Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. B. Medicare.


The Medicare program’s experience with health plan withdrawals, at least in the recent history of the Medicare HMO program, has been attributed to several factors: market competition, declining margins, smaller than expected enrollment, and consolidation among health plans21. Growing evidence suggests that withdrawals can be more precisely traced to changes made in Medicare due to the Balanced Budget Act of 1997. In addition to making many structural changes to the Medicare program that had significant bearing on beneficiaries and providers, HMOs encountered a number of changes that have contributed to a hostile contracting environment. Changes in premium payments, including ceilings on rate increases in markets with above average payments, have reduced revenues for many plans in the markets where enrollment was most substantial. The risk adjustment scheme being phased in for plans has introduced additional uncertainty about future revenues. In addition, added administrative and regulatory impositions increased the cost of offering this product line. Moreover, the convergence of several different changes flowing from the BBA added further uncertainty to plans that have been heavily invested in this product line22.

The result has been a substantial number of plan retreats from selected service areas and withdrawals from some markets all together that have accumulated in the years since the BBA. The number of beneficiaries affected by these changes has also snowballed. In addition, plans remaining in Medicare have raised premiums, trimmed benefits, and adapted their networks to try to restore these products to profitability or staunch their losses23. As noted below, the ability of plans to maintain networks and to control medical loss ratios has been challenged by providers, particularly hospitals, that have been hard hit by BBA reductions and are less willing to accept health plan discounts than they might have been in the past. This pushback has been intensified by provider consolidation to the point where plans in some markets have encountered so much countervailing leverage that they cannot sustain networks, or they cannot retain the compensation terms with providers that the plans believe they need to be financially successful24.

  1. R. Hurley and M. McCue. Commercial Plans and Medicaid Managed Care: An At Risk Relationship.Princeton, NJ: Center for Health Care Strategies, 1998.
  2. R. Hurley and M. McCue. Partnership Pays: Making Medicaid Managed Care Work in a Turbulent Environment.Princeton, NJ: Center for Health Care Strategies, 2000.
  3. General Accounting Office. Medicare Managed Care Plans: Many Factors Contribute to Recent Withdrawals; Plan Interest Continues(GAO/HEHS-99-91, April, 1999).
  4. General Accounting Office, Medicare+Choice Plan Withdrawals Indicated Difficulty of Providing Choice While Achieving Savings,(GAO/HEHS-00-183, September 2000).