Medicare in Red

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According to the Department of Health and Human Services (HHS), red is thefashion color for the summer. Red tape, that is. At a recent policy meeting,the department, known as "MegaRed" by health care professionals, announcedthat it is slapping another layer of red tape onto managed care providerswho participate in Medicare. Those providers can now be fined up to $100,000if they are caught "cherry-picking" their clientele or selectively marketingto recruit a specific consumer group. That is in addition to the alreadycolorful list of regulations choking Medicare managed care plans.

Medicare's latest dilemma is the continuing exodus of managed care providersfrom the program. Last year alone, approximately 100 providers reduced orterminated their services. As a result, 407,000 beneficiaries, a record-highnumber, were forced to find new plans. Those displaced individuals accountfor about 17 percent of Medicare beneficiaries participating in managedcare. 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 andHarvard Pilgrim Health Care, announced that they will be shutting down theirinsurance programs in Hampton Roads, Virginia, and western Massachusetts,respectively. That will force 17,500 senior citizens to find other healthcare plans by year's end.

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

In an unprecedented move, Congress forced Medicare to open its doors tocompetition by passing Medicare +Choice in the 1997 Balanced Budget Act. Thelocus of the program is to provide more consumer choice by expanding managedcare options to include health maintenance organizations, provider-sponsoredorganizations, preferred provider organizations and restricted medicalsavings accounts. But there is a trade-off between newly incorporatedmanaged care plans and the traditional fee-for-service plans offered byMedicare.

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

Red tape is strangling Medicare's managed care providers. Medicare +Choiceimposed new regulations that increase the administrative burden of thoseplans. Last year, 834 pages of new regulations were published by the HealthCare Financing Administration (HCFA). Providers had two months to review thenew regulations and submit 1999 enrollment applications. Many managed careproviders that had submitted their application prior to the May deadlinerequested to amend their proposals. However, the HCFA rejected theirrequests. The resulting departure of so many managed care providers fromMedicare has left consumers with less choice instead of more.

In addition to adding costly new regulations, the government is demandingthat Medicare managed care providers increase their services. Logically, anincrease in services raises the cost of providing those services and ofcorresponding premiums. However, the government enforces price controls bypaying a flat rate to the provider per enrolled beneficiary. Those subsidiesdo not cover the full cost of the newly required expanded health careservices. Therefore, costs exceed revenue. Managed care providers face a netloss. The only choice the government gives providers is to withdraw fromMedicare.

The solutions policymakers are considering for curtailing withdrawals fromMedicare offer no hope for improvement. One option is to increase paymentsto managed care providers. This option would explode the already exorbitantMedicare expenditures. Another proposal is for providers to reduce healthservices or increase their premium prices. That approach would onlyexacerbate Medicare's problems by increasing premium prices therebyincurring higher costs for beneficiaries. Again, where's the high qualityand low price promised by Medicare +Choice? Gone.

Consumer choice, cost constraints and improved quality and price throughcompetition are good objectives. But they are not met under Medicare +Choiceprovisions. The most viable immediate solution is to distribute Medicarefunds directly to beneficiaries in the form of a voucher. The voucher couldthen be used to participate in any of the Medicare plans. Managed careproviders could then determine the quality and price of services based onconsumer demands rather than government demands. Furthermore, privatemanaged care providers would enjoy greater autonomy from the stringentMedicare +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 problemat hand: too much government.

Alejandra Arguello Camerlengo

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