Medicare Managed Care: Better Risk Adjustment Expected to Reduce Excess
Payments Overall While Making Them Fairer to Individual Plans (Testimony,
02/25/99, GAO/T-HEHS-99-72).

Pursuant to a congressional request, GAO discussed the adjustment of
Medicare's payments to managed care plans in the Medicare Choice
program, focusing on the: (1) importance of improving the current risk
adjustment method; (2) implications of rate-setting changes implemented
in 1998; and (3) the advantages and drawbacks of the Health Care
Financing Administration's (HCFA) proposed new interim risk adjuster.

GAO noted that: (1) Medicare's current risk adjuster has failed to
protect taxpayers, certain plans, and beneficiaries, underscoring the
urgency of replacing it with a health-based risk adjuster; (2) studies
show that methodological flaws have led to billions of dollars in excess
payments and inappropriate payment disparities; (3) the Balanced Budget
Act of 1997 provisions now in place may reduce, but not eliminate,
excess payments; and payment disparities persist that could jeopardize
plan participation and access to managed care for costlier seniors; (4)
the new risk adjuster to be in place by 2000 is intended to improve
estimates of health plan enrollees' medical costs; (5) better cost
estimates producing fairer rates could reduce the unnecessary spending
of taxpayer dollars while minimizing the financial disincentive for
plans to serve a costly mix of beneficiaries; (6) the use of the new
adjuster, while not perfect, is an interim step and improves on the one
now in place; and (7) in addition, HCFA plans to phase in the use of the
new adjuster, thereby recognizing the need to avoid sharp payment
changes that could affect plans' offerings and diminish the
attractiveness of the Medicare Choice program to beneficiaries.

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

 REPORTNUM:  T-HEHS-99-72
     TITLE:  Medicare Managed Care: Better Risk Adjustment Expected to 
             Reduce Excess Payments Overall While Making Them
             Fairer to Individual Plans
      DATE:  02/25/99
   SUBJECT:  Overpayments
             Health care programs
             Managed health care
             Health care costs
             Health insurance
IDENTIFIER:  Medicare Choice Program
             Medicare Program
             Medicare Hospital Insurance Trust Fund
             Medicaid Program
             
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cover-2.book GAO United States General Accounting Office

Testimony Before the Subcommittee on Health and Environment,
Committee on Commerce, House of Representatives

For Release on Delivery Expected at 10: 00 a. m Thursday, February
25, 1999 MEDICARE MANAGED

CARE Better Risk Adjustment Expected to Reduce Excess Payments
Overall While Making Them Fairer to Individual Plans

Statement of William J. Scanlon, Director Health Financing and
Public Health Issues Health, Education, and Human Services
Division




GAO/T-HEHS-99-72

  GAO/T-HEHS-99-72

Page 1 GAO/T-HEHS-99-72

Summary Because of problems in the way Medicare paid capitated
managed care plans, the Balanced Budget Act of 1997 (BBA) changed
Medicare's payment rules. The act's provisions acknowledge that
the enrollment of beneficiaries in managed care plans has not
saved the government money

as expected. Studies by us and others show that methodological
flaws have led to billions of dollars in excess payments and
inappropriate payment disparities across counties.  Medicare's
capitation rates are excessive because payments are based on
health care spending for the average non- enrolled beneficiary,
while the plans' enrollees tend to be healthier than average.
Excess payments continued to grow with increased enrollment,
rather

than diminish, as some have speculated. As a county's managed care
enrollee population grew, the concentrations of high- cost
beneficiaries remaining in fee- for- service also grew. Rates
based on these sicker populations resulted in increasingly
excessive payments relative to the

better health, on average, of the managed care population. Our
1997 study of California HMO payments showed that HMOs in counties
in which enrollment was high received a higher percentage of
excess payments. To correct these problems, BBA changed the rate-
setting formula in 1998 and called for the Health Care Financing
Administration (HCFA) to replace

the current risk adjuster in 2000. (The risk adjuster is a
mechanism for modifying a plan's average capitation rate to better
reflect an enrollee's expected medical costs.) The BBA provisions
put in place in 1998 may reduce the overpayments somewhat, but
substantial excess will remain, and payment disparities will
persist that could jeopardize plan participation and access for
costlier seniors. The inadequacy of the current risk adjuster
continues to contribute to inappropriate payments, hurting
taxpayers,

certain plans, and beneficiaries. HCFA's proposed risk adjuster
for 2000 is an interim step that, while not perfect, can improve
estimates of Medicare enrollees' medical costs. A next generation
of risk adjustment is scheduled for 2004. Better cost estimates
producing fairer rates can reduce the unnecessary spending of
taxpayer dollars but, at the same time, mitigate the financial
disincentive for plans to serve a costly mix of beneficiaries.
HCFA plans to phase in the

use of the 2000 adjuster and, in so doing, anticipates the need to
avoid sharp payment changes that could affect plans' offerings and
diminish the attractiveness of the Medicare+ Choice program to
beneficiaries. The success of this and future risk adjustment
efforts also depends on the

Summary Page 2 GAO/T-HEHS-99-72

quality of data HCFA uses. We believe that Medicare's managed care
plans should therefore aggressively pursue the collection of
comprehensive encounter data on their enrollees' medical
conditions and report this information promptly to HCFA.

Page 3 GAO/T-HEHS-99-72

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments

Mr. Chairman and Members of the Subcommittee: We are pleased to be
here today as you address the question of adjusting Medicare's
payments to managed care plans in the Medicare+ Choice program.
Although the subject matter is technical, its implications are
significant for Medicare's greater use of managed care. The
Balanced Budget Act of 1997 (BBA) includes provisions designed to
slow the growth of Medicare payments overall. BBA also encourages
the expansion of managed care in its creation of Medicare+ Choice,
designed to offer

beneficiaries more health plan options beyond those available
through Medicare's health maintenance organizations (HMO). BBA
provisions modify the method used to pay health plans, and it is
the details for implementing these provisions representing
billions of dollars in savings that are under discussion here
today. Managed care plans receive from Medicare a fixed monthly
payment, called

a capitation payment, for each beneficiary they enroll. Because
the payment is fixed per enrollee, regardless of what the plan
spends for each enrollee's care, health plans lack the incentive
to provide unnecessary services. However, the enrollment of
beneficiaries in managed care plans has not saved the government
money as expected, mainly for two reasons.

First, as we and others previously determined, Medicare's
capitation rates are excessive because payments are based on
health care spending for the average non- enrolled beneficiary,
while the plans' enrollees tend to be healthier than average. 1
Second, instead of diminishing as more beneficiaries enrolled in
managed care, excess payments per enrollee

continued to grow. To correct these problems, BBA changed the
ratesetting formula used by the Health Care Financing
Administration (HCFA), the agency responsible for administering
Medicare. It required that most of the rate- setting provisions be
in place in 1998 and required that HCFA

replace Medicare's current risk adjuster the mechanism that
modifies a plan's average capitation rate to better reflect an
enrollee's expected medical costs with a new one to be implemented
in 2000. The risk adjuster in place has been widely criticized as
a major factor in the HMO overpayment problem.

In considering Medicare's new rate- setting method, my comments
today will focus on (1) the importance of improving the current
risk adjustment 1 Medicare HMOs: HCFA Can Promptly Eliminate
Hundreds of Millions in Excess Payments (GAO/HEHS-97-16, Apr. 25,
1997).

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 4 GAO/T-HEHS-99-72

method, (2) the implications of rate- setting changes implemented
in 1998, and (3) the advantages and drawbacks of HCFA's proposed
new interim risk adjuster. My comments are based on information
drawn from our issued work on this subject, supplemented by
relevant published studies and interviews with HCFA officials.

In summary, Medicare's current risk adjuster has failed to protect
taxpayers, certain plans, and beneficiaries, underscoring the
urgency of replacing it with a health- based risk adjuster.

 Studies by us and others show that methodological flaws have led
to billions of dollars in excess payments and inappropriate
payment disparities.  BBA provisions now in place may reduce, but
not eliminate, excess

payments; and payment disparities persist that could jeopardize
plan participation and access to managed care for costlier
seniors.  The new risk adjuster required to be in place by 2000 is
intended to improve estimates of health plan enrollees' medical
costs. Better cost estimates producing fairer rates could reduce
the unnecessary spending

of taxpayer dollars while minimizing the financial disincentive
for plans to serve a costly mix of beneficiaries.

The use of the new risk adjuster, while not perfect, is an interim
step and improves on the one now in place. In addition, HCFA plans
to phase in the use of the new adjuster, thereby recognizing the
need to avoid sharp

payment changes that could affect plans' offerings and diminish
the attractiveness of the Medicare+ Choice program to
beneficiaries.

Background The long- term financial condition of Medicare is now
one of the nation's most pressing problems. As the nation's
largest health insurance program,

Medicare's size and impact on all Americans is significant. The
program covers about 39 million elderly and disabled beneficiaries
at a cost of more than $193 billion in fiscal year 1998. About 83
percent of the program's beneficiaries receive health care on a
fee- for- service (FFS) basis, in which

providers are reimbursed for each covered service they deliver to

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 5 GAO/T-HEHS-99-72

beneficiaries. The rest, about 6. 8 million people, are provided
care through more than 450 managed care plans, as of December 1,
1998. 2 To extend the solvency of Medicare's Hospital Insurance
Trust fund beyond

2008, BBA provided for substantial reforms in both the FFS and
managed care components of Medicare. BBA provisions are expected
to achieve estimated Medicare savings that reduce the program's
average annual growth rate by more than 3 percent, representing
over $100 billion over 5

years. One way in which BBA seeks to restructure Medicare is to
encourage greater participation in Medicare+ Choice. Under this
program, BBA permits the creation of new types of Medicare health
plans, such as preferred provider organizations and provider-
sponsored organizations. BBA's emphasis on Medicare+ Choice
reflects the perspective that increased managed care enrollment
will help slow Medicare spending

while expanding beneficiaries' options in choosing health plans.
BBA also sought to improve the method for setting managed care
plans' payment rates. In general terms, the pre- BBA rate- setting
methodology worked as follows. Every year, HCFA estimated how much
it would spend in each U. S. county to serve the average FFS
beneficiary. It would then discount that amount by 5 percent under
the assumption that the managed

care plans provided care more efficiently than the unmanaged FFS
system. The resulting amount constituted a base county rate to be
paid to the plans operating in that county. Because some
beneficiaries were expected to require more health services than
others, HCFA risk adjusted the base rate up or down for each
beneficiary, depending on certain beneficiary characteristics
specifically, age; sex; eligibility for Medicaid; employment
status; and residence in an institution, such as a skilled nursing
facility. 3

BBA's new payment rate method seeks to address the two main
factors contributing to excess payments: (1) the disparity in
expected health costs between Medicare's FFS and managed care
populations built into each county's base capitation rates and (2)
the failure of the risk adjuster to 2 About 90 percent of the 6.8
million Medicare beneficiaries are enrolled in managed care plans
that receive fixed monthly capitation payments. The remainder are
enrolled in plans that are reimbursed for

the costs they incur, less the estimated value of beneficiary
cost- sharing. 3 Separate rates, using the same demographic
traits, are calculated for beneficiaries who qualify for Medicare
because of a disability (under age 65). Separate rates are also
set for beneficiaries with endstage renal disease (kidney
failure).

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 6 GAO/T-HEHS-99-72

correct for that disparity on an individual enrollee level. BBA
required that a county's capitation rate equal the highest of

 a blended capitation rate, which reflects a combination of local
and national average FFS spending from 1997, updated for increases
in national spending;  the previous year's county rate increased
by 2 percent; or  a minimum payment amount, called a floor, set
equal to $367 in 1998 and

updated each year. Loosening the link between the current cost of
Medicare's FFS population and counties' base rates helps prevent
the excess payments from continuing to increase as more
beneficiaries join managed care plans. BBA

also acknowledges the need for individual enrollee adjustments by
requiring the development of a risk adjustment method based on
health status. The law requires that HCFA develop and report on
the new risk

adjuster by March 1 of this year and the method be in place by
January 2000. 4 Medicare's Current Risk Adjustment Method Fails To
Prevent Overpayments and Appropriately Target Payments To Plans

Risk adjustment is a tool to set capitation rates so that they
reflect enrollees' expected health costs as accurately as
possible. This tool is particularly important given Medicare's
growing use of managed care and the phenomenon of favorable
selection the tendency of managed care plans to attract a
population of Medicare seniors whose health costs are generally
lower than those of the average program beneficiary. Our 1997
study on payments to California HMOs, which enrolled more than a
third of Medicare's managed care population, found that Medicare
overpaid plans

by about 16 percent because HMO enrollees had costs that were
lower than the average beneficiary's. 5

Medicare's current risk adjuster cannot sufficiently lower rates
to be consistent with the expected costs of managed care's
healthier population. The reason is that Medicare's risk adjuster
relies on demographic factors such as age and sex, which alone are
poor predictors of an individual's

4 Technically, the law requires the Secretary of the Department of
Health and Human Services to develop, report, and implement the
health- based risk adjustment method.

5 GAO- HEHS- 97- 16, Apr. 25, 1997. This is consistent with a 1996
study by HCFA researchers finding that health plan enrollees had
costs estimated at 12 to 14 percent below the average
beneficiary's. (Riley and others, HCFA Review, 1996.)

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 7 GAO/T-HEHS-99-72

health care costs. For example, two beneficiaries can be
demographically identical (same age and sex), but one may
experience occasional minor ailments while the other may suffer
from a serious chronic condition.

Without the use of health status factors to make that distinction,
Medicare's risk adjuster produces excessive payments in
compensating plans for their relatively lower cost enrollees. The
financial consequences of a poor risk adjuster are huge. In our
1997 study of California's payment rates, we estimated that
Medicare paid about $1 billion in excess to health plans operating
in California in 1995. Shortly

before we issued our report, the Physician Payment Review
Commission (PPRC), now a part of the Medicare Payment Advisory
Commission, estimated that annual excess payments to Medicare HMOs
nationwide could total $2 billion.

Some analysts have speculated that, with growing enrollment,
health plans would necessarily enroll a substantially larger share
of less healthy beneficiaries, which would raise plans' costs and
reduce Medicare's excess payments. Our 1997 analysis, however,
showed that rather than shrinking

excess payments the rapid growth in Medicare managed care
enrollment actually exacerbated the situation. The counties with
higher managed care enrollment had higher, not lower, excess
payments. Data indicated that the sickest beneficiaries tended to
remain in FFS while the healthier beneficiaries joined managed
care plans. Excess payments grew with managed care enrollment
partly because HCFA based the payment rates on average FFS
spending, which increased as the pool of FFS beneficiaries shrank
and, as a group, became less healthy.

Better risk adjustment is also important for plans that may not be
adequately compensated for serving higher cost beneficiaries who
enroll. Having enrollees who are sicker than the average mix of
Medicare

beneficiaries can alter a plan's costs significantly. About 10
percent of Medicare beneficiaries account for 60 percent of
Medicare's annual expenditures. Without adequate risk adjustment,
plans with more than their share of the costly beneficiaries are
at a competitive disadvantage.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 8 GAO/T-HEHS-99-72

BBA Provisions May Reduce Overpayments, but Substantial Excess

Likely Remains BBA contains several provisions, implemented in
1998, that are designed to

improve Medicare's rate- setting method. Certain provisions seek
to reduce excess payments and inappropriate geographic
disparities. These changes represent steps in the right direction
but do not eliminate the need for a

health- based risk adjuster. Substantial excess payments likely
persist, in part, because other BBA provisions tended to
incorporate the excess that existed in 1997 into the current
rates.

Certain BBA Provisions May Reduce Excess Payments but Are Not
Substitutes for Improved Risk Adjustment

BBA aims to reduce the excess in Medicare's managed care payments
in two ways. First, BBA holds down managed care per capita
spending increases for 5 years. Specifically, BBA sets the factor
used to update

managed care payment rates equal to national per capita Medicare
growth minus a specified percent: 0. 8 percent in 1998 and 0.5
percent in each of the following 4 years.

BBA also provides for a methodological approach known as blending,
which may help reduce excess payments. The blended rate set for
each county combines that county's 1997 rate, updated for
increases in national Medicare spending, and a national average.
The blending formula is currently weighted heavily toward local
rates but will gradually change so that local and national rates
will be weighted equally in 2003. Over time, blending will reduce
the substantial variation in county payment rates that now exist.
For example, county rates ranged from a low of $380 to a high

of $798 in 1999. Because of BBA- mandated budget neutrality and
minimum payment constraints, no county received a blended rate in
1998 or 1999. Blending is expected to occur for the first time in
2000.

Blending may help reduce excess payments because high- rate
counties (where excess payments are estimated to be concentrated)
will receive smaller annual increases relative to low- rate
counties. Evidence on the relationship between county payment
rates and excess payments is provided in a 1997 PPRC study. PPRC
reported that county payment rates tend to overestimate
beneficiaries' health care costs in high- payment- rate

areas and underestimate their costs in low- payment- rate areas. 6
PPRC found that a comprehensive health- based risk adjustment
methodology would have lowered, for example, the average Miami-
area payment rate 6 Physician Payment Review Commission, 1997
Annual Report to the Congress.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 9 GAO/T-HEHS-99-72

from $616 to $460 in 1995. The same methodology would have raised
the average payment rate in rural Minnesota from $263 to $310.

Blending is a rather blunt tool for addressing the excess payment
problem, however, and does not obviate the need for improved risk
adjustment. As the PPRC results indicate, not all high- rate
counties have rates that are too high and not all low- rate
counties have rates that are too low. For example, PPRC's risk-
adjustment methodology would have reduced the average payments in
rural Michigan (a relatively low- payment- rate area) from $346 to
$334. Furthermore, not all plans in high- rate counties may
receive excess payments. Because payment rates are based on the
expected costs of beneficiaries in average health, plans that
attract costly beneficiaries may be underpaid by the current risk
adjustment method.

Some BBA Provisions Have Tended to Incorporate Excess Payments
From 1997 Into Current Rate

Structure BBA specified that 1997 county rates be used as the
basis for all future county rates beginning in 1998. Although the
law changed many aspects of the rate- setting formula, this BBA
provision had the effect of incorporating

the excess payments that existed in 1997 into all future rates. As
we testified before this Subcommittee in February 1997, HCFA's
then current rate- setting methodology resulted in county rates
that were generally too high. Simply put, instead of setting rates
based on the expected cost of the average beneficiary in each
county, the agency set rates based on the expected costs of
serving FFS beneficiaries. If the agency had included the expected
costs of serving managed care beneficiaries who as a group tend to
be healthier than FFS beneficiaries the overall county average
would have been lower. About one- quarter of the $1 billion in
overpayments we estimated in our

California study resulted from flaws in developing the county
rate. Excess payments are also built into current rates because
BBA did not allow HCFA to adjust 1997 county rates for previous
forecast errors a critical component of the rate- setting process.
Although the process for

setting rates was extremely complex and involved separate
adjustments for each county, annual payment rate updating was
straightforward. Each fall, HCFA would forecast total Medicare
spending for the following year; the

estimated percentage spending increase, from the current year to
the following year, was used to update the county rates. Before
applying the increase, however, HCFA corrected any forecast errors
from previous years. If HCFA discovered that previous forecasts
had overestimated or

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 10 GAO/T-HEHS-99-72

underestimated the current spending, the update was appropriately
adjusted. HCFA actuaries now estimate, based on FFS claims data,
that the 1997 managed care rates were too high by 4.2 percent.
BBA, in establishing a new methodology for setting rates in 1998
and future years, specified that HCFA use the 1997 rates as the
basis for the new rates. While the law permits HCFA to correct
forecasts in future years, it did not include a provision that
would have allowed HCFA to correct its forecast for 1997.
Consequently, about $1.3 billion in overpayments were built into
plans' annual payment rates beginning in 1998.

HCFA's Proposed Risk Adjustment Approach Improves on Current
Method and Minimizes Disruption for Plans and Beneficiaries

HCFA's proposed interim health- based risk adjustment method to be
implemented in 2000 represents a major improvement over the
current method. For the first time, Medicare managed care plans
can expect to be paid more for serving beneficiaries with serious
health problems and less for serving relatively healthy ones. The
interim method relies exclusively on hospital inpatient data to
measure health status. Although it would be better to measure
health status with complete and reliable data from other settings,
such as physicians' offices, these data are not yet available. In

addition, HCFA's decision to phase in the new method will likely
minimize disruptive plan pull- outs and altered benefit packages,
which could occur if payment rate changes were implemented too
suddenly.

Proposed Risk Adjustment Method Based on Available Hospital
Inpatient Data

The proposed method, known as the Principal Inpatient Diagnostic
Cost Group (PIP- DCG) method, would use hospital inpatient data to
more accurately match managed care payments to beneficiaries'
expected total Medicare costs. PIP- DCG would assign each
individual to 1 of 15 categories if during the prior year they had
been hospitalized for certain diagnoses. For example, a
beneficiary who had been hospitalized for congestive heart failure
would be placed in one category, while a beneficiary who had been
hospitalized for a kidney infection would be

placed in another. Those beneficiaries who were not hospitalized
and those who were hospitalized for diagnoses not included in PIP-
DCG about 88 percent of all beneficiaries would be placed in the
base category. The next year's payment rate for each enrollee
would be determined by the category the individual was placed in
and by certain demographic data, such as age and sex. Rates for
enrollees placed in one of the 15 prior hospitalization groups
would be higher than rates for those in the base

category with the same demographic characteristics.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 11 GAO/T-HEHS-99-72

HCFA anticipated potential concerns about a risk adjustment
methodology based on hospital inpatient data. Such an approach
could reward plans that hospitalize patients unnecessarily or,
conversely, penalize efficient plans that provide care in other,
less costly settings. HCFA has attempted

to address these concerns in several ways. First, PIP- DCG would
assign individuals to prior hospitalization categories only when
the diagnosis is for a condition that normally requires
hospitalization and is linked to further medical costs in the
following year. To determine which specific diagnoses to include,
HCFA relied on the

advice of a clinical panel. The panel recommended that diagnoses
associated with about one- third of hospital admissions be
excluded because they (1) could be ambiguous, (2) were for
conditions that were rarely the main cause for an inpatient stay,
or (3) were not good predictors of future health care costs. For
example, a beneficiary hospitalized for

appendicitis would not be assigned to a higher cost category
because that condition generally is not linked to further medical
costs in the next year. Also, HCFA's proposal does not permit
enhanced payments for hospital diagnoses associated with 1- day
stays. These admissions may be more discretionary than admissions
for longer stays. Second, delaying an adjustment in payment until
the following year discourages unnecessary hospitalizations that
would trigger an enhanced payment. Further, the payment delay
dampens any incentive to encourage higher cost enrollees who have
been hospitalized to switch plans, since the plan in which the
beneficiary is a member the following year receives the payment.

The PIP- DCG method assumes that admission rates for beneficiaries
of similar health status are the same for FFS and managed care
providers. Although the evidence on managed care admission rates
is limited, findings

presented by the American Association of Health Plans last month
support this hypothesis. A study conducted for the Association
found that hospital admission rates for managed care plans and FFS
plans were comparable. These findings are consistent with those of
a 1993 Mathematica Policy Research study on hospital admissions
rates.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 12 GAO/T-HEHS-99-72

Gradual Implementation of Interim Method Will Minimize Impact on
Health Plans and Beneficiaries

HCFA proposes to phase in the new interim risk adjustment method
slowly. In 2000, only 10 percent of health plans' payments will be
based on the new system. This percentage will be increased each
year until 2003, when 80 percent of plans' payments will be based
on the PIP- DCG risk- adjusted

rate. In 2004, HCFA intends to implement a more accurate risk
adjuster that uses medical data from physicians' offices, skilled
nursing facilities, home health agencies, and other health care
settings and providers- in addition to inpatient hospital data.

Although a gradual phase- in of the interim risk adjuster delays
the full realization of Medicare savings, it also minimizes
potential disruptions for both health plans and beneficiaries.
Rapid payment rate changes could strain the financial soundness of
some plans. Rapid rate changes could also adversely affect
beneficiaries if plans respond by suddenly altering their benefit
packages or reconsidering their commitment to the Medicare+ Choice
program. If HCFA had comprehensive patient- level data from
Medicare managed care plans, it could adjust the PIP- DCG
methodology to reflect any differences in practice patterns
between managed care and FFS providers. Although plans currently
are required to submit only hospital inpatient data, the agency
intends to begin collecting more comprehensive data

shortly. Therefore, it may be possible to refine the PIP- DCG
methodology before the implementation of the full risk adjustment
in 2004.

Conclusions The implementation of a new health- based risk
adjustment system will lead to major changes in Medicare managed
care payments and will create more desirable incentives. Plans
attracting healthier beneficiaries will be paid

less, whereas those attracting costlier beneficiaries will be paid
more. In more fairly compensating individual plans for the
beneficiaries they enroll, the new method will reduce excess
payments and produce savings for taxpayers. The new method
represents an interim step in the use of healthbased risk
adjustment. We believe that to facilitate the introduction of an
improved risk adjuster in 2004, plans should aggressively pursue
the collection and reporting of more comprehensive data on
beneficiaries' medical conditions.

Medicare Managed Care: Better Risk Adjustment Expected to Reduce
Excess Payments Page 13 GAO/T-HEHS-99-72

Mr. Chairman, this concludes my statement. I will be happy to
answer any questions you or other Members of the Subcommittee may
have.

Page 14 GAO/T-HEHS-99-72

Page 15 GAO/T-HEHS-99-72

Page 16 GAO/T-HEHS-99-72

Related GAO Products Medicare Managed Care: Payment Rates, Local
Fee- for- Service Spending, and Other Factors Affect Plans'
Benefit Packages (GAO/HEHS-99-9R, Oct. 9, 1998).

Medicare HMO Institutional Payments: Improved HCFA Oversight, More
Recent Cost Data Could Reduce Overpayments (GAO/HEHS-98-153, Sept.
9, 1998). Medicare HMOs: Setting Payment Rates Through Competitive
Bidding (GAO/HEHS-97-154R, June 12, 1997).

Medicare Managed Care: HMO Rates, Other Factors Create Uneven
Availability of Benefits (GAO/T-HEHS-97-133, May 19, 1997).
Medicare HMO Enrollment: Area Differences Affected by Factors
Other Than Payment Rates (GAO/HEHS-97-37, May 2, 1997). Medicare
HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess
Payments (GAO/HEHS-97-16, Apr. 25, 1997). Medicare HMOs: HCFA
Could Promptly Reduce Excess Payments by Improving Accuracy of the
County Rates (GAO/T-HEHS-97-82, Feb. 27, 1997). Medicare Managed
Care: Growing Enrollment Adds Urgency to Fixing HMO Payment
Problem (GAO/HEHS-96-21, Nov. 8, 1995).

Medicare: Changes to HMO Rate- Setting Method Are Needed to Reduce
Program Costs (GAO/HEHS-94-119, Sept. 2, 1994). Medicare: Health
Maintenance Organization Rate- Setting Issues (GAO/HRD-89-46, Jan.
31, 1989).

(101802) Lett er

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