Medicare and managed care.

Medicare offers nearly universal, but limited, coverage for the elderly. The vast majority of beneficiaries therefore obtain supplemental coverage, or they enroll in HMOs to gain extra benefits at substantially lower or zero cost. This is possible because of reduced utilization and costs, as well as favorable selection of lower-risk enrollees into HMOs. Competition from HMOs may lower local fee-for-service costs as well. Quality and satisfaction measures are quite balanced, with some results showing better HMO performance and some worse. The absence of adequate risk-adjusted payments to HMOs, however, gives them little incentive to develop high-quality programs for the sickest enrollees.