Medicare Managed Care: HMO Rates, Other Factors Create Uneven
Availability of Benefits (Testimony, 05/19/97, GAO/T-HEHS-97-133).
GAO discussed aspects of Medicare managed care, including greater choice
and equity across the program, focusing on: (1) the link between
counties' capitation rates and Medicare's spending on fee-for-service
care; (2) factors affecting the availability of plans in a given area,
the level of premiums charged, and the benefit packages offered; and (3)
modifications to Medicare's current payment methodology that could
reduce health maintenance organization (HMO) overpayments.
GAO noted that: (1) Medicare's risk HMO payment system, which is built
largely on fee-for-service costs, accounts for some, but not all, of the
unevenness in medicare's risk contract program; (2) differences in local
medical prices and service utilization explain much of the variation in
HMO capitation rates across counties; (3) in turn, the variation in
capitation rates explains some of the differences across locations in
availability of risk contract HMOs, level of HMO premiums charged, and
richness of benefits offered; (4) however, other factors also play an
important role; (5) reducing the unevenness in, and realizing the
savings potential of, the risk contract program involves reforming its
payment system; (6) as a start to that process, GAO has proposed
correcting a flaw in Medicare's rate-setting method that currently
contributes to excess payments to HMOs; and (7) GAO's proposed
modification could also help smooth the unevenness in counties' HMO
capitation rates.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-HEHS-97-133
TITLE: Medicare Managed Care: HMO Rates, Other Factors Create
Uneven Availability of Benefits
DATE: 05/19/97
SUBJECT: Health maintenance organizations
Health care programs
Managed health care
Health insurance cost control
Insurance premiums
Competition
Medical services rates
Medical economic analysis
Overpayments
Health resources utilization
IDENTIFIER: Medicare Program
Medicare Risk Contract Program
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Cover
================================================================ COVER
Before the Special Committee on Aging, U.S. Senate
For Release on Delivery
Expected at 2:00 p.m.
Monday, May 19, 1997
MEDICARE MANAGED CARE - HMO RATES,
OTHER FACTORS CREATE UNEVEN
AVAILABILITY OF BENEFITS
Statement of William J. Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division
GAO/T-HEHS-97-133
GAO/HEHS-97-133T
(101566)
Abbreviations
=============================================================== ABBREV
AAPCC - adjusted average per capita cost
ACR - adjusted community rate
HCFA - Health Care Financing Administration
HHS - Department of Health and Human Services
HMO - health maintenance organizations
MEDICARE MANAGED CARE: HMO RATES,
OTHER FACTORS CREATE UNEVEN
AVAILABILITY OF BENEFITS
============================================================ Chapter 0
Mr. Chairman and Members of the Committee:
We are pleased to be here today as you discuss aspects of Medicare
managed care, including greater choice and equity across the program.
In fiscal year 1997, federal expenditures for Medicare benefits are
expected to reach nearly $209 billion. The Congressional Budget
Office estimates that costs will rise an average of 8.4 percent a
year during fiscal years 1998 through 2002. As the Congress seeks
ways to slow this growth rate, several proposals have been made that
would encourage beneficiaries to join risk contract health
maintenance organizations (HMO). Risk contract HMOs have the
potential to be advantageous for two reasons. First, the payment of
a capitated rate for all services needed by each enrolled beneficiary
gives these plans a financial incentive to hold down costs.\1 In
addition, risk contract HMOs often provide Medicare enrollees
additional benefits at lower out-of-pocket costs than Medicare
fee-for-service coverage.
As you know, Medicare risk HMO plans are not available nationwide,
and differences in premiums charged and benefits offered across the
country produce inequities for Medicare program beneficiaries. In
addition, as we recently reported,\2 the risk contract program has
not realized the savings that were anticipated from enrolling
beneficiaries in capitated managed care plans. Concerned about
program inequities and the lack of savings from risk HMOs, you asked
us to discuss the mechanics of the current risk HMO payment system
and its shortcomings--including why the system produces differences
in HMO availability and benefit packages for beneficiaries and fails
to produce expected savings for taxpayers. I will focus on (1) the
link between counties' capitation rates and Medicare's spending on
fee-for-service care; (2) factors affecting the availability of plans
in a given area, the level of premiums charged, and the benefit
packages offered; and (3) modifications to Medicare's current payment
methodology that could reduce HMO overpayments.
My remarks today are based primarily on analyses done for our
recently issued work on HMO rate setting and the enrollment of HMOs
in Medicare's risk contract program. (A list of related GAO products
appears at the end of this statement.)
In summary, Medicare's risk HMO payment system, which is built
largely on fee-for-service costs, accounts for some, but not all, of
the unevenness in Medicare's risk contract program. Differences in
local medical prices and service utilization explain much of the
variation in HMO capitation rates across counties. In turn, the
variation in capitation rates explains some of the differences across
locations in availability of risk contract HMOs, level of HMO
premiums charged, and richness of benefits offered. However, other
factors also play an important role.
Reducing the uneveness in, and realizing the savings potential of,
the risk contract program involves reforming its payment system. As
a start to that process, we have proposed correcting a flaw in
Medicare's rate-setting method that currently contributes to excess
payments to HMOs. Our proposed modification could also help smooth
the unevenness in counties' HMO capitation rates.
--------------------
\1 Other Medicare managed care plans include cost contract HMOs and
health care prepayment plans, which together enroll fewer than 2
percent of the total Medicare population. Because Medicare pays
these plans using methods other than capitation rates, they are not
the subject of this statement.
\2 Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions
in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
BACKGROUND
---------------------------------------------------------- Chapter 0:1
Medicare provides health care insurance for nearly all elderly
Americans (those aged 65 and older) and certain of the nation's
disabled. It is administered by the Health Care Financing
Administration (HCFA), an agency of the Department of Health and
Human Services (HHS). Although most Medicare services are provided
through the fee-for-service sector, in recent years, greater numbers
of Medicare beneficiaries have enrolled in HMOs to receive covered
services.
Medicare risk HMOs must cover all Medicare part A and part B
services. However, many risk HMOs also cover part A and part B
copayments and deductibles and additional services that are not
covered under traditional Medicare--such as a portion of the costs of
outpatient prescription drugs, routine physical exams, hearing aids,
and eyeglasses. HMOs are allowed, subject to certain Medicare
restrictions, to charge beneficiaries a monthly premium for
cost-sharing and services not otherwise covered by Medicare.
However, nearly two thirds of HMOs do not charge beneficiaries a
monthly premium.\3
Congressional interest in risk-bearing HMOs dates from the Social
Security Act Amendments of 1972 (P.L. 92-603). Under the 1972 law,
if an HMO's costs were less than its capitation payments, it was
required to share these profits with Medicare. In addition, an HMO's
profits were capped at 10 percent of its total payment from the
government. However, if an HMO's costs exceeded its payments from
Medicare, the HMO had to absorb the loss or carry it over to offset
future profits from its Medicare business. Few HMOs contracted with
Medicare under this arrangement.
In 1982, the Congress modified Medicare's rate-setting method,
creating the risk contract program that exists today.\4 One
significant change was that the Congress eliminated the 1972 law's
requirement that an HMO's Medicare profits be completely shared with
Medicare. Instead, HMOs are permitted to retain all profits up to
the levels they earn on their non-Medicare business.
As of May 1, 1997, 280 HMOs\5 participated in Medicare's risk
contract program. Recent growth in enrollment of plans in the risk
contract program has been rapid but uneven across the country. When
we reported on 1994 enrollment trends, for example, 15 states had
experienced double-digit growth increases, whereas the other states
had experienced little or no growth.\6 At the end of 1996,
California, Florida, New York, Texas, and Washington had the largest
number of risk contract HMOs, whereas 37 states had five or fewer of
these plans. Medicare's enrollment of beneficiaries in risk HMOs is
currently growing by about 85,000 beneficiaries per month. As of May
1, 1997, 4.6 million, or nearly 12 percent, of the approximately 39
million Medicare beneficiaries were enrolled in risk HMOs.
--------------------
\3 All beneficiaries enrolled in HMOs must, however, continue to pay
their part B premium to Medicare.
\4 The legislation creating this program is contained in section 114
of the Tax Equity and Fiscal Responsibility Act (P.L. 97-248).
\5 Competitive medical plans, which also enter into risk contracts
with Medicare to serve beneficiaries, are included in this figure.
\6 Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing
HMO Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).
DIVERSITY IN CAPITATION RATES
ACROSS COUNTIES IS DRIVEN BY
VARIATION IN LOCAL MEDICARE
FEE-FOR-SERVICE SPENDING
---------------------------------------------------------- Chapter 0:2
Medicare law ties HMO capitation rates to spending in the traditional
fee-for-service program. Every year, HCFA calculates per-beneficiary
spending in each county's fee-for-service sector and, using
projections of spending growth, determines capitation rates for each
county in the following year. Fee-for-service costs vary widely
among counties because of differences in medical prices paid and in
beneficiaries' use of services. Therefore, HMO capitation rates,
directly based on fee-for-service spending, can vary considerably
from one county to another.
HCFA'S PROCESS FOR
DETERMINING AN HMO'S PAYMENT
RATE IS TIED DIRECTLY TO
MEDICARE'S FEE-FOR-SERVICE
SPENDING
-------------------------------------------------------- Chapter 0:2.1
Medicare law stipulates that the capitation rate be set at 95 percent
of the costs Medicare would have incurred for HMO enrollees if they
had remained in fee-for-service.\7
Under Medicare's current rate-setting method, HCFA each year uses the
Medicare costs incurred by a county's fee-for-service beneficiaries
to develop an estimate of each county's average fee-for-service
spending in the following year.\8 The result, multiplied by 0.95,
produces a county rate known as the adjusted average per capita cost
(AAPCC).\9 In projecting spending growth, HCFA's calculations take
into account national trends in inflation and utilization patterns as
well as changes in Medicare program provisions.
To arrive at the capitation rate paid for each HMO enrollee, HCFA
applies a risk-adjustment factor to the AAPCC that is intended to
align the rate with how much an enrollee's expected costs differ from
the average beneficiary's cost. Our work has shown that, even after
HCFA's risk adjustments, the capitation rate is only weakly related
to a beneficiary's expected fee-for-service costs.
--------------------
\7 Section 1876(a)(4) of the Social Security Act (42 U.S.C
1395mm(a)(4) (1994)).
\8 Through this process, HCFA determines county-specific Medicare
expenditures for part A and part B for the elderly and the disabled.
\9 HCFA calculates separate cost figures for Medicare part A and part
B services for the aged, the disabled, and people with end-stage
renal disease.
VARIATION IN FEE-FOR-SERVICE
SPENDING PRODUCES DIVERSITY
IN COUNTIES' AAPCC RATES
-------------------------------------------------------- Chapter 0:2.2
In 1997, the average AAPCC was $395 per month.\10 However, AAPCC
rates vary dramatically from place to place--from a low of $221 in
Arthur County, Nebraska, to $767 in Richmond County (Staten Island),
New York (see fig. 1). Even among counties in the same geographic
area, substantial rate variation can exist. For example, in the
Philadelphia metropolitan area, Philadelphia County's AAPCC is $704,
but in neighboring Montgomery County, Pennsylvania, the AAPCC is
$516. Because capitation rates are based on a beneficiary's county
of residence, a Philadelphia-area HMO would receive $188 more for
serving a Philadelphia county resident than it would for serving a
Montgomery County resident with identical demographic
characteristics. The payment differential remains, even if the two
beneficiaries see the same physician and use the same medical
facilities.
Figure 1: Distribution of
Counties by 1997 AAPCC Rates
(See figure in printed
edition.)
The wide variation in HMO payment rates is a consequence of the
variation in local Medicare fee-for-service expenditures which, in
turn, is caused by local differences in both the prices of medical
services and the quantities of medical services consumed. To
illustrate that price differences alone cannot fully explain the
variation in AAPCC rates, figure 2 shows an estimate of the AAPCC
rate that would exist in Arthur County, Nebraska, and Richmond
County, New York, if the cost of medical services in both counties
were equal to the national average. Although an adjustment for
differences in medical prices reduces the original $546 AAPCC rate
differential by 39 percent, a gap of $332 nevertheless remains.
Figure 2: 1997 AAPCC Rates and
AAPCC Rates Adjusted for Local
Medical Costs in Arthur County,
Nebraska, and Richmond County,
New York
(See figure in printed
edition.)
Differences in the quantity of medical services beneficiaries receive
account for the variation in AAPCC rates not attributable to
differences in local prices. HMO capitation rates are higher in
counties where beneficiaries use more services (or a more expensive
mix of services) compared with counties where beneficiaries use fewer
services. An example of variation in service utilization is Medicare
beneficiaries' use of short-stay hospitals. In 1994, Utah
beneficiaries averaged 1,270 days of hospital care per 1,000
beneficiaries, whereas New York beneficiaries averaged 3,738 days of
hospital care per 1,000 beneficiaries.
Some of the variation in the use of medical services may reflect
inappropriate levels of care. For example, low utilization could be
caused by access-to-care barriers, such as inadequate transportation
or a lack of providers in rural areas. Similarly, some high
utilization could represent excessive use of medical services.
Nonetheless, current fee-for-service medical utilization
rates--whether appropriate or not--are an important factor in
determining HMO capitation payment rates.
HMO enrollment patterns may also contribute to the county variation
in the use of fee-for-service medical services. It is widely
acknowledged that HMO enrollees tend to be healthier than
beneficiaries who remain in fee-for-service--a phenomenon known as
favorable selection. As we recently reported, the growing enrollment
of a county's generally healthier Medicare beneficiaries in risk HMOs
drives up the medical service use rates for the generally sicker
beneficiaries remaining in fee-for-service.\11
--------------------
\10 The average county rate weighted by the number of beneficiaries
living in each county is $468. AAPCC rates discussed in this
statement exclude rates for the U.S. territories.
\11 GAO/HEHS-97-16, Apr. 25, 1997.
CAPITATION RATES ALONE DO NOT
DETERMINE HMO AVAILABILITY,
PREMIUMS CHARGED, OR BENEFITS
OFFERED
---------------------------------------------------------- Chapter 0:3
There is a significant correlation between Medicare's capitation
rates and the availability of Medicare HMOs in different areas, the
premiums these plans charge, and the benefits they offer. However, a
number of exceptions suggests that other factors, such as the
concentration of Medicare beneficiaries and the availability of HMOs
to the non-Medicare population, play an important role.
POPULATION SIZE AND RATE
VOLATILITY ALSO LIKELY
INFLUENCE PLAN PARTICIPATION
IN A GIVEN AREA
-------------------------------------------------------- Chapter 0:3.1
Medicare HMOs are not available everywhere. Nationally, 63 percent
of beneficiaries have at least one plan available to them; 25 percent
have five or more plans available. Many HMOs are concentrated in
urban areas, while rural areas have few or no HMOs. Because
capitation rates are typically higher in urban areas than in rural
areas, Medicare payment rates to HMOs are often considered to be an
important influence on Medicare HMO availability. However, other
factors--such as county size and the stability of the capitation rate
from year to year--also play a key role.
Many counties with low AAPCCs are sparsely populated. Such counties
simply may not have enough potential enrollees to make an HMO
financially viable. As we recently reported, HMO officials have
stated that plans need to enroll at least 10,000 Medicare
beneficiaries within a few years to spread both financial risk and
their fixed costs.\12 In addition, many rural counties are not served
by commercial HMOs. This precludes the formation of Medicare HMOs,
because Medicare requires that HMOs serving rural areas have at least
1,500 commercial members (5,000 for nonrural HMOs) and that at least
50 percent of their enrollees be commercial members.
Instability of capitation rates from year to year may also discourage
some HMOs from locating in areas with few beneficiaries. Between
1996 and 1997, the average AAPCC rate increased by about $23, or just
over 6 percent. However, some counties' rates increased much more
than the average while others decreased substantially.\13 In counties
with a small number of beneficiaries, a relatively few expensive
medical cases in 1 year can drive up Medicare fee-for-service
expenditures (and therefore HMO rates), while an especially "healthy"
year can reduce expenditures. HMO officials have stated that such
rate instability impairs long-term planning efforts--for example, by
complicating decisions about investing in new clinics and expanding
physician networks. By using a 5-year average of fee-for-service
data to determine a county's AAPCC rate, HCFA dampens--but does not
eliminate--the effect of fluctuating fee-for-service costs on HMO
payment rates.
--------------------
\12 Medicare HMO Enrollment: Area Differences Affected by Factors
Other Than Payment Rates (GAO/HEHS-97-37, May 2, 1997).
\13 For example, the AAPCC rate in Loving County, Texas, fell 40
percent (from $881 to $527), while the rate in Culberson County,
Texas, rose 37 percent ($355 to $487).
HMO PROFIT RESTRICTIONS,
COMPETITION ALSO INFLUENCE
PREMIUM RATES AND BENEFIT
PACKAGES
-------------------------------------------------------- Chapter 0:3.2
Beneficiaries' out-of-pocket costs and the benefits they receive
depend on where they live as well as on which HMO they join. For
example, beneficiaries living in southern California who enroll in
PacifiCare pay no monthly premium and may receive an unlimited annual
prescription drug benefit. In contrast, beneficiaries who enroll in
PacifiCare in Portland, Oregon, pay a $37 monthly premium and receive
no prescription drug benefit.
Geographic differences in capitation rates (PacifiCare of southern
California receives an average monthly capitation rate of $497, while
PacifiCare of Oregon receives $338) explain part of the premium and
benefit variation, but not all. Restrictions on HMO profits and the
amount of local competition among HMOs also influence the
out-of-pocket costs beneficiaries must pay and the benefits they
receive.
MEDICARE'S HMO PROFIT
RESTRICTIONS
------------------------------------------------------ Chapter 0:3.2.1
Medicare's restrictions on HMOs' profit-making partly explain the
link between capitation payments to HMOs and their benefit packages.
Medicare does not permit HMOs to earn profits on their risk contracts
that are higher than on their commercial business. If HCFA estimates
that the capitation payments would result in an HMO earning excess
profits, the plan must reduce premiums (or other beneficiary
out-of-pocket expenses), offer additional benefits, or return money
to the program. Virtually all HMOs in this situation decide to
reduce premiums or offer additional benefits.
HCFA attempts to enforce Medicare's restrictions on HMOs' profits
through what is known as the "adjusted community rate" (ACR) process.
Before each contract year, every HMO submits to HCFA a
proposal--called the ACR proposal--that describes the HMO's planned
package of benefits (which may go beyond those covered by
fee-for-service Medicare) and monthly premiums and other charges to
beneficiaries. The ACR also includes an estimate of the amount the
HMO would have charged commercial enrollees for a similar benefit
package. Although this estimate may initially be based on HMOs'
actual charges, numerous adjustments must be made to account for the
generally higher utilization of services by Medicare beneficiaries
compared with commercial enrollees and any differences in benefit
coverage between the two groups. HCFA reviews the ACR proposal to
determine whether the plan must offer additional benefits to
enrollees and the maximum premium the plan will be permitted to
charge. The net result is that the more an HMO will profit from its
Medicare business, the more additional benefits Medicare enrollees
receive.
COMPETITION FOR MARKET
SHARE
------------------------------------------------------ Chapter 0:3.2.2
The amount of local competition among HMOs for market share can also
influence the level of HMO premiums and benefits. Through the ACR
process, HCFA approves the maximum premium (and other beneficiary
out-of-pocket costs) an HMO may charge for its proposed benefit
package. HMOs may, however, charge a premium lower than the one
approved by HCFA or offer benefits beyond those included in the
plan's ACR proposal. Many HMOs seeking greater market share take
advantage of this option. For example, Health Options, Inc.,
operating in the competitive south Florida market, is permitted to
charge a monthly premium of $94 for the package of benefits contained
in its ACR proposal. However, Health Options has waived this
premium--beneficiaries pay no monthly fee. PacifiCare, in the
competitive Los Angeles market, is allowed to charge a $12 monthly
premium for its package of benefits, which includes a prescription
drug benefit with a $2,500 annual limit. As with Health Options,
however, market forces induced PacifiCare to go beyond the ACR
requirements. PacifiCare enrollees in the Los Angeles area pay no
monthly premium, and some receive an unlimited annual drug benefit.
CORRECTING RATE-SETTING FLAWS
ADDRESSES HMO OVERPAYMENT
PROBLEM, MAY REDUCE RISK
CONTRACT PROGRAM UNEVENNESS
---------------------------------------------------------- Chapter 0:4
The variation in the risk contract program that produces inequities
across the country in Medicare beneficiaries' costs and benefits is a
manifestation of rate-setting flaws that produce HMO overpayments.
As mentioned earlier, favorable selection--the tendency of HMOs to
attract healthier than average beneficiaries--produces AAPCC rates
that are higher than warranted in some counties. Favorable selection
can result in overpayments to HMOs in two ways.
First, as discussed earlier, estimating a county's average cost of
serving Medicare beneficiaries under fee-for-service is central to
the current method for setting HMO rates. The problem is that HCFA's
method excludes HMO enrollees' costs from estimates of the
per-beneficiary average cost and bases the AAPCC only on the cost of
the county's fee-for-service beneficiaries. Thus, the rates
generated reflect the costs of only a portion of the county's
Medicare beneficiaries--a portion which, according to the
preponderance of research on this subject, is generally more costly
than the portion of beneficiaries enrolled in HMOs. In this way, the
current method generates rates that result in overpayments to HMOs in
counties where the Medicare HMO population is, on average, healthier
than the Medicare fee-for-service population.
A difficulty in correcting the problem is that HCFA cannot directly
observe the costs HMO enrollees would have incurred if they had
remained in the fee-for-service sector. We have proposed a
modification that addresses this problem. We developed a way to
estimate HMO enrollees' expected fee-for-service costs using
information available to HCFA, thus generating an AAPCC that
represents the costs of all Medicare beneficiaries in the county.
On the basis of our work examining the AAPCC rates of California's 58
counties,\14
we found that in 1995 our method would have reduced excess payments
to HMOs by $276 million, or about 25 percent of total excess
payments. Thus, if HCFA adopted our modification, Medicare could
save hundreds of millions of dollars in HMO overpayments.
HCFA recognizes the effect of favorable selection on AAPCC rates.
The administration's current budget proposal calls for an
across-the-board reduction in Medicare's HMO payments that would
lower the payments from 95 percent to 90 percent of estimated
fee-for-service costs. Our modification to calculating AAPCC rates
takes a more targeted approach. Under our method, HMOs in counties
with higher excess payments would receive greater payment reductions
than HMOs in counties with lower excess payments. The modification
could be applied to HCFA's current payment method or other methods
that rely on fee-for-service costs to set or update HMO rates. (See
the appendix for a more detailed discussion of our work.)
Second, favorable selection results in overpayments to HMOs because
of HCFA's method of risk adjustment. Medicare's risk adjusters
explain only about 3 percent of the variation in individual-level
health care costs and are thus not adequate to account for the cost
differences among beneficiaries. The difficulty is that the risk
adjusters are not precise enough to distinguish between two
beneficiaries who may be demographically identical but who may have
significant health differences. For example, of two beneficiaries
alike in age, sex, and the other demographic traits considered by
HCFA's risk adjusters, one may experience occasional minor ailments,
while the other may suffer from a serious chronic condition. Because
such dramatic differences in health status are not captured in risk
adjustment, some HMOs receive payments that are higher than justified
by the expected costs of their enrollees.
HCFA announced in January 1997 that it was about to launch a
demonstration project on two risk-adjustment systems that seek to
differentiate more and less costly patients on the basis of
diagnostic information from inpatient, outpatient, and physician
encounters. HCFA has not announced a schedule for implementing a
better risk adjuster programwide.
--------------------
\14 We selected California because, at the time of our review, it
covered 36 percent of all Medicare enrollees and includes counties
that in 1995 had the nation's highest HMO penetration rates. Our
estimates pertain to a large portion of the risk contract program; we
did not develop a national estimate.
CONCLUSIONS
---------------------------------------------------------- Chapter 0:5
The AAPCC system, with its linkage to fee-for-service expenditures,
is an imperfect mechanism for setting capitation rates. It
incorporates some local factors--such as service utilization
differences--that may be inappropriate without adequate adjustments.
As a result, the system assigns some counties AAPCC rates that are
too low and other counties rates that are too high. Coupled with
such factors as market competition and Medicare's complex ACR
process, Medicare's payment system results in dramatic contrasts in
HMO plan availability, out-of-pocket beneficiary costs, and benefit
packages. Addressing the flaws in setting capitation rates is
essential if the risk contract program is to realize the potential of
program savings, enhanced benefits, and beneficiary equity.
-------------------------------------------------------- Chapter 0:5.1
Mr. Chairman, this concludes my prepared statement. I will be
pleased to answer any questions.
CONTRIBUTORS
---------------------------------------------------------- Chapter 0:6
For more information on this testimony, please call Jonathan Ratner,
Associate Director, on (202) 512-7107 or James C. Cosgrove,
Assistant Director, on (202) 512-7029. Other contributors to this
product include Richard M. Lipinski and Hannah F. Fein.
INCLUDING HMO ENROLLEES' COSTS IN
COUNTY AVERAGE CALCULATION
IMPROVES ACCURACY OF AAPCC
=========================================================== Appendix I
Modifying the method for calculating adjusted average per capita cost
(AAPCC) rates would help reduce Medicare's excess health maintenance
organization (HMO) payments in counties with healthier-than-average
Medicare HMO enrollees. In setting AAPCC rates, the Health Care
Financing Administration (HCFA) currently estimates the average
Medicare costs of a county's beneficiaries using the costs of only
those beneficiaries in Medicare's fee-for-service sector. This
method would be appropriate if the average health cost of
fee-for-service beneficiaries were the same as that of
demographically comparable HMO enrollees. However, in counties where
there are cost differences between Medicare's fee-for-service and HMO
enrollee populations, this method can either overstate the average
costs of Medicare beneficiaries and lead to overpayment or understate
average costs and lead to underpayment. Correcting this problem is
difficult because it is impossible to observe the costs HMO enrollees
would have incurred if they had remained in the fee-for-service
sector. Therefore, we developed a method to estimate HMO enrollees'
expected fee-for-service costs using information available to HCFA.
Our method consists of two main steps:
First, we compute the average cost of demographically similar new
HMO enrollees during the year before they enrolled--that is,
while they were still in fee-for-service Medicare. These
fee-for-service costs are available through HCFA's claims data.
Next, we adjust this amount to reflect the expectation that a new
enrollee's use of health services will, over time, rise.\15
Having completed these steps, we combine the result with an estimate
of the average cost of fee-for-service beneficiaries. This new
average produces an AAPCC rate that reflects the costs of all
Medicare beneficiaries.
--------------------
\15 Our analysis adjusts for (1) the tendency for enrollees' costs to
become more like--or "regress" toward--the fee-for-service cost mean
after joining an HMO and (2) the costs incurred by HMO enrollees who
die while enrolled, because last-year-of-life costs are typically
high relative to those incurred in preceding years. How our method
accounts for these costs is discussed more thoroughly in
GAO/HEHS-97-16.
SELECTED 1995 AAPCC RATES
PRODUCED SUBSTANTIAL EXCESS
PAYMENTS
------------------------------------------------------- Appendix I:0.1
To illustrate the effect of our approach, we analyzed data for
counties with different shares of beneficiaries enrolled in HMOs. We
chose counties within a single state to eliminate variations
attributable to state differences. We selected California because,
at the time of our review, it covered 36 percent of all Medicare HMO
enrollees and includes counties that in 1995 had the nation's highest
HMO penetration rates. We found that our method could have reduced
excess payments by more than 25 percent. Although better risk
adjusters could further reduce the large remainder of excess
payments, improving risk adjustment is a complex effort that may take
years to implement full-scale.
The following key points also emerged from our analysis:
First, for the counties that we analyzed, we estimated that total
excess payments in 1995 amounted to about $1 billion (of about
$6 billion in total Medicare payments to risk HMOs in the
state). Applying our method for setting AAPCC rates would have
reduced the $1 billion in excess payments by about $276 million.
Second, the excess payments attributable to inflated AAPCC rates
were concentrated in 12 counties with large HMO enrollment and
ranged from less than 1 percent to 6.6 percent of the counties'
total HMO payments, representing between $200,000 and $135.3
million.\16 Despite the size of these amounts, the application
of our method would have produced relatively small changes in
the monthly, per-beneficiary capitation payments, ranging from
$3 to $38.
Third, our analysis did not support the hypothesis, put forward by
the HMO industry and others, that the excess payment problem
will be mitigated as more beneficiaries enroll in Medicare
managed care and HMOs progressively enroll a more expensive mix
of beneficiaries. Our analysis--which includes data from
counties with up to a 39-percent HMO penetration in
1995--indicated that the difference between Medicare rates and
our rates is larger in counties with higher Medicare
penetration. For example, the four counties with the highest
rates of excess payment, ranging from 5.1 to 6.6 percent, were
also among the counties with the highest HMO enrollment
percentages in 1995.
--------------------
\16 For the state's remaining 46 counties, excess payments
attributable to inflated county rates amounted to less than 3 percent
of the 58-county total.
DATA ARE AVAILABLE TO ENABLE
HCFA TO PROMPTLY ADJUST
AAPCC RATES
------------------------------------------------------- Appendix I:0.2
Because the data we used to estimate HMO enrollees' costs come from
data that HCFA compiles to update HMO rates each year, our method has
two important advantages. First, HCFA's implementation of our
proposal could be achieved in a relatively short time. The time
element is important, because the prompt implementation of our method
would avoid locking the current methodological flaw into any adopted
changes to Medicare's HMO payment method that continued to use
current AAPCC rates as a baseline or fee-for-service costs to set
future rates. Second, the availability of the data would also make
our proposal economical: the savings to be achieved from reducing
AAPCC excess payments would be much greater than the administrative
costs of implementing the process.
RELATED GAO PRODUCTS
=========================================================== Appendix 1
Medicare HMO Enrollment: Area Differences Affected by Factors Other
Than Payment Rates (GAO/HEHS-97-37, May 2, 1997).
Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in
Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb.
25, 1997).
Medicare HMOs: Rapid Enrollment Growth Concentrated in Selected
States (GAO/HEHS-96-63, Jan. 18, 1996).
Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO
Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).
Medicare: Changes to HMO Rate Setting Method Are Needed to Reduce
Program Costs (GAO/HEHS-94-119, Sept. 2, 1994).
*** End of document. ***