State: Bush lays out Medicare plan: analysis

Bush lays out Medicare plan: analysis

Pullback of HMOs makes Bush's plan more challenging.

By STEPHEN NOHLGREN

For Brooksville retirees Floyd and Virginia Lewandowski, Medicare finance comes down to one lamentable fact: Come Jan. 1, not a single insurance company will offer them an HMO plan.

The Lewandowskis, who live on combined Social Security income of $12,000 a year, have been entrusting their health to Humana Gold Plus. Managed care makes them jump through hoops, but it's cheaper than regular Medicare and provides benefits like prescription drugs they can't otherwise afford.

But Humana, the last Medicare HMO left in Hernando County, is pulling out.

"I'm very disgusted," Virginia Lewandowski said. "I thought I had protection as long as I lived. Now they come up with this."

The steady retrenchment of Humana and other HMOs presents an ideological challenge for Texas Gov. George W. Bush, who unveiled his plans for revamping Medicare Tuesday.

Bush promises to help low-income folks like the Lewandowskis pay their health bills, give every beneficiary a shot at buying prescription drug coverage and otherwise drag Medicare into the 21st century with preventive care benefits.

Bush's optimism is based squarely on faith that free-market competition can generate huge savings in health care just it does in selling toothpaste or used cars. Private insurance companies would bid against each other to provide seniors and disabled people with a basic package of Medicare benefits, including prescription drugs. That would drive the price down.

Though Bush doesn't use the words Medicare HMO, that's essentially what he's talking about.

However, today's business climate calls their savings potential into question.

"There's a clash of theory and reality here," said John Rother, the AARP's director of legislation and public policy. "Not only are HMOs pulling out, the majority of those staying in the program are cutting back on their drug benefit.

"That certainly casts doubt on their ability to operate so much more efficiently."

Industry representatives attribute HMO cutbacks to burdensome red tape and paltry government payments. This year's Medicare budget, for example, would raise payments to HMOs only 2 percent.

The Bush camp blames the Democrats.

"The Clinton-Gore administration bungled rules and cut reimbursement in ways that frustrate these private companies and drive them out of the market," said Bush spokesman Tucker Eskew. "Gov. Bush wants to do away with that kind of ham-fisted, centralized, one-size-fits-all kind of government management."

Medicare HMOs seemed a godsend when they began about 15 years ago. The government paid the HMOs 95 percent of what traditional Medicare typically spent on older and disabled people, ostensibly saving taxpayers 5 percent whenever someone signed up.

HMOs charged no premiums, minimal copayments and covered eyeglasses and prescription drugs, a great deal for people willing to give up their choice of doctors.

This seemingly painless success story was not lost on a bipartisan commission that advised Congress in 1997 on how to keep Medicare solvent for the next five decades.

Several Democratic appointees agreed with the Republicans that competition was the way to go. Let private HMOs bid against each other to provide Medicare benefits, the commission advised. Combined with a slight rise in the eligibility age, that would generate enough savings to provide drugs and shave $10-billion a year off Medicare spending.

When Bush mentions his "bipartisan approach," to Medicare, he's referring to the commission's plan.

Even as the commission was drafting its report, however, alarm bells were sounding at the General Accounting Office.

It turns out that Medicare HMOs were attracting the healthiest beneficiaries, the GAO reported. People with chronic health problems tended to stay in traditional, fee-for-service Medicare, perhaps because they had long relationships with doctors they wanted to keep.

That drove up costs in the traditional Medicare program while creating unnecessary surpluses on the managed care side, the GAO said. Overpayments, not competitive efficiency, accounted for the extra goodies that HMOs provided.

In response, the Clinton administration and the Republican-controlled Congress agreed to roll back HMO payments in the Balanced Budget Act of 1997. Since then, Medicare HMOs all over the country have cut benefits and retreated to their most profitable locales. By January, Hillsborough and Pinellas counties will drop from eight to five HMOs. Citrus and Hernando counties will have none.

About 6-million of Medicare's 40-million beneficiaries still belong to HMOs, but the growth rate of 100,000 people a month has dropped to zero. Industry representatives are lobbying Congress for a $15-billion cash infusion over the next five years, and that's without mandated drug coverage.

"What has really hurt the (bipartisan commission) as a political proposition was the huge numbers of HMOs pulling out," Princeton economist Uwe Reinhardt said last week. "They were cherry-picking and everyone knew it."

Traditional Medicare holds two great advantages over private insurance, Reinhardt said: Medicare dictates prices to health care providers and also requires them to absorb much of the system's administrative costs. As a result, Medicare sends 98 cents of every dollar to providers.

"An HMO needs 15 percent just for profits and administration to be comfortable. That gives you a pretty lousy reputation on Wall Street, but you can make it," Reinhardt said. "Drugs for the elderly would easily add another 15 percent to the premiums for HMOs."

In early years, Medicare HMOs saved money by negotiating deep discounts from hospitals and doctors, he said. But that climate has changed. Hospitals and doctors now have been cut to the bone by their own Medicare cutbacks.

"The calculation that Bush doesn't seem to grasp is there is such a thing as politics," Reinhardt said. "The American Medical Association and the American Hospital Association are not going to sit on their hands while HMOs slice out another 15 percent from their revenues."

Marilyn Moon, economist at the Urban Institute, said Medicare costs historically have risen more slowly than health care costs in general. The Bush proposal is "predicated on the belief that the private market is much more efficient than Medicare," she said. "There's very little evidence that is the case."

HMO critics are ignoring a crucial element, said Susan Pisano, spokeswoman for the American Association of Health Plans. HMOs save a lot of money with preventive care. "We work hard to keep people out of hospitals."

Pisano also disagreed with the GAO's assessment that Medicare HMOs picked off the healthiest beneficiaries. The GAO studies were flawed, she said, because they measured the Medicare bills of people the year before they joined an HMO:

"They failed to confront the reality that maybe people used health services sparingly in a particular year because they couldn't afford them."

Instead of leveling the playing field, payment cutbacks to HMOs torpedoed a valuable service, she said: "We have competed successfully in the past, going head-to-head with fee-for-service. With any reasonably structured program, we will shine."

Gail Wilensky, an economist who ran Medicare under President George Bush, agrees that a healthier client base may have helped early HMOs look more efficient than they actually were. But the 1997 payment cutbacks way overcompensated, she said.

Moreover, today's Medicare HMOs must labor under mounds of regulations and capricious policy swings that Gov. Bush would eliminate.

The right managed care system "can provide the same service at a lower rate," Wilensky said. "We ought not dismiss the notion of choice to seniors just because we hit a stumbling block."