~Q}J

OR

~00

Prepared by

Lynn EtheredgeConsultant

'5~rnQ1)~Q1)~ Health Insurance Reform Project, George Washington University

Prepared with support from the Robert Wood Johnson Foundation

~":8

Q1J

Summary: The Medicare provisions of the reconcili-ation bill and President Clinton's proposals wouldboth allow many new health plans to compete forMedicare enrollees and structure a competitive, con-sumer-choice system. Medicare will enter this newenvironment with serious shortcomings. The logic ofmarket competition will call for upgrading manyaspects of Medicare if it is to be successful. AmongMedicare's features that need to be reconsidered arebenefits, consumer focus, premium financing, pay-ment policies, provider arrangements, performanceaccountability, management systems, risk adjust-ment and market strategies, social mission responsi-bilities, and research and development.

portant capacity to use government-set pay-ment rates to help control costs. But Medi-care's past successes and popularity shouldnot engender complacency about its potentialfuture as a competitor with private healthplans. Medicare decision makers and adminis-trators have usually been able, over the past30 years, to think and act as monopolists. Thatwill no longer be the case. The future reality isthat Medicare's policy will need increasinglyto take into account the demands-and limita-tions-imposed by a competitive, individual-choice market.

How should the Medicare program be rede-signed for this new, competitive environment?What program areas need to be addressed toshape up the Medicare program's shortcom-ings as a competitor in an individual con-sumer-choice market?

This paper aims to provide an overview ofthe Medicare program's new competitive envi-ronment and of the specific Medicare policiesthat political decision makers, administrators,and constituency groups will need to recon-sider. It is divided into two major sections:

.A sununary of the basic areas of agreementbetween the reconciliation bill and the presi-dent's proposals that would fundamentallychange the competitive environment for theMedicare program. Even if Medicare re-forms are not enacted this year, these areasof agreement provide a useful template forconsidering what statutory changes may becoming in future legislative sessions.

.A discussion of ten key aspects of the Med-icare program that will need to be reconsid-ered as the Medicare market evolves andMedicare faces new challenges from com-petitive health plans.

The recent national political discussionsabout Medicare's future reflect an apparentconsensus that the 37 million elderly and dis-abled persons eligible for Medicare shouldhave expanded choice of enrollment in privatehealth plans. The 1996 reconciliation bill (H.R.2491) passed by both houses of Congress al-lows many new health plans to compete forMedicare enrollees and structures a competi-tive consumer-choice market for Medicare andthese other plans. President Clinton's Medi-care proposals, although differing in importantrespects, would also open the Medicare mar-ket to many new health plans and structure acompetitive consumer-choice system. The ap-parent agreement on enhanced competitionand consumer choice suggests a challengingfuture for the Medicare program, which re-mains a fee-for-service insurance program. Forthe under-65 population, competition by"managed care" health plans has rapidly dis-placed fee-for-service health insurance; man-aged care enrollments rose from 30% of work-ers in 1988 to 70% in 1995.

Medicare may not experience the samerapid demise as other fee-for-service plans. Itis still the program of choice for 90% of theMedicare eligible population, and it has astrong "brand name," the wide providerchoice of fee-for-service insurance as well asits lack of limits on service use, and the im-

MEDICARE IN A COMPETITIVEENVIRONMENT

The reconciliation bill and Clinton's proposalswould create a much tougher competitive envi-ronment for the Medicare program. They would

-2-

can choose to enroll (or disenroll) in Medicareand its competing health plans. To assist inthese choices, Medicare enrollees will havecomparative information on the benefits andpremiums offered by each plan, as well asother information. To date, Medicare hasmade little effort either to alert Medicare en-rollees to their options for electing competitorhealth plans or to'provide side-by-side com-parisons. A new government-sponsoredchoice system may go far toward informingMedicare enrollees about the better benefitsavailable in private health plans and encour-aging them to give serious consideration toselecting one of these plans.

This apparent legislative consensus wouldaddress many of the competitive disadvan-tages that have limited the growth of the Med-icare competitive market. It is reasonable tothink that if this legislation is enacted theMedicare program will face much stiffer com-petition and, for the foreseeable future, thecurrent rate at which Medicare's competitorplans are increasing their Medicare enroll-ments-25% to 30% annually-will continueor possibly accelerate.

In addition to having common elements intheir approach to structuring the future compet-itive environment, the two proposals differsomewhat in other respects. The reconciliationbill would offer high-deductible plans and med-ical savings accounts, allow associations andunions to sponsor plans, permit premium re-bates, and allow door-to-door marketing. TheClinton plan would add medigap policies to theannual open season enrollment competition.

bring into the marketplace many new compet-ing health plans, open up competition by healthplans with better benefits than Medicare, allowmore attractive design features than traditionalHMOs, and structure an anpual"open season"consumer-choice system in which beneficiarieswould be able to make informed, side-by-sidecomparisons about remaining in the currentMedicare system. Specific shared elements ofthe two plans include the following:

.Attractive health plan features. Both proposalswould open the Medicare market to compe-tition from HMO point-of-service (POS)plans and preferred provider organization(PPO) plans. These managed care designs,which offer greater freedom of choice ofprovider than traditional HMOs, haveproved popular with the under-6S popula-tion. For an elderly population that is awareof its needs for medical care, such flexibilitymay prove particularly important.

.Better benefit options. Both proposals allowcompeting health plans to offer better finan-cial protection than Medicare as well as en-hanced supplemental benefits that are im-portant to the elderly and disabled, such as

prescription drug coverage..More health plan sponsors. Both proposals also

allow provider-sponsored networks to offerplans to Medicare enrollees. Marketing byphysicians and other health care providersto their patients may further encourage pa-tients to join health plans, as well as bring-ing more plans to the market.

.Improved quality assurance. Both proposalsrequire accreditation of health plans (as wellas state licensure), both require health plansto have approved quality assurance pro-grams, and both require reporting of se-lected quality and health outcomes data for"report cards" that will provide more infor-mation to help beneficiaries make theirchoices.

MARKET -ORIENTED THINKING ABOUTTHE MEDICARE PROGRAM

With the enactment of a consumer-choicearrangement, determinants of Medicare's fu-ture will shift from what goes on inside theBeltway (the political marketplace) to whatgoes on in local health care markets, as com-peting health plans target some of Medicare's37 million eligible individuals to convince

.An organized "consumer choice" competitive sys-tem. Both proposals also structure an annual"open season" in which Medicare eligibles

-3-

them to enroll. The logic of market competi-tion will call for upgrading many aspects ofMedicare if it is to be successful in this newenvironment.

For an overview of Medicare's competitiveposition vis-a-vis private health plans, let usconsider a hypothetical situation in whichthere are just two.competitorsfor,a market of37 million individuals. One competitor canoffer only a single product (developed 30years ago) that has less attractive benefits thanare being purchased by 80% of its customers,and it cannot offer supplemental benefits. Thiscompetitor can set only a single national pricefor its product, can pay its suppliers only by anational computer-based price schedule, mustaccept virtually all suppliers, and, as primarilya bill-paying organization, has little influenceon supplier performance. This competitor alsois not allowed to market its products, and ithas to depend on its major competitors to op-erate its program. Its personnel and operatingpolicies, regulations, and policymaking aresubject to political decision makers and gov-ernment-wide policies. It must bear socialcosts not paid by its competitor.

The other competitor can offer the range ofbenefits and supplemental packages wantedby consumers, and it can adjust its premiumsto reflect costs and market opportunities. Itcan select its suppliers for economy, quality,and service; can hold them accountable forperformance; and has organized managementsystems. It can advertise and market its prod-ucts. This competitor uses private-sector ad-ministrative practices and can offer compre-hensive benefits for $1,000 per person ($2,000per couple) less expense. As the market growsfrom 37 million to 70 million persons by thetime the baby boom generation is fully retired,most of the new customers will already besigned up with the second competitor, and thefirst competitor will have to persuade them toleave. Which competitor will be in the better

position?

position similar to that of the first competitor.It will probably face a number of health plansthat are similar to the second competitor ineach major market area. Nearly all fundamen-tal aspects of the Medicare program will needto be "reengineered" for it to be successful inthis environment. Among the aspects of theMedicare program that will need to be recon---sidered-for1heir

competitive fitness are thefollowing:

.benefits,.consumer focus,.premium financing,.payment policies,.provider arrangements,.performance accountability,.management systems,.risk adjustments and market strategies,.social mission responsibilities, and.research and development.

This agenda involves consideration of poten-tially far-reaching, even revolutionary, changesin the Medicare program. Given the apparentagreement that Medicare-eligible personsshould have the benefits of better private healthplan options and competition, its implicationsfor Medicare's future now need consideration.What kind of Medicare program do we want inthe future? Shouldn't we want the Medicareprogram to be a first-rate competitor with pri-vate health plans, one that is allowed to provideits enrollees with the benefits they want, and toadopt the best practices from private-sectorhealth plans? Should public policy try to fostercompetition between a public Medicare pro-gram and competing health plans, with theview of trying to get the best of what the publicand private sectors can offer? Or should publicpolicy-explicitly or by default-leave Medicarebasically unchanged and likely to become aresidual program?

The following sections propose some start-ing points for new thinking about the Medi-care program in each of the ten areas men-tioned above and sketch some of the potentialimplications for Medicare's future.As a new competitive market system is

initiated, Medicare will be in a competitive

-4-

.A high-deductible and medical savings accountoption, if that is allowed for private-sector com-petitors. Medicare may have some competi-tive advantages in the administrative costsof setting up and operating such arrange-ments.

A decision to offer improved basic or sup-plemental benefits will draw the Medicareprogram into competition with the Medicaresupplementary coverage market. In 1992, thismarket covered about 27 million Medicareenrollees, with premiums of $27 billion; abouthalf of the policies were employer-sponsoredbenefits and half were medigap policies. Thearguments for a competitive Medicare pro-gram offering such benefits, at least vis-a-vismedigap policies, are as follows: (a) Medicarecan offer such benefits at significantly lowercosts, for example, less than a 3% administra-tive expense versus an average premium re-tention of 15% for group medigap policies and25% for individual medigap policies in 1993,2-and (b) the high costs of private medigap pre-miums (about $1,000 aIUlUally) mean that aMedicare enrollee must pay about $1,000($2,000 per couple) more for comprehensiveMedicare-plus-medigap coverage than forcomparable comprehensive benefits fromHMOs that enroll Medicare beneficiarles.3 Thisis a significant market disadvantage for theMedicare program.

Consumer Focus

Medicare's eligible populations will need tobe seen as 37 million individual customerswith differing needs and desires who canchoose among competitor products.

Medicare has been described as an "IBMmainframe" program in what will be a "PC"

Benefits

Medicare's benefits will need to be seen as aproduct-or a product line-that is in compe-tition with other offerings in the marketplace.

The Medicare program now offers a singleproduct designed to match the prevailing in-surance plans of 30 years ago. It offers basichospital coverage (90 days per benefit period,60-day lifetime reserve, no coverage thereaf-ter), steep hospital benefit cost-sharing ($736deductible per benefit period, $184 per day fordays 61 through 90, $368 per day for the 60lifetime reserve days), and includes no limiton out-of-pocket expenses for physician ser-vice benefits (for which there is a $100 annualdeductible and 20% copayment). Medicaredoes not cover outpatient prescription drugs.To fill in these amounts, 78% of Medicare en-rollees obtain medigap or other supplementalcoverage. Medicare's competitors, in additionto offering comprehensive coverage, can alsotailor benefit packages to Medicare marketsand subpopulations with a variety of benefitsand cost-sharing options.

For the future, the Medicare program willneed to consider both improving its basic ben-efits and expanding its "product line" of sup-plemental benefits to enhance its competitiveposition. Such options could include:

.Improved basic benefits, offered either across-the-board or through high-option plans. Thestandard option could consist of the currentMedicare benefits, and the high-option plancould include the comprehensive hospitalbenefits and annual out-of-pocket spendinglimit that are popular features of private

medigap plans.

.Supplemental benefit options that have provedbroadly attractive for Medicare's competitorplans, for example, prescription drugs, eyeexams and eyeglasses, and hearing aids. Themedigap market now includes ten govern-ment-determined plan designs; potentiallyall ten could be offered by the Medicareprogram itself)

"Medicare's economies come from lower marketing ex-penses (signup at the same time as SMI benefits); lowerpremium collection costs (automatic electronic deductionfrom social security checks, like the SMI premium); andreduced claims processing costs (automatic electronicadjudication along with basic benefits.)

-5-

premiums, as well as benefits and copay-ments, to match actual costs and market con-ditions. Over time, Medicare may need to con-sider allowing the beneficiary premiums tovary with the costs of insurance coverage, inorder to bring Medicare's premium closer to acompetitive market amount.

future. Its design philosophy as a single na-tional program with a monopolistic viewpointwill be increasingly challenged as its custom-ers have a variety of choices from health plansthat are actively marketing to them, designingproducts to meet their needs and desires, pric-ing them competitively, and seeking to satisfycustomers. There is considerable diversityamong Medicare's enrollees. In a consumer-choice environment, each of these individualswill be able to choose annually to stay withone health plan or switch to another one. In-creasingly, newly eligible persons will alreadybe enrolled prior to age 65 with a competingemployer-based health plan that is workinghard to retain their enrollment. Medicare willneed market research about consumer prefer-ences with respect to Medicare and its com-peting plans, such as is carried out by privateinsurers. This research will need to include:

.Analyses of "joiners" and "leavers" to deter-mine their characteristics and the compari-sons between Medicare and its competitorsthat entered into their decision.

.Analyses of "stayers" to determine what fac-tors account for "brand loyalty" to theMedicare program and to its competitors.

.Focus groups and opinion research polls to bet-ter understand what changes Medicare'scustomers would like to see in the program.

-Payment 'Policies

Medicare's fee-for-service payment policieswill need to be assessed to identify where na-tional payment formulas result in over- andunder- payment of market rates and how suchpayments affect the program's competitiveposition with beneficiaries and providers.

As a near-monopoly bill-payer for 37 millionindividuals, the Medicare program has beenable to use its financial leverage to set hospital(DRG) and physician (RBRV5) rates, unilater-ally, at amounts needed to meet budget pro-jections. Medicare's major budget-control strat-egy, for more than a decade, has been to tight-en its payment rates to below average marketprices and to restrain annual rate updates.This strategy is continued in both the reconcil-iation bill and the Clinton proposals; specifi-cally, budget control for the Medicare fee-for-service system would be exercised by reducingMedicare payment rates, on a sector-by-sectorbasis, if spending exceeded legislatively settargets. Using national payment rates-andnationally uniform adjustments in these feeschedules-is the only major competitive strat-egy allowed to the Medicare program in thecurrent reconciliation legislation.

The competitive world of the future will in-troduce two new constraints on the usefulnessof this strategy. If Medicare's payment ratesdrop below what hospitals and physicians canreceive from private health plans that competewith Medicare (for example, provider-spon-sored networks), providers will have financialincentives to join (or start) such plans and en-courage their Medicare patients to enroll inthem. If Medicare's payment rates drop farenough below market rates to impinge on ac-cess to services, consumers interested in leaving

Premium Financing

Medicare's financing from beneficiary pre-miums will need to be assessed in terms of thevalue provided compared to marketplace pre-miums for its competitor plans.

Medicare now charges a uniform nationalpremium (the SMI premium) of $42.50 permonth for its single national policy. Since theMedicare spending for the SMI program variesby more than 2 to 1 among states, the federalpremium subsidy amount varies. With no flex-ibility for pricing its product to reflect actualcosts, Medicare may be at a competitive disad-vantage in some areas. In contrast, competingprivate health plans can adjust their enrollee

-6-

being driven out of the competitive market bya concentration of uncompetitive providers.Many other specific changes would also helpto further Medicare's evolution from a bill-paying insurer to an effective purchaser ofhealth care that can use the best practices ofprivate health plans; these are discussed in anearlier Health Insurance Reform Project paper(Reengineering- Medicare: F-rom :Bill-Paying In-surer to Competitive Purchaser). As discussed inthat paper, such changes should be selectiveand targeted at specific program management

problems.

Medicare will also have many more health planoptions to choose from.

The Medicare program will thus need to bealert to the potential failures of its principalcompetitive strategy. Among the options thatmay need to be considered are for Medicare tomove away from national computer-formulaprice schedules.and nacona llY11nif~ adjust-ments and begin to set its prices on a market-by-market and a service-by-service basis. Insome areas, Medicare may be able to achievegreater economies than now provided by theDRG and RBRVS systems; in other cases, itmay need to pay more so that it does not in-duce providers and patients to switch to com-

petitor plans.

Provider Arrangements

Medicare's provider arrangements will needto evolve so that Medicare can become an ef-fective purchaser of health care services andadopt the best practices of private health plansto manage costs, quality, and service.

Medicare is now among the last of the "anywilling provider," fee-for-service insuranceplans; the resulting inability to manage qualityand volume of services is its major competi-tive disadvantage vis-a-vis private healthplans. The Medicare program runs the risks ofbeing the "mother lode" for all of those hospi-tals and physicians that, because of their unac-ceptable costs, quality or service, are not in-cluded in private-sector managed care plans.Medicare currently holds out to such provid-ers the lure of a population with large medicalneeds and a program with little control onquantity of services.

The Medicare program will need to considerdeveloping various forms of preferred pro-vider networks, so that it can build its futurearound those providers offering the best qual-ity, costs and service but still allow individu-als to use out-of-network providers of theirchoice (for higher copayment or premiumamounts). This would help to preserve thebasic Medicare program by protecting it from

Performance Accountability

Medicare's performance accountability willneed to reflect the same "report card" dataand accreditation standards as applied to itscompetitor plans.

The Medicare program needs to recognizethat it will be in competition based not just onbenefit packages and costs but also on qualityof care and effectiveness in improving healthof its enrolled populations. There is ampleevidence of quality problems in the Medicareprogram to warrant more effective quality-oriented efforts, particularly to deal withchronic and preventive care concerns. To iden-tify-and deal with-its own competitiveweaknesses vis-a-vis private health plans,Medicare needs to (a) adopt a new missionphilosophy of accountability for health of itsenrolled population and (b) assess its perfor-mance--nationally and by market area-through "report card" information that thereconciliation bill and Clinton plan propose berequired from Medicare's competing healthplans. Using the same logic, Medicare shouldalso apply the accreditation standards re-quired for its competitor health plan to itsown contractors (intermediaries, carriers, andpeer review organizations [PROs]) to assurethat they have the quality, internal processes,and effectiveness in improving health statusneeded in the new health care market.

-7-

while their private operations seek to prosperby attracting Medicare enrollees. Medicare'sresolution of these issues is complicated by thestatutory franchises guaranteed to its contrac-tors. These franchises include the "providernomination" clause that allows hospitals tochoose the Medicare contractors that will audittheir bills and cost reports, the reservation ofPartB contracts to insurance companies, andthe preference for medical society-sponsoredgroups as PRO agents. Medicare should havenew administrative flexibilities to use what-ever private-sector organizations will bestserve the public in the future.

The Medicare program is also at a disadvan-tage with private business operations since itsauthorities for hiring, promotion, and compen-sation are set by civil service regulations; itsmajor policy changes need to be approved byboth houses of Congress and the president;and its administrative practices, governed bythe Administrative Procedures Act, involve athree-year-iong process for establishing newoperating policies. All of these characteristicswill also need to be reconsidered.

Management Systems

Medicare's management systems will needto evolve to deliver a range of products, tomany different customers, at cost, quality andservice performance that meets or exceedscompetitive standards.

Medicare's management system has the po-tential strengths of a unique public-privateparmership. Nearly all of Medicare's day-to-day operations are carried out by private-sec-tor contractors, primarily health insurancecompanies and the PROs. The ability to seekout new management parmers gives Medicarea potential for partnering with state-of-the-artperformers in the private sector as well aspotential flexibility and innovation capabilitythat would be far more difficult in a govern-ment-run program. Medicare will increasinglyneed to consider establishing relationshipswith new sets of contractors and usingprivate-sector contractors to accomplish itsnew tasks.

The Medicare program will also need toconsider issues that will arise because its mostimportant contractors-particularly, BlueCross and Blue Shield plans and other insur-ance companies-have growing conflicts ofinterest with the Medicare program. Theseinsurers will own and operate some of theMedicare program's major competing healthplans; the Blues and Prudential, as well, arethe leading writers of medigap benefits, whichMedicare may want to incorporate into itsown product line in competition with medigappolicies. These contractors may have consider-able difficulty in resolving these difficulties inways that best serve the Medicare program'sneeds: Will they put their best resources andefforts into the success of their own venturesor into that of a major competitor, the Medi-care program? The medical society-sponsoredPROs may also have conflicts of interests ifmedical societies form provider-sponsorednetworks to compete with the Medicare pro-gram. Possibly, there may be ways to build"fire wallsll and other means by which thesecompanies can be effective Medicare partners

Risk Adjustments and Market Strategies

Risk adjustments between Medicare and itscompeting health plans are essential to provid-ing a market in which competition is based oncost, quality, and service rather than on riskselection. Medicare will also need to developdifferentiated market strategies for a variety ofcompetitive environments.

The shortcomings of the current risk-adjustment (AAPCC) methodology for payingMedicare's competing health plans puts Medi-care at a competitive disadvantage. It encour-ages its competitor health plans to engage inrisk-skimming and means that such practiceswill drive up Medicare's average per enrolleecosts. As many fee-for-service insurance planshave discovered over the past decade, such (un-corrected) competitive practices are quite dan-gerous and can quickly make fee-for-serviceinsurers irreversibly and fatally noncompetitive.Without better risk-adjustment approaches, the

-8-

Angeles), 50% of Medicare enrollees have al-ready opted for private health plans. Medicareneeds strategic planning that recognizes thediversity of the competition that it faces andthe need for market-focused analyses, includ-ing how different premium risk adjusters canaffect competitor behavior. Such capabilitieswill be particularly important in adjusting tothe rapid changes that would follow enact-ment of Medicare reform legislation.

Social Mission

Medicare's social mission responsibilities-such as funding for graduate medical educa-tion and disproportionate share hospitals-will need to be reconsidered for financing thatwill not result in Medicare's being at a com-petitive disadvantage.

The Congress has given Medicare a numberof social missions-and financing responsibili-ties-that are not required of its competitorhealth plans. These include financing for gradu-ate medical education and hospitals with dis-proportionate shares of charity populations. In1993, these expenses were $5.4 billion for gradu-ate medical education and indirect medical edu-cation and $3 billion for disproportionate sharehospital payments. As Medicare must increas-ingly compete with private health plans, politi-cal decision makers will need to consider vari-ous alternative financing for such burdens, in-cluding removal of these expenses from Medi-care, with new financing provided from generalrevenues or other government sources, and/orrequirements that Medicare's competitor plansprovide equivalent payments.

Medicare program is in considerable peril ofbecoming a residual program with a concentra-tion of the highest-expense populations thatprivate health plans do not wish to enroll.Moreover, as discussed above, Medicare's abil-ity to continue to compensate for this shortcom-ing through reducing provider payments willbe constrained. The serious problems facingMedicare in this regard, and the possibilities of .~

better options, are discussed in a recent HealthInsurance Reform Project paper by StanleyJones (Why Not the Best for the Chronically nil).

Medicare will also need to develop marketstrategies that recognize the differences amongcompetitive market areas. Medicare was de-signed with a great deal of uniformity in enroll-ment, benefits, financing, provider paymentpolicies, regulations, and administrative struc-ture. But, at the health market level, it is farfrom a uniform or steadily changing program.There is great diversity in nearly every dimen-sion of service use, rates of increase, and expen-ditures. Even on a regional basis, Medicare en-rollees' use of hospital care varies by a ratio of 2to 1-from 1,735 days per 1,000 enrollees in thewestern states to 3,455 days per 1,000 enrolleesin the northeastern states in 1992. From 1986 to1992, Medicare Part B expenditure growth var-ied by more than 3 to 1 among states-from 4%to 5% annually in California and Hawaii to be-tween 13% and 16% annually in South Carolina,Delaware, Kansas, Nevada, and North Carolina.Medicare needs strategic planning that recog-nizes the great diversity of the problems it facesand the need for differentiated managementstrategies tailored to its problems in individualmarkets.

The competition for the Medicare programfrom competing health plans also varies wide-ly among areas and results partially from theAAPCC payment methods. As of January1995,2 states alone-Calliornia and Florida-accounted for nearly 60% of Medicare HMOenrollment, while 19 states had no MedicareHMO enrollees and 32 states had 1% or fewerof their Medicare-eligible populations enrolledin HMOs. In some areas (for example, Los

Research and Demonstrations

Medicare's research and demonstrationsneed to provide the basis for an integratedstrategy for shaping Medicare's future in acompetitive, consumer-choice market.

The Medicare research and demonstrationauthorities have often had a focus oriented tothe Washington political process. mcreasingly,Medicare will need to be market-oriented and

_0-

start out in a disastrously noncompetitive po-sition. How well Congress, HCF A, and con-stituency groups understand and respond tothe needs for some of the changes describedabove will help to determine whether Medi-care will be an effective competitor or a resid-ual program in the future.

The author thanks Stanley Jones and a number ofother health insurance experts for discussions aboutMedicare and its competing health plans.

studies will need to provide the information,insights, and prototypes it will need to excel ina competitive environment. Among the types ofuseful studies would be the following:

.Consumer market research on Medicare vis-a-vis its competitors.

.New approaches for risk-adjustment andservice contracting.

.Studies of Medicare's most successful com-petitors, to determine how their offeringsare superior to Medicare's.

.Improved clinical effectiveness and out-comes studies to provide an adequate scien-tific basis for dealing with the very largeregional variations in Medicare service vol-ume among areas and in rates of service useincrease.

.Studies of Medicare's high-use populations,who are likely to be "demarketed" by Medi-care's competitors and remain in the Medi-care program.

.Studies of disease management and preven-tion initiatives. Members of Medicare's el-derly population, many with chronic condi-tions, are with the Medicare program for anaverage of more than a decade and up to 40years or more; individuals in the Medicaredisabled populations may be enrolled even

longer.

ENDNOTES

1. Medicare drug coverage is discussed in PharmacyBenefit Management: The Right Rx? Health InsuranceReform Project, April 1995.

2. In 1993, 38% of medigap policies failed to meetfederal minimum standards for benefit payout ratesof at least 65% for individual policies and 75% forgroup policies. General Accounting Office, MedigapInsurance: Insurers' Compliance with Federal MinimumLoss Ratio Standards, 1988-93 (GAO/HEH5-95-151),August 1995.

3. George Chulis et al., "MCBS Highlights:Ownership and Average Premiums for MedicareSupplementary Insurance Policies," Health CareFinancing Review, Fall 1995, pp. 255-275.

MEDICARE'S FUTURE

In a comprehensive analysis, the Medicareprogram's future could look brighter than dis-cussed above, particularly if some of its mostimportant competitive shortcomings are re-solved. Similarly, Medicare's potential compet-itors have a number of problems of their ownto address. But complacency about Medicare'sfuture would be imprudent (at least).

The Medicare program has been a greatsocial policy success for its first 30 years. Butmany of its major elements will require re-thinking for this new competitive, consumer-choice environment. At first, Medicare may

-10-