Medicare and HMOs — The Search for Accountability

The New England Journal of Medicine, 5/14/2009 - Twenty-five years after the introduction of health maintenance organizations (HMOs) as an alternative to fee-for-service Medicare, the promise of these private plans — that competition among them would lead to improvements in the quality and efficiency of health care delivery — remains largely unfulfilled. Some analysts see this failure as a reason to scrap them. However, given the inherent limitations of fee for service, a better solution would be for the new administration and Congress to make one more attempt to extract value from private health plans by holding them accountable for the quality and cost of the care they provide. Establishing accountability is the central challenge of Medicare reform.
Part of the difficulty in reaping rewards from competition among private health plans is that the federal government pays these plans too much. As a result of legislation enacted in 2003 by a Republican Congress, HMOs and other health plans in the Medicare Advantage program are paid substantially more than Medicare would spend on similar beneficiaries under fee for service. The Medicare Payment Advisory Commission (MedPAC) has estimated that the overpayment is 14%,1 or approximately $10 billion in 2008.2 But the overpayment is almost certainly larger, since this estimate does not take into account health plans' successful efforts to raise their risk-adjusted payment amounts by increasing the number and severity of the diagnoses that they report.

The Centers for Medicare and Medicaid Services (CMS) has begun the process of reducing payments to Medicare Advantage plans. Rates for 2010 will average 4.0 to 4.5% lower, in nominal dollars, than rates for 2009, reflecting a 3.4% adjustment for diagnostic coding intensity, an assumption that fee-for-service Medicare expenditures will increase by only 0.8% from 2009 to 2010, and other technical adjustments in the rate-setting process.

If the overpayment is substantially reduced, the most rapidly growing part of Medicare Advantage — private fee-for-service plans — will almost surely undergo a rapid reversal of fortune. These plans add almost no value to care delivery: they do not use a network of providers, nor do they engage in substantial utilization management or quality improvement. They are popular largely because the extra payments lavished on them by the federal government allow them to provide additional benefits to enrollees. It would be difficult to find a well-respected policy analyst to defend the existence of these plans. There remains substantial debate about why competition among HMOs has not produced the benefits hypothesized by private-market advocates and about the future role of HMOs in Medicare. Some analysts assert that private plans inevitably create large increases in administrative costs, siphon off valuable resources for executive salaries and profits, create hassles for patients and physicians, and cannot be held accountable by patients or the public. In this view, there is no constructive role for health plans as intermediaries between the government and health care providers. Arguments on the other side start with a recitation of the ills of the fee-for-service system — perverse incentives, lack of accountability, difficulty in providing coordinated care for people with chronic illness, overpayment for high technology, decisions regarding coverage of new technology in which politics sometimes trumps evidence, and the inability to create an environment in which physicians and administrators can work cooperatively to figure out how many and what type of health care resources are needed to take care of an enrolled population. According to proponents of these arguments, competition among private plans might cure some of the ills of the fee-for-service payment system, because private health plans could work more flexibly and cooperatively with physicians and hospitals than can the federal government to figure out how best to use health care resources to improve patients' health.

Source: Medicare and HMOs — The Search for Accountability Richard Kronick, Ph.D.