Why can't a government HMO make money?

No. 1 health insurer ends Medicaid HMO, but some succeed

January 05, 2001|By M. William Salganik | M. William Salganik,SUN STAFF

When HMOs showed in the 1990s that they could hold down premiums in commercial insurance, government health planners began to think HMOs could control costs for their programs as well.

Enrollment in Medicare HMOs rose sharply in the mid-1990s. Then, the federal government changed the way it reimbursed the Medicare HMOs, and many got out of the business. Effective Monday, nearly a million seniors - including about 55,000 in Maryland - had to find new coverage.

Enrollment in Medicaid managed care plans also climbed in the mid-1990s as states turned to HMOs to control costs. But this week, CareFirst BlueCross Blue- Shield, Maryland's largest health insurer, announced that it was pulling out of the state's Medicaid HMO program.

As recently as a few months ago, when it began cutting back, CareFirst covered 100,000 Medicaid HMO members.

"Just as we've heard the concerns about whether [health] plans [would] stay in the Medicare market, some states are experiencing that in the Medicaid market," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.

Some say Medicaid managed care, like Medicare managed care, may be on the decline, collapsing under the weight of tight government payments or flaws in design.

The federal government sets some of the rules for Medicaid, and provides some of the money, but states pay the rest of the cost, and have broad latitude in how they run the program.

Maryland, in 1997, switched more than 300,000 mothers who receive welfare, their children and disabled enrollees to Medicaid HMOs.

"Five or six years ago, governors across the country were saying that Medicaid was going to drive them to bankruptcy," said Nelson Sabatini, former Maryland health secretary and now senior vice president at the University of Maryland Medical Systems.

In turning to HMOs to cut costs, "they take an underfunded program, discounting it, expanding the benefits, and adding 20-plus percent for administrative costs," he said.

The result is that some participating HMOs find that they are losing money - CareFirst said it lost $11 million on Medicaid last year - and leave the market.

"The payment environment is unstable and unpredictable, and the payment methods are flawed. In terms of being able to make a long-term commitment to a program, that's not a good environment to be operating in," said Susan Pisano, vice president of the American Association of Health Plans, an HMO trade group.

She was speaking about Medicaid HMO programs in general, and not specifically about Maryland's program.

Others, however, believe that what's happening is not a collapse, but an inevitable shakeout as different business plans are tested in a relatively new market.

Pisano said Medicare and Medicaid HMOs share some common problems, such as "regulatory burden" and "payment issues."

However, she continued, "There hasn't been the kind of precipitous decline we have seen in the Medicare program, and participation [by HMOs in Medicaid] continues to be high."

"There are firms able to enter this business and be successful," said Douglas B. Sherlock, senior health care analyst for the Sherlock Co., a Pennsylvania financial adviser.

While Blue Cross plans have left Medicaid in several states, he said, companies that specialize in Medicaid have remained profitable.

Debbie I. Chang, state assistant health secretary, notes that seven other health plans have remained in the Maryland plan; some are profitable, and some are expanding.

The ability to survive financially, she said, is determined not by how much the state pays but by "how much you spend on administration and how you manage the care."

A key legislator in health policy, Del. Michael E. Busch, chairman of the House Economic Matters Committee, said the CareFirst departure is not a sign that the program needs radical redesign. "There may be adjustments to be made, but you don't give up on the system," he said.

Sherlock expects managed care to grow in Medicaid, and perhaps in Medicare as well, as a Republican administration, more friendly to working with private companies, takes over.

David Sandman, senior program officer at the Commonwealth Fund, a health-oriented New York foundation, said that while commercial HMOs are cutting back on Medicaid participation, "there is more and more enrollment in [Medicaid] plans sponsored by hospitals or community health centers."

Rowland said states may modify their models of Medicaid managed care, with some trying to find a mix of managed care and fee-for-service medicine.

"Only a few years ago, Medicare managed care was being hailed as the solution to the program's financial problems," said Sandman. "Medicaid managed care was often thought of as a magic bullet. But the reality has proven much more complicated."

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