Late 1970s—The federal government begins offering health maintenance organizations (HMOs) as an option to Medicare beneficiaries.
Although still a novel concept in most parts of the United States, the government saw in the HMOs’ approach to care and financing a way to control rising health care costs. No longer would the government outlays for health care be unlimited. If costs rose above a certain limit, the HMO would absorb the difference. Conversely, plans would profit by holding down costs below what the government reimbursed.
In the Medicare Advantage program, as the plans were later called, the government paid the Medicare HMOs 95 percent of the average per capita cost for traditional Medicare’s fee for service care. That figure reflected the cost efficiency expected in an HMO.
1982—Congress passes the Tax Equity and Fiscal Responsibility Act, which allows HMOs to contract with Medicare more easily.
Throughout the decade, Medicare health plans expanded across the country -- mirroring the growth of HMOs in the private sector. Seniors became more accepting of the HMO concept, which required them to use doctors in the network and get plan approval to see specialists. In return, Medicare health plan members had more complete coverage compared to traditional Medicare, which covered only about 80 percent of seniors’ medical costs.
1990s--Medicare HMOs were taking credit for lowering seniors’ demand for hospital care compared to those in traditional Medicare. But there was a catch: Studies found Medicare HMOs were enrolling a younger and healthier population than the traditional program. The “cherry picking” strategy meant the traditional Medicare program was seeing higher costs because it was left with the older and sicker enrollees. To make sure plans were not overpaid, health policy experts suggested the plans bid against each other to offer coverage in an area, a proposal the industry has fought for years.
1997--As part of the Balanced Budget Act, Congress capped raises in health plan Medicare reimbursement to 2 percent in most areas of the country. But health inflation then was at 6 percent. The major plans responded by leaving dozens of counties and forcing more than 250,000 seniors to change health plans or go back to traditional Medicare. Remaining plans increased costs and curtailed benefits.
2003--With the Medicare Prescription Drug, Improvement and Modernization Act, the Bush administration reversed the funding cuts made five years earlier and for the first time, the federal government moved to pay the Medicare HMOs more than the average per capita costs in traditional Medicare. In addition, Congress allowed the formation of new types of Medicare health plans that gave members more flexibility to seek care. These were preferred provider organizations (PPOs) and fee-for-service plans.
2009--The Medicare Advantage plans now enroll 10.3 million seniors. The plans cost 14 percent more than regular Medicare, or about an extra $12 billion a year.
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