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LTC Bullet: HMOs Struggle with Medicare

Wednesday September 9, 1998


The New York Times reported today (9/9/98) that HMOs squeezed by falling government
payments and expensive benefit packages are either ending or scaling back their Medicare

Aetna, Pacificare Health Systems, Oxford Health Plans, Foundation Health Systems, Kaiser Permanente, and Blue Cross and Blue Shield associations have all cancelled Medicare plans in parts of 13 states over the last year, according to the Times.

HMOs are otherwise modifying their Medicare plans to protect already thin operating margins.
HMOs are cutting expensive perks including prescription drug programs that attracted
Medicare enrollees in the first place. Capping payments to doctors is another cost control
measure now being employed.

HMO Medicare plans face an uncertain future. The Balanced Budget Act of 1997 (BBA) re-
duced the annual increase in Medicare payments to HMOs. In some counties, the annual
increase has been cut to 2%, less than half the national medical cost inflation rate. The BBA
also created Medicare managed care alternatives to HMOs which will soon compete for the
same Medicare clientele.

No doubt HMO executives are experiencing deja vu. HMOs face the same dilemma with
Medicare plans as they have already experienced with their Medicaid programs: How to
provide quality care with inadequate resources. (See LTC Bullet: "HMOs Get Dose of
Medicaid Reality" 7/6/98 at

The government for its part continues to encourage HMOs to enroll Medicare patients
on the theory that better cost control is the secret to success in the Medicare market.
Without adequate resources to provide quality care, however, Medicare HMOs can survive
only for so long.

Readers should consider these developments in the context of government plans to extend
managed care and capitation to the provision and financing of long-term care. What did the
sage say? ... Those who do not learn from history are doomed to repeat it.

Source: David J. Morrow, "After Recruiting Elderly, Many HMO's Now Retreat," New York
Times, September 9, 1998.