NCPA - National Center for Policy Analysis

Medicare's Experiment With Managed Care

November 20, 1998

A few years ago, the Clinton administration and Republicans created incentives for Health Maintenance Organizations (HMOs) and other managed care companies to get into the business of providing medical care for senior citizens. The program, called Medicare+Choice, allowed HMOs to contract with the Health Care Financing Administration to provide care for seniors for a set per capita fee.

The idea was to offer seniors more choices and reduce the spiraling costs of the Medicare program, which heretofore was wholly a fee-for-service program. Roughly half a million seniors signed up for the program.

Now many of those companies are leaving the Medicare HMO business and are being criticized for abandoning seniors. But observers say the deck was stacked against them.

  • HCFA, critics charge, undermined the program, rigorously enforcing price controls in the form of a cap of 2 percent on increases in the per capita payments.
  • Then it forbade firms from increasing seniors' co-pays by even $2.
  • Next, HCFA dumped close to 900 pages of regulations on the managed care providers -- for instance, requiring providers to renegotiate contracts with every one of their doctors.

In August, the HCFA refused to loosen the price caps -- although it increased payments for traditional fee-for-service Medicare. Since then, close to 100 companies have withdrawn from the program or are planning to reduce services available to seniors in January.

Observers note the federal government does have a perfectly functional choice arrangement for its own employees that isn't so regulated. Federal employees get to select each year from a variety of insurance options -- HMOs, fee-for-service, medical savings accounts and so forth -- and competition keeps costs low.

Source: Editorial, "Medicare's Market Fling," Wall Street Journal, November 20, 1998.


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