The History and Growth of Medicare Managed Care

Healthcare insurance and delivery systems in the United States have undergone dramatic changes in the past decade. Managed care dominates and, in some cases, is the only health insurance option offered by an employer (Jensen et al., 1997). Nearly three-fourths of all employees with health insurance were enrolled in some form of managed care-either a health maintenance organization, preferred provider organization, or a point-of-service plan in I995, up from 5I percent in I993. Both employers and employees have been turning to managed care options because they offer lower premium costs and lower costsharing requirements than traditional indemnity coverage. Higher managed care enrollments have lead to greater provider participation in these delivery systems. About 65 percent of all HMOs in I996 were independent practice associations (IPAs), which allow physicians to participate in an HMO and still treat non-HMO patients (American Association of Health Plans, 1997). The number of hospitals having at least one contract with an HMO or a PPO also has been increasing, growing from 57 percent in I99o to 68 percent in I994 (Prospective Payment Assessment Commission, I996). These changes in the healthcare delivery system, and the underlying private sector insurance systems, have transformed the types of choices presented to older populations in the Medicare insurance program. Managed care has been heralded as one of the answers for solving Medicare's high-cost problem. HMos are paid a capitated amount each month (a preset rate per person regardless of actual service use). In turn, they are responsible for all patient costs associated with Medicare's standard benefit package. Proponents have argued that Medicare could use HMOs to transfer some of its costs to the delivery system without restricting beneficiary coverage. HMOs have lowered costs for some populations because they reduce inappropriate service use, especially for specialists and hospital emergency departments (Hurley, Freund, and Paul, I993) and use a less expensive mix of services, including less hospital care, fewer expensive treatments and procedures, and more ambulatory care, such as physician visits (Miller and Luft, I994; Brown et al., I993). HMOs also limit their costs by contracting with select providers-either those they employ (as in the staff-model HMOs) or those who have agreed to lower rates in exchange for treating the HMOs' enrollees. Despite these practices, Medicare's experience has shown that while the potential for saw ings was present, the managed care program was not leading to lower costs. Where savings could have been gained from the delivery system's efficiencies, HMOs are allowed to provide beneficiaries with supplemental benefits and lower out-of-pocket costs rather than return the difference between costs and payments to the program. Further, favorable risk selection has been occurring (Langwell and Esslinger, I997; Riley et al., I996). This means that beneficiaries who enrolled in managed care tended to be healthier than the average beneficiary, and those who needed care were less likely to enroll in an HMo. Because Medicare's payment methodology does not adequately correct for these differences in costs, the early evaluation found the program costs were 5.7 percent higher than they would have been under the fee-for-service program (Brown et al., I993). Program savings could be gained, however, if both the sick and the healthy enrolled in these capitated systems or if payments were adjusted to reflect the enrolling population. Congress attempted to correct these problems in the Balanced Budget Act of I997 (see Beeuwkes Buntin and Newhouse, this issue). HMOS have also been lauded as a means of improving the quality of care delivered, particularly for special populations such as the chronically ill. However, research in this area has been inconclusive. Medicare's early evaluation findings showed that while HMO enrollees used a less expensive mix of services, their outcomes were similar to those of their counterparts who received fee-for-service care, suggesting that quality was not compromised by the different service use (Brown, 1993; Shaughnessy, Schlenker, and Hittle, 1994). …