By Amy Goldstein
Washington Post Staff Writer
Monday, August 18, 1997; Page A01

Group Health Cooperative of Puget Sound aggressively pursues the business of elderly patients throughout Washington state, but had never ventured east across the state line. At the prices the federal Medicare program was willing to pay HMOs in Idaho, recruiting next door did not seem worthwhile.

But suddenly Group Health, one of the nation's granddaddies of managed care, plans to woo as many Medicare patients in certain Idaho counties as it can find. The reason lies in the budget agreement signed by President Clinton earlier this month: In one county just across the border from Spokane, Wash., for example, monthly Medicare payments will soar from $307 to $437 per patient.

"We will follow the money," said Maribeth Capeloto, Group Health's director of federal relations.

That is precisely the kind of reaction that policymakers who drafted the budget accord had in mind. Luring health maintenance organizations into communities they have avoided is one of many strategies imbedded in the federal budget agreement that could, over time, profoundly change the face of medical treatment for the nation's elderly.

Until now, Americans age 65 and older have remained relatively insulated from the remarkable transformation of the U.S. health care system in this decade that has forced changes in the way much of the country gets medical care. Unlike most other people, the vast majority of the country's 33 million Medicare beneficiaries – secure in the knowledge that the government would pay much of the bill – have continued to choose their own physicians and visit them as often as they want.

But now a new assortment of medical plans, combined with a variety of new financial levers, is designed to tilt Medicare as well sharply toward managed care.

As health officials, policy analysts and the medical industry try to decipher the changes that will be unleashed during the next several years, some are beginning to ask a fundamental question: Will the government's plan work?

Proponents predict that the $192 billion federal program will save money and that patients will be happier under a system that opens Medicare to intense competition from HMOs and other private health plans.

But there are also concerns being raised about whether the changes may undermine the program's financial stability by creating a medical caste system in which the wealthiest and healthiest Medicare patients are siphoned off into a separate group with their own form of health care.

In the short term, advocates and opponents agree, patients will face a range of medical alternatives that could seem dizzying. "It is very much like telephone deregulation," said John Rother, the chief lobbyist for the American Association of Retired Persons.

Starting late next year, all Medicare patients will have to decide annually whether to stay in the traditional "fee-for-service" brand of Medicare or switch to one of several newfangled arrangements.

These include HMOs and so-called preferred provider organizations that offer incentives for patients to choose their doctors from a set list. They also include a new breed of health networks for the elderly run by physicians or hospitals.

The agreement allows 390,000 Medicare recipients nationwide to try controversial "medical savings accounts," in which patients buy insurance policies with high deductibles while they put aside money for medical expenses in special tax-free accounts. And, for the first time, patients may choose a plan that allows their private doctors to charge more than the standard Medicare rates in exchange for providing more services than the program typically covers.

Patients, particularly older retirees who until now have not needed to become shrewd consumers in the world of managed care, "are going to find this a bewildering and confusing array," said Marilyn Moon, a health economist at the Urban Institute and one of two public trustees of the Medicare Trust Fund.

And although politicians have couched the program's changes in the rhetoric of "choice," a value important to patients, analysts say beneficiaries are likely to discover that many of the new arrangements impose unfamiliar limits on when and where they can receive care.

How such changes play out is a question with high stakes for American taxpayers.

Medicare was created three decades ago as a government-run insurance system that, for the first time, promised equal access to health care for all elderly and disabled Americans, rich and poor alike. Today, Medicare has swelled to the point that it now accounts for $1 of every $8 in the federal budget, and it faces enormous financial strains.

The trust fund that pays for hospital care is expected to become insolvent in several years, and the program's financial underpinnings are ill-prepared to withstand the ballooning costs that will occur when the large baby boom generation begins to retire early in the next century.

The strategies in the budget agreement represent a kind of interim tack while the federal government tries to figure out what to do in the long run. The agreement will lead to unprecedented reins on the program's spending – $116 billion in the next five years – but it omitted several proposals that would have changed some of Medicare's ground rules (the age at which people become eligible, for example).

In tipping the program toward managed care, the agreement accelerates a trend. Some 4.4 million Medicare patients now belong to private HMOs, and – even without the agreement – federal estimates have projected HMO enrollment would increase to 9.3 million within five years.

But now, the thinking goes, private plans may become more appealing because they will expand beyond HMOs to include doctor- and hospital-run networks that are likely to have fewer restrictions on patients. "What we used to have is old-fashioned Medicare and HMOs. Now they are moving toward each other," the AARP's Rother said.

Managed care's allure is that it often offers benefits, such as prescription drugs, that traditional Medicare has excluded. At the same time, the budget agreement will change the way that nursing homes, rehabilitation services and outpatient hospital clinics are paid for their fee-for-service patients. Borrowing from the method used since the early 1980s for inpatient hospital services, the government will begin to pay a fixed rate for each kind of service, no matter how long a patient stays. As a result, providers of treatment could become less generous with their care, making fee-for-service medicine less appealing to patients.

But some patients may prove reluctant to switch, even with the financial inducements tilting toward manged care.

"People would pretty much stick to where they are. Medicare . . . has done a beautiful job up until now," said Chester McPherson, 77, a retired insurance agent in Lincoln, Neb., a state in which, like Idaho, Medicare HMOs have been scarce and payments are to rise dramatically.

McPherson said he and his acquaintances are wary of managed care because they have watched local Medicaid patients enter such plans. "Some of them are complaining they aren't getting the help they want," said McPherson, who works part time giving financial advice to other senior citizens.

The decisions of individual patients have important economic consequences for the program as a whole. The Congressional Budget Office predicts that the new variety of plans will lead to $22.5 million in Medicare savings over the next five years, but whether its prediction proves right depends on which kinds of patients end up in which versions of the program.

Many experts expect that older patients, who tend to be sicker and thus more expensive, will be the most likely to remain in the original program. But if the pool of Medicare patients splinters too much, so that only the healthiest ones pick private medical plans, the government could end up overpaying those plans to take care of patients who require little care. If that happens, HMOs and private organizations could end up making money, while the Medicare program saves little or nothing.

There is a second uncertainty as well: Will the government's new financial incentives prove strong enough to push HMOs into new places?

Nick Franklin, senior vice president for public affairs of PacifiCare Health Systems, a California-based company with about 1 million Medicare patients in a dozen states, said the company picks communities partly by sizing up how many patients, doctors and hospitals are already there. If the potential market isn't big enough, it doesn't go.

"There are some areas that are still not going to be served, no matter how high the [payment] rates go," Franklin said.

Even in places where HMOs and other health plans will be plentiful, it is unclear what will happen.

"The door has been opened to creatively establish a more cost-efficient Medicare program than we have now," said Daniel H. Johnson Jr., immediate past president of the American Medical Association, which won a victory when the agreement included new networks run by doctors. "The elderly aren't monolithic," he said. "Why should they be in a monolithic health care system?"

But the Urban Institute's Moon is less hopeful. The new choices, she fears, could end up providing extra benefits to the healthiest and wealthiest while leaving the neediest patients in a traditional program that is newly saddled with soaring costs.

"That is a prescription for Medicare being a disaster," Moon said.