Commentary

Medicare in Red

By Alejandra Arguello Camerlengo
July 14, 1999
According to the Department of Health and Human Services (HHS), red is the fashion color for the summer. Red tape, that is. At a recent policy meeting, the department, known as “MegaRed” by health care professionals, announced that it is slapping another layer of red tape onto managed care providers who participate in Medicare. Those providers can now be fined up to $100,000 if they are caught “cherry-picking” their clientele or selectively marketing to recruit a specific consumer group. That is in addition to the already colorful list of regulations choking Medicare managed care plans.

Medicare’s latest dilemma is the continuing exodus of managed care providers from the program. Last year alone, approximately 100 providers reduced or terminated their services. As a result, 407,000 beneficiaries, a record-high number, were forced to find new plans. Those displaced individuals account for about 17 percent of Medicare beneficiaries participating in managed care. Such high numbers are not likely to decrease in 1999. If anything, they are likely to increase.

Just last month, two more managed care providers, Sentara Healthcare and Harvard Pilgrim Health Care, announced that they will be shutting down their insurance programs in Hampton Roads, Virginia, and western Massachusetts, respectively. That will force 17,500 senior citizens to find other health care plans by year’s end.

What could be the cause of this mass exodus? The government. Unrealistic goals and reams of new regulations have made the flight of managed care providers from Medicare inevitable.

In an unprecedented move, Congress forced Medicare to open its doors to competition by passing Medicare +Choice in the 1997 Balanced Budget Act. The locus of the program is to provide more consumer choice by expanding managed care options to include health maintenance organizations, provider-sponsored organizations, preferred provider organizations and restricted medical savings accounts. But there is a trade-off between newly incorporated managed care plans and the traditional fee-for-service plans offered by Medicare.

Under managed care, beneficiaries enjoy a wider range of health services (such as prescription drugs, dental coverage, eye and hearing exams) at lower monthly costs. The catch is that managed care enrollees are confined to a narrowly defined list of doctors, from which they select a primary physician who is the gatekeeper to other specialized doctors. In the traditional fee-for-service plans, enrollees may see any physician they prefer, but generally at a higher cost. As its name suggests, Medicare +Choice was aimed at providing Medicare consumers more choice in selecting their health care plan by allowing them to opt for either a traditional fee-for-service plan or a new managed care plan. However, with the flight of managed care providers from Medicare, that goal is failing to materialize.

Red tape is strangling Medicare’s managed care providers. Medicare +Choice imposed new regulations that increase the administrative burden of those plans. Last year, 834 pages of new regulations were published by the Health Care Financing Administration (HCFA). Providers had two months to review the new regulations and submit 1999 enrollment applications. Many managed care providers that had submitted their application prior to the May deadline requested to amend their proposals. However, the HCFA rejected their requests. The resulting departure of so many managed care providers from Medicare has left consumers with less choice instead of more.

In addition to adding costly new regulations, the government is demanding that Medicare managed care providers increase their services. Logically, an increase in services raises the cost of providing those services and of corresponding premiums. However, the government enforces price controls by paying a flat rate to the provider per enrolled beneficiary. Those subsidies do not cover the full cost of the newly required expanded health care services. Therefore, costs exceed revenue. Managed care providers face a net loss. The only choice the government gives providers is to withdraw from Medicare.

The solutions policymakers are considering for curtailing withdrawals from Medicare offer no hope for improvement. One option is to increase payments to managed care providers. This option would explode the already exorbitant Medicare expenditures. Another proposal is for providers to reduce health services or increase their premium prices. That approach would only exacerbate Medicare’s problems by increasing premium prices thereby incurring higher costs for beneficiaries. Again, where’s the high quality and low price promised by Medicare +Choice? Gone.

Consumer choice, cost constraints and improved quality and price through competition are good objectives. But they are not met under Medicare +Choice provisions. The most viable immediate solution is to distribute Medicare funds directly to beneficiaries in the form of a voucher. The voucher could then be used to participate in any of the Medicare plans. Managed care providers could then determine the quality and price of services based on consumer demands rather than government demands. Furthermore, private managed care providers would enjoy greater autonomy from the stringent Medicare +Choice provisions.

Before MegaRed accessorizes Medicare managed care with excessive red tape, it should realize that less is more. HHS is losing sight of the real problem at hand: too much government.

Alejandra Arguello is assistant director of development at the Cato Institute.