[Congressional Record Volume 146, Number 86 (Friday, June 30, 2000)]
[Extensions of Remarks]
[Pages E1172-E1176]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                          MEDICARE RX 2000 ACT

                                 ______
                                 

                               speech of

                            HON. BILL LUTHER

                              of minnesota

                    in the house of representatives

                        Wednesday, June 28, 2000

  Mr. LUTHER. Mr. Speaker, the time is long overdue to develop a truly 
meaningful voluntary prescription drug benefit for our nation's 
seniors. But as we ensure affordable prescription drug coverage that is 
accessible to each and every senior in America, let us also use this 
opportunity to remedy the serious disparities in the current 
Medicare+Choice program.
  Just this week, one of the remaining HMOs offering a Medicare+Choice 
plan in my district announced that it would no longer offer its plan. 
The reason it gave for its withdrawal: Minnesota's appallingly low 
payment rates to Medicare HMOs. Citizens in Minnesota as well as other 
parts of the country are today subsidizing a system that unfairly 
penalizes them for living in areas of the country that have 
historically provided low-cost and efficient healthcare services.
  Many counties in our country receive such low Medicare HMO payments 
that seniors either have no HMO option, or receive an unacceptably 
inadequate benefits package. Even the seniors who have the option to 
enroll in a Medicare+Choice plan pay high premiums for a relatively 
meager benefit. At the same time seniors in other parts of the country 
are receiving generous benefits including prescription drugs without 
having to pay an extra penny towards a premium.
  This issue is about fairness and the efficient delivery of health 
care as care costs consume

[[Page E1173]]

an ever increasing share of our country's resources. The development of 
a prescription drug benefit offers us the opportunity to address and 
correct the current unjust disparity in the Medicare program. No more 
federal dollars should go to the HMOs that are already offering a plan 
with a rich benefits package until we achieve fairness. Instead, let's 
develop a genuine prescription drug benefit that ensures that all 
seniors have fair and equitable access to healthcare services and 
prescription medication. Let's develop a Medicare system that rewards 
efficiency, not waste. We owe this to the citizens of our country, as 
well as future generations of Americans.
  My office and the rest of the Minnesota Congressional Delegation have 
filed a Congressional amicus brief on behalf of Minnesota Attorney 
General Mike Hatch and the Minnesota Senior Federation's lawsuit 
seeking to change the current unfairness in our Medicare system. I 
insert the brief for the record, and I ask for my colleagues' support 
on this important issue.

          United States District Court, District of Minnesota


                   Court File No. 99-CV-1831 DDA/FLN

  State of Minnesota, by its Attorney General, Mike Hatch; Minnesota 
   Senior Federation--Metropolitan Region and Mary Sarno, Plaintiffs

                                  vs.

The United States of America and Donna E. Shalala, Secretary of Health 
                     and Human Services, Defendants


                         STATEMENT OF INTEREST

       This memorandum is respectfully submitted by the Members of 
     the Congressional delegation of the State of Minnesota as 
     amici curiae to support each of plaintiffs' constitutional 
     claims. This case involves basic public health issues for 
     senior citizens in Minnesota regarding the cost of and 
     beneficiary access to health benefits.
       The amici curiae have an interest in protecting and 
     promoting the health, safety and welfare of their 
     constituents, in ensuring that their constituents are not 
     discriminatorily denied their rightful status within the 
     federal system, and in securing the underlying incentives of 
     the federal Medicare program for their constituents.
       With this brief, the amici curiae wish to bring to the 
     Court's attention the policy dimensions of this lawsuit. As 
     legislators in the United States House of Representatives and 
     Senate, the amici curiae have a unique perspective on the 
     substance and political dynamics of the federal Medicare 
     program. It is the hope of the amici curiae that this 
     memorandum assists the Court in adjudicating this matter in 
     favor of their constituents, the citizens of Minnesota. Amici 
     urge the Court to rule in favor of Minnesota senior citizens 
     who, by virtue of nothing else but their geographic 
     residence, continue to suffer from the unequal and disparate 
     treatment of the federal Medicare managed care funding 
     scheme.


                              INTRODUCTION

       This memorandum asserts that the current reimbursement 
     formula for Part C of the federal Medicare Program 
     (``Medicare+Choice'') is not rationally related to the 
     program's objective of uniformity, arbitrarily limits 
     beneficiary options through low reimbursements for 
     Medicare+Choice and thus violates equal protection under the 
     law. More specifically, this memorandum asserts the 
     following: (1) the reimbursement system of Medicare+Choice is 
     patently irrational and does not remotely effectuate a key 
     objective of the program; moreover, it does not promote 
     efficiency in the health care system; (2) this irrational 
     reimbursement system has disparate and adverse effects on the 
     citizens of Minnesota and, consequently, has adversely and 
     disproportionately affected their access to and enrollment in 
     Medicare+Choice; and (3) legislative and political solutions 
     to this irrational and unfair reimbursement system have been 
     unsuccessful and leave no recourse but legal action before 
     this Court
       (1) Irrationality. One of the key goals of Medicare+Choice, 
     the roots of which stem from Congressional action in 1972 and 
     1982, is to furnish participating risk plans with uniform 
     incentives to provide non-covered benefits to their 
     beneficiaries. This goal is evident from (a) examining the 
     initial, uniform structure and spirit of Medicare's Parts A 
     and B, established in 1965, that are still in place today; 
     Congress has done nothing since then to indicate a change in 
     that spirit of uniformity; and (b) the utilization of the 
     adjusted community rate (``ACR'') mechanism and the 
     ``required benefit value'' that gives incentives to provide 
     non-covered benefits. In other words, uniformity plus 
     incentives equals uniform incentives. Under Medicare+Choice, 
     the reimbursement system provides Minnesota with low 
     capitation payments. As a result of static ACRs, the required 
     benefit values for plans in Minnesota are extremely small or 
     nil. Thus, participating plans in Minnesota have no incentive 
     to offer non-covered benefits to their enrollees. As such, 
     Medicare+Choice's reimbursement system is irrational, does 
     not remotely effectuate one of the program's key goals, and 
     cannot justify the unequal, disparate treatment of Minnesota 
     citizens.
       (2) Adverse Impact. This irrational system adversely 
     impacts Minnesota citizens by saddling them with high co-
     payments and extra premiums that carry no extra benefits. 
     Minnesota's burden is not one shared by states like Florida 
     or New York, whose citizens enjoy a panoply of extra benefits 
     at no extra cost. This inequitable treatment adversely 
     affects access to and enrollment in Medicare+Choice plans in 
     Minnesota.
       (3) Failed Legislative Efforts. Political reform and 
     legislative remedies have been unsuccessful. Until 1997 and 
     the Balanced Budget Act (``BBA''), Congress was unable even 
     to address the issue in a meaningful fashion. At its 
     inception, the average adjusted per capita cost (``AAPCC'') 
     schedule was based on arbitrary tabulations. The BBA's modest 
     reforms were wholly inadequate. Budget neutrality rules kept 
     (and continue to keep) capitation payments low, and the BBA 
     failed to substantively reform the ACR mechanism. 
     Consequently, legal action is Minnesota's only recourse.

      I. IRRATIONALITY OF THE MEDICARE+CHOICE REIMBURSEMENT SYSTEM

       One of the key purposes of Medicare+Choice is to provide 
     incentives for participating risk plans to offer non-covered 
     benefits (e.g., prescription drug benefits) to beneficiaries 
     at the lowest possible cost to beneficiaries. However, the 
     reimbursement system under Medicare+Choice does not offer 
     such incentives to participating plans in Minnesota. The 
     result is that most participating plans in Minnesota either 
     do not offer any non-covered benefits to beneficiaries, or 
     they offer such non-covered and covered benefits with high 
     premiums and co-payments. Such is not the case in other 
     states. This disparate, unequal, and unfair result is the 
     consequence of an irrational reimbursement system that does 
     not provide the purported incentives of Medicare+Choice in 
     Minnesota, which are provided in other states. Moreover, it 
     is this disconnect that gives the federal government no 
     rational basis for its disparate and unequal treatment of 
     Minnesota senior citizens under Medicare+Choice.


                               A. PURPOSE

       Medicare was established in 1965 as a national insurance 
     program for elderly and disabled people. It is, in fact, the 
     nation's largest health insurance program. Medicare Parts A 
     and B provided covered benefits (e.g., general hospital 
     services) to beneficiaries on a fee-for-service basis. Under 
     Part B, participating beneficiaries partly fund the program 
     with uniform, monthly premiums assessed against participating 
     beneficiaries. This original structure of Medicare under 
     Parts A and B is instructive. At its inception in 1965, 
     Medicare was created to provide uniform health care services 
     at uniform and equal costs to all qualified beneficiaries 
     over the age of 65. There is no reason to suspect that the 
     intent behind Medicare's uniformity of benefits and inherent 
     equality has changed.
       In 1972, Congress amended the Social Security Act to 
     incorporate managed care principles into the Medicare system. 
     In so doing, the national legislature allowed health 
     maintenance organizations (``HMOs'') to be paid a flat, 
     monthly capitation payment for Parts A and B services on 
     either a cost or risk basis. Such capitation payments were 
     based on an actuarial calculation of the average adjusted per 
     capita cost (``AAPCC'') per Medicare beneficiary. Congress 
     set capitation payment rates at 95% of the estimated per 
     capita costs of fee-for-service Medicare beneficiaries. This 
     choice of 95% was purely arbitrary. (See Section 111, infra.)
       In 1982, Congress again amended the Social Security Act to 
     broaden the scope of participating organizations in Medicare. 
     Specifically, while the Tax Equity and Fiscal Responsibility 
     Act of 1982 (``TEFRA'') retained the AAPCC formula and 
     continued to provide participating plans with a monthly 
     capitation payment on a county-by-county basis, TEFRA also 
     incorporated the adjusted community rate mechanism into its 
     reimbursement system. By so doing, Congress intended, inter 
     alia, to provide participating risk plans with incentives to 
     provide non-covered beneficiaries.
       In 1997, Congress enacted the Balanced Budget Act of 1997, 
     which modified the payment methodology for the first time and 
     created Medicare Part C or Medicare+Choice. The BBA altered 
     the reimbursement system for participating risk plans in a 
     failed attempt to equalize vastly diverging capitation 
     payments. However, the BBA did little if anything to 
     substantively change or affect the ACR mechanism that 
     determines the scope of non-covered benefits.
       In sum, Medicare was established in 1965 to provide uniform 
     medical benefits to all qualified senior citizens regardless 
     of geographic residence. This is evident from the original 
     structure of Parts A and B of the program that is still in 
     place today. Furthermore, the subsequent incorporation of 
     managed care principles into the federal program and the 
     creation of Medicare+Choice did nothing to alter Medicare's 
     spirit of uniformity. Thus, by examining Medicare+Choice 
     within the context of uniformity for covered benefits under 
     Parts A and B, one of the key purposes behind Medicare+Choice 
     and its ACR mechanism becomes clear: Medicare+Choice, through 
     the ACR mechanism, endeavors to give all participating plans 
     relatively uniform incentives to provide their beneficiaries 
     with extra, non-covered benefits at the lowest possible cost.


                     B. IRRATIONALITY OF THE SYSTEM

       Given the above purpose of Medicare+Choice, the 
     reimbursement system for

[[Page E1174]]

     participating plans provides no rational basis for the 
     federal government's unequal and disparate treatment of 
     Minnesota citizens. That is, the reimbursement system fails 
     to effectuate the purpose behind Medicare+Choice--to furnish 
     participating plans with uniform incentives to provide non-
     covered benefits. More specifically, Minnesota's chronically 
     low, county-based capitation payments, when compared to 
     Minnesota's various county-based ACRs, give absolutely no 
     incentive to participating plans to provide non-covered 
     benefits to qualified Minnesota senior citizens.
       Moreover, the underlying and flawed AAPCC formula, upon 
     which current payment rates currently rely, originates from 
     arbitrary tabulations. This arbitrary quality further 
     underpins the irrationality of the reimbursement system. (See 
     Section III, infra.)
       The reimbursement system under Part C of Medicare has two 
     components. The first component is an actuarial methodology 
     used to calculate risk plan payment rates each year. This 
     component actually determines the monthly capitation payment 
     to each plan on a county-by-county basis. The second 
     component is the ACR mechanism. This component determines the 
     scope and/or amount of non-covered Medicare benefits and 
     services a beneficiary receives.
       Before the Balanced Budget Act of 1997, the capitation 
     payment rate was known as the adjusted average per capita 
     cost (``AAPCC''). The AAPCC was a relatively simple and crude 
     formula whereby Medicare would pay a risk plan 95% of what a 
     beneficiary would have received under a traditional fee-for-
     service arrangement. This actuarial project was calculated on 
     a county-by-county basis.
       Thus, the underlying methodological paradigm of the AAPCC 
     was actuarially based on historical fee-for-service 
     expenditures. This methodology accounted for (and continues 
     to account for) the wild variations in payment rates for 
     participating risk plans (See Section II, infra.) Minnesota 
     counties, in particular, were and continue to be adversely 
     affected by this wide disparity in payment rates from county 
     to county. Minnesota's historically efficient system, 
     including its early development of HMOs, was beneficial to 
     the Medicare program because Minnesota's lower charges 
     relative to the national average saved the program money. 
     However, because Medicare managed care based its capitation 
     amounts on historical charges, Minnesota counties were in 
     effect punished for their efficiency with low capitation 
     amounts. Other states and counties that had high service use 
     patterns and inputs costs were paid generously for their 
     inefficiency. Under current federal law and regulations, 
     these rates are locked in perpetuity. Given the purpose of 
     Medicare+Choice--to provide uniform incentives--this 
     capitation payment methodology, based on data that punished 
     historical efficiency, is irrational.
       The BBA replaced the AAPCC methodology and created the 
     current capitation payment methodology, but it retained the 
     old AAPCC rates for its baseline, which are the substantive 
     statistics on which the BBA's new tabulations rely. 
     Specifically, the BBA created a Medicare Part C 
     (``Medicare+Choice''), under which Medicare's monthly 
     capitation payment is the greater of: (a) a blended 
     capitation rate, which is the sum of a percentage of a 
     county-specific rate and a percentage of a price-adjusted 
     national rate, multiplied by a budget neutrality factor 
     designed to ensure that the aggregate payments under this 
     blended rate do not exceed the amount that would have been 
     paid under an AAPCC rate alone; by the year 2003, a maximum 
     blend will consist of a 50% county-based rate and a 50% 
     national capitation rate; (b) a minimum monthly payment 
     level, which in 1998 equaled $367; or (c) a minimum 102% of 
     the previous year's capitation rate.
       That is, the BBA failed to jettison AAPCCs altogether and 
     to recalculate plan payments derived from a new statistical 
     baseline. The inherent inequities that result from county-
     based fee-for-service projections remain in the capitation 
     payment structure. Minnesota continues to suffer from 
     disparate treatment, although Medicare's mission is to 
     provide an equitable entitlement for all American citizens 
     regardless of residency. Even the adoption of the blended-
     rate rule under the BBA has had no relative, immediate 
     effect, because the combination of the low national growth 
     percentage and the budget-neutrality rule has delayed its 
     application. (See Section III, infra.
       The second component of Medicare's risk program payment 
     methodology is the adjusted community rate mechanism. The ACR 
     mechanism is the process through which health plans determine 
     the minimum amount of Medicare non-covered benefits they 
     provide to enrollees (the ``required benefit value'') and the 
     premiums they are permitted to charge for those extra 
     benefits. When compared to its low ACRs, Minnesota's low 
     payment rates crystallize the unfair nature of basing 
     capitation payment rates on Medicare fee-for-service data as 
     a means of creating uniform incentives to participating risk 
     plans.
       The ACR process requires a plan to use its costs and 
     revenues from its commercial business to estimate the cost of 
     providing services to Medicare enrollees. This cost report is 
     the actual ``adjusted community rate.'' If the monthly 
     capitation payment exceeds the ACR, Medicare requires risk 
     plans do one of three things: (1) receive only the ACR amount 
     from the government; (2) contribute all or a portion of the 
     excess money into a stabilization fund; or (3) provide 
     beneficiaries with additional benefits with a value equal to 
     the difference between the ACR and AAPCC or the ``required 
     benefit value.'' Thus, one of the key purposes behind the ACR 
     mechanism becomes all too clear. Congress created 
     Medicare+Choice and the ACR mechanism to furnish 
     participating plans with incentives to choose option three. 
     If plans could reduce their ACRs, their static capitation 
     payments would enable them to attract Medicare customers with 
     additional non-covered benefits. The magnitude of the 
     capitation payment/ACR difference (or the required benefit 
     value per enrollee) is the crucial determination of the scope 
     and amount of additional benefits one receives under 
     Medicare.
       As such, the disparate payment rates when compared with 
     ACRs are evidence of an irrational and unfair reimbursement 
     system that does not give Minnesota participating plans any 
     incentive to provide non-covered benefits. (See Section II, 
     infra.) The capitation payment rate punished Minnesota for 
     efficiencies the state health care system had achieved in the 
     1970s and 1980s. Because counties outside Minnesota with 
     historically high fee-for-service rates eventually enacted 
     managed-care reforms and instituted cost-effective, efficient 
     measures (as reflected in their continuously decreasing 
     ACRs), the magnitude of their required benefit values are 
     high. This allows risk plans in those counties to offer 
     additional non-covered benefits to their beneficiaries for 
     little or no additional cost. However, Minnesota counties 
     could not undergo a similar evolution towards increased 
     efficiency or cost-effectiveness. Counties in Minnesota had a 
     long history of efficient health care (a legacy of the 
     state's pioneering efforts in managed care). As a result, 
     Minnesota ACRs have been low for decades, and the difference 
     between Minnesota's historically low capitation payments and 
     its ACRs were, and continue to be, extremely small or nil. 
     Consequently, the system is inherently unfair--Minnesota 
     beneficiaries are not entitled to the same non-covered 
     benefits that other citizens in other states' counties enjoy, 
     because participating risk plans in Minnesota have no 
     incentive to provide such services. That is, plans in 
     different states have vastly different required benefit 
     values. (See Section II, infra.)
       Under a rational and equitable system, the ACR and the 
     capitation payment rates should almost perfectly correlate, 
     taking into account the differences in costs of commercial 
     and Medicare beneficiaries. That is, the dollar difference 
     between a risk plan's ACR and its capitation payment should 
     have the same purchasing power regardless of the county in 
     which a beneficiary resides. However, this is simply not the 
     case. Instead, the required benefit values vary wildly from 
     county to county, and this translate into inequitable access 
     by senior citizens to non-covered benefits and services. (See 
     Section II, infra.)


                             C. EFFICIENCY

       The current reimbursement system for Medicare+Choice 
     encourages inefficiency in an era when the federal government 
     should be encouraging efficiency. The fact is that States are 
     in effect rewarded for historically inefficient health care 
     systems with high capitation payments, and Medicare+Choice 
     essentially punishes Minnesota for its pioneering efforts in 
     managed care. While Part C currently awards efficiency with 
     large required benefit values (i.e., participating plans are 
     encouraged to reduce their ACRs) the fact that capitation 
     payments remain static perpetuates historical inefficiency 
     built into the system.
       Minnesota's unique history precludes the state from reaping 
     the benefits of large required benefit values. Because the 
     BBA shackled capitation payment increases with a budget 
     neutrality rule (see Section III, infra), Minnesota counties 
     continue to receive chronically low and inadequate 
     reimbursement rates. A system that truly encouraged 
     efficiency would take into account Minnesota's pioneering 
     efforts in health care and reward the state with higher 
     capitation payments. This would translate into larger 
     required benefit values for participating plans.
       One of the most pressing issues facing the United States 
     today is the enduring trend of rising health care costs. 
     These rising costs prevent the health care system from 
     providing universal coverage; they stifle the expansion of 
     life-saving and life-enhancing benefits, such as prescription 
     drug coverage; and they burden covered beneficiaries with 
     higher premiums and co-payments. Thus, Minnesota's 
     chronically low payments prevent the state from capitalizing 
     on its unique place in history. Minnesota bucked the trend of 
     rising health care costs and actually delivered high quality, 
     affordable care to its citizens. Minnesota's success should 
     be held as a model for the nation and an example of what our 
     country can do to reign in health care costs. However, 
     Medicare+Choice does just the opposite by undermining the 
     drive for greater efficiency.
       In sum, by ruling in favor of Minnesota in this lawsuit, 
     the Court has the unique opportunity to accomplish what the 
     United States Congress has to date been unable to do: promote 
     quality health care that is equitably delivered in an era of 
     rising health care costs.

              II. CONSEQUENCES OF THE SYSTEM ON MINNESOTA

       The effects of this irrational system have been devastating 
     to the state of Minnesota

[[Page E1175]]

     and its citizens. Minnesota counties' capitation payments are 
     alarmingly low when compared with the capitation payment 
     rates of counties in other states, and its ACRs have remained 
     static. As a consequence, access by Minnesota seniors and 
     Minnesota's enrollment rates in Medicare+Choice are adversely 
     and disproportionately affected.


                    A. DISPARATE CAPITATION PAYMENTS

       The disparity of capitation payment rates for Minnesota and 
     other states is striking. In 1997, the reimbursement rate for 
     Dakota County, Minnesota was $379.11; in Hennepin County, 
     Minnesota, the rate was $405.63. In 1997, the reimbursement 
     rate for Richmond County, New York, was $767.35, while in 
     Dade County, Florida, the AAPCC rate was $748.23. In 1997, 
     every county in Minnesota had an AAPCC rate below the 
     national average AAPCC rate. In 1999, despite the BBA 
     reforms, little changed. The capitation payment rate in 
     Dakota County was $394.42, while the payment rate in Broward 
     County, Florida, was $676.64. (See Appendix A; see also 
     Section III, infra.)


               B. DISPARATE EFFECTS OF THE ACR MECHANISM

       In addition, because of its historic efficiency, 
     Minnesota's ACRs have remained static. Consequently, the 
     difference between Minnesota's low capitation payments and 
     its static ACRs is minimal or non-existent. Conversely, other 
     states with recently improved efficiency have experienced 
     falling ACRs, enabling them to enjoy large required benefit 
     values as a result of their high capitation payments and low 
     ACRs. The result is that different managed care plans in 
     different states have different incentives with regard to 
     non-covered benefits. In Minnesota, seniors face high 
     Medicare premiums and co-pays and receive few or no non-
     covered benefits, while other states' citizens enjoy a 
     multitude of life-saving and life-improving non-covered 
     benefits with few or no extra payments. Nowhere is this more 
     obvious than in coverage for prescription drugs.
       The following chart illustrates the differences between 
     required benefit values in different metropolitan areas:

  TABLE 1.--RISK-PLAN BENEFITS AND MONTHLY PREMIUMS BASED ON ADJUSTED COMMUNITY RATE PROPOSALS BY MARKET, 1995
                                               [Dollars per month]
----------------------------------------------------------------------------------------------------------------
                                                                             Required     Optional
             Primary Meroplitan Statistical Area               Number of     Benefit      Benefit      Premium
                                                                 Plans        Value        Value       Charged
----------------------------------------------------------------------------------------------------------------
United States...............................................          174       $25.17       $56.67       $22.04
Boston......................................................            8         4.09        71.56        47.84
Chicago.....................................................            3        24.45        38.31         0.00
Los Angeles.................................................           13        68.83        37.18         6.08
Miami.......................................................            8       106.27        20.75         0.00
Minneapolis.................................................            3         0.00        75.89        60.97
New York....................................................            5        53.37        46.77         8.80
Philadelphia................................................            6        19.30        66.85        10.00
Portland, OR................................................            7         9.38        64.52        46.00
San Francisco...............................................            8        21.50        56.96        20.25
Nonmetroplitan California...................................            6        14.43        60.19        31.08
Nonmetroplitan Florida......................................            5        12.46        73.61         9.80
Nonmetroplitan Pennsylvania.................................            3         6.70        62.18       18.14
----------------------------------------------------------------------------------------------------------------
Note.--Required benefit values is equal to Medicare savings in the adjusted community rate proposal; opttional
  benefit value is equal to the maximum monthly premium. Values are unweighted averages of all Medicare risk
  plans.
Data Source: Physician Payment Review Commission (now Medicare Payment Advisory Commission) analysis of 1995
  adjusted community rate proposal data from the Health Care Financing Administration.
Table Source: United States House of Representatives Committee on Ways and Means, 1998 Green Book: Background
  Material and Data on Programs Within the Jurisdiction of the Committee on Ways and Means Washington, D.C.:
  U.S. Government Printing Office, May 19,1998. P. 200, Table 2-36.

       For example, a Medicare+Choice enrollee in Dakota County, 
     Minnesota may choose the HealthPartners--Standard Option 
     (``Minnesota Plan'') by paying--in addition to Medicare Part 
     B's premium--an annual premium of $1,137. By contrast, a 
     similar enrollee in Broward County, Florida pays no 
     additional costs. The Minnesota beneficiary pays a $10 co-pay 
     per visit with his or her personal physician or specialist 
     doctor, while the Florida beneficiary pays no additional co-
     pay. Except for injectable insulin, the Minnesota beneficiary 
     pays all costs for all outpatient prescription drugs, while 
     the Florida beneficiary pays nothing for a full outpatient 
     prescription drug benefit. The Minnesota beneficiary pays 20% 
     for out-of-area ambulance transportation, while the Florida 
     beneficiary pays nothing for such transportation. The 
     Minnesota beneficiary pays a $10 co-pay for each individual 
     outpatient mental health session, while the Florida 
     beneficiary pays nothing for each session. The Minnesota 
     beneficiary pays a $30 co-pay for emergency services, while 
     the Florida beneficiary pays nothing for such services. The 
     Minnesota beneficiary pays a $30 co-pay for ``Urgently Needed 
     Services'' in the plan's service area, while the Florida 
     beneficiary pays nothing. (see Plaintiffs' Complaint, 
     paragraphs 32-40.)


                  C. EFFECTS ON ACCESS AND ENROLLMENT

       The disparate effects of Medicare+Choice's reimbursement 
     system have adversely affected Minnesotans' access to and 
     enrollment in participating risk payment plans. Minnesota 
     health plans have entirely withdrawn from or declined to 
     participate in the Medicare+Choice program, have withdrawn 
     from offering such plans in various counties in Minnesota, or 
     have suffered a reduction in the available networks of health 
     care providers that provide medical services to enrollees. 
     Currently, only three health plans offer Medicare+Choice 
     plans to seniors in Minnesota--and this figure represents a 
     reduction from the previous figure of four. Such limited 
     Medicare+Choice plans are available almost exclusively in the 
     counties of the Minneapolis-St. Paul metropolitan area and 
     are not generally available to beneficiaries in rural 
     Minnesota counties. (Refer to Table I for a list of the 
     number of participating plans by state or metropolitan area.)

     III. POLITICAL AND LEGISLATIVE SOLUTIONS HAVE BEEN INADEQUATE

       Legislative and political solutions to Minnesota's low 
     capitation payments have been largely unsuccessful. From its 
     inception, AAPCCs were based on arbitrary tabulations, and 
     early demonstration projects indicated that the payment 
     methodology was problematic. Furthermore, when legislative 
     relief came in 1997, the BBA failed to adequately ameliorate 
     payment disparities.


                            A. EARLY HISTORY

       From the first risk-contracting demonstration projects in 
     the late 1970s, it was clear that the method of reimbursement 
     was flawed for use in rural- and conservative-practice areas. 
     Risk contracting was first authorized in 1972, but due to 
     poor provider participation, the Health Care Financing 
     Administration (HCFA) solicited applications for new models 
     for capitated payments in 1978. Five demonstration projects 
     resulted, one of which, the Greater Marshfield (Wisconsin) 
     Community Health Plan, was located in a rural area.
       Reimbursement rates for all five projects were established 
     at 95% of the average FFS costs for the counties involved in 
     the demonstration, a schedule that became known as the AAPCC. 
     This value of 95% of the average FFS was arbitrarily chosen 
     and is not substantiated by research that would show this 
     value represents an expected savings from coordination of 
     care. The formula has failed to provide all Medicare 
     beneficiaries equal access to the Medicare+Choice option.
       Though Marshfield succeeded in reducing utilization of 
     services by nearly 10 percent over the course of the 
     demonstration the total loss for the plan and its sponsors 
     was over $3 million. With these losses in mind, the HCFA 
     terminated the Marshfield demonstration. Marshfield responded 
     by requesting experimentation with the AAPCC to see if some 
     alternative or variation could more accurately predict cost. 
     The HCFA rejected this suggestion without explanation.
       In the early and mid-1980s, more demonstrations were 
     established. Plans in the Twin Cities of Minnesota provided 
     additional, non-covered benefits, such as outpatient 
     prescription drugs, and competed aggressively for enrollment. 
     Enrollment in risk products grew dramatically, to a peak of 
     60% of the Twin Cities metro area's senior population by 
     1986-87. Nationally, in fiscal year 1986, $1.3 billion was 
     reimbursed to 142 risk contractors who provided care to 
     nearly 75,000 beneficiaries.
       In response to market interest, several plans expanded 
     their Medicare risk service areas to rural counties, assuming 
     that lower AAPCCs in those counties would correlate with 
     lower cost to serve a rural population. However, the reverse 
     proved to be true and seniors flocked to the plans' 
     comprehensive coverage with significant pent up demand. After 
     a couple years of significant losses, most of the plans 
     withdrew from rural counties, and again, the payment 
     structure failed beneficiaries in rural areas.
       The mid- and late-1980s saw several years of no increase in 
     the AAPCCs, with payments actually falling in at least one 
     year. As a result, health maintenance organizations (HMOs) 
     which had long-since pulled out of rural areas began to 
     reduce benefits and significantly raise member premiums. 
     Enrollees began to pay more and more of the cost of the added 
     benefits through their premiums. Increasing numbers of 
     seniors moved to lower option risk products without 
     prescription drug coverage as the higher option products 
     became unaffordable for many. Even with significant member 
     cost-sharing, many of the HMOs experienced marked losses and 
     began exiting the risk contract business.
       Analysis by the Physician Payment Review Commission in 1997 
     shows that in June 1997, 33% of all Medicare beneficiaries 
     lacked

[[Page E1176]]

     access to risk plans. At the same time, some 60% of 
     beneficiaries had a choice of plans, and one-third had five 
     or more available to them.
       Patterns of enrollment differ across urban and rural 
     locales, as well as across different regions in the nation. 
     Enrollment in central urban areas was about 24% in June 1997, 
     about twice the level in outlying urban areas. Urban areas 
     with the greatest share of national enrollment growth tend to 
     be those where Medicare payments are high. Enrollment is 
     generally higher in western states and a few specific 
     southern and eastern states. In fact, five states account for 
     over two-thirds of all enrollees. (For statistics regarding 
     access and enrollment rates, see United States House of 
     Representatives Committee on Ways and Means, 1998 Green Book: 
     Background Material and Data on Programs Within the 
     Jurisdiction of the Committee on Ways and Means. Washington, 
     D.C.: U.S. Government Printing Office, May 19, 1998. Section 
     2: Medicare.)
       No actions taken to date have resolved the underlying 
     arbitrary and flawed AAPCC formula, which is responsible for 
     creating all the disparities in reimbursements to plans and 
     benefits to beneficiaries. The old AAPCC formula, and the new 
     configurations which rely upon the AAPCC, were not based on 
     actuarially sound data. Given the discrimination the current 
     system creates across the country and between beneficiaries 
     enrolled in a national, uniform program, there is no 
     reasonable basis for this formula.


                       B. THE BALANCED BUDGET ACT

       The BBA was Congress' first legislative attempt to 
     comprehensively address the issue; however, the BBA failed to 
     ameliorate the inherent deficiencies and irrationality of the 
     reimbursement system. At present, participating risk plans in 
     Minnesota do not have any incentives to offer non-covered 
     benefits to their beneficiaries. This is because the BBA did 
     nothing to substantially reform the ACR mechanism, nor did it 
     adequately address the disparities in capitation payment 
     rates.
       The BBA sought to lessen payment disaparity by de-linking 
     AAPCC updates from local FFS spending. The BBA established a 
     new mechanism for calculating Medicare's monthly payments to 
     HMOs and other managed care and capitated plan providers. A 
     county's Medicare+Choice payment was the higher of three 
     different rates--a floor payment of $367, a minimum annual 
     increase of 2 percent, or a 50/50 blend of local and national 
     rates that was to be fully phased-in by FY 2003.
       Initially, many rural counties in Minnesota received 
     significant reimbursement increases under the new floor 
     payments. For example, Watonwan County saw AAPCC 
     reimbursements increase from $251.05 to $367.00 (a 32 percent 
     increase) in 1998, but this is still a far cry from the 
     nearly $800 rate paid to other counties in other states. 
     Unfortunately, these payments were essentially frozen at 
     these new floor levels, as the local/national blend was 
     difficult to implement because of a budget-neutrality 
     provision. (See Appendix B.)
       In both 1998 and 1999, none of Minnesota's counties 
     received a local/national blend rate. This outcome resulted 
     from the budget neutrality provision of the BBA, which 
     requires that Medicare+Choice payments not exceed payments 
     that would have been made if payments were based solely on 
     local rates. According to the House Committee on Ways and 
     Means, a budget neutrality adjustment is ``applied as 
     necessary to the blended rates to ensure that the aggregate 
     of payments for all payment areas equals that which would 
     have been made if the payment were based on 100 percent of 
     the areas-specific capitation rates for each payment area. In 
     no case may rates be reduced below the floor or minimum 
     increase amounts for the particular county. In some years, it 
     may not be possible to achieve budget neutrality because no 
     county rate may be reduced below its floor minimum increase. 
     The law makes no provision for achieving budget neutrality 
     after all county rates are at the floor or minimum 
     increase.'' (see 1998 Green Book, supra.) In other words, if 
     awarding each county the maximum rate (among its floor, 
     blend, or minimum update) results in total payments that 
     exceed the budget neutral target, counties which would 
     otherwise receive the blend rate have their rates reduced to 
     meet the target. The net result in 1998 was that Minnesota's 
     urban counties (e.g. Hennepin and Ramsey Counties) received 
     only a 2% increase and fell even further behind the highest 
     reimbursed counties in other states. (see Appendix A.)
       In 1999, the budget neutrality provision reduced 
     Medicare+Choice rates for aged beneficiaries in 1,293 
     counties. These counties would have received blended-rate 
     amounts if sufficient monies were available to fund all 
     counties at the maximum of the floor, blend, or minimum 
     update. Consequently, as a result of the budget neutrality 
     provision, the gap between high and middle level AAPCC 
     counties, contrary to Congressional intent, actually grew in 
     the first year of BBA. Two years after enactment of the BBA, 
     counties in Minnesota were still 21 percent below the 
     national average reimbursement level for Medicare+Choice.
       Essentially, these variations in reimbursements have 
     created a two-tiered system of health care delivery, which is 
     the foundation of the plaintiffs' lawsuit against the federal 
     government. As the lawsuit rightly contends, these payment 
     imbalances have created a geographical class system of 
     Medicare benefits where beneficiaries in high cost areas 
     receive extra benefits at no additional cost, while 
     beneficiaries in low cost areas are denied these benefits.

                             IV. CONCLUSION

       For the forgoing reasons, the undersigned amici curiae 
     respectifully request this Court to deny Defendants' Motion 
     to Dismiss.

     

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