Managed Care And Competition Unlikely To Generate
Sufficient Savings To Address Medicare's Fiscal Concerns

Private Plans 'A Tool, Not A Strategy,' Health Affairs Article Says;
Debate On Medicare's Obligations And Financing Still Needed

BETHESDA, Md.—Competition among private-sector Medicare health plans may be a useful tool to reconfigure care delivery but is unlikely to generate the savings necessary to help the program withstand the retirement of the baby-boom generation, according to a Health Affairs Web-exclusive article posted today.
Marsha Gold, a senior fellow with Mathematica Policy Research Inc., in Washington, D.C., makes this conclusion in an article that reviews Medicare+Choice's performance under the payment and regulatory constraints of the Balanced Budget Act of 1997, as well as the lessons it has for the current debate on whether and how to expand Medicare benefits and modernize the Medicare program.

Medicare managed care plans expanded rapidly during the 1990s, when favorable government payments allowed them to charge low premiums—in many cases, no premium at all—and offer an enhanced benefit package. At the same time, however, favorable selection meant that Medicare managed care cost the government more than if enrollees had stayed in the traditional fee-for-service program.

In passing the Balanced Budget Act, which folded earlier Medicare managed care plans into the Medicare+Choice program, Congress set some conflicting goals: Saving money, expanding the program to rural areas, and offering beneficiaries more benefits and choices. Program enrollment was forecast to grow quickly as a result.
By slowing down payments to existing Medicare+Choice plans, however, the federal government caused them to withdraw from many markets, as well as increase premiums and trim benefits. Medicare+Choice also suffered from the same market backlash as commercial managed care. As a result, in 2002 there were fewer Medicare+Choice enrollees than when the Balanced Budget Act passed. The expansions to rural areas, meanwhile, never materialized.

Gold writes that the lessons from the Medicare+Choice experience show that legislative efforts alone to create market won't succeed if other market conditions are unfavorable; that not all health care markets have the right mix of demographics, provider networks, and other factors to support private plans or competition; that beneficiaries don't have an incentive to change plans unless there are better benefits; and that market instability is an issue to be concerned about in structuring market-based strategies.

As Medicare confronts future fiscal strains as well as demands to add an outpatient prescription drug benefit, some policymakers will tout the market competition of private-sector managed care plans as a way to keep the program's costs under control. Gold cautions that much of those savings are likely to be absorbed by beneficiaries and will be much more modest than some policymakers suggest.

"Any savings will probably not offset the growing pressures on Medicare to expand benefits and address the demands created by the growth of technology and the baby-boom generation's coming retirement," Gold says. "While managed care has demonstrated some potential to be more efficient, the level of savings is limited by the difficulty of changing providers' practice patterns and reconfiguring care delivery. Political opposition to explicitly limiting access to available care and technology also is strong.

"There may be many reasons to pursue the development of a more organized care system, but realistically, large and rapid cost savings to underwrite desired policy change is not one of them," she says.

Under a competitive model, segmentation of the market by income, race, and ethnicity likely would grow, she concludes, particularly if the system is not adequately financed. As a result, moving to a competitive model will not lessen the need for a debate on Medicare's obligations and how to finance them.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. The paper was supported by the Council on Health Care Economics and Policy, with funding from the Robert Wood Johnson Foundation to Mathematica Policy Research Inc., a nonpartisan research firm that conducts policy research and surveys for federal and state governments, as well as private clients.

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©2003 Project HOPE–The People-to-People Health Foundation, Inc.