Keeping elderly care out of the E.R.

HMOs paid too much

need fixes

July 10, 2000|By Matthew Miller

LOS ANGELES -- Here's a little quiz for you health care aficionados: What's the connection between HMOs saying they can't afford to serve Medicare patients in many towns anymore and the bipartisan drive to finally offer Medicare patients prescription drug benefits?

According to Dr. John Wennberg of Dartmouth, the answer involves a paradox: If we cut payments to HMOs serving Medicare patients even further, we'll save enough cash to fund prescription drugs for every senior.

To understand why Dr. Wennberg is right, you have to look past political jitters over today's squealing HMOs to the nutty economics of Medicare's managed-care program. Worries about a few hundred thousand seniors being dumped from Medicare HMOs masks the fact that HMOs are still being overpaid for many millions of seniors they serve.

That's because the feds pay HMOs a fixed rate of about 93 percent of what traditional fee-for-service Medicare costs per person in a county. The idea was that this 7 percent "cut" would be the government's way of getting in on the savings available from managed care.

But the formula ends up rewarding cities like Miami and Los Angeles, where docs have historically had a "when in doubt, do more" mentality. The result is that Medicare payments to HMOs vary wildly across the country, ranging from $3,000 per beneficiary in some Midwestern towns to more than $9,000 in big cities.

In some places, these payments have indeed become too low, which explains why HMOs are pulling out. But in most counties, the overpayment for past excesses presents a fabulous arbitrage opportunity. How? When HMOs bear the risk and are paid a fixed fee per patient rather than getting reimbursed for each service, they suddenly find they can keep seniors just as healthy for a lot less.

With costs of HMOs plummeting because of the fixed fee they are being paid but Medicare payments continuing at more than 90 percent of what they were, it's like having a license to print money. What's more, by recruiting healthier, lower cost seniors but still getting overpaid for them, these HMOs are able to offer extras like eyeglasses, dental care, prescription drugs and lower co-payments. Everyone wins -- except, of course, sicker seniors and those in counties where Medicare isn't overpaying, who in effect subsidize the extra benefits the lucky elderly get.

Enter Dr. Wennberg, the nation's leading student of these regional variations. As he told me recently, only a tiny portion of these regional cost variations can be explained by cost-of-living differences for supplies, wages and the like. Instead, they're driven by local differences in the numbers of doctors and hospital beds and the associated "practice style" this breeds -- a self-interested case of supply driving demand.

As Dr. Wennberg puts it, "geography is destiny" in Medicare -- the amount of services and attention you get depends entirely on where you live. Perhaps because beneficiaries everywhere face identical premiums and deductibles, this swing in the actual benefits they receive hasn't caught fire politically. Most striking for the long-term cost picture, however, is that counties that spend three times as much on Medicare as others show no improvement in health.

This last fact prompts Dr. Wennberg's radical idea: Why not benchmark Medicare services and costs, he says, to some sensible average that we know can deliver quality health care? For all the private sector's market cheerleading, of course, HMOs fiercely resist the competitive bidding that would flush out the current windfalls and rationalize the system.

Yet Dr. Wennberg reckons that if the rest of the nation delivered care in the high-quality yet cost-effective manner of a city like Minneapolis, we'd save $20 billion a year -- enough to fund the drug benefits both parties want while freeing today's budget surpluses to extend coverage to the uninsured.

To be sure, "End the Crazy Regional Variation in Health Care Costs!" won't be a winning slogan for the Bush or Gore campaign this year. But whoever's elected will find there's no way to avoid this issue if we're to have the coverage we deserve at prices the nation can afford.

Matthew Miller is a syndicated columnist and his e-mail address is mattino@worldnet.att.net.

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