As Good as It Gets? The Future of Medicare+Choice

Medicare+Choice is:

(a) an attempt to rationalize the payment system for Medicare managed care plans by reducing the wide disparity in payment rates among urban and rural areas and addressing evidence of selection bias through risk adjustment;

(b) part of an effort to extend the life of the Medicare trust fund by reducing Medicare payments to fee-for-service providers and managed care plans significantly;

(c) an experiment designed to introduce new private-sector health plan choices to Medicare, such as preferred provider organizations (PPOs) and provider-sponsored organizations (PSOs);

(d) all of the above;

(e) none of the above.

If you have difficulty with this quiz, you are not alone. The Medicare+ Choice program was perhaps the most-celebrated feature of the much-celebrated Balanced Budget Act of 1997 (BBA). With the enactment of Medicare+Choice, it seemed that the quest to modernize Medicare by offering beneficiaries new private sector choices had finally begun in earnest. The program was heralded by the Clinton administration and Republicans and Democrats in Congress alike as the kind of Medicare reform that they could all embrace.

The managed care industry, while nervous about some features of the new law (in particular the requirement for a transition to risk-adjusted payments), considered other aspects to be major victories. At the time the BBA was enacted in July 1997, some 6 million beneficiaries—approximately 15 percent of the total Medicare population—were enrolled in managed care plans, and everyone, including the industry, expected that number to grow significantly. The American Association of Health Plans (AAHP), the managed care trade association, praised the new plan, noting: "We are particularly pleased that this historic budget agreement will expand beneficiary choices and promote competition within the Medicare system." AAHP also made clear that it had "consistently held the position that Medicare HMO beneficiaries should not be required to shoulder a disproportionately large share of the Medicare savings," concluding that the BBA "strikes the proper balance between strengthening Medicare's financial condition and continuing to provide high quality, comprehensive health care to seniors in health plans." ¹

The bureaucrats were on board as well. I should know—I was the chief bureaucrat during this period, having been confirmed by the Senate to head the Health Care Financing Administration (HCFA, recently renamed the Centers for Medicare and Medicaid Services [CMS]) just as the BBA was enacted. Of the 335 provisions in the BBA, the ones that most worried us at the HCFA were those creating Medicare+Choice. But our concerns were not the usual policy quibbles. Rather, we fretted over how to handle the expected influx of new plans, and new types of plans, we expected to flood the agency (McGinley 1997). It would not be an overstatement to say that all parties—the politicians, the policy community, and the industry leaders—considered Medicare+Choice both a major short-term success and perhaps even the best hope for Medicare's future.

Fast-forward to the early fall of 1998. We are in the ballroom of a downtown D.C. hotel at the semiannual AAHP meeting. Having just delivered a speech brimming with optimism about Medicare+Choice, I descend from the podium, expecting warm applause. (It was still early in my tenure.) But instead of delivering bouquets, the bevy of industry executives who jostle forward plead for permission to withdraw the proposals they submitted to HCFA and raise the premiums they will charge beneficiaries—higher than expected prescription drug costs, they say, will mean they cannot deliver the benefits they promised just three months ago.

That was the first real sign of the turmoil to come. By October 1998, little more than a year after the BBA was enacted, dozens of managed care plans bolted from Medicare or reduced the number of...