies by GAO and others found
that Medicare's previous payment methodology tended to
overcompensate managed care plans. 3 In addition, the BBA included
provisions to make plans more accountable for the quality of care
they

1 A plan refers to a package of specific health benefits, out- of-
pocket costs, and terms of coverage. An MCO refers to the entity
that offers one or more such plans. 2 Prior to 1999, these plans
were known as risk HMOs or risk plans. Before the BBA was passed,
only a few types of plans offered services to Medicare
beneficiaries. In recent years, the vast majority of beneficiaries
who opted for managed care enrolled in risk plans. Other types of
Medicare plans included HMOs with cost contracts and health care
prepayment plans. These plans differed substantially from risk
plans both in how they operate and how Medicare reimburses them.
Risk HMOs, along with new types of plans authorized by the BBA,
are now known as Medicare+ Choice plans. When we refer to a plan
or a managed care plan in this report, we are referring only to
plans that receive capitated payments, including both risk plans
and Medicare+ Choice plans; other types of plans with different
payment mechanisms are excluded from our analysis.

3 Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions
in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).

GAO/HEHS-99-91 Medicare Managed Care Page 1

B-282017

provide. For example, the BBA required Medicare managed care plans
to implement new and more comprehensive quality assurance
programs.

Last fall, shortly before the start of the Medicare+ Choice
program, nearly 100 Medicare managed care plans announced that
they would not renew their Medicare contracts or that they would
reduce the geographic areas they served. Beneficiaries affected by
these withdrawals either had to switch plans or return to FFS; a
small percentage of these beneficiaries were left with no
alternative but FFS. 4 Because of your concern over these
developments, you asked us to provide you with information about
recent plan decisions (requesters are listed at the end of this
letter). This report focuses on plans that receive capitated
payments and provides information on the patterns of plan and
beneficiary participation in managed care, factors associated with
plans' decisions to enter or leave the Medicare+ Choice program,
and changes in plans' benefit packages and premiums. Appendix I
presents details of our methodology.

Results in Brief Although an unusually large number of managed
care plans left the Medicare program recently, a number of new
plans have demonstrated

their interest in serving beneficiaries by applying to enter the
program or expanding the areas in which they offer services. Last
fall, shortly before Medicare+ Choice was implemented, 45 plans
announced they would not renew their Medicare contracts and 54
others announced they would reduce the geographic areas in which
they provided services. About 407,000 enrollees (7 percent of the
managed care population) had to choose a new managed care plan or
switch to FFS. A small number of the affected enrollees had to
switch to FFS because no plans remained to provide services in
their areas. At the same time, however, several new plans applied
to enter the program. Thus far, the Health Care Financing
Administration (HCFA), which administers Medicare, has approved 10
new plans for 1999 and is reviewing 30 additional plan
applications. Some of the pending plan applications are for
counties that previously had few or no managed care plans. If HCFA
approves all of the pending plans and service area expansions,
slightly more beneficiaries will have access to a managed care
plan in 1999 than in 1998.

4 Some beneficiaries affected by the withdrawals live in counties
served by cost HMOs and could join this kind of plan rather than
return to FFS. Medicare payments to these plans are based on the
costs they incur and enrolled beneficiaries can receive covered
Medicare benefits from providers regardless of their affiliation
with the plan. For these reasons, cost HMOs are more similar to
the FFS program than to risk HMOs, which receive a fixed monthly
payment and whose enrolled Medicare beneficiaries must generally
receive services through plan- affiliated providers.

GAO/HEHS-99-91 Medicare Managed Care Page 2

B-282017

Plan withdrawals cannot be traced to a single cause; a variety of
factors appear to be associated with plans' participation
decisions. Payment level is one factor that influences where plans
offer services, but withdrawals were not limited to counties with
low payments. In fact, 91 percent of high- payment- rate counties
experienced a plan withdrawal compared with 34 percent of low-
payment counties. When a plan reduced its service area, however,
we found that counties with low payment rates relative to payments
in the rest of a plan's service area were more likely to
experience a withdrawal than counties with higher payment rates. A
review of other factors suggests that a portion of the withdrawals
may have been the result of plans deciding that they were unable
to compete effectively in certain areas. For example, plans were
more likely to withdraw from counties in which they had begun
operating since 1992, where they had attracted fewer enrollees, or
where they faced larger competitors. Some plans have indicated
that they withdrew from areas where they were unsuccessful in
establishing sufficient provider networks. Plan representatives
also cited the administrative burden associated with new Medicare+
Choice program requirements as a significant factor in plans'
decision- making. However, few national MCOs terminated all of
their Medicare plans; instead, most continue to offer plans in
other areas.

A broad comparison of plan benefit packages from 1997 and 1999
indicates modest reductions in the inclusion of certain benefits.
Our analysis focused only on whether specific benefits were
offered by plans in each of the 2 years, because information was
not available to determine whether plans changed coverage levels
for these benefits. In 1999, a slightly greater percentage of
beneficiaries can join a plan that offers prescription drug
coverage, while a slightly smaller percentage of beneficiaries
have access to a plan offering dental care, hearing exams, and
foot care. Beneficiaries living in the lowest- payment- rate areas
experienced greater decreases in access than the average
beneficiary. In addition, those living in the lowest payment areas
experienced a decrease in access to plans offering prescription
drug benefits, while beneficiaries in higher payment areas saw an
increase in access to plans offering drug benefits. Decreases in
the lowest- payment- rate areas occurred despite the fact that the
average payment for plans in these counties rose by 23 percent
between 1997 and 1999 compared with a 4- percent increase for all
other counties.

Background Medicare is the nation's health insurance program for
those aged 65 and older and certain disabled individuals. All
beneficiaries may receive health

care through Medicare's traditional FFS arrangement.
Alternatively, a

GAO/HEHS-99-91 Medicare Managed Care Page 3

B-282017

beneficiary may enroll in a Medicare managed care plan if one is
available in the county in which he or she lives. The vast
majority of the nation's 39 million Medicare beneficiaries remain
in the traditional FFS program, but enrollment in Medicare managed
care plans has grown rapidly in recent years. Currently, about 17
percent of all Medicare beneficiaries are enrolled in a managed
care plan.

Medicare Managed Care Before BBA

As of December 1, 1998, about 90 percent of Medicare's managed
care enrollees were in risk plans. Such plans assumed the
financial risk of providing care for a fixed monthly per-
beneficiary fee paid by Medicare. Payment rates were determined
for each county on the basis of the average adjusted per capita
FFS spending in that county. 5 Because these plans were assumed to
be able to provide services more efficiently than the FFS sector,
Medicare law set payment rates at 95 percent of the FFS amount in
each county. These county rates were adjusted up or down on the
basis of enrollees' demographic characteristics, such as age and
gender. The adjustments, known as risk adjustments, were intended
to account for differences in beneficiaries' expected health care
costs. That is, payment rates for enrollees who were expected to
require more medical care were supposed to be higher than the
rates for healthier enrollees.

This payment methodology has been criticized for a number of
weaknesses. Basing payments on per capita FFS spending resulted in
significant variation in capitation rates across counties that did
not necessarily reflect differences in costs faced by managed care
plans. 6 Rural areas, which generally had much lower payment rates
than urban areas, often had few or no managed care plans. In
addition, years of research indicated that Medicare's payment
methodology and demographic risk adjusters resulted in excess
payments to plans because they generally attracted healthier
beneficiaries with below- average health care costs. 7
Consequently, many managed care enrollees would have cost Medicare
less if they had stayed in the FFS sector. In 1997 the Physician

5 HCFA estimated how much would be spent in each county to serve
the average FFS beneficiary. This amount could be higher or lower
than actual per capita spending in each county if the demographic
composition of the county's population differed from the national
average.

6 Medicare Managed Care: HMO Rates, Other Factors Create Uneven
Availability of Benefits (GAO/T-HEHS-97-133, May 19, 1997). 7
Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Overall While Making Them Fairer to Individual
Plans (GAO/T-HEHS-99-72, Feb. 25, 1999).

GAO/HEHS-99-91 Medicare Managed Care Page 4

B-282017

Payment Review Commission 8 estimated that Medicare paid as much
as $2 billion annually in excess payments to managed care plans.

Historical Trends in Plan Participation and Enrollment

*** End of document. ***