Medicare and Medicaid: Implementing State Demonstrations for Dual
Eligibles Has Proven Challenging (Letter Report, 08/18/2000,
GAO/HEHS-00-94).

Pursuant to a congressional request, GAO reviewed states' initiatives to
enroll dual eligibles (beneficiaries who qualify for both Medicare and
Medicaid benefits) into one managed care plan, focusing on: (1) the
status and key features of state initiatives focusing on: (1) the status
and key features of state initiatives to integrate care for
dual-eligible beneficiaries; and (2) factors that have contributed to
the length of the waiver negotiation process and implementation time
frames.

GAO noted that: (1) two states are enrolling a small number of dual
eligibles in limited geographic areas into integrated care programs, and
two additional states plan to implement programs by 2001; (2) officials
in these four states view their initial efforts as stepping stones and
plan to make their programs more widely available; (3) since the 1995
approval of an integrated care program in Minnesota, the states of
Wisconsin and New York also have received federal approval to integrate
Medicaid and Medicare services for dual eligibles; (4) states are
emphasizing service delivery in beneficiaries' homes and targeting
different segments of the dual-eligible population compared with the
Program for All-Inclusive Care for the Elderly , which enrolls only
frail individuals; (5) all plans in states with approved programs are
nonprofit, including the three participating health maintenance
organizations in Minnesota; (6) important factors associated with
states' decisions about pursuing integrated care programs for dual
eligibles are the complexity of planning and implementing a
demonstration and the extended time frames needed to do so; (7) states
have criticized the length of the process required to gain federal
approval for their initiatives; (8) in states with approved programs,
the federal waiver review process ranged from over 1 year to over 3
years; (9) though some delays were associated with the Health Care
Financing Administration's (HCFA) 1997 reorganization and the heavy new
demands on the agency as a result of 1997 legislation, HCFA has taken
action to try to speed up the review process; (10) difficulty in
reaching agreement on an appropriate Medicare payment methodology for
integrated care programs was an important factor that delayed the
approval of state waiver applications; (11) the challenge has been to
agree on payment rates that adequately compensate health plans for
differences in frailty among dual eligibles while meeting the Office of
Management and Budget's requirement that Medicare demonstrations not
increase federal Medicare expenditures; (11) Medicare's move toward a
new diagnosis-based risk-adjustment methodology raises concerns for
state demonstrations because research has shown that the methodology
tends to underestimate the costs of frail beneficiaries; and (13) this
situation underscores the importance of learning from these four state
demonstrations so that their experience may inform similar initiatives
that other states may be considering.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-00-94
     TITLE:  Medicare and Medicaid: Implementing State Demonstrations
	     for Dual Eligibles Has Proven Challenging
      DATE:  08/18/2000
   SUBJECT:  Health maintenance organizations
	     Health insurance cost control
	     Health care programs
	     Managed health care
	     Elderly persons
	     State-administered programs
	     Federal/state relations
	     Waivers
IDENTIFIER:  Medicare Choice Program
	     Medicaid Program
	     Colorado Medicare Program
	     Florida Medicare Program
	     Massachusetts Medicare Program
	     Minnesota Medicare Program
	     New Your Medicare Program
	     Texas Medicare Program

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GAO/HEHS-00-94

Results in Brief 4

Background 6

Voluntary State Programs Have Limited Operational Experience
and Scope 10

Developing and Implementing Dual-Eligible Initiatives Has Been
a Lengthy Process 16

Conclusions 26

Agency Comments and Our Evaluation 27

Appendix I: Examples of Advantages States See in Integrated
Care for Dual Eligibles

32

Appendix II: Descriptions of PACE, S/HMO I and II, and EverCare Programs

33

Appendix III: Concepts Being Tested by States' Integrated Care
Demonstrations for Dual Eligibles

37

Appendix IV: Description of Medicaid Integrated Care Programs
in Texas, Florida, and Colorado

39

Appendix V: BBA Changes to Medicare HMO Payment
Methodology

42

Appendix VI: GAO Methodology for Combining Part A and
Part B Risk Adjusters

44

Appendix VII: Comparison of Medicare Payments Under M+C,
PACE, and State Demonstration Programs

46

Appendix VIII: Comments From the Health Care Financing
Administration

47

Table 1: Comparison of Key Characteristics of State Integrated Care Programs
12

Table 2: Time (in Months) for Planning, Federal Review, and
Preparing for Implementation of Four State Waiver Requests 18

Table 3: GAO Analysis of Risk Adjusters for Programs Serving Dual Eligibles
23

Table 4: Comparison of PACE, S/HMO, and EverCare 35

Table 5: 1999 Risk Adjusters for Programs Serving Dual Eligibles 44

Table 6: Payments Under M+C, PACE, and State Demonstrations That Serve Frail
Dual Eligibles Living in the Community, for a 75-Year-Old Female Residing in
Each Location in Calendar
Year 1999 46

BBA Balanced Budget Act of 1997

CCN Continuing Care Networks

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HMO health maintenance organization

M+C Medicare+Choice

MedPAC Medicare Payment Advisory Commission

MOU memorandum of understanding

MSHO Minnesota Senior Health Options

OMB Office of Management and Budget

PACE Program for All-Inclusive Care for the Elderly

SCO Senior Care Options

S/HMO Social Health Maintenance Organization

Health, Education, and
Human Services Division

B-281823

August 18, 2000

The Honorable Charles E. Grassley
Chairman
The Honorable John B. Breaux
Ranking Minority Member
Special Committee on Aging
United States Senate

The Honorable Ron Wyden
United States Senate

Hoping to expand the scope of earlier provider-initiated demonstrations,
states have been seeking federal waivers since the early 1990s to use
managed care approaches to integrate the delivery of acute and
long-term-care services for certain "dual eligibles"--low-income Medicare
beneficiaries who also qualify for full Medicaid benefits.1 Dual eligibles
often receive their Medicare and Medicaid benefits from two different sets
of providers. In part, this situation stems from the different rules under
which the two programs operate and the fact that Medicaid pays for services
not covered by Medicare, reducing the incentive for dual eligibles to enroll
in a Medicare managed care plan. While some states require or allow dual
eligibles and other Medicaid beneficiaries to enroll in a managed care plan
to receive Medicaid benefits, Medicare beneficiaries (including dual
eligibles) cannot be required to do so in order to receive Medicare
benefits. In fact, an estimated 97 percent of dual eligibles receive their
Medicare benefits under Medicare's fee-for-service option. To foster the
delivery of benefits in a more integrated fashion, some states are exploring
the pooling of separate Medicaid and Medicare payments and making one
managed care plan responsible for the delivery of all covered services. The
theory is that the managed care plan will have an incentive--a
per-beneficiary payment--to provide the most appropriate care in the most

cost-effective setting.2 However, states have often raised concerns about
the length of the federal review process for these complex
initiatives--initiatives that raise important financing issues.

Concerned about the apparent limited experience to date with states'
integrated care initiatives, you asked us to determine (1) the status and
key features of state initiatives to integrate care for dual-eligible
beneficiaries and (2) factors that have contributed to the length of the
waiver negotiation process and implementation time frames. To address these
issues, we interviewed program officials in seven states that sought federal
approval for integrated care demonstrations: Colorado, Florida,
Massachusetts, Minnesota, New York, Texas, and Wisconsin. We obtained a
federal perspective on these initiatives from officials at the Health Care
Financing Administration (HCFA), the agency within the Department of Health
and Human Services (HHS) responsible for their review and approval, and from
officials at the Office of Management and Budget (OMB) who establish rules
for federal financial participation. We also interviewed providers either
participating in integration initiatives or planning to enroll dual
eligibles, and advocates for dual-eligible beneficiaries. In addition, we
reviewed (1) pertinent documents related to integrated care initiatives,
such as state waiver proposals and the terms and conditions that accompanied
federal approval, and (2) the available research on dual eligibles,
including information on the Program for All-Inclusive Care for the Elderly
(PACE) and other provider-initiated demonstrations that served as a point of
departure for state integrated care programs. We performed our work between
May 1999 and April 2000 in accordance with generally accepted government
auditing standards.

Currently, two states are enrolling a small number of dual eligibles in
limited geographic areas into integrated care programs, and two additional
states plan to implement programs by 2001. Officials in these four states
view their initial efforts as stepping stones and plan to make their
programs more widely available. Since the 1995 approval of an integrated
care program in Minnesota, the states of Wisconsin and New York also have
received federal approval to integrate Medicaid and Medicare services for
dual eligibles. HCFA and Massachusetts are working toward final approval

of that state's program.3 The Minnesota and Wisconsin demonstrations have
operated for over 3-1/2 years and 1-1/2 years, respectively, and currently
serve about 4,200 dual eligibles in 12 counties. New York expects to begin
implementation in May 2001 in the Rochester area. Massachusetts has a goal
of statewide enrollment with an implementation target date of early 2001.
States are emphasizing service delivery in beneficiaries' homes and
targeting different segments of the dual-eligible population compared with
PACE, which enrolls only frail individuals--that is, people who are at risk
of nursing home placement. The demonstrations in Minnesota and New York are
open to all dual eligibles over the age of 65--both community residents and
those in nursing homes. In contrast, Wisconsin's program focuses on the
noninstitutionalized--individuals who are at risk of nursing home placement
and are either elderly or younger and physically disabled. Two states are
contracting or plan to contract with health plans that had no prior
experience in bearing financial risk, such as hospital-based plans and
community-based long-term-care organizations; Wisconsin is also contracting
with PACE sites. All plans in states with approved programs are nonprofit,
including the three participating health maintenance organizations (HMO) in
Minnesota.

Important factors associated with states' decisions about pursuing
integrated care programs for dual eligibles are the complexity of planning
and implementing a demonstration and the extended time frames needed to do
so. At present, states need to undertake considerable planning before waiver
submission and then again after approval to bring health plans on board and
to prepare for actual enrollment. Finding the overall challenges too great,
Florida and Texas dropped the idea of integrating Medicare and Medicaid
services and instead are developing projects integrating Medicaid acute- and
long-term-care services only. Colorado is now pursuing a program that avoids
the use of waivers altogether. States have criticized the length of the
process required to gain federal approval for their initiatives. In states
with approved programs, the federal waiver review process ranged from over 1
year to over 3 years. Though some delays were associated with HCFA's 1997
reorganization and the heavy new demands on the agency as a result of 1997
legislation, HCFA has taken action to try to speed up the review process.

Difficulty in reaching agreement on an appropriate Medicare payment
methodology for integrated care programs was an important factor that
delayed the approval of state waiver applications. The challenge has been to
agree on payment rates that adequately compensate health plans for
differences in frailty among dual eligibles while meeting OMB's requirement
that Medicare demonstrations not increase federal Medicare expenditures from
what they would have been without the demonstration. In contrast to
Medicare, which pays managed care plans a rate based on the average cost of
dual eligibles, adjusted for demographic differences, HCFA and OMB's
approach to demonstrations has generally been to establish a separate,
higher rate for frail dual eligibles and a lower rate for healthier dual
eligibles. On the basis of the PACE precedent, single, higher payment rates
for frail dual eligibles were approved for Minnesota, Wisconsin, and
Massachusetts. Only New York's demonstration is exploring the variability in
costs among frail dual eligibles by establishing several rates rather than a
single payment rate. For now, Wisconsin and Massachusetts have agreed to
rates that they believe may not be adequate to cover the costs of serving
disabled and frail dual eligibles, respectively, but are continuing to work
toward establishing higher rates. Medicare's move toward a new
diagnosis-based risk-adjustment methodology raises concerns for state
demonstrations because research has shown that the methodology tends to
underestimate the costs of frail beneficiaries. This situation underscores
the importance of learning from these four state demonstrations so that
their experience may inform similar initiatives that other states may be
considering.

While Medicare and Medicaid generally cover different populations, an
estimated 2.5 million low-income individuals are dually eligible for full

Medicaid coverage and services covered by Medicare.4 For such dual
eligibles, Medicaid also covers Medicare part B premiums. Medicare, the
federal health insurance program for elderly and disabled Americans, covered
an estimated 39 million beneficiaries at a projected cost of $233.4 billion
in fiscal year 1999.5 Medicare is financed by a combination of payroll
taxes, beneficiary premiums, general revenue, and interest on trust fund
assets. On the other hand, Medicaid serves certain low-income beneficiaries
and is jointly funded by state and federal revenues. In fiscal year 1998,
the federal government paid 57 percent of Medicaid's $177.1 billion cost to
cover about 40.5 million beneficiaries. Subject to certain federal statutory
requirements as well as HHS guidance and review, each state designs and
administers its own Medicaid program by (1) setting income and asset
eligibility requirements, (2) selecting which optional beneficiary groups
and services to cover, and (3) determining the scope of and payments for
mandatory and optional services.

Medicaid fills in Medicare coverage gaps for its low-income elderly and some
of its younger physically disabled beneficiaries.6 Medicare covers their
acute-care needs, such as hospitalizations and physician services, but
generally does not pay for long-term care, except when it is accompanied by
a need for skilled care, either in an institution or in a beneficiary's
home. Medicaid covers long-term-care services delivered either in a nursing
home or, at state option, in the community and provides benefits generally
not covered by fee-for-service Medicare, such as prescription drugs. The
extent of Medicaid coverage for dual eligibles, however, differs across
states. Drug coverage and community-based care may be limited or unavailable
in some states for certain populations but more comprehensive in others.
Some services are covered by both programs. For example, dual eligibles can
obtain services under the Medicare home health and skilled nursing facility
benefits that are similar to long-term-care services paid for by Medicaid.
When a benefit is covered by both programs, such as post-acute skilled
nursing facility care or home health services, Medicare is the primary
payer. Because of pressures in both programs to control costs, the overlap
in benefits has, at times, resulted in tension between state and federal
officials as to which program should cover certain services.

Most Medicare beneficiaries may choose between two different delivery
systems--a fee-for-service model, in which individuals receive services from
the providers of their choice who are paid separately for each service, and
an HMO option, in which all covered services must be obtained from a
participating health plan that is paid a fixed per-person, per-month fee
(capitation). The Balanced Budget Act of 1997 (BBA) created the
Medicare+Choice Program (M+C) to reflect steps taken to encourage the wider
availability of HMOs and the participation of other types of coordinated
care plans. As of June 1, 1999, about 18 percent of Medicare beneficiaries
were enrolled in a Medicare HMO, while the remaining 82 percent were in the
program's fee-for-service option. About 97 percent of dual eligibles receive
their Medicare benefits on a fee-for-service basis. States also use both
fee-for-service and managed care for Medicaid beneficiaries. About 54
percent of Medicaid beneficiaries, primarily low-income families, are
enrolled in managed care either on a voluntary basis, like Medicare, or
through mandatory state programs. Some states have mandatory programs that
require dual eligibles to receive Medicaid services from a managed care
plan.

Dual eligibles, both those with full Medicaid coverage and those for whom
Medicaid only provides assistance regarding Medicare cost-sharing, are among
the most vulnerable Medicare beneficiaries. Although some dual eligibles are
relatively healthy, many have substantially greater health care needs and
fewer resources to meet those needs than the average Medicare beneficiary.
By definition, dual eligibles are poor: most had annual incomes below
$10,000, and one-fifth had annual incomes under $5,000 in 1997. Almost 40
percent of dual eligibles are minorities. Compared with Medicare-only
beneficiaries, dual eligibles are more likely to

ï¿½ be female;

ï¿½ live in a nursing home;

ï¿½ have a serious disease or chronic condition such as stroke, diabetes,
mental disorder, or incontinence;

ï¿½ suffer from serious functional limitations, both physical and cognitive;
and

ï¿½ have less access to a regular source of care or preventive services and
make greater use of emergency room services.

Dual eligibles were estimated to represent 17 percent of Medicare
beneficiaries in 1997, but they accounted for about 28 percent of Medicare
expenditures that year. Similarly, they accounted for 19 percent of the
Medicaid population but 35 percent of Medicaid expenditures, primarily
because of their higher use of nursing home care.7 Medicare and Medicaid
expenditures for dual eligibles were an estimated $113 billion in 1997. The
nonelderly disabled and persons aged 85 and older--who are more likely to be
dually eligible--are the fastest growing segments of the Medicare
population.

Since the early 1990s, states have expressed interest in experimenting with
managed care approaches that integrate services for Medicare beneficiaries
who are eligible for full Medicaid benefits. In addition to cost savings,
states are attempting to (1) address the fragmentation in delivery systems,
(2) ensure access to primary and preventive care, (3) improve accountability
for health outcomes, (4) provide incentives for the appropriate use of
medical services, and (5) reduce administrative differences between Medicare
and Medicaid. To integrate Medicare and Medicaid services, states have
generally sought federal waivers of certain Medicare and Medicaid
requirements. Currently, there are two relevant federal waiver authorities.
Section 222(b) of the Social Security Act Amendments of 1972 provides
authority for demonstrations that experiment with the Medicare payment
methodology. Section 1115 of the Social Security Act authorizes
demonstrations that test Medicaid

program innovations.8 A long-standing federal policy for the approval of
such demonstrations is that they be budget neutral--that expenditures under
the waiver be no higher than they would be without a waiver.

Experimentation with approaches to coordinate the delivery of acute- and
long-term care under a capitation arrangement dates back to the 1970s. The
Congress has authorized four demonstration programs since then: (1) PACE,
(2) two generations of the Social Health Maintenance Organization program
(S/HMO I and S/HMO II), and (3) EverCare. These demonstrations vary in the
extent to which they serve dual eligibles: while 96 percent of PACE
enrollees were dual eligible in 1997, S/HMO and EverCare enrollment of dual
eligibles represented 5 to 6 percent and 70 to 75 percent of enrollees,
respectively. PACE targets frail individuals and attempts to keep them out
of nursing homes, while EverCare focuses on improving outpatient services
for beneficiaries who already reside in nursing homes.9 S/HMO expands the
traditional Medicare benefit package by adding some long-term-care benefits.
Compared with PACE, S/HMOs provide more limited long-term-care benefits.
(App. II compares and contrasts these demonstration programs.)10

Scope

Four states have obtained or soon expect to obtain approval to establish
Medicaid/Medicare integrated care demonstrations for dual eligibles. Only
the demonstrations in Minnesota and Wisconsin are operational--for 3-1/2
years and 1-1/2 years, respectively. These two programs are currently small,
operating in a total of 12 counties, with enrollment of about 4,200. In
addition to frail, elderly dual eligibles, healthier dual eligibles are
often eligible to enroll in these voluntary programs. Several states also
plan to enroll non-dual Medicaid- or Medicare-only beneficiaries. Developing
plan capability to integrate care is a challenge because participating plans
have limited experience in providing the broad range of services covered
under the demonstrations. Because of program complexities and the lengthy
waiver-approval process, several other states that considered pursuing
similar demonstration initiatives decided instead to focus on integrating
Medicaid acute- and long-term-care services.

Currently Small

The first state integrated care program--Minnesota Senior Health Options
(MSHO)--was approved in 1995 after almost 4 years of development and
negotiation with HCFA and OMB over federal waivers. Implemented in 1997,
MSHO became an important model for other state initiatives. Since MSHO, HCFA
also has approved the Wisconsin Partnership Program, which was fully
implemented in January 1999, and the Monroe County, New York, Continuing
Care Networks (CCN), which plans to begin enrolling beneficiaries in May
2001. A fourth program, Massachusetts' MassHealth Senior Care Options (SCO),
is expected to receive final approval and begin implementation by early
2001.

Program officials in Minnesota, Wisconsin, and New York told us that the
modest size of their voluntary programs--operating or scheduled to operate
in 13 counties with an overall enrollment goal of about 16,400
beneficiaries--is only a starting point.11 They consider these
demonstrations to be the basis for larger projects that may eventually
expand to other locations or cover additional populations. MSHO, the largest
operational program, has an enrollment goal of 4,000. As of April 2000, the
program had enrolled 3,435 beneficiaries in seven counties in the
metropolitan Minneapolis-St. Paul area.12 Minnesota has requested HCFA's
approval to expand eligibility to include younger, disabled dual eligibles
under age 65. With enrollment of 782 as of March 2000, Wisconsin officials
received federal approval to raise the Partnership enrollment cap from 1,200
to 2,400 in the five counties that enroll beneficiaries. New York's goal is
to enroll 10,000 participants in Monroe County, the area adjacent to
Rochester. Massachusetts is the only demonstration with an initial goal of
statewide enrollment. State officials hope to enroll up to 42,400 dual
eligibles during the first 5 years of the program. The scope of the SCO
program will ultimately depend on the willingness of plans across the state
to participate. Table 1 compares key characteristics of these four states'
integrated care programs.

                                        State initiatives
                                                  Approved but
                        Operational                                   Pending
                                                 not operational
              Minnesota Senior Wisconsin
 Program name Health Options   Partnership       Continuing CareMassHealth: Senior
              (MSHO)           Program           Networks (CCN) Care Options (SCO)a
              7 metropolitan
              counties around  5 counties--2                    Statewide
              Minneapolis/St.  urban (Dane,      Monroe County, (dependent on
                               Milwaukee) and
 Location     Paul (Anoka,     3 rural           New York       qualified
              Carver, Dakota,                    (Rochester     bidders/provider
              Hennepin,        (Chippewa,        area)          network
              Ramsey, Scott,   Dunn, Eau                        participation)
              Washington)b     Claire)
 Approval date/operational status
 Date approvedApril 1995       October 1998      September 1999 Pending
 Date                                            May 2001       Early 2001
 operational  February 1997    January 1999      (projected)    (projected)
                               1. Frail
                               elderly aged 55
                               or older at
                               risk of nursing
              1. Dual          home placement
              eligibles aged   who are
              65 or older.     Medicaid-only                    1. Dual eligibles
                               or dual           1. Dual        aged 65 or older.
                               eligibles.        eligibles aged
 Eligible     2. As of fall                      65 or older.   2. Medicaid
 population   2000, planned    2. People ages                   beneficiaries aged
              expansion to
              individuals      18 to 65 with     2. Medicare    65 or older who are
              under age 65     physical          beneficiaries. not
              with physical    disabilities at                  Medicare-eligible.
              disabilities.c   risk of nursing
                               home placement
                               who are
                               Medicaid-only
                               or dual
                               eligibles.
 Enrollment
                               2,400 cap                        42,400 goal in
 Cap/goal     4,000 goal       (increased from   10,000 goal    first 5 years (40
                               1,200 as of                      percent of 106,000
                               Mar. 2000)                       MassHealth seniors)
              3,435 average
              monthly                            Enrollment
 Current      enrollment as of 782 enrolled as   expected to    Enrollment expected
 enrollment   April 2000d      of March 2000     begin in May   to begin in early
                                                 2001           2001

 Health plan characteristics
                                                 One local
              Three                              nonprofit
              participating                      provider-based
              nonprofit HMOs.  Four              health system, 32 organizations
              Most plans are   Partnership       which includes (including hospital
 Number of    contracting with providers who     hospitals,     networks, PACE
 plans/type ofnewly formed     are all           nursing homes, providers, and
 organization geriatric care   nonprofit         and a PACE     Medicare HMOs) have
              systems to                         program (a     expressed interest
              provide all or   community-based   second health  in becoming SCOse
              part of the MSHO organizations     system withdrew
              benefit package.                   from the
                                                 demonstration
                                                 in Feb. 2000)
                               1. Model is
                               similar to
                               PACE, but         1. Is testing a
                               without           capitation
                               restrictions on   payment model
              1. 76 percent of primary           that is
              enrollees live   physician or      risk-adjusted  1. HCFA has an MOU
              in nursing       use of day        for functional with state to
              homes.           care.             status of      jointly select and
                                                 enrollees.     contract with SCOs.
              2. Plans are     2. Two
 Unique       responsible for  providers are     2. Will use a  2. Enrollment
 featuresf    the first 180    PACE sites.       local          broker will enroll
              days of nursing                    provider-based and disenroll
              home care for    3. Includes the   health system. beneficiaries.
              community        younger,
              enrollees.       physically        3. Will enroll 3. Has a goal of
                               disabled.         dual eligibles being a statewide
                                                 and Medicare   program.
                               4. Operates in    beneficiaries
                               some rural        in the same
                               areas             plan.

 Waivers
              Section 1115
              approved in 1995                   Section 1915(a)
 Medicaidg    but recently                       and 1915(c)    Section 1915(a)
              switched to      Section 1115      combination
              1915(a) and
              1915(c)
              combination
 Medicare     Section 222      Section 222       Section 222    Section 222

aIn April 2000, HCFA and Massachusetts signed an MOU that established terms
and conditions and defined the federal and state roles and responsibilities
in implementing an integrated care program. The MOU reflects the commitment
of both parties to implementing a demonstration program. A number of steps
need to be taken before final approval and implementation.

bMSHO is authorized to operate in 7 counties, but currently there are no
networks in Carver County.

cThe fall 2000 expansion is for Medicaid contracts only. Before expansion is
allowed for Medicare, Minnesota needs to complete the transition from its
section 1115 waiver and request an amendment to the current Medicare 222
waiver.

dSince the inception of MSHO, Minnesota has served over 6,000 enrollees.
Because of their overall frailty, many enrollees died while in the program.

eThese 32 organizations attended a series of technical assistance sessions
on the Massachusetts program held between February and October 1999.

fAppendix III summarizes the concepts HCFA is testing with these
demonstration programs.

gAlthough Wisconsin has a section 1115 Medicaid waiver for its Partnership
Program, New York and Massachusetts eventually opted to use a different,
nonwaiver authority--section 1915(a), which allows voluntary programs for
dual eligibles and is not subject to OMB's budget-neutrality policy. Because
of continuing negotiations with OMB over Medicaid budget neutrality,
Minnesota has received approval to switch from its 1115 waiver to a
combination of 1915(a) authority and a 1915(c) waiver. The 1915(c) waiver
allows states to provide home and community-based services to individuals at
risk of nursing home placement and permits Minnesota to access some special
eligibility provisions such as protection against spousal impoverishment.

Initiatives in Minnesota, Wisconsin, New York, and Massachusetts are
attempting to expand on earlier, provider-initiated demonstrations,
particularly the PACE model. State initiatives differ from PACE in that not
all enrollees are frail and that service delivery occurs outside of the
adult day care center. Generally, states are designing their voluntary
programs to appeal to a broader population, including healthier dual
eligibles and even Medicare-only beneficiaries. The programs in Minnesota,
New York, and Massachusetts offer the option of enrollment to any dual
eligible over age 65, both those in the community (the healthy as well as
the frail) and those in nursing homes. In contrast to the other state
initiatives, Wisconsin's Partnership Program enrolls frail, elderly dual
eligibles aged 55 or older and dual eligibles with physical disabilities
under age 65. Frail dual eligibles are those whom the state has assessed as
at risk of nursing home placement. Three states also include some non-dual
eligibles in their programs. In New York's CCN program, all Medicare
beneficiaries are eligible to enroll. A state official told us that since
the program is voluntary, having a larger enrollment base makes it easier to
attract health plans. In Massachusetts, a small number of Medicaid-only
beneficiaries over age 65, primarily immigrants who do not qualify for
Medicare, will also be eligible for the program.13 In Wisconsin, Medicaid
recipients who meet the program's other eligibility criteria may enroll.

a Range of Covered Services

Developing plan capability to integrate care for dual eligibles is a
challenge for implementing demonstrations. The eight health plans involved
in the approved demonstrations in Minnesota, Wisconsin, and New York include
hospital-based plans, community-based long-term-care organizations, PACE
sites, and HMOs. All eight participating plans we reviewed are nonprofit
entities, including three HMOs located in Minnesota, a state that

requires such plans to be nonprofit.14 At the outset of the demonstration
programs, few of the participating plans had the ability to offer both
acute-and long-term-care services. As a result, most plans had to either
acquire the needed capability or subcontract with other providers to fill
gaps in their networks. Some are small, nontraditional providers and did not
participate previously in the Medicare program. Plans are at significant
financial risk because they are responsible for the entire range of
services. In general, these programs include few "carve outs," and plans are
expected to show flexibility in providing any services that keep enrollees
out of nursing homes and hospitals.15

Three of the seven states we reviewed--Colorado, Florida, and
Texas--modified their original plans and focused only on integrating
Medicaid acute- and long-term-care services. Each of these states considered
establishing a program to integrate Medicare and Medicaid services for dual
eligibles modeled on Minnesota's approach. Although Colorado's dual-eligible
demonstration for Mesa County was approved in July 1997, the state dropped
the Medicare portion over a year later because of concern that the plan
would lose money if it accepted HCFA's proposed Medicare payment rate rather
than the cost-based payment it was receiving.16 Texas and Florida narrowed
their programs, in part to avoid the time associated with obtaining section
1115 and section 222 waivers. In addition, Texas preferred a program with
mandatory enrollment. While this is possible in Medicaid, HCFA cannot waive
the requirement that dual-eligible Medicare beneficiaries have the freedom
to choose whether to join a health plan to obtain their Medicare benefits.
Texas is currently implementing an initiative in Harris County that requires
mandatory enrollment of Medicaid beneficiaries and offers an inducement for
dual eligibles to enroll voluntarily in the same HMO for their Medicare
services. Florida is focusing on capitating home and community-based
services and, when necessary, nursing home care for dual eligibles aged 65
or older in two counties. (See app. IV for more information on these state
initiatives.)

Lengthy Process

States have criticized the length of the process required to gain federal
approval for integrated care demonstrations, which ranged from 16 months to
over 3 years. In part, the length of the negotiation process was due to (1)
temporary delays that occurred around the time of HCFA's 1997
reorganization, (2) the BBA's imposition of a heavy new workload on the
agency, and (3) BBA Medicare payment changes. HCFA has since undertaken
initiatives intended to speed up the review process. But focusing on
negotiations with HCFA and OMB overlooks other factors that contributed to
the time required to launch these complex initiatives--the actual
development of the proposal and the need to contract with health plans.
These two tasks added considerable time to the overall process.

Ensuring that demonstrations did not increase federal Medicare expenditures
also tended to prolong negotiations. At issue is the appropriate payment
factor for frail dual eligibles. Though HCFA and OMB believe that federal
financial interests are best protected by using risk adjusters that reflect
variability in the costs of frail dual eligibles who may enroll, this
approach is reflected in only one of four state demonstration programs--New
York's. On the basis of precedents established by earlier provider-initiated
demonstrations, Minnesota, Wisconsin, and Massachusetts each negotiated a
single risk adjuster for frail dual eligibles.17 The debate over risk
adjusters for Wisconsin and Massachusetts is not over, since both states
view the payment rates as inadequate. Furthermore, HCFA has reserved the
right to substitute a more appropriate risk adjuster in the waiver
agreements negotiated to date.

Has Taken Steps to Address Negotiation Time Frames

Federal review and approval account for only a portion of the total time
involved in crafting and implementing an integrated care demonstration. For
example, MSHO was under review for about 16 months, but it was in the
planning stage for more than 2 years before Minnesota formally submitted its
request for a demonstration waiver (see table 2). In addition, after
receiving approval in early 1995, the state spent about 2 years negotiating
contracts with health plans and taking the other steps necessary to
implement the program. As with Minnesota, several years elapsed between
Massachusetts' preparation of a concept paper and its submission of a waiver
application. New York officials pointed out that state and provider issues
can also add time to the development of a waiver proposal. The CCN program
was formally approved in September 1999, but officials anticipate enrollment
will not begin until 19 months later to allow time to develop a contract
with a local health system and to build the necessary enrollment, payment,
and data-reporting systems. During the 32 months that Wisconsin's waiver
application was under review, the state worked with community-based
organizations that had expressed interest in participating in the program.
These organizations initially operated under partial capitation to help them
transition to accepting full financial risk.18 Because this transition
period coincided with waiver negotiations, about 2 months elapsed between
HCFA approval and the phase-in of plan responsibility for Medicare-covered
services. In commenting on a draft of this report, HCFA noted that
operational differences between Medicaid and Medicare add an additional
element of complexity to demonstrations. Considerable effort has been made
to understand and then try to streamline various administrative systems that
must be in place for these demonstrations to begin.19

                    State planning                 Implementation (time
                    prior to waiver    Federal     between approval and
                    submission         review      enrollment)
 Minnesota (MSHO)   26                 16          21
 Wisconsin
 (Partnership       12                 32          2
 Program)
                                                   19
 New York (CCN)     29                 40
                                                   (based on estimated
                                                   enrollment date)
 Massachusetts                                     Awaiting final approval
 (SCO)              30                 36a         and implementation

aAs of June 2000.

Source: Interviews with program officials.

According to state and federal officials, HCFA's July 1997 reorganization
and new BBA workload demands unintentionally lengthened the review process.
Initially, the reorganization, combined with turnover among experienced
staff, resulted in delays while new responsibilities and chains of command
were being worked out. The timing of the reorganization also coincided with
enactment of the BBA, which placed additional demands on HCFA management
because of the significant number of Medicare and Medicaid initiatives that
the agency was directed to develop and implement. Moreover, because of
changes in Medicare's HMO program and the initiation of new payment
methodologies for some Medicare benefits, state officials had to evaluate
the BBA's effect on the financing and operation of their demonstration
programs. Appendix V describes the BBA changes to the Medicare HMO payment
methodology.

Subsequent to these events, HCFA and OMB took several steps to speed up the
review and approval process and to improve overall communications with state
officials. For example, HCFA determined that an existing nonwaiver
authority, section 1915(a), can be used instead of 1115 waivers to integrate
the financing of acute- and long-term-care demonstration projects. Section
1915(a) allows voluntary Medicaid programs that only require HCFA approval
of health plan contracts and are not subject to the budget neutrality
policy.20 In commenting on a draft of this report, officials in Minnesota,
New York, and Massachusetts said that the use of the 1915(a) authority had
not resolved their concern about OMB's budget neutrality policy on the
Medicaid side and that the 1915(a) option limits their ability to expand
eligibility to, for example, higher-income individuals at risk of entering a
nursing home. Minnesota stressed that, given predicted financing problems
with the Medicare program and the projected increase in the elderly
population, experimentation with building comprehensive chronic care
delivery systems should be a higher priority for the federal government.
HCFA is also testing a new approach to working with the states. HCFA and
Massachusetts have signed an MOU that establishes a partnership in
developing an integrated care demonstration. Under this agreement, HCFA and
Massachusetts will jointly select and contract with the participating health
plans, which should facilitate program implementation.

Has Been Difficult for Some States

Securing federal and state agreement on how much Medicare will pay health
plans has taken considerable time and effort. HCFA and OMB have attempted to
ensure that Medicare pays no more for dual eligibles who voluntarily enroll
in an integrated care demonstration than it would have paid had these
beneficiaries remained in the fee-for-service program. Most state integrated
care demonstrations are open to all dual eligibles, which raises the issue
of how to adjust payments for the anticipated costs of dual eligibles who
actually join the demonstration. Medicare's payment methodology normally
pays health plans on the basis of the average cost of all dual eligibles,
adjusted for certain demographic factors that affect health costs. This
process of adjusting the average rate up or down for different enrollee
characteristics is known as risk adjustment. State and federal officials
have to reach agreement about the health status characteristics and
associated service costs of those who might be attracted to the
demonstrations.

The approach taken by HCFA and OMB recognizes that frail dual eligibles are
more expensive than their healthier counterparts. Wisconsin and Minnesota
use the PACE risk adjuster for frail enrollees, while Massachusetts plans to
use a variation of the S/HMO I adjuster. Only the payment methodology in the
New York demonstration attempts to reflect the variability in the cost of
frail dual eligibles by establishing three different payment categories. To
compensate for higher payments for frail dual eligibles, two of the three
states using a single risk adjuster are required to use a lower payment rate
than the M+C rate for nonfrail dual eligibles. HCFA said that because of an
oversight, Minnesota was not required to use a lower payment for nonfrail
dual eligibles.

Wisconsin and Massachusetts are concerned about the adequacy of their
payment rates. Wisconsin is enrolling younger, physically disabled dual
eligibles who, it believes, are considerably more expensive than frail PACE
enrollees. Massachusetts analyzed Medicare and Medicaid claims data to
support its request for a higher risk adjuster for frail dual eligibles than
was ultimately approved, but OMB was skeptical about this analysis.
Medicare's move toward a new diagnosis-based risk-adjustment methodology, as
mandated by the BBA, has raised concerns that it might be applied to
specialized programs such as PACE and state demonstrations. Research has
shown that the new methodology tends to underestimate the costs of frail
beneficiaries, who are a disproportionate share of these programs'
enrollees.

Dual Eligibles Are More Costly Than the Average Beneficiary

Medicare policy for persons enrolling in HMOs is to pay the plans no more
than what the program would have paid had that person received services in
the traditional fee-for-service program.21 To accomplish this, rates paid to
HMOs have been based on the average program costs for fee-for-service
beneficiaries. However, costs vary dramatically across individuals. To
protect HMOs that serve many individuals with above-average costs and to
protect the Medicare program from situations in which many individuals with
below-average costs join HMOs, these average rates are adjusted to reflect
the expected cost of actual enrollees. This risk adjustment is achieved by
multiplying the average rate by a factor that adjusts the rate paid either
up or down. For example, because older persons are expected to have higher
costs, a plan is paid 1.26 times the average for an 85-year-old male
beneficiary who joins the plan. Dual eligibles have also been demonstrated
to have higher costs, so plans are paid even more--2.22 times the
average--if the 85-year-old male enrollee is a dual eligible. The Medicare
HMO payment for dual eligibles is based on the estimated average cost of
this population--including both healthier and sicker dual eligibles. While
dual eligibles are, on average, more costly to serve than other Medicare
beneficiaries, there is considerable variability. Some dual eligibles are
relatively healthy and seek few medical services during the course of a
year, while others' medical expenditures more closely resemble costs for the
Medicare program as a whole. Finally, a segment of the dual-eligible
population is much more expensive than the average dual-eligible
beneficiary. Even among frail dual eligibles, costs vary considerably.

HCFA and OMB Have Approved a Variety of Frailty Risk Adjusters

Relying on the precedent set by PACE, HCFA and OMB recognize that frail dual
eligibles are more expensive than their healthier counterparts. In granting
states a higher risk adjuster for frail dual eligibles, HCFA and OMB have
generally lowered the payment for healthier dual eligibles. However, HCFA
officials told us that, because of an oversight, what they characterized as
a "long-standing approach" was not applied to Minnesota.22 As a result,
health plan payments for healthier dual eligibles in Minnesota equal what is
paid for all dual eligibles under M+C. While Minnesota, Wisconsin, and
Massachusetts use a single risk adjuster for frail dual eligibles, New
York's CCN program uses several risk adjusters that attempt to reflect
differences in impairment among frail dual eligibles.

Recognizing the differential costs to serve individuals with greater needs,
PACE established a precedent for higher Medicare payments for frail dual
eligibles. Because PACE enrolls only frail individuals, rather than a cross
section that includes healthier dual eligibles, it was necessary to develop
a special risk-adjustment factor for its enrollees. The PACE factor of 2.39
represents a "best estimate" based on 1983 negotiations and available data.
After about 15 years of implementation experience and a number of
HCFA-sponsored research projects, the extent to which the PACE risk adjuster

accurately pays for the frail dual eligibles enrolled in the program remains
unclear.23

Table 3 presents our analysis of risk adjusters used for dual eligibles
enrolling in M+C HMOs, PACE, and the demonstrations in Minnesota, Wisconsin,
New York, and Massachusetts. Appendix VI describes the methodology used in
this analysis. Minnesota and Wisconsin use the PACE risk adjuster for frail
dual eligibles, which applies the same factor regardless of age or gender.
The risk adjusters negotiated by Massachusetts for frail dual eligibles are
those used by the S/HMO I demonstration and vary only by enrollee gender.24
Finally, New York's system adjusts for the level of impairment (using three
categories) and the gender of the enrollee. Enrollees must be
nursing-home-certifiable to be considered frail. In MSHO, only about 170 of
the approximately 3,400 enrolled dual eligibles are classified as frail
elderly living in the community. All of the 782 individuals enrolled in
Wisconsin's Partnership Program as of March 2000 are frail elderly or
younger disabled individuals at risk of nursing home placement. To
illustrate how these different risk adjusters affect payments under
different demonstrations, appendix VII compares the Medicare payments for
nursing-home-certifiable enrollees in PACE and state demonstration programs
with the payment under M+C for a hypothetical dual-eligible beneficiary.

                                                               Male Female
 M+C HMOsa
 Frail and nonfrail dual eligibles 65-69 years old             1.13 0.91
 Frail and nonfrail dual eligibles 85+ years old               2.22 1.74
 PACE
 All enrollees (only frail persons living in the community may
 enroll)                                                       2.39 2.39
 Minnesota (MSHO)
 Frail dual eligibles (all ages)                               2.39 2.39
 Nonfrail dual eligibles 65-69 years old                       1.13 0.91
 Nonfrail dual eligibles 85+ years old                         2.22 1.74
 Wisconsin (Partnership Program)
 All enrollees (only frail persons may enroll)b                2.39 2.39
 Massachusetts (SCO)
 Frail dual eligibles (all ages)                               2.71 2.42
 Nonfrail dual eligibles 65-69 years old                       1.01 0.83
 Nonfrail dual eligibles 85+ years old                         2.11 1.51
 New York (CCN)
 Frail (all ages)
 With mild impairment
                                                               1.66 1.66

 With moderate impairment
                                                               2.81 2.50

 With severe impairment
                                                               3.57 3.04

 Nonfrail dual eligibles 65-69 years old                       1.01 0.83
 Nonfrail dual eligibles 85+ years old                         2.11 1.51

Note: To simplify comparisons, we combined the Medicare part A (hospital
services) and part B (physician and outpatient services) risk adjusters into
one number. These risk adjusters apply to either healthier dual eligibles or
those determined to be at risk of nursing home placement but still living in
the community. A different risk adjuster is used for dual eligibles who
reside in nursing homes.

aThe M+C risk adjuster for dual eligibles is based on the estimated average
cost of this population, and therefore makes no separate adjustment for
frailty. However, M+C payments for dual eligibles do vary according to the
age and gender of the enrollee.

bFrail includes both elderly and younger disabled individuals who are at
risk of nursing home placement.

Source: GAO calculations, based on approved risk adjusters for each program.

Wisconsin and Massachusetts Are Concerned About Adequacy of Frailty Adjuster
for Their Demonstration Programs

Wisconsin and Massachusetts program officials told us that they are
concerned about the adequacy of the Medicare payments approved for certain
dual eligibles.25 Both states view the agreements reached with HCFA and OMB
on Medicare payments as temporary. In the meantime, Massachusetts plans to
subsidize health plan payments to make up for what they perceive as a
Medicare shortfall.

Wisconsin. Wisconsin's Partnership Program is unique in that two of the four
sites are enrolling younger, physically disabled dual eligibles. A
Partnership official believes that this group is much more expensive to
serve than frail, elderly dual eligibles. However, the state lacked
supporting data to justify a risk adjuster higher than the 2.39 PACE rate.26
Using data based on sites' experience with enrolling this population, the
state hopes to demonstrate to HCFA and OMB that Medicare's cost of serving
younger, disabled dual eligibles requires a risk adjuster closer to 4.0. A
state official acknowledged the complexity of the task and indicated that
the state plans to collect data over the next 18 months to make its case.

Massachusetts. On the basis of the state's analysis of merged Medicaid and
Medicare data, Massachusetts concluded that the cost of serving frail dual
eligibles requires a risk adjuster of 4.03. OMB officials told us that they
had serious reservations about the state's analysis. In particular, they
were skeptical about the high proportion of total expenditures for frail
dual eligibles that the state attributed to Medicare--about 78 percent. In
contrast, national data show that Medicaid and Medicare expenditures for
dual eligibles are about evenly divided between the two programs. Moreover,
Massachusetts analyzed data for the period from July 1, 1994, to June 30,
1995. Changes mandated by the BBA in 1997 have lowered Medicare expenditures
on home health and thus altered the relative contribution of Medicare. These
changes were not reflected in the older data analyzed by the state.
Massachusetts acknowledged this shortcoming but noted that post-BBA data
were not available.

Another federal concern involved Massachusetts' inability to account for
variability in the costs of the frail dual eligibles who actually enrolled
in the program. Massachusetts proposed applying the same high-frailty
adjuster to all nursing-home-certifiable dual eligibles, even though
research has shown considerable variation in the costs of such
beneficiaries. Massachusetts officials argued, however, that their program
would appeal primarily to sicker dual eligibles who have the most to gain
from better-coordinated care. The state lacked assessment data on dual
eligibles that would allow differentiation of the relative frailty of those
deemed to be nursing-home-certifiable.

Massachusetts agreed to HCFA and OMB's proposal to use, on an interim basis,
the S/HMO I risk-adjustment methodology that pays a higher rate than PACE
for the frail elderly.27 However, the state believes that the S/HMO I risk
adjuster still underpays for nursing-home-certifiable dual eligibles. The
state has a strategy for augmenting the Medicare portion of the capitation
payment to health plans that enroll the frail elderly. In contrast to its
original plan to focus enrollment on persons living in the community,
Massachusetts now plans to make a concerted effort to enroll beneficiaries
who are already in nursing homes because research related to the PACE
program has shown that nursing home beneficiaries have lower Medicare
expenditures. Having more nursing home beneficiaries enrolled will provide
funds to subsidize the Medicare cost of nursing-home-certifiable
beneficiaries.28

Research Suggests That New Diagnosis-Based Risk Adjuster for Medicare Would
Underpay for Frail Dual Eligibles Enrolled in Specialized Programs

In 1999, the Secretary of Health and Human Services deferred application of
a new diagnosis-based risk adjuster to specialized programs such as PACE and
the Minnesota integrated care demonstration. The new BBA-authorized
risk-adjustment system for M+C HMOs, for which phase-in began in January
2000, initially will use diagnoses from hospital encounter data to adjust
payments (see app. V for details on the implementation schedule). States
have been concerned about the applicability of this approach to
demonstration programs because research has shown that while the new
diagnosis-based risk adjusters improve the overall accuracy of Medicare
payments to health plans, they tend to underestimate the cost

for plans concentrating on frail beneficiaries.29 Moreover, the
underestimation of the cost increases when the population served is more
functionally limited and thus tends to cost more. MedPAC concurred with the
deferral and further recommended that HHS undertake research to identify
factors influencing the costs of care for frail beneficiaries and other
beneficiaries to determine what changes are needed to improve M+C
claims-based risk adjustment for frail beneficiaries, including an
assessment of data needed to support improvements in M+C risk-adjustment
systems. Risk adjusters for such special populations need to account for the
potentially greater severity of individual conditions and the multiplicity
of conditions these persons may have. While state concerns have been
temporarily addressed, uncertainty remains, because in approving the
demonstration programs HCFA has explicitly reserved the right to substitute
a "more appropriate" Medicare payment methodology for the MSHO, Partnership
Program, and CCN demonstrations if one is developed.

Despite broader interest, only three states have received approval to
implement integrated care demonstrations for dual eligibles. Currently,
state programs are small in both geographic coverage and enrollment.
Undertaking such demonstration programs requires a strong commitment on the
part of states, given the considerable front-end planning needed prior to
submitting a waiver proposal and the lengthy postapproval efforts to bring
on-line health plans capable of integrating the delivery of acute- and
long-term-care services. Some states have expressed concern about the length
of the federal review process, which was prolonged by negotiations between
federal and state officials over the Medicare payment methodology. Several
states are using the PACE risk adjuster, which, after 15 years, still has
not been validated, and which does not reflect differences in the costs of
frail beneficiaries. Only one approved state demonstration is designed to
test multiple payment categories that attempt to take into account the
variations in costs of frail dual eligibles. Medicare's move toward a new
diagnosis-based risk-adjustment methodology raises concerns for state
demonstrations because research has shown that the methodology tends to
underestimate the costs of frail beneficiaries. This situation underscores
the importance of learning from these four state demonstrations so that
their experience may inform similar initiatives that other states may be
considering.

Comments on a draft of our report were provided by the Administrator of
HCFA; the Branch Chief, Health Financing Branch, Health Division, OMB; the
Director of Program Development, Massachusetts State Department of Health;
the Director of Minnesota Senior Health Options, Minnesota Department of
Human Services; the Director of the Division of Program Development and
Initiatives, New York State Department of Health; the Project Manager,
Wisconsin Partnership Program; and two academic experts.

HCFA agreed with the report's overall findings and conclusions but commented
on our description of its efforts to identify an appropriate payment
methodology for frail dual eligibles. HCFA stated that it has engaged in a
large body of research in an attempt to find an appropriate payment
methodology. Because recent research has uncovered numerous problems with
the use of "frailty" measures for payment purposes, HCFA believes that
defining a payment methodology for integrated care demonstrations may
require moving beyond the common notion of using survey-based functional
status, or "frailty," as a risk adjuster. Therefore, it is seeking to refine
the frailty approach or find an alternative risk-adjustment methodology for
plans that enroll special populations. We agree that a narrow
conceptualization of frailty is unlikely to be sufficient and that clinical
assessments are preferable to survey-based information. In fact, many states
determine frailty by conducting a face-to-face assessment of an individual's
need for assistance with daily living, not by relying on surveys or
questionnaires. Risk adjusters for such special populations need to account
for the potentially greater severity of individual conditions and the
multiplicity of conditions frail individuals may have. We have revised the
report to more fully portray HCFA's research efforts and have clarified the
refinements of risk-adjustment methods needed for these populations.

HCFA also acknowledged that difficulties in defining an appropriate payment
methodology significantly contributed to the amount of time taken for states
to obtain program approval. However, HCFA stressed the importance of the BBA
payment changes and noted that they further complicate negotiations with
states. We agree and have highlighted the BBA changes in the report. At
HCFA's suggestion, we have also expanded the discussion on the effect of
operational differences between Medicare and Medicaid programs on the length
of the approval process. (HCFA's comments are included in app. VIII.)

Minnesota provided extensive comments on the draft report, some of which
were echoed by officials from New York and Massachusetts and our expert
reviewers. Most reviewers believed that the report should have (1) described
in more detail the budget neutrality issues raised by integrated care
demonstrations, (2) placed less emphasis on PACE, (3) discussed more fully
state program objectives, and (4) discussed additional issues that add to
the complexity of implementing these demonstrations. We have modified the
report where appropriate to reflect these comments, and we further discuss
the first two areas in the following paragraphs.

Budget Neutrality Policy

Although the states generally recognized that HCFA and OMB contend with
legitimate issues in establishing reimbursement rates for integrated care
demonstrations, they suggested either that the flexibility around these
issues is insufficient or that OMB's policy needs to be reconsidered.
Massachusetts and Minnesota officials criticized HCFA and OMB's policy on
Medicare budget neutrality, which requires the use of M+C rates rather than
historical fee-for-service costs as the basis for comparison. States
expressed concerns with both the base rate used to determine reimbursement
rates for the demonstrations and the risk adjusters applied to those rates.

While acknowledging the link between M+C payment rates and fee-for-service
spending prior to the BBA, officials from Massachusetts and Minnesota
nonetheless took issue with the decision to base payments on M+C rates and
argued that historical fee-for-service spending would be a more appropriate
basis for measuring budget neutrality. They noted that dual-eligible
beneficiaries are not typically enrolled in M+C plans because Medicaid pays
their Medicare cost-sharing and gives them access to medications and other
services not covered by Medicare. Similarly, M+C plans have little incentive
to encourage enrollment among frail dual eligibles because of this
population's relatively high costs, which may not be fully reflected in
current M+C payment policy. OMB, however, used the M+C base rates and
focused the negotiations on what it considered to be the most important
issue--developing appropriate risk adjustors for a voluntary program
designed to appeal to frail beneficiaries.

Massachusetts officials stated that the methodology used to compute M+C
rates makes the rates too low for determining budget neutrality. First, they
said that M+C rates are automatically discounted by 5 percent below
estimated fee-for-service costs, in part to adjust for favorable selection
in M+C plans. However, the 5-percent reduction in payments was not designed
to offset favorable selection but rather to capture some of the projected
cost savings from the more efficient provision of care in managed care
plans. OMB officials said that the process of developing risk adjustors for
the Massachusetts demonstration took into consideration the fact that M+C
base rates were discounted to reflect the anticipated efficiencies of
managed care delivery systems. Moreover, favorable selection may be the
result not only of plans' marketing practices but also of enrollee
self-selection, which may still occur in the integrated care setting.
Second, Massachusetts officials stated that a BBA provision (known as
blending) would slow the rate of growth of payments in high-cost areas (such
as Massachusetts) and reduce variation in payments across counties. However,
a slowdown in fee-for-service spending growth has postponed the
implementation of this provision. Thus, only minor blending occurred in
2000, and no blending will occur in 2001 or as long as fee-for-service
spending growth remains low.

PACE

The states and the expert reviewers said that the draft report
overemphasized PACE and overstated its importance as a starting point for
their demonstrations. They concluded that we were suggesting that PACE
should be viewed as an alternative to states' demonstrations. The report
presents information on PACE to provide important context with respect to
states' demonstrations--both differences and similarities. States, we noted,
are going beyond the PACE model because it serves only the frail elderly who
meet state criteria for nursing home placement and it relies on adult day
care centers, which some elderly find too restrictive. We stressed that
state demonstrations, unlike PACE, also are serving (1) healthier dual
eligibles and (2) nursing home residents. States believe that the former may
become frail and thus benefit from preventive health care and screening,
while the latter could benefit now from better management of primary care
and acute-care services. Finally, the report points out a similarity between
state and provider-initiated demonstrations--the use of the PACE and S/HMO
precedent to negotiate similar risk adjusters for frail enrollees.

All those commenting on the report also provided technical comments, which
we incorporated when appropriate.

As agreed with your staffs, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days after
its issue date. We will then send copies to the Honorable Donna E. Shalala,
Secretary of Health and Human Services; the Honorable Nancy-Ann Min DeParle,
Administrator of HCFA; appropriate congressional committees; and others upon
request.

If you or your staffs have any questions, please call me at (202) 512-7118
or Walter Ochinko, Assistant Director, at (202) 512-7157. Other major
contributors to this report include Sally Kaplan, Carmen Rivera-Lowitt,
Susanne Seagrave, and Shari Sitron.

Kathryn G. Allen
Associate Director, Health Financing and
Public Health Issues

Examples of Advantages States See in Integrated Care for Dual Eligibles

 Advantage               Example
                         In order for Mary to live in her own home, her
                         daughter arranged for support services covered by
                         Medicaid. Mary fell and broke her hip and was in
                         the hospital for 4 days. When she came home, she
                         needed additional services. For the new services,
 Continuity of care      Medicare paid instead of Medicaid, so her health
                         care workers also changed. In an integrated care
                         program, Mary would have had a care coordinator to
                         help arrange for her care before, during, and
                         after her hospital stay. Thus, Mary would have
                         been able to keep the same workers.
                         Alice, who is 81 and lives in her own home, has
                         severe arthritis of the spine. The integrated care
                         program coordinator found that Alice has been
                         sleeping in a recliner for over a year because she
                         had been unable to lie flat in a bed. Alice was
 Nontraditional benefits very uncomfortable in the recliner and was not
                         sleeping well. The care coordinator ordered a
                         hospital bed, which made a big difference in
                         Alice's comfort. She is sleeping better because
                         she can change her position during the night and
                         her pain has been lessened.
                         The interdisciplinary team approach ensures care
                         coordination across systems that currently operate
                         independently. The team coordinates all aspects of
                         care and targets points of intersection, where the
                         health care system traditionally breaks down, to
 Interdisciplinary team  coordinate transitions between service providers.
                         The interdisciplinary team knows all aspects of a
                         participant's care plan, preventing situations
                         where two or more different systems prescribe
                         duplicative or contradictory treatments.
                         Participants' involvement in decision-making
                         ensures a high degree of satisfaction.

Sources: Minnesota Senior Health Options and the Wisconsin Partnership
Program.

Descriptions of PACE, S/HMO I and II, and EverCare Programs

This appendix describes four provider-initiated demonstration programs.
Table 4 compares and contrasts these programs.

In 1983, the Congress directed HHS to approve the necessary waivers for On
Lok Senior Health Services in San Francisco. On Lok originated as an adult
day care center in 1971, but over time it added capacity to integrate health
and social services. The Congress authorized PACE as a demonstration in 1986
to replicate the delivery system pioneered by On Lok. An expansion from 10
to 15 PACE sites was approved 4 years later. The BBA transformed PACE from a
demonstration with a fixed number of sites to a permanent program under
Medicare, granting states the option of offering PACE to their Medicaid
enrollees.30 As of April 2000, there were 25 PACE sites serving about 6,000
enrollees, with additional locations, known as "pre-PACE" sites,
participating under Medicaid capitation only.

PACE seeks to maintain the frail elderly in the community. Enrollment is
open to all individuals aged 55 years or older who meet states' standards
for being at risk of nursing home placement and reside in the area served by
the PACE sites.31 Such individuals are commonly referred to as "frail"
because they have difficulty performing daily activities such as bathing or
dressing and are thus at risk of nursing home placement. In fact, PACE
enrollees require human assistance with an average of three activities

of daily living.32 On average, enrollees are 80 years old. Health and
long-term-care services are paid for on a capitated basis and provided
primarily in adult day health centers, participants' homes, or inpatient
facilities as needed. A multidisciplinary team of physicians, nurses, social
workers, physical and occupational therapists, and others manage enrollee
care. In structure, PACE resembles a small, staff-model HMO, in which
doctors are employees of the health plan. Most of the PACE sites are quite
small. While enrollment ranges from 39 to almost 900, more than one-half of
the sites serve under 200 enrollees and only two serve more than 500.

S/HMO I, which has been in operation since 1985, tests a model intended to
integrate acute, chronic and long-term care, and social services provided
through capitated HMOs. All enrollees are entitled to basic Medicare
benefits and expanded benefits (such as prescription drugs and eyeglasses).
In addition, enrollees determined to be at risk of
institutionalization--commonly referred to as
nursing-home-certifiable--under state Medicaid standards are entitled to a
long-term-care benefit. The Congress mandated the second-generation S/HMO II
demonstration in 1990. It is similar to the S/HMO I in many ways, but it
refines the targeting of at-risk beneficiaries, financing methods, and
benefit design of the S/HMO model. HCFA chose six organizations to
participate, but only one is currently active. S/HMO II incorporates
practices developed by geriatricians into the operations of the plans, such
as comprehensive geriatric assessments for certain patients, treatment of
functional problems, and an interdisciplinary team approach. Both S/HMO I
and S/HMO II include a case management component that emphasizes
community-based services and coordination of nursing home and non-nursing
home care. Enrollment in S/HMO I and S/HMO II as of April 2000 was 81,718.

EverCare, a subsidiary of United Health Care, began operating in 1993 with
the primary goal of providing better case management for permanent

nursing home residents. As of April 2000, EverCare had enrolled 10,725
nursing home residents. Unlike PACE and S/HMO, EverCare does not expand the
Medicare benefit package significantly. EverCare assigns a physician and
geriatric nurse practitioner to nursing home residents to provide primary
care in the nursing home. The program provides these services to reduce
residents' use of hospital and emergency room care. The demonstration also
is intended to improve the quality of care and health outcomes and to
develop practice guidelines.

                           PACE                  S/HMO             EverCare
 Number of sites    25 in 13 statesa   3 S/HMO Ib; 1 S/HMO IIc   6
 Approval/enrollment
 dates
                    1983 On Lok; 1986
                    PACE replication;d
 Approved           and in 1997, the   1984 S/HMO I; 1990 S/HMO  1992
                    BBA made PACE a    II
                    permanent Medicaid
                    state plan option

 Enrollment         1983 On Lok; 1990  1985 S/HMO I;1996 S/HMO
 commenced          for PACE           II                        1993
                    replication sites
                    Frail, elderly
                    persons aged 55 or
                    older who meet                               Permanent
                    states' standards  S/HMO I and II:           nursing home
                    for nursing home   Individuals over 65 years residents.
                    placement and      of age who are entitled   Enrollees
                                                                 require
 Eligible populationreside in the area to Medicare part A and    assistance
                    served by the PACE part B. In addition,
                    organization. PACE S/HMO II also enrolls     with an
                    enrollees require  disabled individuals      average of 4
                    human assistance   under age 65.             to 5
                    with an average of                           activities of
                    3 activities of                              daily living.
                    daily living.
 Enrollment
                    Some states
 Cap                establish a        Cap for all sites:        None
                    maximum number of  324,000
                    enrollees
                                       S/HMO I: 46,458; S/HMO
 Current enrollment 6,000 enrolled (as II: 35,260 (as of Apr.    10,725 (as of
                    of Dec. 1999)                                Apr. 2000)
                                       2000)
                    25 plans.
                    One-third are
                    freestanding,
                    community-based
                    provider entities.
                    The balance are
                    health systems,
                    community health   Total of 4 HMOs. S/HMO I
 Health plan        centers, or larger has 3 plans. S/HMO II has 1 HMO--United
 characteristics    long-term-care     1 plan (Health Plan of    HealthCare
                    providers. PACE    Nevada).
                    resembles a small,
                    staff-model HMO,
                    in which
                    interdisciplinary
                    team members are
                    employees of the
                    health plan.
                                                                 Physician and
                                                                 nurse
                                                                 practitioners
                                                                 assigned to
                                                                 provide
                                                                 primary care
                                                                 in nursing
                                                                 homes to
                    Program generally                            reduce use of
                    requires that      S/HMO I offers basic      hospital and
                    enrollees attend   Medicare, expanded        emergency room
                    the adult day      benefits (such as         care.
                    health center and  prescription drugs and    Providers
                    use only the       eyeglasses), and          supply
                    plan's providers.  community-based long-term geriatric
                    The BBA made PACE  care. The latter is only  services,
                    a permanent        available to              coordinate
                    program under      nursing-home-certifiable  care,
                                       enrollees. S/HMO II plans
 Unique features    Medicare, giving   incorporate practices     communicate
                    states the option                            with families,
                    of offering PACE   developed by              and oversee
                    to their Medicaid  geriatricians into the    hospital care.
                    enrollees by       operations of the plans,  Program does
                    amending their     such as comprehensive     not cover
                    state Medicaid     geriatric assessments for prescription
                    plans and          certain patients,         drugs or
                    gradually          treatment of functional   long-term
                    expanding the      problems, and an          nursing home
                    authorized number  interdisciplinary team    care, but uses
                    of PACE sites.     approach.                 capitation
                                                                 payment that
                                                                 is sometimes
                                                                 increased
                                                                 above Medicare
                                                                 amounts to
                                                                 encourage
                                                                 physician
                                                                 visits.
 Waivers
 Medicaid           Section 1115       Section 222               Section 222
 Medicare           Section 222

aThe 13 states are Mass. (5); Calif. (4); N.Y. (4); Ohio (2); Wisc. (2); and
Colo., Md., Mich., Ore., S.C., Tenn., Tex., and Wash. with one site each.

bThe three S/HMO I sites are Medicare Plus II in Portland, Ore.; Elderplan
in Brooklyn, N.Y.; and SCAN Health Plan in Long Beach, Calif.

cHCFA initially selected 6 sites, but only 1 (in Nevada) is currently
active.

dOn Lok, the PACE precursor, was authorized in 1983 and came under full
capitation that year. In 1986, the Congress authorized frail elderly
demonstrations to replicate On Lok. These programs became known as PACE and
in essence On Lok became the first PACE site. No additional sites became
operational until 1990.

Sources: PACE, MedPAC, and HCFA officials.

Concepts Being Tested by States' Integrated Care Demonstrations for Dual
Eligibles

HCFA summarized the key concepts being tested by state integrated care
demonstrations as follows.

Minnesota: Minnesota Senior Health Options (MSHO), approved April 1995:

ï¿½ How is care delivered to dual-eligible beneficiaries through the
integration of Medicare and Medicaid administrative requirements and
processes as administered by the state? How are managed care organizations,
the state, HCFA, and beneficiaries affected?

ï¿½ How well do complex network arrangements deliver integrated Medicare and
Medicaid services and care coordination to dual-eligible beneficiaries,
including frail elderly community-dwelling and institutionalized members?

Wisconsin: Wisconsin Partnership Program, approved October 1998:

ï¿½ How does the independent practice model of Partnership compare with the
PACE model with respect to utilization, costs, and outcomes of care?

ï¿½ How successful is the Partnership model for serving people with physical
disabilities?

ï¿½ How successful is the Partnership model as a model for rural health care
delivery for elderly and physically disabled people?

New York: Continuing Care Networks (CCN), approved September 1999:

ï¿½ How well does a functionally based payment model predict the costs of
services for beneficiaries?

ï¿½ How effective is the CCN model in integrating services for frail elderly
beneficiaries in the context of overall plan enrollment of both
Medicare-only and dual-eligible members, who may or may not be frail?

ï¿½ How effective are innovative service delivery care management strategies
that involve a combination of private and public financing for community
long-term-care benefits?

ï¿½ How effective are provider-based networks at delivering integrated care
for Medicare and dual-eligible beneficiaries?

Massachusetts: MassHealth Senior Care Options Demonstration (SCO), awaiting
final approval as of June 2000:

ï¿½ Can states and HCFA evolve a more efficient administrative capability for
implementing a demonstration?

ï¿½ In two phases of financing, how will risk-adjusted payment systems be
implemented and will these systems lead to improvement in predicting the
costs of frail elderly beneficiaries?

ï¿½ Will these changes benefit plans by making their costs more predictable
and help beneficiaries by reducing the temptation of plans to avoid
enrolling sicker, higher-cost beneficiaries?

ï¿½ Does a coordinated enrollment process through an enrollment broker enhance
consumer choice and understanding of the program?

ï¿½ How effective are SCO models that emphasize geriatric expertise in both
care planning and service delivery? How effective is the use of social and
community support services in avoiding inappropriate nursing home placement
of beneficiaries? Do innovative coordinated-care models result in the
delivery of better, more cost-effective care?

ï¿½ What efficiencies in program administration were gained from the
competitive selection of contractors and 3-way contracts between SCO and
federal and state governments?

Description of Medicaid Integrated Care Programs in Texas, Florida, and
Colorado

This appendix describes three state programs that integrate health care
financing and delivery for Medicaid services only. These states originally
attempted to integrate Medicare and Medicaid acute- and long-term-care
services, but for various reasons changed their initial plans.

In 1995, the state legislature required the Texas Health and Human Services
Commission to pilot a cost-neutral model for the integrated delivery of
acute- and long-term-care services for aged and disabled Medicaid
recipients. Program officials originally planned on a fully integrated,
mandatory program but then learned that an integrated care program cannot be
mandated on the Medicare side. In addition, officials began to understand
how complicated and time-consuming the process would be. Eventually, a
combination 1915(b) and 1915(c) waiver, which mandated participation and
capitated acute- and long-term-care services on the Medicaid side, was
approved in January 1998.33

The targeted population is almost 60,000 aged and disabled Medicaid
recipients in Harris County, Texas (Houston area). Provision of services
began when the federal government approved waivers in January 1998, and
enrollment became mandatory for Medicaid recipients in April 1998. As of
December 1999, there were 54,873 enrollees--about half of whom were dual
eligibles. An enhanced prescription drug benefit is available to dual
eligibles who choose the same HMO for both Medicare and Medicaid services.
Otherwise, coverage is limited to three prescriptions per month. As a result
of limited marketing, only 300 enrollees had opted for this incentive. All
enrollees have a choice of three HMOs, one of which also enrolls Medicare
beneficiaries.

(Operational)

Florida submitted a waiver application to HCFA in November 1996 for its
Long-Term-Care Community Diversion Pilot Project. The state originally
wanted both a section 1115 Medicaid waiver and a section 222 Medicare
waiver, but after discussions with HCFA, Florida decided not to integrate
Medicare with Medicaid services because of the time it had taken other
states to negotiate and obtain such waivers. Instead, the state chose to use
a 1915(c) waiver that allows HMOs to be paid a capitated rate for nursing
home and community-based services. The waiver was approved in March 1997.

The project now operates in the Orlando area with one HMO and in the Palm
Beach area with two HMOs. Participants must be 65 years or older, meet
Medicaid financial eligibility requirements, be nursing home certifiable,
meet special clinical eligibility criteria, and be eligible for Medicare
benefits. As of June 2000, enrollment in the Orlando area was 375 and in the
Palm Beach area 325. All of the enrollees are dual eligibles.

Rocky Mountain HMO approached Colorado about integrating acute- and
long-term-care services in 1994--at the same time the state also began
considering a similar initiative. Unlike most HMOs that are paid a capitated
rate prospectively, Rocky Mountain is a cost-based Medicare HMO whose
payments are settled after the fact. Rocky Mountain had a prominent share of
the Mesa County market, including enrollment of more than half of the
dual-eligible residents. As of March 20, 1999, there were 2,090 dual
eligibles in Mesa County, 1,111 of which were enrolled in Rocky Mountain
HMO. The state and Rocky Mountain HMO had estimated enrolling 7,720
Medicaid-only and dual-eligible beneficiaries in Mesa County.

The Integrated Care and Financing Project anticipated using a section 1115
Medicaid waiver and a section 222 Medicare waiver. Although financing issues
were still being worked out, the state received HCFA approval on July 1,
1997. After approval, negotiations continued on a Medicare reimbursement
methodology. Ultimately, however, HCFA and Colorado were unable to reach
agreement. As a result, the state dropped the Medicare aspect of its project
and focused on the integration of Medicaid acute- and long-term-care
services using a section 1115 waiver.

HCFA approved Colorado's 1115 waiver in October 1999.34 About a month later,
Rocky Mountain announced its withdrawal from the integrated care program
because of disagreements with the state over its Medicaid contract. Colorado
now plans to establish an integrated care program in Denver without the use
of Medicare and Medicaid waivers/authorities.

BBA Changes to Medicare HMO Payment Methodology

Before the BBA changed the rate-setting process for fiscal year 1998, the
monthly amount Medicare paid plans for each plan member was tied directly to
local spending in the fee-for-service program. In general terms, the pre-BBA
rate-setting methodology worked as follows. Every year, HCFA estimated how
much it would spend in each county to serve the "average" fee-for-service
beneficiary. It would then discount that amount by 5 percent under the
assumption that HMOs provided care more efficiently than the unmanaged
fee-for-service program. 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; disability status; and residence in an
institution, such as a skilled nursing facility.35

The BBA substantially changed the method used to set the payment rates for
Medicare HMOs. As of January 1, 1998, plan payment rates for each county are
based on the highest rate resulting from three alternative methodologies: a
minimum amount ($379.84 in 1999); a minimum increase over the previous
year's payment rate (equal to 2 percent); or a blend of historical
fee-for-service spending in a county and national average costs, adjusted
for local price levels.36 The changes were intended to address criticisms of
the preceding payment system by loosening the link between local
fee-for-service spending increases and plan payment rate increases in each
county. The blending provision, in particular, will eventually move all
rates closer to a national average by providing for larger payment increases
in low-rate counties and smaller payment increases in high-rate counties. In
addition, the establishment of a minimum payment rate was meant to encourage
plans to offer services in areas that historically have had low payment
rates and few participating plans--primarily rural counties.

The BBA also directed the Secretary of Health and Human Services to develop
and implement a better risk-adjustment method to adjust plan payments,
beginning January 1, 2000. The interim health-based risk-adjustment
methodology, based on the Principal In-Patient-Diagnostic Cost Group model,
uses only hospital inpatient data to gauge beneficiary health status. Under
this system, payments are still adjusted as well for beneficiary age, sex,
original reason for Medicare eligibility (such as disability), and Medicaid
enrollment. The adjustment for beneficiary residence in an institution has
been eliminated from the methodology. HCFA proposes to phase in the new
interim risk adjustment system slowly. In 2000 and 2001, only 10 percent of
health plans' payments will be based on the new system. This percentage is
scheduled to increase to no more than 20 percent in 2002 and is unspecified
after this year.37 Eventually, HCFA intends to implement a more accurate
risk adjuster that uses medical data from additional health care settings
and providers, such as physician offices and hospital outpatient
departments.

GAO Methodology for Combining Part A and Part B Risk Adjusters

To make it easier to compare risk adjusters across programs, we combined
separate part A and part B factors where applicable. Only the risk adjuster
for the PACE program uses a single factor. The following formula shows our
methodology for computing the single factors. Table 5 contains the actual
part A and part B factors.

For example, the 1999 part A rate for Hennepin, Minnesota, was $242.11 and
the part B rate was $179.90. The risk adjuster reported in table 3 for
nonfrail dual-eligible males 65 to 69 years old is given by the following:

                                                Male             Female

                                           Part A  Part B    Part A Part B
 M+C HMOs
 Frail and nonfrail dual eligibles 65-69
 years old                                 1.15    1.1       0.8    1.05
 Frail and nonfrail dual eligibles 85+
 years old                                 2.6     1.7       2.1    1.25
 PACE
 All enrollees (only frail persons living
 in the community may enroll)              2.39    2.39      2.39   2.39
 Minnesota (MSHO)
 Frail dual eligibles (all ages)           2.39    2.39      2.39   2.39
 Nonfrail dual eligibles 65-69 years old   1.15    1.1       0.8    1.05
 Nonfrail dual eligibles 85+ years old     2.6     1.7       2.1    1.25
 Wisconsin (Partnership Program)
 All enrollees (only frail persons may
 enroll)                                   2.39    2.39      2.39   2.39
 Massachusetts (SCO)
 Frail dual eligibles (all ages)           2.88    2.49      2.88   1.79
 Nonfrail dual eligibles 65-69 years old   1.02    0.99      0.69   1.01
 Nonfrail dual eligibles 85+ years old     2.54    1.54      1.84   1.07
 New York (CCN)
 Frail (all ages)
 With mild impairment                      1.75    1.53      1.75   1.55
 With moderate impairment                  2.98    2.57      2.98   1.86
 With severe impairment                    3.82    3.23      3.82   1.98
 Nonfrail dual eligibles 65-69 years old   1.02    0.99      0.69   1.01
 Nonfrail dual eligibles 85+ years old     2.54    1.54      1.84   1.07

Comparison of Medicare Payments Under M+C, PACE, and State Demonstration
Programs

To illustrate how different risk adjusters affect payments under various
demonstrations, table 6 compares the Medicare payments under M+C, PACE, and
state demonstration programs for a hypothetical frail dual- eligible
enrollee living in the community. M+C HMOs are paid based on the average
cost of all dual eligibles--both healthier and frail. Thus, their payments
for frail dual-eligible enrollees are lower than payments based on separate
risk adjusters for frail-only dual eligibles. In addition, table 6 reflects
differences in the base payment rates due to differences in local health
care costs.

            Program             Monthly payment
 Minnesota (Hennepin County)
 M+C HMOs                       $575.93
 PACE                           1,008.60
 MSHO                           1,008.60
 Wisconsin (Dane County)
 M+C HMOs                       526.86
 PACE                           922.66
 Partnership Program            922.66
 New York (Monroe County)
 M+C HMOs                       584.93
 PACE                           1,024.35
 CCN
 Low impairment                 713.51
 Medium impairment              1,072.59
 High impairment                1,301.07
 Massachusetts (Suffolk County)
 M+C HMOs                       904.88
 PACE                           1,584.67
 S/HMO I                        1,681.54
 SCO                            1,601.47

Source: GAO analysis, based on HCFA's M+C rate data and interviews with
states' officials.

Comments From the Health Care Financing Administration

(101785)

Table 1: Comparison of Key Characteristics of State Integrated Care Programs
12

Table 2: Time (in Months) for Planning, Federal Review, and
Preparing for Implementation of Four State Waiver Requests 18

Table 3: GAO Analysis of Risk Adjusters for Programs Serving Dual Eligibles
23

Table 4: Comparison of PACE, S/HMO, and EverCare 35

Table 5: 1999 Risk Adjusters for Programs Serving Dual Eligibles 44

Table 6: Payments Under M+C, PACE, and State Demonstrations That Serve Frail
Dual Eligibles Living in the Community, for a 75-Year-Old Female Residing in
Each Location in Calendar
Year 1999 46
  

1. The term "dual eligible" is sometimes applied to other low-income
Medicare beneficiaries who do not qualify for full Medicaid coverage under
state income standards but who receive Medicaid coverage of Medicare
cost-sharing requirements.

2. App. I describes some of the advantages states see in integrated care
programs for dual- eligible beneficiaries.

3. In April 2000, HCFA and Massachusetts signed a memorandum of
understanding (MOU) that establishes terms and conditions and defines the
federal and state roles and responsibilities in implementing an integrated
care program. The MOU reflects the commitment of both parties to
implementing a demonstration program. A number of steps need to be taken
prior to final approval and implementation.

4. The total number of dual eligibles was about 6.5 million in 1996 and
included Medicare beneficiaries who do not qualify for full Medicaid
coverage. The Congress established three programs to assist Medicare
beneficiaries with incomes above the qualifying level for full Medicaid
coverage. Under the Qualified Medicare Beneficiary program, Medicaid pays
Medicare premiums, deductibles, and coinsurance for individuals with incomes
at or below 100 percent of the federal poverty level. Under the Specified
Low-Income Medicare Beneficiary program, Medicaid pays the Medicare part B
premium for individuals with incomes above 100 percent but less than 120
percent of the federal poverty level. Finally, the Qualifying Individuals
program, which operates with fixed funding for a 5-year period beginning in
1998, assists individuals on a first-come, first-served basis; Medicaid is
required to pay the Medicare part B premium for beneficiaries with incomes
at least 120 percent but less than 135 percent of the poverty level and to
provide a small rebate of Medicare premiums for beneficiaries with incomes
at least 135 percent but less than 175 percent of the federal poverty level.
See Low-Income Medicare Beneficiaries: Further Outreach and Administrative
Simplification Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999 ), p.
4.

5. This estimate is based on Congressional Budget Office projections. After
subtracting beneficiary premiums, the fiscal year 1999 Medicare net cost to
the government was projected to be $210 billion. Disabled Americans qualify
for Medicare after they receive cash disability benefits under title II of
the Social Security Act for 24 months.

6. In 1995, the cost-sharing liability for Medicare-covered services
averaged about $760 per beneficiary. For those living at the poverty level,
this cost represented about 10 percent of income ($7,470) for a single
person and 15 percent of income ($10,030) for a couple. (See GAO/HEHS-99-61,
p. 1.)

7. William D. Clark and Melissa M. Hulbert, "Research Issues: Dually
Eligible Medicare and Medicaid Beneficiaries, Challenges and Opportunities,"
Health Care Financing Review (Winter 1998).

8. Currently, section 222(b) is codified at 42 U.S.C. 1395b-1(a)(1)(A).
Despite its new codification, most health care professionals--including
HCFA--continue to refer to the authority as a 222 waiver. The 1115 waiver is
codified at 42 U.S.C. 1315(a).

9. Individuals who are determined to be at risk of nursing home placement,
that is, "nursing-home-certifiable," are considered frail. Generally, frail
individuals require assistance with daily activities such as bathing or
dressing. States are responsible for making these eligibility assessments
using state standards.

10. For a more detailed discussion of these demonstrations, see Medicare
Payment Advisory Commission (MedPAC), Report to the Congress: Selected
Medicare Issues, ch. 5 (Washington, D.C.: MedPAC, June 1999).

11. HCFA has granted some states waivers that allow mandatory enrollment in
Medicaid managed care programs. Medicare beneficiaries' enrollment in
managed care plans is entirely voluntary.

12. Minnesota has permission to operate MSHO in seven metropolitan area
counties. It currently lacks a provider network in one county (Carver), but
dual eligibles in that county are eligible to enroll in MSHO using a network
in an adjacent county.

13. Most Americans aged 65 or older are entitled to participate in Medicare.
These individuals (or their spouses) established their entitlement during
their working careers by paying the Hospital Insurance payroll tax on
earnings covered by either the Social Security or railroad retirement
systems for at least 40 quarters.

14. HMOs participating in MSHO typically subcontract with care systems that
tend to be owned by provider groups--clinics, hospitals, and long-term-care
providers. Most of these care systems are organized as for-profit
enterprises, even though many of the hospitals and long-term-care providers
that sponsor them have nonprofit status. These care systems are locally
based and not owned by out-of-state companies.

15. Benefits not the responsibility of the managed care plan are referred to
as "carved out."

16. Under a cost contract, Medicare pays the reasonable cost the entity
incurs in furnishing covered services (less the estimated value of
beneficiary cost-sharing).

17. In Massachusetts, the risk adjuster for frail dual eligibles varies by
gender.

18. These organizations actually enrolled dual eligibles in 1996, operating
under an existing home and community-based services waiver as prepaid health
plans with hospital, laboratory, and X-ray services carved out and paid on a
fee-for-service basis. Medicare services for enrollees were also paid on a
fee-for-service basis.

19. Enrollment, marketing, evidence of coverage contracts, provider
contracts, grievance and appeals systems and rights, benefit definition and
coordination, and other key systems and policies must be worked through
between each state and HCFA.

20. HCFA must approve health plan capitation rates, which may not exceed the
upper payment limit--that is, what would have been paid for an equivalent
population in fee-for-service.

21. In fact, the Medicare payment rate for plans was initially set at 95
percent of the average fee-for-service cost so that the program would
benefit from savings that health plans could generate. However, Medicare
HMOs have generally been overpaid, because beneficiaries who enrolled have
been healthier than the average beneficiary. See Medicare+Choice: Reforms
Have Reduced, but Likely Not Eliminated, Excess Plan Payments
(GAO/HEHS-99-144, June 18, 1999 ).

22. S/HMO I was the first demonstration to implement lower payment rates for
community-dwelling, nonfrail plan members in 1985.

23. In 1983, HCFA and On Lok, the precursor of the PACE program, agreed on a
rate that is between the expenditures of an expensive comparison population
enrolled in fee-for-service--who were assumed to be nursing-home-certifiable
on the basis of their pattern of service use--and the average spending for
less costly beneficiaries living in nursing homes. Post-1983 research
studies have examined the appropriateness of the PACE rate. The conclusions
have been mixed. Studies using older data tend to confirm the PACE rate but
show considerable variation in spending for frail persons--ranging from 1.66
for the least costly nursing-home-certifiable beneficiary up to 4.0 for
individuals with severe disabilities or recent hospitalizations. On the
other hand, studies using more recent data suggest that the comparison
population is more expensive and that therefore the PACE rate may be too
low. A 1997 study noted that more recent data reflect the sharp increase in
Medicare home health payments since a court decision in 1988 struck down
HCFA's interpretation of the home health benefit as inconsistent with the
Medicare statute. (See Gruenberg and others, An Examination of the Impact of
the Proposed New Medicare Capitation Methods on Programs for the Frail
Elderly (Cambridge, Mass.: Long Term Care Data Institute, Jan. 1999), pp.
42-3, and An Examination of the Cost-Effectiveness of PACE in Relation to
Medicare (Cambridge, Mass.: DataChron Health Systems, Inc., Jan. 1997).

24. While the M+C payment includes a 5-percent discount off the base rate to
reflect the anticipated savings from HMOs, the Congress authorized an
exception to this methodology for the S/HMO I demonstration. Massachusetts
will use the S/HMO I risk adjuster, but it will be multiplied by the
discounted M+C base rate.

25. Massachusetts accepted the HCFA/OMB offer to use the S/HMO I risk
adjuster on an interim basis.

26. PACE enrollees must be 55 years or older, but on average they are 80
years old. Medicare beneficiaries under age 65 have not been allowed to
enroll in S/HMO I but are enrolled in S/HMO II.

27. Massachusetts declined HCFA's suggestion that the state become a test
site for the new diagnosis-based risk adjusters that are under development
for Medicare HMOs.

28. As of fiscal year 1999, there were 37,397 dual eligibles in nursing
homes in Massachusetts.

29. Gregory C. Pope and others, "Evaluating Alternative Risk Adjusters for
Medicare," Health Care Financing Review, Vol. 20, No. 2 (Winter 1998), and
Leonard Gurenberg and others, An Examination of the Impact of the Proposed
New Medicare Capitation Methods on Programs for the Frail Elderly
(Cambridge, Mass.: Long Term Care Data Institute, Jan. 1999).

30. HCFA is in the process of issuing implementing regulations to reflect
the BBA changes. The PACE interim final rule, published November 24, 1999,
in the Federal Register, does not specify the frailty factors to be used in
determining Medicare and Medicaid payment rates for PACE sites. The frailty
factor used to calculate the Medicare payment rate must be specified in the
PACE agreement. The monthly Medicaid capitation payment amount must also be
specified in the PACE program agreement and take "into account the
comparative frailty of PACE participants."

31. Though 96 percent of PACE enrollees are dual eligibles, eligibility for
both Medicaid and Medicare is not a participation requirement. States'
assessments of individuals vary considerably in terms of (1) their nursing
home eligibility criteria; (2) whether state standards require a specific
number and types of impairment or rely on the judgment of the individual
responsible for the assessment; and (3) their sophistication, including
whether they document degrees of impairment.

32. Activities of daily living include bathing, dressing, feeding,
toileting, and transferring. On average, PACE beneficiaries suffer from 7 to
8 major medical diagnoses and exhibit some degree of cognitive impairment.
Over half of enrollees receive human assistance with walking. Finally,
nearly 90 percent require assistance in taking medications, and almost all
enrollees are dependent on assistance for meal preparation, shopping,
housework, and other such activities.

33. Under section 1915(b), a state can mandate enrollment in a managed care
plan. The 1915(c) waiver was required to allow Texas to incorporate services
provided under its 1994 home and community-based services waiver.

34. A factor that delayed approval of the Colorado program in 1999 was the
need to address new mandatory criteria for including children with special
needs in its waiver.

35. Separate rates are calculated for (1) beneficiaries who qualify for
Medicare because of a disability (under age 65) and (2) the elderly.
Separate rates are also set for beneficiaries with end-stage renal disease
(kidney failure).

36. Because of low growth in Medicare spending, and BBA's limit on aggregate
health plan payments and minimum payment requirements, no county received a
blended rate in 1998 or 1999. According to HCFA actuaries, the blending
provision could not be funded because the BBA's minimum payment requirements
resulted in total plan spending that exceeded the BBA's required limit on
total health plan payments by $95 million in 1998 and $80 million in 1999.
Blending occurred for the first time in 2000.

37. This revised phase-in schedule is outlined in the Medicare, Medicaid,
and State Children's Health Insurance Program Adjustment Act of 1999.
*** End of document. ***