Medicare HMOs

MAY 1, 1995 VOLUME 2, NUMBER 43

Health Maintenance Organizations (HMOs) have become increasingly important to Medicare recipients in recent years. In an effort to reduce Medicare cost increases, the federal government has actively encouraged the growth of managed care alternatives; a large and growing portion of Medicare enrollees in Tucson receive their care from an HMO.

The attraction of a Medicare HMO is obvious. Medicare deductibles are usually eliminated, and the 20% copayment requirement of traditional Medicare is reduced to a small per-visit cost. Medications may be provided by an HMO (usually with a flat and modest per-prescription charge), even though they are not covered under traditional Medicare. The total out-of-pocket cost to the participant may be dramatically reduced.

At the same time, the cost to the government of caring for a Medicare patient under an HMO is also reduced, at least in theory. Under current rules, Medicare pays the HMO 95% of what the average Medicare patient in the community costs the system; ideally, HMO contributions should represent a 5% savings to the government.

Even with the reduced payments to the providers, Medicare HMOs are profitable and eager to enroll new patients. How do they manage this fiscal magic?

As it turns out, “manage” is the right word. Some part of the HMOs profitability can be ascribed to healthier patients tending to seek out HMOs (so that the average cost of caring for an HMO patient is actually less than the average cost of caring for a traditional insurance-based patient). However, much of that profitability is due to concepts of managed care.

Managed care simply describes a system where financial and management incentives are provided to encourage less care (and less expensive types of care) to recipients. The challenge of a managed care system is to balance the desire for reduced levels of care with a need for high quality of care.

Some of that balancing is provided by regulatory oversight. In other words, the federal government requires certain minimum services to be provided by HMOs serving Medicare enrollees, and monitors the actual performance of the HMO to ensure that those standards are maintained.

Another balancing of cost and quality of care should take place as part of the economic nature of HMOs. At least theoretically, if patients are encouraged to seek medical care earlier and more often during the course of their illnesses (by reduced co-payments and provision of medications, for instance), they should experience fewer incidents of expensive catastrophic illness.

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