Medicare HMO risk contracts: background, problems, and prognosis

Major changes in the Medicare program mandated by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) became effective in 1985 and included the introduction of a capitated system for reimbursing health maintenance organizations (HMOs) for health care services provided to enrolled Medicare beneficiaries. Risk contracts with HMOs allowed the enrollment of some 900,000 individuals by May of 1987. The program has witnessed some variability in results including the Health Care Financing Administration's (HCFA's) May 1987 termination of its risk contract with International Medical Centers, Inc., a Florida-based HMO serving 150,000 subscribers, because of a number of problems, including quality of care. Recent Administration proposals would create a "private health plan option" (PHPO) with capitation and managed care provisions for all Medicare beneficiaries. This proposal would allow employers (and other entities not eligible for TEFRA risk contracts) to provide group health benefits to retirees with costs reimbursed on a capitated basis.