This paper evaluates the consequences of transferring Medicare beneficiaries into managed care organizations (MCOs). Drawing on peer-reviewed sources in health policy, economics, and law, it argues that such a shift would produce no meaningful cost savings and would expose elderly patients to increased denial of necessary medical treatments. The paper reviews the failed Medicare + Choice program of 1997 as a historical case study, analyzes administrative and fraud-related cost problems, and examines the moral hazard inherent in MCO utilization review practices. It concludes that while Medicare requires reform, transferring beneficiaries to MCOs is not a viable solution.
The American healthcare system has been at the center of debate for many years. One of the most pressing issues confronting it is Medicare and its beneficiaries. This paper focuses on the ramifications of moving Medicare beneficiaries into managed care organizations (MCOs). The central argument is that such a move would be a bad idea: there will be no real cost savings, and many individuals are likely to be denied needed care.
An article in the American Economic Review explains that Medicare is the second-largest government entitlement program in the United States. The cost of running this program is astronomical. The article reports that in 1999 the government spent $230 billion — approximately 13% of its budget — on Medicare and its beneficiaries (Antos and Bilheimer).
The major issue with Medicare is that it is expected to grow exponentially in the coming years due to an aging population. It is estimated that 47 million people will ultimately be enrolled in the program (Antos and Bilheimer). Furthermore, "Medicare spending will grow from 2.6% of GDP in 1995 to 6.3% of GDP in 2030" (Antos and Bilheimer). As enrollment increases, the ratio of contributing workers will decrease, creating a shortage of funds and potentially leading to an even larger health crisis than the one that currently exists.
Some experts believe that moving Medicare beneficiaries to managed care organizations would alleviate the problem. While Medicare has been growing substantially, managed care organizations have also been expanding (Fischer). However, an article entitled "The Unraveling of Managed Care: Recent Trends and Implications" asserts that there is almost no cost savings associated with moving Medicare beneficiaries to MCOs (Gorin). The article explains that there are significant administrative and procedural costs associated with transferring Medicare beneficiaries to a managed care system (Gorin).
The article also notes that there have already been attempts to combine Medicare with managed care; however, there has never been an attempt to transfer all Medicare recipients into managed care programs (Gorin). The most notable attempt came in 1997 with the Medicare + Choice (M+C) program (Gorin). This voluntary program gave elderly enrollees a wide range of services, including private fee-for-service networks, medical savings accounts, and PPOs (Gorin). The purpose of the program was to open "Medicare to competition" on the theory that market forces "would not only lower costs but also enable many beneficiaries to obtain prescription drugs and other benefits not covered by Medicare" (Gorin).
The program failed, and subsequent assessments identified several contributing problems. One analysis identified a slowdown in the rate of growth of M+C payments — itself a response to previous overpayments to Medicare managed care plans — as a key factor in declining enrollment. Original projections for the program were also probably unrealistic. Another important factor was the broader backlash against managed care, which made Medicare HMOs less profitable than anticipated and fueled public suspicions about M+C (Gold, 2003, as cited in Gorin). Hurley et al. (2003) similarly linked the problems of Medicare HMOs to "a growing backlash against the HMO product" (p. 410, as cited in Gorin). Based on the experience of M+C, Gold (2003) concluded that managed care and market competition are unlikely to resolve the problems facing Medicare (Gorin).
Very little cost savings was associated with this program because Medicare was frequently overcharged and fraud was rampant (Gorin). Moreover, while more efficient technologies can reduce certain prices, those same technologies also tend to increase overall spending (Gorin). The article ultimately concludes: "Despite all its difficulties, Medicare has been more successful than private insurers in controlling per capita health care spending and satisfying consumers" (Gorin).
For these reasons, moving Medicare beneficiaries to managed care organizations will not result in any real cost savings. The M+C program confirms that significant problems arise when the two systems are combined, and evidence suggests that consumers prefer the Medicare program as it currently exists.
"MCOs deny treatments, endangering elderly patients"
"Lawsuits expand consumer rights against MCO denials"
Antos, Joseph R., and Linda Bilheimer. "Medicare Reform: Obstacles and Options." American Economic Review 89.2 (1999): 217–221.
Fischer, Pamela P. "Parkinson's Disease and the U.S. Health Care System." Journal of Community Health Nursing 16.3 (1999): 191–204.
Gorin, Stephen H. "The Unraveling of Managed Care: Recent Trends and Implications." Health and Social Work 28.3 (2003): 241+.
Rosenbaum, Sara, and Brian Kamoie. "Managed Care and Public Health: Conflict and Collaboration." Journal of Law, Medicine & Ethics 30.2 (2002): 191+.
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