Medicare Managed Care

Rapid growth in the number of Medicare beneficiaries in health maintenance organizations (HMO) increases the urgency of correcting rate-setting flaws that result in unnecessary Medicare spending. By not tailoring its HMO capitation payment to how health or sick HMO enrollees are, the Health Care Financing Administration (HCFA) cannot realize the savings that private-sector payers capture from HMOs. Two lessons can be learned from GAO's review of ways to fix Medicare's HMO capitation payments. First, a multipronged approach to rate setting makes sense. The large disparities in market conditions between states call for solutions keyed to market conditions. Second, with respect to achieving the promise of such initiatives, details matter. How these strategies are designed and implemented could mean the difference between success and failure. GAO believes that in the short term, HCFA can overcome its capitation problem by introducing a better health status risk adjustor. HCFA should also promptly test competitive bidding and other promising approaches to setting HMO rates that reduce Medicare costs.