Reforms of Medicare risk may end up a mixed bag

Budget plan seeks to balance rate inequities

"Location, location, location" seems to be the theme behind the Clinton administration’s efforts to close payment-rate gaps in the popular Medicare managed care program. If your practice happens to be located in Adams, NE, you’re likely to see a nice improvement in payment rates. But medical practices in New York City and other large urban centers may have far less to cheer about under the Clinton budget proposal.

Overall, many providers aren’t buying the government’s revamping of the fast-growing program. They’re concerned that managed care organizations (MCOs), not providers, will be the primary beneficiaries of rate adjustments. Others are reserving judgment until the looming budget battle plays out in Congress, according to interviews with representative groups.

This year’s budget proposes $34 billion of savings in Medicare risk programs through the year 2002. The Administration contends that Medicare is currently overspending on managed care by as much as $1 billion per year.

^{Budget proposes direct payments}

But the proposal also is intended to achieve the following goals:

• Expand choices for beneficiaries.

• Encourage greater enrollment in Medicare managed care.

• Adjust payment rates to Medicare health maintenance organizations (HMOs) to close historical geographic rate gaps.

• Revamp the way Medicare pays providers for indirect and graduate medical education costs, to make payments go directly to hospitals and medical schools.

Health care organizations are applauding the proposal on medical education payments but have mixed reactions on the other significant payment issue rate adjustments.

According to the budget plan, beginning in 1998 Medicare would pay HMOs the greater of either 1) a blended local/national rate, 2) a fixed minimum amount, or 3) a minimum percent increase.

In March, HCFA released an analysis outlining the potential impact on HMOs if the Clinton budget were to be approved today. The analysis looks at counties with different populations to illustrate how HMOs would fare under the budget plan.

The plan would essentially freeze spending in highly populated, high-cost urban areas such as New York, slow spending in mid-sized counties, and raise rates for the smallest counties, guaranteeing a per-member-per-month (PMPM) minimum of $350 per enrollee.

Each area would be affected differently, partly because the rate changes would be based on one of the three payment methodologies applied to a minimum percent increase, according to HCFA.

For example, in Orange County, CA, payments from 1998 through 2002 would be based on a blend of local and national HCFA rates. The blended-rate approach would reduce the amount of the area’s periodic payment updates through 2002. This would increase rates by 16.1%, but drop high-cost Orange County to 37% above the national average, compared with its current 45%.

In contrast, payments in Loraine, OH, also would be based on a blended rate, but with only modest increases due to sizable carve-outs in indirect and graduate medical education and disproportionate-share hospital payments. Here, the blend also reduces payment updates, increasing rates by 18.1% but placing Loraine at 18% above the national average, compared to the present 23%. (For a comparison of the breakdown by six selected counties, see related chart, p. 75.)

^{Critics question reform’s strength}

The disparities between regions exist partly because of tradition, but they are largely due to changes in the cost of providing services to Medicare recipients. The administration wants to curb costs, but they also wish to narrow gaps in the related Average Adjusted Per Capita Cost rate-setting formula to make payment rates fairer.

But some observers wonder if reforms will go far enough. "Once you make the changes, let’s make sure the money gets to physicians," says James Moser, a senior economist with the American Medical Association in Chicago.

That may not occur, according to independent policy analyst Heidi Wagner Hayduk, JD, of McLean, VA. Hayduk advises the health insurance industry on Medicare issues. In her view, the rate-juggling in high-cost counties will lead to cutbacks in generous HMO products such as drug benefits, already being squeezed by rising costs. HCFA predicts no cutbacks will occur because HMOs still will need to compete for enrollees. But rate changes may make it tougher for providers to negotiate decent contracts.

Under the Clinton proposal, "expenditures for managed care will grow by only 2.4% per year, compared with 6% in Medicare fee for service. That’s less than the inflation rate," Hayduk says.

That’s also bad news for providers in the Bronx section of New York, which was singled out by the HCFA study as a potentially big loser if rates get adjusted.

HMOs that serve the Bronx now get $728.24 PMPM, more than 80% above the national average by county. But under the proposed rate adjustment, total increases will likely slow to 0.5% through 2002 from the current 5.3% annual adjustment. Consequently, rates will drop to 51% above the national average, while costs presumably will continue escalating.

If predictions come true regarding cutbacks in benefits, growth in senior managed care is likely to diminish, says gastroenterologist Sovi Joseph, MD, a partner in a two-member Bronx specialty practice. "Already our patients are living at the mercy of free physician drug samples," he says.

Lower payment will only hurt a place such as the Bronx, which is overrun by rampant poverty, high Medicaid rolls, and intense health plan price competition, says Joseph. Many providers won’t stay in managed care. "If you take the positives away, where are the incentives?" he says.

Ironically, things are little better at the other end of the spectrum. For general surgeon John Barth, MD, of rural Adams County, NE, rate reform in Medicare managed care is as remote an issue as his tiny county is from the halls of Washington, DC. Although Medicare represents a good 50% of his patient revenue, managed care has made so few inroads in Adams County that the solo-practice physician rarely thinks about it, he says.

Yet according to HCFA, the county, which has less than 5,000 Medicare recipients and virtually no managed care enrollment, stands to see big gains in HMO PMPM rates. The current rate stands at $260.40, which is 34% below the national average. In fact, the proposed $350 minimum floor guaranteed to counties such as Adams would represent a 34% increase over 1997, according to HCFA.

While the largest boost would come in 1998, rates through 2002 would increase by 59.2%, placing Adams County at 14% below the national average instead of 34%. However, Barth sees little to get excited about. "An appendix removal will still pay much lower in [rural] Nebraska than elsewhere. It’s not like the HMOs are going to make out on this," he says.