(MONEY Magazine) – Desperate to get a piece of the rapidly growing, increasingly healthy 65-and-over population, health maintenance organizations are selling themselves to the nation's estimated 38 million Medicare recipients these days with the zeal of old-time circus barkers: "Medical benefits far beyond those offered with traditional Medicare! No paperwork! Low co-payments and no deductibles! The highest-quality services and facilities! Doctors who will keep you alive forever!" Well, okay, maybe they don't say you'll live forever. But the rest of the sales pitch has been mighty effective: Medicare beneficiaries are now signing up for HMOs at a rate of one every 30 seconds. As a result, the nation's 350 Medicare managed-care plans today serve 13% of the 65-plus population, or 4.8 million people. And experts say that with both the government and seniors trying to reduce their health-care spending, 25% of Medicare recipients may be in HMOs in five years.

For some of them, joining a Medicare HMO will be a smart move. For others, however, it could be a mistake. Our reporting shows that Medicare HMOs can be a satisfactory option if you're in good health. But as managed-care members like Jean and Gil Meinke of San Antonio, shown at right, are finding out, if you have a serious or chronic medical condition, HMOs can have significant shortcomings that you need to understand before you sign up. "I just don't think most people know what they're getting into when they go into a Medicare HMO," says Jean Meinke, 63.

After interviewing more than two dozen patients, doctors, administrators, consumer advocates and policy experts, a MONEY investigation has found the following disturbing news about Medicare HMOs:

--Studies show that seniors have more trouble getting specialty care in HMOs than with traditional fee-for-service plans.

--Elderly patients who need home health care or who are chronically ill are likely to get less treatment through Medicare HMOs than from fee-for-service plans.

--Some HMOs appear to have used unscrupulous practices to trick seniors into joining.

--Medicare HMO patients lack a timely, efficient appeals process when they don't get the care they think is essential. This can delay urgently needed treatment.

Traditionally, when you hit 65, the federal government begins shouldering most of your medical bills through fee-for-service care that covers 80% of the approved charge for most "reasonable and necessary" doctors' visits. Medicare HMOs, which began gaining popularity in the mid-'80s, also get Uncle Sam to pick up much of the tab. To hold down costs, the HMOs limit your choice of doctors and access to specialists. All Medicare beneficiaries, HMO members or otherwise, must pay Medicare's Part B premium, which covers doctors' bills and is now $525.60 a year.

Clearly, however, Medicare HMOs offer several advantages over traditional fee-for-service Medicare. First, members have virtually no paperwork, since the plans handle all insurance forms. Second, HMOs provide more comprehensive coverage, typically offering benefits traditional Medicare doesn't--like prescription drugs, dental services, eyeglasses and preventive care--at little or no charge. And they are inarguably cheaper: To get such extras with fee-for-service Medicare, you'd have to buy a supplemental Medigap insurance policy, which isn't cheap. Last year the average premium cost rose 23% at Prudential, the biggest Medigap seller, and its basic plan can run up to $1,020 a year.

In addition, roughly 60% of HMO members owe no premiums with their plans. Co-payments are minimal in a Medicare HMO too, generally ranging from just $5 to $20 per office visit. And there are no deductibles, even for hospital stays. Indeed, HMOs pick up virtually the whole tab on approved hospital care. Traditional Medicare, by contrast, holds you responsible for up to $760 in hospital charges during a 60-day period.

The attractive package of advantages that Medicare HMOs offer helps explain why a 1993 study by Mathematica Policy Research in Princeton, N.J. of 12,500 seniors found that 93% of those in managed-care plans would recommend their HMO to a friend or relative. And a recent report by the Physician Payment Review Commission in Washington, D.C., an independent advisory committee that reports to Congress on Medicare-related issues, says that only 7.5% of Medicare HMO members drop out of their plans each year. Of those who do leave, most simply switch to another HMO.

But critics, like Diane Archer, executive director of the nonprofit Medicare Rights Center in New York City, contend that such studies are misleading. They say Medicare HMO members now make up the healthiest portion of the senior population, who may simply be happy about avoiding insurers' paperwork and getting extra coverage. "HMOs do not compete based on quality of care but on the basis of costs and benefits, which attract healthy patients," Archer says. Indeed, the 98 managed-care plans in the Mathematica study had enrollees with fewer chronic health problems than their non-HMO peers. Furthermore, the report noted that in virtually every area except cost, HMO enrollees were less likely than other seniors to rate their health care as excellent.

So should you forget about an HMO's cost savings and stick with traditional Medicare? Not necessarily. But you ought to exercise caution when choosing which health-care option is best. Here are the four major problems seniors need to be aware of when considering a Medicare HMO, and how to avoid them.

1. NOT ALL HMOS ARE CREATED EQUAL.

Approximately 50% of all Medicare beneficiaries can choose from two or more HMOs in their area. And just as Chicago Hope and ER aren't interchangeable, no two managed-care plans are alike. For example, both Aetna plans and Prudential run Medicare HMOs in San Francisco. Aetna charges a $6 co-payment per prescription, with a cap on what it will pay of $1,000 a year. Prudential's SeniorCare charges a $5 to $30 co-payment, with a $500 to $1,250 cap.

Or consider a 1995 General Accounting Office (GAO) study that looked at three Medicare HMOs based in Miami. Nearly 33% of CareFlorida's members left the HMO within their first three months. By contrast, only 10% of Health Options' or Prudential Health Care's Medicare patients left so soon. Marguerite O'Toole, senior vice president of Medicare operations for Foundation Health, the Rancho Cordova, Calif. company that took over CareFlorida two years ago, admits that in the past, there were complaints that the HMO's sales agents were forging signatures of beneficiaries on enrollment forms or didn't fully explain to their clients that their choice of doctor would be restricted. The result: Many enrollees dropped out because they'd never intended to join in the first place. Now the company says any representative found engaging in such behavior is immediately fired and all signatures are verified. Unfortunately, consumer advocates report that they continue to get complaints about managed-care plans tricking seniors into enrolling.

What you can do: If you're interested in joining a Medicare HMO, check out all the managed-care plans in your area. Start by calling the Medicare hotline of the Health Care Financing Administration (HCFA) at 800-638-6833. Ask for the names of local plans. In addition, your state or county's local Health Insurance Counseling and Advocacy Program (HICAP) can sometimes provide you with information about individual plans. To get the HICAP number, call Eldercare Locator at 800-677-1116. Once you have a list of the HMOs, phone them and request a benefits summary, cost breakout and lists of both primary and specialty-care doctors. Starting this fall, HCFA plans to publish quality and performance data for Medicare HMOs on its Website (www.hcfa.gov).

2. HMOS MAY OFFER LESS CARE AND HEALTH COVERAGE THAN FEE-FOR-SERVICE PLANS.

Last October, the Journal of the American Medical Association published a study of 2,235 Medicare and Medicaid patients that found that the elderly more frequently experienced a decline in their physical health when enrolled in HMOs than with traditional Medicare. The reason, researchers concluded, was that the HMO patients probably had access to fewer specialists and expensive medical technology than their fee-for-service counterparts. Karen Ignagni, president of the American Association of Health Plans, which represents 1,000 HMOs, says her group takes such findings seriously. But, she says, "overall we think the quality of care we offer is at least as good as that in the fee-for-service system."

Medicare HMOs sometimes come up short providing home health care too. A 1994 study of 1,632 Medicare patients nationwide conducted by the Center for Health Policy Research in Denver examined the difference in home health care of managed-care and fee-for-service systems. The researchers found that HMO patients received less frequent treatment than those with fee-for-service, producing a detrimental impact on their progress. For example, after 12 weeks of home visits, 48% of traditional Medicare patients could feed themselves more easily, compared with just 34% of HMO patients.

What you can do: Look for a plan that offers doctors, home health-care agencies, hospitals and skilled-nursing facilities that are easily accessible. Also, while all HMOs are required to cover medically necessary emergency services in hospitals that aren't in the HMO's network, plans vary widely in their definitions of what constitutes an emergency. So be sure to check out the fine print in your plan's benefits summary. And make sure after-hours-care treatment facilities are offered. If you have a chronic condition, you'll want to verify that you'll be able to get referrals and access to the kinds of specialists you'll need.

3. THE APPEALS PROCESS IS FRUSTRATING AND INEFFICIENT.

Consumer advocates say that one of the most common complaints they get from seniors is that their HMO is denying them coverage they believe they deserve. Just ask Gil and Jean Meinke in San Antonio. Last October, Gil, then 65, who is enrolled in the Humana Gold HMO, passed out during a church service and was rushed to a hospital emergency room. He was treated for cardiac arrest, and as part of his follow-up care he was ordered to visit a cardiologist every week for the next month. Unfortunately, the plan would not approve the cardiologist he chose, even though the Meinkes say they had been led to believe otherwise. "I felt traumatized all over again," Jean says. She spent four days of "lots and lots" of phone calls before Humana finally agreed to pay.

When your Medicare HMO denies you coverage, federal law says it must provide a written explanation of its decision and your right to appeal. If you decide to challenge the HMO's decision, your plan must then rule in your favor within 60 days or forward your claim to HCFA. The government then has 30 days to issue its decision. If they find in the HMO's favor, you have 60 days to request a hearing from an administrative law judge.

The trouble is, this process almost never unfolds so seamlessly, and it is so time consuming that patients could literally die waiting. For instance, in 1995 the GAO found several HMOs in California and Florida holding on to beneficiary appeals for as long as 200 days before forwarding them. "In Southern California, it was taking two years to get a hearing," says Carol Jimenez, a Long Beach attorney. "By that time, the patient is either in much worse shape or dead."

The appeals problem is hardly limited to California and Florida. In October, an Arizona district court ruled in favor of 15 Medicare HMO beneficiaries who said they had been denied covered services without adequate notice or a meaningful opportunity to appeal. For example, Gregoria Grijalva, then a 71-year-old diabetes patient, was told by her HMO (FHP in Tucson) that it wouldn't cover the home health care her doctor recommended. Efforts by the Grijalva family to find out why coverage was being denied proved futile, and Grijalva initially didn't know she could appeal. The court found that "not one notice provided the specific basis for coverage denials." It is currently reviewing a proposal that would improve the appeals process.

What you can do: Ask the HMO how it handles appeals and the average length of time it takes for a ruling. If you're already in an HMO, make sure that whenever you're denied coverage you get a full, written explanation of your appeals rights and the process.

4. YOU COULD HAVE TROUBLE GETTING MEDIGAP INSURANCE IF YOU DROP OUT OF YOUR HMO.

By law, you can leave a Medicare HMO at any time and go back to traditional fee-for-service or switch to another managed-care plan. If you do go back to fee-for-service, however, you may face a maddening time trying to buy a Medigap policy. That's because during the six months after you turn 65, if you've enrolled in Medicare Part B, any health insurer selling Medigap policies must let you purchase one, regardless of your health. But once that window of opportunity closes, you can be denied Medigap coverage in most states. Even if an insurer agrees to sell you a policy, you'll pay a stiff premium because of your age and any pre-existing health problems. This problem may get even worse soon. Consumer advocates expect Congress to push legislation that would limit the open-enrollment period for Medicare HMOs to just once a year.

What you can do: Hold on to your Medigap policy for the first few months after enrolling in a Medicare HMO, or at least until you feel comfortable about staying in the plan. Yes, that means you'll have to keep paying the Medigap premium. But if your health suffers, you could end up paying thousands more over your lifetime if you try to sign up for Medigap after leaving an HMO. In this case, an ounce of prevention can be worth a bundle.