HMOs are expected to provide all covered services to members in return for fixed premiums. HMOs may have their own staff of physicians and other providers to deliver care, or they may contract with individual providers or medical groups to deliver services. From the Medicare beneficiaries’ perspective, HMOs may offer a more comprehensive package of services than fee-for-service Medicare and at a lower cost than beneficiaries might incur if they purchased such coverage through supplementary insurance. HMOs were designed to offer preventive health services inexpensively and to constrain the provision of expensive services, primarily through the use of a reimbursement method known as capitation. Under capitation, Medicare pays HMOs a fixed amount per month for each beneficiary. This method typically places HMOs at risk for health costs, thereby giving them a financial incentive to control the use of services, emphasize preventative care, and avoid unnecessary care. Some HMOs, in turn, transfer a portion of their financial risk to care providers, such as physicians or physician groups. To encourage commercial and Medicare use of HMOs, in the early 1970s, the Congress authorized federal standards and oversight to ensure reasonable care and service. For example, initial legislation authorizing a Medicare HMO program required quality of care standards at least equal to those prevailing in the HMO’s service area. In addition, HMOs had to have sufficient operating experience and enrollment to permit evaluation of their capacity to provide appropriate care, and to sustain financial losses if the Medicare payment did not cover costs. Federal standards were strengthened as the government gained experience with HMOs. Currently, performance standards for HMOs serving Medicare beneficiaries are designed to safeguard beneficiary interests by ensuring the following: Plans have adequate finances and management. HMOs must meet financial solvency requirements, have minimum enrollments necessary to assume the financial risks, and provide adequate administration and management. Plans manage quality, utilization, and access to medical care. Plans must operate internal quality assurance systems to detect and correct patterns of underservice and poor quality care, provide reasonable access to specialists and services, and not transfer excessive financial risk to providers. Plans treat enrollees fairly. HMOs must use fair marketing practices that do not mislead or confuse enrollees, must provide necessary and covered services, and must follow equitable grievance and appeal procedures. Before an HMO may participate in Medicare, HCFA conducts a review to determine if the HMO meets federal requirements. During this “certification” review, HCFA looks at several indicators of the HMO’s ability to provide services to Medicare beneficiaries. These indicators include documentation of financial condition, marketing projections, qualifications of management staff, and management information systems. After awarding a Medicare contract to an HMO, HCFA monitors its performance for continued compliance with federal requirements. HCFA also contracts with peer review organizations (PRO)—independent, state-based organizations that use local doctors and nurses—to assess quality of care provided to beneficiaries. HCFA has a variety of tools available to enforce compliance with standards. These include authority to sanction an HMO by terminating or not renewing its contract, stopping enrollment, or imposing monetary penalties. Additionally, HCFA has numerous administrative means to encourage compliance, such as withholding an HMO’s request for expanding service areas. HMO care has become widespread in the private sector. In seeking ways to ensure quality and value in HMO care, large employers and the HMO industry are demanding HMO accountability beyond existing federal protections. Some large employers, for example, are requiring that HMOs undergo quality accreditation reviews conducted by the National Committee for Quality Assurance (NCQA). NCQA is a private agency that works with large employers to set and enforce HMO quality standards. Its standards focus primarily on quality assurance in HMOs’ management of medical operations, and its review and enforcement methods differ from HCFA’s. In addition, a group of large employers and HMOs are working with NCQA to develop standard performance measures for HMOs that would enable employers and consumers to compare HMOs and make informed choices. Recent enforcement cases show that HCFA processes remain slow at addressing problems in HMOs that do not readily comply with federal standards. PRO sampling of care in Florida during 1991 raised concerns with the quality of care at one HMO. The HMO questioned these findings, leading to a special PRO review and to the events discussed below. In 1992 and 1993 the PRO found serious quality problems in most of the risk contract HMOs in the Florida Medicare market, which has about 17 percent of all Medicare HMO enrollees. PRO review of hospitalized patients at one HMO, for example, raised serious issues about quality in 25 percent of the 109 cases sampled. After reviewing PRO findings, an internal HCFA task force suggested special investigations of quality assurance and utilization management practices at all Florida Medicare risk HMOs. PRO sampling of care in Florida Medicare HMOs, for example, found patterns of quality problems, including incorrect diagnoses, inappropriate assessment of test results, inappropriate treatment plans, underutilization, access concerns, delays in treatment, and treatment that was not competent or timely. Specific cases included the following: Delay in treatment. A beneficiary suffered recurrent urinary tract infections, tested positive for protein and blood in the urine, and had test results that suggested the presence of prostate cancer. Several months passed before the HMO referred him to a urologist and before the urologist performed further tests. The patient ended up in a hospital emergency room, and was treated for undiagnosed bladder cancer that had perforated the large intestine. Treatment not competent or timely. A beneficiary was treated with a blood-thinning drug that requires careful monitoring to avoid excessive bleeding. As a result of inadequate monitoring, the patient was admitted to a hospital with internal bleeding, which was found to be due to an excess of the blood-thinning drug. Denial of access. In a 24-hour period, a beneficiary with signs and symptoms of both pneumonia and a heart attack twice sought and was denied admission to a hospital. The HMO primary care physician concurred with both denials of admission. After the second attempt, the patient died on the way to his primary care physician. HCFA’s oversight of one of the Florida risk HMOs illustrates the pattern that has emerged between HCFA and HMOs that do not take prompt actions to correct performance problems. This HMO won a HCFA demonstration contract in 1982. After a series of financial problems and other compliance violations, the HMO was declared insolvent in 1987, and another HMO acquired its assets. The new HMO operates in four Florida markets under a single contract with HCFA. The HCFA enforcement activity documented in the following paragraphs relates to the South Florida market, but enrollment and payment statistics in table 1 relate to all four markets. HCFA data systems track the HMO’s contract as though it were a single-market HMO—the normal contracting arrangement for Medicare. Since 1987, HCFA repeatedly found that the HMO’s South Florida operations did not meet federal standards for quality assurance. During this period, HCFA undertook special studies and received PRO reports that indicated continuing problems with quality of care. Nevertheless, it allowed the HMO to continue enrolling beneficiaries and operating as freely as a fully compliant HMO, until HCFA’s 1994 investigation of quality assurance practices led to voluntary enrollment restrictions at selected medical centers. From 1988 to 1994, the HMO maintained and increased its revenues from Medicare by enrolling over 336,500 beneficiaries to replace the over 269,000 who disenrolled. The HMO had Medicare revenues in 1994 that exceeded $1 billion and constituted 72 percent of its total revenues. HCFA recently determined that the South Florida HMO has been responsive to its 1994 findings and in January 1995 approved the HMO’s corrective action plan. HCFA has since visited the HMO’s offices and declared the HMO in compliance with requirements, effective July 5, 1995. (Table 1 presents the history of HCFA’s oversight and enforcement related to the HMO’s quality assurance practices, including PRO reviews of quality of care.) Slow enforcement by HCFA was not unique to quality problems, or to the Florida market. Two other enforcement cases we reviewed to test HCFA’s processes were in California and Illinois and included marketing abuses, including high-pressure, illegal practices resulting in high levels of complaints and disenrollments from misinformed beneficiaries (see p. 12); nonpayment or slow payment of claims for beneficiaries’ out-of-plan services, which can result in out-of-pocket expenses or bill collection actions against the beneficiaries; and not following prescribed appeal processes, resulting in some Medicare beneficiaries not receiving the services they are entitled to under the HMOs’ Medicare contracts (see p. 13). HCFA’s monitoring and certification process has not been adequate to ensure that Medicare HMOs comply with standards for ensuring quality care. This has been confirmed by HCFA, PRO, and NCQA findings showing a mismatch between what HMOs are supposed to do and what they actually do to manage and ensure quality of care. NCQA recently found many HMOs out of compliance with its standards. Of the 15 Florida Medicare plans NCQA had reviewed as of December 1994, only 1 received full accreditation, 8 received less than full accreditation, and 6 were denied accreditation. HCFA efforts to ensure that Medicare beneficiaries receive quality care from HMOs continues to be inadequate for three reasons. Specifically, HCFA conducts limited quality assurance reviews, does not routinely collect utilization data that could most directly indicate potential quality problems, and does not assess HMO risk-sharing arrangements with providers that can trigger quality problems. HCFA’s routine compliance monitoring reviews do not go far enough to verify that HMOs monitor and control quality of care as federal standards require.