[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
          MEDICARE+CHOICE: AN EXAMINATION OF THE RISK ADJUSTER

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                         HEALTH AND ENVIRONMENT

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 1999

                               __________

                           Serial No. 106-10

                               __________

            Printed for the use of the Committee on Commerce


                                


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                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Health and Environment

                  MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan                 SHERROD BROWN, Ohio
CLIFF STEARNS, Florida               HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 PETER DEUTSCH, Florida
RICHARD BURR, North Carolina         BART STUPAK, Michigan
BRIAN P. BILBRAY, California         GENE GREEN, Texas
ED WHITFIELD, Kentucky               TED STRICKLAND, Ohio
GREG GANSKE, Iowa                    DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia             THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma              LOIS CAPPS, California
  Vice Chairman                      RALPH M. HALL, Texas
RICK LAZIO, New York                 EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming               ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona             JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING,         (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Archer, Diane, Executive Director, Medicare Rights Center....    67
    Bertko, John, Principal, Reden & Anders, Ltd.................    98
    Discenza, Judith A., Vice President, Blue Cross and Blue 
      Shield of Florida..........................................    79
    Hash, Michael, Deputy Administrator, Health Care Financing 
      Administration.............................................     7
    Johnson, Kirk, Senior Vice President, CNA Health Partners....   102
    Margulis, Heidi, Vice President, Government Affairs, Humana, 
      Inc........................................................    89
    Miller, Ann, Member, AARP Board of Directors.................    61
    Scanlon, William J., Director, Health Financing and Public 
      Health Issues, Health, Education, and Human Services 
      Division, General Accounting Office........................    42
    Schub, Craig, President, Secure Horizons USA.................    84
    Wegner, Nona Bear, Senior Vice President, The Seniors 
      Coalition..................................................    70
    Wilensky, Gail R., Chair, Medicare Payment Advisory 
      Commission.................................................    35

                                 (iii)



          MEDICARE+CHOICE: AN EXAMINATION OF THE RISK ADJUSTER

                              ----------                              


                      THURSDAY, FEBRUARY 25, 1999

                  House of Representatives,
                             Committee on Commerce,
                    Subcommittee on Health and Environment,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2322, Rayburn House Office Building, Hon. Michael 
Bilirakis (chairman) presiding.
    Members present: Representatives Bilirakis, Stearns, Deal, 
Bilbray, Whitfield, Coburn, Lazio, Shadegg, Pickering, Bryant, 
Brown, Waxman, Green, Strickland, Barrett, and Eshoo.
    Staff present: Tom Giles, majority counsel; Dan Boston, 
majority professional staff; Jason Lee, majority professional 
staff; Penn Crawford, legislative clerk; Bridgette Taylor, 
minority counsel; and Amy Droskoski, minority professional 
staff.
    Mr. Bilirakis. The hearing will come to order. Good 
morning.
    In the Balanced Budget Act of 1997, the Congress created 
the Medicare+Choice Program to provide Medicare beneficiaries 
with new choices of private health care plans. I supported 
those efforts because I believe that all seniors should be 
given the right to choose their own health coverage. 
Medicare+Choice offers new private health plan options to 
Medicare beneficiaries.
    Seniors, as we know, may still select existing Medicare 
fee-for-service or they may now choose a Medicare+Choice health 
plan. In addition, a new payment method for health plans 
participating in the Medicare+Choice Plan was created by HCFA. 
This new payment methodology will be the focus of today's 
hearing. Prior to BBA 97, payments to Medicare managed care 
plans were based on the adjusted average per capita cost which 
we fondly always refer to as the AAPCC.
    This was a monthly payment to Medicare risk HMO's that 
considered the cost of providing services to Medicare 
beneficiaries through the traditional Medicare program. 
However, HCFA and others were concerned that the AAPCC was an 
inaccurate representation of the true cost for HMO enrollees. 
Most studies indicate that healthier Medicare beneficiaries 
enroll in risk plans leading many to conclude that HMO's 
participating in the Medicare Program were receiving excessive 
AAPCC payments. Due to these valid concerns, BBA 97 mandated 
that HCFA implement a model which considered beneficiary health 
status when determining payment.
    On January 15, 1995, HCFA announced the details of this new 
payment model, better known as a risk adjuster. The HHS 
Secretary is required to implement this risk adjustment 
methodology by January 1, 2000. In general terms, the risk 
adjustment considers a person's diagnosis in 1 year and 
predicts additional costs that the person will incur the 
following year. For example, an individual who has appendicitis 
1 year, is not expected to have higher than average health 
costs the following year.
    Therefore, such an encounter is not taken into 
consideration by the risk adjustment model. However, if someone 
has a stroke, above-average costs are predicted an a plan would 
receive a larger payment to cover the additional health care 
costs of this stroke patient. Currently Medicare pays health 
plans a fixed monthly payment for each beneficiary based 
largely on the fee-for-service, Medicare reimbursement for each 
county in the United States.
    Risk adjustment adds diagnostic information to the payment 
calculation and significantly improves, we think, the accuracy 
of predicting expected costs. So overall this new system allows 
the market place to create new private health care options and 
provides beneficiaries with the information they need to make 
informed choices. For many, Medicare HMO's cover their 
deductibles, co-payments and other cost sharing, thus 
eliminating the need to purchase expensive Medigap insurance.
    Most HMO's also provide beneficiaries, as we know, with 
extra benefits such as pharmaceutical drugs, eyeglasses, 
etcetera. The number of Medicare beneficiaries who enroll in 
HMO's has grown substantially with approximately 6.5 million 
enrollees in 1997. With the establishment of the 
Medicare+Choice Program this number is expected to grow even 
higher. I am pleased that the Administration has chosen to 
phase in the risk adjuster methodology in order to minimize any 
negative consequences to the plans.
    Or even more important, to our Nation's seniors. Similarly, 
I am also pleased that HCFA has been flexible with health plans 
on many of the new BBA 97 compliance standards. For instance, 
HCFA's willingness to move the ACR date for this year from May 
1, to July 1, was beneficial to both the plans and the 
beneficiaries. However, there are still many questions that 
must be addressed on HCFA's development of this new payment 
methodology. And of course we all are particularly interested 
in the real world impact on seniors and their health plans.
    Over the past few months, a significant number of health 
plans have terminated our contracts with Medicare, upsetting 
the lives of more than 300,000 beneficiaries. In my home State 
of Florida, nearly 60,000 seniors have been impacted in more 
than 25 separate counties. I am deeply concerned about this 
matter, I think we all are. And want to work with HCFA, fellow 
Members of Congress and the health plans on a viable solution. 
And of course holding this hearing is the first step toward 
resolving this serious problem, we trust.
    Over the next several months it will be critical for 
Congress, HCFA, beneficiaries and private plans to work 
together in a cooperative manner to make the Medicare+Choice 
Program work. Now having said this, I am sure the whole country 
knows by now that there is a bi-partisan Medicare Commission 
which may or may not come up with a proposed solution to the 
long term care financing problems of Medicare. I am not sure 
whether I can say I am optimistic or pessimistic at this point.
    A few days ago I was more optimistic than I am today. But I 
suppose that no matter what we might ultimately come up with if 
do, and certainly this Congress has to. If the Commission does 
not. In all probability the risk adjustment process will 
probably, will still be the one that will be in effect and I am 
sure that Mr. Hash will expand upon that. So I do want to 
conclude by welcoming our first witness, Mike Hash, the Deputy 
HCFA Administrator. Mike has testified before us before, but 
more importantly, I think he has provided distinguish service 
to this subcommittee for a number years on the issues of 
Medicare and health care reform.
    And Michael, we look forward to your testimony. I know that 
your knowledge of the Medicare program will clarify the issues 
behind this complex risk adjustment model. Let us hear now, the 
ranking member and my very good friend, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. Thank you for arranging 
today's hearing on risk adjustment. I would also like to thank 
Mike Hash, Bill Scanlon and the many other distinguished 
witnesses who have joined us today. Risk adjustment in Medicare 
is not an option, it is a necessity. Effective risk adjustment 
means more equitable payment across Choice+ Plans and the right 
distribution of payments between Choice+ and traditional 
Medicare.
    The ultimate beneficiary is the Medicare enrollee. Proper 
risk adjustment promotes the right level of care for enrollees 
with different health needs. Just as proper risk adjustment 
strengthens the link between payments and costs, a risk 
adjustment mechanism that poorly predicts actual costs, weakens 
that link. Our discussion today will, I hope, shed light on the 
effectiveness of the proposed risk adjustment methodology, so 
that we can move forward toward a better calibrated payment 
system.
    Risk adjustment is a quality issue, an equity issue and a 
fiscal issue. I am glad we will look more closely at that topic 
today. Thank you.
    Mr. Bilirakis. And I thank the gentleman. Mr. Whitfield.
    Mr. Whitfield. First, Mr. Chairman, thank you very much. 
All of us are quite anxious about this hearing today. It is 
obviously a very important subject. I have always been amazed 
at HCFA because it has been my experience as a layman that 
everything that HCFA does, and I don't mean to be critical, 
seems to be pretty archaic and byzantine to me. So when they 
come up with these new formulas, it is always quite 
enlightening.
    And we recognize the importance of the risk adjusters 
because we want to provide incentives for plans to enroll the 
sickest patients and not disenroll them. So I think all of us 
are looking forward to the testimony that will be provided 
today and I yield back the balance of my time.
    Mr. Bilirakis. And I thank the gentleman. Mr. Bryant, 
opening statement.
    Mr. Bryant. Thank you Mr. Chairman. My fellow members of 
the committee, good morning. I do want to welcome our guests 
and thank the witnesses who are appearing before us today. I 
appreciate you taking your time to be with us and certainly 
look forward to hearing your testimony this morning. I am not 
alone in thinking that Medicare is one of the most important 
issues Congress will face this year.
    We do owe to the millions of American seniors who depend on 
Medicare for health care expense, to make sure the program is 
solvent in the future and that it serves them well. We can all 
agree that protecting the financial stability is crucial. 
However, in addition to stabilizing the cost of Medicare, I 
believe it is also important to examine the effects, the 
changes Congress made in the Balanced Budget Act are having.
    We must also examine the effects of HCFA's implementation 
of those changes and effects that it will have on private 
health plans participating in the Medicare+Choice. I want to be 
sure that the seniors in Tennessee and across America have 
choices when it comes to health care coverage. Now having said 
that, I have come to the hearing today with an open mind. I 
look forward to hearing the different parties represented here 
today and what you have to say with regard to Medicare+Choice 
risk adjuster. Thank you again, Mr. Chairman, and I yield back.
    Mr. Bilirakis. I thank the gentleman. The gentleman from 
Ohio, I know you are just barely catching your breath, but you 
are more than welcome to make an opening statement.
    Mr. Strickland. Thank you. Thank you, Mr. Chairman. 
Recently Mr. Hash, there was a headline in the Dayton, Ohio 
paper that read, Seniors Ill Over Anthem Exit. Company losses 
are forcing it out of the HMO market in some counties. The 
article goes on to describe the story of a senior, Dodie 
Armstrong, who received her cancellation notice before her 
health care coverage membership even took effect.
    Ms. Armstrong had gone to a meeting in April of last year 
to learn about Senior Advantage, the health maintenance 
organization that Anthem Blue Cross and Blue Shield was 
marketing aggressively to Medicare beneficiaries. The speaker 
at this meeting did not mention that Anthem had asked for 
Federal approval to withdraw Senior Advantage from Ms. 
Armstrong's community, yet they were still promotion their 
health care plan.
    Even more troubling this incident was not an isolated one 
that was happening to seniors across the country. In my rural 
Ohio district, the median annual income for individuals over 
age 65 is $19,096. Given the high out-of-pocket health care 
costs born by senior citizens with chronic health problems, 
even with Medicare coverage, the HMO option is attractive to 
many southern Ohioans because it is affordable. These people 
simply cannot afford to incur additional costs of $1,000 to 
$2,000 a year in health care cost because their primary health 
care plan decides they are no longer a profitable market 
sector.
    As we all know, the Balanced Budget Act of 1997, implements 
the risk adjustment formula to address the adverse selection 
issue. While many people have shown concerns over the quality 
of daily use to determine the formula and the actual short and 
long term implications of this approach, I believe risk 
adjusters begin to address a serious matter that needs to be 
resolved quickly. If I can just share one observation. A 
physician in Ohio has recently expressed concern that his older 
patients are extremely upset about the availability or lack of 
it, of affordable health care.
    He believes that as a result of this uncertainty, he will 
begin to see more seniors with anxiety, depression, chest pains 
and other problems triggered by stress. Even for those seniors 
who can still manage to cover their health care costs without 
the HMO, the money spent on health care takes away from money 
otherwise budgeted for groceries, electricity and rent. For a 
vulnerable population stress, which has a very significant 
influence on overall health, could become a life-threatening 
matter. The time is right for us to pursue options that make it 
more likely that managed care entities will not only make but 
will honor commitments to the most vulnerable among us.
    I am eager to work toward redirecting the focus of HMO's 
away from profit motives and toward the focus of providing 
quality, affordable health care to everyone. And I believe that 
risk adjusters just may be the first step that will enable them 
to do so. Having said that, I look forward to hearing from you. 
Thank you.
    Mr. Bilirakis. The gentleman from Texas, Mr. Green, for an 
opening statement.
    Mr. Green. Thank you, Mr. Chairman. And I want to thank you 
for calling the hearing this morning because this is the first 
hearing this session on what I consider one of the more 
important issues. Not in Medicare, the global issue, but also 
in Medicare+Choice it was created to give more options and more 
beneficiaries more health care options. Particularly many 
seniors chose Medicare HMO's because of the additional 
benefits, especially the prescription drug benefit.
    In a recent survey of drug costs in my own district showed 
that seniors without any prescription drug benefit were paying 
almost double what HMO's and other preferred customers pay. 
Unfortunately the Medicare+Choice Program seems to be, at best, 
falling well short of our goals. Hundreds of thousands of 
seniors live in areas that are not served by HMO's and many 
more were dropped from their HMO when they decided, when it was 
decided Medicare simply wasn't profitable enough to continue 
covering those seniors.
    Of course that statement lies in direct contrast to what a 
recent GAO Report says that the Medicare HMO on the average are 
still being paid, being overpaid because they typically recruit 
and serve healthier seniors. And that is why a full 
implementation of the risk care adjuster is important. It is 
the only way to make sure that HMO's are paid for what they do 
and who they serve. If a specific HMO wants to only cover 
healthy patients, then they should only be paid as much as that 
HMO, as an HMO that is willing to provide to care to sicker 
patients.
    However, the recent withdrawal of so many HMO's from the 
Medicare Program raises legitimate questions on whether these 
HMO's are being overpaid by Medicare or if in their minds they 
are not just being overpaid enough. I look forward to hearing 
from our distinguished witnesses today and I thank you for 
being here. Mr. Chairman, I yield back my time.
    Mr. Bilirakis. Mr. Waxman, no opening statement?
    Mr. Waxman. I will pass.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. John Shadegg, a Representative in Congress 
                       from the State of Arizona
    Mr. Chairman, I commend you for holding this hearing. 
Medicare+Choice is a program which is significant to many of the people 
who are over-65 and reside in and around my district, Phoenix. Changes 
which are made to this program, be they to beneficiaries directly or to 
plans and their operations, are important to my constituents. Given the 
expectation that the number of people in Arizona aged 65 and over will 
grow by 34% between 1998 and 2010, effects of changes to the 
Medicare+Choice program are particularly significant.
    Let me restate the importance of the Medicare+Choice program in 
Arizona: Arizona has 10 Medicare HMOs, and Medicare enrollment in these 
``risk HMOs'' as a percentage of total beneficiaries is 39%. This is 
almost three times the national average of 15%. Changes to this program 
affects nearly a quarter-million people in Arizona.
    For the past few years, a great deal of attention has been given to 
the need to reform Medicare, improving its solvency and making it 
operate in a more efficient manner. While the President has proposed 
setting aside 15% of surplus to ``save'' Medicare, I am skeptical of 
his ideas. Also, we need to think and act in a way to make Medicare run 
in a more efficient manner. And, we have done that, in the Balanced 
Budget Act of 1997 with the proposal to more properly risk adjust 
payments to Medicare HMOs.
    It is for this reason that I support the concept which passed in 
the Balanced Budget Act of 1997--to find a better methodology for the 
payment of Medicare HMOs and prevent overpayment of these companies 
relative to the risk and expenses incurred by enrollees using their 
services. We need to find ways to improve incentives for plans to 
provide high quality health care services, but also to seek out ever 
greater cost savings to be passed on to Medicare, and ultimately, 
taxpayers.
    Let me also say that I support other proposals to improve the 
efficiency of Medicare. Phoenix has recently been chosen as a test site 
for the Competitive Pricing Demonstration Project, to improve the 
setting of Medicare+Choice reimbursement rates.
    I commend HCFA for phasing in these changes over a 5 year period 
and recognize that Congress may have tied HCFA's hands with respect to 
only collecting hospital encounter data for use in this program. 
However, I have significant concerns about the implementation of the 
methodology which HCFA has recently proposed. In its proposal, HCFA has 
chosen a route which only uses outpatient encounter data in the fifth 
and final year of the transition period, rather than phasing it in 
sooner, not later.
    I want to highlight how this program may impact non-hospital 
programs such as long term care facilities and other providers that 
focus on keeping the elderly out of hospitals. EverCare is a skilled 
nursing facility which presently operates a successful demonstration 
program nationally, which includes sites in Phoenix. As a result of 
using only hospital encounter data and not phasing in the use of 
outpatient data, EverCare may face the prospect of closing down its 
facilities after 2000. Under Medicare+Choice rules, also, if EverCare 
closes its facilities, it will not be able to re-enter a market for 5 
years. Certainly, having companies like EverCare leave the 
Medicare+Choice program and forcing its residents to look elsewhere 
will be an outcome that benefits no one.
    During this hearing I look forward to hearing from HCFA and its 
plans to improve the transition to the risk adjustment methodology, 
especially from 2000 to 2001 How will it begin to use outpatient data? 
I also look forward to hearing from the health plans and beneficiaries 
who will be affected by this program.
    Thank you and I yield back the balance of my time.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you, Mr. Chairman.
    I am pleased that the Health and Environment Subcommittee is 
holding this hearing today. The Medicare+Choice program stands as one 
of Congress' most significant achievements.
    Prior to the Balanced Budget Act of 1997, America's seniors were 
faced with an ailing Medicare program. Just as troubling, Medicare was 
a program that offered its beneficiaries little freedom to obtain truly 
responsive and effective coverage.
    The Medicare+Choice program changed all that. The explicit intent 
of this program is to give seniors access to more choices than ever 
before, so that they can get better coverage than ever before.
    That is why it is so vitally important that Congress ensure that 
the risk adjustment model developed by HCFA for the Medicare+Choice 
program meets not only the letter of the law, but also the spirit in 
which Congress intended these changes in plan payments. I am pleased 
that the Administration has chosen to phase-in this new payment 
methodology to minimize any potential negative consequences to the 
plans.
    Similarly, I am also pleased that HCFA is showing greater 
flexibility in helping plans meet many of the new BBA '97 compliance 
standards. For instance, their willingness to move the ACR date for 
this year from May 1 to July 1, is good for both the plans and the 
beneficiaries.
    As we will hear today, early efforts by HCFA to write 
Medicare+Choice regulations have been widely viewed as too onerous and 
prescriptive. Last Fall, a number of insurance providers dropped out of 
the market. We cannot let this pattern repeat itself.
    I am pleased that the Agency is taking steps to rewrite portions of 
these regulations. And I would encourage them to continue doing so.
    This Committee takes a dim view of regulations that exceed their 
statutory basis. That is why I hope we will continue this series of 
formal inquiries by this Committee into this important program and its 
implementation.
    Again, Mr. Chairman, thank you for convening this hearing today.

    Mr. Bilirakis. Thank you, I would appreciate that. The 
opening statements, of course, of all members of the 
subcommittee are, without objection, made a part of the record. 
Mr. Hash, I am going to set the clock for 10 minutes. Obviously 
your written statements are part of the record, please share 
your knowledge with us.

 STATEMENT OF MICHAEL HASH, DEPUTY ADMINISTRATOR, HEALTH CARE 
                    FINANCING ADMINISTRATION

    Mr. Hash. Thank you, Mr. Chairman. Congressman Brown, 
distinguished members of the subcommittee, I want to thank you 
for this opportunity to come and discuss our efforts to pay 
Medicare+Choice Plans accurately and fairly. The Balanced 
Budget Act, as has been pointed out here this morning, requires 
Medicare risk adjust payments starting January 1, 2000. That 
means we must base our payments to plans on the health status 
of their enrollees.
    We believe this is a vast improvement over the current 
payment method. Risk adjustment will increase payment to plans 
for their sickest enrollees, and thus curtail what many have 
perceived as the disincentives to enroll these beneficiaries. 
It will also lower payments for healthier enrollees of managed 
care plans. Risk adjustment is an essential component of the 
Medicare+Choice Program.
    We want to thank, at the outset here, the health plans who 
are contracting with Medicare, for their cooperation in 
providing the data that is essential and needed for this 
important advancement in payment policy. And we want to 
continue working with plans to resolve any remaining data 
issues. The law requires us to begin risk adjustment, as I 
said, on January 1, 2000. However, we believe we must proceed 
in an incremental and prudent fashion.
    So we have decided to phase in the risk adjustment over a 
5-year period to prevent disruptions to beneficiaries or to the 
Medicare+Choice Program and health care plans. In the first 
year, only 10 percent of the payment to health plans will be 
based on this new risk adjustment. First we must base the risk 
adjustment on in-patient data alone, that is where we are 
starting. But by 2004, we will be using data on all health care 
encounters including out-patient services, physician office 
visits and so forth to implement a comprehensive risk 
adjustment.
    Later this year we will be issuing a schedule for health 
plans and the methods for reporting this wider base of 
encounter data that I referred to. If we could base risk 
adjustment on more comprehensive health care data now, we 
would. But that cannot be done at this time. But even with that 
limitation, we believe that risk adjustment, based on in-
patient data alone, will increases the accuracy of our payments 
to Medicare+Choice Plans by five-fold.
    Plans themselves have raised concerns about risk adjustment 
based on in-patient data alone, suggesting that it could create 
perverse incentives for unnecessary hospitalizations. We 
therefore have taken a number of steps in designing our payment 
and risk adjustment to prevent inappropriate hospital 
admissions or attempts to inflate data submitted for use in 
risk adjustment payments.
    It is essential to stress, I think that risk adjustment 
will not and cannot be budget neutral. The whole reason for 
proceeding with risk adjustment is that the Medicare Program 
has not been paying plans accurately and properly. There is 
substantial evidence, which you will be hearing about in the 
course of today's testimonies, that we overpay plans because 
payments are not now currently adjusted for the health care 
status or expected health care costs of enrollees in managed 
care plans.
    Studies by the Physician Payment Review Commission, PPRC, 
now MedPAC, the Congressional Budget Office, Mathematica Policy 
Research and many others, have all found that Medicare has been 
paying far too much because plans tend to enroll healthier, 
low-cost beneficiaries. If risk adjustment were budget-neutral, 
Medicare and the Taxpayers who fund it, would continue to lose 
billions of dollars of each year on managed care payment.
    Accurate risk adjustments inevitably and appropriately must 
change aggregate payments to managed care plans. Actual savings 
will vary according to the extent that less healthy 
beneficiaries enroll in Medicare+Choice Plans. Risk adjustment 
significantly changes the incentives and could well lead to the 
enrollment of beneficiaries with greater health care needs and 
that could lead to higher payments for health plans who enroll 
such individuals.
    Overall we project that payment to plans on average in the 
year 2000, will change by less than 1 percent of total managed 
care payments. Phasing in the risk adjust also substantially 
buffers the plans from any financial impact that they are 
likely to experience. Without a transition, Medicare savings 
for a full risk adjustment or without a phase in would have 
been $1.4 billion or more in the first year, in the year 2000. 
And as much as $4.5 billion over the full 5 years.
    We will closely monitor the impact of the risk adjustment 
on beneficiaries and plans and continue to work with them to 
refine and improve this methodology. But clearly we believe we 
must start now. Mr. Chairman, I want to thank you for this 
opportunity to come before you and to talk about this important 
change in the way we pay Medicare health plans that are serving 
our beneficiaries.
    I look forward to responding to any questions that you or 
other members of the subcommittee may have. Thank you very 
much.
    [The prepared statement of Michael Hash follows:]
      Prepared Statement of Mike Hash, Deputy Administrator, HCFA
    Chairman Bilirakis, Congressman Brown, distinguished committee 
members, thank you for inviting me here to discuss our efforts to pay 
health plans accurately and fairly. The Balanced Budget Act of 1997 
requires Medicare to ``risk adjust'' payments to Medicare+Choice 
organizations, starting January 1, 2000. That means we must base 
payment to Medicare+Choice plans on the health status of their 
enrollees.
    Risk adjustment is an essential component of the Medicare+Choice 
program, and represents a vast improvement over the current payment 
method. It helps assure that payments are appropriate and curtail the 
disincentive for plans to enroll sicker beneficiaries.
    Under risk adjustment, data on individual beneficiaries use of 
health care services in a given year will be used to adjust payment for 
each beneficiary enrolled in a Medicare+Choice plan the following year. 
The payment adjustments are based on the average total cost of care for 
individuals who had the same diagnoses in the previous year. In order 
to prevent disruptions to beneficiaries and health plans, we will phase 
this change in over five years. Initially, we will use data on 
inpatient hospital stays and move in an orderly fashion, as envisioned 
in the Balanced Budget Act, to use of data from other health care 
settings.
    We would like to thank plans for their cooperation in providing the 
data needed to implement this important advance.
    Currently, some 6 million of Medicare's 40 million beneficiaries 
have chosen to enroll in Medicare+Choice plans. Risk adjustment will 
increase payment to plans for their sickest patients, and thus curtail 
the disincentive for plans to enroll these beneficiaries. It also will 
lower payment to plans for their healthier patients. Risk adjustment is 
an essential step forward for beneficiaries, taxpayers, and health 
plans.

 Risk adjustment will help beneficiaries feel confident in all 
        their Medicare+Choice options. It will assure beneficiaries 
        that Medicare pays plans the right amount to provide all 
        necessary care because payment to plans will take each 
        enrollee's health status into account. That will help people 
        with serious illnesses, such as cancer or cardiovascular 
        disease, who can benefit most from the coordination of care 
        health plans can provide.
 Risk adjustment will help taxpayers by addressing the main 
        reason that Medicare has lost rather than saved money on 
        managed care. Many studies show that health plans enroll 
        Medicare beneficiaries who, on average, are much healthier and 
        therefore less costly than those who remain in traditional 
        Medicare. This ``favorable selection'' of healthy beneficiaries 
        has cost taxpayers $2 billion a year, according to a 1997 
        report by Congress' Physician Payment Review Commission (now 
        part of the Medicare Payment Advisory Commission).
 Risk adjustment will help level the playing field among 
        Medicare+Choice plans. It will temper the risk of significant 
        financial loss when plans enroll beneficiaries who have 
        expensive care needs, and focus competition more on managing 
        care than on avoiding risk. Risk adjustment also will help 
        plans by alleviating concerns among beneficiaries that plans 
        have financial incentives to deny care.
Phasing-In Risk Adjustment
    The law requires us to proceed with risk adjustment starting 
January 1, 2000, and does not call for a transition. However, we 
believe we must implement these changes in an incremental and prudent 
fashion, as was done with other new major payment systems. We are, 
therefore, using flexibility afforded to us in the law to phase in risk 
adjustment over 5 years to prevent disruptions to beneficiaries or the 
Medicare+Choice program.
    In the first year, only 10 percent of payment to plans for each 
beneficiary will be calculated based on the new risk adjustment method 
based on inpatient hospital diagnoses. The remaining 90 percent will be 
based on the existing method for calculating plan payments, which are 
flat amounts per enrollee per month based on the average cost to care 
for Medicare fee-for-service beneficiaries in each county and adjusted 
for basic demographic factors like age and sex. In 2001, 30 percent of 
payment amounts will be risk adjusted. In 2002, 55 percent of payment 
amounts will be based on risk adjustment. In 2003, 80 percent of 
payment amounts will be based on risk adjustment. By 2004, we and 
health plans will be ready to use data from all sites of care, not just 
inpatient hospital information, for risk adjustment. Then, and only 
then, will payment to plans be 100 percent based on risk adjustment.
Using Inpatient Data
    During the first year of data collection for risk adjustment, both 
the statute and practical issues require that we use hospital inpatient 
data alone. About one in every five Medicare beneficiaries is 
hospitalized in a given year. Data on these hospitalizations are 
relatively easy to gather, easy to audit, and highly predictive of 
future health care costs. We will use the data to pay plans more for 
beneficiaries hospitalized the previous year for conditions that are 
strongly correlated with higher subsequent health care costs. While we 
will eventually be using a broader data base for risk adjustment, that 
is simply not feasible at this time.
    The Balanced Budget Act clearly stipulated that more comprehensive 
data on outpatient, physician, and other services could be collected 
only for services provided on or after July 1, 1998. That was prudent, 
because it has been no small task for plans to learn how to gather the 
inpatient data we are using for the initial phase-in of risk 
adjustment. Requiring plans to provide additional data on outpatient, 
physician and other services would have been unduly burdensome at this 
time.
    This year, we will issue a schedule and guidance to plans for 
reporting other encounter data, such as outpatient information. The 
schedule will provide sufficient time for plans to gather accurate data 
and for HCFA to analyze and incorporate the data into accurate risk 
adjusted payments. We are now confident that by 2004 we will be using 
data on all health care encounters to assess beneficiary health status 
for risk adjustment. If we could base risk adjustment on more 
comprehensive data now, we would. But we cannot. The law requires us to 
move forward. And, even with its limitations, this initial risk 
adjustment system based on inpatient data alone will increase payment 
accuracy 5-fold.
    The initial risk adjustment system uses only the approximately 60 
percent of inpatient hospital diagnoses that are reliably associated 
with future increased costs. For example, beneficiaries hospitalized 
for conditions such as heart attacks in aggregate are at higher risk of 
subsequent cardiovascular problems, and they consistently have higher 
health care costs in the subsequent year. Hospitalizations for such 
diagnoses will lead to higher payments to plans in the following year 
under risk adjustment. Hospitalizations for acute conditions such as 
appendicitis, however, rarely lead to increased subsequent care costs. 
They will not lead to higher payments under risk adjustment.
    The 60 percent of hospital admission diagnoses that are clearly 
associated with increased subsequent care costs account for about 30 
percent of all Medicare spending the following year. It is important to 
note that, while risk adjustment is initially based only on inpatient 
data, the risk adjustment payments account for all costs of care 
associated with each diagnosis. It is also important to note that risk 
adjustment is not cost-based reimbursement; it is reimbursement 
adjusted for projected need based on health status in the previous 
year.
Determining Diagnosis Groups
    The relevant diagnoses will be used to classify beneficiaries into 
15 different cost categories. One category is for beneficiaries who 
were not hospitalized the previous year with relevant diagnoses. For 
beneficiaries included in any of the other categories, plans will 
receive an additional payment to cover the increased risk associated 
with diagnoses in that category.
    Payment will continue to be adjusted for demographic factors, such 
as age, gender, county of residence, and whether a Medicare beneficiary 
is also a Medicaid beneficiary. We have revised these demographic 
factors for use with risk adjustment, for example, by no longer 
including institutional status because the risk adjustment methodology 
itself does a good job of predicting expenses for nursing home 
residents.
    Medicare will calculate a score for each beneficiary to determine 
the payment that will be made if they choose to enroll in a 
Medicare+Choice plan. For example, Medicare's average payment per year 
to health plans is $5,800. Under risk adjustment, payment for an 85-
year-old man will on average be $6,414. It will be an additional $2,060 
if he is on Medicaid, another $1,207 if he is disabled, and $8,474 more 
if he was admitted to the hospital for a stroke the previous year, for 
a total of $18,155. The score for each beneficiary will be calculated 
annually, and will follow them if they move from one health plan to 
another.
Protecting Program Integrity
    Most health plans operate with integrity and play by the rules, and 
we doubt that plans will compromise successful medical management 
programs that keep patients out of the hospital in order to game the 
risk adjustment system. However, plans themselves have raised concerns 
that risk adjustment based on inpatient data alone could create 
perverse incentives for unnecessary hospitalizations. We, therefore, 
have taken solid steps to prevent gaming of the system with 
inappropriate hospital admissions or attempts to inflate the data 
submitted for use in risk adjustment.
    The risk adjustment system does not include hospital stays of just 
one day, in order to help guard against inappropriate admissions. And 
it excludes diagnoses that are vague, ambiguous, or rarely the 
principal reason for hospital admission. In addition, we will use 
independent experts to assess the validity and completeness of data 
plans submit to us by conducting targeted medical record reviews and 
site visits. This will help ensure that plans do not ``upcode,'' or 
claim that hospital admissions were for more serious conditions that 
would result in higher payment.
Protecting Taxpayers
    It is essential to stress that risk adjustment will not and cannot 
be budget neutral if we intend to protect the Medicare Trust Fund and 
be fair to the taxpayers who support our programs. The whole reason for 
proceeding with risk adjustment--and specifically with risk adjustment 
that is not budget neutral--is that Medicare has not been paying plans 
properly.
    There is considerable evidence that we have overpaid plans and 
continue to overpay plans, in large part because payments are not 
adjusted for risk.

 The Physician Payment Review Commission, in its 1997 Annual 
        Report to Congress, estimated that Medicare has been making up 
        to $2 billion a year in excess payments to managed care plans. 
        This Congressional advisory body notes that, unlike the private 
        sector where managed care has slowed health care cost growth, 
        managed care has increased Medicare program outlays. The 
        Commission's 1996 Report found that those who enroll in managed 
        care tend to be healthy and those who disenroll tend to be 
        unhealthy, exacerbating Medicare losses.
 Mathematica Policy Research, which has conducted several 
        studies on Medicare HMOs, says care of Medicare beneficiaries 
        in HMOs costs only 85 percent as much as care for those who 
        remain in traditional fee-for-service Medicare. That is 10 
        percent less than the 95 percent of the average fee-for-service 
        costs plans were being paid.
 The Congressional Budget Office has said managed care plans 
        could offer Medicare benefits for 87 percent of Medicare fee-
        for-service costs, even though they were paid 95 percent.
    Congress also recognized that plans have been paid too little for 
enrollees with costly conditions, and too much for those with minimal 
care needs. The simple demographic adjustments made now for age, 
gender, county of residence, Medicaid and institutional status, do not 
begin to accurately account for the wide variation in patient care 
costs. Risk adjustment will.
    The vast majority of beneficiaries enrolled in Medicare+Choice cost 
far less than what Medicare pays plans for each enrollee. Medicare fee-
for-service statistics make clear why risk adjustment must not be 
budget neutral. More than half of all Medicare fee-for-service 
beneficiaries cost less than $500 per year, while less than 5 percent 
of fee-for-service beneficiaries cost more than $25,000 per year, 
according to the latest available statistics for calendar year 1996. 
The most costly 5 percent account for more than half of all Medicare 
fee-for-service spending.
    Since Medicare+Choice enrollees tend to be healthier than fee-for-
service Medicare beneficiaries, the ratio of high to low cost 
beneficiaries in health plans is even more stark. Clearly, care for the 
overwhelming majority of Medicare enrollees costs plans much less than 
what Medicare pays because our payments are predicated on the average 
beneficiary cost of care, calculated by county. This average includes 
the most expensive beneficiaries in fee-for-service, who generally do 
not enroll in managed care.
    If risk adjustment was budget neutral, Medicare and the taxpayers 
who fund it would continue to lose billions of dollars each year on 
Medicare+Choice. Accurate risk adjustment inevitably and appropriately 
must change aggregate payment to plans.
    Budget neutral risk adjustment would cost taxpayers an estimated 
$200 million in the first year of the phase-in, and $11.2 billion over 
5 years if health plans maintained their current, mostly healthy mix of 
beneficiaries. It is important to stress that actual savings to 
taxpayers from risk adjustment will vary to the extent that less 
healthy beneficiaries enroll in Medicare+Choice plans, resulting in 
higher payments than health plans receive today.
    The amount of payment change will vary among plans and depend on 
each plan's individual enrollees. Total payment may be higher for some 
plans as they enroll a mix of beneficiaries that is more representative 
of the entire Medicare population. As part of our Medicare+Choice March 
1 rate announcement, we will send a letter to each health plan with an 
estimate of how payment will differ from what they are paid now, based 
on their current mix of enrollees.
    Overall, we project that payment to Medicare+Choice plans on 
average will change by less than one percent in the first year. How it 
will change over time depends on the mix of beneficiaries in each plan. 
Risk adjustment significantly changes incentives for plans and could 
well lead to enrollment of beneficiaries with greater care needs. That 
could result in plans receiving higher payments than they do now. 
Phasing in risk adjustment also substantially buffers the financial 
impact on plans. The federal government is forgoing $1.4 billion in 
savings in the first year and as much as $4.5 billion over the full 5 
years because of the phase in.
    Payment changes will be further buffered by an annual payment 
update for 2000 that our preliminary estimate suggests will be 5.2 
percent. This is substantially larger than projections that were made 
last year. The final figure will be released March 1, 1999. This annual 
update is based on formulas set in law and projected expenditures for 
Medicare that are included in the President's fiscal year 2000 budget.
                               conclusion
    Risk adjustment is an essential step forward for Medicare, 
beneficiaries, taxpayers and the Medicare+Choice program. It will help 
Medicare pay plans fairly and accurately. It will curtail disincentives 
to enroll less healthy beneficiaries. It will help taxpayers and the 
Medicare Trust Fund start saving, rather than losing, money on managed 
care. It will help level the playing field among plans. And it is 
required by law.
    We are aware of the magnitude of the impact of risk adjustment and 
are, therefore, phasing in implementation to avoid undue disruptions. 
We are also taking proactive steps to prevent potential gaming of the 
system. We will closely monitor the impact on beneficiaries and plans. 
We will continue to consult with beneficiary groups, health plans and 
academic experts. Adjustments can be made each year as we proceed.
    But, clearly, we must proceed. Risk adjustment is too important to 
postpone and too important to implement without a prudent phase-in that 
allows time for any necessary refinements. Again, I thank you for 
inviting us here today to discuss this, and I am happy to answer your 
questions.

    Mr. Bilirakis. Thank you, Mr. Hash. Well, let me ask you a 
question that is in the general, generic, category. And without 
maybe oversimplifying the problem, it seems to me that many of 
these managed care companies which are choosing not to continue 
in the Medicare beneficiary area, are doing so mainly on the 
come, so to speak. Or doing so because the risk adjustment is 
coming and they don't like what they see coming and what their 
obligations or responsibilities are going to be.
    Many of them have already told us they look upon the 
regulations as being too onerous in addition to the other 
responsibilities that go along with it. What is your response 
to that?
    Mr. Hash. Mr. Chairman, we think that the risk adjustment 
methodology that we are going to phase in is actually a needed 
improvement to the management of the program. We think it is 
what the Congress intended when it enacted the Balanced Budget 
Act. We have spent a lot of time over the last year working 
with plans, with other experts, with the Academy of Actuaries, 
with a whole host of folks to actually design an appropriate 
and implementable risk adjustment methodology and we think we 
have done that or are about to do that.
    And we don't think that it would be appropriate to delay 
the progress on bringing payments more in line with the 
expected cost of the beneficiaries who choose to enroll in 
managed care plans. The imbalance between what we are paying 
and the costs of the enrollees has been documented in study 
after study. And I think if for no other reason, our fiduciary 
responsibility to the program means that we should move ahead 
and make sure these payments are accurate rather than continue 
with the significant overpayments that we have experienced.
    Mr. Bilirakis. Well are beneficiaries being dropped, 
because programs or plans are pulling out of certain areas. I 
took a look at a chart here somewhere and there are more 
beneficiaries impacted by this in Florida, for instance. That 
concerns you, does it not?
    Mr. Hash. It does.
    Mr. Bilirakis. All right. Now what, if that concerns you, 
how is HCFA planning to meet that concern? I mean, we have 
heard the opening statements up here and we have heard a lot of 
complaints on the AAPCC process. And risk adjustment appears to 
be, certainly make a lot more sense. I think roughly everybody 
seems to think it is a good idea. But in the meantime, we have 
these problems.
    We have these beneficiaries who basically have lost their 
choice. They certainly could go back to fee-for-service, but 
they have lost their choice. How will you respond to that and 
how is HCFA planning to respond to that? What are you plans and 
your strategy in that regard?
    Mr. Hash. Mr. Chairman, since the experience of last fall 
that you and other members heard a lot about when plans decided 
not to participate or at least to reduce the geographical areas 
that they were going to participate in, we have been working 
with the plans and with folks in the Congress, your staff as 
well, to analyze exactly what the reasons were for that non-
participation. And you may know, that last month, we published 
a regulation, an interim final regulation, that addressed a 
number of concerns that plans had raised about the regulations 
we published last summer, last June, to implement the 
Medicare+Choice Program.
    We think we have actually gone a significant way toward 
addressing the issues that plans identified as the reason for, 
at least some of the reasons for, dropping out. I think it is 
important to recognize that there are a host of factors that 
influence a decision by a health plan to withdraw from 
participation in Medicare. One of the things I think that 
struck me as most interesting about the experience last fall 
was that as we look back on it, we determined that about an 
equal percentage of health plans that had been participating in 
the Federal employees health benefit program also dropped out 
of that program or chose not to participate for Federal 
employees this coming year in some of the same markets that the 
Medicare+Choice Plans withdrew from.
    Presumably in addition to payment concerns, health plans 
look at market situations, the penetration of their own plan, 
the competitive nature of the markets in which they are 
engaged. There are a whole host of factors, only one of which 
presumably is Medicare payment and Medicare requirements. And 
we tried to address some of the concerns that have been raised 
since last fall.
    Mr. Bilirakis. So, in other words, you feel that many of, 
or at least some of the clients' decisions to withdraw aren't 
necessarily directly related to the proposed risk adjustment 
plan?
    Mr. Hash. I believe that to be the case, Mr. Chairman.
    Mr. Bilirakis. All right. Let me ask you, were you or a 
member or one of your representatives going to remain 
throughout the entire----
    Mr. Hash. Yes sir, yes sir.
    Mr. Bilirakis. [continuing] and take notes?
    Mr. Hash. Yes sir.
    Mr. Bilirakis. Because we have a lot of the insurance 
representatives testifying later on.
    Mr. Hash. Yes sir.
    Mr. Bilirakis. Thank you very much. Mr. Brown to inquire.
    Mr. Brown. Thank you, Mr. Chairman. Mr. Hash, thank you for 
your very informative testimony. Clearly part of the problem is 
we don't have enough information from many of these Medicare 
HMO's so we can make some of these decisions, but last, as you 
know, some 400,000 people nationally have been dropped from 
their Medicare HMO. United Health has dropped some 50,000. In 
my home county of Lorraine, Ohio they dropped 2,000 people 
without appropriate notice. People read it in the newspaper and 
began to call offices like mine and others.
    But in counties nearby, Cuyahoga, Medina County, other 
counties, they didn't drop people. I know because we don't have 
all the information, so perhaps you can't answer this. But if 
we had had a risk adjustment system like the one discussed 
today, would this likely have happened?
    Mr. Hash. Well, I think it is hard to say, as I said a 
moment ago. There are many factors that go into the calculation 
about whether to participate and which markets to participate 
in. To say that if we had a full comprehensive risk adjustment 
in place, would that have reduced the extent to which plans 
pulled out? I think in some cases it probably would have. For 
plans who felt like they had above-average health cost 
enrollees, more adequate payments for the needs of those 
enrollees would have obviously helped to ameliorate their 
financial concerns about continuing to participate. But I am 
not sure that would be the case in all plans. And the risk 
adjustment benefit depends on the nature of the kinds of 
individuals, in terms of their expected health care costs, that 
are actually enrolled in the plan.
    So, you know, for plans who withdrew because they felt like 
they had a non-representative group of enrollees in the sense 
that their health care costs were higher on average than the 
typical Medicare beneficiary, those people would have been 
helped by a full risk adjustment.
    Mr. Brown. You had said that you don't have, you can't use 
comprehensive data to develop the risk adjuster. Is that 
because you are not getting that data from HMO's? You can't 
gather the data or you haven't had time to process it and put a 
comprehensive amount of data together to do it? What is the 
problem?
    Mr. Hash. It is some of all of that, Mr. Brown. Risk 
adjustment for plans and for us represents a new stage of our 
relationship. We have not traditionally, in our contracts with 
managed care plans, required them to report to us the clinical 
data on hospitalizations or encounter data on out-patient 
services or clinic services. That has not been a part of what 
they have been doing. So what we have been trying to do is to 
build the data infrastructure.
    We started with, as the Congress said in the BBA, 
collecting in-patient hospital data. That is what we did 
beginning January 1, 1998. We are going to put in place the 
tools and the formats for plans to report this broader array of 
data, but we think it takes time. We want to work with the 
plans and give them the time to do this. We want to prepare 
ourselves to make sure we can receive that data properly. And 
that is why we have phased in the risk adjustment in the way we 
have.
    Mr. Brown. One final question. Congressman Stark has sent 
some testimony to this committee, which in a moment I will ask 
the chairman to enter into the record. In his testimony, he 
noted that a letter from the HCFA Administrator describes a 
``little known glitch in the Balanced Budget Act that overpays 
HMO's $8 billion over 5 years and $31 billion over 10 years.'' 
The HCFA Administrator ascribes this overpayment to a lower 
rate of medical inflation.
    Would a risk adjustment have dealt with this, so that this 
overpayment would not have happened? Or if it would not have, 
is there a way of doing risk adjustment and somehow roll this 
hedge against inflation or really a reverse of that into it?
    Mr. Hash. I think what happened, Mr. Brown, was we 
estimated the updates that are required for updating the rates 
paid to managed care plans. And in the base year that now forms 
the basis for rates for managed care plans, 1997, the statute 
in the BBA did not included authority for us to correct any 
errors in that projection.
    And as we look back on the estimates we made from 1997, we 
determined that the overstatement was about 4 percent of what 
it should have been in terms of the update to the rates. And we 
lack the authority to correct what was built in, and that is, I 
think, what Mr. Stark is referring to as built in and above 
inflation to the rates. This would not actually be affected by 
the risk adjustment methodology that we are talking about. It 
is a separate but important issue.
    Mr. Brown. And can we deal with that.
    Mr. Hash. I don't think actually that is----
    Mr. Brown. So that it is----
    Mr. Hash. [continuing] that is a problem that can be dealt 
with by the risk adjustment language. I think we would be happy 
to work with you and others to see other avenues for dealing 
with it. But I don't think it can be dealt with through risk 
adjustment.
    Mr. Brown. Mr. Chairman, I would like to ask your honor's 
consent to enter into the record Mr. Stark's testimony?
    Mr. Bilirakis. Without objection.
    Mr. Brown. Thank you, Mr. Chairman.
    [The prepared statement of Hon. Pete Stark follows:]
  Prepared Statement of Hon. Pete Stark, a Representative in Congress 
                      from the State of California
    Mr. Chairman, Members of the Committee: Congratulations on holding 
this hearing on this important issue. I would like to make three short 
points.
    1) On behalf of the HMOs that have done the right thing and 
enrolled a fair and representative proportion of the Medicare 
population--both the sick and the well--I urge that Congress not 
consider legislation delaying the phase-in of the risk adjustor. Any 
delay will reward those who have avoided the sick and chronically ill, 
and punish those who have sicker than average patients--and that is 
exactly the opposite of good health policy.
    By phasing in the risk adjustment, we have already hurt the best 
HMOs, and given the industry a $4.7 billion gift (see attached table).
    2) Second, we should not buy the argument of the for-profit HMOs 
that we are not paying them enough. I would like to enter into the 
Record a summary of the ways we have been overpaying Medicare HMOs. I 
would also like to enter a letter from the HCFA Administrator that 
describes a little known `glitch' in the Balanced Budget Act that 
overpays HMOs $8 billion over five years, and $31 billion over ten 
years. This overpayment occurs because we took away the authority of 
HCFA to adjust for overpayments in 1997. We paid plans a higher amount 
in 1997 than was justified in light of the lower medical inflation 
which actually occurred. By allowing these overpayments, we built into 
the budget base billions of dollars in extra payments. As the 
Administrator's letter makes clear, the other budget savings in the BBA 
do not even correct for this mistake--let alone reduce the earlier, 
underlying overpayment to the Plans.
    3) Most importantly, the testimony today of the fourth panel of 
private sector plans shows--indeed proves--why the Premium Support plan 
being pushed by a majority of the Bipartisan Commission on the Future 
of Medicare will not work
    The President of PacifiCare Health Systems is testifying:
        ``Unless Congress [delays risk adjustment/gives us more money] 
        the number of providers who refuse to contract with 
        Medicare+Choice plans will increase, and health plan 
        withdrawals will continue at a more rapid pace.''
    The Vice President of Blue Cross and Blue Shield of Florida is 
testifying:
        ``that HCFA's current approach [to risk adjust] will ultimately 
        cause health plans to exit the program or significantly reduce 
        benefits . . .''
    On behalf of the Health Insurance Association of America, the 
Senior Vice President of CNA Health Partners is testifying:
        ``If the current reimbursement structure is not adjusted [i.e., 
        pay us more money] more Medicare+Choice organizations are 
        likely to withdraw from areas served and beneficiaries enrolled 
        in the remaining plans will likely experience premium increases 
        or reduced benefits.''
    And the Vice President of Humana testifies:
        ``Some plans have already decided to discontinue participation 
        in the M+C program in one or more counties . . . it is likely 
        more plans will go this route in the next two years if the . . 
        . risk adjustment system is implemented on the current 
        schedule.''
    In short, pay us more or we can't offer extra benefits--in fact, we 
may not even be able to stay in the program.
    But as described in my second point above, we currently pay 
Medicare HMOs more than we should. We pay the plans more for the people 
they enroll than we would have paid if those people had stayed in 
Medicare Fee-For-Service. The taxpayer would actually save money if we 
abolished the Medicare+Choice program.
    Unfortunately, the beneficiaries in these plans who have been 
getting extra benefits will lose, and that is why we need to improve 
the core Medicare program, so that everyone has a drug benefit and 
catastrophic protection--and so that people do not need to join an HMO 
to get extra benefits.
    The Bipartisan Commission on the Future of Medicare's majority is 
pushing the idea that we can save Medicare hundreds of billions of 
dollars--as much as $475-$850 billion in the year 2030--if we can only 
get more people to enroll in private plans. (They have no proof of this 
savings; they just assume--assume--that private plans will grow 1% per 
year less than Medicare fee-for-service over the next thirty years. 
They assume this although the history of the last 11 years shows 
Medicare and Premium Support growing at almost exactly the same rate--
the FEHBP Premium Support model grew only 0.1% less than Medicare, not 
1.0% less!)
    But if plans say they cannot offer extra benefits at a time when we 
are overpaying them, they certainly won't be able to when Medicare 
actually starts saving money by paying them more accurately for the 
people they enroll.
    And if the plans can't offer extra benefits, who in the world would 
want to join a system that rationed their choices and services?
    Premium Support won't work to save Medicare--it is just a way to 
raise premiums on seniors and the disabled to force them into bare-
bones, no-frills HMOs that will offer no extra benefits. Indeed, more 
than half of all the savings projected for the Breaux-Thomas Premium 
Support plan would come from higher payments by beneficiaries.
    I hope all the Members will consider the testimony of Panel 4 
before they endorse the Premium Support scheme.
    The representatives of the managed care plans testifying today are, 
in fact, testifying that the Breaux-Thomas Premium Support plan will 
not work.

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    Mr. Bilirakis. Mr. Whitfield.
    Mr. Whitfield. Mr. Hash, I had noticed that a lot of these 
payments are going to be based upon a diagnostic cost grouping. 
And under the existing payment system, I think, to hospitals 
there are, and I am not sure I have this correct, but there are 
DRG groupings.
    Mr. Hash. That is correct.
    Mr. Whitfield. Now are they the same as this diagnostic 
group?
    Mr. Hash. They are not, Mr. Whitfield. What we have done in 
the risk adjustment, is to identify what amounts to 
approximately 12 percent of all hospital admissions. We have 
indicated that for enrollees that have an admission that falls 
into one of those categories, about 15 categories altogether, 
that will be an individual for which a larger payment will be 
forthcoming to the plan.
    The hospital in-patient DRG System is one which involves 
something like 480 or so separate DRG's to cover the full array 
of conditions that might occasion someone to be hospitalized.
    Mr. Whitfield. Okay so the, I noticed in the diagnostic 
groups, there are 172 of those and so that is totally separate 
then from the other, okay. And could you just briefly explain 
the way you are going to use the diagnostic cost groups in 
determining the factor that would be applied to patients?
    Mr. Hash. Yes it is, the first step is to identify a subset 
of hospital admissions that are associated with high cost, both 
the probability of future hospitalizations, as well as in many 
cases, extensive outpatient care that is required. And, having 
identified people who have a hospital admission in one of those 
categories that is associated with significant increased health 
care costs, then those individuals will be assigned a risk 
score, if you will, higher than the average. This will 
translate into a payment on their behalf that will be higher 
than the average payment the plan would otherwise receive.
    Mr. Whitfield. Okay. Okay, Mr. Chairman, I yield back the 
balance of my time.
    Mr. Bilirakis. I thank the gentleman. Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Hash, given 
the experience that some of my constituents have had in regard 
to losing coverage that they thought they had and could depend 
upon, I just want your personal opinion, if you would be 
willing to offer it. Do you think that HMO's that market just 
seniors should have an obligation, as a part of their marketing 
strategies, to provide a disclaimer indicating to the seniors 
that this coverage may not be there for them in the future. So 
that they can make whatever choices they make with, after being 
fully informed as to what they may face?
    Mr. Hash. That is a difficult question, Mr. Strickland. I 
would have to say, from the marketing point of view, such a 
disclaimer in marketing materials, I think, would be viewed as 
a significant impediment to the enrollment of Medicare seniors. 
On the other hand, I recognize that the fact that plans can 
voluntarily come and go in the Medicare Program. Actually, as 
you might know, if plans withdraw from the Medicare+Choice 
Program from now on, they are banned from coming back in the 
program for 5 years.
    So there is, how should we say, a much stronger 
disincentive for a plan that is currently participating in the 
program to withdraw if they expect to come back into the 
program any time in the near future. So I think some of the 
ability of plans to come and go on an annual basis, will be 
reduced by that protection in the BBA. And one of the things we 
do require, we have a lot of requirements related to the 
marketing materials, that plans reach out to senior citizens.
    And one of the requirements associated with marketing is 
that they must disclose that they can terminate coverage. In 
other words, they tell the beneficiaries that if they give them 
proper notice, that the plan may in fact withdraw from 
participation in the Medicare Program. So that is actually part 
of the notice requirements that we impose in terms of the 
marketing materials that they use.
    Mr. Strickland. Well apparently for many that, that 
information is not either being given or being recognized 
because so many of my constituents made decisions in good 
faith, they gave up Medigap coverage, they have pre-existing 
health care conditions and then at a moment in time, they find 
that they do not have the coverage that they, I mean that is 
what, I have always thought that is what insurance is. 
Something that you can depend on.
    If you can't depend upon it, then it is not insurance, it 
is something else. And it just, it really troubles me that so 
many of our most vulnerable citizens feel as if they have been 
manipulated or misled and I was just wondering if there was 
something we could do to make that less likely to happen in the 
future?
    Mr. Hash. Well, I think I should point out why I think it 
is less likely in the future. Last year was unique in the sense 
that it was something of a transition year. Plans operating 
under the old system had the opportunity to give a notice 90 
days before the end of the year, October 1, that they would not 
be participating in the new calendar year.
    That has now changed under the BBA and plans have to 
indicate to us earlier in the year about their commitment to be 
in, so that when beneficiaries have a chance to make a choice 
in November of each year. Plans will then be locked in for the 
coming year and there won't be this last minute kind of 
withdrawal from the program that we experienced last year. So I 
think the potential is much less in the future.
    Mr. Strickland. Okay, and if I can ask one more quick 
question. As a result of Mr. Waxman's suggestion, I had a study 
done in my district regarding prescription drug prices. And 
what we found was that seniors who participate in HMO plans, 
that the drugs available to them are much cheaper than seniors 
who are not a part of such a plan. The differential on five 
drugs was 107 percent. And I am wondering, as you do this risk 
adjustment, if you factor in the fact that HMO's on average get 
much, much less costly drugs than do non-HMO participating 
seniors?
    Mr. Hash. I think the answer to that is a complicated one, 
Mr. Strickland. But the brief answer would be, you know, that 
Medicare does not cover much in the way of drugs to begin with, 
so that wouldn't be reflected in our payments to managed care 
plans. With respect to the drugs that we do cover under 
Medicare, which are basically drugs often that are provided as 
part of an in-patient hospital stay, the cost of those drugs 
are reflected in the rates in the sense that the way we cover 
them under the fee-for-service system.
    They are built in there, but they are probably built in at 
a level that is higher than the acquisition costs on the part 
of HMO's, because many HMO's obtain discounts and have group 
purchasing arrangements that provide, as you point out, more 
favorable drug prices. And that data is not fully reflected in 
the rates that we pay.
    Mr. Strickland. And it seems as if some cost shifting may 
be taking place from the HMO participant to the non-
participating senior.
    Mr. Hash. Yes.
    Mr. Strickland. Thank you, Mr. Chairman, I am sorry I went 
over.
    Mr. Bilirakis. No problem. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Mr. Hash, I have three 
questions for you and I will one at a time, of course. The 
health care plans have expressed concerns that it is difficult 
for them to validate or replicate your risk adjustment 
calculations because HCFA has not provided them with the 
formulas used for the components of the risk adjustment 
methodology. This lack of complete information makes it 
difficult, if not impossible, for the health organizations to 
forecast revenues.
    Will this information be provided to health plans and if 
so, when?
    Mr. Hash. Mr. Bryant, we want to work with the plans to 
resolve any questions about data that is not available to them, 
because I have heard the same sort of comments. Let me just 
say, as I indicated earlier, beginning last September, 
September 8 to be exact, we published for comment the model, 
the risk adjustment model and methodology that we were going to 
use. We got lots of comments from health plans and others.
    We submitted it to the American Academy of Actuaries, who 
have also reviewed and analyzed it. We met with the health 
plans in the fall over this. On January 15, we sent a notice to 
all health plans which indicated what the methodology was and 
provided information about the average risk scores that were 
being determined. On March 1, next week, we will be 
communicating with every plan giving them information about 
their specific risk adjustment for the enrollees that they 
currently have.
    They can use that information to prepare their submissions 
to us later in the year about the benefits and premiums they 
are going to charge. We will be giving them the software that 
we used to group the patients into these various risk cells. We 
think we have been very forthcoming, very transparent. To the 
extent there are issues that plans feel that we have not given 
them, we would like to talk to them about that.
    We would be happy to try to work with them. But we think we 
have been very forthcoming on the data front.
    Mr. Bryant. Thank you. And I know we will certainly hear 
from some of those folks later on in this hearing. Earlier you 
have made arguments that health plans have been overpaid for 
providing health care services and that the risk adjustment 
method is needed to correct this overpayment. However, the 
health care organizations maintain that the data used to make 
this judgment is old data from 1992, in fact.
    Number one, I guess, is that a correct statement that it is 
from 1992? And number two, how can you state with certainty 
that plans are currently overpaying using data from 7 years 
ago?
    Mr. Hash. Mr. Bryant, I would say that there are a variety 
of studies out there that have looked at the issue of the 
adequacy of payments, proper payments to managed care plans. 
Some of those studies go back as far as you are talking about. 
One as recently as 1997, by the Physician Payment Review 
Commission indicated that they felt in the aggregate we were 
overpaying managed care plans by $2 billion a year.
    The General Accounting Office, which will be testifying 
following me, has also done studies based on more recent 
information. So I think actually there is a considerable amount 
of evidence of current vintage that suggests that we are 
overpaying health plans.
    Mr. Bryant. Again, my final question. You alluded to some 
of this information in your statement, I wish you would expand 
on that. In terms of the transition, the concerns that the 
first 4 years of, we haven't finished the first 4 years of the 
5 year phase in, concern only in-patient hospital data that 
would be used to predict future patient cost. Further, only 
hospital stays of 2 days or longer will be included in the 
methodology.
    I guess what we are looking for is more reasoning for this 
and also that, as you said, there might be some perverse 
incentive involved here that would have health care providers 
admit beneficiaries who keep in the hospital longer to work 
this in. Again, could you simply expand on why this was chosen?
    Mr. Hash. Well, the first answer is, to your question, is 
that we used in-patient data because the BBA laid out a 
schedule that said we were to start collecting only in-patient 
hospital data, January 1, 1998, and to use that for the first 
part of the risk adjustment beginning in the year 2000. That is 
the short answer for why we are using in-patient data.
    On the issue of whether our methodology creates an 
incentive for inappropriate hospitalizations, I think what we 
have done in designing our methodology is to carve out from the 
admissions that we are going to treat ones that are warranting 
a special payment, discretionary admissions, admissions for 
conditions that are not associated, you know, with future 
health care.
    For example, someone who has an appendectomy who may have a 
very short hospital stay, that would be an admission which we 
would not count as predictive of increased future costs.
    Mr. Bryant. When will you do this? Because again, I think 
our whole----
    Mr. Hash. That is----
    Mr. Bryant. [continuing] our whole purpose is to----
    Mr. Hash. That is actually a part of the risk methodology 
that we will be implementing next January.
    Mr. Bryant. But can you get these encounters, these other 
medical encounters, for the 4 years?
    Mr. Hash. We are going to start collecting that data. We 
are going to put out a schedule later this year and we will, 
our present plan is, to implement the full risk adjuster based 
on the more comprehensive data in 2004.
    Mr. Bryant. Thank you.
    Mr. Bilirakis. The gentleman's time has expired. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And Mr. Hash, the plans 
that have withdrawn from the Medicare Program over the last 6 
months claim to be losing money, however the GAO recently 
reported that even after the Balanced Budget Act, Medicare 
still overpaid some of the plans. Were the plans that withdrew 
actually losing money or were they not earning as much as they 
expected?
    Mr. Hash. I actually have not been able to review the 
financial conditions of the plans that withdrew, so I wouldn't 
be in a position to comment on their profitability or lack 
thereof. Clearly in some of their statements about their 
reasons, they indicated that Medicare was no longer profitable 
to them.
    Mr. Green. The risk adjustment is critical in preventing 
the cherry picking of healthy beneficiaries and, but is it 
possible that the basic payment levels are too low to meet the 
needs of seniors?
    Mr. Hash. There has been a lot of talk about that, Mr. 
Green. And I think the answer to that is that it depends on 
what part of the country you are talking about, what kind of 
area. The BBA, as you know, went a long way to try to narrow 
the range of payments that Medicare makes to managed care plans 
by bringing up the floor. It is now about $380 per person in 
the lowest areas.
    And it also put in a blending methodology which in the 
first 2 years, 1998 and 1999, we were not able to actually 
implement because of budget neutrality limitations. But the 
newest data for the year 2000, in terms of the update for 
managed care rates, indicates that there will be about a 5.1 
percent increase in managed care rates. The effect of that will 
be to fund the blended rates in the large number of counties 
around the country.
    What that means is, for counties that are below the 
average, by blending with the average, their rates will be 
brought up. So we think that in lower payment areas, beginning 
in the year 2000, there will be some additional help in terms 
of the adequacy of the payment rates that are available for 
Medicare beneficiaries in private plans.
    Mr. Green. And why wasn't out-patient data included?
    Mr. Hash. Well, because under the way the BBA laid out the 
requirement to move to risk adjustment, it required us to start 
collecting in-patient hospital data on or after January 1, 
1998. That is what we have done. We will be allowed to collect 
a broader array of data, including the out-patient data and 
that is what we will use for the comprehensive risk adjustment 
that will be put into effect in 2004.
    Mr. Bilirakis. Thank you, Mr. Green. Thank you, gentleman. 
The vice chairman of the subcommittee, Dr. Coburn.
    Mr. Coburn. Mr. Hash, good to see you again. Thank you, and 
let me just remind you I am still waiting for some of that 
information on nursing homes.
    Mr. Hash. Yes, actually Dr. Coburn, I signed the letter 
this morning.
    Mr. Coburn. Great, thanks. Do you feel comfortable that you 
really have----
    Mr. Hash. And one to you, Mr. Chairman, as well.
    Mr. Coburn. Do you feel comfortable that you really have 
the data right now, enough data based on what the experience is 
out there, to put forward a risk adjuster?
    Mr. Hash. Dr. Coburn, we do. We have collected data on over 
1.2 million admissions between the period July 1, 1997, through 
June 30, 1998, for 5.5 million beneficiaries and we actually 
think we have a very rich data base.
    Mr. Coburn. And geographically distributed properly as 
well?
    Mr. Hash. Yes, sir.
    Mr. Coburn. Okay. I am interested in what Mr. Brown gave us 
in terms of adjusting and I would be anxious to talk with you 
in terms of trying to do the authority to get the adjustments 
made in terms of that growth. Would it be possible for HCFA to 
develop comparisons, say like from 1990 to the present to give 
the members on the committee sort of a historical perspective 
on the number of renewals and non-renewals on Medicare managed 
care?
    In other words, we are seeing this big abrupt withdrawal 
now, but how does that compare to historical changes and 
renewals and non-renewals?
    Mr. Hash. Last year was definitely much higher than any 
previous experience. I think I am correct and my colleagues 
will probably correct me here. For the years 1994, 1995 and 
1996, we had a total of 5 health plans that completely withdrew 
or reduced service areas. And obviously we had a much larger 
number last year, 99 either withdrew completely or reduced 
their geographical service area. So last year was, by any 
means, much higher than any previous experience.
    And in fact plans have been generally increasing in 1999, I 
am told, to correct it here a little bit. In the mid-'80's we 
had a very large drop of plans who dropped out of the program. 
I will get you the specific data on that.
    [The following was received for the record:]


                                  Medicare Plan Renewals/Non-renewals 1985-1998
----------------------------------------------------------------------------------------------------------------
                                                                                                      Percentage
                              Year                               Total Risk     Non-      Renewals       Non-
                                                                  Contracts   renewals                 renewing
----------------------------------------------------------------------------------------------------------------
1985...........................................................          87           3          84  ...........
1986...........................................................         149           7         142            5
1987...........................................................         161          29         132           18
1988...........................................................         154          34         120           22
1989...........................................................         131          38          93           29
1990...........................................................          96          14          82           15
1991...........................................................          93          12          81           13
1992...........................................................          96           8          88            8
1993...........................................................         110           4         106            4
1994...........................................................         148           1         147            1
1995...........................................................         181           0         181            0
1996...........................................................         241           2         239            1
1997...........................................................         307           8         299            3
1998...........................................................         346          45         301           13
----------------------------------------------------------------------------------------------------------------
Source: Medicare Managed Care Contract Plans Monthly Summary Reports.
Non-renewal rates peaked in 1988 and 1989.
The percentage of nonrenewals in 1998 was 14 versus 22 in 1988.
Prepared by the Office of Legislation, HCFA, March 1999.


    Mr. Coburn. I think it would be real helpful for the 
members to see it in terms of perspective. You know as you look 
at all this, firms are going to either participate or not 
participate on this on whether they can make any money in it. I 
mean that is what they are in the business for. As you sit and 
look at that, how much money should they make?
    Mr. Hash. Well, I think again it is difficult to answer 
that precisely. I think the purpose of this risk adjustment 
methodology is to try to say, with the payment policy we have 
now, we are clearly not paying appropriately and that we need 
to change that and to bring the payments more in line with the 
expected costs that enrollees are going to experience. And if 
that means that people have lower than average costs, who are 
enrolled in managed care plans, that is going to be a lower 
payment for them.
    But for those who have sicker patients, it is going to be a 
higher payment for them and we think that is an appropriate 
change.
    Mr. Coburn. So could these firms expect in the future that 
now the risk adjustment is out there and things are going along 
and can they expect a crunch again? In other words, all of a 
sudden we move more people into managed care and the costs rise 
a little faster than what they were and things start going up 
and they creep a little bit. Are we going to come back through 
HCFA and say, well you know, our risk adjuster is a little too 
high, we are growing a little faster than what we thought too. 
And we are going to tighten that up.
    Because ultimately that is what it counts on. And I am 
interested in your perspective, because I know you all 
understand that if they don't make any money, they won't be, I 
mean they may on the short term. And I am not saying they are 
not making any money. There was a wonderful report on 
PacifiCare that happened to time with this hearing that is 
enlightening. But the point is at some point we have to decide, 
with your help, how much is a good rate of return for people 
who are offering this service?
    Mr. Hash. I agree with that, Dr. Coburn. I mean we do have 
to monitor very carefully participation by plans and the 
reasons they are giving for the inadequacy of our payments, 
where that exists. And pay attention to that. Because if we 
want choices for Medicare beneficiaries we are going to have to 
pay adequately for it. I just don't have a ready answer to tell 
you what sort of changes might be needed.
    But one of the reasons we are phasing in this risk 
adjustment is to not further destabilize the market for these 
plans and to minimize the changes of payments that will happen 
to plans. So that at least in the short run, we shore up the 
market place for our beneficiaries.
    Mr. Coburn. Well is it your feeling, I know you may not be 
able to have the knowledge on this. Is it your feeling that we 
had the tremendous withdrawals in this because of the lack of a 
certain expectation coming? And that because there was a lack 
of an expectation of a fixed amount or an unknown out there in 
terms of being able to predict what they were going to be able 
to do, we saw more withdrawal than what we would have 
otherwise?
    Mr. Hash. I think the anticipatory effects played a large 
role. I think people were uncertain at the point they made 
their decision about what the risk adjustment would be over 
time. I think they were uncertain about the rate of increase in 
plan payments over time in the aggregate. And that uncertainty 
certainly played a role in the decision of many plans, I am 
sure, to withdraw.
    Mr. Coburn. Thank you.
    Mr. Bilirakis. Mr. Waxman to inquire.
    Mr. Waxman. Thank you, Mr. Chairman. Mr. Hash, if we don't 
have an adequate risk adjuster, it seems to me we are 
encouraging plans to try to skim and get the healthiest 
population in order to make more money. Then we overpay them 
because we pay them based on the amount that Medicare paid for 
the average population. If we can't get a risk adjuster, we are 
overpaying them. Isn't that what we are faced with and why this 
committee and the Congress asked you to develop a risk 
adjustment?
    Mr. Hash. That is correct, Mr. Waxman.
    Mr. Waxman. We don't want to overpay. We don't want to give 
an incentive for plans to try to refuse the sicker patients and 
only go after the healthier patients. But it is not easy doing 
a risk adjuster, is it?
    Mr. Hash. No, sir, it is not. It is very complicated.
    Mr. Waxman. It is very complicated, but it is very 
necessary. But let me just go beyond where we are today. There 
is a Medicare Commission that is now looking at changing the 
Medicare Program. And if we don't have a good, accurate risk 
adjuster under the premium support system, which is what they 
are talking about over there, what we are going to have, it 
seems to me, is a system where people who go into a fee-for-
service system are going to find it unaffordable because they 
are going to have to pay more money. Isn't that the case? And 
why would that be the case, if it is?
    Mr. Hash. It is the case. Well, I think there are several 
issues there. But a premium support program, as I understand 
it, could not function without a risk adjustment methodology. 
It just would not work. And I think members of the Commission, 
Mr. Bilirakis, who is a member of the Commission, have been 
through lots of discussions about that. So I think that is one 
of the reasons for what we are doing here. If it turned out 
there were some kind of premium support approach introduced 
into Medicare, experience with this risk adjustment is 
absolutely essential to making that----
    Mr. Waxman. When you say it wouldn't work. It would work--
--
    Mr. Hash. Well----
    Mr. Waxman. [continuing] it would produce some results that 
we wouldn't find very satisfying.
    Mr. Hash. Correct.
    Mr. Waxman. I mean after all if you pay a percent of the 
average of the premiums for all plans, including fee-for-
service, and you don't have any risk adjustment, if a plan is 
able to make a lot of money and pay a lower amount because they 
have skimmed off a healthier population, then they are going to 
drag down that average of all the plans.
    And then, as a senior, when you want to go into a plan that 
has a higher premium and costs more money, the government says, 
oh, this is all we are going to give you for that. You are 
going to have to come up with the difference because you are 
going into a plan that is going to have a disproportionate 
amount of sicker patients, it's premium is higher, you get paid 
proportionately less for it. Isn't that the fear we would have?
    Mr. Hash. That is correct. If you don't have a risk 
adjustment you are going to have significant adverse selection 
in the model that you just described. And the affect of adverse 
selection is obviously that the plans who get the sicker 
individuals will have increasingly higher costs, higher 
premiums. And the individuals who choose those kinds of plans, 
will have to pay more for them.
    Mr. Waxman. Well it seems to me the stakes get higher and 
higher. We better make sure we have some risk adjuster that 
works, especially if we are even looking at a drastic, radical 
change of the Medicare Program as is being discussed by this 
Commission. We are having a tough enough time now, under the 
Medicare+Choice Plan to make sure that we get a risk adjustment 
that works.
    Let me ask you about the prescription drug issue. The 
President has said we ought to cover prescription drugs under 
Medicare. Some people are saying we ought to cover prescription 
drugs under Medicare only if people go into a managed care 
plan. What would be your view of a system like that?
    Mr. Hash. Well, I think the President has been very direct 
on that point, Mr. Waxman. And his view and the view of the 
Administration is clearly that prescription drugs are a needed 
addition to the Medicare Benefit Package and that they should 
be provided across-the-board in the traditional fee-for-service 
program, as well as any private managed care plans.
    Mr. Waxman. Well wouldn't some want to push people into 
managed care? Isn't that mainly what people think we want to 
do? I mean if we stack the deck without a risk adjuster and we 
cover drugs only under managed care, aren't we telling people, 
you don't really have a Medicare choice, you have a choice 
between a bunch of managed care plans?
    Mr. Hash. That certainly is one way to look at it, Mr. 
Waxman. I think what we are trying to ensure is that we don't 
have a situation where there are markers for plans that create 
adverse selection. Which gets to the same point you are making, 
which is if only some plans offered prescription drugs to a 
senior and disabled population, they are going to inordinately 
attract, I think, a large number of those beneficiaries into 
those plans.
    Mr. Bilirakis. The gentleman's time has expired.
    Mr. Coburn. Yes sir, would you yield for one question for 
Mr. Hash.
    Mr. Bilirakis. Without objection, you can have an 
additional 30 seconds.
    Mr. Waxman. Thirty seconds, okay.
    Mr. Coburn. I just want to complement your political savvy. 
I mean we are already debating something that isn't out there 
yet and it is really important. I really respect that because 
you are already setting the markers of where you don't want the 
Commission to go, which I praise you for. I think that is good. 
It is also very smart politically. My question was----
    Mr. Waxman. How about on policy grounds?
    Mr. Coburn. No, I think it is better on political grounds 
than it is policy. My question is----
    Mr. Waxman. Are you ready to make the leap?
    Mr. Coburn. Not with Mr. Waxman, it is not. Mr. Hash, the 
average paid on HMO yearly, versus the average consumed by non-
HMO Medicare, could you give us those two numbers?
    Mr. Hash. I think the average payment for a Medicare+Choice 
Organization is about $475. And the annual amount on the fee-
for-service side I think is more like $5,000 or so a year, but 
I am quickly dividing that to make it comparable to the $475, 
would be----
    Mr. Coburn. It is about $5,500?
    Mr. Hash. Yes, roughly.
    Mr. Coburn. So in essence, right now today, managed care is 
$500 more?
    Mr. Hash. No, that is the annual amount per capita for 
Medicare, about $5,500.
    Mr. Coburn. And what is it on managed care?
    Mr. Hash. It would be 475 times 12.
    Mr. Coburn. Well, that is about $5,700.
    Mr. Hash. Yeah.
    Mr. Coburn. So it is comparable. Okay, thank you. And I 
thank the gentleman for yielding.
    Mr. Bilirakis. Mr. Deal to inquire.
    Mr. Deal. Thank you, Mr. Hash. With the risk adjustment 
factor going in, are we still operating under the 95 percent 
cap?
    Mr. Hash. You mean, I think you mean that we pay 95 percent 
of the average fee-for-service costs.
    Mr. Deal. Is that still a limiting factor on the top side?
    Mr. Hash. Yes, sir, it is.
    Mr. Deal. How do you deal with that if in fact the risk 
adjustment has the exact opposite effect of what we say managed 
care has now. That is, is there going to be an incentive to 
select those who are sicker because the risk adjustment in 
effect pays more. If that occurs, how does the 95 percent 
figure into the mix? Are they going to be penalized if they 
have a higher number of sicker patients as opposed to what the 
situation is now? How does that fit?
    Mr. Hash. Well, the 95 percent in effect, gets you to what 
we would say would be the base rate for managed care plans. And 
what the risk adjustment does is to say, for that small subset 
of enrollees who have these hospital episodes that fall into 
one of these 15 categories, that the base rate will be 
increased by an amount that roughly approximates what the data 
show are the expected health care expenditures in the following 
year for an individual who has such a hospital episode.
    So I think, you know, the way those two things work 
together is that 95 percent just gets you to the base rate that 
we actually pay. The risk adjustment methodology identifies a 
subset of all the people who get the base rate and gives them 
an additional premium associated with their expected health 
care costs for the coming year.
    Mr. Deal. Okay. Will the assessment be made on an annual 
basis, a per patient annual basis?
    Mr. Hash. It will be.
    Mr. Deal. And it is prospective, in other words.
    Mr. Hash. It is.
    Mr. Deal. You assess their situation in 1999, which would 
affect their rate reimbursement for the year 2000?
    Mr. Hash. That is correct.
    Mr. Deal. Are there any interim adjustments based on 
catastrophic illness, etcetera?
    Mr. Hash. Well, the way the methodology works is that we 
are actually basing the next year's adjustment on the 
experience in the year that is from the prior June/July period. 
Let me say that again. For the year 2000, the data for the risk 
adjustment will be the hospital data that covers the period 
July 1, 1998, through June 30, 1999. So it is a period that is 
6 months in advance of the beginning of the calendar year. The 
other option that we considered was to actually base it on the 
full calendar year prior to, which would have required us to 
have a retroactive adjustment to the rates once we got all the 
data in, calculated the risk scores and then made an 
adjustment.
    We put out both of those options last September in our 
proposal to the public, and I think the vast majority of health 
plans suggested they wanted to have the 6 month approach that 
we have adopted, that is where the full risk adjustment comes 
into effect, but is not subsequently adjusted during the course 
of the year.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Coburn [presiding]. Mr. Barrett.
    Mr. Barrett. Thank you very much, Mr. Chairman. You have 
touched, I think, in your written testimony and I apologize for 
not being here, on your concerns about gaming the system. Could 
you run through again what you are going to do to make sure 
that there is going to be little gaming of the system?
    Mr. Hash. Well, we don't actually think there will be much 
of that because, first of all, we have eliminated from 
consideration discretionary hospital admissions, the 1-day 
stays. We think that to the degree people are worried about 
inappropriate hospitalizations to qualify an individual for a 
high-risk score the likelihood of that is not very large for a 
couple of reasons. One is the effect of the risk adjustment is 
not immediate after the hospitalization. It is in the year 
following the year in which the episode occurred.
    And therefore there is some substantial uncertainty about 
whether that individual will even be in that plan a year from 
now. And second, to have admissions that were inappropriate, 
you would have to also encourage physicians and individual 
beneficiaries to undergo hospitalization which they 
traditionally are resistant to do. So we actually think we have 
built in enough adjustments to our system to mitigate against a 
possibility of any manipulation of the data Mr. Barrett. Thank 
you. I want to touch a little bit on the, and you made 
reference to this in your comments about the disparity, the 
payment disparity. And I come from a State where there is a 
concern that the payments are lower than they should be. Can 
you talk about how in the first 2 years because of the Balanced 
Budget limitations, we were not able really to bring up the 
floor. You would concur with that?
    Mr. Hash. Well, the things that were supposed to happen as 
a result of the BBA were three things. One, the floor was to be 
raised. There was a minimum update of 2 percent each year. And 
there were a series of blended rates that were being phased in 
over the course of the 5 years of the BBA. What the statute 
says was, you must do the floor and the 2 percent update and if 
there is any money left over, you can actually fund the 
additional cost of a blended approach.
    It turned out that in the first 2 years, 1998 and 1999, the 
floor came up, 2 percent was offered, but in no county that 
would otherwise have gotten a blended rate was that actually 
able to be----
    Mr. Barrett. For the 2 percent, did that go to everyone? So 
did you actually have a situation----
    Mr. Hash. Well, that was the minimum now----
    Mr. Barrett. Okay.
    Mr. Hash. For people who were affected by the floor, we had 
payments as low as about $220 a month. The floor was 
originally, I think, $370. So people who went from $220 to 
$370, had a very substantial, greater than 2 percent, gain. It 
is fair to say, however, that in many of those counties there 
are not any managed care plans.
    So that from a plan perspective, the raising of the floor 
probably didn't affect a lot of plans because they weren't 
serving areas where the floor was raised
    Mr. Barrett. And I assume that you have studies that would 
show where the plans are most prolific.
    Mr. Hash. Oh, yes.
    Mr. Barrett. In other words, I am assuming that, I would be 
interested in getting some of that information.
    Mr. Hash. Be happy to supply that.
    Mr. Barrett. Because intuitively I would think that a lot 
of these areas that have the low reimbursement rates are going 
to, not going to have this. So this becomes sort of an academic 
exercise if we don't have people who are providing these plans.
    Mr. Hash. Well, I think it is fair to say that most of the 
penetration of managed care in the Medicare Program is in 
geographical areas where the payments made by the Program are 
relatively high. We do have that data and would be happy to 
share it with you.
    [The following was received for the record:]


        Managed Care Penetration and Weighted Payment Rates for Counties, Sorted by Payment Decile, 1998
----------------------------------------------------------------------------------------------------------------
                        Payment Rate*
-------------------------------------------------------------    Average  Payment**         Penetration  Rate
               High                            Low
----------------------------------------------------------------------------------------------------------------
$783..............................                     $506                      $587                    26.31%
$506..............................                     $461                      $487                    19.18%
$461..............................                     $435                      $446                    13.97%
$435..............................                     $413                      $422                    11.53%
$413..............................                     $394                      $403                    11.95%
$393..............................                     $376                      $386                     8.80%
$376..............................                     $367                      $371                     6.73%
$367..............................                     $367                      $367                     4.67%
----------------------------------------------------------------------------------------------------------------
Note: In the above table, counties were sorted by the aged M+C payment rate (highest to lowest) and then divided
  into 10 equal groups. For example, the 1st decile represents the 10% of counties with the highest payment
  rates. The average payment for these counties is $587 and the penetration rate is approximately 26%. There are
  many factor's that weigh on a plan's decision to enter or leave a market. Payment rate may be one factor.
* The bottom three deciles, representing plans receiving the floor payment, were combined into one group for
  analysis.
** Weighted by number of risk enrollees.
Source: HCFA, Office of Legislation, March 1999


    Mr. Barrett. And just to follow up on that. As I follow the 
Medicare Commission Reports that talk about prescription drug 
coverage and talk about maybe having more incentives for people 
who are in HMO's. Again, my concern is that we are leaving a 
lot of people behind if the emphasis is going to be in that 
area. And there are huge parts of this country where managed 
care just is simply not interested in going because of that.
    So all of a sudden we are looking at a multi-tiered system 
based more on geography than anything else.
    Mr. Hash. Well, I guess to respond to that I would say, 
that is one of the reasons, at least as the President has 
looked at and talked about the deliberations in the bi-partisan 
Commission, I think he has been very outspoken about the need 
to maintain a defined, benefit package across-the-board for all 
Medicare beneficiaries regardless of whether they are in a 
private plan or in the traditional fee-for-service program.
    So in order to make sure that everywhere the beneficiaries 
have a guarantee of a defined benefit package, including 
prescription drugs. I mean that is a core, or should be a core 
feature of any strengthening or improvement of the Medicare 
Program----
    Mr. Barrett. Okay, thank you.
    Mr. Coburn. Mr. Barrett, did you want to request that he 
send us that information?
    Mr. Barrett. Yes, please.
    Mr. Coburn. If you would, Mr. Hash? Would you, Mr. Hash?
    Mr. Hash. Be happy to.
    Mr. Coburn. In terms of the comparison of rates and 
participation rates based on payments. The gentleman from 
Florida.
    Mr. Stearns. I thank you, Mr. Chairman. Mr. Hash, I have 
here a document that is dated December 11, 1998, and I 
understand the committee just recently got this. It is a list 
of risk plans not renewing or reducing services to areas for 
1999. And going through this I notice Florida is almost two 
pages here. And a lot of these counties are in my Congressional 
District, Clay, Baker, Lake, Marion, but you even have Orange 
County here, which is Orlando.
    You have Volusia County which is Daytona Beach. So you have 
counties here like Clay, in my district, which is basically a 
lot of working people. And yet all these HMO's are leaving. So 
I guess, for the record, tell me why they are leaving again?
    Mr. Hash. Well, I think there are a variety of reasons, as 
I, you might not have been here but I talked about this a 
little bit earlier. And the variety of reasons includes plans' 
decisions about their relative market position, their 
penetration in the market, and the competitiveness of the 
market. Obviously, some of it has to do with their anticipation 
of what Medicare rates are going to be like.
    There was further uncertainty about what the risk 
adjustment methodology, how that would affect them. There are a 
variety of factors and they are not easily generalizable 
because each market, I think, is very different. And I think 
the decisions that were made in Florida are ones that are 
unique to the market place.
    Mr. Stearns. That is my main question. Is there something 
about Florida that is different than other States?
    Mr. Hash. No, no, when I said unique, I mean that the 
particular decision by a given plan to withdrawal completely or 
reduce their service area is affected by the particular 
circumstances in which they find themselves. That could be that 
they have a relatively small penetration into the Medicare 
market place and do not feel, in terms of the numbers that they 
have been able to enroll, that it provides an adequate base in 
terms of taking the risk on for this population.
    Mr. Stearns. Mr. Hash, in three of these which are in my 
Congressional District, there were no HMO's. In other words, 
this HMO that left was the only one.
    Mr. Hash. Right.
    Mr. Stearns. There was no competition.
    Mr. Hash. Right.
    Mr. Stearns. And they, when I talked to them, they always 
complain they are not getting enough money from you to make it 
worthwhile and they want to see a reimbursement similar to what 
Miami is getting. Is that a legitimate argument?
    Mr. Hash. Well, I----
    Mr. Stearns. They say because there is less population, and 
the cost of living is less. And Miami costs more, so Miami is 
getting more. And so they go to Miami and they don't go to----
    Mr. Hash. The reasons the payments vary so dramatically in 
the Medicare+Choice program have to do with the range and 
variation in the Medicare costs. That is what really is at the 
base of what the rate is in any given area. It is what has been 
the historical cost experienced in terms of the price paid for 
services and the utilization patterns for services in that 
area.
    In a place like Dade County, both price and utilization 
historically has been at the top of the list of Medicare 
utilization and price across the country. That translates into 
among the very highest payment rates. In other areas of the 
country and other counties even I am sure in the State of 
Florida, price and utilization rates in the Medicare Program 
over time have been very much different than what is going on 
in Dade County.
    Mr. Stearns. This is my last question, Mr. Chairman. I know 
we have to vote. Maybe in one or two sentences, if you had the 
power and you could make the decision today and you had the 
genie right on your shoulder, what would you do in two 
sentences to make universal availability of HMO's across this 
country in an affordable, accessible way.
    Mr. Hash. I think that is a question I can't answer in one 
or two sentences.
    Mr. Stearns. You have got a genie on your shoulder now.
    Mr. Hash. But I would like to work with you to try to find 
the answer to that.
    Mr. Stearns. You sound like a politician. Thank you, Mr. 
Chairman.
    Mr. Coburn. I just want to confirm with you, Mr. Hash, that 
we will get the comparison from 1990 to now on renewals/non-
renewals, if you would. And your staff is going to remain here 
for the rest? Okay, thank you very much.
    Mr. Hash. Thank you, Mr. Chairman.
    Mr. Coburn. And we will adjourn until I guess, until the 
chairman gets back. How is that?
    [Brief recess.]
    Mr. Bilirakis. The hearing will come to order. The second 
panel will consist of Dr. Gail Wilensky, Chair of the Medicare 
Payment Advisory Commission and Bill Scanlon. Mr. Scanlon is 
Director of Health Financing and Public Health of the United 
States General Accounting Office. Welcome, Dr. Wilensky and Mr. 
Scanlon. You have been here before, both of you have and how.
    Your written testimony is obviously a part of the record. 
We will set the clock at 5 minutes. If you feel you have got to 
exceed that, I don't think we will shut you off. We will start 
off with Dr. Wilensky.

    STATEMENTS OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT 
 ADVISORY COMMISSION; AND WILLIAM J. SCANLON, DIRECTOR, HEALTH 
  FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, AND 
       HUMAN SERVICES DIVISION, GENERAL ACCOUNTING OFFICE

    Ms. Wilensky. Thank you. Thank you very much, Chairman 
Bilirakis and members of the subcommittee for inviting me to be 
here. I am here in my role as Chair of the Medicare Payment 
Advisory Commission. I want to summarize a few thoughts that I 
would like to leave you with following the discussion that went 
on in the very interesting first panel.
    The first point is just to remind you what the problem is 
that you are trying to fix with regard to risk adjustment. And 
that is that payments to plans have not reflected predictable 
differences--and the emphasis on the predictable--in seniors' 
health care spending. And so what we have seen from HCFA is an 
attempt to make an interim adjustment to the payment that 
relies on data from in-patient stays on the patients' diagnosis 
as a better way to adjust payments to reflect the seniors' 
health status.
    We have already been using age and sex and their 
employment, whether or not they are institutionalized and 
whether they are on Medicaid. But as you well know, that has 
not been a very good way to pick up other predictable 
differences based on their health care status. Now the plans 
have taken a number of hits on their base payment as a result 
of the Balanced Budget Act. And you are probably going to hear 
more about that later.
    But I think it is important to distinguish between whether 
or not the base payment to a plan is adequate or right--
particularly as a result of the various changes that have 
occurred from the Balanced Budget Act--and whether the relative 
payments between plans and between the plans and traditional 
Medicare are right. What this is supposed to accomplish, the 
risk adjustment, is to make the relative payments right. You 
could agree on that and still have an argument about whether 
the base has been hit too hard or will be hit too hard in the 
future.
    There has clearly been stronger reductions because of the 
stronger than anticipated reductions in fee-for-service 
spending from the Balanced Budget Act and there have been a 
number of administrative requirements that have increased 
spending needs for the plans, including some of the data 
reporting requirements that have been put on them. And this 
risk adjustment, it appears, will also reduce overall the 
payments to the plans. But it doesn't address the issue about 
the relative payments.
    Third point is that the focus ought not to be thought of as 
punishing plans, but rather trying to provide incentives so 
that plans who are willing to, or who want to take on 
chronically ill patients, get paid appropriately so they can do 
that and have that payment reflected in their premiums. Now 
there are some appropriate concerns that have been raised if 
they only use in-patient data.
    They are basing the expenditures on what we know from fee-
for-service data, and as I have talked about, it is one more 
hit, it looks like overall. But the fact is I think HCFA has 
done the very best that it could, given the requirements of 
beginning to implement risk adjustment January 2000. As you 
know, they only have data from the in-patient stay. They are 
phasing in the change. They will phase it in over a several 
year period.
    They are backloading the change, that is it is a little 
change in the beginning. Most of the change occurs in the last 
few years. And by the time they finish the phase in, full 
encounter data, that is data from the out-patient setting, 
should be available. And that will make it a much better risk 
adjustment. So in conclusion I would like to say that while I 
think there can be some question about some of the changes that 
have occurred this year, about when the appropriate date is to 
ask health care plans to put in the information on their 
premium and benefit combinations to maybe move it a little 
later than it is now in statute in May.
    There can be some questions raised about whether the 
requirements for reporting of data are too onerous or too 
costly or whether the base payment is right. But the risk 
adjustment that has been proposed by HCFA, I think is a very 
reasonable rule. I think by having it phased in, by backloading 
the impact, by using full encounter data as soon as they can, 
they have really produced a very reasonable rule. And I would 
urge you to proceed with it. Thank you.
    [The prepared statement of Gail R. Wilensky follows.]
    Prepared Statement of Gail R. Wilensky, Chair, Medicare Payment 
                          Advisory Commission
    Good morning Chairman Bilirakis and members of the Subcommittee. I 
am Gail Wilensky, Chair of the Medicare Payment Advisory Commission 
(MedPAC). I am pleased to be here this morning to discuss the issue of 
risk adjustment and the Medicare+Choice program.
                                summary
    The system used to adjust payments to Medicare's risk-contracting 
plans and now Medicare+Choice plans has been widely acknowledged to be 
inadequate because it does not accurately reflect predictable 
differences in enrollees' health spending. As a result, Medicare has 
overpaid plans to care for relatively healthy enrollees and underpaid 
plans to care for those in poorer health. Overall, payments have 
exceeded plans' costs of providing the basic Medicare benefit package.
    A better risk adjustment system would improve payment equity across 
plans and reduce Medicare's overpayments to plans. The interim risk 
adjustment system proposed by the Health Care Financing Administration 
(HCFA)--which relies on principal diagnoses from inpatient hospital 
stays--is imperfect, but it represents a step in the right direction by 
making payments correspond more closely to enrollees' health needs. 
Moreover, many of the limitations of the proposed interim system could 
be mitigated by moving to a system based on diagnosis data from all 
sites of care. MedPAC supports HCFA's efforts to do this effective for 
payments in 2004.
    Adopting any new system of risk adjustment would introduce swings 
in payments to plans. Accordingly, MedPAC supports the phase-in 
proposed by HCFA that back-loads the impact.
                  risk adjustment and why it is needed
    Risk adjustment is a term used to describe incorporating 
predictable differences in health status and service needs into the 
capitation payments made to health plans. When payments are risk 
adjusted, plans receive larger payments for their relatively sick 
enrollees and smaller payments for their healthier ones.
    In Medicare, risk adjustment is intended both to make payments 
equitable across Medicare+Choice plans and to account for differences 
in the mix of enrollees between the traditional fee-for-service program 
and the Medicare+Choice program. Put another way, risk adjustment may 
be viewed as a means of encouraging health plans to serve beneficiaries 
with severe or chronic illnesses by paying plans more to care for them.
    Medicare beneficiaries' needs for health services--inpatient care, 
physician visits, and so on--vary, and this variation has both a random 
component and a systematic component. The random component reflects 
service needs that are, by definition, unpredictable, so that if there 
were no other differences among beneficiaries, risk adjustment would 
not be necessary. In such a situation, unexpectedly high costs for some 
enrollees in a plan would be offset by unexpectedly low costs for other 
enrollees. Given sufficient numbers of enrollees, payments to plans 
would be correct on average.
    In fact, there are differences among beneficiaries that lead to 
systematic and predictable differences in their needs for health 
services. For example, older people use more services than younger 
people, and people with severe or chronic illnesses use more services 
than others. These predictable differences in the use of services--
whether they are predictable either by health plans or by enrollees 
themselves--introduce the potential for risk selection. If no 
adjustments are made to account for these differences, plans will be 
overpaid for healthy enrollees and underpaid for sick enrollees. 
Accordingly, they will have an incentive to enroll beneficiaries whose 
expected costs are below average, because they will still receive the 
average payment. If plans act on this incentive and successfully 
attract relatively healthy beneficiaries, aggregate payments will be 
too high.
              medicare's current system of risk adjustment
    Currently, Medicare adjusts payments to private health plans to 
reflect only differences among enrollees in their demographic 
characteristics (age and sex), employment status, institutional status, 
and eligibility for Medicaid. This risk adjustment system accounts for 
the relatively greater use of health services of older beneficiaries 
and those who are institutionalized, and the relatively lower expected 
costs associated with working enrollees who have primary coverage 
through their employers. However, it does not account for variation due 
to differences in health status. Until 1998, the original payment 
method paid 95 percent of expected fee-for-service spending for 
beneficiaries with similar characteristics, which was intended to 
account for health plans' ability to deliver care more efficiently. 
Now, payments are based on updated 1997 rates.
Payment inequity and overpayment under the current system
    A common complaint about the current system is that plans have 
experienced significant favorable risk selection--enrollment of 
relatively healthy beneficiaries--that is not reflected in their 
payments. Because it does not take health status into account, the 
current system rewards organizations that attract healthier enrollees 
because it does a very poor job of accounting for predictable 
differences in health spending. Plans are thus paid the same amount for 
two beneficiaries with identical demographic characteristics, even 
though differences in their health status would suggest that one will 
be much more costly than the other.
    Empirical research supports the assertion that plans have 
experienced favorable selection while their payments have been based on 
average risks within demographic groups. For example, Riley and 
colleagues (1996) found that in 1994 the predicted costs of Medicare 
risk plan enrollees were 12 percent lower, on average, than the 
predicted costs of fee-for-service enrollees with the same demographic 
characteristics. Because payments currently are adjusted only for 
demographic differences, even setting rates at 95 percent of the amount 
Medicare expected to spend for a beneficiary in the fee-for-service 
program resulted in overpayments of as much as 7 percent (Riley et al. 
1996, Hill et al. 1992). Those overpayments are in part why Medicare 
risk plans have been able to offer expanded coverage to enrollees.
    Some favorable risk selection may be inevitable because the methods 
organizations use to recruit enrollees might not reach people with poor 
health status, such as the institutionalized, or because healthy people 
may be less particular about being able to see a specific physician. 
Moreover, even if selection to plans has been favorable in the 
aggregate, that does not mean that all individual plans have 
experienced favorable selection. For example, one study shows that 
mortality and hospitalization rates rise as length of managed care 
enrollment increases (PPRC 1996). This ``regression towards the mean'' 
means that in terms of their use of health services, managed care 
enrollees become more like fee-for-service beneficiaries over time. 
Thus, plans that have participated in Medicare longest and have long-
tenured enrollees may see less favorable selection.
Risk adjustment requirements in the Balanced Budget Act
    In response to concerns about the current system, the Balanced 
Budget Act of 1997 (BBA) directed HCFA to develop a new risk adjustment 
system. The rationale of the Congress for mandating the new system was 
to make Medicare's payments to Medicare+Choice organizations more 
accurately reflect predictable differences in health spending by 
enrollees. This new system should improve Medicare+Choice by making 
payments more equitable across plans and making them reflect the 
generally better health of Medicare+Choice enrollees as compared with 
fee-for-service beneficiaries.
    The BBA required the new risk adjustment system to use enrollees' 
health status and demographic characteristics to account for variations 
in their expected spending. It laid out a very tight time schedule, 
requiring HCFA to implement the system by January 1, 2000.To meet that 
schedule, the agency must:

 publish a preliminary notice by January 15, 1999, describing 
        the changes in methods and assumptions it will use to determine 
        payment rates for 2000, compared with those for 1999 (HCFA 
        1999);
 publish a final notice by March 1, 1999, on the payment rates 
        for 2000 and the risk and other factors it will use to adjust 
        those payment rates; and
 submit a report to the Congress that describes the risk 
        adjustment method it will implement with the new payment rates, 
        also by March 1, 1999.
    While HCFA has supported research to develop improved risk 
adjustment methods for more than a decade, implementing the new system 
has required HCFA to collect and analyze a substantial amount of new 
data in a short period of time. The agency must measure not only the 
health status of beneficiaries enrolled in Medicare+Choice plans, but 
health status and subsequent spending for beneficiaries in the 
traditional fee-for-service program.
    HCFA must collect data from Medicare+Choice organizations both to 
determine monthly payments for each enrollee starting in 2000 and to 
inform Medicare+Choice organizations about the anticipated effects of 
the new risk adjustment system.
    HCFA must measure health status and spending for fee-for-service 
beneficiaries for two reasons. First, the agency must estimate risk 
scores that measure relative levels of expected spending for 
beneficiaries with different combinations of health conditions and 
demographic characteristics. These scores require beneficiary-specific 
data on health conditions, demographic characteristics, and annual 
Medicare spending for covered services that are currently available 
only for beneficiaries in the traditional fee-for-service program. 
Second, once the new risk scores are developed, HCFA must adjust the 
per capita monthly payment rate for each county--the county rate book--
to reflect the county's expected level of per capita spending for a 
beneficiary with national average health and demographic 
characteristics.
    To facilitate these tasks, the BBA permitted HCFA to collect 
encounter data--which provide information similar to claims data--on 
hospital inpatient stays from Medicare+Choice organizations, but not 
before January 1, 1998. Starting July 1, 1998, HCFA could collect 
encounter data from other providers of care such as physician offices, 
hospital outpatient departments, skilled nursing facilities, and home 
health agencies. HCFA will be able to use the diagnoses reported in the 
encounter data to develop indicators of beneficiary health status.
    HCFA has indicated it has been meeting the time requirements of the 
BBA and has collected almost complete hospital inpatient encounter data 
records from nearly all organizations. A small number of organizations 
have supplied incomplete data, and HCFA is working with them to get 
complete data. Some organizations are less confident and believe the 
data generally are not complete due to systems problems. However, the 
actual risk scores will be based on the next round of data collection, 
which should afford an opportunity to work out existing problems.
                     hcfa's proposed interim system
    The schedule outlined in the BBA restricted HCFA to adopt, at least 
initially, an interim system in which health status will be measured 
using only hospital inpatient diagnoses. Before the Congress passed the 
BBA, HCFA argued that it needed data as soon as possible to implement 
an improved risk adjustment system. However, HCFA and the Congress 
recognized that Medicare+Choice organizations could not establish 
systems for reporting data from sites of care other than hospital 
inpatient departments in time for implementation by January 1, 2000. 
Therefore, HCFA indicated to the Congress it needed inpatient data by a 
particular date and left the Congress to determine the remaining time 
frame.
Description of the proposed interim system
    In the interim system, HCFA will determine payments to 
Medicare+Choice organizations according to the following process. 
First, HCFA will characterize beneficiaries by:

 age and sex;
 principal diagnoses associated with any inpatient hospital 
        stays they had during the previous year;1
---------------------------------------------------------------------------
    \1\  Inpatient diagnoses are based on encounter data submitted by 
organizations for current enrollees and on Medicare fee-for-service 
claims for new enrollees who were previously in the traditional 
program. Risk scores for beneficiaries who are newly eligible for 
Medicare and who enroll in a Medicare+Choice plan will be based solely 
on their demographic characteristics. This is necessary because HCFA 
lacks a claims history for these beneficiaries.
---------------------------------------------------------------------------
 eligibility for Medicaid benefits during the previous year; 
        and
 for aged beneficiaries, previous eligibility for Medicare on 
        the basis of a disability.
    Based on this classification, HCFA will determine prospective risk 
scores for Medicare+Choice enrollees (see the Appendix for more 
detail). Risk scores are intended to measure enrollees' expected 
spending in the forthcoming payment year relative to that of the 
average beneficiary in the traditional fee-for-service program. As in 
the current risk adjustment system, spending patterns in the 
traditional fee-for-service program will be treated as a baseline, so 
the risk score associated with each combination of demographic and 
health status factors will be estimated using fee-for-service 
data.2
---------------------------------------------------------------------------
    \2\ In principle, risk scores could (perhaps should) be estimated 
using Medicare+Choice spending patterns, but data on annual spending 
for covered services, which are needed to estimate expected spending 
given enrollees' diagnoses and demographic characteristics, are not now 
available for Medicare+Choice enrollees.
---------------------------------------------------------------------------
    In the last step, HCFA will calculate payments for enrollees as the 
product of three factors:

 the year 2000 payment amount for enrollees' county of 
        residence from the county rate book;
 a factor that will adjust the county payment rate to reflect 
        the change in risk measurement methods; and
 the enrollees' risk scores based on the interim system.
    The county adjustment factors are needed to change the county 
payment amounts so they are consistent with the new system. Under the 
current system, each county payment rate is based on the updated 1997 
payment rate, which reflects the current expected fee-for-service 
spending per capita in the county for a beneficiary with the national 
average demographic profile. Because the new risk adjustment system 
captures risk differences among beneficiaries more precisely than does 
the current system, HCFA needs to recalibrate the county amounts using 
the new adjusters. This method will ensure that the county payment 
rates reflect the 1997 expected fee-for-service spending per capita in 
the county for a national average beneficiary, as measured by the new 
system.
The interim system intended to improve payment equity
    The interim risk adjustment system should be an improvement over 
the current system because payments to organizations will more 
accurately reflect the predictable differences in health spending by 
their enrollees. If it works as intended, the system will encourage 
organizations to compete on the basis of how effectively they manage 
care and not reward plans for attracting favorable risks.
    The interim system is consistent with the BBA's objectives for risk 
adjustment. First, it will encourage organizations to compete on 
factors other than risk selection because the profits from favorable 
selection will be lower. Second, organizations may have more resources 
for developing specialized care management programs for enrollees with 
serious conditions, which may lead to improvements in efficiency and in 
the quality of care enrollees receive. Finally, aggregate overpayments 
to Medicare+Choice organizations that result from enrolling healthier 
Medicare beneficiaries may be reduced.
Potential concerns with the interim system
    Despite these improvements over the current system, the interim 
system's dependence on hospital inpatient diagnoses raises several 
potential concerns that policymakers should monitor closely.
    Incentives to hospitalize inappropriately. Because organizations 
will receive higher payments only for enrollees who have been 
hospitalized, the proposed system may create incentives for 
Medicare+Choice organizations to hospitalize enrollees inappropriately. 
However, the impact of such incentives is likely to be mitigated by a 
number of factors.

 First, payments for enrollees' hospital stays are based on 
        their expected spending in the year following the stay, so the 
        incremental payment may be lower in many cases than the 
        hospitalization cost the organization incurred.
 Second, organizations will not receive an increased payment 
        until the calendar year after a hospitalization, and then only 
        if the hospitalized beneficiary remains enrolled in the same 
        organization.3
---------------------------------------------------------------------------
    \3\ In fact, there will be a lag of six months between collecting 
diagnosis data and calculating risk scores. Thus, payments for calendar 
2000 will be based on data collected between July 1, 1998 and June 30, 
1999.
---------------------------------------------------------------------------
 Finally, organizations would have to influence physicians to 
        hospitalize more patients and to overcome resistance on the 
        part of enrollees to being hospitalized.
    To further counteract any incentive to hospitalize, HCFA will treat 
enrollees with one-day inpatient stays and those with diagnoses for 
which hospitalization is discretionary the same as enrollees who were 
not hospitalized. HCFA considers a hospitalization to be discretionary 
if the principal diagnosis represents only a minor or transitory 
disease or disorder, is rarely the main cause of an inpatient stay, or 
is vague or ambiguous.
    Adjustments based on fee-for-service patterns. A second potential 
problem is that risk scores based on fee-for-service hospitalization 
patterns may understate the riskiness of certain Medicare+Choice 
enrollees. This understatement will occur if Medicare+Choice 
organizations substitute other sites of care in place of 
hospitalizations more frequently than do providers in traditional fee-
for-service Medicare. If this were true, Medicare+Choice enrollees with 
serious conditions would be hospitalized less often and would receive 
lower risk scores, on average, than fee-for-service beneficiaries with 
comparable conditions and demographic characteristics.
    How serious this problem could be is unclear. Hill and colleagues 
(1992) found that Medicare managed care organizations did not reduce 
the hospitalization rate relative to fee-for-service Medicare. But 
Medicare+Choice organizations have also argued that they hospitalize 
comparable patients for shorter stays than do fee-for-service providers 
in traditional Medicare, and results from Hill and others support this 
argument. To the extent organizations shorten hospital stays to one 
day, HCFA's proposal to treat enrollees with one-day stays the same as 
enrollees without inpatient stays will compound any understatement 
caused by calibrating risk scores based on fee-for-service data.
    Potential for large changes in payments. A third issue is that 
implementing any improvements in risk adjustment will often lead to 
changes in payments to some individual plans that are much larger than 
the change in aggregate Medicare+Choice payments. Under the interim 
system, these changes could affect some Medicare+Choice organizations' 
decisions to participate in some or all of the market areas they serve 
for Medicare and disrupt Medicare+Choice coverage for some 
beneficiaries.
    Medicare+Choice organizations are understandably concerned about 
the effects of HCFA's new risk adjustment system on their future 
payments. Other things being equal, adoption of this new system on 
January 1, 2000, will change payments for individual organizations and 
reduce overall Medicare+Choice payments. However, the full effects of 
the new system are somewhat uncertain because the data that HCFA will 
use to determine payments to organizations in 2000 will not be 
available until late in 1999 when enrollment data are available.
    MedPAC has not yet made a comprehensive assessment of the impact of 
the new system on specific plans. But the amounts involved will be 
significant. Based on preliminary data, HCFA estimates that if the new 
system were implemented immediately and if there were no changes in the 
composition of enrollment:

 variation in payments for individuals would range by a factor 
        of about 25, compared with the current variation of about 6;
 additional payments would be made for about 12 percent of 
        enrollees, and about 20 percent of total payments would be 
        redistributed;
 aggregate plan payments would fall by 7.6 percent; and
 payments to some plans could fall by 15 percent, whereas 
        payments to others could increase by 5 percent.
    Inpatient data inadequate. Finally, some analysts have expressed 
concerns that payments to Medicare+Choice organizations under the 
interim system will not fully account for measurable and predictable 
differences in spending among their enrollees because there is 
diagnosis and health status information that is not reflected in the 
demographic and hospital diagnosis data used. As a result, 
organizations that attract seriously ill enrollees still will be 
underpaid, while those that attract healthy ones will continue to be 
overpaid. This concern is valid, but the new system nonetheless 
represents a substantial improvement over the existing system.
                        medpac's recommendations
    In MedPAC's Report to the Congress: Medicare Payment Policy that 
will be released next week, the Commission makes two recommendations 
that could mitigate many of the concerns associated with a new risk 
adjustment system for Medicare+Choice.4
---------------------------------------------------------------------------
    \4\ Risk adjustment may reduce incentives for risk selection, but 
will not by itself create neutral financial incentives to provide 
specific services. In its March 1998 Report to the Congress, MedPAC 
recommended a large-scale demonstration of partial capitation or other 
methods that would pay plans partly on the basis of a capitated rate 
and partly on the basis of payment for services used. The Commission 
continues to support such a demonstration to test the merits of 
supplementing risk adjustment with risk sharing.
---------------------------------------------------------------------------
Recommendation to use diagnosis data from all sites of care
    Many of the problems cited for the proposed interim system could be 
mitigated by replacing it with a permanent one in which health status 
is based on diagnoses assigned during both inpatient hospital and other 
types of health care encounters. Thus, MedPAC recommends that:
        As quickly as feasible, the Secretary should develop the 
        capability to use diagnosis data from all sites of care for 
        risk adjustment.
    In its January 15, 1999, 45-day risk adjustment notice, HCFA 
indicated it intends to replace the interim system on January 1, 2004, 
with a comprehensive system based on diagnoses from beneficiaries' 
encounters with all major types of providers. To make that possible, 
HCFA will require organizations to augment their hospital inpatient 
data with information from enrollees' encounters in physicians' 
offices, hospital outpatient departments, skilled nursing facilities, 
and home health agencies. However, this requirement will not be 
implemented before October 1, 1999.
Recommendation to phase in the interim system to cushion its effects on 
        payments
    MedPAC agrees with the Secretary's plan to phase in the interim 
risk adjustment system:
        The Secretary's plan to phase in the interim risk adjustment 
        system--with a method that uses a weighted blend of the payment 
        amounts that would apply under the interim system and those 
        that would apply under the current system--is sound. The weight 
        on the interim payment amounts should be back-end loaded. That 
        is, the weights should be relatively low in the first years so 
        that most organizations will not experience extreme changes in 
        their total payments.
    The phase-in should reduce the number of organizations that 
withdraw from the Medicare+Choice program, but it also will slow the 
benefits of adopting the interim risk adjustment system. In addition, 
the phase-in will raise Medicare spending because the reduction in 
payments that otherwise might occur under the interim system will not 
be fully realized.
    Blended payments will be made during 2000 through 2003. In 2000, 
payments will be calculated using 90 percent of the existing system and 
10 percent on the interim system.5 Progressively lower 
weights will be assigned to the existing system in 2001 through 2003. 
In 2004, payments will be based on full implementation of a 
comprehensive risk adjustment system that uses data from all sites of 
care.
---------------------------------------------------------------------------
    \5\  As an example of how the blend will work in 2000, consider an 
organization that would receive a monthly payment for an enrollee of 
$470 under the interim system and $500 under the current system. In 
2000, the blended monthly payment would be: (.10)x($470) + (.90)x($500) 
= $497.
---------------------------------------------------------------------------
                               conclusion
    Changes in Medicare's rules for private health plans participating 
in the program have had both intended and unintended consequences. 
These changes, introduced in conjunction with the new Medicare+Choice 
program, were designed to improve Medicare's risk contracting program 
by increasing the fairness of the distribution of payments to health 
plans, by creating incentives to improve quality of care, and by 
helping beneficiaries to make more informed choices. But taken together 
with lower base payment updates attributable to the BBA and to 
unexpected slowing in the growth of fee-for-service Medicare spending, 
the new rules may have made participation in Medicare less attractive 
from the plans' perspective. Plans have expressed particular concerns 
about the combined impact of lower base payment updates under the BBA 
and possible decreases from that base as risk adjustment is 
implemented.
    Improving Medicare's current risk adjustment system is essential. 
Risk adjustment is about getting relative payment rates right, so that 
payments for enrollees in the Medicare+Choice program more closely 
match their expected costs. It is appropriate that the new system of 
risk adjustment be phased in, both to avoid any instability that sudden 
swings in payments to health plans could have for their enrollees and 
to allow time for policymakers to assess how it is working, but the 
benefits of better risk adjustment should not be delayed more than 
necessary. While the Commission recognizes that the transition to the 
new Medicare+Choice program has been less smooth than many had hoped, 
we believe the issues raised during the transition should be considered 
separately from the issue of improving Medicare's system of risk 
adjustment.

    Mr. Bilirakis. Thank you, Doctor. Mr. Scanlon.

                STATEMENT OF WILLIAM J. SCANLON

    Mr. Scanlon. Thank you very much, Mr. Chairman and members 
of the subcommittee. I am pleased to be here today as you 
consider HCFA's proposed risk adjuster for rates paid to 
Medicare+Choice Plans. As you have heard from several sources, 
Medicare's current risk adjuster falls far short of its 
intended goal of assuring appropriate payment for such plans. 
In 1997, we issued a report on Medicare's payments to HMO's in 
California.
    I think that the California study produced two findings 
which are very relevant for today's discussions. First of all, 
as other research has demonstrated for earlier time periods and 
using smaller numbers of beneficiaries, we found that the 
combination of the Medicare's pre-Balanced Budget Act rate 
setting method and the existence of favorable selection for 
HMO's, led to excessive capitation rates.
    These rates, based on the experience of a sicker population 
of non-enrollees, were paying for the services needed by the 
healthier population of enrollees. We estimated that $1 billion 
in overpayments, representing about 16 percent of the total 
payments, were made to plans in 12 California counties. A 
quarter of these overpayments were attributable to computing 
each county's average rate using only the service experience of 
fee-for-service beneficiaries and not that of all 
beneficiaries.
    Three-quarters of the overpayments was due to the failure 
of Medicare's risk adjuster to adequately lower those average 
rates to be consistent with managed care enrollees, better 
health and lower use of services. The second finding was that 
under Medicare's pre-Balanced Budget Act rate setting method, 
excess payments were continuing to grow with increased 
enrollment, rather than diminish, which many had speculated 
they would.
    The reason was that as a county's managed care population 
grew, the concentrations of higher cost beneficiaries remaining 
in fee-for-service also grew. Rates based on the sicker fee-
for-service populations resulted in increasingly excessive 
payments relative to the average better health of the managed 
care population. Our work specifically showed that HMO's in 
counties with the highest managed care penetration received a 
higher share of excess payments.
    The Balanced Budget Act modified the method for setting 
county rates, halting the spiral of increasing overpayments 
being built into these average rates. However, in establishing 
1997 levels as the base, it is also clear that historical 
overpayments remain in today's capitation rates. The rates 
continue to be quite generous relative to the expected use of 
medical services by Medicare's managed care population.
    However, excess payments in the aggregate do not mean that 
every plan is overpaid. A fundamental problem with Medicare's 
current risk adjustment method is that it puts plans enrolling 
high cost beneficiaries at a competitive disadvantage. 
Demographic information alone is inadequate to predict an 
enrollee's health care cost. As a result, a current risk 
adjustment does not adequately raise a plan's capitation rate 
enough to pay appropriately for sicker beneficiaries' use of 
services.
    As a practical matter, Medicare managed care plans 
receiving a fixed payment per enrollee are not likely to go out 
of their way to encourage Medicare's frailest seniors to join 
their plans. We and others have repeatedly called for a health-
based adjuster, HCFA's proposed method using hospital and 
patient data, while not perfect, is headed in the right 
direction.
    HCFA has taken steps to ensure that the shortcomings 
associated with having to use these data are reduced. It was an 
appropriate step to seek expert clinical input to identify and 
exclude from the risk adjustment calculations hospitalizations 
that were more likely discretionary or not predictive of future 
costs. We also find that HCFA's phase in approach is prudent.
    It avoids rapid payment changes that plans may find 
difficult and that could adversely affect beneficiaries if 
plans respond by suddenly altering their benefit packages or 
reconsidering their commitment to the Medicare+Choice Program. 
Nevertheless, because having encountered data on Medicare 
managed care enrollees' use of services in all settings is 
critical to improving risk adjustment, we urge that plans 
participating in Medicare+Choice collect and report these data 
to HCFA as soon as possible.
    All plans may not be able to submit such data quickly, so 
it may not be feasible to accelerate the transition to the 
comprehensive risk adjusters currently planned for the year 
2004. However, having full encounter data from some plans, may 
allow HCFA to assess the appropriateness of the interim risk 
adjusters and make modifications during the transition period, 
if appropriate.
    Overall, we believe that the new health-based risk adjuster 
system will help reduce overpayments to managed care plans and 
will also make payments fairer to plans enrolling Medicare's 
costliest beneficiaries. Thank you, Mr. Chairman. I would be 
happy to answer any questions you or the members may have.
    [The prepared statement of William J.. Scanlon follows.]
 Prepared Statement of William J. Scanlon, Director, Health Financing 
and Public Health Issues, Health Education and Human Services Division, 
                                  GAO
    Mr. Chairman and Members of the Subcommittee: We are pleased to be 
here today as you address the question of adjusting Medicare's payments 
to managed care plans in the Medicare+Choice program. Although the 
subject matter is technical, its implications are significant for 
Medicare's greater use of managed care. The Balanced Budget Act of 1997 
(BBA) includes provisions designed to slow the growth of Medicare 
payments overall. BBA also encourages the expansion of managed care in 
its creation of Medicare+Choice, designed to offer beneficiaries more 
health plan options beyond those available through Medicare's health 
maintenance organizations (HMO). BBA provisions modify the method used 
to pay health plans, and it is the details for implementing these 
provisions--representing billions of dollars in savings--that are under 
discussion here today.
    Managed care plans receive from Medicare a fixed monthly payment, 
called a capitation payment, for each beneficiary they enroll. Because 
the payment is fixed per enrollee, regardless of what the plan spends 
for each enrollee's care, health plans lack the incentive to provide 
unnecessary services. However, the enrollment of beneficiaries in 
managed care plans has not saved the government money as expected, 
mainly for two reasons. First, as we and others previously determined, 
Medicare's capitation rates are excessive because payments are based on 
health care spending for the average non-enrolled beneficiary, while 
the plans' enrollees tend to be healthier than average.1 
Second, instead of diminishing as more beneficiaries enrolled in 
managed care, excess payments per enrollee continued to grow. To 
correct these problems, BBA changed the rate-setting formula used by 
the Health Care Financing Administration (HCFA), the agency responsible 
for administering Medicare. It required that most of the rate-setting 
provisions be in place in 1998 and required that HCFA replace 
Medicare's current risk adjuster--the mechanism that modifies a plan's 
average capitation rate to better reflect an enrollee's expected 
medical costs--with a new one to be implemented in 2000. The risk 
adjuster in place has been widely criticized as a major factor in the 
HMO overpayment problem.
---------------------------------------------------------------------------
    \1\ Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions 
in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
---------------------------------------------------------------------------
    In considering Medicare's new rate-setting method, my comments 
today will focus on (1) the importance of improving the current risk 
adjustment method, (2) the implications of rate-setting changes 
implemented in 1998, and (3) the advantages and drawbacks of HCFA's 
proposed new interim risk adjuster. My comments are based on 
information drawn from our issued work on this subject, supplemented by 
relevant published studies and interviews with HCFA officials.
    In summary, Medicare's current risk adjuster has failed to protect 
taxpayers, certain plans, and beneficiaries, underscoring the urgency 
of replacing it with a health-based risk adjuster.

 Studies by us and others show that methodological flaws have 
        led to billions of dollars in excess payments and inappropriate 
        payment disparities.
 BBA provisions now in place may reduce, but not eliminate, 
        excess payments; and payment disparities persist that could 
        jeopardize plan participation and access to managed care for 
        costlier seniors.
 The new risk adjuster required to be in place by 2000 is 
        intended to improve estimates of health plan enrollees' medical 
        costs. Better cost estimates producing fairer rates could 
        reduce the unnecessary spending of taxpayer dollars while 
        minimizing the financial disincentive for plans to serve a 
        costly mix of beneficiaries.
    The use of the new risk adjuster, while not perfect, is an interim 
step and improves on the one now in place. In addition, HCFA plans to 
phase in the use of the new adjuster, thereby recognizing the need to 
avoid sharp payment changes that could affect plans' offerings and 
diminish the attractiveness of the Medicare+Choice program to 
beneficiaries.
                               background
    The long-term financial condition of Medicare is now one of the 
nation's most pressing problems. As the nation's largest health 
insurance program, Medicare's size and impact on all Americans is 
significant. The program covers about 39 million elderly and disabled 
beneficiaries at a cost of more than $193 billion in fiscal year 1998. 
About 83 percent of the program's beneficiaries receive health care on 
a fee-for-service (FFS) basis, in which providers are reimbursed for 
each covered service they deliver to beneficiaries. The rest, about 6.8 
million people, are provided care through more than 450 managed care 
plans, as of December 1, 1998.2
---------------------------------------------------------------------------
    \2\ About 90 percent of the 6.8 million Medicare beneficiaries are 
enrolled in managed care plans that receive fixed monthly capitation 
payments. The remainder are enrolled in plans that are reimbursed for 
the costs they incur, less the estimated value of beneficiary cost-
sharing.
---------------------------------------------------------------------------
    To extend the solvency of Medicare's Hospital Insurance Trust fund 
beyond 2008, BBA provided for substantial reforms in both the FFS and 
managed care components of Medicare. BBA provisions are expected to 
achieve estimated Medicare savings that reduce the program's average 
annual growth rate by more than 3 percent, representing over $100 
billion over 5 years.
    One way in which BBA seeks to restructure Medicare is to encourage 
greater participation in Medicare+Choice. Under this program, BBA 
permits the creation of new types of Medicare health plans, such as 
preferred provider organizations and provider-sponsored organizations. 
BBA's emphasis on Medicare+Choice reflects the perspective that 
increased managed care enrollment will help slow Medicare spending 
while expanding beneficiaries' options in choosing health plans.
    BBA also sought to improve the method for setting managed care 
plans' payment rates. In general terms, the pre-BBA rate-setting 
methodology worked as follows. Every year, HCFA estimated how much it 
would spend in each U.S. county to serve the ``average'' FFS 
beneficiary. It would then discount that amount by 5 percent under the 
assumption that the managed care plans provided care more efficiently 
than the unmanaged FFS system. The resulting amount constituted a base 
county rate to be paid to the plans operating in that county. Because 
some beneficiaries were expected to require more health services than 
others, HCFA ``risk adjusted'' the base rate up or down for each 
beneficiary, depending on certain beneficiary characteristics--
specifically, age; sex; eligibility for Medicaid; employment status; 
and residence in an institution, such as a skilled nursing 
facility.3
---------------------------------------------------------------------------
    \3\ Separate rates, using the same demographic traits, are 
calculated for beneficiaries who qualify for Medicare because of a 
disability (under age 65). Separate rates are also set for 
beneficiaries with end-stage renal disease (kidney failure).
---------------------------------------------------------------------------
    BBA's new payment rate method seeks to address the two main factors 
contributing to excess payments: (1) the disparity in expected health 
costs between Medicare's FFS and managed care populations built into 
each county's base capitation rates and (2) the failure of the risk 
adjuster to correct for that disparity on an individual enrollee level. 
BBA required that a county's capitation rate equal the highest of

 a blended capitation rate, which reflects a combination of 
        local and national average FFS spending from 1997, updated for 
        increases in national spending;
 the previous year's county rate increased by 2 percent; or
 a minimum payment amount, called a floor, set equal to $367 in 
        1998 and updated each year.
    Loosening the link between the current cost of Medicare's FFS 
population and counties' base rates helps prevent the excess payments 
from continuing to increase as more beneficiaries join managed care 
plans. BBA also acknowledges the need for individual enrollee 
adjustments by requiring the development of a risk adjustment method 
based on health status. The law requires that HCFA develop and report 
on the new risk adjuster by March 1 of this year and the method be in 
place by January 2000.4
---------------------------------------------------------------------------
    \4\ Technically, the law requires the Secretary of the Health and 
Human Services to develop, report, and implement the health-based risk 
adjustment method.
---------------------------------------------------------------------------
medicare's current risk adjustment method fails to prevent overpayments 
               and appropriately target payments to plans
    Risk adjustment is a tool to set capitation rates so that they 
reflect enrollees' expected health costs as accurately as possible. 
This tool is particularly important given Medicare's growing use of 
managed care and the phenomenon of favorable selection--the tendency of 
managed care plans to attract a population of Medicare seniors whose 
health costs are generally lower than those of the average program 
beneficiary. Our 1997 study on payments to California HMOs, which 
enrolled more than a third of Medicare's managed care population, found 
that Medicare overpaid plans by about 16 percent because HMO enrollees 
had costs that were lower than the average beneficiary's.5
---------------------------------------------------------------------------
    \5\ GAO-HEHS-97-16, Apr. 25, 1997. This is consistent with a 1996 
study by HCFA researchers finding that health plan enrollees had costs 
estimated at 12 to 14 percent below the average beneficiary's. (Riley 
and others, HCFA Review, 1996.)
---------------------------------------------------------------------------
    Medicare's current risk adjuster cannot sufficiently lower rates to 
be consistent with the expected costs of managed care's healthier 
population. The reason is that Medicare's risk adjuster relies on 
demographic factors such as age and sex, which alone are poor 
predictors of an individual's health care costs. For example, two 
beneficiaries can be demographically identical (same age and sex), but 
one may experience occasional minor ailments while the other may suffer 
from a serious chronic condition. Without the use of health status 
factors to make that distinction, Medicare's risk adjuster produces 
excessive payments in compensating plans for their relatively lower 
cost enrollees.
    The financial consequences of a poor risk adjuster are huge. In our 
1997 study of California's payment rates, we estimated that Medicare 
paid about $1 billion in excess to health plans operating in the 
California in 1995. Shortly before we issued our report, the Physician 
Payment Review Commission (PPRC), now a part of the Medicare Payment 
Advisory Commission, estimated that annual excess payments to Medicare 
HMOs nationwide could total $2 billion.
    Some analysts have speculated that, with growing enrollment, health 
plans would necessarily enroll a substantially larger share of less 
healthy beneficiaries, which would raise plans' costs and reduce 
Medicare's excess payments. Our 1997 analysis, however, showed that--
rather than shrinking excess payments--the rapid growth in Medicare 
managed care enrollment actually exacerbated the situation. The 
counties with higher managed care enrollment had higher, not lower, 
excess payments. Data indicated that the sickest beneficiaries tended 
to remain in FFS while the healthier beneficiaries joined managed care 
plans. Excess payments grew with managed care enrollment partly because 
HCFA based the payment rates on average FFS spending, which increased 
as the pool of FFS beneficiaries shrank and, as a group, became less 
healthy.
    Better risk adjustment is also important for plans that may not be 
adequately compensated for serving higher cost beneficiaries who 
enroll. Having enrollees who are sicker than the average mix of 
Medicare beneficiaries can alter a plan's costs significantly. About 10 
percent of Medicare beneficiaries account for 60 percent of Medicare's 
annual expenditures. Without adequate risk adjustment, plans with more 
than their share of the costly beneficiaries are at a competitive 
disadvantage.
 bba provisions may reduce overpayments, but substantial excess likely 
                                remains
    BBA contains several provisions, implemented in 1998, that are 
designed to improve Medicare's rate-setting method. Certain provisions 
seek to reduce excess payments and inappropriate geographic 
disparities. These changes represent steps in the right direction but 
do not eliminate the need for a health-based risk adjuster. Substantial 
excess payments likely persist, in part, because other BBA provisions 
tended to incorporate the excess that existed in 1997 into the current 
rates.
Certain BBA Provisions May Reduce Excess Payments but Are Not 
        Substitutes for Improved Risk Adjustment
    BBA aims to reduce the excess in Medicare's managed care payments 
in two ways. First, BBA holds down managed care per capita spending 
increases for 5 years. Specifically, BBA sets the factor used to update 
managed care payment rates equal to national per capita Medicare growth 
minus a specified percent: 0.8 percent in 1998 and 0.5 percent in each 
of the following 4 years.
    BBA also provides for a methodological approach known as 
``blending,'' which may help reduce excess payments. The blended rate 
set for each county combines that county's 1997 rate, updated for 
increases in national Medicare spending, and a national average. The 
blending formula is currently weighted heavily toward local rates but 
will gradually change so that local and national rates will be weighted 
equally in 2003. Over time, blending will reduce the substantial 
variation in county payment rates that now exist. For, example, county 
rates ranged from a low of $380 to a high of $798 in 1999. Because of 
BBA-mandated budget neutrality and minimum payment constraints, no 
county received a blended rate in 1998 or 1999. Blending is expected to 
occur for the first time in 2000.
    Blending may help reduce excess payments because high-rate counties 
(where excess payments are estimated to be concentrated) will receive 
smaller annual increases relative to low-rate counties. Evidence on the 
relationship between county payment rates and excess payments is 
provided in a 1997 PPRC study. PPRC reported that county payment rates 
tend to overestimate beneficiaries' health care costs in high-payment-
rate areas and underestimate their costs in low-payment-rate 
areas.6 PPRC found that a comprehensive health-based risk 
adjustment methodology would have lowered, for example, the average 
Miami-area payment rate from $616 to $460 in 1995. The same methodology 
would have raised the average payment rate in rural Minnesota from $263 
to $310.
---------------------------------------------------------------------------
    \6\ Physician Payment Review Commission, 1997 Annual Report to the 
Congress.
---------------------------------------------------------------------------
    Blending is a rather blunt tool for addressing the excess payment 
problem, however, and does not obviate the need for improved risk 
adjustment. As the PPRC results indicate, not all high-rate counties 
have rates that are too high and not all low-rate counties have rates 
that are too low. For example, PPRC's risk-adjustment methodology would 
have reduced the average payments in rural Michigan (a relatively low-
payment-rate area) from $346 to $334. Furthermore, not all plans in 
high-rate counties may receive excess payments. Because payment rates 
are based on the expected costs of beneficiaries in average health, 
plans that attract costly beneficiaries may be underpaid by the current 
risk adjustment method.
Some BBA Provisions Have Tended to Incorporate Excess Payments From 
        1997 Into Current Rate Structure
    BBA specified that 1997 county rates be used as the basis for all 
future county rates beginning in 1998. Although the law changed many 
aspects of the rate-setting formula, this BBA provision had the effect 
of incorporating the excess payments that existed in 1997 into all 
future rates.
    As we testified before this Subcommittee in February 1997, HCFA's 
then current rate-setting methodology resulted in county rates that 
were generally too high. Simply put, instead of setting rates based on 
the expected cost of the average beneficiary in each county, the agency 
set rates based on the expected costs of serving FFS beneficiaries. If 
the agency had included the expected costs of serving managed care 
beneficiaries--who as a group tend to be healthier than FFS 
beneficiaries--the overall county average would have been lower. About 
one-quarter of the $1 billion in overpayments we estimated in our 
California study resulted from flaws in developing the county rate.
    Excess payments are also built into current rates because BBA did 
not allow HCFA to adjust 1997 county rates for previous forecast 
errors--a critical component of the rate-setting process. Although the 
process for setting rates was extremely complex and involved separate 
adjustments for each county, annual payment rate updating was 
straightforward. Each fall, HCFA would forecast total Medicare spending 
for the following year; the estimated percentage spending increase, 
from the current year to the following year, was used to update the 
county rates. Before applying the increase, however, HCFA corrected any 
forecast errors from previous years. If HCFA discovered that previous 
forecasts had overestimated or underestimated the current spending, the 
update was appropriately adjusted.
    HCFA actuaries now estimate, based on FFS claims data, that the 
1997 managed care rates were too high by 4.2 percent. BBA, in 
establishing a new methodology for setting rates in 1998 and future 
years, specified that HCFA use the 1997 rates as the basis for the new 
rates. While the law permits HCFA to correct forecasts in future years, 
it did not include a provision that would have allowed HCFA to correct 
its forecast for 1997. Consequently, about $1.3 billion in overpayments 
were built into plans' annual payment rates beginning in 1998.
hcfa's proposed risk adjustment approach improves on current method and 
            minimizes disruption for plans and beneficiaries
    HCFA's proposed interim health-based risk adjustment method--to be 
implemented in 2000--represents a major improvement over the current 
method. For the first time, Medicare managed care plans can expect to 
be paid more for serving beneficiaries with serious health problems and 
less for serving relatively healthy ones. The interim method relies 
exclusively on hospital inpatient data to measure health status. 
Although it would be better to measure health status with complete and 
reliable data from other settings, such as physicians' offices, these 
data are not yet available. In addition, HCFA's decision to phase in 
the new method will likely minimize disruptive plan pull-outs and 
altered benefit packages, which could occur if payment rate changes 
were implemented too suddenly.
Proposed Risk Adjustment Method Based on Available Hospital Inpatient 
        Data
    The proposed method, known as the Principal Inpatient Diagnostic 
Cost Group (PIP-DCG) method, would use hospital inpatient data to more 
accurately match managed care payments to beneficiaries' expected total 
Medicare costs. PIP-DCG would assign each individual to 1 of 15 
categories if during the prior year they had been hospitalized for 
certain diagnoses. For example, a beneficiary who had been hospitalized 
for congestive heart failure would be placed in one category, while a 
beneficiary who had been hospitalized for a kidney infection would be 
placed in another. Those beneficiaries who were not hospitalized and 
those who were hospitalized for diagnoses not included in PIP-DCG--
about 88 percent of all beneficiaries--would be placed in the base 
category. The next year's payment rate for each enrollee would be 
determined by the category the individual was placed in and by certain 
demographic data, such as age and sex. Rates for enrollees placed in 
one of the 15 prior hospitalization groups would be higher than rates 
for those in the base category with the same demographic 
characteristics.
    HCFA anticipated potential concerns about a risk adjustment 
methodology based on hospital inpatient data. Such an approach could 
reward plans that hospitalize patients unnecessarily or, conversely, 
penalize efficient plans that provide care in other, less costly 
settings. HCFA has attempted to address these concerns in several ways.
    First, PIP-DCG would assign individuals to prior hospitalization 
categories only when the diagnosis is for a condition that normally 
requires hospitalization and is linked to further medical costs in the 
following year. To determine which specific diagnoses to include, HCFA 
relied on the advice of a clinical panel. The panel recommended that 
diagnoses associated with about one-third of hospital admissions be 
excluded because they (1) could be ambiguous, (2) were for conditions 
that were rarely the main cause for an inpatient stay, or (3) were not 
good predictors of future health care costs. For example, a beneficiary 
hospitalized for appendicitis would not be assigned to a higher cost 
category because that condition generally is not linked to further 
medical costs in the next year. Also, HCFA's proposal does not permit 
enhanced payments for hospital diagnoses associated with 1-day stays. 
These admissions may be more discretionary than admissions for longer 
stays.
    Second, delaying an adjustment in payment until the following year 
discourages unnecessary hospitalizations that would trigger an enhanced 
payment. Further, the payment delay dampens any incentive to encourage 
higher cost enrollees who have been hospitalized to switch plans, since 
the plan in which the beneficiary is a member the following year 
receives the payment.
    The PIP-DCG method assumes that admission rates for beneficiaries 
of similar health status are the same for FFS and managed care 
providers. Although the evidence on managed care admission rates is 
limited, findings presented by the American Association of Health Plans 
last month support this hypothesis. A study conducted for the 
Association found that hospital admission rates for managed care plans 
and FFS plans were comparable. These findings are consistent with those 
of a 1993 Mathematica Policy Research study on hospital admissions 
rates.
Gradual Implementation of Interim Method Will Minimize Impact on Health 
        Plans and Beneficiaries
    HCFA proposes to phase in the new interim risk adjustment method 
slowly. In 2000, only 10 percent of health plans' payments will be 
based on the new system. This percentage will be increased each year 
until 2003, when 80 percent of plans' payments will be based on the 
PIP-DCG risk-adjusted rate. In 2004, HCFA intends to implement a more 
accurate risk adjuster that uses medical data from physicians' offices, 
skilled nursing facilities, home health agencies, and other health care 
settings and providers--in addition to inpatient hospital data.
    Although a gradual phase-in of the interim risk adjuster delays the 
full realization of Medicare savings, it also minimizes potential 
disruptions for both health plans and beneficiaries. Rapid payment rate 
changes could strain the financial soundness of some plans. Rapid rate 
changes could also adversely affect beneficiaries if plans respond by 
suddenly altering their benefit packages or reconsidering their 
commitment to the Medicare+Choice program.
    If HCFA had comprehensive patient-level data from Medicare managed 
care plans, it could adjust the PIP-DCG methodology to reflect any 
differences in practice patterns between managed care and FFS 
providers. Although plans currently are required to submit only 
hospital inpatient data, the agency intends to begin collecting more 
comprehensive data shortly. Therefore, it may be possible to refine the 
PIP-DCG methodology before the implementation of the full risk 
adjustment in 2004.
                              conclusions
    The implementation of a new health-based risk adjustment system 
will lead to major changes in Medicare managed care payments and will 
create more desirable incentives. Plans attracting healthier 
beneficiaries will be paid less, whereas those attracting costlier 
beneficiaries will be paid more. In more fairly compensating individual 
plans for the beneficiaries they enroll, the new method will reduce 
excess payments and produce savings for taxpayers. The new method 
represents an interim step in the use of health-based risk adjustment. 
We believe that to facilitate the introduction of an improved risk 
adjuster in 2004, plans should aggressively pursue the collection and 
reporting of more comprehensive data on beneficiaries' medical 
conditions.
    Mr. Chairman, this concludes my statement. I will be happy to 
answer any questions you or other Members of the Subcommittee may have.

                          Related GAO Products

    Medicare Managed Care: Payment Rates, Local Fee-for-Service 
Spending, and Other Factors Affect Plans' Benefit Packages (GAO/HEHS-
99-9R, Oct. 9, 1998).
    Medicare HMO Institutional Payments: Improved HCFA Oversight, More 
Recent Cost Data Could Reduce Overpayments (GAO/HEHS-98-153, Sept. 9, 
1998).
    Medicare HMOs: Setting Payment Rates Through Competitive Bidding 
(GAO/HEHS-97-154R, June 12, 1997).
    Medicare Managed Care: HMO Rates, Other Factors Create Uneven 
Availability of Benefits (GAO/T-HEHS-97-133, May 19, 1997).
    Medicare HMO Enrollment: Area Differences Affected by Factors Other 
Than Payment Rates (GAO/HEHS-97-37, May 2, 1997).
    Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in 
Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
    Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by 
Improving Accuracy of the County Rates (GAO/T-HEHS-97-82, Feb. 27, 
1997).
    Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing 
HMO Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).
    Medicare: Changes to HMO Rate-Setting Method Are Needed to Reduce 
Program Costs (GAO/HEHS-94-119, Sept. 2, 1994).
    Medicare: Health Maintenance Organization Rate-Setting Issues (GAO/
HRD-89-46, Jan. 31, 1989).

    Mr. Bilirakis. Thank you Mr. Scanlon and Dr. Wilensky. Are 
you both concerned that in some areas of the country risk 
adjustment may result in more plan withdrawals, on the 
assumption now that a lot of the withdrawals are due to the 
forthcoming risk adjustment plan?
    Ms. Wilensky. I am concerned in that this will exacerbate 
the problem we saw this year. But I think it may be possible to 
make some changes that will reduce some of the likely that will 
occur. As I mention in my testimony, part of the concern that 
we have heard raised is that the Balance Budget Act required 
the premium benefit combination to be reported in May, which is 
very early in the year.
    And that some of the plans found themselves in a position 
by mid-summer where their expectations after one quarter were 
not well met. And that when they attempted to make some 
adjustments in the early fall, they were unable to do so. One 
of the recommendations that MedPAC is making is to move that 
date a little later. We understand it is a tradeoff with making 
sure that seniors can get their information in a timely way, 
but 6 months seems a little unduly long as a window.
    And that that might help the plans be in a better position 
to know the premium benefit tradeoffs. Second, we ought to make 
sure that----
    Mr. Bilirakis. The July 1, date, I guess, is now the firm 
date.
    Ms. Wilensky. Yes.
    Mr. Bilirakis. Are you satisfied that it is----
    Ms. Wilensky. I think the July date was what we were 
thinking about. I thought that required a statutory change. So 
it maybe what has been agreed to informally, but I don't know 
that. But if that would go through, I think that would be a 
good improvement. The second thing is whether the quality 
requirements are appropriate to the needs. In having been in 
that place, I have sympathy with the interest and need for 
information. Making sure that the requirements are not too 
burdensome and too costly is something that ought to have some 
oversight.
    And ultimately whether or not the payment is right. 
Particularly the 95 percent after the full phase in of risk 
adjustment I think would also be an appropriate 
reconsideration. None of those, in my view, alters the 
appropriateness of risk adjustment. It is a problem. You heard, 
Mr. Waxman, Mr. Brown, all of you on the committees, discussing 
why having appropriate adjustments for the health status should 
be considered as a part of the plan.
    I urge you not to try to fix one problem by altering the 
solution of another.
    Mr. Scanlon. We share the concern about the withdrawals of 
plans and the reductions in service areas in different portions 
of the country. And certainly the change in the rates may be a 
factor. However, in looking at participation of plans in the 
past, we discovered that rates alone are not the sole 
determinate of how much managed care penetration there is in an 
area.
    We have low rate areas of this country in which there was 
very extensive managed care participation on the part of 
Medicare beneficiaries in part because there was strong 
participation among non-Medicare, younger individuals in 
managed care. As Dr. Wilensky indicated, there has been a 
series of changes that have occurred recently with respect to 
managed care participation. The fact that the volume and the 
speed with which the changes have occurred is a major factor in 
plans perhaps assessing their participation. This may be a 
short term phenomenon.
    We are doing work for this committee as well as for the 
Committee on Ways and Means and the Senate Finance Committee 
looking at the change in plans' participation and we will try 
to identify, to the extent possible, how different factors have 
played a role in affecting participation now. But I would also 
emphasize that we are potentially in a period of transition.
    In some respects the terms under which Medicare is 
purchasing managed care have changed and managed care plans 
have to assess whether or not they can provide care, under 
those terms. But frankly, they have been changed in ways that 
we have talked about over the years that are positive from the 
program's perspective.
    These changes involve trying to align payment appropriately 
and making sure that we have accountability for the care that 
we purchase.
    Mr. Bilirakis. How close are you, Mr. Scanlon, to 
definitizing the reasons why----
    Mr. Scanlon. We are hoping to report to you by the end of 
next month.
    Mr. Bilirakis. By the end of March.
    Mr. Scanlon. Right.
    Mr. Bilirakis. Okay, now I guess you are doing that for 
Ways and Means now?
    Mr. Scanlon. We are doing it for you, Ways and Means and 
Finance.
    Mr. Bilirakis. Okay.
    Mr. Scanlon. All three committees, all three authorizing 
committees.
    Mr. Bilirakis. Well that is, I think significant.
    Ms. Wilensky. Mr. Bilirakis, MedPAC is also attempting to 
monitor the counties in which change is occurring, withdrawal 
occurring. And as part of our June Report we will have whatever 
information is available to us. What has happened and any 
information we have as to why there has been withdrawals and 
the effect that it has had on the beneficiaries' access to 
health care plans.
    Mr. Bilirakis. We have had counties where there have been 
withdrawals, but in many of those counties there are other 
options.
    Ms. Wilensky. Most of the counties.
    Mr. Bilirakis. Under the fee-for-service. Most of those 
counties, yes.
    Ms. Wilensky. Right.
    Mr. Bilirakis. But there are some counties where there 
aren't any other options and that is significant information. 
Was that information requested of Mr. Hash? We have a break 
down by county and we have the total. For instance, in Florida, 
58,571 enrollees are affected. But only 8,271, as I read this 
chart, are affected so adversely that there aren't any other 
choices.
    So, there is no breakdown of that 8,271 by county so that 
we can have some idea. I don't know----
    Ms. Wilensky. HCFA would have that information. It is 
available by county.
    Mr. Bilirakis. Is HCFA still here? All right, can we 
request that information from you as soon as you can get it? 
And since you have already broken out the 8,271, you must have 
that by county, I would think? Good. If you could submit that 
to us, I would appreciate it. All right, thank you. Mr. Brown.
    [The following was received for the record:]


       Plans that Left Medicare or Reduced Their Service Area: Counties with No Other Managed Care Option
                               (as of the contract year beginning January 1, 1999)
----------------------------------------------------------------------------------------------------------------
                                                                   Non-Renew or
            State                County Name     Contract Name     Service Area     AAPCC    Eligibles   #Benes
                                                                    Reduction                           Enrolled
----------------------------------------------------------------------------------------------------------------
California...................  Colusa.........  Health Net CA..  SAR............    $514.42      2,557       209
California...................  Glenn..........  Health Net CA..  SAR............    $452.95      4,155       483
California...................  Inyo...........  Cigna S. CA....  SAR............    $419.87      3,916       162
California...................  Lassen.........  National Med,    Non-Renew......    $435.79      3,929         2
                                                 Inc.
California...................  Modoc..........  National Med,    Non-Renew......    $401.19      1,760        23
                                                 Inc.
California...................  Mono...........  Cigna S. CA....  SAR............    $422.10        812         7
California...................  Monterey.......  Pacificare N.    SAR............    $493.50     43,324     4,325
                                                 CA.
California...................  Plumas.........  Health Net CA..  SAR............    $517.82      3,996        63
California...................  Shasta.........  National Med,    Non-Renew......    $490.85     30,917     1,088
                                                 Inc.
California...................  Sierra.........  Health Net CA..  SAR............    $454.96        710        18
California...................  Siskiyou.......  National Med,    Non-Renew......    $412.28      9,761       275
                                                 Inc.
California Total.............  ...............  ...............  ...............  .........    105,837     6,655
Delaware.....................  Kent...........  Aetna--Del.....  Non-Renew......    $411.14     15,892       760
Delaware.....................  Kent...........  AmeriHealth HMO  Non-Renew......    $411.14     15,892       263
Delaware.....................  Kent...........  Optimum Choice.  Non-Renew......    $411.14     15,892        29
Delaware.....................  Sussex.........  Aetna--Del.....  Non-Renew......    $463.82     29,931     1,072
Delaware.....................  Sussex.........  AmeriHealth HMO  Non-Renew......    $463.82     29,931       869
Delaware.....................  Sussex.........  Optimum Choice.  Non-Renew......    $463.82     29,931       379
Delaware Total...............  ...............  ...............  ...............  .........     59,862     3,372
Florida......................  Citrus.........  AvMed..........  SAR............    $463.64     35,278     1,391
Florida......................  Gilchrist......  AvMed..........  SAR............    $476.67      2,031       409
Florida......................  Glades.........  Humana Medical   SAR............    $580.75        923       138
                                                 Plan, S. FL.
Florida......................  Hendry.........  Humana Medical   SAR............    $509.16      3,587       747
                                                 Plan, S. FL.
Florida......................  Highlands......  Humana/PCA.....  SAR............    $460.03     25,776     1,218
Florida......................  Highlands......  United Health    SAR............    $460.03     25,776       172
                                                 Care FL.
Florida......................  Marion.........  AvMed..........  SAR............    $426.12     66,282     3,866
Florida......................  Monroe.........  Humana Medical   SAR............    $605.18     11,437     1,234
                                                 Plan, S. FL.
Florida......................  Okeechobee.....  Humana Medical   SAR............    $720.81      6,845     1,970
                                                 Plan, S. FL.
Florida......................  Polk...........  Aetna--FL......  SAR............    $397.97     90,138     1,638
Florida......................  Polk...........  Florida First    Non-Renew......    $397.97     90,138         0
                                                 Health Plans,
                                                 Inc.
Florida......................  Polk...........  Humana/PCA.....  SAR............    $397.97     90,138       169
Florida......................  Polk...........  United Health    SAR............    $397.97     90,138       565
                                                 Care FL.
Florida......................  Polk...........  CIGNA..........  SAR............    $397.97     90,138        10
Florida Total................  ...............  ...............  ...............  .........    242,297    13,527
Kentucky.....................  Carroll........  Southeastern     SAR............    $419.61      1,649         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Gallatin.......  Southeastern     SAR............    $427.91        919         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Grant..........  Southeastern     SAR............    $442.00      2,962         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Hardin.........  Southeastern     SAR............    $506.02     10,965         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Henry..........  Southeastern     SAR............    $466.06      2,481         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Meade..........  Southeastern     SAR............    $508.52      2,198         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Owen...........  Southeastern     SAR............    $379.84      1,332         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Shelby.........  Southeastern     SAR............    $393.88      3,837         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Spencer........  Southeastern     SAR............    $449.11      1,212         0
                                                 United
                                                 Medigroup.
Kentucky.....................  Trimble........  Southeastern     SAR............    $494.58      1,064         0
                                                 United
                                                 Medigroup.
Kentucky Total...............  ...............  ...............  ...............  .........     28,619         0
Missouri.....................  Gasconade......  Group Health     SAR............    $379.84      3,270        90
                                                 Plan.
Missouri.....................  Montgomery.....  Group Health     SAR............    $400.08      2,412        34
                                                 Plan.
Missouri Total...............  ...............  ...............  ...............  .........      5,682       124
Minnesota....................  Goodhue........  Medica Minn....  SAR............    $379.84      7,170        72
Minnesota Total..............  ...............  ...............  ...............  .........      7,170        72
New Hampshire................  Strafford......  Aetna--NH......  Non-Renew......    $406.83     14,391       187
New Hampshire Total..........  ...............  ...............  ...............  .........     14,391       187
New York.....................  Broome.........  Welicare.......  SAR............    $379.84     39,143     2,021
New York.....................  Broome.........  Community        Non-Renew......    $379.84     39,143     2,761
                                                 Health Plan.
New York.....................  Tioga..........  Community        Non-Renew......    $379.84      7,431       364
                                                 Health Plan.
New York Total...............  ...............  ...............  ...............  .........     46,574     5,146
North Dakota.................  McLean.........  Blue Cross &     Non-Renew......    $379.84      2,217         3
                                                 Blue Shield of
                                                 North Dakota.
North Dakota.................  Mountrail......  Blue Cross &     Non-Renew......    $379.84      1,351         0
                                                 Blue Shield of
                                                 North Dakota.
North Dakota.................  Renville.......  Blue Cross &     Non-Renew......    $379.84        573         0
                                                 Blue Shield of
                                                 North Dakota.
North Dakota.................  Ward...........  Blue Cross &     Non-Renew......    $387.06      8,337         9
                                                 Blue Shield of
                                                 North Dakota.
North Dakota Total...........  ...............  ...............  ...............  .........     12,478        12
Ohio.........................  Coshocton......  Community        SAR............    $413.89      6,155       692
                                                 Insurance OH.
Ohio.........................   Coshocton.....  Community        SAR............    $413.89      6,155         0
                                                 Health OH.
Ohio.........................   Muskingum.....  Community        SAR............    $394.85     14,840         2
                                                 Health OH.
Ohio Total...................  ...............  ...............  ...............  .........     20,995       694
Oregon.......................  Hood River.....  Qualmed Oregon.  Non-Renew......    $379.84      2,743       258
Oregon.......................  Lincoln........  Qualmed Oregon.  Non-Renew......    $379.84      9,925       121
Oregon.......................  Wasco..........  Qualmed Oregon.  Non-Renew......    $379.84      4,408       149
Oregon Total.................  ...............  ...............  ...............  .........     17,076       528
Texas........................  Freestone......  Pacificare TX..  SAR............    $379.84      2,922        77
Texas........................  Karnes.........  PCA TX.........  Non-Renew......    $379.84      2,566         2
Texas........................  Limestone......  Humana TX......  SAR............    $379.84      4,371         5
Texas........................  Mc Lennan......  Humana TX......  SAR............    $379.84     30,779        11
Texas........................  Navarro........  Pacificare TX..  SAR............    $417.42      7,613       392
Texas........................  Wilson.........  Humana TX......  SAR............    $401.27      3,511       159
Texas Total..................  ...............  ...............  ...............  .........     51,762       646
Utah.........................  Davis..........  IHC Utah.......  Non-Renew......    $379.84     17,475       587
Utah.........................  Davis..........  Pacificare Utah  Non-Renew......    $379.84     17,475       645
Utah.........................  Morgan.........  IHC Utah.......  Non-Renew......    $419.37        615        31
Utah.........................  Morgan.........  Pacificare Utah  Non-Renew......    $419.37        615         9
Utah.........................  Salt Lake......  IHC Utah.......  Non-Renew......    $381.21     80,489     5,229
Utah.........................  Salt Lake......  Pacificare Utah  Non-Renew......    $381.21     80,489     7,447
Utah.........................  Summit.........  Pacificare Utah  Non-Renew......    $379.84      1,449        97
Utah.........................  Tooele.........  Pacificare Utah  Non-Renew......    $418.57      3,013       139
Utah.........................  Utah...........  Pacificare Utah  Non-Renew......    $382.96     25,599     2,383
Utah.........................  Wasatch........  Pacificare Utah  Non-Renew......    $379.84      1,324        61
Utah.........................  Weber..........  IHC Utah.......  Non-Renew......    $379.84     22,299     1,009
Utah.........................  Weber..........  Pacificare Utah  Non-Renew......    $379.84     22,299       925
Utah Total...................  ...............  ...............  ...............  .........    152,263    18,562
Virginia.....................  Albemarle......  QualChoice VA..  Non-Renew......    $413.51      8,177       208
Virginia.....................  Buckingham.....  QualChoice VA..  Non-Renew......    $418.45      2,045         3
Virginia.....................  Caroline.......  NYLCare--MDNA/   Non-Renew......    $433.45      3,032       106
                                                 DC.
Virginia.....................  Charlottesville  QualChoice VA..  Non-Renew......    $410.17      7,253       187
                                City.
Virginia.....................  Fauquier.......  NYLCare--MDNA/   Non-Renew......    $424.54      5,885       347
                                                 DC.
Virginia.....................  Fluvanna.......  QualChoice VA..  Non-Renew......    $437.79      2,866        71
Virginia.....................  Fredericksburg   NYLCare--MDNA/   Non-Renew......    $453.99      8,080       239
                                City.            DC.
Virginia.....................  Greene.........  QualChoice VA..  Non-Renew......    $440.94      1,567        37
Virginia.....................  King George....  NYLCare--MDNA/   Non-Renew......    $432.61      1,688        25
                                                 DC.
Virginia.....................  Louisa.........  NYLCare--MDNA/   Non-Renew......    $456.03      3,626        47
                                                 DC.
Virginia.....................  Louisa.........  QualChoice VA..  Non-Renew......    $456.03      3,626        50
Virginia.....................  Madison........  QualChoice VA..  Non-Renew......    $387.38      1,861        25
Virginia.....................  Nelson.........  QualChoice VA..  Non-Renew......    $409.42      2,990        34
Virginia.....................  Orange.........  QualChoice VA..  Non-Renew......    $414.43      5,301        50
Virginia.....................  Richmond.......  NYLCare--MDNA/   Non-Renew......    $425.76        790         0
                                                 DC.
Virginia.....................  Spotsylvania...  NYLCare--MDNA/   Non-Renew......    $452.25      3,917       102
                                                 DC.
Virginia.....................  Stafford.......  NYLCare--MDNA/   Non-Renew......    $457.11      4,069       157
                                                 DC.
Virginia.....................  Westmoreland...  NYLCare--MDNA/   Non-Renew......    $484.77      3,344        63
                                                 DC.
Virginia Total...............  ...............  ...............  ...............  .........     66,491     1,751
West Virginia................  Monongalia.....  HealthAmerica..  SAR............    $502.11      9,711         0
West Virginia Total..........  ...............  ...............  ...............  .........      9,711         0
Total for All States.........  ...............  ...............  ...............  .........    841,208    51,276
----------------------------------------------------------------------------------------------------------------
Source: HCFA 12/98


    Mr. Brown. Thank you, Mr. Chairman. Dr. Wilensky, thank you 
for joining us. Without risk adjustment a plan with sicker than 
average enrollees that offers high quality benefits can lose 
money. A competing plan with healthier than average enrollees 
offering the same high quality benefits could prosper and make 
money. Can such a system work without risk adjustment?
    Ms. Wilensky. Not for very long. You run the risk of 
inappropriately rewarding plans because of their selection and 
inappropriately hurting plans because of either their 
intentional or unlucky attraction of sick people. If you are 
going to appropriately reward and incent plans for taking on 
sick people and giving sick people an option of having 
coordinated care as a replacement for Medicare, you need to 
make this adjustment.
    If you don't get into trouble without making an adjustment, 
it is just because you are lucky. The incentives are there to 
get yourself in trouble. A very important step, it has been 
discussed for many years, and HCFA is starting what I think is 
a reasonable process.
    Mr. Brown. So Medicare managed care really can't work 
without risk adjustment.
    Ms. Wilensky. What you may end up doing is having a health 
care plan that contracts with an academic health center or a 
very well-known health foundation or health care provider that 
itself attracts very sick people finding itself disadvantaged 
relative to a health care plan that didn't have such 
arrangements. That is not a very good idea in terms of 
rewarding one and penalizing the other.
    It is not just Medicare/managed care. It is actually any 
kind of replacement Medicare plan. If you allowed for private 
fee-for-service, which you actually did as part of the Balanced 
Budget Act, you need to have risk adjustment any time there is 
a choice of a health care plan. It is very similar to why you 
have a classification system for paying hospitals.
    If you paid hospitals the same amount, given somebody's 
age, and didn't make any kind of adjustment for the diagnosis, 
you would obviously overpay hospitals that admitted people with 
relatively minor health conditions. And you would underpay them 
if they had by-pass surgery or valve replacement, et cetera. 
This is really the same kind of adjustment. You acknowledge 
that health status will predictably influence a patient's use 
of expenditures and it is the predictable difference that you 
try to compensate for.
    Mr. Brown. Mr. Scanlon, we have been hearing that HCFA 
should wait to implement risk adjustment until we have a 
better, a more complete set of data to incorporate into it. Now 
given HCFA's historic overpayment to managed care plans, I 
assume waiting to implement risk adjustment will cost the 
Medicare Program a lot of money.
    Do you have an idea how much HCFA will lose if risk 
adjustments, say, were delayed for 2 years?
    Mr. Scanlon. The estimate of overpayment made by Physician 
Patient Review Commission was $2 billion. A risk adjuster, 
however, is not going to eliminate all of that overpayment. It 
is only going to eliminate a fraction. My understanding of 
HCFA's estimate of the cost through the transition is that it 
is roughly $1.4 billion, I think, that is going to be lost due 
to phasing this in as opposed to immediately implementing it.
    So it is somewhere in that ball park, I think, per year 
that we are talking about. We defer to HCFA on more precise 
numbers for that.
    Mr. Brown. Okay, thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Whitfield.
    Mr. Whitfield. Thank you, Mr. Chairman. Dr. Wilensky and 
Mr. Scanlon, do we have any reason to anticipate that as a 
result of this risk adjustment approach that some health 
maintenance organizations may become more specialized or make 
an effort to focus more on the treatment of seriously ill 
Medicare patients? And then from that, because of the 
efficiency and quality just make that sort of a specialty that 
they would have of treating those kinds of patients?
    Ms. Wilensky. Well, we would like to assume we could get 
there. I think in the beginning the adjustment probably isn't 
all that good that you would want to make that your 
overwhelming specialty. But as we get better in making risk 
adjustments, it certainly should allow plans that want to 
attract physicians and other health care providers that treat 
seriously ill patients to do so and not feel that they will be 
penalized. And that would not be the case now.
    If you had a health care plan that specialized in the 
treatment of AIDS patients or diabetics with multiple 
complications, they would be hurt by our payment system.
    Mr. Scanlon. I would agree. I think that we have seen in 
the experience of the Medicaid Program which has somewhat more 
experience with risk adjustment that it does alleviate some of 
the concerns of plans that might include within their networks 
a specialty center, like an academic medical center or a cancer 
center or a group of physicians who provide care for people 
with AIDS.
    Because without risk adjustment, many plans are fearful of 
having those types of providers in their network, feeling that 
they will attract a disproportionate number of people with very 
high cost illnesses. With risk adjustment, more of these 
providers end up potentially in networks. That is a very 
positive. But I agree also that it will take awhile before we 
may see a plan that specializes in providing such care.
    Mr. Whitfield. And would there be any regulations or 
current laws on the books that would prohibit an entity from 
pursuing that. I mean, in other words could they say, well, we 
are not going to take this Medicare patient because we want 
this one?
    Ms. Wilensky. No. It is not legal to make that kind of 
selection. But you can indirectly influence who you are 
attractive to by which groups of physicians or what hospitals 
you contract with. If you contract with a cancer hospital or 
you contract with an academic health center, particularly one 
that specializes in certain complicated treatments, you are 
going to be very attractive to sick people.
    If you contract only with community hospitals that do 
little of tertiary, quertesary medicine, you will be less 
attractive. So there are ways to make it more or less 
attractive.
    Mr. Whitfield. It seems to me that over the long term that 
would be a positive benefit if you do have organizations that 
really are specializing in particular areas. Would you all 
agree with that?
    Ms. Wilensky. I agree. Whether or not that happens will 
depend on whether or not we will have a risk adjustment system 
that does that. An idea that the Vice Chair of MedPAC, Joe 
Newhouse, has raised is to try to make sure very sick patients 
continue to be attracted to plans through something called 
partial capitation, where a portion of the payment that would 
go to the plan would reflect actual use.
    So that you would have maybe 20 percent of the payment for 
the person reflect the actual use and 80 percent being a health 
adjusted risk payment, just to make sure that the very sickest, 
who use a lot of resources, aren't shunned by health care 
plans. I think it would be much better if we had opportunities 
for very sick people to have their care better coordinated than 
exists under current Medicare.
    Mr. Whitfield. I yield back the balance of my time.
    Mr. Bilirakis. Mr Waxman, inquiries.
    Mr. Waxman. Thank you, Mr. Chairman, I appreciate the 
testimony from both our witnesses. Both of you believe we ought 
to try to develop a risk adjustment in order to make the 
Medicare+Choice System work. HCFA is starting off looking at 
in-patient information. They are hoping to get more data on 
out-patient. They are going to have 1 year and try to learn 
from that year to extrapolate to the next. This is not easy 
work, is it, to develop a risk adjuster?
    Ms. Wilensky. No. They have been sponsoring research for at 
least 10 years.
    Mr. Waxman. Does that give you some caution about moving 
forward with changes that put more weight on a risk adjustment 
working pretty well?
    Ms. Wilensky. Well, I think what HCFA has done by the phase 
in and by the backwaiting of change, is a reasonable way to 
minimize disruptions and to have the biggest impact occur when 
you should expect to have better data. One of the things that 
happens when you introduce change is that you typically get 
better just by doing it, which is one of the reasons I am eager 
to have them start.
    Mr. Waxman. Mr. Scanlon, I would like your response to that 
question, and let me put it differently. Government is not the 
best in accomplishing management of very complicated systems. 
And now we are going to have government involved in a very 
major way to make adjustments between plans as to the severity 
of the illnesses of the population and a lot of other factors. 
This is complicated business.
    Do you feel some sense that we ought to recognize that 
while we would like to have risk adjustment, we may not achieve 
one that works real well for some time, and therefore we ought 
to be a little bit careful in moving in a direction where we 
expect it to work very well?
    Mr. Scanlon. Well, I think we should be extremely careful 
to make sure that it works as well as we possibly can. But the 
reality is we already have risk adjustment. We have a risk 
adjustment system that is based on demographic characteristics 
and whether someone is Medicaid eligible and whether someone is 
in an institution and whether someone is eligible because they 
are either aged or disabled.
    It is not working. Those factors explain about 1 percent of 
the variation in medical costs. The hospital-based system is 
going to explain about 5 percent of the variation in medical 
cost. It is an improvement; it is not a solution. An all 
encounter system is going to continue to improve this share of 
medical cost variation that we can explain.
    So I think that we really do need to push for moving toward 
that better system. The phasing period here is critical. We 
have seen HCFA as backloading the system. In this first year, 
we are only going to adjust the cost by blending a 10-percent 
base on the new risk adjuster and 90 percent based on the old.
    Mr. Waxman. Let me interrupt you because I have limited 
time. I don't disagree with your testimony, that we need a risk 
adjuster. What I am trying to figure out is how Mr. Bilirakis 
and Mr. Dingell and others sitting on this Medicare Reform 
Panel make a judgment when they are looking at the notion of 
premium support, and the idea of a premium support is 
predicated on plans coming in and bidding, and then basing the 
premium contribution on some percentage of the average of all 
the bids.
    Unless we have a real good risk adjuster that works, we 
still have a good chance that some plans are going to be able 
to bid very low because they are still, in lots of clever ways, 
able to select out a patient population that is a lower risk. 
And insofar as we have some plans able to bid low, that is 
going to pull the average down. So if we have a percent of an 
average premium that we are going to say to people we'll 
contribute for their Medicare selection, then those who are 
sicker and older and maybe less prosperous, are going to have 
to come up with a lot more money if they go into a plan that 
takes care of them.
    I don't know if Mr. Whitfield was suggesting that some 
plans might find it advantageous to take more sick people. I 
don't think it is ever going to be advantageous to have to 
spend more money on a capitated population. So my concern is if 
people have to go into a plan that is going to spend more 
money, they are going to have to come up with a lot of money 
out of pocket in order to be in that plan or be forced into 
whatever may be available to them.
    So I am just worried that unless we know a risk adjustment 
works, then we ought to be cautious about leaping into a whole 
new system.
    Mr. Scanlon. I don't think we have made a leap in this 
situation.
    Mr. Waxman. I am not talking about what we are doing now, I 
am talking about what the Commission is talking about.
    Mr. Scanlon. Right. And there is no question about what we 
want----
    Mr. Waxman. To move to enhance premium or premium support 
or whatever they call it.
    Mr. Scanlon. The more we rely on the risk adjuster the 
better risk adjusters we need. I think that during this 
transition period, we need to learn from this experience. We 
have been learning about risk adjusters from the experience of 
the Medicaid Program, from some experience in the private 
sector. This is really Medicare's first attempt to try and do 
something that is health-based.
    Mr. Waxman. My time is up. We have been researching this 
for 10 years. You say the more experience we have with a risk 
adjuster, the better we will be. I am just saying, we are not 
there yet where we can say we know what really works. I want to 
be sure that if we move into a whole new system of premium 
support that we don't act as if we had a risk adjustment that 
was working so well that we are not going to leave a lot of 
people and plans in the lurch.
    Mr. Scanlon. I am not going to say that your concern is not 
valid. But I would say we have been researching it for 10 
years, now we need to be using it and see if we can learn from 
the use of it.
    Mr. Waxman. While we are using it a lot of plans are 
closing their doors.
    Mr. Scanlon. Well, we are hoping that is not the full story 
there.
    Mr. Bilirakis. Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. I will be brief. I 
think I heard you just say that we have, in reality, a risk 
adjuster no matter what, it already exists. This one wasn't 
studied or calculated very well. We are now working on trying 
to study and calculate a new one. And in that regard let me 
ask, particularly you, Mrs. Wilensky, but Mr. Scanlon if you 
want to comment I would be interested in that as well.
    The risk adjuster currently being used focuses on in-
patient hospital data. It is clear the law requires that in the 
first year, but then is not so clear as to the remaining years, 
yet it appears HCFA is going to look at in-patient data for 
all, for four of the 5 years. I guess I am interested in what 
information we will not capture by looking at in-patient data. 
And what the affect of that might be and what you think we 
should be looking at?
    Ms. Wilensky. Well, there is no question that there is an 
irony about using in-patient only data to adjust payments to 
risk-based plans. They have spent their whole being trying to 
alter the in-patient/out-patient mix of services to use more 
out-patient, not to rely on in-patient. And so there clearly is 
an irony about having that happen.
    However, HCFA has attempted to mitigate the problems by not 
looking at discretionary in-patient stays. By not looking at 1-
day stays. Although that could go either way. And by moving as 
quickly as they feel possible to full encounter data. If it is 
possible to get to full encounter data by year 3, that would be 
much better. The sooner the better. And the fact that you are 
backloading it, helps some.
    It is not, by any means, a perfect way to go, but I think 
starting the process will help. And moving as fast as humanly 
possible, even if you don't have full encounter data, to 
encounter data for most plans would be a worthwhile tradeoff. I 
would also like to just comment on the discussion we were 
having about the complexity. It is true this will make it more 
complex, but remember relative to what?
    We have a Medicare Plan where government is involved in 
deciding 9,000 CPT Codes and 500 Admission Codes and a number 
of post-acute payment rates. So it is a very complicated system 
that we have. If we can make adjustments so that we give sick 
people a chance to have a different kind of health care plan, I 
think it is really worth pushing on. So I think you can 
mitigate some of the concerns about in-patient only. But it is 
a fair issue.
    Mr. Shadegg. Mr. Scanlon.
    Mr. Scanlon. We share the same views as Dr. Wilensky in 
terms of this not being a perfect system. There is a lot of the 
variation in medical costs that will not be recognized. Pushing 
forward is the key here as is trying, during this transition 
period, to accelerate what we know and whether or not 
adjustments are needed.
    Mr. Shadegg. I guess I would only conclude by saying, with 
regard to the question of going forward with the risk adjuster 
about which we do not have perfect knowledge is probably true 
that on a few occasions government has passed legislation 
without knowing all of their unintended consequences. Mr. 
Chairman, I yield back.
    Ms. Wilensky. Even in Medicare.
    Mr. Shadegg. I yield back the balance of my time.
    Mr. Bilirakis. Mr. Barrett to inquire, sir.
    Mr. Barrett. Thank you, Mr. Chairman. Mr. Scanlon, have you 
been surprised, you talked about plans dropping out. Have you 
been surprised by the number of providers that have dropped 
out?
    Mr. Scanlon. We have been somewhat surprised but not 
totally. We have made a significant number of changes to what 
is to be a managed care plan within the Medicare Program. We 
saw in the mid 1980's, a similar sort of high level of 
withdrawals as plans were learning to be able to serve elderly 
beneficiaries, and some were finding that this was more 
difficult than they originally thought. And then after 
enrolling they decided to sort of leave Medicare.
    My sense is that what we will see is that some of those 
same plans that chose to leave will come back into some areas, 
but not necessarily into others. The market for managed care, 
frankly, is in some turmoil today that didn't exist a few years 
ago. We had a period of very low inflation. We are not seeing 
premiums going up. We have managed care plans reassessing their 
ability to serve, not just Medicare, but as Mr. Hash indicated, 
FEHBP beneficiaries and changing the terms that they are 
willing to provide private employers.
    So I think that all of these things are going on. It is 
very hard to sort out what the lessons are from something that 
is in this much turmoil, but we are trying to do it to the 
extent we can now. I do think we need to be cautious about 
changing our direction which is sound in the sense that we feel 
that Medicare is moving toward paying more appropriately and 
asking for accountability on what is being purchased.
    Mr. Barrett. Same question, Dr. Wilensky?
    Ms. Wilensky. I was surprised, although I think part of the 
change, the drop out, didn't have to occur if HCFA had behaved 
more like an Insurance Commissioner. Allow plans to come in, 
beat them up, give them 15 or 20 percent of what they asked for 
in terms of their second round of change, and we might have 
forestalled some of the withdrawal.
    Part of it was some bad decisions on the part of some plans 
to go into areas where they had too little infrastructure. It 
may also have been a problem that plans used to think about a 
zero premium or a very small premium, but I think now they are 
looking at a competitive Medigap alternative which is 
frequently $1,800 a year.
    And so it may well be possible to offer an attractive 
package with a premium that is $30 or $50 a month more than 
they had been offering. More than they would have been charging 
before. But far less for a full package of Medigap benefits 
than is available as the alternative. So I think there may have 
been some learning going on. There may have been some bad 
expectations by the plans and by seniors. And the plans may 
have made some strategic errors in terms of how rapidly they 
went out into some of the areas.
    But I am concerned. I think we have to watch what is going 
on. It may be that some of the requirements have raised too 
much uncertainty, but I don't think risk adjustment is the 
place to stop. That is a very important change.
    Mr. Barrett. Were the decisions to pull out exclusively 
economic decisions?
    Ms. Wilensky. Well my sense is--and I know you have panels 
later from the health care plans who can tell you more--that 
plans were quite reluctant to pull out. It is bad publicity, it 
doesn't sit well. Most of these plans didn't leave entirely. 
They left some markets. At least most of the big companies 
stayed in Medicare in some markets and left in other markets.
    My sense is that they were concerned that not only were 
they losing money, or not making money in some markets, but 
they had high degrees of uncertainty about whether things were 
going to get better in the near term. In fact, some sensed that 
they were much more likely to be hurt even more. And on those 
grounds, they left the areas. I think it is economic, but not 
as little as saying, we weren't making enough money.
    I think there was a sense that this is not something you 
want to do. But if they didn't do it this year, there is a 5-
year stay out period. So it was less costly to do it now than 
it will be in the future. That will be a much bigger decision.
    Mr. Barrett. Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank you, Mr. Barrett. Well, the fact is 
that, the many, some plans are withdrawing. The fact is that 
they are withdrawing in some areas where there are no other 
choices other than going back to fee-for-service, which is very 
difficult for some people because of their reasons for going to 
managed care in the first place. Prescription drugs 
principally, I guess.
    Now you have mentioned, Dr. Wilensky, that possibly taking 
a look at the reimbursement rates in some areas and what not, 
and the staff and I have talked and they have mentioned that 
too. I guess the first thought that comes to my mind is would 
this be maybe rewarding some, you mentioned bad public 
relations and the fact that they didn't very rashly withdraw, 
but they really were reluctant to withdraw. And I will accept 
that. But could this be rewarding some people maybe who should 
not have withdrawn?
    Ms. Wilensky. I think you need to know more about what 
happened and why it happened and what is likely to happen in 
the future. MedPAC is very concerned about this. We are going 
to monitor it. We think you need to monitor it. I don't think 
any of us understand enough about what is going on to say throw 
more money at the problem. We ought to look at the additional 
costs that we are imposing on plans and we ought to be careful 
about what happens in the future.
    But I don't think there is evidence to date to suggest go 
in and put more money to fix the problem.
    Mr. Bilirakis. Is there something else that could be done, 
maybe, whether it be in addition to that or lieu thereof in 
some cases the data that is, how onerous is this data 
gathering?
    Ms. Wilensky. Well, I think that is an issue that, and it 
may be one that GAO either has or could look at, which is the 
data that are being required to be reported under the HCFA 
rules. Whether it is as lean and as cost-effective a 
requirement as possible, whether there are some ways to lighten 
that burden. And perhaps along with changing the date of the 
ACR reporting, that might be able to keep some plans in. And 
encouraging a little more dialog between HCFA and some of the 
health care plans, although I know that they engage in that.
    It is important to have these options out there. It is not 
obvious why you should have seen so much change early on. I am 
surprised. Ultimately there is a problem that in the high 
spending areas where there have been a lot of health care 
plans, the slow growth in the capitation payment is going to 
mean a big divergence between what traditional Medicare spends 
in some of the south Florida counties and some of the 
California counties and what the capitation plans get as their 
capitation rate.
    And that is a mistake. That differential payment will 
continue because traditional Medicare is going to be growing at 
5 or 6 percent per year, per capita payments in these areas are 
probably going to grow at the minimum of 2 percent per year. 
And you are going to have to go back and try and get those in 
alignment. That is probably the one thing you can plan on 
having to take up in the next year or 2. Right now I don't 
think we know much more than that. But perhaps Bill would 
comment.
    Mr. Scanlon. I think we do need to be very concerned about 
what it is that we have asked the plans to do in terms of the 
reasonableness of the burden for participation. But at the same 
time, we maybe also need to focus on whether or not the basic 
premise that we are using, not just for the managed care 
portion of Medicare but with respect to many services as well. 
We have built our payment methods on national averages.
    What we have seen are withdrawals in certain areas and not 
within others. We need maybe to ask ourselves, do we need a 
different but still rational basis upon which to base payment. 
It may be that we do. Participation levels over the longer haul 
may be an indicator that more regionalization is important. A 
similar kind of concern may arise in the future with respect to 
physicians, who have also experienced very significant changes 
in the payments that they are receiving.
    Ultimately, we need to think about our philosophy about 
setting rates more generally rather than just for the Medicare 
managed care program.
    Mr. Bilirakis. Thank you. Mr. Brown? Mr. Barrett? Thanks so 
very much. We appreciate your patience and your willingness to 
help out. The next panel. Ann Miller, Member of the Board of 
Directors of AARP and Diane Archer, Director of the Medicare 
Rights Center. Oh, I am sorry, I didn't mean to leave out Ms. 
Wegner. Nona Wegner, Senior Vice President of the Seniors 
Coalition. We had the pleasure of her company just recently 
before this committee.
    Your written testimony is a part of the record. We would 
prefer that you would complement it orally. We will set the 
clock at 5 minutes and hopefully you will stay as close to it 
as you possibly can.
    Ms. Miller.

  STATEMENTS OF ANN MILLER, MEMBER, AARP BOARD OF DIRECTORS; 
 DIANE ARCHER, EXECUTIVE DIRECTOR, MEDICARE RIGHTS CENTER; AND 
 NONA BEAR WEGNER, SENIOR VICE PRESIDENT, THE SENIORS COALITION

    Ms. Miller. I am Ann Miller from Morro Bay, California. I 
am a Member of the AARP's Board of Directors. In 1997, AARP 
supported the BBA and its creation of Medicare+Choice. I am 
pleased to be here today to present AARP's views on 
Medicare+Choice, the risk adjuster and other reform issues. 
Medicare+Choice was enacted to expand the health care options 
available to Medicare beneficiaries while at the same time 
maintaining affordable, quality care in Medicare.
    Last fall's unexpected disruption in Medicare HMO 
availability, illustrates the magnitude of these changes and 
holds several lessons. First, while private sector options have 
been able to address some glaring faults in original Medicare, 
such as the lack of prescription drug coverage and high out-of-
pocket costs, these options are not without their own 
shortcomings.
    A private business can be more innovative and efficient. 
But if it is not profitable, it will leave the market. 
Therefore, private market participation in Medicare must be 
structured to assure beneficiaries have stability in their 
health insurance coverage. Second, the impact of the BBA has 
been and will continue to be significant. It must be evaluated 
and understood before launching even a greater Medicare Reform.
    The Medicare HMO withdrawals last year displaced about 
400,000 Medicare beneficiaries from their HMO's. This 
unexpected event created a lot of confusion and frustration as 
beneficiaries struggled to find alternative HMO's or returned 
to original Medicare. The HMO industry contends that the BBA 
payment methodology was the chief reason that plans pulled out 
of certain markets. AARP does not have enough data to evaluate 
whether or not payments are adequate or fairly calculated, but 
such claims should be carefully reviewed to ensure that we 
don't return to the error of overpayments to some plans.
    We believe it is important for Congress, the Medicare 
Commission, HCFA, health plans and beneficiaries to understand 
what caused last year's withdrawals. In order to determine how 
to preserve enrollment stability for beneficiaries without 
undermining the physical integrity of the program. Health plans 
have also reported that uncertainty about risk adjustment 
contributed to their decisions to pull out of certain markets 
in 1998, and that could lead to future withdrawals.
    While we understand that the methods of risk adjustment are 
imperfect, it is important that HCFA move forward by phasing in 
the proposed risk adjuster to allow a smooth transition to more 
accurate payments for plans. The proposed phase in will soften 
the economic impact on plans while implementing at least a 
partial solution. Another important issue is the Medicare 
Beneficiaries Education Campaign.
    Medicare+Choice can realize its potential only if 
beneficiaries have the knowledge that will enable them to be 
wise consumers in the market place. We support HCFA's efforts 
to educate beneficiaries and as a part of our effort to make 
Medicare+Choice work, AARP has a campaign to educate our 
members about Medicare+Choice. Congress must also do its part 
by providing sufficient resources so HCFA can carry out this 
challenging task.
    And we strongly support increasing Medicare+Choice user 
fees to $150 million. This increase is needed to assure that 
all aspects of the education campaign can be carried out as 
Congress envisioned. I want to emphasize the importance of 
fully understanding the changes that have already been made 
under Medicare+Choice before we layer on new changes.
    Let me assure you, however, that AARP does not believe that 
the status quo in Medicare is acceptable. More must be done to 
assure the program's long term solvency and prepare Medicare 
for the retirement of the baby boomers. There are some 
fundamental principles that have guided Medicare, which AARP 
believes should be the basis of any efforts to reform the 
program. I want just to highlight a few.
    Medicare should continue to be available to all older and 
disabled Americans despite health status or income. It should 
guarantee a defined set of benefits with payments that keep 
pace with the cost of the benefit package. Medicare should keep 
up the advances in medicine. This means, among other things, 
including prescription drug coverage in the Medicare benefit 
package. And changes in Medicare financing and benefits should 
protect all beneficiaries, including those with low incomes, 
from burdensome out-of-pocket costs.
    AARP looks forward to continue to work with this committee 
and your colleagues in the House and Senate on a bi-partisan 
basis to improve on the Medicare+Choice Program. We also want 
to work with you to advance a Medicare Reform Package. The 
status quo in Medicare is not acceptable. But together we must 
ensure that any reform package continues Medicare's promise of 
quality, affordable health care. Thank you.
    [The prepared statement of Ann Miller follows.]
   Prepared Statement of Ann Miller, Member, AARP Board of Directors
    Good morning Mr. Chairman and members of the Committee. I am Ann 
Miller from Morro Bay, California. I am a member of the AARP Board of 
Directors and come before you as a representative of a group whose 
large and diverse membership includes millions of current and future 
Medicare beneficiaries. The Association supported the creation of the 
Medicare+Choice program as part of the Balanced Budget Agreement in 
1997 and we appreciate this opportunity to share the beneficiary 
perspective on the Medicare+Choice program today.
    In 1997, Congress passed the Balanced Budget Act (BBA) that 
included sweeping changes in the Medicare program. The BBA provided 
significant program savings to extend Medicare's solvency until 2008 
and made several major changes affecting the program's beneficiaries. 
These changes included the creation of the Medicare+Choice program 
through which four new health plan options are to become available to 
beneficiaries. The legislation also addressed when and how 
beneficiaries can enroll in health plans or Medigap plans, as well as 
what information beneficiaries receive about those choices. In 
addition, as the changes mandated by the BBA take effect, virtually 
every beneficiary will face higher out-of-pocket expenses for health 
care.
    AARP supported the BBA and its creation of Medicare+Choice in order 
to accomplish the objective of expanding choice in the program while 
also protecting access, affordability, and quality. We understood that 
extending the short term solvency of the Medicare program required 
shared sacrifice from all who participate in the program--providers and 
beneficiaries alike. We also recognized that Medicare+Choice would lay 
the foundation for essential longer term reform in the Medicare 
program.
Impact of BBA
    Last fall's unexpected disruption in Medicare HMO availability, 
however, serves as a wake-up call to all who seek to bring private 
sector solutions to bear on Medicare's problems. While private sector 
options have been able to remedy some glaring faults in original 
Medicare, such as the lack of prescription drug coverage and high out-
of-pocket costs, these options are not without their own failings. When 
private businesses are given the right to manage a beneficiary's care 
in exchange for the opportunity to earn a profit, several things can 
happen. On the plus side, the innovations in administrative efficiency 
and improved health care delivery could benefit the patient with lower 
costs, better benefits, and better coordinated care. On the minus side, 
patients may have less control over health care treatments, and no 
control over whether their chosen health care plan continues to be 
available from year to year. It is a challenge to separate the positive 
from the negative, because the same factors create both results. A 
private business can be more innovative and efficient, but if it is not 
profitable, the private business will leave (or not enter) the market. 
The beneficiary who gained the extra benefits for a time, can lose in 
the long run.
    One of the lessons from the initial implementation of 
Medicare+Choice is that every change to Medicare will have 
consequences, some predictable, some unanticipated. In fact, the 
disruption last year, which seemed enormous to those affected, occurred 
before any new Medicare+Choice plans were available. Once new types of 
private plans are offered, other issues are certain to arise. At this 
point, two things are clear: first, private market participation in 
Medicare must be structured to assure beneficiaries have stability in 
their health insurance coverage; and second, the impact of the BBA is 
significant and it must be evaluated and understood in order to plan 
the even greater changes needed to strengthen Medicare for the future.
Issues Arising from Medicare+Choice Implementation
    Beginning late last fall, Medicare beneficiaries began to feel the 
effects of the program's transformation. Medicare, like other health 
insurance programs, has always been complex. But, with the advent of 
new choices, greater private sector involvement, and the accompanying 
need for information, it has become even more confusing. In order to 
protect beneficiaries' choices, significant issues, such as payment 
methodology, risk adjustment and public information and education, will 
need to be addressed and understood as Medicare+Choice is implemented. 
We need to address these needs and stabilize the Medicare+Choice 
program before greater changes take place.
    Payment Methodology/Medicare HMO Withdrawals--Last fall, about 
400,000 beneficiaries found themselves displaced from their current 
HMOs when multiple plans terminated their Medicare contracts. The 
majority of beneficiaries who lost coverage had the option of joining 
another HMO in their area, but often that meant changing doctors or 
losing extra benefits that had attracted them to the particular HMO in 
the first place. Beneficiaries were also entitled to return to original 
fee-for-service Medicare, but for many that was not a preferred option. 
Often, these beneficiaries chose managed care because it both relieved 
them of the financial burden of Medigap insurance payments and offered 
needed benefits, such as prescription drugs, that are not covered by 
Medicare. Under the BBA, beneficiaries who lost their HMO coverage and 
returned to original Medicare were given certain rights to purchase--or 
repurchase--a Medigap policy, but they would have to bear the 
significant expense, generally in excess of $100 a month. Even if they 
can afford Medigap, not all beneficiaries are protected by the rules. 
Disabled beneficiaries may not have the right to purchase Medigap and 
no beneficiary is guaranteed the right to purchase a policy with drug 
coverage.
    The Medicare HMO withdrawals at the end of 1998 affected 7 percent 
of all Medicare beneficiaries in managed care. While only 1 percent 
lost their managed care option, all of these beneficiaries were deeply 
troubled, and the general disruption in the HMO market could make other 
beneficiaries reluctant to join a Medicare HMO in the future.
    Several reasons have been put forward to explain the HMO 
withdrawals from Medicare. The HMO industry contends that the BBA 
Medicare payment rates and methodology was the chief reason that plans 
pulled out of certain markets. Whether or not the payments are adequate 
or fairly calculated is an issue on which AARP does not have enough 
data to permit us to evaluate the situation. We believe, however, that 
it is important for all stakeholders--Congress, the Medicare 
Commission, HCFA, health plans and beneficiaries--to understand what 
caused last year's rash of HMO withdrawals in order to determine how to 
preserve enrollment stability for beneficiaries without undermining the 
fiscal integrity of the program.
    Most stakeholders agree that it is necessary to change deadlines of 
the Medicare+Choice program to allow the program to function more 
smoothly and to attempt to avoid a repeat of last year's HMO withdrawal 
problem. We understand that one proposal is to move the date for plans 
to file the Adjusted Community Rate (ACR) from May 1 to July 1. This 
would allow Medicare+Choice plans to base their next years' benefits 
and premiums on two quarters of experience. We believe moving the date 
of the ACR submission to no later than July is a reasonable 
accommodation to the needs of managed care plans to set their rates 
based on recent data. AARP continues to believe that plans have the 
responsibility to identify problems that may affect rates as early as 
possible. If plans are going to operate responsibly as part of Medicare 
and deal fairly with beneficiaries, they need to be aggressive in their 
efforts to set rates appropriately. Changing the timeline for plan 
submission of ACR data will not be without its impact on beneficiaries, 
however. It will necessitate adjustments in the information that can be 
included in the Medicare Handbook, which will have to be carefully 
worked out in 1999.
    Ultimately, the HMO withdrawal situation underscores the importance 
of original Medicare. Regardless of the market decisions of private 
health plans, beneficiaries need the security of knowing original 
Medicare and access to Medigap are there for them.
    Risk Adjustment--Health plans have also reported that uncertainty 
surrounding new risk adjustment methodology contributed to their 
decisions to pull out of certain markets in 1998, and beneficiaries 
fear a similar response by health plans this year.
    In its 1996 Annual Report to Congress, the Physician Payment Review 
Commission estimated that HMOs received overpayments of about 5 to 6 
percent per beneficiary because the populations they enrolled were 
healthier than the general Medicare population. In recognition of that, 
the BBA requires HCFA to implement a risk adjustment method to set 
payment rates based on the ``expected relative health status of each 
enrollee.'' Risk adjustment is intended to ensure that health plans are 
neither penalized for enrolling beneficiaries with chronic illnesses 
nor overcompensated for enrolling healthier beneficiaries. In theory, 
risk adjustment will make all beneficiaries equally attractive to 
health plans regardless of their health status. The BBA requires the 
system to be in place no later than January 1, 2000.
    Last September, HCFA released a notice describing the risk 
adjustment method it intends to implement. The new system will adjust 
payments to Medicare+Choice plans for each Medicare beneficiary based 
on whether the individual's ``risk factor'' is higher or lower than 
that of an average beneficiary. Specifically, payments to 
Medicare+Choice plans will be risk adjusted by incorporating diagnosis 
information into the payment methodology. The information used would be 
based on inpatient hospital encounter data to determine payments to 
Medicare+Choice organizations and, eventually, additional encounter 
data (outpatient hospital, physician services, etc.) will be 
incorporated into the methodology as well.
    We understand that the diagnosis-based or hospital data risk 
adjuster has several advantages, including that it is more readily 
available, strongly correlated with future expenses, and verifiable 
through audit. On the other hand, this approach has met with some 
criticism. Health plans argue that using hospital-only data to 
determine diagnosis penalizes plans that avoid hospitalizations, 
potentially creating inappropriate incentives to needlessly hospitalize 
Medicare beneficiaries. Also, it does not recognize the cost of 
treating expensive illnesses that do not result in hospitalizations.
    While we understand that available methods of risk adjustment are 
imperfect, adding risk adjustment is still essential to derive a more 
accurate payment for Medicare+Choice plans. If plans are to compete 
fairly in the Medicare market, it will be necessary to minimize risk 
selection through improved risk adjustment. Prior risk adjusters based 
on demographic factors are widely recognized to be inadequate to 
protect the Medicare system. AARP understands that HCFA intends to 
address plans' concerns about financial impact by phasing-in the 
implementation of the diagnosis-based risk adjuster. AARP believes that 
it is important that HCFA move forward with the proposed risk adjuster 
in order to allow a smooth transition to more accurate payment for 
plans. Refinement of risk adjustment methodology should continue, as 
Medicare cannot afford to wait for a perfect risk adjuster before 
implementing at least a partial solution.
    Medicare+Choice Information and Education--In supporting expansion 
of Medicare choices, AARP emphasized the importance of solid, consumer-
friendly information so that beneficiaries can make informed decisions 
and select the best health plan choices for them. But, we also 
recognize that educating beneficiaries so that they understand the 
complex range of choices facing them is an enormous task. Recent 
research in five cities conducted for AARP by Dr. Judith Hibbard of the 
University of Oregon found that many beneficiaries were not able to 
make knowledgeable choices even between the original Medicare fee-for-
service program and Medicare HMOs. As more Medicare options become 
available, this task will grow still more difficult. In addition, for 
those beneficiaries who do select any of the new Medicare+Choice 
options, they will need help in navigating within those options. These 
challenges must be taken very seriously by HCFA, the Congress, health 
plans, and groups like AARP.
    AARP supported Medicare+Choice in order to give beneficiaries the 
full benefit of innovations in health care delivery. However, 
Medicare+Choice can realize its potential only if beneficiaries acquire 
the knowledge that will enable them to exercise their leverage as 
informed consumers in the marketplace. We support HCFA's efforts to 
educate beneficiaries and have joined with the Agency as a partner in 
its education campaign. AARP has also undertaken a campaign to educate 
our members about the Medicare+Choice program and the new options they 
may have available to them.
    We believe Congress, too, must do its part by providing sufficient 
resources to enable HCFA to carry out its challenging tasks. This year, 
for example, we anticipate that HCFA will need to make changes in its 
beneficiary education campaign to reflect modifications in program 
timelines, like the ACR filing date, and to respond to problems 
encountered last year. Medicare has found its $95 million 
appropriation--less than $3 per beneficiary--barely sufficient to carry 
out the education campaign. Presently the #800 line is operational only 
in the five pilot test states and the full Medicare Handbook has been 
mailed only to those states. By the end of this year, these services 
must be available nationwide. Therefore, we strongly support the 
Administration's proposed increase in Medicare+Choice user fees to $150 
million. AARP believes this increase is needed to assure that all 
aspects of the education campaign can be carried out as Congress 
envisioned, including the #800 telephone assistance line with live 
operators as opposed to an automated response system.
Greater Medicare Reforms
    As we've noted, Medicare+Choice is still in its infancy and many of 
the changes enacted by the Balanced Budget Act are still phasing in. 
The overall affect of these changes on beneficiaries, providers and the 
Medicare program itself is not yet clear and there is much to be 
learned. The challenges and the successes of Medicare+Choice will have 
important implications for broader reform of the Medicare program. The 
amount of ``fine-tuning'' now under discussion for Medicare+Choice 
offers ample reason why larger-scale reforms in Medicare must be made 
slowly and cautiously.
    While we have stated the importance of understanding the impact of 
the changes that have already been made before new changes are layered 
on top, this does not mean that the status quo in Medicare is 
acceptable.
    Medicare continues to face financial challenges which have to be 
addressed if the program is to continue to remain strong for current 
and future beneficiaries. Equally important, Medicare's benefits and 
delivery system need to be modified to live up to the demands of 21st 
century medicine. That means that greater reforms are still necessary. 
The Balanced Budget Act extended Medicare's solvency only until 2008. 
More must be done to ensure the program's long-term solvency. The 
program must also be prepared to handle the enormous number of baby 
boomers who are moving towards retirement.
    To this end, AARP believes that there are some fundamental tenets 
that have guided Medicare and should be the basis of any efforts to 
reform the program:

 First and foremost, Medicare should continue to be available 
        to all older and disabled Americans despite health status or 
        income. Our nation's commitment to a system in which Americans 
        contribute to the program through payroll taxes during their 
        working years and then are entitled to receive the benefits 
        they have earned is the linchpin of public support for 
        Medicare. Toward that end, AARP views it as unacceptable to 
        create a situation where more Americans would be uninsured by 
        requiring people to wait until they are 67 to receive Medicare.
 Medicare should guarantee a defined set of benefits with 
        payments that keep pace with the cost of the benefit package. 
        Clearly defined benefits, across all plans, provide an anchor 
        on which health plan benefits and the government's 
        contributions are based. On the other hand, a defined 
        contribution, with payments tied to artificial budget targets 
        rather than the cost of a benefit package, creates the 
        potential for both benefits and government payments to diminish 
        over time. The latter would leave beneficiaries more vulnerable 
        to rising health care costs--something over which individual 
        Americans have little control.
 Medicare should keep up with advances in medicine and medical 
        technology in much the same way as do private and employer-
        provided insurance. This means, among other things, modernizing 
        Medicare's defined benefit package to include prescription drug 
        coverage. Prescription drugs keep people healthy, independent, 
        and out of hospitals. Therefore, there should be a guarantee of 
        drug coverage across all Medicare plans. Without such coverage 
        in every Medicare plan, there would be a greater tendency 
        towards adverse selection of beneficiaries.
 Changes in Medicare financing and benefits should protect all 
        beneficiaries--including those with low-incomes--from 
        burdensome out-of-pocket costs. Medicare beneficiaries should 
        continue to pay their fair share of the cost of coverage, but 
        out-of-pocket costs must be kept affordable. The average 
        beneficiary already spends nearly 20 percent of his/her income 
        out-of-pocket on health care. If cost-sharing is too high, 
        Medicare's protection would not be affordable and many 
        beneficiaries could be left with relatively few coverage 
        options.
 Medicare must have a stable source of financing that keeps 
        pace with enrollment and the costs of the program. Ultimately, 
        any financing source will need to be both broadly based and 
        progressive. Additionally, AARP supports using an appropriate 
        portion of the on-budget surplus to insure Medicare's financial 
        health beyond 2008.
 As private insurance participation in Medicare expands, 
        effective administration of the program will be essential. The 
        agency or organization that oversees Medicare must be 
        accountable to Congress and beneficiaries for assuring access, 
        affordability, adequacy of coverage, quality of care, and 
        choice. This will require things like: ensuring that a level 
        playing field exists across all options; modernizing original 
        Medicare fee-for-service so that it remains a viable option for 
        beneficiaries; improving the quality of care delivered to 
        beneficiaries and ensuring that all health plans meet rigorous 
        standards; and continuing to rigorously attack waste, fraud, 
        and abuse in the program.
    AARP is awaiting the Medicare Commission's report. We have reviewed 
the ``premium support'' proposal put forth by Senator Breaux. This 
proposal relies heavily on the private insurance market to provide 
health insurance coverage to Medicare beneficiaries. As discussed 
earlier, a step towards greater involvement of private sector health 
plans in Medicare requires careful assessment and ample time to test 
the potential impact on beneficiaries. Since many details of this 
particular proposal are still sketchy it is premature for us to comment 
on it fully. As more information becomes available, AARP will weigh the 
proposal--as we will any Medicare reform plan--against the fundamental 
principles of the Medicare program described above.
    In the meantime, AARP will continue to work with the Commerce 
Committee, and your colleagues in the House and Senate to improve upon 
the Medicare+Choice program. We also want to work with you to advance a 
Medicare reform package. The status quo in Medicare is not acceptable. 
But together we must ensure that any reform package continues 
Medicare's promise of quality, affordable health care.

    Mr. Bilirakis. Thank you very much, Ms. Miller. Before I 
recognize Ms. Archer, the Chair recognizes Mr. Brown.
    Mr. Brown. Ms. Miller, thank you. Congresswoman Lois Capps, 
who is your Member of Congress, I believe, asked me to welcome 
you. She could not be here today because of an illness in her 
family, but wanted to extend her greetings and thank you for 
traveling all the way across the country.
    Ms. Miller. Well, thank you. Yes, Morro Bay is part of San 
Luis Obispo County and I am in her district.
    Mr. Brown. And you definitely have a friend in the work she 
does in this committee.
    Ms. Miller. Thank you.
    Mr. Brown. Thank you.
    Mr. Bilirakis. Ms. Archer.

                   STATEMENT OF DIANE ARCHER

    Ms. Archer. Thank you. My name is Diane Archer. I am the 
Executive Director of Medicare Rights Center, a national not-
for-profit organization based in New York. We help seniors and 
people with disabilities on Medicare through telephone 
counseling, public education and policy work. I thank the 
Commerce Committee for this opportunity to testify today.
    MRC devotes considerable resources to counseling our 
clients on how to choose a Medicare health plan. We tell people 
to choose carefully because quality matters and quality varies. 
But we can't give callers information to help them choose among 
the many Medicare plans based on the health care they offer. 
Good information on health plan quality is not available.
    For now we know that many of our clients are forced to 
choose a health plan based solely on out-of-pocket costs and 
additional benefits. But a choice that doesn't factor in 
quality, isn't an informed choice and doesn't make for a 
competitive market place. To help ensure that seniors and 
people with disabilities get good care from their plans, they 
must be encouraged to compete on their health performance.
    As a Nation, we should measure the success of the market 
place and Medicare on how well health plans treat seniors and 
people with disabilities who need care the most. Currently 75 
percent of Medicare costs cover the health care needs of the 
sickest 10 percent of the Medicare population. The Medicare 
Program was founded to provide a safety net for these 
vulnerable seniors and people with disabilities who would 
otherwise be uninsurable.
    If we overlooked the health care needs of these people, 
Medicare will no longer be the safety net it is intended to be. 
Risk adjusting payments to health plans are essential if they 
are to compete for members with costly health care needs. 
Because of the current payment system, some of the most 
vulnerable people on Medicare tell us they fear they may not be 
able to get the care they need from Medicare HMO's.
    And we have no evidence about particular health plans to 
allay their fears. Unfortunately today, Medicare's capitated 
payment system penalizes plans that develop and promote 
programs for people with costly health care needs. If they 
attract too many people with complex conditions, they can't 
stay in business. As a result, health plans don't compete on 
the quality of health care they provide to people with costly 
conditions.
    And without good risk adjustment, the Federal Government 
winds up wasting taxpayer dollars by overpaying HMO's to enroll 
healthy people. A better risk adjustment system will help the 
Medicare market place and provide an incentive for plans to 
enroll people with costly conditions. By the year 2000, plans 
will be paid slightly more for enrollees who were hospitalized 
in the previous year to account for higher average projected 
total cost in the current year.
    The new system will begin to compensate those private 
Medicare plans with higher numbers of members with costly 
needs. Today choosing a private Medicare plan is not a matter 
of informed choice, and it can be as risky as a trip to a Vegas 
slot machine. We will know that the Medicare market place is 
meeting the health care needs of those who need it the most 
when private Medicare plans aggressively develop and advertise 
programs for people with cancer, heart disease and other 
serious illnesses.
    Risk adjustment will push the Medicare market in the right 
direction, encouraging health plans to compete against each 
other on the quality of their product, health care, and 
improved risk adjustments should encourage full disclosure by 
health plans of their treatment policies and enable people on 
Medicare to make informed choices about which plan to join now 
for when they become sick later. With risk adjustment the most 
vulnerable seniors and people with disabilities on Medicare 
would not need to fear falling by the Medicare wayside.
    Instead, the Medicare Program could become a public/private 
partnership that we can all be proud of and a legacy for future 
generations. Thank you.
    [The prepared statement of Diane Archer follows.]
Prepared Statement of Diane Archer, Executive Director, Medicare Rights 
                                 Center
    My name is Diane Archer. I am the Executive Director of the 
Medicare Rights Center, a national not-for-profit organization based in 
New York City. MRC helps seniors and people with disabilities on 
Medicare through telephone counseling, public education, and public 
policy work. Under a contract with the New York State Office for the 
Aging, with funding from the Health Care Financing Administration, we 
operate New York State's Health Insurance Assistance Program hotline. 
Each year, we field approximately 50,000 hotline calls from people with 
Medicare questions and problems and provide direct assistance on a 
variety of Medicare issues to more than 7,000 individual callers. I 
thank the Commerce Committee for this opportunity to testify on the 
need to risk adjust payments to private Medicare plans. Only through 
risk adjustment will these plans have the incentive to develop and 
promote programs for enrollees with costly conditions and to provide 
treatment information that consumers need to make informed health care 
choices.
    MRC devotes considerable resources to counseling our clients on how 
to choose a Medicare health plan. Our counselors tell people to choose 
carefully because quality matters and quality varies between plans. 
But, we cannot give callers information to help them choose a private 
Medicare plan based on the health care they offer. Good information 
about how private Medicare plans care for enrollees with costly health 
care conditions is unavailable. For now, we know that many of our 
clients are forced to choose a health plan based on out-of-pocket costs 
and additional benefits without factoring in quality. But a choice 
based solely on costs and benefits is not an informed choice and does 
not make for a competitive marketplace. To help ensure that seniors and 
people with disabilities get good care from their health plans, health 
plans must be encouraged to compete on their health performance.
    We as a nation should measure the success of the Medicare 
marketplace on how well health plans treat those seniors and people 
with disabilities who need care the most. Currently, 75% of Medicare 
costs cover the health care needs of the sickest 10% of the Medicare 
population. The Medicare program was founded to provide a safety net 
for these vulnerable seniors and people with disabilities who would 
otherwise be uninsurable. If we overlook the health care needs of the 
most vulnerable people on Medicare, Medicare will no longer be the 
safety net it is intended to be.
    Risk adjusting payments to health plans is essential if they are to 
compete for members with costly health care needs. As a result of the 
current payment system, some of the most vulnerable people on Medicare 
tell us they fear they may not get the care they need from Medicare 
HMOs. And we have no evidence about particular plans to allay their 
fears. Unfortunately, today, Medicare's capitated payment system 
penalizes plans that develop and promote programs for people with 
costly health care needs. If they attract too many people with complex 
conditions, they will go out of business. As a result, health plans do 
not compete on the quality of health care they provide to enrollees 
with costly conditions. And without good risk adjustment, the federal 
government winds up wasting taxpayer dollars by overpaying HMOs to 
enroll healthy people.
    We believe that even the most basic risk adjustment will help the 
Medicare marketplace and provide an incentive for plans to enroll 
people with costly conditions. By the year 2000, plans will be paid 
slightly more for enrollees who were hospitalized in the previous year 
to account for higher average projected total cost in the current year. 
This new risk adjustment methodology is an improvement over the 
existing system because we know that people with costly health 
conditions like cancer, congestive heart failure, and diabetes are more 
likely to need extended hospital stays than other enrollees. The new 
system will no longer reward health plans with a disproportionate 
number of healthy members. Rather, it will begin to compensate those 
private Medicare plans with higher numbers of members with costly 
needs.
    Today, choosing a private Medicare plan is not a matter of informed 
choice, and it can be as risky as a trip to a Vegas slot machine. We 
will know that the Medicare marketplace is meeting the health care 
needs of those who need it the most when Medicare HMOs and other 
private Medicare health plans aggressively develop and advertise 
programs for people with cancer, heart disease, and other serious 
illnesses. Because health plans want to attract as healthy a membership 
as possible, they vie for clients with glossy pictures of seniors 
riding bikes and swinging on swings with their grandchildren. Risk 
adjustment would push the Medicare market in the right direction, 
encouraging health plans to compete against each other on the quality 
of their product--health care. And, improved risk adjustment should 
encourage full disclosure by health plans of their treatment policies 
and enable people on Medicare to make informed choices about which plan 
to join now for when they become sick later. With risk adjustment, the 
most vulnerable seniors and people with disabilities on Medicare would 
not need to fear falling by the Medicare wayside. Instead, the Medicare 
program could become a public-private partnership that we can all be 
proud of, and a legacy for future generations. Thank you.

    Mr. Bilirakis. Thank you, Ms. Archer. Ms. Wegner.

                 STATEMENT OF NONA BEAR WEGNER

    Ms. Wegner. I thank the committee for this opportunity for 
my organization to be represented. The Seniors Coalition in a 
non-profit, non-partisan advocacy organization representing 
about 3 million older Americans and their families. This 
hearing addresses a very important health care issue of deep 
concern, not only to my members but to every senior citizen.
    Over the last decade we have vigorously supported providing 
Medicare beneficiaries with age-appropriate options so as to 
place them on an equal footing with the products and services 
presently available to younger consumers. We were very hopeful, 
and we still are hopeful, that the Medicare+Choice provisions 
of the Balanced Budget Amendment will do this.
    But as of today, that has not happened. Clearly that was 
the intent of the passage of the legislation, but the choices 
which we expected to see available have not come to pass. We 
believe that there are a number of important factors which have 
created this problem and I would just like to mention two. 
First, we are told and on behalf of our members, who inquired 
about and were told, that the late issuing of HCFA's first 
interim regulations significantly delayed the entry of products 
into the market place.
    But second, concern over the risk adjuster is a factor 
which is acknowledged universally as being one of the issues. 
We acknowledge and truly believe that a risk adjustment factor 
is critical in balancing affordability and profitability in the 
development of new health care products. There are both 
anecdotal evidence as well as the evidence presented today that 
justifies that. So we will not quarrel with that idea.
    But we do want to say that it is important to look at how 
that risk adjustment is developed and whether or not it 
reflects accurately the market place balance that must occur 
for products to be brought on line and consumers to have access 
to it. It certainly is true that the Medicare+Choice options as 
envisioned in the BBA would benefit seniors both economically 
and physically through better health care outcomes.
    But for seniors who are economically vulnerable and 
physically frail, as my co-panelist just said, perhaps more 
important than choice is quality and availability of access to 
service. The harsh reality is that there are few products in 
the market place and seniors have neither choice not cost-
savings nor quality right now. I want to digress just a moment, 
as I was invited to do, to say that we are concerned that in a 
defined benefit program, that choice does become a problem.
    I just want to relate something that happened to me this 
week. I had a member of my organization who lives in south West 
Virginia call me and his wife has Parkinson's Disease. Whether 
it was through the Michael J. Fox discussion of his surgery or 
not, he and his wife investigated deep brain surgery. Her 
doctor recommended that treatment for her, but it was not 
covered by Medicare.
    I don't have an answer for him. I know that that is a 
naughty problem that leads away from this issue, but in looking 
at what we construct, we have to keep in mind that Medicare was 
created in an environment in the 1960's in which deep brain 
surgery was never even envisioned, let along performed. What we 
see here in all of this are growing pains in which we are 
trying to restructure the system.
    So we really encourage the restructuring of the system. We 
know that the risk adjuster is a bridge to it. It may not be 
perfect and I have one more thing I want to say. In which I 
say, I don't think it is. But we need to do that in order to 
move it forward. It is like having a child with growing pains. 
We can't stop raising the child. We can't stop and wait because 
Medicare must evolve to create a health protection for seniors 
in the 21st century.
    The medical advantages we have today and the way in which 
the practice of medicine have evolved are far beyond anything 
that was ever conceived in the original construction of the 
Medicare Plans. Now let me return back to my other point that I 
want to make. Is that we are very concerned that basing only, 
that basing the risk adjuster only on in-patient hospital data 
has a negative consequence. I will stop there. Thank you.
    [The prepared statement of Nona Bear Wegner follows.]
  Prepared Statement of Nona Bear Wegner, Senior Vice President, The 
                           Seniors Coalition
    Good morning. I am Nona Wegner, Senior Vice President of The 
Seniors Coalition, a non-profit, non-partisan senior-citizen advocacy 
group here today on behalf of our 3 million members and supporters. 
Thank you for allowing me to speak to you on this critical issue.
    The Seniors Coalition has long promoted the concept of providing 
Medicare beneficiaries with options and alternatives similar to those 
available to younger health care consumers. We were extremely hopeful 
that the Medicare+Choice provision of the 1997 Balanced Budget Act 
would, at last, effect this change.
    At this juncture, however, it would appear that neither the hopes 
of the Congress who passed the measure, nor those of seniors who wanted 
new choices, have come to pass. Certainly we realize that the late 
release date of HCFA's interim regulations were one factor that has 
delayed the entry of products to the market place, but we also believe 
that industry concern over the risk adjuster is another factor of 
considerable importance.
    We do understand and acknowledge that risk adjustment is necessary 
to the operation of a competitive marketplace. Alice Rosenblatt, then 
Chairperson of the Risk Adjustment Work Group of the American Academy 
of Actuaries, in testimony to the House Ways and Means Committee in 
1997 noted: ``Risk assessment and risk adjustment are methods intended 
by policymakers to promote competition the basis of medical and 
administrative efficiency, rather than risk selection. She goes on to 
say that the goals of risk adjustment include maintaining consumer 
choice, protecting the financial soundness of the system and 
compensating plans fairly for the risks they assume.
    Let me stop here and say I am not an actuary, nor am I here to 
present myself in such a way. I am, however, a consumer, as are Seniors 
Coalition members, and we are here to voice our concern that the 
current marketplace is not serving our needs. Of course we want quality 
and affordability in healthcare services and delivery; these are as 
important as choice, if not more so. But when there are no products, we 
have neither choice, nor cost savings, nor quality.
    In short, when the regulatory environment is such that companies 
hesitate to bring products to the marketplace--products that are 
desperately needed--we must ask why.
    The question leads us to the heart of many of our concerns about 
Medicare and the role of government in our healthcare decision making. 
Many other experts you have here today will crunch the numbers. I, on 
the other hand, wish to briefly discuss the impact of this problem in 
human terms.
    The Seniors Coalition has grave concerns about using inpatient 
hospitalization data as the basis for the risk adjuster for three 
reasons:

1. It creates an incentive to game the system by hospitalizing seniors 
        who might otherwise be better served with outpatient treatment.
2. Increased hospitalization inevitably adds more cost to an already 
        overburdened Medicare system, worsening an already desperate 
        financial crisis.
3. Reliance on such a model flies in the face of the way in which 
        modern health care delivery has evolved. Inpatient hospital 
        care is no longer the treatment of choice in for the treatment 
        of many types of conditions resulting from acute and/or chronic 
        illnesses. Lack of recognition of this fact can lead to 
        actually diminishing the quality of care given to older 
        Americans.
    In conclusion, we believe that four years is too long to wait for 
HCFA to develop a formula for risk adjustment that takes into account 
the complexities and standards of practice in medicine today. We are 
concerned that such a model will not only slow down the entry of new 
Medicare products to the marketplace but impact negatively upon the 
financial solvency of Medicare and far more importantly reduce the 
quality and availability of services to Medicare beneficiaries.

    Mr. Bilirakis. Well thank you, Ms. Wegner. And of course 
you heard Dr. Wilensky agree with you and hopefully that, as 
time goes on, will work itself out. Ms. Miller, when you say 
that seniors should continue to pay their fair share, is that 
in relation to the cost of the program or how much a senior can 
afford? I guess the question goes to, are you advocating means 
testing the program?
    Ms. Miller. I think that we should have health care for all 
Medicare beneficiaries regardless of their income, and whether 
they can pay for it or not.
    Mr. Bilirakis. Yes.
    Ms. Miller. Our actual goal is Medicare beneficiaries 
should be able to choose the kind of medical health care option 
that best meets their needs. And Medicare+Choice is a step 
toward providing that choice.
    Mr. Bilirakis. Yes, okay. But you have heard the problems 
with the cost of the programs. And do you know what I mean by 
means testing?
    Ms. Miller. Yes.
    Mr. Bilirakis. All right. I mean right now under the 
current program you are talking about, let us say, with the 
Part B premiums, the multi-millionaire pays no more than the 
poorest person. How do you feel about that?
    Ms. Miller. AARP is not, at this point, I cannot speak for 
the position on it. We have to look at all issues and respond 
for the best area of our membership. So I would have to not 
respond.
    Mr. Bilirakis. You are being a lawyer on me now, aren't 
you?
    Ms. Miller. No, I am being honest.
    Mr. Bilirakis. Do you have a personal opinion? I don't mean 
on behalf of the AARP. I don't mean to put you on the spot, but 
you may have a personal opinion.
    Ms. Miller. Absolutely. No, I don't want to give you a 
personal opinion, if I may take that option. Because there is 
too much involved here on both sides and it would have to be 
looked at.
    Mr. Bilirakis. Ms. Archer, do you have any opinion.
    Ms. Archer. I do.
    Mr. Bilirakis. You know, if you can do it quickly.
    Ms. Archer. Yeah, I am opposed to mean testing. The 
millionaires do pay a lot more in taxes than the low-income 
seniors. We want a program that treats everybody equally, that 
makes everybody, satisfies everybody's needs. Once you start 
means testing you begin to create dissention in the program and 
I believe a lower quality program.
    Mr. Bilirakis. Ms. Wegner.
    Ms. Wegner. Traditionally my organization has opposed means 
testing. We would look at an individual proposal, but, and I 
would not speak about what my organization would do in the 
future, but traditionally it was opposed.
    Mr. Bilirakis. Interesting. You have all said that risk 
adjustment is essential. And yet you have sat through very 
patiently the rest of the hearing and you have realized the 
problems that we have with seniors basically being dropped from 
the program and some of the blame, at least, is being 
attributed to the new risk adjustment. Do you feel that risk 
adjustment is so important that it sort of overbalances? Do you 
know what I mean, Ms. Archer?
    In other words, along with risk adjustment we have this 
problem. And it is a problem that we all consider very serious. 
How would you respond to that?
    Ms. Archer. I think I should raise one point that hasn't 
been raised today. My understanding is there are 9 million 
people on Medicare today who can't join an HMO even if they 
wanted to. So that is the beginning of the issue. Risk 
adjustment, I don't believe, is going to do two things that we 
need it to do. That you need it to do and consumers need it to 
do.
    From your perspective it is going to save you literally 
billions of dollars in overpayments to health plans. That is 
critical to preserving the Medicare Program. I think we all 
agree with that. And from a consumer point of view, it is the 
only thing that I see that we can do that will begin to 
encourage plans to want to try people who are sick. To promote 
and develop programs for people who are sick.
    Mr. Bilirakis. So even if we can't solve the immediate 
problem, you feel that strongly about the risk adjustment 
process.
    Ms. Archer. I do.
    Mr. Bilirakis. Good. Ms. Wegner.
    Ms. Wegner. I would concur. We are concerned that despite 
the safeguards, which I understand HCFA has tried to implement, 
that there will be found a way to gain the system. And history 
has chosen, has told us that that has been the case. We are 
concerned about the impact on patients about that. But we have 
to, the fact that we don't have a perfect system, doesn't mean 
that we shouldn't move toward bettering it.
    Mr. Bilirakis. And you all agree that choice is 
significant. So you like the idea of additional choice.
    Ms. Archer. I would say here that good choice is 
significant. That in fact what is most significant to seniors 
is security, stability and affordability. And if you have 
choice and a market place that is in constant turmoil, that is 
not good. Choice and health plans that aren't doing right by 
their members, that is no good. Moreover, I would say seniors 
don't need a lot of choice and don't want a lot of choice. They 
want some limited choice to guarantee affordability, security, 
comprehensive benefits.
    Mr. Bilirakis. Ms. Archer, on Page 3 of your written 
statement you say, ``today choosing a private Medicare Plan is 
not a matter of informed choice, but can be as risky as a trip 
to a Vegas slot machine.'' And yet, I am sure you are aware 
that HCFA has invested a lot of money in this document which is 
intended to inform seniors and ensuring that they get the 
information needed in order to make informed choices. Do you 
have any response to that?
    Ms. Archer. I would say a few things. No. 1, if anybody has 
any sort of notion of how they would pick a health plan today, 
let me know, because I think HCFA would agree that it is just 
impossible today. Because there are so many factors that we 
don't understand about each health plan. providers can come and 
go from one moment to the next. You join, your doctor is in the 
network, the next thing that doctor is out.
    The drugs that they cover can change from one day to the 
next. You join because your drug is covered, it is no longer 
covered. The plan terminates and it raises premiums enormously.
    Mr. Bilirakis. So you don't feel that HCFA, in spite of 
their effort is adequately----
    Ms. Archer. Informing people?
    Mr. Bilirakis. Yes.
    Ms. Archer. It is not adequately informing people, but it 
doesn't have the tools to because the data is yet to be 
available. So I can't fault HCFA for only providing people with 
information that they have available. The information that we 
need is just not yet available. We are making some progress 
with HEDIS data, Health Employer Data Information Set, 
information and CAHP's data, Consumer Assessment of Health 
Plans data, which is beginning to measure plan quality.
    But again, like risk adjustment, we are only in the 
beginning stages of that. So it is very hard for people to make 
an informed choice about their health plan based on quality. On 
cost it is a little bit easier.
    Mr. Bilirakis. All right, thank you. I am sure my time has 
long expired. Mr. Brown.
    Mr. Brown. Mr. Chairman, thank you. Ms. Miller, on 
prescription drugs there are lots of proposals out there now. 
Some in the Medicare Commission want to extend coverage of 
prescription drugs only to Medicare beneficiaries in HMO's. 
Others want to see universal coverage of all Medicare 
beneficiaries' prescription drug costs. Others want to see a 
catastrophic prescription drug plan.
    Others want to start from the first dollar and put a limit 
on annual benefits. AARP, I know, supports some kind of 
prescription drug coverage. What is your position precisely?
    Ms. Miller. Prescription drugs is good medicine, and I will 
give you an example with me. Prescription drugs is exactly what 
is keeping me well. I had a heart attack about 6 years ago, a 
mild one. But the prescription drugs for high blood pressure 
has kept me well and I depend on that. Prescription drugs is 
absolutely good medicine.
    Now we don't have enough data yet from the Commission, it 
is kind of sketchy, so that we can make any decisions along 
that line. But we need to have prescription drugs as part of 
the traditional Medicare package.
    Mr. Brown. So you do not support prescription drug coverage 
only for Managed Care enrollees?
    Ms. Miller. No, it should be across the board.
    Mr. Brown. It should be across the board.
    Ms. Miller. Yes. But I am adding the fact that when things 
fall out as far as the other plans are concerned and people are 
without health care, then can then turn to their traditional 
Medicare and hopefully have prescription drugs along with it. 
That fills a void.
    Mr. Brown. Okay, thank you. Ms. Archer, one quick question 
and then a bit longer one. You mentioned that 9 million 
Medicare beneficiaries cannot join an HMO. That is for 
geographic reasons, generally?
    Ms. Archer. Yes.
    Mr. Brown. Okay.
    Ms. Archer. Yes.
    Mr. Brown. If I understood you correctly, you said there 
are disincentives in the current system, obvious disincentives, 
I think, for plans to enroll higher cost people. Could you 
elaborate on how that works?
    Ms. Archer. Sure, I mean if a bunch of us got together and 
said, we want to create the best HMO out there. We want to have 
the best hospital affiliations, academic affiliations, best 
providers, we are going to offer the best care for people with 
cancer. We would go out and actively promote it. People with 
cancer or heart disease would all join and we wouldn't be paid 
adequately to service them. We would be out of business very, 
very quickly. From a market place perspective, the health plans 
are paid in a way where their incentive is to steer clear from 
people with costly health care needs in order to do well on the 
stock exchange.
    Mr. Brown. Okay. My concern is the converse: HMO's 
marketing only to the healthy. You are saying you are 
advertising to only get the sickest people. Some HMO's maybe 
just get a cross-section of people but so often HMO's seem to 
try to cream skim. Explain that side of the coin to me?
    Ms. Archer. I don't know if you saw the Kaiser Family 
Foundation Report, but they did a whole analysis of this issue. 
But the ads are usually of healthy people exercising, scuba 
diving and having a lovely time of it and that is all well and 
good. But again, we think that Medicare's major important role 
is not to help the healthy people get health care but to help 
the most vulnerable.
    Mr. Brown. Tell me more. Okay, I understand that 
philosophically. Tell me more about how they actually market. 
They run ads with healthy people. Healthy people watch it on 
tv, they want to join. Less healthy people may not want to 
join. But give me other examples of how they promote favorable 
selection?
    Ms. Archer. No, here is another way. If you call them and 
you ask what they will do for you if you have cancer or heart 
disease or some other costly illness. Or if you write them. We 
have written them and asked them for treatment information. It 
is all proprietary. So if you are at all concerned about how 
you are going to be treated, what treatment options are 
available to you, before you join you are going to find that 
you can't get a good answer from the plan.
    I think there was an article in the Washington Post 
recently about a man in a Medicare HMO who had AIDS. He had 
been getting Protease Inhibitor from his Medicare HMO which was 
closing down. He was trying to find information about other 
HMO's that would provide that drug. Which again, was going to 
keep him going, and he couldn't get it from those HMO's. And 
for good reason, again. If they were to disclose it, they would 
be attracting too many people with AIDS and they couldn't 
afford to do that. So that is a serious problem.
    Mr. Brown. There is certainly an incentive not to disclose 
it. And there is also an incentive not to offer it.
    Ms. Archer. That is exactly right. The better ones might 
offer it, but if it is at all promoted, then they have to, they 
were going to stop offering it. The ones who just are out there 
to make money are not going to be promoting or setting up those 
kinds of programs.
    Mr. Brown. Thank you.
    Mr. Bilirakis. Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman. Ms. Wegner, let me ask 
you about some concerns that have been raised here today about 
the phase in of the risk adjuster and the use of in-patient 
data and the impact of these on the health plans. How would 
you, would you elaborate actually on the effects of this 
adjuster would be on beneficiaries and the care provided to 
him.
    Ms. Wegner. As I pointed out in my testimony, I am not an 
Actuary, so I can't give you a mathematical model. But as a 
representative as consumers and judging from history of other 
kinds of regulatory implementation, there is a distinct, we 
think, predisposition for this system to be gained. So that 
hospitalization for perhaps, and I know that the focus has been 
on a 1-day hospitalization, may not be that, but there will be 
a focus on hospitalization which is what we are concerned 
about.
    And we have several concerns related to that. One is in-
patient hospitalization is the most costly means of treatment. 
It already impacts negatively Medicare and its financial 
situation. Two, it is not in the best interest of seniors. And 
three, it sort of flies in the face of a medical model in which 
out-patient treatment procedures have become the norm. One of 
my children had her entire knee replaced and it was done as 
out-patient surgery.
    I was really reluctant. When the second child had it, it 
was exactly the best way to go. They were happier being at home 
and it was much better. Now I am not saying my child is the 
same as a senior, but there are great advantages to not 
promoting hospitalization. So all of those things make us very 
concerned when there are other data available to look at 
treatment. I am sorry that was such a long answer.
    Mr. Bryant. I wanted to ask all three of you three quick 
questions and I am sort of alone up here, so maybe we can go a 
little bit over our time. But I will start with Ms. Miller and 
then Ms. Archer and then Ms. Wegner. In terms of your 
organizations, No. 1, how many of your members, estimated 
obviously, would likely join Medicare+Choice as a result of 
this new risk adjustment?
    And second, are you concerned that there may be more of 
your members in plans now that could conceivably see those 
plans that they are in now cut services and withdraw as a 
result of this new methodology? And third and finally, is there 
any resistance from the more healthy members in these 
Medicare+Choice Plans now who do not want to see the risk 
adjuster?
    Three sort of detached questions, but if you can recall 
those, if you can answer those for me quickly. And if you need 
for me to remind you, I will happily do that.
    Ms. Miller. I don't know the exact percentage, I am taking 
a guess because we would have to get this from our staff.
    Mr. Bryant. Just your estimate.
    Ms. Miller. Okay, a ball park figure I would imagine it is 
probably in the 30 percent range that are in HMO's. I don't 
know how many have, I can't break that down for you. But I will 
go back to the fact that our beneficiaries have to choose the 
medical plan that works for them and their best options that 
satisfies their particular needs. I will give you, again, an 
example.
    I have Medicare and I have a Medigap policy. I don't have 
prescription drugs. I find that the plan that has the 
prescription drugs will cost more than if I buy my prescription 
drugs on my own. So I stay with the plan that I have. However, 
what about the people that cannot get the Medigap policy and 
need the prescription drugs. We have to fill that gap. So that 
is why I say that prescription drugs added on to the 
traditional Medicare Plan is very, very important so that all 
people can be benefited by it.
    Mr. Bryant. Mr. Chairman, can I have maybe 2 additional 
minutes to allow Ms. Archer to answer those questions?
    Mr. Bilirakis. Sure.
    Ms. Archer. I don't know how many more are likely to join 
because of this beginning phase in risk adjustment. Although I 
think many will join for affordability reasons. I think to the 
extent that they are concerned about cuts in services and plan 
terminations, they are already concerned. And I am not sure to 
what extent. Certainly I haven't read much about risk 
adjustment in the papers. That is going to be the issue for 
them.
    It is going to be thinking about what they have read about 
over the last few months about plan terminations. That is going 
to be what slows down potentially enrollment in HMO's. My 
understanding is that there has been a tremendous slow down in 
HMO enrollment over the course of the last 4 months, in part 
because of these plan terminations. Then I guess your final 
question was resistance of healthy people to join plans?
    I can't see that at all. I think that for healthy people 
plans can work very well and they are very affordable.
    Mr. Bryant. Thank you. Ms. Wegner, do you have any comments 
above and beyond that?
    Ms. Wegner. Only that just that my membership has a smaller 
percentage currently in HMO's, and that may reflect geography 
and availability or it may reflect a resistance to change. That 
I don't know, but it is an interesting question that we would 
like to pursue.
    Mr. Bryant. Thank you all for our testimony.
    Mr. Bilirakis. Ms. Miller, I just wanted to get clear. You 
have the fee-for-service Medicare and you have Medigap policy. 
Your Medigap policy does or does not cover prescription drugs?
    Ms. Miller. Does not.
    Mr. Bilirakis. It does not.
    Ms. Miller. But there is an option.
    Mr. Bilirakis. There are some Medigap policies that do?
    Ms. Miller. Right. But in my particular case, when I 
figured it out with all the deductions and what have you, it 
was a little less expensive for me to keep the policy I have.
    Mr. Bilirakis. And still pay for your prescription drugs?
    Ms. Miller. Right.
    Mr. Bilirakis. Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. One of the, in fact, 
all of the questions I think are good for this panel. One of 
the questions I wanted to ask is that I am concerned about a 
lot of the low-income seniors that are beneficiaries, who there 
is assistance available for Medigap or Medicare supplements but 
they don't always know about them. In fact the story was that 
there was a pamphlet sent out that displayed a notice to low-
income seniors to be eligible for assistance with premiums and 
cost-sharings.
    And apparently the pamphlet was received and the State 
program was flooded with calls who need it. Are we doing as 
good a job as we should on making sure seniors, poor seniors 
know that this is available?
    Ms. Archer. The answer is that it is actually been the 
State's responsibilities and that has been the problem. I think 
the Federal Government would do a much better job of ensuring 
that low-income seniors knew about the qualified Medicare 
Beneficiary Program and other programs to help them with their 
costs. If Social Security were responsible for handling these 
applications, my understanding in New York, for example, is 
that the State local offices, the local Medicaid offices which 
are required to process the claims, were mistakenly turning 
down many of our clients because they didn't have Medicaid.
    Well, the whole point of these programs is that you don't 
need to have Medicaid in order to qualify. Other States have 
incredibly complicated application processes. With the QI2 
Program which only gives people $1.07 a month, I have heard 
from many, many people in the States that it is just too costly 
to implement it. It costs them more to implement than it does 
to give people the benefit.
    So there are a lot of obstacles for people enrolling in 
these programs that I think could be alleviated if the Federal 
Government took the application process on itself and had 
Social Security do it.
    Mr. Green. Thank you. Any other comments?
    Ms. Wegner. Mr. Green, I just wanted to add that one of 
the, I think, one of the barriers to the dissemination of 
information is that the government always thinks of using 
dissemination only in government channels. There are many other 
methods of communication using utility companies, using 
voluntary organizations, and using other things in the not-for-
profit sector and even in the private sector for the 
dissemination of information.
    It has a high probability of reaching low-income seniors, 
but those channels are not utilized. I would argue that that 
approach might be cheaper and perhaps as effective as well, and 
they are often overlooked.
    Mr. Green. Okay. So we have to do a better job and maybe 
instead of having 50 State programs doing this, having some 
kind of standardization for the whole country so seniors will 
know that these are available.
    Ms. Miller. AARP tries very hard to educate our membership 
on all issues. We have an 800 number, we have a website and 
hopefully we can get to all people, not just our own 
membership, through the website.
    Mr. Green. Yeah. Although I have to admit I am a member of 
AARP and I wish I could read the magazine, much less everything 
else I get in the mail. And I know there is an effort to 
publicize to the local chapters and I visit. But again, the 
membership is not, compared to the numbers that we have.
    Ms. Miller. We have forums all across the country. We have 
our volunteers from AARP to help get that message across.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank you, Mr. Green. Anything further, Mr. 
Brown. You are excused. Thank you so very much for your 
patience and for your consciousness in wanting to contribute. 
The last panel consists of Mr. John Bertko, Principal with 
Reden and Anders, Limited. Heidi Margulis, Vice President of 
Government Affairs for Humana. Judy Discenza, Chief Actuary of 
the Blue Cross/Blue Shield of Florida.
    Craig Schub, I hope I haven't mispronounced too badly, 
President of Secure Horizons USA, Santa Anna, California. And 
Kirk Johnson, Senior Vice President of CNA Health Planners, 
Chicago, Illinois. Welcome, ladies and gentlemen and again 
thank you so very much for your patience in sitting out there 
throughout this very lengthy hearing knowing that you are going 
to be at the tail end. And ordinarily at the tail end, 
unfortunately, we never have as many members as we do right at 
the beginning. But it is certainly not any indication of lack 
of interest, particularly on a day like this where we have had 
the last vote unusually early, at 12:30.
    So you know many are already on the airplane flying home. 
But your testimony is very important to us and it is a part of 
the record and certainly will be a factor in what we might do 
regarding this problem. I guess we will start off, your 
testimony, your written testimony, as you know, is a part of 
the record and hopefully you could just complement it with some 
oral testimony. Judy Discenza, please kick it off, Ms. 
Discenza.

 STATEMENTS OF JUDITH A. DISCENZA, VICE PRESIDENT, BLUE CROSS 
  AND BLUE SHIELD OF FLORIDA; CRAIG SCHUB, PRESIDENT, SECURE 
   HORIZONS USA; HEIDI MARGULIS, VICE PRESIDENT, GOVERNMENT 
AFFAIRS, HUMANA, INC.; JOHN BERTKO, PRINCIPAL, REDEN & ANDERS, 
   LTD.; AND KIRK JOHNSON, SENIOR VICE PRESIDENT, CNA HEALTH 
                            PARTNERS

    Ms. Discenza. Mr. Chairman and members of the subcommittee, 
my name is Judy Discenza, I am Vice President and Actuary of 
Blue Cross and Blue Shield of Florida. Risk adjustment is a 
process that varies HMO reimbursements prospectively, as you 
know, depending on the expected health care needs of its 
members. This concept is familiar to the insurance industry of 
course. Actuaries always attempt to match revenues with risk as 
closely as possible. The method scheduled to be used next year, 
though, could produce outcomes quite different from what is 
desired and could ultimately cause additional plans to exit the 
market or reduce member benefits.
    There are three reasons for this. First and foremost, as 
you have heard earlier, the current approach to risk adjustment 
in biased against managed care plans because it is based on in-
patient data only. Second, there are unresolved data and 
systems questions that will accentuate the problems of 
implementing the method. And third, it could lead to 
disproportionate reductions in payments to plans.
    For this reason, my company urges delaying the current risk 
adjustment approach so that HCFA and the industry can study, 
refine and test an improved model. We believe that a refined 
risk adjuster without the problems of an in-patient only 
approach, will ultimately help to expand beneficiaries' 
choices. But implementing a flawed interim solution, will only 
add to the volatility already affecting Medicare+Choice.
    First, why is the approach flawed? The risk adjustment 
method to be used for the first 4 years is a proxy for true 
risk assessment. The substitute method uses, as we heard 
earlier, about 12 percent of admission types to determine the 
health status of the entire enrolled population. That means 
that only those seniors who have specific types of hospital 
stays factor into risk determination.
    Those for whom hospital stays are shortened or avoided, are 
assumed to be in better than average health. Serious, chronic, 
costly conditions can be totally ignored. Unfortunately also 
this approach creates incentives for increased and unnecessary 
hospitalization, exactly the opposite of what managed care 
tries to do. Perverse incentives happen largely because there 
is no risk adjustment score for any member treated of a 
significant health care condition without a hospital admission 
of at least 2 days.
    A risk adjustment method should aid our health care system 
by encouraging efficient use of health care services. It should 
not provide incentives for increased hospitalization, tempting 
plans to shift their limited dollars into much less productive 
types of treatments. That is the main reason we urge revising 
the current plan to allow for full study, refinement and 
testing in a Medicare managed care environment using both in-
patient and ambulatory care.
    The method, not the concept, is faulty because it is 
incomplete and because it will be counterproductive. In 
addition to those flaws though, we face unresolved data and 
systems issues. Perhaps the most serious of them is the Y2K 
problem. As you know, Medicare sees Y2K compliance as important 
enough to suspend a number of initiatives, including some of 
those mandated by Congress, to free resources to deal with Y2K 
systems issues.
    A similar problem exists for plans in attempting to collect 
the data needed to implement a risk adjustment system. It takes 
major systems changes to gather, format and report all of the 
encounter data that will be needed for risk adjustment. We 
still have not received the guidance from HCFA regarding the 
planned October submission of ambulatory encounter data. Plans 
cannot afford to divert Y2K resources this year.
    Finally, at the same time that risk adjustment method 
creates incentives to hospitalized patients and after 2 years 
of 2 percent caps on payment increases, HCFA estimates that 
this proposal will produce 5 year payment reductions for 
Medicare+Choice plans of over $11 billion. Even with the 
proposed phase in, some of the plans that would otherwise be 
capped at 2 percent, could see their year 2000 payment increase 
entirely offset.
    In Florida, for example, the 2 percent cap on revenues has 
applied in every county where our program exists. That means 
that the original 95 percent of AAPCC, I have got maybe one 
more point if I could continue?
    Mr. Bilirakis. Please, please proceed.
    Ms. Discenza. Thank you. Have already been reduced to an 
average of 89 percent. To continue this process and then 
overlay risk adjustment, will continue to widen the gap between 
fee-for-service and Medicare+Choice reimbursement. That will 
bring the reimbursement down to about 85 percent of AAPCC, not 
the 95 percent that we have been most familiar with.
    And in fact if, when the full risk adjustment, even on the 
in-patient is implemented, it could drive some areas of our 
State down to in between 70 and 75 percent. Thank you very 
much.
    [The prepared statement of Judith A. Discenza follows.]
 Prepared Statement of Judith A. Discenza, Vice President, Blue Cross 
                       and Blue Shield of Florida
    Mr. Chairman and members of the subcommittee, I am Judith A. 
Discenza, Vice President and Actuary for Blue Cross and Blue Shield of 
Florida. Our Health Options plan is a large Medicare risk contractor 
with an enrollment of approximately 123,000 Medicare beneficiaries.
    I appreciate the opportunity to testify before the Subcommittee 
today on how HCFA's current approach to implementing risk adjustment 
will heighten already existing threats to the Medicare+Choice (M+C) 
program. As a result of constrained payments and the business risks of 
implementing the regulations, more than 500,000 Medicare beneficiaries 
were affected when health plans in 1998 scaled back their service or 
decided not to participate. The result is that Medicare beneficiaries 
were left with fewer, not more, health plan choices. Because of 
uncertainty related to regulation and reimbursement around 
Medicare+Choice and in large part, uncertainty around the risk 
adjustment methodology, continued volatility in Medicare+Choice is 
likely.
    In light of the existing serious issues surrounding 
Medicare+Choice, we urge delaying the current risk adjustment approach 
and encourage HCFA to work with the industry to study, refine, and test 
a risk adjustment model. While we support efforts to devise and apply 
more effective methods of risk adjustment, we are concerned that HCFA's 
current approach will ultimately cause health plans to exit the program 
or significantly reduce benefits for three reasons:

 First, HCFA's current approach is flawed because it only uses 
        inpatient data;
 Second, HCFA's current approach is fraught with unresolved 
        data and systems questions, all of which will accentuate the 
        problems of implementing an inherently biased risk adjustment 
        methodology; and
 Third, even in the first year of the phase-in, HCFA's current 
        approach could lead to significant proportionate reductions in 
        payments to plans, particularly in areas that have been capped 
        at 2 percent for several years running.
    I shall now address these points in more detail.
 i. the current risk adjustment method is flawed because it relies on 
                             inpatient data
    Currently, HCFA is proposing that a proxy be used for true risk 
assessment. The substitute methodology is based only on inpatient 
hospital data.
    Using only inpatient stays of two days or more will also create an 
incomplete picture of a plan's health risks. For example, any attempt 
to identify diabetics by using hospitalization data will almost 
certainly miss most of them. One would need data on physician visits, 
or better yet, pharmacy data, to identify beneficiaries with diabetes.
    Relying on hospital stays of two or more days means that only those 
seniors who have specific types of hospital stays provide the sole 
means of determining health status for the entire enrolled population. 
Those for whom hospital stays are shortened or avoided are assumed to 
be in better than average health.
    The proxy being implemented also creates a situation in which 
inpatient stays could increase, driving up medical costs. The method 
presents problems because a key objective of managed care is to focus 
on prevention and thereby minimize the frequency of hospitalization. A 
hospital-based risk adjuster provides incentives for increased and 
unnecessary hospitalization and provides disincentives for plans that 
successfully minimize the need for hospitalization.
    A primary goal of the health care system is to provide appropriate 
care at the appropriate time to individuals. Much of the health 
services and clinical research of the past 10 years has focused on 
excess capacity in the health care system and the resulting overuse of 
health care services. Blue Cross and Blue Shield of Florida is 
concerned with overuse of services. An appropriate risk adjustment 
methodology, by providing appropriate reimbursement and incentives, 
will aid our health care system by encouraging efficient use of health 
care services. However, risk adjustment, which provides incentives for 
increased hospitalization, will have the opposite effect.
    The penalty results from the absence of a risk adjustment ``score'' 
for any member treated for a serious condition without a hospital 
admission of two or more days. For example, a member who undergoes an 
angioplasty in an outpatient clinic will not receive a ``score'' for 
having a serious condition, even though his or her care was as 
effective as a fee-for-service (FFS) beneficiary treated as an 
inpatient. The only way that a health plan gets ``credit'' for 
enrolling a high-risk beneficiary is if the beneficiary is admitted to 
a hospital.
    Further heightening the incentive against appropriate care is the 
exclusion of short-stay admissions from risk adjustment scoring. 
Excluding one-day stays from the payment model is questionable. As an 
example, an individual with a particular diagnosis who is enrolled in 
Medicare FFS may be hospitalized for three days. An individual with the 
same diagnosis enrolled in a M+C plan may be hospitalized for only one 
day, then moved to a sub-acute facility (for which no ``score'' is 
credited). When short stay admissions are eliminated from the risk 
adjustment process, M+C plans may be penalized in that they receive no 
additional payment for treating these patients because the patients did 
not have a qualifying inpatient admission.
    An additional problem is the exclusion of low frequency, but 
potentially high-cost, admissions due to sample size limitations. The 
interim risk adjustment method does not include diagnoses that occur 
among fewer than 1,000 Medicare beneficiaries--even if these conditions 
are associated with extraordinary medical costs. Thus, a plan that 
enrolls a beneficiary with one of these rare, high-risk conditions 
would not receive credit for needed care.
    Over the years managed care has capitalized on new technologies and 
advancements in medical treatments to keep people out of the hospital. 
Hospital stays have decreased substantially over this period. Rather 
than move the trend in the opposite direction, we urge revising the 
current risk adjustment plan to allow for full study, refinement, and 
testing in a Medicare managed care environment.
    There are two lessons which we can learn from the current examples 
of systems which use risk adjustment: 1) because they do not cover 
individuals over 65, they do not provide complete models for the 
Medicare+Choice population; and 2) they all either use or recognize the 
need to move to a full encounter model. In Washington State, the 
covered population includes public employees and non-Medicare retirees, 
and uses a risk adjustment model that is based on both inpatient 
hospital and ambulatory data. In Minneapolis, the covered population 
includes those who are less than 65 and also uses a risk adjustment 
model that is based on both inpatient hospital and ambulatory data. In 
California, the covered population includes those less than 65 and 
utilizes an inpatient only risk adjustment model, but recognizes the 
need to move to a full encounter model as data becomes available.
     ii. the current risk adjustment approach contains unresolved 
                        implementation problems
    Compounding the conceptual problems of HCFA's current risk 
adjustment method are unresolved implementation problems that stem 
largely from two issues:

(1) The limited ability that health plans have to validate the risk 
        adjustment calculations or replicate the model; and
(2) Data and systems complications, particularly surrounding year 2000 
        compliance.
Limited Validation/Replication ability
    A major factor in an organization's decision to offer a 
Medicare+Choice plan is the ability of the organization to forecast 
revenues. Health plans face significant uncertainties because it is 
difficult to validate or replicate HCFA's risk adjustment calculations. 
Additionally, because HCFA has not yet disclosed the formulas used for 
components of the risk adjustment process it is impossible to replicate 
the analyses.
    Data and Systems Complications--The most important systems issues 
revolve around the Year 2000 (Y2K) problem. Plans are currently making 
a major effort to ensure that ``Y2K'' does not disrupt services for 
their Medicare and non-Medicare enrollees. Medicare sees Year 2000 
compliance as so important that it has suspended a number of 
initiatives--including initiatives mandated by Congress--to free 
resources to deal with Y2K systems issues. At least 15 HCFA initiatives 
have been delayed or modified due to Y2K concerns:

 The implementation of SNF consolidated billing.
 The implementation of new payment systems for ambulatory 
        surgical centers and hospital outpatient services.
 The implementation of new payment methods for home health 
        agencies.
    The purpose of these actions is to minimize the number of system 
changes that might interfere with the ability of contractors to make 
sure that information systems are ready for the Year 2000 and are able 
to process claims without interruption. A similar problem exists for 
the data needed to implement a risk adjustment system. We have not 
received guidance from HCFA regarding the planned October submission of 
ambulatory encounter data. It is vital to have information such as the 
required fields, implementation instructions, and data format 
requirements with sufficient time for system changes well before the 
data is required to be submitted. The burden of system changes around 
these new requirements comes at a particularly bad time in relation to 
system changes for Y2K
    A related issue is what will happen in the event of a computer 
systems failure. There is a possibility of computer systems failure 
anywhere in the process--i.e., in the transfer of data, in the 
processing of data, etc. Computer failures related to the Year 2000, 
particularly for hospitals that must transfer data to plans or directly 
to fiscal intermediaries are special concerns. As the HCFA 
Administrator noted in recent testimony before the House Ways and Means 
Subcommittee on Health:
        ``Health care providers must be Year 2000 compliant in order to 
        bill us properly and continue to provide high quality care and 
        service to Medicare beneficiaries . . . Our monitoring 
        indicates that some . . . providers could well fail. We are 
        providing assistance to the extent that we are able, but that 
        likely will not be enough. This matter is of urgent concern, 
        and literally grows in importance with each passing day.''
    The current risk adjustment method contains unresolved data and 
information systems issues. For example, it is unclear how plans will 
be able to check for completeness of data arriving at HCFA for risk 
adjustment. Plans will face challenges in checking for data 
completeness--they may have trouble with fiscal intermediaries or with 
the editing process. In addition, plans may have difficulty getting 
data on all services, particularly from capitated providers. The detail 
of the data or the process at this time is insufficient to provide 
confidence that all data are being transmitted, received and used 
appropriately.
            iii. significant reductions in payments to plans
    HCFA estimates that this risk adjustment proposal will produce 
five-year payment reductions for Medicare+Choice plans of $11.2 
billion. Such reductions are likely to reduce the health plan choices 
available to beneficiaries and the benefits that these plans can offer.
    Even with HCFA's proposed phase-in--in which only 10 percent of the 
risk adjustment effect kicks in--some of the plans that are again 
capped at 2 percent could see their year 2000 payment increase entirely 
offset. In 1998 and 1999, virtually all Medicare beneficiaries lived in 
areas that receive 2 percent payment increases; we expect that millions 
of Medicare beneficiaries will again see plans in their areas receive 2 
percent in 2000. HCFA estimates that this risk adjustment method could 
trim as much as 2 percent from some plans'' payments. In addition, all 
Medicare+Choice plans are required to pay a user fee to defray the 
costs of HCFA's informational campaign, which will probably be about 
0.4 percent. Thus, despite acceleration in private sector health care 
costs in 2000, some M+C plans might actually see a decrease if HCFA 
implements this risk adjustment method in 2000.
                             iv. conclusion
    Congress created the Medicare+Choice program in the Balanced Budget 
Act of 1997 (BBA) to expand the types and number of private health 
plans offered to Medicare beneficiaries. However, as a result of 
constrained payments and the business risks of the implementing 
regulations, health plan options and choices have not expanded 
significantly; in fact, they have contracted in many areas. The 
premature adoption of a risk adjustment method will only intensify the 
volatility of the Medicare+Choice program.
    Blue Cross and Blue Shield of Florida believes that a refined risk 
adjuster--without the inherent bias of the inpatient-only approach--can 
further the objective of expanding the choices available to Medicare 
beneficiaries. However, prematurely implementing interim solutions 
could well work against this objective.
    As stated in the beginning of this testimony, we urge delaying the 
current risk adjustment approach to give more time to study, refine, 
and test a valid risk adjustment model in a Medicare managed care 
environment. We look forward to a continued dialogue with HCFA to 
ensure a proper approach to risk adjustment and, hence, the viability 
of the Medicare+Choice program.
    Thank you for the opportunity to speak with you on this important 
issue.

    Mr. Bilirakis. Mr. Schub, is that correct? Naturally, I am 
going to get it wrong.
    Please proceed.

                    STATEMENT OF CRAIG SCHUB

    Mr. Schub. Thank you, Mr. Chairman and members of the 
subcommittee. Thank you for this opportunity to comment on the 
issues related to the implementation of the Medicare+Choice 
risk adjuster provisions of the Balanced Budget Act. I am Craig 
Schub, President of Secure Horizons USA. That is PacifiCare's 
health plan for seniors. PacifiCare provides health coverage 
for 3.5 million individuals in 10 States.
    Through Secure Horizons we serve nearly 1 million Medicare 
beneficiaries, the largest Medicare enrollment nationwide. The 
preceding Panelists and those to come will detail the technical 
and methodological problems that plague the risk adjusters and 
threaten the goals of the Medicare Risk Program, but I would 
like to focus my remarks on the cumulative impact of these 
problems on providers and beneficiaries.
    Given our experience in 1998 and 1999, where we saw an 
exodus from the Medicare+Choice Program, PacifiCare is very 
concerned that providers leaving networks and health plans, 
exiting from Medicare+Choice, could continue and become 
particularly acute in mid 2000 without corrective action. This 
will leave beneficiaries with fewer choices for coverage and 
greater out-of-pocket cost. Our Medicare Provider Networks have 
become fragile in some areas as payment is stretched thinner 
and thinner.
    We have also experienced difficulty attracting new 
providers to our Medicare Networks. The reason, the lower 
payment differential between Medicare+Choice and our prime 
competitor, which is the fee-for-service system. It is 
increasing. The proposed risk adjuster further widens the 
differential by adjusting payments, often already discounted 
payment schedule that is currently less than 95 percent.
    And I understand that is different as has been previously 
stated today. HCFA asserts that the proposed risk adjuster 
merely affects health plans, not the providers and 
beneficiaries. It ignores the latest and predominant provider 
models and contracting methods. Namely, the health plans 
contract with local provider groups on a percentage of premium 
capitation basis. Over the preceding years, this model had 
expanded the provider choices for beneficiaries.
    It has given physicians autonomy in treating their patients 
within a competitive and accountable delivery system. 
PacifiCare contracts with over 350 medical groups that 
represent over 66,000 physicians and hospitals. And we pay them 
a contractually defined percentage of the per member premium. 
PacifiCare estimates that in the first year of implementation, 
risk adjusters will reduce the cost to the company of up to $64 
million. But that money otherwise would have gone directly to 
providers, paid for health prevention programs, such as those 
that identify, that provide mammography screening for early 
identification of breast cancer, diabetes management and other 
quality management programs.
    Even more problematic is the fact that reduced provider 
payment will be the direct result of not having hospitalized 
more of their patients in lieu of more cost-effective 
alternatives. The end result is that providers as well the plan 
are paid less than is warranted by the benefits and the actual 
severity of the illness that the plan carries.
    This clearly affects the willingness of providers to 
participate in Medicare+Choice Plans. But most importantly, it 
is the beneficiary who is going to experience reductions. Where 
no providers will contract at the premium rate paid by 
Medicare+Choice, no choice exists. And for seniors who are 
enrolled in a plan that is no longer available, benefits they 
once received at no cost must now be paid for through expensive 
Medigap Plans or out of their own pockets.
    Seniors that can and do remain in a Medicare+Choice may see 
their benefits reduced or co-payments increased. The 
beneficiary impact is especially troublesome when one considers 
that a larger percentage of lower and middle income 
beneficiaries enroll in Medicare+Choice Plans. Additionally, 
the nature of patients' specific risk adjustment raises the 
questions of privacy that I do not believe have been seriously 
explored.
    Today seniors are satisfied getting more benefits and 
better care from HMO's as demonstrated in even recent HCFA 
studies. That is why, in an effort to not further jeopardize 
the choices envisioned by the BBA, PacifiCare proposes a delay 
in the implementation of the risk adjusters until we can 
achieve the following three objectives. One, a fair and sound 
methodology is developed. Two, adequate HCFA information 
systems are in place. And three, a stable and predictable and 
timely process is established for determining risk adjuster 
payment rates. Thank you.
    [The prepared statement of Craig Schub follows.]
 Prepared Statement of Craig Schub, President, Secure Horizons USA, on 
                  Behalf of PacifiCare Health Systems
                            i. introduction
    Mr. Chairman and members of the Subcommittee, thank you for this 
opportunity to comment on issues related to the implementation of the 
Medicare+Choice risk adjuster provisions of the Balanced Budget Act of 
1997 (BBA). I am Craig Schub, President of Secure Horizons USA, 
PacifiCare Health Systems' Medicare plan. PacifiCare is based in Santa 
Ana, California and provides health coverage for more than 3.5 million 
individuals in ten states--Arizona, California, Colorado, Kentucky, 
Nevada, Ohio, Oklahoma, Oregon, Texas, and Washington--and the 
territory of Guam. Through Secure Horizons, we enroll nearly one 
million Medicare beneficiaries--the largest Medicare enrollment 
nationwide.
    With the passage of the BBA, Congress created the new 
Medicare+Choice program to spur competition, expand health care choices 
for seniors, and extend the solvency of the Medicare Trust Fund. 
PacifiCare was, and continues to be, pleased to have a significant role 
in supporting these goals. However, Congress' intent simply will not be 
realized if the Medicare+Choice program is permitted to stay on its 
current course. Unless Congress takes corrective action, the number of 
providers who refuse to contract with Medicare+Choice plans will 
increase, and health plan withdrawals will continue at a more rapid 
pace. Beneficiaries will be left with fewer choices for health 
coverage, disruptions due to changes in the availability of providers, 
greater out-of-pocket costs, and higher Medigap premiums for those who 
are forced to return to the traditional Medicare fee-for-service 
program.
    The risk adjuster, as proposed by HCFA, is one of the most 
troubling factors that threaten the stability of the Medicare+Choice 
program. It poses two fundamental problems: 1) it exacerbates the 
cumulative impact of payment reductions to Medicare+Choice plans; and 
2) it creates unworkable and burdensome administrative processes that 
increase plan costs and raise the likelihood of inaccurate payment. 
Taken together, these problems will widen the growing disparity between 
payment to Medicare+Choice plans and reimbursement under fee-for-
service. This will make it difficult for Medicare+Choice plans to 
operate in certain markets and to maintain the level of benefits and 
services to which beneficiaries have become accustomed. It is 
unrealistic for HCFA or Congress to assume that a disparity of this 
magnitude will have no adverse impact on providers, delivery of 
services, or health care options for seniors.
                        ii. the payment backdrop
    The BBA established a new payment formula for Medicare+Choice 
plans. Plans receive the highest of a minimum payment floor, a phased-
in blend of national and local rates, or an annual minimum two percent 
payment update. The BBA also limited the annual rate of growth in 
Medicare+Choice to Medicare fee-for-service growth minus 0.8 percent in 
1998 and fee-for-service growth minus 0.5 percent from 1999 to 2002. 
These provisions were estimated to achieve $22.5 billion in budgetary 
savings over five years.
    In fiscal years 1998 and 1999, HCFA assessed a $95 million user fee 
on Medicare+Choice plans to fund the education campaign for 100 percent 
of the Medicare beneficiaries, even though only approximately 15 
percent of the Medicare population are in Medicare+Choice plans. 
Depending upon the year, this user fee reduced the minimum update by 
18%-25% for many plans. This is essentially an additional tax imposed 
on the plans. HCFA is asking for authority to assess a fee of $150 
million in FY2000, despite the fact that the BBA only authorizes a $100 
million user fee for 2000.
    It is against this backdrop of significant payment reductions that 
the risk adjuster is imposed. According to HCFA's own calculations, the 
risk adjuster, which will be phased in beginning in January 2000, will 
reduce payments to Medicare+Choice plans by an additional $11.2 billion 
(or 7.6%).
           iii. key methodological flaws of the risk adjuster
A. Ignores Budget Neutrality
    By providing for implementation of a risk adjuster in BBA, Congress 
intended to improve payment accuracy by paying plans less to take care 
of healthier individuals and more to care for sicker individuals. The 
BBA included a budget neutrality requirement that applies to 
Medicare+Choice payment provisions, including the risk adjuster. HCFA, 
however, refuses to implement the risk adjuster in a budget-neutral 
manner. Its methodology is designed to extract additional savings 
($11.2 billion) from Medicare+Choice plans in contravention of the 
budget agreement.
B. Improperly Relies on Inpatient Data Only
    HCFA's initial risk adjuster model attempts to correlate health 
status with individual patient diagnoses based only on inpatient 
admissions. This ignores the fact that advances in medicine provide for 
treatment of many serious diseases in outpatient settings. For example, 
the care for a cancer patient has changed dramatically from inpatient-
based to outpatient-based with better results. Many cancer patients 
require few, if any, hospitalizations, but they do require costly 
medications and services. Yet, under the proposed risk adjuster, they 
would be counted as ``healthy'' patients, and their plans and providers 
would not receive an appropriate adjustment to cover their expensive 
treatments.
    Moreover, the HCFA model establishes a financial incentive to 
hospitalize beneficiaries. Although this is unlikely to affect the 
manner in which the vast majority of health plans deliver care, it does 
create a perverse incentive that is not in the best interests of the 
beneficiary or the ultimate payor--the federal government.
    We do not believe it was Congress' intent to penalize health plans 
for providing patients with the services most appropriate for their 
conditions. Nor is it good public policy to incentivize costly and 
inappropriate hospitalizations. In order for a risk adjuster model to 
differentiate between good medical management and health status, it 
must include diagnoses of beneficiaries in the outpatient and 
ambulatory settings, as well as the inpatient setting.
C. Excludes One-Day Hospital Stays
    The HCFA model improperly excludes encounter data from one-day 
hospital stays. As with the reliance on inpatient data, exclusion of 
one-day hospitalizations creates perverse incentives. It encourages 
providers to lengthen hospitalizations to two days which would not be 
desirable from a quality or efficiency perspective.
D. Ignores Investments in Initiatives to Improve Member Health
    Health plans typically engage in numerous efforts designed to 
improve the health of its members, such as preventive services, disease 
management, wellness programs, chronic care initiatives, and quality 
measurement and reporting. To the extent that these programs are 
successful in improving health outcomes (e.g., preventing a heart 
attack), the health plan will receive lower payments from HCFA. Again, 
the methodology results in a bias against health plans. The costs 
associated with these quality-of-care programs are real, but because 
they are invisible, plan revenue ultimately will decrease. 
Consequently, plans will be less able to continue to build upon these 
innovations in health care management and delivery.
E. Excludes an Institutional Adjustment
    By excluding an institutional adjustment from the risk adjuster 
methodology, HCFA will be overpaying for institutionalized 
beneficiaries and underpaying for all others. Since health plans tend 
to enroll fewer institutionalized members, the result is a negative 
bias in Medicare+Choice payments.
F. Misstates Cost in the Year of Death
    Providers who incur significant costs in caring for a beneficiary 
in the last year of life will not get paid for these costs under HCFA's 
proposed methodology. This is because the payment will not be 
determined until eighteen months after the death in many cases. Unless 
a beneficiary is still in the program at the time of payment, the 
payment will not be directed to the plan in which he or she was 
enrolled.
                         iv. key systems issues
A. HCFA's Information Systems are Insufficient and in Some Cases, 
        Inoperable
    HCFA's information systems are unable to accept, process, or 
manipulate correctly much of the data that health plans already have 
submitted. For example, a system change implemented in October 1998 has 
prevented HCFA from tracking beneficiaries who have moved from plan to 
plan, thus understating inpatient costs for those members. The problem 
is so acute that despite its statutory duty to provide plans with 
payment estimates for January 1, 2000, by March 1st of this year, HCFA 
has informed plans that they should rely on their own estimates for 
purposes of developing their benefit packages. It is our understanding 
from HCFA that hospitalizations of up to one-third of PacifiCare's 
members in California (added as a result of a recent merger) may not be 
included in its risk adjustment payment calculation due to problems 
with HCFA's information systems and processing of plan encounter data.
    HCFA is struggling to meet the challenges of Year 2000 compliance, 
and this is adversely affecting its ability to properly implement the 
risk adjuster. The situation is not likely to improve in the near 
future. This raises serious questions about the integrity of the data 
upon which HCFA relies and the accuracy of the resulting payment 
adjustments. Prior to using a data set for the development of payment 
rates, HCFA has an obligation to assure itself and those who will be 
paid under the system that the data is of the highest integrity. Tests 
should be performed to challenge the validity of the data in each of 
the key variables used in the payment process. The data also should be 
reconciled to other sources within HCFA to assure that it is complete 
and accurate. Moreover, HCFA has a fiduciary as well as administrative 
responsibility to advise Congress on systems that do or do not work 
when advancing from theory to operations, particularly when something 
as fundamental as payment for Medicare services is at stake. It is 
unclear whether HCFA has undertaken these critical verification and 
disclosure functions.
B. HCFA's Data Requirements Impose Excessive Burdens and Costs on Plans
    The HCFA risk adjuster data requirements are extraordinary, forcing 
plans to divert resources away from health care services for members in 
order to pay for expensive information systems and operations. To date, 
plans have not been provided sufficiently detailed information to 
reconcile data records or ensure accuracy. As a result, plans cannot 
determine whether or not HCFA will pay appropriately.
                v. impact on providers and beneficiaries
    HCFA's assumption that the proposed risk adjuster merely affects 
health plans ignores the reality of the latest provider models and 
contracting methods--namely, contracting with local provider groups on 
a ``percent of premium capitation'' basis. Formative work on 
appropriate plan payment levels and diagnostic cost groups were based 
on less sophisticated delivery models as opposed to those that are 
commonly in place today in mature managed care markets. While more 
traditional provider models survive, the most rapid and stable growth 
in managed care has been built on contracting with local providers.
    If inpatient diagnoses under-represent the true illness burden of 
many managed care seniors, then the providers who care for them 
necessarily feel the impact of the proposed risk adjuster. PacifiCare 
contracts with over 350 medical groups and hospitals and pays them a 
contractually defined percentage of the per-beneficiary premium. 
PacifiCare estimates that in the first year of implementation, risk 
adjuster reductions will cost the company up to $64 million. 
Approximately $54 million of this amount will be borne by its 
providers. The end result is that the providers, as well as the plan, 
are paid less than is warranted by the actual severity of the illness 
burden of the plan's members. This clearly affects the willingness of 
providers to participate in Medicare+Choice plans.
    Reduced Medicare+Choice payments already have adversely affected 
PacifiCare's ability to renegotiate provider contracts; implementation 
of the proposed risk adjuster will exacerbate the situation. For 
example, in late 1998, many providers concluded that Medicare+Choice 
payments for 1999 were inadequate to support the continued delivery of 
quality health care services. They opted to return to traditional 
Medicare because fee-for-service payment was more lucrative. In total, 
PacifiCare exited 25 counties in five states, affecting 17,632 
beneficiaries. And we were not alone. For 1999, nearly 100 plans 
withdrew from some of their Medicare+Choice markets, affecting 500,000 
beneficiaries.
    By encouraging the migration of expensive patients back to fee-for-
service Medicare, the risk adjuster defeats Congress' stated purpose of 
ensuring more choice, competition, and savings through the efficiencies 
and quality management of Medicare+Choice plans. Seniors also 
experience a financial burden. Benefits they once received at no cost 
must now be paid for through expensive Medigap plans or out of their 
own pockets. Seniors that do remain in a Medicare+Choice plan may see 
their benefits reduced and/or their co-payments increased. The 
beneficiary impact is especially troublesome when one considers that 
larger percentages of lower and middle income beneficiaries enroll in 
Medicare+Choice plans. Predictable and accurate payments are essential 
to patient protection, provider financial stability, and the ability of 
health plans to serve more markets.
                             vi. conclusion
    There are numerous other BBA implementation problems that impact 
reimbursement and Medicare+Choice plan operations. We have attached as 
an exhibit to this testimony a brief description of some of these 
issues. The risk adjuster must be considered in the context of all of 
the implementation problems because their cumulative effect seriously 
threatens the viability of the Medicare+Choice program.
    In addition to the specific recommendations mentioned above, 
PacifiCare proposes a further delay in implementation of the risk 
adjuster until the following conditions are met:

1) A fair methodology is developed;
2) Adequate HCFA information systems are in place to ensure complete 
        and accurate data; and
3) A stable, predictable, and timely process is established for 
        determining risk-adjusted payment rates in a budget-neutral 
        manner.
    PacifiCare appreciates this opportunity to present this testimony 
to the Subcommittee. We look forward to continuing to work with 
Congress and HCFA to ensure the successful implementation of the 
Medicare+Choice program.

    Mr. Bilirakis. Thank you, sir.
    Ms. Margulis.

                  STATEMENT OF HEIDI MARGULIS

    Ms. Margulis. Thank you, Mr. Chairman. In 1997, 
Congressional leaders had a vision. To deliver more health care 
benefits to Medicare beneficiaries at lower cost by providing 
them with the same kinds of private health care choices you and 
I have. Mr. Chairman, members of the committee, I am Heidi 
Margulis, I represent Humana, a company who covers 500,000 
Medicare+Choice beneficiaries.
    Beneficiaries for whom we are privileged and proud to be 
providing more benefits, including prescription drug coverage, 
preventive services and disease management programs that are 
demonstrably improving the health and well-being of those 
seniors.
    We support your vision and the goals of the BBA and are 
here to discuss how the proposed risk adjustment payment 
methodology affects Medicare beneficiaries blurs the vision you 
had in 1997.
    Let me state for the record, Humana supports risk 
adjustment done correctly. I have three key messages today 
about the risk adjustment methodology. First, HCFA should adopt 
a risk adjustment methodology that reflects the perspective 
health care needs of patients. Second, HCFA's current risk 
adjustment proposal is based on insufficient data that will 
cause seniors harm and should be re-evaluated prior to 
implementation.
    And last, Congress and HCFA should delay this risk 
adjustment proposal and set a course to implementing one with 
adequate and supportable data. The new risk adjustment proposal 
which reduces payments to plans by billions more than you 
intended will have significant consequences on the availability 
of M+C Plans for seniors. This proposed payment reduction comes 
on the heels of three other significant payment reductions, 
both intended and unintended; an 8-percent reduction relative 
to fee-for-service, payment reductions due to the removal of 
graduate medical education, and the payment of user fees for 
beneficiary information materials.
    Risk adjustment methods can be implemented either to save 
money or in a budget neutral manner. The method HCFA plans to 
use does indeed save money for Medicare, but it does so by 
taking the money out of the pockets of beneficiaries by 
unnecessarily reducing payments and undermining seniors access 
to choice.
    The combination of risk adjustment and these payment 
reductions together may lead to more health plans withdrawing 
from the program leaving some seniors with fewer or in some 
cases, no Medicare HMO choices. I don't believe that was your 
intent and I urge you to evaluate the current proposal for risk 
adjustment. There are reliable and accurate ways to develop 
risk adjusters that correctly reflect the future health care 
costs of beneficiaries. Humana previously worked with the State 
of California in developing risk adjusters for the health 
insurance plan of California, the HIPC.
    Experience taught us that cooperation, communication and a 
simulation for any major payment change, worked for both 
government and beneficiaries. We have been involved in risk 
adjustment work group discussions with HCFA for some time and 
have shared perspectives on the effect of various risk 
adjustment models and how the private sector risk adjusts. We 
believe that together we can develop a workable risk adjustment 
methodology to ensure that payments to plans are accurate and 
truly reflect the future health care costs of our members.
    We need time and HCFA's continued cooperation and 
understanding of what will and will not practically work in the 
market place and ask for your assistance in that. In my written 
testimony and others, you have heard about the complications 
caused by HCFA's proposed methodology. Let me highlight just 
one. Current model relies exclusively on in-patient hospital 
data. No data on services provided outside the hospital or in 
other institutional settings are used.
    Therefore it rewards hospitalizing patients, a trend that 
has dramatically changed over the past several years. Private 
health plans work to keep people out of the hospital by 
stressing prevention and the best practices of disease 
management. As a Humana example, we are recognized nationally 
as a leader in disease management programs from diabetes to 
complex chronic conditions to chronic heart failure.
    As part of these programs members collaborate with their 
caregiver to coordinate care, hopefully avoiding 
hospitalizations. Patients like these programs and health 
outcomes are measurably improved. These trends should be the 
mainstay for the Medicare+Choice Program as well. The 
methodology proposed by HCFA penalizes plans that have these 
disease management programs because there will be fewer 
hospitalizations.
    Disease management programs aren't free, we bear the cost 
of these innovative treatment programs. Based on our 
experienced in our congestive heart failure program, we expect 
to reduce an estimated 2,300 hospital admissions for our 4,000 
beneficiaries enrolled in this program. Under the new 
methodology, we will lose $12,000 per admission, a $28 million 
loss which could translate into--may I, I am close to the end.
    Mr. Bilirakis. Please continue.
    Ms. Margulis. [continuing] In prescription drug coverage 
for all seniors in a market. Congress and HCFA should take 
additional time to determine a risk adjustment method. I urge 
you to delay the implementation of this proposed risk 
adjustment methodology for at least 1 year and stop the phase 
in of a flawed system. Become an active participant in helping 
us get this done correctly for the 6 million seniors who have 
made this choice and for those who wish to make this choice. 
Thank you.
    [The prepared statement of Heidi Margulis follows.]
  Prepared Statement of Heidi Margulis, Vice President of Government 
                         Affairs, Humana, Inc.
Introduction
    Good morning, Mr. Chairman. I am Heidi Margulis, Vice President of 
Government Affairs at Humana, Inc. I am pleased to be here this morning 
to talk with you about the effects of risk adjustment on 
Medicare+Choice organizations. Humana has been an active participant in 
the Medicare program since the mid 1980's--we currently provide 
coverage for over 500,000 Medicare+Choice enrollees and are committed 
to continued participation in this program. We have also been active in 
the discussions that have occurred between managed care plans and HCFA 
on the topic of risk adjustment.
    One of HCFA's goals in implementing a risk adjustment system 
\1\,\2\ for Medicare+Choice is to ensure that Medicare 
payments to health plans are accurate and that they reflect the health 
care needs of enrolled members. We believe that this is a laudable goal 
and are committed to working with HCFA and other interested parties in 
this endeavor. Payments that are risk adjusted based on health care 
diagnostic data appear to be, on the surface, an improvement over the 
current methodology, but only if designed fairly and implemented 
correctly. My testimony addresses the issues that Humana has identified 
and the potential effects of risk adjustment on Humana's 500,000 
enrollees, and the Medicare+Choice program.
---------------------------------------------------------------------------
    \1\ Iezzoni, LI, et al. ``Paying more fairly for capitated care,'' 
New England Journal of Medicine, 339(26), December 24, 1998, pp. 1933-
38.
    \2\ Medicare+Choice Rates--45 Day Notice, http://www.hcfa.gov/
stats/hmorates/45d1999/45d.htm.
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Risk Assessment and Risk Adjustment
    It may be helpful to first describe the difference between risk 
assessment and risk adjustment. Risk assessment is a means of 
determining objectively how much an individual or a subgroup differs in 
cost from the average of the entire group. Individuals who are 
projected to incur more costs for medical services are considered 
relatively high risks (and, thus, have higher risk scores) than those 
who are expected to incur lower costs.\3\ Risk assessment can be 
accomplished using only demographic data, with diagnostic information, 
or through use of health status surveys.
---------------------------------------------------------------------------
    \3\ See ``Health Risk Assessment and Health Risk Adjustment, 
Crucial Elements in Effective Health Care Reform,'' Monograph Number 
One, American Academy of Actuaries, May 1993 for a more detailed 
explanation.
---------------------------------------------------------------------------
    Risk adjustment may be called ``health-based payment.'' It is a 
process that can be used to determine the amount of funds that should 
be allocated to account for the differences in risk characteristics. 
While all covered individuals should be allocated a ``base'' or minimum 
payment, only for those enrollees with high risk characteristics should 
a health plan receive additional risk adjustment transfers.
Brief Actuarial History of Risk Adjustment
    Health plan actuaries have been using various forms of risk 
adjustment for years for pricing premiums for health insurance 
coverage. Age/sex rating, experience rating, and tier rating have been 
components of the methods used to determine premiums to be charged for 
a specific category of individuals. The insurance industry's practice 
of health underwriting has been based on the ability to appropriately 
project next year's costs based on current claims experience (for large 
employer groups), or on past medical conditions along with age and sex 
(for individuals), or on a combination (for small employer groups). 
This type of cost and illness information has been used in a way that 
is generally similar to how the new health risk adjustment methods 
operate.
    Humana has had actual experience with some of the early adopters of 
risk adjustment methods. One of the best-designed early ``natural 
experiments'' was the Health Insurance Plan for California (the 
``HIPC''), a small group purchasing pool.\4\ The HIPC implemented an 
inpatient-data risk adjuster for the 1996/97 contract year, after two 
years of development and simulation. Humana's small employer division, 
Employers Health Insurance, participated in the HIPC as one of two 
original PPOs and was actively involved in the design and 
implementation of the HIPC's risk adjustment method. Humana and the 
HIPC learned several lessons as we progressed from the ``good idea'' 
stage to full implementation, including:
---------------------------------------------------------------------------
    \4\ Bertko, J. and Hunt, S. ``Case Study: The Health Insurance Plan 
of California,'' Inquiry, 1998, 35:148-153.

 A full and open process between vendors (health plans) and the 
        payment agency (the HIPC's parent, California's Managed Risk 
        Medical Insurance Board) was very helpful in designing a 
        practical method;
 Any new data collection process will have flaws which only 
        ``trial and error'' can uncover and which can then be 
        corrected; and
 A simulation period for a brand new payment method is 
        invaluable for learning the details of the approach and for 
        evaluating the ``real world'' impact (on premiums and 
        behavior).
What HCFA Did--Right and Wrong
    I will turn now to a few specific comments about the proposed risk 
adjustment system. In its efforts to implement a risk adjustment 
system, HCFA has considered and responded to several critical issues. 
First, HCFA realized that given a January 1, 2000 implementation date, 
the use of inpatient data (while imperfect) is the only practical 
option. Second, HCFA has adopted a prospective payment method, using a 
6-month data lag. This means that payments to a health plan will be 
made based on information that at most is between 6 and 18 months old. 
Third, HCFA plans to implement the system using a ``back-loaded'' 
transition approach, somewhat limiting the degree to which health plan 
payments are affected in the early years of the transition period.
    The system that HCFA plans to implement uses the Principal 
Inpatient Diagnostic Cost Group (``PIP-DCG'') model, which groups 
diagnostic data according to expected cost.\5\ This model has been 
extensively tested on Medicare fee-for-service data alone. However, it 
relies exclusively on inpatient hospital data; no data on services 
provided outside the hospital are used. There are several shortcomings 
to a system that uses only inpatient data, including a payment bias 
against Medicare+Choice plans.
---------------------------------------------------------------------------
    \5\ Ellis, RP, Pope, GC, Iezzoni, LI, et al. ``Diagnosis-based risk 
adjustment for Medicare capitation payments,'' Health Care Financing 
Review,'' 17(3), 1996, pp. 101-28.
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    Many managed care organizations have implemented programs to treat 
patients on an outpatient basis when appropriate. For example, Humana 
has developed several disease management programs for our enrollees--
ranging from asthma to diabetes to complex chronic conditions to 
congestive heart failure. As part of these programs, our health plan 
enrollees collaborate with their caregivers to manage their care, often 
eliminating or shortening inpatient stays and improving health status. 
High levels of patient satisfaction are associated with these programs 
as well as reduced costs. When health plans implement programs that 
manage care and keep enrollees out of the hospital, they bear the full 
cost of those programs. Without such programs, enrollees would be more 
likely to be hospitalized, an outcome that is costly and unnecessary as 
the hospital may no longer be the most effective setting for such care. 
The PIP-DCG risk adjustment method penalizes plans that have such 
disease management systems because such plans will have fewer inpatient 
admissions.
    The proposed risk adjustment system also excludes ``short'' 
hospital stays, those that are shorter than two days. In so doing, HCFA 
again penalizes those health plans that are able to provide treatment 
during a short inpatient stay. As an example, an individual with a 
particular diagnosis who is enrolled in Medicare FFS must be 
hospitalized for three days prior to discharge to a sub-acute care 
facility. An individual with the same diagnosis enrolled in a 
Medicare+Choice plan may be hospitalized for only one day, then moved 
to a sub-acute facility (which is not part of the inpatient hospital). 
The Medicare+Choice plan would not receive any additional payment for 
the treatment of this individual, since the patient did not have a 
qualifying inpatient admission.
    There is a similar problem for conditions that can be treated 
equally well on an inpatient or outpatient basis--so called 
``discretionary diagnoses.'' In these cases, health plans are only paid 
if the condition is treated on an inpatient basis. While the PIP-DCG 
system does make some effort to exclude such cases,\6\ some 
discretionary diagnoses are still included on the final list of 
diagnostic groups that lead to additional payment above the base 
payment amount such as many types of congestive heart failure. It is 
unlikely that there will be a large scale effort on the part of health 
plans to move care back into the hospital to increase payment. However, 
a very real potential effect is that health plans will be less likely 
to be innovative--either to invest in new disease management programs 
or in new technologies that would allow patients to be treated on an 
outpatient basis.
---------------------------------------------------------------------------
    \6\ Iezzoni, LI, et al. ``Paying more fairly for capitated care.''
---------------------------------------------------------------------------
    There are also technical shortcomings to the proposed risk 
adjustment system. First, there is a difference in the time period used 
to calibrate the PIP-DCG model and what will actually be used to pay 
health plans. The current model was developed using data from one 
calendar year to predict expenses for the immediate next calendar year 
(i.e., calendar 1995 data were used to predict calendar year 1996 
expenses). In HCFA's 45-day notice,\7\ a 6-month time lag for the 
actual implementation of the PIP-DCG model is described--this model 
will use data from a 12-month period (July 1-June 30) to predict 
expenses for the year beginning six months later (i.e., data from July 
1, 1998-June 30, 1999 will be used to predict year 2000 expenses) using 
the original, ``no lag'' risk weights. A more appropriate technical 
solution would be for a different set of risk weights to be used; these 
weights would be calibrated to incorporate the 6-month time lag.
---------------------------------------------------------------------------
    \7\ Medicare+Choice Rates--45 Day Notice, http://www.hcfa.gov/
stats/hmorates/45d1999/45d.htm.
---------------------------------------------------------------------------
    Another technical issue relates to the criteria that were used to 
determine whether a particular diagnosis would be included in the group 
of diagnoses that lead to increased payments for health plans. To be 
included, at least 1,000 beneficiaries in the original sample had to 
have the diagnosis. Such a decision rule helps to stabilize payments in 
the model; however, by setting a minimum threshold, admissions with 
very high costs may be excluded and plans will not receive any 
additional payment for these very high cost cases.
Risk Adjustment Implementation Issues
    There are several important issues related to the implementation of 
the proposed risk adjustment system. One of the reasons we are 
reluctant to have risk adjusted payments implemented this year is that 
we have received insufficient information from HCFA on the details of 
the risk adjustment process. For plans to have confidence in the risk 
adjustment system that HCFA implements, we must be able to understand 
the system and be able to replicate HCFA's results. To this end, we 
believe that HCFA must disclose all of the formulas used in the risk 
adjustment process--we cannot replicate results given with the 
information we have received thus far.
    To date, HCFA has not disclosed all of the formulas used for the 
various components of the risk adjustment process even though plans 
have asked for this information for several months. As one example, a 
re-scaling factor is used to transform the current AAPCC county 
ratebook into the new risk county ratebook that forms the basis for 
calculating an individual's risk-adjusted payment. Thus far, HCFA has 
only provided a brief description of this formula--not all the 
components of the formula. Months ago, the American Association of 
Health Plans (AAHP), the industry's trade association, and others 
submitted to HCFA a list of desired information that would allow plans 
to make the same kinds of calculations that HCFA is making. A summary 
of the types of information needed is included in one of the 
attachments to this testimony.
    HCFA has indicated that when it does release data to the health 
plans on March 1st, it will do so on a summary basis. Again, this will 
not allow plans to compare their own results with those of HCFA--the 
plans need individual data to determine whether they are using the same 
data and whether they are applying the risk adjustment technology 
appropriately. We understand that HCFA has faced a daunting time 
schedule in attempting to implement a risk adjustment system for 
January 1, 2000 and believe that they could do more to disclose 
relevant information to health plans if they had more time.
    Many of the key implementation issues relate to the gathering, 
transmission, and analysis of data. Each health plan submits its data 
to a fiscal intermediary, which in turn submits the data to HCFA. To 
date, plans have not been able to confirm that the data submitted to 
HCFA are being transmitted, received and used correctly or whether 
there are other systems' issues HCFA has identified. If there are HCFA 
or fiscal intermediary systems problems that need to be fixed, plans 
are concerned those fixes may be delayed due to Year 2000 compliance 
issues. There may be as yet undetected problems in the data transfer 
process, potentially leading to incorrect payments to plans.
    While Humana is generally pleased with the performance of its 
Fiscal Intermediary, Palmetto Government Benefit Administrators, we 
have had to work out several time-consuming processes to understand the 
nature of the Medicare FFS edit ``error messages'' that became part of 
the process. This happens, we believe, because HCFA is forcing the 
``square peg'' of managed care data into the ``round hole'' of a Fiscal 
Intermediary's FFS information system. Here are just a few of our 
issues:

 Inability to obtain a relevant list of error codes. If we had 
        obtained a list with the coding logic that creates an error 
        message, we would correct the problems at the source of the 
        error and avoid further submissions with these so-called 
        errors.
 The Fiscal Intermediary provides errors grouped in an almost 
        useless format--by provider. We need to have a more ``user-
        friendly'' or managed care-relevant error report--such as 
        returning our own list with the error reason annotated in the 
        same format.
 There are a lot of claims--Beginning March 1, we will be 
        submitting encounter data in batches of 11,000 every two 
        weeks--because of capacity constraints at the Fiscal 
        Intermediary. Humana is being forced to build a special program 
        just to organize the error list electronically to allow 
        reconciliation and correction.
    The HCFA contractor that combines all of the Fiscal Intermediaries' 
claims has its own turnaround and through-put issues. As reported to me 
by our staff, error edits can take between one day and three weeks for 
each batch. The process of informing us of errors is incredibly 
inefficient, as demonstrated by the following:

 The HCFA contractor ``kicks out'' one error at a time on a 
        claim and then returns it. When corrected for that specific 
        error, the contractor may then find another error on the same 
        claim and return it again. This process is repeated until all 
        codes on a claim have been accepted.
 Each separate error requires a new claim line, which then 
        clogs up our claim system with unnecessary claims history.
 We cannot obtain the logic behind the edits to identify and 
        fix the source of the errors and are forced to continue this 
        awkward, time-consuming, and costly process. This is just one 
        example of where resources are used for unnecessary 
        administrative costs rather than for patient care.
    There are related problems with HCFA's own system (Common Working 
File). We received a 22,000-page report to be reconciled. Although most 
of these claims were accepted, we understand that some of the remainder 
may have ``disappeared.''
    These are just a few examples of our frustrations and concerns 
about the start-up phase of this new data collection process. While 
HCFA has made a valiant attempt to prepare for start-up, there are 
still too many unresolved issues. Among them, our Chief Financial 
Officer must ``attest'' to the accuracy of our data submissions. He 
takes this responsibility seriously and is greatly concerned about the 
remaining problems. Second, any loss of data unfairly penalizes health 
plans since most hospital admissions create additional payments for 
sick members. Missing data means reduced payments in 2000. Each 
qualifying missed claim represents approximately $1,900 to $26,500.
Phase-In of Risk Adjustment
    HCFA included a phase-in schedule for the risk adjustment system. A 
transition approach has a long history in the Medicare program--such 
rules were used for the implementation of Medicare's Prospective 
Payment System (PPS) and Resource-Based Relative Value System (RBRVS). 
During the transition for PPS, for example, hospitals received a blend 
of a hospital-specific payment rate and a Federal payment rate. In the 
first year of the transition, hospital payments were more heavily 
weighted toward the hospital's own costs, while toward the end of the 
transition, hospital payments were more heavily weighted toward the 
Federal payment rate.\8\
---------------------------------------------------------------------------
    \8\ 1986 Annual Report to Congress: Impact of the Medicare Hospital 
Prospective Payment System, Health Care Financing Administration, May 
1989.
---------------------------------------------------------------------------
Effects of Risk Adjustment
    As many Subcommittee Members and staff may know from a HCFA 
briefing on January 14, 1999, preliminary estimates by HCFA analysts 
indicate that HCFA's fully phased-in PIP-DCG risk adjuster would reduce 
payments to health plans for the 195 plans that were measured.\9\ It 
must be noted that a risk adjustment method can be designed to be 
budget-neutral; HCFA, however, has released a method that apparently is 
intended to reduce payments to health plans even further than intended 
by Congress.
---------------------------------------------------------------------------
    \9\ Presentation to Congressional staff by the Health Care 
Financing Administration on January 14, 1999.
---------------------------------------------------------------------------
    There are two main issues related to the impact on health plans: 
(1) Should the new risk adjuster be budget neutral? and (2) Are the 
results of PIP-DCG risk adjustment method biased because of the 
reliance on only inpatient data?
    Although HCFA analysts and other researchers \10\ have previously 
submitted studies using Medicare Fee For Service data indicating 
concerns about overpayment of health plans in excess of 10%, HCFA's own 
impact assessment using actual preliminary health plan data showed a 
payment reduction of 7.6% for a typical month. Because this analysis 
used the initial submission of somewhat incomplete admission data, the 
actual payment reduction impact is likely to be less than 7% with 
better data. Reducing the PIP-DCG method's biases would likely 
eliminate more of the preliminary estimate of overpayment.
---------------------------------------------------------------------------
    \10\ Brown, R.S., Bergeron, J.W., Clement, D.G., Hill, J.W., and 
Retchin, S.M., ``Does Managed Care Work for Medicare? An Evaluation of 
the Medicare Risk Program for HMOs,'' Princeton, NJ: Mathematica Policy 
Research, Inc., December 1993.
---------------------------------------------------------------------------
    Some or all of this overpayment issue has already been addressed. 
Implementation of a risk adjuster that is not budget-neutral would be 
the sixth reduction in payment to health plans relative to FFS 
Medicare. The first reduction is the long-established 5% reduction in 
the payment to health plans relative to the average FFS payment--a 
reduction that is continued through use of the 1997 county ratebooks 
under the BBA. This reduction was originally made to assure savings in 
the Medicare Risk program. The second reduction is the five year phase-
in of a ``growth reduction'' of 2.8% under BBA, which is an arbitrary 
payment reduction. The third reduction, while not intended as a 
reduction, is related to decreasing the geographic payment disparity 
between high and low cost counties which affects counties where the 
majority of beneficiaries reside. The fourth reduction is reduced 
payments to FFS providers--an indirect reduction--and the fifth 
reduction, also not intended to be a reduction, is the unfair 
imposition of a ``user fee'' to cover the cost of beneficiary education 
materials for all beneficiaries--not just those in managed care. 
Finally, HCFA has proposed a risk adjustment implementation that 
further reduces payments to Medicare+Choice contractors, rather than 
using risk adjustment to allocate proper funding to health plans that 
enroll sicker members. We strongly recommend that risk adjustment be 
implemented on a budget-neutral basis to avoid ``double jeopardy'' of 
multiple payment reductions.
    The other major issue is the bias against managed care health plans 
through use of HCFA's version of the PIP-DCG method. There are several 
areas where this bias will have an effect on payments. The following 
are examples:

 HCFA's elimination of ``short stay'' admissions from the PIP-
        DCG model payments. Humana, like most Medicare+Choice 
        contractors has successfully reduced the length of stay at 
        acute facilities. The elimination from payment ``scoring'' of 
        hospital stays of less than two days penalizes health plans 
        that have reduced hospital costs. For Humana's senior and 
        disabled members, 22% of hospital visits were in the ``short 
        stay'' category, based on a recent study. While many of these 
        stays will be for less serious conditions, the effect of the 
        elimination was approximately a 1.5% reduction in payment. In 
        contrast, there is much less incentive in Medicare FFS to 
        achieve significant reductions in length of stay given 
        Medicare's requirement of a 3-day stay prior to discharge to a 
        sub-acute care facility.
 HCFA's inclusion in PIP-DCG payments of certain conditions 
        that are more commonly treated in FFS medicine by an inpatient 
        admission. There is a wide variation in treatment practice 
        across the U.S.\11\ and great efforts by health plans to 
        appropriately treat members in the lowest cost setting. Since 
        this setting is more frequently an outpatient clinic or 
        physician office, conditions that are ``site-of-treatment 
        discretionary'' should be moved to the ``base'' payment 
        category, so health plans are not penalized (by failing to 
        trigger additional payments associated with a PIP-DCG group) 
        through shifting patients to these less expensive ambulatory 
        sites. Using definitions of discretionary conditions from an 
        older study by members of the DCG research team,\12\ our 
        consultants found that keeping these discretionary conditions 
        in the PIP-DCG model could reduce payments to health plans by 
        1% to 3%.
---------------------------------------------------------------------------
    \11\ Wennberg, J.E., Freeman, J.L., Shelton, R.M., and Bubolz, 
T.A., ``Hospital Use and Mortality among Medicare Beneficiaries in 
Boston and New Haven,'' New England Journal of Medicine, 321(17):1168-
73, October 26, 1989.
    \12\ Ellis, R., and Ash, A. ``Refining the Diagnostic Cost Group 
Model: A Proposed Modification to the AAPCC for HMO Reimbursement,'' 
February 1988, report prepared for the Health Care Financing 
Administration.
---------------------------------------------------------------------------
 A perverse incentive created by use of only inpatient 
        admissions rather than more complete diagnostic data. Humana 
        recognizes the practical need to begin risk adjustment with 
        only inpatient data. While pragmatic issues may mandate the use 
        of an inpatient data method at the start, health plans should 
        not be penalized at every decision point. If some of the biases 
        can be corrected, then health plans will be paid more 
        appropriately for providing care in a cost effect manner.
    We would point out that this practical approach penalizes the 
``good deeds'' that health plans accomplish, such as preventing heart 
conditions. For example, Humana has over 3,900 members in a disease 
management program to prevent or reduce Congestive Heart Failure (CHF). 
Our specialists estimate that 60% of admissions linked to CHF can be 
eliminated--therefore, we hope to eliminate all admissions next year 
for 2,300 of the 4,000 seniors in the program. However, if all these 
members are Medicare+Choice members, we will then lose about $12,000 
per admission by not triggering the additional payment for PIP-DCG 16--
for a total of about $28 million. On a per-person basis in the region 
affected, reimbursement would be reduced by about $100 per member per 
year. We may need to reduce members' prescription drug benefits by 
nearly 33% to offset this revenue loss.
    Possible effects of inappropriate implementation of risk adjustment 
on our Medicare+Choice enrollees could be significant. While the phase-
in reduces concerns in the first year, the amount of payment reduction 
that may be incorrect in the second year is frequently greater than a 
health plan's entire profit/surplus margin. One or more consequences 
will occur: health plans will reduce supplemental benefits, premiums 
will be charged or increased, or health plans will exit counties that 
are currently marginal or difficult markets. The recent study in JAMA 
about ``spillover'' effects of Managed Care points out the savings that 
would be eliminated from FFS Medicare without the beneficial presence 
of health plans.\13\
---------------------------------------------------------------------------
    \13\ Baker, L. ``Association of Managed Care Market Share and 
Health Expenditures for Fee-for-Service Medicare Patients,'' Journal of 
the American Medical Association, 1999, 281: 432-437.
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Administrative Cost Concerns
    The cost of adapting to risk adjustment is just one of many 
administrative costs resulting from the Balanced Budget Act (BBA). 
Although Humana has begun to estimate these costs, we continue to 
collect and submit new data, adapt our rating and budget processes, 
revise provider contracts, products, enrollment systems and 
communication materials, collect data for newly mandated clinical 
studies and train providers and staff. To provide some idea of the 
magnitude of the administrative costs, we turn to the issue of provider 
contracting. Humana has over 128,000 separate providers of all types--
physicians, hospitals, labs, DME vendors, etc. Because of BBA changes, 
we are in the process of re-contracting with a significant number of 
those providers--providers in whose offices we are concurrently 
auditing medical records for the purposes of HEDIS and clinical studies 
and securing data to meet regulatory requirements for physician 
incentive arrangements. The average cost of just re-contracting runs 
about $34 per hour and 3 hours of effort, for an average contract cost 
of roughly $100. Including the costs for drafting and regulatory agency 
filing of contract forms, we estimate provider re-contracting costs 
will exceed $3.2 million.
    Beyond risk adjustment, the HCFA's BBA regulations have imposed 
extensive new requirements for oversight, additional clinical studies 
for quality measurement, and other compliance requirements. As an 
example, the two required Medicare clinical studies for each Humana 
Medicare+Choice plan requires an expenditure of $75,000 per plan for 
data collection alone. Current accreditation costs for Humana requires 
an expense of between $300,000 and $1.5 million.
Request for Deferral of Risk Adjustment
    We would ask that risk adjustment using inpatient data for the 
Medicare+Choice program be deferred for at least one year due to lack 
of disclosure of necessary methodological and formula-related 
information to plans, data collection issues, known and unknown HCFA 
and Fiscal Intermediary systems issues and the potential adverse 
effects this payment method could have on beneficiaries and health 
plans. To date, health plans have submitted detailed claims data to 
HCFA and HCFA is in the process of analyzing those data. As you may 
know, due to provisions in the Balanced Budget Act of 1997, Medicare 
payments to health plans have increased in many counties by only 2% in 
the previous two years, a level below the cost increases that many 
health plans have experienced. As a result, increased payment 
uncertainty due to a new risk adjustment system will exacerbate what is 
already a difficult situation for many health plans. Some plans have 
already decided to discontinue participation in the M+C program in one 
or more counties. In spite of the phase-in of risk adjusters, it is 
likely more plans will go this route in the next two years if the PIP-
DCG risk adjustment system is implemented on the current schedule.
    As an alternative to implementation of the proposed system on 
January 1, 2000, we suggest that over the next year, HCFA continue to 
analyze data submitted by the health plans and conduct a simulated risk 
adjustment. This would allow hospitals, health plans, HCFA and its 
contractors enough time to improve their data reporting systems so as 
to ensure proper payment. A similar timeframe for implementation was 
used in California for the Health Insurance Plan of California (HIPC), 
a small-group purchasing cooperative.\14\ We strongly believe that a 
simulation of risk adjustment over the next year would provide 
invaluable information to participating health plans and to HCFA.
---------------------------------------------------------------------------
    \14\ Bertko, J. and Hunt, S. ``Case Study: The Health Insurance 
Plan of California.''
---------------------------------------------------------------------------
Conclusion
    Humana supports the move towards a risk-adjusted payment system but 
only after several key risk adjustment method issues are resolved and 
data collection processes are improved significantly. We urge you and 
HCFA to defer implementation of the new risk adjustment system for at 
least one year to allow this improvement. We understand that HCFA faced 
a daunting schedule and believe that the Agency could do more to 
disclose relevant information to health plans if it had more time. As 
an alternative to implementing the proposed system on January 1, 2000, 
we suggest that over the next year, HCFA continue to gather and analyze 
data submitted by the health plans, conduct a simulated risk 
adjustment, and work towards improving the entire data process. This 
would allow all parties sufficient time to improve their data reporting 
systems so as to ensure proper payment. We strongly believe the 
additional time would allow health plans and HCFA to obtain valuable 
experience and information, allowing all to have greater faith that the 
new risk adjustment system is an improvement and is being implemented 
correctly.
    This concludes my prepared testimony. I would be happy to answer 
any questions you may have.
Request for Data to Understand HCFA's Proposed PIP-DCG Risk Adjustment 
        Method
    Risk adjustment is correctly recognized as a major change in 
payment methodology. As such, all components of the method must be 
fully understood by health plans as well as HCFA. At this point, the 
conceptual components of the method have been published and are 
beginning to be understood. However, many of the calculations and much 
of the underlying data remain in the ``black box'' used by HCFA. The 
HMO industry requires access to all of the calculations and data, 
including access to all of the demographic data now used (e.g., data on 
the new ``originally disabled'' status), diagnostic data needed to 
create the PIP scores and the calculations which create the ``re-
scaling'' factors needed to convert the current AAPCC county ratebook 
into the new county ``risk'' ratebooks.
Data, Formulas and Examples Required
    The following data, formulas or examples are needed to fully work 
through the risk adjustment method and its implementation process:

1. HCFA should provide a detailed illustration of every formula and 
        calculation used to determine the results of applying the risk 
        adjustment method. For example, HCFA should provide examples of 
        calculations for health plans in five counties (e.g., large 
        urban county, suburban county, rural county, and very small 
        rural county) showing exactly how the rescaling factors are 
        calculated and how the risk scores of illustrative health plans 
        would be calculated.
2. HCFA should provide detailed descriptions of how the various BBA 
        provisions (e.g., the floors, blend, removal of GME and budget 
        neutrality) will apply to the two separate rate books (the 
        ``old'' AAPCC and the new risk ratebooks) and provide examples 
        of when one ratebook would replace another (e.g., if the floor 
        using the new risk ratebook would be larger than the floor 
        using the old AAPCC ratebook).
3. HCFA should provide access to all the Fee For Service demographic 
        information in a county (in a confidential format) so that 
        health plans can replicate the rescaling factor calculations. 
        This would include providing appropriate designation of 
        ``originally disableds,'' Working Aged, Medicaid eligibles 
        (under both the old and new rules) and institutionalized (under 
        the old AAPCC rules) in a format that would allow health plans 
        to calculate the old county ratebook portion of the rescaling 
        factor and the demographic components of the new county risk 
        ratebook.
4. HCFA should provide access for several counties (e.g., 10 counties 
        in various geographic regions) to the full diagnostic data that 
        were used to calculate the PIP-DCG scores for those counties. 
        While this data may be part of the very large 100% Medicare FFS 
        data set that is available, providing the 10-county amount in a 
        useable format and size would be very helpful. In addition, it 
        would be useful to have HCFA provide the actual calculation 
        illustrations for each of the 10 counties (i.e., the 
        distribution of PIP-Groups and diagnoses as an intermediate 
        step to allow confirmation of the results).
5. HCFA should provide access to all of the demographic data of a 
        health plan's own members required to compute the PIP-DCG 
        scores under the new method. At this time, health plans do not 
        have access to records regarding ``originally disabled'' status 
        and prior Medicaid status (in some cases, such as recent 
        enrollees). In addition, Working Aged status is generally not 
        well-documented. We would like to obtain a better idea of how 
        the Working Aged files are maintained.
6. HCFA should provide any impact analysis of removing short stays 
        (i.e., admissions of less than two days length) and a list of 
        diagnoses that are disproportionately affected.
7. HCFA should provide detailed illustrations and data for the 
        development of the ``new beneficiary'' category of payment 
        factors.
8. HCFA should provide more detail about the kinds of data transmission 
        and analysis problems that have emerged for each health plan's 
        data submission. Because of anecdotal evidence, many health 
        plans have concerns that data were submitted, collected, 
        transmitted or analyzed in an inadequate manner. To date, the 
        very brief summary letter mailed by HCFA on December 11, 1998 
        is somewhat helpful in understanding the magnitude but of very 
        little help in finding and focusing on one-time or systematic 
        problems.
9. HCFA should provide a briefing on any data backlog problems that 
        have surfaced at any of the six Fiscal Intermediaries, at 
        HCFA's risk analysis contractor or at the agency itself.
    The following chart provides a summary indication of the kinds of 
data and calculation illustrations still likely to be needed after 
March 1st.

                       Data and Information Needed from HCFA for Risk Adjustment Analysis
----------------------------------------------------------------------------------------------------------------
       Data/Information Needed             Available 1/15?           Available 3/1?        Available 1/1/2000?
----------------------------------------------------------------------------------------------------------------
Detailed description of every          No.....................  No.....................  No
 procedure and step of risk
 adjustment calculations used by HCFA.
Detailed description and examples of   No.....................  No.....................  No
 how HCFA is interpreting BBA
 provisions for floors, blending, 2%
 min. etc.
Electronic data file for all FFS       No.....................  No.....................  No
 demographic data for each county,
 including Medicaid, institutional,
 originally disabled, and Working
 Aged statuses to allow checking of
 the demographic portion of the re-
 scaling factor.
Electronic file for all FFS members    Partial--only provided   N/A....................  N/A
 PIP scores to allow checking of the    county relative risk
 risk portion of the re-scaling         scores; may need to
 factor.                                have an audit
                                        procedure.
Electronic data file for demographic   No.....................  Summaries only--perhaps  A member-by-member PIP
 data for all health plan members for                                                     and demographic score
 each county, including Medicaid,                                                         for currently enrolled
 institutional, originally disabled,                                                      members
 Working Aged statuses.
Impact analysis of eliminating one-    May be able to analyze   No.....................  No
 day stays: types of diagnoses          and try to assess.
 eliminated and the impact.
Detailed description, data and         No.....................  No.....................  No
 examples to allow health plans to
 replicate calculation of the re-
 scaling factors.
More detailed information about data   No, other than the       No.....................  No
 problems and quality of data (e.g.,     12/11/98 letter
 comparisons of frequencies of
 diagnoses) for health plan submitted
 data.
Information about backlog and          No.....................  No.....................  No
 transmission problems at the Fiscal
 Intermediaries or into HCFA systems.
Detailed description of the method     Very short description   No.....................  No
 and calculations used to determine     provided.
 the ``neutral'' demographic factors
 for new Medicare entrants.
----------------------------------------------------------------------------------------------------------------


    Mr. Bilirakis. Mr. Bertko, please proceed, sir.

                    STATEMENT OF JOHN BERTKO

    Mr. Bertko. Good afternoon, Mr. Chairman and members of the 
committee. My name is John Bertko and I appreciate the 
opportunity to provide you with information about my experience 
with risk adjustment using HCFA's proposed Principal Inpatient 
Diagnostic Cost Group or PIP-DGC method.
    I am a Principal with Reden and Anders, an actuarial 
consulting and data analysis firm which is part of Ingenix, the 
information division of United Health Group. Over the past 
year, Reden and Anders has analyzed the affects of risk 
adjustment for many clients, including 15 large Medicare+Choice 
Contractors operating in 40 markets. I will be drawing upon 
that experience today to provide an actuary's perspective on 
the effects and issues associated with the proposed risk 
adjuster.
    In my opinion, risk adjustment using diagnostic data 
represents a step forward in making appropriate payments to 
Medicare+Choice Contractors. Technically, payments using health 
risk adjusters are somewhat more accurate than the current 
method. With a risk adjusted system, health plans will be paid 
more for individuals with health problems and less for healthy 
individuals.
    Also, use of risk adjustment helps achieve the policy goal 
of better matching payment to the needs of the covered 
population. Under this PIP-DCG method, most enrollees will be 
assigned to the healthy or base category. This means that 
health plans will receive a base payment amount of 
approximately $5,000. Then HCFA will analyze each enrollees 
medical encounters over the previous year to see if that 
enrollee had an admission that falls into one of the 15 PIP-DCG 
categories that increase payments.
    A qualified in-patient admission then creates a PIP score 
that is worth from $2,000 to $26,000 more in additional 
payments. Now, because the PIP-DCG method relies exclusively on 
in-patient data, as mentioned by most speakers today, it should 
be considered only a first step. Analysts and Actuaries 
recognize the bias inherent in a payment method that uses only 
in-patient data since payments to health plans are reduced for 
keeping members out of the hospital.
    However, in an in-patient data method is really the only 
practical first step and should be acceptable, but only if 
implemented with care. While I believe that the overall design 
of the PIP-DCG model is appropriate, there are several 
components of the model that should be re-examined because of 
unnecessary payment bias. As one example, HCFA and others have 
talked about that the decision to eliminate short stays, that 
is admissions of less than 2 days.
    Thus if a person with a heart condition is treated during a 
1-day hospitalization and then sent to a sub-acute facility, no 
payment other than the base payment is made. In fee-for-service 
Medicare it is much more likely that this person will be 
hospitalized for 2 days or more adding to the payment bias. The 
second example involves conditions that can be treated either 
on an in-patient basis or an out-patient basis, such as a 
physician office or clinic.
    Again, for any treatment that occurs in a non-hospital 
setting, health plans will not receive any payment over the 
base amount. An option would be for HCFA to remove some of 
these discretionary conditions from the PIP-DCG model to reduce 
the payment bias. Next, one of an Actuaries professional 
requirements is that he or she be able to replicate the results 
of another Actuary's work. At this point, I am unable to say 
that I can perform a thorough replication of HCFA's work.
    I agree with all of Mike Hash's statements earlier, but I 
strongly recommend that HCFA produce full disclosure and have 
open discussions with health plans and other interested parties 
about more of the details. This involves disclosing all of the 
formulas used for every component in the model and the research 
reports used to create the model. Health plans need to be able 
to fully test and understand the model's operation. Last, 
implementation of the PIP-DCG model requires creation of a new 
data transmittal an analysis process.
    In this process, encounter data must be handed from 
hospitals to health plans to fiscal intermediaries to HCFA like 
a runner's baton. If this data baton is dropped anywhere along 
the way, health plans then are automatically penalized through 
payment reductions. There are many opportunities for errors and 
break downs in the system. These include hospitals delaying 
correction of in-patient data errors. Plans having difficulty 
gathering data from capitated providers who pay their own 
claims.
    And many of the fiscal intermediaries having awkward or 
very slow procedures in place to identify and report errors. My 
experience as an Actuary in California, with Colorado, with 
Washington State, is that risk adjustment can be done correctly 
by taking the time necessary to have all the components working 
right.
    In summary, risk adjusted payments represent an improvement 
over the current payment method, but only if the practical data 
issues are first addressed and several components of HCFA's 
model are re-examined. HCFA staff are really to be commended 
for their hard work and moving toward implementation on such a 
demanding timetable. I suggest, however, that implementation 
not occur until HCFA and the health plans are satisfied that 
all the data issues have been addressed and that several of 
these biases are re-examined and removed. Thank you.
    [The prepared statement of John Bertko follows.]
Prepared Statement of John Bertko, Principal, Reden & Anders, Ltd; San 
                               Francisco
    Good Morning, Mr. Chairman and Members of the Committee. I 
appreciate the opportunity to provide you with information about my 
experience with risk adjustment for health plans using the Principal 
Inpatient Diagnostic Cost Group (or PIP-DCG) method. I am a consulting 
actuary and Principal with Reden & Anders, Ltd., an actuarial 
consulting and data analysis firm, which is part of Ingenix, the 
information division of United Health Group. Reden & Anders' risk 
adjustment clients include 15 large Medicare+Choice contractors with 
operations in nearly 40 diverse markets. Over the past year, we have 
been analyzing data from our clients, in an effort to help them better 
understand how their payments for Medicare enrollees will change as a 
result of the implementation of a risk adjustment system. I will be 
drawing from this experience and providing an actuary's perspective on 
the effects of and issues associated with the proposed PIP-DCG risk 
adjuster.
Risk Adjusted Payments Are an Improvement over the Current Method
    In my opinion, risk adjusted payments using diagnostic data 
represent a step forward in making appropriate payments to 
Medicare+Choice contractors. Technically, a payment system using health 
risk adjusters is somewhat more accurate than the current payment 
system. This is especially true for groups of individuals with more 
health problems--in most cases, health plans will spend more to treat 
these individuals and, as a result, deserve higher payments. Similarly, 
for groups of healthy individuals, risk-adjusted payments to health 
plans will be appropriately reduced. Use of risk adjustment also helps 
to achieve the policy goal of better matching payment to the needs of a 
covered population.
    In any diagnosis-based risk adjustment method, each individual is 
assigned a ``relative risk score'' based on his or her past illness 
history. In comparison with the average risk score of 1.00 for an 
entire population (both sick and healthy individuals), someone with a 
heart condition may have a relative risk score of 3.0, which means we 
expect the person to have expenditures that are three times the average 
next year. By contrast, a healthy 70 year-old male may have a risk 
score of .70, meaning that we would expect his expenditures for the 
next year to be only about 70% of the average of the group.
    Under the PIP-DCG method, most enrollees (i.e., those who do not 
have a qualifying inpatient stay) will be assigned to the ``healthy'' 
(base) category. This means that health plans will receive a base 
payment amount (approximately $5,000 for these individuals). The base 
payment varies by age and gender, as well as by disability, welfare, 
and working aged status. HCFA will analyze each enrollee's medical 
encounters over the previous year to determine whether the enrollee had 
an admission that falls into one of the 15 PIP-DCG categories with 
increased payments. An inpatient admission creates a PIP-DCG score that 
is worth from $2,000 to $26,000 per year in additional payments.
    Because the PIP-DCG method relies only on inpatient data, it should 
be considered a first step, or a ``Work in Progress,'' but an important 
improvement over the current method--which uses only age, gender, and 
status (disability, institutionalization, welfare or Working Aged 
status) for payments. Other methods that use data from both the 
inpatient and outpatient settings (``full'' data methods) are under 
development and are being used in some settings (e.g., by the Buyers 
Health Care Action Group in Minneapolis). HCFA has indicated that it 
plans to use both inpatient and outpatient data for risk adjustment 
beginning in 2004.
    Analysts and actuaries recognize the bias inherent in a payment 
method that uses only inpatient data, since Managed Care plans are 
penalized for keeping members out of the hospital. However, an 
inpatient data-based method is the only practical first step and should 
be acceptable, if implemented with care. The inpatient method should 
also be thought of as a natural transition to a method that uses both 
inpatient and outpatient data. This is because the relative risk scores 
that are calculated using only inpatient data are, generally, closer to 
the average for the group (1.00) than risk scores calculated using 
``full'' data methods, thus reducing the effects on payment to health 
plans. On the other hand, health plans that successfully treat high-
cost conditions in an ambulatory setting will be penalized, since no 
additional payment will be provided for high-cost individuals who have 
not had an admission.
PIP-DCG Model Still Needs Refinement
    While I believe that the PIP-DCG model overall is well-designed and 
has been tested extensively on the Medicare population, there are 
several components of the model that should be re-examined. As noted 
above, any inpatient-data risk adjuster will be biased against Managed 
Care plans because of their ability to eliminate some inpatient 
admissions. Although this circumstance must be accepted during a 
transition phase, other components of the HCFA model add to this bias. 
As one example, HCFA has chosen to eliminate ``short stays'' or 
admissions with a length of stay of less than two days from 
contributing to an enrollee's risk score. Thus, if a person with a 
heart condition is treated during one day and then sent to a Skilled 
Nursing Facility, the health plan will receive only the base payment 
for that enrollee, since the enrollee did not have a qualifying 
inpatient admission. In FFS Medicare, it is much more likely that this 
person will be hospitalized two days or more, adding to the payment 
bias. Similarly, there are other conditions that can be treated either 
on an inpatient basis or an outpatient basis (in a physician office or 
clinic). Again, for any treatment that occurs in a non-hospital 
setting, health plans will not receive any payment over the base 
amount. The result would be that the relative risk scores for enrollees 
in Managed Care plans would be lower than the relative risk scores of 
Medicare FFS enrollees. One way to address this problem would be for 
HCFA to remove some of these conditions from the PIP-DCG model.
HCFA Needs to Disclose Data and Methods
    One of an actuary's professional requirements is that he or she be 
able to replicate the findings of another actuary's work. To date, we 
have analyzed data for our clients, using our ``best guess'' regarding 
the various formulas and components of the PIP-DCG Model. Therefore, at 
this point, I am unable to perform a thorough replication. I strongly 
recommend that HCFA provide full disclosure and have open discussions 
with health plans, consultants, academics, and other interested 
parties. This involves disclosing all of the formulas used for every 
component of the model, as well as providing access to data in HCFA's 
files about beneficiary status and health conditions so that health 
plans can test and fully understand the model's operation.
Implementation Issues
    Implementation of the PIP-DCG payment method has required the 
creation of a new data transmittal and analysis process. As part of 
this process, encounter data must be handed from hospitals to health 
plans to Fiscal Intermediaries to HCFA or its contractor. If the ``data 
baton'' is dropped anywhere along the way, then health plans are 
penalized automatically through lower payments. For example, sometimes 
hospitals make mistakes regarding an inpatient admission and attribute 
it to the wrong health plan. We have heard reports of hospitals 
delaying correction of errors, with the result being that health plans 
cannot submit corrected encounter records. Some plans may have 
difficulty gathering data from capitated providers who pay their own 
claims. Many of the Fiscal Intermediaries have awkward or slow 
processes in place to identify and report errors. As a result, health 
plans can spend an inordinate amount of time trying to fix errors. If 
the Fiscal Intermediaries were more forthcoming with what triggered 
errors, the health plans could correct the errors before submitting 
data to the Fiscal Intermediaries. HCFA has at least a few small 
problems in its systems for making use of encounter data. With the lack 
of sufficient feedback on the data errors, health plans are unable to 
confirm that data being used by HCFA matches their internal records.
Summary
    Risk-adjusted payments represent an improvement over the current 
AAPCC payment method, but only if practical data issues are first 
addressed and several components of HCFA's PIP-DCG method are re-
examined. HCFA staff are to be commended for their hard work in moving 
towards implementation on such a demanding timetable. I suggest that 
implementation not occur, however, until HCFA and health plans are 
certain that all biases are removed from the model and important data 
process issues are corrected.

    Mr. Bilirakis. Mr. Johnson.

                   STATEMENT OF KIRK JOHNSON

    Mr. Johnson. Thank you, Mr. Chairman and members of the 
committee. I am Kirk Johnson, Senior Vice President of CNA 
Health Partners, a subsidiary of a multi-line insurance 
carrier, CNA. I am testifying today on behalf of the Health 
Insurance Association of America, which CNA is a member. HIA 
members include companies currently serving as Medicare+Choice 
carriers, companies who are considering doing it and companies 
who have withdrawn from the program.
    Although CNA has a significant involvement in health care, 
it is the largest professional liability insurer in the country 
and we administer the second largest of the Federal employee 
health benefit plans, the Mailhandlers Plan. CNA does not 
itself have a Medicare Risk Plan or Medicare+Choice product. 
CNA Health Partners, however, is a management services 
organization, a partner for doctors, hospitals and integrated 
delivery systems who have become Medicare Risk Plans as HMO or 
who take downstream risks from other risk plans and Contractors 
like those here today, or who desire to become PSO's, Provider 
Service Organizations.
    PSO's, as you know, were created by the Balanced Budget Act 
of 1997. They were supposed to offer to Medicare beneficiaries 
a competitive alternative to traditional HMO's and to fee-for-
service providers. The Medicare+Choice law has not yet done 
what it is intended to do. It has not created more competition 
or more choices for Medicare beneficiaries. It has not yet 
rationalized the payment mechanism so that there is 
predictability and fairness.
    It has not yet made it possible for doctors, hospitals and 
integrated delivery systems to directly contract with HCFA to 
offer their own plans. Indeed, the Act has made it less likely 
that they will subcontract on a risk basis with existing plans 
today. The reason is only partly concerns about the risk 
adjustment formula, although we have them. In fact, behind me 
are charts which show how the disparity in payments to fee-for-
service versus risk plans will grow by 2003 under the current 
formula.
    The primary reason providers are not in this business are 
the very ones which you have heard from the established 
national Medicare risk plans. It is difficult for the 
government to be both a purchaser and a regulator. It cannot 
pay less than the rate of medical inflation on the one hand, 
and at the same time add significant new regulatory 
requirements, procedures and restrictions on a plans ability to 
make essential market adjustments.
    No one would expand into or enter into this market. It is 
particularly unlikely that providers will do that. Providers, 
doctors and hospitals do not have either the scale, the big 
networks or the sophisticated claims and information 
infrastructure of the national plans. There were less than a 
handful of PSO's under the new BBA provisions last year.
    Congress and the regulatory system gave PSO's very little 
help. In fact for many providers, and we represent a 
substantial number of them who have PSO aspirations, the 
program appeared to be going backwards. For example, the 
mandated expedited appeal procedures which entitle every 
Medicare beneficiary to a formal appeal virtually any time he 
or she disagrees with a physician's treatment recommendation.
    It turns a common medical matter for which a second opinion 
would be an obvious remedy, into an expensive, administrative, 
legal adversary one. The requirement that every detail of a 
plan be approved and then frozen well in advance of the 
effective date. What will amount to, on the average, of 2 
percent reimbursement increases for most plans at a time when 
medical inflation is three times that. Finally, the important 
and necessary risk adjustment for providers is particularly 
necessary.
    Providers are going to attract patients who know them best, 
the sick ones. But it should not be done in a way that reduces 
overall reimbursement, and it should not add substantially to 
the already serious regulatory burdens on them. Health care 
costs are going to go up, perhaps dramatically. There is no way 
and it would be immoral if not illegal to do so, to manage out 
of the system the ever-growing technology gains that save life 
and enhance its quality, even though they will inexorably add 
to the cost.
    Creating new competitive alternatives as the BBA did, was 
the right approach. Particularly the opportunity for providers 
to accept financial accountability, directly or in partnership 
with the plans. I think most would agree that doctors, now the 
ones who are licensed to practice medicine, will have to find 
the next round of savings and efficiencies in medicine. They 
can do it now because of the innovations in medical technology 
and the incentive to take financial accountability, but they 
have precisely the same concerns about the execution of the BBA 
as the existing Medicare Plans have. Thank you.
    [The prepared statement of Kirk Johnson follows.]
 Prepared Statement of Kirk Johnson, Senior Vice President, CNA Health 
   Partners, on Behalf of the Health Insurance Association of America
    Mr. Chairman and members of the Committee, I am Kirk Johnson, 
Senior Vice President of CNA Health Partners. I am testifying today on 
behalf of the Health Insurance Association of America (``HIAA''). As 
the preeminent health insurance trade association, HIAA is the 
principal voice of the broadest spectrum of the health insurance 
industry. HIAA represents over 265 members that include commercial 
insurers, health maintenance, preferred provider and managed care 
organizations and businesses that provide products and services to the 
health insurance industry. Together, HIAA members provide health, long-
term care, supplemental, and disability income insurance coverage to 
more than 110 million Americans. Association members include companies 
currently serving as Medicare+Choice managed care contractors, 
companies who are considering offering new Medicare+Choice options, and 
companies that have recently withdrawn from the Medicare+Choice 
program, giving us a unique perspective on the issues under review by 
this Committee. CNA Health Partners is a company assisting new or 
developing Medicare+Choice organizations.
    I am pleased to have this opportunity to discuss the implementation 
of the Medicare+Choice program with you and to share a few of our 
principle concerns. HIAA and CNA Health Partners believe that the 
Medicare+Choice program represents an essential component in the 
government's effort to ensure the financial survival of the Medicare 
program and to meet the health care needs of the baby boom generation 
as we move into the 21st Century. HIAA applauds the Commerce Committee 
for its role in shaping these bold Medicare reforms through the 
Balanced Budget Act of 1997. Recent developments, however, suggest that 
the Committee's work is not yet done. To ensure the promise of the 
reform, and to facilitate beneficiary choice under the Medicare 
program, additional legislative and policy modifications must be made.
  concerns about low anticipated medicare+choice organization payment 
                             rate increases
1. Limits on Annual Increases in Capitation Rates and Concerns 
        Regarding the New Proposed Risk Adjustment Methodology Threaten 
        the Continued Attractiveness of the Medicare+Choice Program to 
        Beneficiaries and Providers.
    a. Most Plans Will Experience Cost Increases From Medical Inflation 
That Exceed Payment Increases During the Coming Year.--Perhaps the 
greatest threat to the success of the Medicare+Choice program is the 
collective impact of changes in Medicare's payment methodology enacted 
by the BBA. In order to achieve a successful partnership between the 
federal government and Medicare+Choice organizations, program rules 
must: (1) allow payment rates that recognize and adjust for the actual 
costs of providing health care and permit necessary investment in 
clinical and operational improvements, and (2) incorporate financial 
incentives to reward those Medicare+Choice organizations that achieve 
the government's economic, clinical and operational objectives.
    As set forth in Section 1853(c) of the BBA, Medicare+Choice 
organizations will be paid the greater of:
    (a) a blended capitation rate, which is the sum of a percentage of 
the area-specific capitation rate and a percentage of the national 
Medicare+Choice capitation rate (the percentage balance will change 
over time until it reaches a 50/50 blend in 2002); or
    (b) a minimum amount, which is $379.84 per enrollee per month in 
1999; or
    (c) a minimum percentage increase for 1998 equal to an increase of 
2 percent of the 1997 Adjusted Average Per Capita Cost (``AAPCC'') rate 
for the particular county, with increases of 2 percent in each 
subsequent year.
    Due to a budget neutrality requirement, the blended capitation rate 
was not available in 1998 or 1999. The Health Care Financing 
Administration (HCFA) anticipates, however, that the blend will apply 
for the first time in the year 2000. While the majority of counties 
will receive blended payments, it is HIAA's understanding that 
approximately 30 percent of counties will continue to receive the floor 
amount and 11 percent of counties will receive the minimum two percent 
increase.
    The practical result, based on actual Medicare+Choice enrollment, 
is that Medicare+Choice organizations serving a majority of Medicare 
beneficiaries enrolled in such organizations will receive rate 
increases of the minimum 2 percent or only slightly more. For many--if 
not all--of these organizations, this increase would not be sufficient 
to cover the increased cost of providing mandated services, given 
projected medical inflation 1. This, combined with the fact 
that many Medicare+Choice organizations experienced significant losses 
in 1998 (and anticipate additional losses in 1999), forecasts trouble 
for the program.
---------------------------------------------------------------------------
    \1\ The budget for fiscal year 2000 includes funding original fee-
for-service Medicare that reflects anticipated increases in medical 
costs over a five year period of 27% and an increase in the Federal 
Employee Health Benefit Program of about 50%. Estimates of the likely 
growth for Medicare+Choice plans in high paying counties for the same 
period is less than 10%.
---------------------------------------------------------------------------
    Indeed, inadequate reimbursement rates largely were responsible for 
the retrenchment of Medicare+Choice plans last Fall. At that time, some 
of the most respected Medicare+Choice organizations in the country 
withdrew from states and counties with low capitation rates. Other 
withdrawals occurred in low enrollment areas even though capitation 
rates were above average. As reported, 42 health plans decided to 
withdraw from the Medicare+Choice program and 53 plans decided to cut 
back their services. In all, about 400,000 Medicare beneficiaries were 
effected. To put this in perspective, HCFA averaged two Medicare risk 
contract cancellations per year from 1993 through 1997.
    The use of the blended rate for some Medicare+Choice plans for the 
first time in 2000 is clearly a step in the right direction in terms of 
ensuring fair and adequate reimbursement. However, HIAA strongly 
believes that additional adjustments are necessary to attract and 
maintain the number and diversity of Medicare+Choice organizations 
necessary to establish a sound and attractive market-based alternative 
to the traditional fee-for-service program.
    Accordingly, HIAA urges Congress to reconsider the artificial and 
arbitrary limits on capitation rate increases set forth in the BBA. 
Specifically, HIAA suggests that annual increases in Medicare+Choice 
payment rates be sufficient to fully cover medical inflation 
experienced in the local markets. Because local employer health plans 
and other commercial customers have a tremendous incentive to keep 
costs down, they will positively affect the inflation rate in each 
market. If the current reimbursement structure is not adjusted, more 
Medicare+Choice organizations are likely to withdraw from areas served 
and beneficiaries enrolled in the remaining plans will likely 
experience premium increases or reduced benefits. Finally, as 
Medicare+Choice plans leave the market, the original Medicare program 
(with its higher per capita costs) will have more beneficiaries and put 
additional strain on both the Part A Trust Fund and the budget.
    b. The New Risk Adjustment Methodology Will Substantially Reduce 
Payments to Medicare+Choice Organizations.--Change in the 
Medicare+Choice payment calculations is all the more necessary because 
the risk adjustment process which HCFA is implementing is expected to 
substantially reduce aggregate payments to Medicare+Choice plans while 
adding additional administrative requirements and expenses. According 
to preliminary HCFA estimates, total Medicare+Choice plan revenues for 
the year 2000 are projected to be $200 million less than they would 
have been under the Adjusted Average Per Capita Cost (``AAPCC'') 
payment method and $6.3 billion less in 2004. As a result, some plans 
will see even their minimum two--percent increase eroded in 2000 as the 
risk adjustment methodology is phased in. Thus, what began as a 
straightforward effort to more accurately compensate plans for the 
health care costs of their particular members will, unexpectedly, 
result in an overall reduction in funds to Medicare+Choice 
organizations.
    This development runs counter to HIAA's understanding of 
Congressional intent, i.e., that the savings resulting from the 
percentage reduction 2 in plan payments for years 1998 
through 2002 was intended to be in lieu of any net program savings from 
risk adjustment. (Indeed, the Congressional Budget Office did not score 
any projected savings in connection with the risk adjustment program 
under BBA 97). The new methodology, and huge projected revenue 
reductions, underscores HIAA's concerns regarding the inadequacy of 
plan payments under Medicare+Choice. To the extent that the proposed 
HCFA risk adjustment methodology translates into a significant overall 
decrease in payments for the Medicare+Choice program, it will 
undoubtedly be an additional deterrent to program participation. 
Accordingly, HIAA urges Congress to require HCFA to modify the risk 
adjustment methodology so that aggregate payments to Medicare+Choice 
plans for 2000 and beyond are based on aggregate BBA adjustments, 
making the risk adjustment process budget neutral.
---------------------------------------------------------------------------
    \2\ In addition to the 5 percent reduction in payment from fee-for-
service costs which existed prior to the BBA, the increase in payment 
to Medicare+Choice organizations under both the blended rate and the 
floor will not fully reflect anticipated medical inflation. A reduction 
of 0.8 percent was made in 1998 and reductions of 0.5 percent are to be 
included in 1999 through 2002. The cumulative effect of these 
reductions will be that even the blended rate adjustment will be 
inadequate. This, coupled with the insufficient increases in the 
minimum rate, will undermine Congressional intent to encourage growth 
of Medicare+Choice options for seniors in low cost areas.
---------------------------------------------------------------------------
    c. The User-Fee ``Tax'' on Medicare+Choice Organizations for 
Beneficiary Education is Inequitable and Reduces Even Further Payments 
to Medicare+Choice Organizations.--HIAA strongly supports educating and 
informing Medicare beneficiaries about all coverage options, including 
the Medicare+Choice program, and supplying beneficiaries with 
straightforward, unbiased information to help them choose appropriate 
coverage. That said, we are concerned that the BBA, to support 
beneficiary education activities for all 37 million beneficiaries, 
places a ``user fee tax'' on Medicare+Choice organizations 
only.3 The educational campaign is a benefit to all Medicare 
beneficiaries. Indeed, initial information suggests that the toll-free 
number HCFA established last year with funds from the $95 million 
dollar ``tax'' assessed upon Medicare+Choice organizations primarily 
fielded calls from beneficiaries seeking information about the fee-for-
service program. Considerations of equity dictate that the educational 
program--which informs beneficiaries about basic program benefits and 
requirements--be funded from the Medicare trust fund, or another broad-
based source of revenue, as are other such essential program functions.
---------------------------------------------------------------------------
    \3\ Medicare+Choice organizations essentially pay a ``head tax'' 
(i.e., an amount based on the number of Medicare+Choice enrollees in 
their plan) to support the public information program.
---------------------------------------------------------------------------
    We note that this tax, which is .355% of the total monthly payments 
to each Medicare+Choice plan in 1999, further exacerbates the problems 
outlined above concerning inadequate reimbursement. Indeed, when the 
user fee tax is combined with potential large revenue reductions from 
risk adjustment, some existing Medicare+Choice plans will see little or 
no increase in their payment rates from 1999 to 2000 even though HCFA 
is using a phase-in of an interim risk-adjustment methodology.
    The cumulative effect of these three payment reductions will vary 
depending upon the relationship of the current payment, current 
benefits, and the number of beneficiaries enrolled.
    In your district, Chairman Bilirakis, there were 139,000 
beneficiaries enrolled in Medicare risk plans (or 32 percent of 
Medicare beneficiaries). We project 4 that Medicare+Choice 
plans will receive only 51.4 percent or half of the increase per capita 
relative to Medicare fee for-service increases. We also project an 
increase in the 65+ population from 482,000 in 1998 to 533,000 in 2003. 
If Medicare+Choice options are withdrawn or have less perceived value 
by then, a reduction of Medicare+Choice enrollment to 75 percent of 
existing numbers would reduce the savings from BBA for 2003 by $77.7 
million 5 from your district alone.
---------------------------------------------------------------------------
    \4\ Our projections utilize September 1998 enrollment figures, a 
1998 Price Waterhouse report on Medicare Capitated Payments, and 
reflect HCFA's assumption for the average cost to Medicare+Choice plans 
of risk adjustment.
    \5\ Lost savings, based on the difference in projected per capita 
payments to HCFA vs. Medicare+Choice, multiplied by the potential 
Medicare+Choice enrollment less 75 percent of current enrollment.
---------------------------------------------------------------------------
    HIAA has calculated the impact of BBA's payment policies, including 
risk adjustment, for the counties of each member of this subcommittee. 
A composite of your district's projected payments has been delivered to 
your office. As examples of these projections, attached to our 
testimony are the projections for Chairman Bilirakis' district and 
Representative Brown's district.
2. The May 1 Deadline for Filing ACRs Has Created Serious Problems in 
        the Administration of the Medicare+Choice Program and Should Be 
        Changed to November 1.
    The BBA moved the deadline by which Medicare+Choice plans must 
submit their adjusted community rate (ACR) proposals from November 1 to 
May 1. This was done in order to allow HCFA sufficient time to approve 
rates and include this rate information in the materials to be 
distributed to beneficiaries as part of the educational campaign. The 
problem with this time frame is two-fold. First, by submitting 
proposals seven months in advance of the actual effective date (i.e., 
January 1), plans place themselves at substantial risk that health care 
costs will rise in unexpected ways in the latter half of the year and 
thus not be captured in the proposals. This is what occurred last year, 
contributing to the decision by many Medicare+Choice organizations to 
not renew their Medicare+Choice contracts for 1999, or to reduce their 
service areas. Also, proposals submitted by May 1st are based on 
relatively limited claims experience with the Medicare beneficiary 
population enrolled in the more rapidly growing plans and are thus less 
likely to be accurate predictors of costs than proposals based on a 
longer period of time.
    Accordingly, HIAA proposes moving the ACR deadline to November 1 or 
as close to that date as operationally possible.6
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    \6\ We recognize that HCFA may prefer a date earlier than November 
1 in order to collect information for the annual public information 
campaign. We believe that HCFA's public information objectives can be 
met while permitting Medicare+Choice organizations to submit ACRs on 
the old schedule. Working with third party publishers, including daily 
newspapers, HCFA could more than adequately distribute plan specific 
information to beneficiaries in a timely fashion.
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    In regulations published earlier this month, HCFA ``recognize[d] 
the difficulties inherent to estimating the cost of a benefit package 
for 2000 based on at most 4 months of experience under the 1999 benefit 
package,'' but indicated that it had no discretion in this matter due 
to the statutory mandate. The President's fiscal year 2000 budget 
includes a proposal that would extend the deadline for ACR submissions 
until July 1. HCFA strongly supports this proposal. Given the 
importance of this issue to Medicare+Choice organizations, and the 
concerns involved, HIAA urges the Committee to take steps to put in 
place a permanent workable deadline for ACR submissions and suggests 
that an ACR date of November 1.
3. Congress Should Return to the Previous Policy Allowing Flexible 
        Benefits and Premiums Within a Service Area.
    Historically, Medicare risk contractors were able to offer 
different benefit or charge structures within a given contracted 
service area. For example, modified benefit packages were often 
developed and offered in a subset of the contracted service area. While 
Medicare beneficiaries residing in the segmented service area were 
offered a uniform array of benefits at a uniform price, uniformity was 
not required across the entire service area. This flexibility was 
important because it allowed contractors to adjust their benefit 
package and premium structure to take into account differences in 
capitated payment rates received, which varied by county.
    In the BBA, Congress mandated a new policy requiring that 
organizations offer uniform benefits and premiums throughout a service 
area, despite varying payment levels. Under the Medicare+Choice 
regulations, an organization may offer multiple plans and propose 
different services areas for each plan. (Were this not the case, 
organizations would be discouraged from expanding to outlying rural 
counties that typically offer lower reimbursement rates.) This 
regulatory policy allows Medicare+Choice organizations to achieve 
results similar to the original flexible benefit policy, but only at 
significant additional expense. Instead of one ACR being filed for a 
broad service area with benefits modified to reflect anticipated 
revenues, as used to be the case, multiple ACRs must be generated for 
separate Medicare+Choice plans by each organization, and reviewed and 
approved by HCFA. The Congressional mandate thus imposes significant 
administrative costs on the organizations and the agency, with 
absolutely no benefit to beneficiaries. Therefore, HIAA urges Congress 
to repeal the uniform benefits and premium provisions of the BBA.
 in many places the regulations are overly rigid and demanding so they 
      become an impediment to small and/or rural medicare+choice 
                             organizations
1. The Quality Assurance Approach is Misguided.
    HIAA believes that some form of quality standards are important to 
any market-based approach to Medicare. Without quality standards, or 
some other performance measurement, the added costs of maintaining 
quality will be difficult to present fairly although over time, it will 
be obvious. That being said, HIAA has serious concerns about the 
breadth and depth of the onerous quality assessment, performance 
improvement and performance measurement standards developed by HCFA.
    a. Performance Measures Should Vary More by Type of Plan--As an 
initial matter, we believe that performance measures should be designed 
to fit the services offered by various types of plans. HCFA, however, 
has essentially embraced a ``one size fits all'' approach. As a result, 
it is unlikely that Medicare+Choice PPO plans that offer a broad choice 
of providers to beneficiaries (but are loosely ``managed'') will be 
able to meet the quality requirements. Similarly, the extensive 
quality-related requirements applied to MSA plans and private fee-for-
service plans are likely to deter the necessary investment required 
before these types of plans can be offered. The bottom line is that the 
HCFA regulations are so inflexible that few options other than existing 
managed care arrangements with large numbers of beneficiaries can be 
developed. As a result, beneficiary choice will suffer, and a key goal 
of the Congress' work on BBA will have been defeated. In rural areas 
with no existing private health plan options, these regulations 
effectively preclude any chance that new choices will develop under 
most reasonable financial scenarios.
    b. The Extensive Data Collection Proposed Is Not Necessary--Second, 
the extensive data collection and reporting efforts required under the 
regulations will add significant administrative costs to 
Medicare+Choice organization operations. We question whether these 
costs are justified or desirable, and whether the quality assurance 
goals might not be met just as well through alternative approaches. 
HIAA strongly believes that consumers, not government officials, should 
dictate through their plan choices the extent and nature of quality 
improvement, balanced against costs. Under this approach, organizations 
that are responsive to consumer preferences would be rewarded with 
greater market share. Fewer government resources would be required for 
oversight.
    HCFA could, however, play a central role in ensuring that minimum 
standards are met and encouraging quality initiatives through flexible, 
incentive-based standards established by contracts. HCFA is to be 
congratulated for posting beneficiary satisfaction survey results and 
other such information on the Medicare internet site 
(www.medicare.gov). In HIAA's view, this would be far superior to the 
current practice of setting detailed regulatory mandates which run the 
risk of leading to micromanaging and encouraging uniformity at the 
price of creative experimentation.
    In trying to determine the cost of the extensive data collection 
effort proposed, HIAA notes that many health care organizations, 
particularly those with loosely managed network-style delivery systems 
(such as PPOs) do not currently have the capability to capture or 
report performance data at the level being proposed. The BBA's 
limitations on increases in capitation rates means that outside sources 
will be required to fund system upgrades. Even if financially possible, 
the time required for procurement, installation, training, and 
validation are not consistent with HCFA's scheduled implementation and 
reporting requirements for Medicare+Choice plans. As a result, these 
quality assessment requirements will be a significant deterrent to 
expanding senior's choices as potential new plans decide not to 
participate in the Medicare+Choice program. At the very least, HIAA 
believes that organizations making a good faith effort to meet the 
regulatory requirements should be provided a transition period where 
penalties would not be imposed. This is particularly important given 
plan efforts to address Year 2000 computer issues.
    c. The ``Deemed Status'' Program Should Be Implemented 
Immediately.--Most Medicare+Choice organizations already adhere to 
rigorous quality assurance review by nationally accredited health care 
organizations. HCFA has provided by regulation that Medicare+Choice 
organizations may be ``deemed'' to meet quality assessment and 
performance improvement requirements if judged to do so by a national 
accreditation organization approved by HCFA and applying HCFA's 
standards for assessing compliance. This approach has much merit. It 
would allow plans to work with reviewers who already are familiar with 
their operations, creating obvious efficiencies and potential cost-
savings. HCFA has failed, however, to establish procedures to implement 
the ``deemed status'' process. To date, HCFA has not designated any 
national accreditation organization for this purpose, nor has it issued 
policy guidance on how this process will work. HIAA urges Congress to 
direct HCFA to promptly institute a procedure for awarding deemed 
status since this process has the potential to reduce some of the 
substantial costs associated with HCFA's extensive quality assurance 
measures.
2. The Proposed Risk Adjustment Policy is Ill-Conceived.
    On January 15, 1999, HCFA announced its methodology for 
implementing the risk adjustment mandate set forth in the BBA. While 
HIAA believes that improved risk adjustment is an appropriate and 
essential long-term goal for the program, we have serious concerns 
regarding the current HCFA proposal, which calls for the initial use of 
only inpatient hospital data. During the Administration's proposed 5-
year phase-in period, plans would receive capitated payments based on a 
blend of payment amounts under the current demographic system and the 
interim (PIP-DCG) risk adjustment methodology. For the year 2000, for 
instance, the HCFA plan calls for a separate capitated payment rate for 
each enrollee based 90 percent on the demographic method and 10 percent 
on the risk adjustment methodology. By 2004, payment rates would be 
based on comprehensive risk adjustment using full (i.e., inpatient and 
other) encounter data and the demographic method would not be used. 
HIAA's concerns with this proposal are both practical and programmatic.
    First, the practical. The time frame for implementation outlined by 
HCFA is simply far too short. Given the significant technological 
considerations involved, it is unreasonable for the agency to require 
that all Medicare+Choice organizations be able to provide physician, 
outpatient hospital, skilled nursing facility and home health data 
beginning as early as October 1, 1999. (HCFA has not yet identified a 
specific date by which this information must be provided, creating 
additional uncertainty.) The collection, verification, transmission and 
analysis of ``representative'' encounter data is a complicated 
endeavor. Capturing this data in a valid, accurate and transferable 
manner will be a major challenge for most plans. Indeed, some HIAA 
member companies that currently contract with HCFA do not have the 
technical capability to capture and transmit encounter data other than 
inpatient encounters. Nor do our members with PPO and similar network-
style delivery systems have the capability to do so. They are simply 
not organized in a manner that will allow them to collect this level of 
data.
    Even if the capital for such purposes can be arranged, HCFA's 
proposed time frame is insufficient to allow Medicare+Choice 
organizations to procure and install the required systems. Procuring 
systems that can accomplish these tasks requires very careful planning 
and assessment, review of the capabilities of competing technologies 
and vendors. Time is needed to install the systems, modify provider 
contracts if necessary to ensure adequate reporting to the 
Medicare+Choice plan, train the staff (both at the Medicare+Choice 
organization and provider locations) and verify and validate the data. 
All of these steps must be carefully executed or the system will fail. 
These obstacles to compliance cannot simply be wished away. Moreover, 
the imposition of these costs on all Medicare+Choice plans will make 
the development of rural plans even more difficult because they will 
continue to have fewer beneficiaries enrolled compared to plans in 
other areas.
    The process by which information is communicated to, and received 
by, HCFA is likely to present significant technological problems as 
well, if past experience is any guide. HIAA members have experienced, 
and continue to experience, problems in ensuring that accurate 
inpatient hospital data is transmitted via Medicare fiscal 
intermediaries to HCFA.
    Difficulties can also be expected as HCFA attempts to manipulate 
significant amounts of data for the first time using the proposed PIP-
DCG risk adjustment model. The methodology developed by HCFA is 
complicated and requires numerous steps. The process is yet untested. 
HCFA faces a monumental task in getting the PIP-DCG system to work. We 
are awaiting the opportunity to review the plan-specific effects of the 
data collected to date. Moreover, as HCFA acknowledges, ``the PIP-DCG 
model is [simply] an interim step towards implementation of a 
comprehensive risk adjustment model (i.e., one which uses diagnoses 
from all sites of service.)'' HIAA strongly believes that the ambitious 
time frame proposed by the agency rests on a flawed premise: namely, 
that all of the anticipated technological and methodological problems 
can be resolved in the five-year window.
    HIAA's doubts in this regard are heightened by the fact that 
planned implementation coincides, at least initially, with agency 
efforts to ensure Year 2000 readiness, both internally and in 
connection with Medicare+Choice organizations and other contractors. If 
HCFA transitions to risk adjustment before the necessary fixes are made 
and before reliable data are gathered and properly analyzed, the 
consequences could be catastrophic for individuals enrolled in 
Medicare+Choice plans, as well as the Medicare managed care program 
generally.
    As if all this were not reason enough to delay implementation, HIAA 
has significant programmatic concerns regarding the proposed risk 
adjustment model. First, HIAA is concerned that variations resulting 
from excessive payments under the original Medicare fee-for-service 
program have been incorporated into the risk adjustment calculation. 
Additional, unnecessary hospitalizations that have occurred within the 
original Medicare Part A fee-for-service program, despite HCFA's 
attempt to fight this, are still significant. As a result, 
Medicare+Choice organizations will receive lower payments through the 
proposed risk adjustment methodology. HCFA should not penalize the 
managed care portion of Medicare for the program's failure to limit 
false or fraudulent claims and medically unnecessary hospitalizations. 
One approach to avoid this, would be to limit the use of risk 
adjustment so that the total amount paid to all Medicare+Choice plans 
is not reduced but instead redistributed among Medicare+Choice plans 
only.
    Second, recognizing the fact that most federal agencies rely on 
sampling, HCFA's expectation of reported data on all individuals seems 
excessive. Given that even the more comprehensive risk adjuster will 
not be able to fully reflect all differences, HIAA believes that 
Congress should require HCFA to reexamine the use of plan-based 
sampling to reduce the administrative burden on the plans, reduce the 
potential for errors in the start-up phases, and increase the privacy 
of each individual's sensitive medical information.
    Third, HIAA strongly believes that it is poor public policy to base 
risk adjustment--even temporarily--on inpatient hospital data only. 
Such an approach, even with the adjustments that HCFA has made to its 
initial risk adjustment proposal, would reward Medicare+Choice plans 
with excessive hospital use, and penalize plans that have effectively 
reduced inpatient hospitalizations and focused on providing more care 
on an outpatient basis. The incentives created by a risk adjustment 
methodology based exclusively on inpatient hospital data could result 
in increased inappropriate hospital use, increased avoidable costs, and 
a set back in the effort to realize greater efficiency in the health 
care system. Beneficiaries enrolled in plans with a relatively high 
proportion of members who receive care for expensive chronic illnesses 
outside the hospital setting would be particularly harmed.
    For all these reasons, HIAA urges HCFA to delay the implementation 
date of risk adjustment beyond January 1, 2000. Since HCFA believes it 
does not have the authority to do this, Congress should revise the 
implementation date. While the effort to collect encounter data should 
proceed in a careful and deliberate manner, changes in payment 
methodology based on risk adjustment should not be implemented until 
complete and reliable encounter data are available. To ensure the 
validity of the data and a viable risk adjustment process, Congress 
should direct HCFA to (1) conduct a demonstration project aimed at 
validating the proposed methodology and (2) identify less costly and 
less data intensive ways of performing risk adjustment.
                         summary and conclusion
    If the Medicare program is to be sustained for the next generation 
of beneficiaries and beyond, it is crucial that the federal government 
employ every strategy appropriate to enhance quality health care 
options for beneficiaries and encourage the development of lower cost 
options rather than relying on punitive regulations which will reduce 
choice and funnel more people into the highest cost option--fee-for-
service Medicare. The Medicare+Choice program already is at an early 
crossroad where improvements can allow it to flourish but neglect of 
necessary change will doom it to failure. It would be more wise, in the 
long run, for the government to employ market-oriented strategies to 
ensure that there are Medicare+Choice options available to 
beneficiaries and to create incentives for private health insurers and 
providers to deliver value in the context of the Medicare program. 
Because it is a critical building block in this market-based strategy, 
Medicare+Choice must be successful.
    In summary, HIAA believes that the prospects for success will be 
greatly improved if the following steps are taken with respect to the 
Medicare+Choice program:

 Adjust the payment structure so that increases cover medical 
        inflation;
 Issue revised regulations to reduce costly administrative 
        burdens on small, rural and non-HMO plans;
 Change the due date of ACRs to November 1 to eliminate 
        unnecessary risk;
 Delay and revise the proposed risk adjustment model to reduce 
        the cost of reporting and system development; and
 Modify the role of risk adjustment so that overall revenues to 
        the Medicare+Choice program are not reduced, but simply 
        reallocated among based on the health status of enrollees.
    A final word of caution: Congress must act quickly to direct HCFA 
to change course in the manner outlined and to find ways to reduce the 
regulatory burden of participating in the Medicare+Choice program if it 
wants the program to succeed. The time frames for critical decisions 
relating, for instance, to system investments are very short, 
particularly given HCFA's anticipated risk adjustment schedule. Thus, 
if Congress is to make adjustments to the program, it should act now.
    Thank you, Mr. Chairman. I would be happy to answer any questions 
you may have at this time.

    Mr. Bilirakis. Thank you, Mr. Johnson. Thanks to all of 
you. Ms. Discenza, has Blue Cross/Blue Shield of Florida 
withdrawn from any county?
    Ms. Discenza. No, sir, none at all.
    Mr. Bilirakis. Why have you all chosen not to do it when so 
many others have?
    Ms. Discenza. Our whole business is confined to Florida. 
And to ignore the seniors market in Florida would be a big 
mistake for us. We actually even have more customers under our 
Medigap products right now than we do under our 
Medicare+Choice. So we think that that market is one that we 
must value over the long term, but I will confess that we 
thought very seriously last fall.
    Mr. Bilirakis. I was about to commend you. Go ahead, no.
    Ms. Discenza. We did think very seriously about certain 
locations. Because honestly, not just the risk adjusters but 
the 2 percent cap with costs going up at 5 or 6 percent.
    Mr. Bilirakis. Is that a bigger problem for you all, the 2 
percent cap for that period of time versus the risk adjusters? 
You know risk adjustment is something, you heard the testimony 
earlier, is something that HCFA has been considering and 
working on for 10 years. And some of you say that you would 
like to see a year's delay. You know, it would be interesting 
to find out what an extra year would do when you have already 
been, it has already been worked on for a 10-year period of 
time?
    I suppose there may be a little more out-patient 
information available and ambulatory-type information over a 
year's time. But let me ask you again, Ms. Discenza, I didn't 
mean to cut you off. Did you have something else?
    Ms. Discenza. No, that is okay.
    Mr. Bilirakis. Could you explain in a little more detail 
how payments to Medicare+Choice Plans have ended up being so 
far below the traditional fee-for-service program?
    Ms. Discenza. In the initial part of the program, the 95 
percent was chosen to recognize the fact that HMO's should have 
better overall experience, and when the Balanced Budget 
Amendment passed, that difference was widen. Widen because the 
reimbursement has been going up for all of our counties by 2 
percent a year, when our costs are going up five or six.
    Well that means that the 95 percent went to, say, 92 least 
year and to about 89 this year. Let us say to 86 or even 85 
next year, and maybe combining that with the question that you 
asked a minute ago, risk adjusters or the reductions in overall 
payments, it is the combination of the two that really hurts 
us. That if we are already at 85 percent and the studies that I 
have read say that Medicare+Choice people have health 
improvements that average even 10 percent from the average 
population.
    We are already pushed below that 10, and then to have the 
prospect of full risk adjuster implementation drive that down 
even further is, our concern is.
    Mr. Bilirakis. Now Blue Cross/Blue Shield is a non-profit?
    Ms. Discenza. We are a not-for-profit mutual that pays 
Federal income tax.
    Mr. Bilirakis. I won't try to figure that one out.
    Ms. Discenza. I won't either.
    Mr. Bilirakis. Let me ask a question, I think you mentioned 
you wanted the opportunity to be able to work with HCFA in 
trying to devise a better, in your eyes, risk adjustment 
program. Well, let me ask the question. Have you been 
approached, have any of you been approached by HCFA? Do you 
have to work with HCFA?
    Ms. Margulis. Yes.
    Mr. Bilirakis. Okay. What has happened? Your advice has 
been ignored? Tell me a little bit.
    Ms. Margulis. Mr. Chairman, we have been working with HCFA 
over a period of time on this payment methodology, and there 
are basically two issues, I will give two examples. The first 
is that while the loss specifies the use of in-patient hospital 
data and such other data as the Secretary requires.
    Mr. Bilirakis. And we recognize that that is really not the 
best way to approach it.
    Ms. Margulis. Correct. But HCFA had the opportunity along 
the way, as we shared our information with them, to make some 
different choices that would not have created as large a bias 
against the managed care plans. And I would list a couple of 
those for you. The first is, I believe, Mr. Bertko referred to 
short stays. As you may be aware, managed care plans have 
significantly more 1-day stays. That is probably due to the 
fact that we treat our beneficiaries in an out-patient setting 
and into these management programs.
    Second, by using in-patient hospital data, it does not 
recognize those other in-patient settings, such as skilled-
nursing facilities, where we may take someone with a diagnosis 
who has been in the hospital for 1 day and transfer them to a 
skilled-nursing facility. We have that data, we could have 
provided that data to HCFA. Third, with regard to those 
conditions that could be treated on an in-patient or out-
patient basis, while HCFA did make some in-roads in agreeing 
that those could be considered discretionary conditions, there 
is some others, for example, in the chronic heart failure area 
that are still left in that bias against us.
    So we have worked with them. The second area, if I might 
talk about that is, for months we have asked HCFA to supply us 
with the data necessary to replicate the formulas to be able, 
as Mr. Bertko said, to go back and recalculate the formulas and 
the information that HCFA has. They have not supplied us with 
that information. Sorry for the long answer. I probably could 
go on.
    Mr. Bilirakis. Well, I think, again, I think it was you who 
talked about disease management programs. You make a good point 
in that regard. Certainly the Y2K is something that maybe we 
haven't considered adequately. I have, after Mr. Brown finishes 
up, I am sure Humana is anticipating a question from a 
Floridian.
    Ms. Margulis. Absolutely.
    Mr. Bilirakis. Mr. Brown.
    Mr. Brown. There seems to be a lot of Floridians on this 
panel. Is that my imagination?
    Mr. Bilirakis. Ms. Margulis is from Louisville, Kentucky, 
by the way.
    Mr. Brown. Yeah, but there is still one. Thank you. Mr. 
Chairman, I am a little perplexed by all this. You know I 
represent a district in northeast Ohio. Two counties in my 
district United Health Care disenrolled 2,000 people in each 
county. Gave sort of cavalier notice to them by publishing 
something in the newspaper.
    Then I read in the paper that the CEO of United Health Care 
made $68 million last year. I read in the Los Angeles Times, 
Orange County edition, the county where Mr. Schub's company is, 
I think. PacifiCare Health Systems, No. 1 operator of Medicare 
HMO said fourth quarter operating profits more than tripled as 
it left some markets and cut costs. You see executive salaries 
skyrocketing in this business.
    You see huge marketing costs with full page ads in 
expensive big city newspapers. Then I read that more and more 
of you are dropping senior citizens in some counties, because 
you are just not getting enough money to cover them. But in 
counties next door you are staying because beneficiaries there 
are profitable. And then Mr. Schub's testimony says, unless 
Congress takes corrective action, the number of providers who 
refuse to contract with Medicare+Choice plans will increase and 
health plan withdrawals will continue at a more rapid pace. All 
within the context of bigger executive salaries, good profits 
for PacifiCare, expensive marketing campaigns. And you want the 
Medicare Commission to give you more money. That's what I don't 
understand, Mr. Schub.
    Mr. Schub. I think maybe I would start, Mr. Brown, with 
just a comment that the industry has been going through a lot 
of change through the preceding years. In that period of 
change, health plans have been profitable and unprofitable, and 
our company as well. Last year we had some significant write 
downs from markets that were, were literally out of control.
    So the news release you saw was a company that has gotten 
itself to a little more than 2 percent after tax profit margin, 
with a lot of hard work and see ourselves as a stable company 
right now. We are committed to the Medicare business. We take 
our seniors to be our No. 1 priority. The health improvement 
our seniors and the success of our provider partners is what 
our company is about.
    We have to earn more than, we have to have some retained 
earnings to be able to apply capital and expand the program. We 
believe that a slightly more than 2 percent after tax margin, 
is an acceptable margin when you consider the fact that any 
not-for-profit hospital has to maintain at least twice that to 
simply maintain their bond rating and borrow money. So all 
organizations in health care have to have some sort of a margin 
after tax.
    As it relates to executive compensation, we bench mark 
ourselves against other industries. I can't speak for United, 
but I know that within PacifiCare we bench mark ourselves 
against other industries and are not excessive in terms of 
executive compensation. To the point, last year there were no 
bonuses paid, simply because of the fact that the company did 
not perform.
    Mr. Brown. Mr. Bertko, you mentioned in your testimony that 
HCFA's proposed risk adjustment model is an improvement over 
the status quo. You said payments to health plans would be more 
accurate. Tell us some of the deficiencies in the current AAPCC 
rate, if you would?
    Mr. Bertko. Yes, I will. First off, I think many of the 
previous speakers have said that in general the age, gender and 
status ones basically overpay for folks that are very healthy 
and do underpay by some considerable amount for folks who are 
in the sickest quartile or quintile. So that is the main 
feeling of it. It doesn't recognize the real needs of the 
population. And in this case, by using this part of diagnostic 
data, you are able to better match, not perfectly, but better 
match up what the payment would be versus what the needs of the 
population are.
    Mr. Brown. So risk adjustment clearly is preferable to 
AAPCC, I mean there is no doubt about that?
    Mr. Bertko. Yes. And again, I think the only thing I would 
add there is that the data streams and the mechanics that go 
with it have to be in the right shape when you start it up.
    Mr. Brown. I have one other question. Ms. Discenza, HCFA 
says that managed care plans are experiencing favorable 
selection. Most managed cares plans disagree with that notion. 
If HCFA says that many of you are experiencing favorable 
selection and many of you disagree with that statement, does 
that mean that you have better data or tools than HCFA does to 
assess beneficiaries' health status?
    Ms. Discenza. Actually the studies that I have seen I don't 
think the majority of us would question that in fact people who 
choose to join HMO's usually have had better past health care 
results than people who choose not to join HMO's. That is true 
not in just the seniors' market but in the under 65 market as 
well. That is something though that tends to happen more often 
when a program is new than when it is very mature.
    If we look at, for example, the under 65 population today 
with as broad an HMO enrollment as there is today, there is 
not, the gap between those who will choose an HMO and those who 
don't is narrowing. I personally do not question at all the 
studies that show that those who join, the seniors who join an 
HMO were easily in 10 percent, 5 to 10 percent better health in 
the year before the joined.
    Mr. Brown. So that would, that would certainly argue for a 
risk adjustment?
    Ms. Discenza. There is no question that risk adjusters, 
done correctly, are appropriate.
    Mr. Bilirakis. So what you are saying is that risk 
adjustment can be beneficial as well as the opposite for your 
company, right?
    Ms. Discenza. Risk adjusters, done appropriately.
    Mr. Bilirakis. Done correctly.
    Ms. Discenza. The problem is that if we started off, as I 
mentioned earlier, with 95 percent with a 5-percent reduction 
in the beginning of the Medicare, what was called Medicare Risk 
Program, that has now moved down to below 90. And if we move 
with risk adjusters down from there, it seems to me we could 
well be double counting this purported healthiness of the 
Medicare+Choice enrollment.
    Mr. Bilirakis. Mr. Bryant, would you like to inquire?
    Mr. Bryant. Thank you, Mr. Chairman. I will ask maybe one 
or two of you if you want to answer this. Many health plans 
have developed specialized programs and provide high quality 
care in settings other than hospitals to members who otherwise 
would have been treated as an in-patient setting. Can you 
provide an example of such a program that you have and how it 
is penalized by HCFA's new risk adjustment method? And I have 
got a CNA question.
    Ms. Margulis. Mr. Bryant, we have a congestive heart 
failure program that covers approximately 4,000 beneficiaries 
in our market. We anticipate this next year that we will be 
able to reduce hospital admissions by 2,300 of those 
beneficiaries. Each one of those avoided hospitalizations is 
$12,000, which will result in a potential $28 million loss. And 
if I put that on a per beneficiary basis, that could mean that 
we would have to reduce prescription drug coverage in those 
markets for beneficiaries.
    Mr. Bryant. Did you get any comfort this morning from Mr. 
Hash. I think, I thought I heard him say that they were going 
to try to use other provider, medical encounters fairly soon. 
Although I understood it was going to be 3 or 4 years, 5 years 
perhaps. But I thought I heard him say that that was going to 
be more immediate.
    Ms. Margulis. No sir, unless we have some sort of delay 
where we can go back and perhaps make some adjustments, test 
the data. A page from the California HPIC would be to step 
back, make sure that we can accurately correct and process the 
data and simulate the payment method so that we can make 
corrections.
    What I would say too, and I have heard a lot people here 
today say this. We are talking about implementing a risk 
adjustment system done correctly. But I would say to the 
members of the committee, this is now being done on top of a 
pile of other reductions that has already, in essence, taken 
away any favorable selection that there would have been.
    So we are very cognizant of that and concerned that we 
won't be able to offer the kinds of additional benefits that 
attract people to our programs. If we don't go back and correct 
some of the errors and flaws that we think this current process 
has. And to implement, as many of the Panelists spoke about, we 
are only implementing 10 percent of this new payment 
methodology. We think it is wrong to implement a flawed system. 
It means the second year is only, the problems are only 
exacerbated.
    Mr. Bryant. You know, what I hear you saying is that while 
the rhetoric is there that they want competition in private 
sector market place to work, the regulations and the 
implementation is making it, these items are making it very 
difficult for you to compete and operate. Would that be a yes 
or no?
    Mr. Johnson. It would be a yes. A large part of it is the 
uncertainty, a And the anxiety, particularly for providers, who 
are going at risk. In a fee-for-service world, the risk is 
minimal and you can control some of that by working harder, 
doing more procedures, whatever. In a capitated world where you 
are really trying to be organized, coordinating care and take 
all comers. Most of the provider plans we represent are not-
for-profits who are doing this in the community because there 
is an access issue.
    For those continued uncertainty about how the regulations 
are going to hit them next year or in 6 months, without the 
flexibility to adapt, is just causing them to say, no, let us 
not do it. And on balance, these systems offer improvements. At 
least they offer a different kind of care and a choice. Which 
really ought to be in the system, but for providers it is not, 
they are not going to do it.
    It is just the regulatory system, the uncertainly about how 
these adjustments are going to affect them, a And risk 
adjustments should help providers. We will attract a 
disproportionate number of sick patients if we have a good 
reputation in our community. But we don't know whether being 
efficient about it, reducing in-patient stays, is going to 
actually hurt us or help us in the formula. And we don't know 
whether we can get all the data together to actually produce 
what is needed by HCFA in the timeframe required.
    Mr. Bryant. Mr. Schub.
    Mr. Schub. If I could just add to that, thank you Mr. 
Bryant. The point that was raised before by the chairman, that 
predictability is a big issue, a And the simplicity of 
understanding, you can't serve two masters. And that is what 
the comments that were just made refer to. That physicians, 
they generally practice one style of medicine and they need to 
know what the game is and what you want them to do. And they 
can demonstrate significant changes in health care cost 
reductions while maintaining quality and satisfaction. But at 
this point, they are getting very confused.
    Mr. Bilirakis. Well thanks, Mr. Bryant. Just one comment 
here. For instance, Humana, I don't mean to pick on you but I 
have already told you----
    Ms. Margulis. It has been done before.
    Mr. Bilirakis. Humana has pulled out or reduced services in 
14 Florida counties. That plan pulled out or reduced services 
more than any other plan in our State. None of that took place 
in my Congressional District, I suppose that was more of a 
coincidence than anything else. But you know, your timing, not 
only Humana's but I think managed care's timing stinks, quite 
frankly. I mean you are under attack these days. I don't think 
a 2-percent profit margin in wrong.
    This is America. If the stockholders of United, is it, 
don't care about their CEO receiving a $65 million salary last 
year, then I am not going to care about it. But if in fact I 
see that that company has pulled out and really putting in 
jeopardy a lot of Medicare beneficiaries, then that is going to 
concern me. You have said you will work with HCFA. You have 
said that HCFA has been respondent in some degrees and not 
respondent in others.
    I don't know. Are you going to basically force us to do 
what most of us don't want to do? And that is to mandate that 
you continue to cover some of these Medicare beneficiaries in 
some of our, well, in America? You could be leading toward 
that. And I don't think you want that. And I guarantee you I 
don't want that. But you know, we have got people out there who 
have complained to us. Now maybe some of them would, some of 
these plans would have withdrawn anyhow in the normal course of 
events.
    But as I said, your timing is rotten and it seems to me 
that, you know, I get the feeling that you are using this risk 
adjustment as rationale. And you are using it, basically I made 
the comment in my opening statement about on the come. Risk 
adjustment is coming and you are not happy with the way it 
seems to be devised by HCFA. You are pulling out and you feel 
that maybe that is going to be beneficial to work with HCFA to 
improve it.
    But it may work the other way around. And I would really 
hate to see that, but it could happen. Do you have any comment, 
Ms. Margulis? I guess I should at least give you that 
opportunity.
    Ms. Margulis. Yes sir. Yes, we also, I might say, thought 
the timing was very poor as well. Let me say first that we have 
been in the Medicare Risk and now Medicare+Choice Program for 
13 years.
    Mr. Bilirakis. Any you are heavy in the Tampa Bay area in 
Florida.
    Ms. Margulis. Clearly, clearly. And we bought a troubled, 
you may remember, plan back in 1987.
    Mr. Bilirakis. I remember.
    Ms. Margulis. And had troubles for many years.
    Mr. Bilirakis. And that is why I say, I don't know that. I 
should question a 2-percent return or whatever the case may be. 
I don't do that.
    Ms. Margulis. I think what I would want to say to you is 
that we have been a long, long-term participant in this 
program. We believe in it. We would like to be in every Florida 
county. The situation last year was unusual for us. You may 
recall last year we acquired a large company in Florida, 
Physician Corporation of America. There were issues in some of 
those counties that were related to an acquisition and 
integration. One of the requirements for us to remain in this 
program is to have adequate provider health care delivery 
systems and adequate networks, a And in many cases we were 
unable to have that kind of network that we could offer an 
affordable, quality product.
    Mr. Bilirakis. Why, because of the current, because of the 
current AAPCC or what? What was the reason?
    Ms. Margulis. Related to a variety of considerations, a And 
I believe Mr. Hash and several people said that withdrawals are 
due to many conditions in a market. Let me say this, that the 
promulgation of the Medicare+Choice rules, the timing of that 
plus the notification deadline for non-renewals and the thought 
that if we could change the environmental situation in many of 
those counties in 1999 or 2000, we could go back to those 
counties.
    I think a number of our decisions were based on that.
    Mr. Bilirakis. I am sorry, what do you mean by 
environmental?
    Ms. Margulis. If, when pulling out in October, there is no 
5 year penalty for going back, s So we would have an 
opportunity, if we could build an adequate network and realize 
that we would be able to cover our costs for providing services 
that would attract beneficiaries to our plans, we could go 
back. I think what I want to say long term is that it is our 
intent to be a long-time participant in this program.
    We want to work on, not only a payment methodology that 
doesn't every year put Congress in the position of having a 
formula fight, b But also one that can deliver additional 
benefits to seniors and to all beneficiaries to join this 
program. The risk adjustment methodology we feel, if 
implemented correctly and based on adequate and sufficient 
data, will help. As I mentioned before, not on top of a whole 
lot of other payment reductions so that we can no longer be 
attractive to people in the fee-for-service sector to select 
us.
    Mr. Bilirakis. Well, all right. I want to publicly commend 
HCFA, gentleman, there may be more than just you here, sir, I 
don't know. But the point is I have asked that they have a 
representative here to listen to all this, they have, and I 
think that is good. But you have also heard that there might be 
openness for more work with these people. As much as we may 
try, the risk adjustment seems to be something that everybody 
thinks is a good idea, but you say it has to be done right.
    I don't know what doing it right is or isn't. But you know 
we have beneficiaries out there who have lost a choice, a very 
important choice. And we have to respond to them.
    And I think you all have got to realize that. Hopefully you 
do. I have nothing further. Do you have anything further, Mr. 
Brown? Well, thank you so very much. Again, I appreciate your 
patience.
    [Whereupon, at 2:16 p.m., the subcommittee was adjourned.]
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