MEDICARE+CHOICE

In 1985, Congress amended the Medicare program to allow a beneficiary to elect coverage under a health maintenance organization (HMO) as an alternative to the traditional Medicare program. At first, the number of persons electing this option was relatively small. Many of the elderly had not had HMO coverage during their working years and viewed such coverage with some skepticism. In addition, many HMOs continued to focus on expanding their traditional market of younger, healthier lives rather than entering a new and demographically different market. In addition, there were complex federal rules that had to be satisfied to enter the Medicare market.

The situation slowly changed as more HMOs got into the Medicare market and the public became more familiar with HMO coverage. In addition, as medical costs continued to rise, the election of an HMO option made more sense from a cost standpoint. As a result, HMO coverage for Medicare beneficiaries grew rapidly in the mid to late 1990s, and approximately one out of six beneficiaries now has such coverage.

Under the 1985 rules, an HMO is basically given 95 percent of what Medicare would expect to pay to provide benefits if a beneficiary electing HMO coverage had stayed in the traditional Medicare program. In turn, the HMO is expected to provide at least the same benefits as those that are available under Medicare. While an HMO can provide additional benefits and charge an extra premium, many HMOs have provided additional benefits such as prescription drugs without charging an additional premium. Such zero-premium plans have been very popular among Medicare beneficiaries. While they must continue to pay the Part B Medicare premium, these beneficiaries have been able to receive coverage that is broader than traditional Medicare and thus have no reason to purchase a supplemental medigap policy.

In 1999, Part C of Medicare (called Medicare+Choice) went into effect. It expands the choices available to most Medicare beneficiaries by allowing them to elect health care benefits through one of several alternatives to the traditional Parts A and B as long as the providers of these alternatives enter into contracts with the Health Care Financing Administration. However, beneficiaries must still pay the Part B premium.

The new Medicare+Choice plans include the following:

- HMOs as previously allowed

- Preferred-provider organizations (PPOs)

- Provider-sponsor organizations (PSOs), similar to HMOs but established by doctors and hospitals that have formed their own health plans

- Private fee-for-service plans

- Private contracts with physicians

- Medical savings accounts

These plans must provide all benefits available under Parts A and B. They may include additional benefits as part of the basic plan or for an additional fee.

Through 2001, beneficiaries may enroll in a Medicare+Choice plan or switch options (including reenrollment in parts A and B) at any time. In 2002, changes will be allowed only once during the first six months of the year. Beginning in 2003, an annual change will be allowed only during the first three months of the year.

Unfortunately, the initial reaction to Medicare+Choice has been less than overwhelming. As of early 2000, few new providers of alternative coverage have entered the marketplace. One reason for this is that the Medicare+Choice rules are extremely complex, and it is questionable if many of the potential providers can enter the market in a viable way. In addition, several HMOs that previously offered coverage have left the market for a variety of reasons; other HMOs no longer offer zero-premium plans or have increased premiums and/or reduced benefits. These changes stem from two factors. First, HMO costs have increased significantly in recent years, partially because of major increases in the cost of prescription drugs, which are a major source of medical expenses for the elderly. Second, the rate of growth of Medicare payments to HMOs has been reduced so that many HMOs are receiving increases that fail to match their increases in expenses.