Medicare HMOs

This testimony discusses the rates that Medicare pays health maintenance organizations (HMO) in its risk contract program, Medicare's principal managed care option. Medicare's method for paying risk contract HMOs was designed to save the program five percent of the costs for beneficiaries who enroll in HMOs. However, GAO testified that HMO rate-setting problems have prevented Medicare from realizing this saving. The program's rate-setting methods have resulted in excess payments to HMOs because HMO enrollees would have cost Medicare less if they had stayed in the fee-for-service sector. A recent estimate placed the total excess payments to HMOs at $2 billion annually. GAO's method of calculating the county rate would reduce payments more for HMOs in counties with higher excess payments and less for HMOs in counties with lower excess payments. GAO's method represents a targeted approach to reducing excess payments and could lower Medicare expenditures by at least several hundred million dollars each year.

GAO noted that: (1) HCFA's current method of determining the county rate produces excess payments; (2) because HCFA's method excludes HMO enrollees' costs from estimates of the per-beneficiary average cost, it bases county payment rates on the average per-beneficiary cost of only those beneficiaries that remain in the fee-for-service sector and ignores the costs HMO enrollees would have incurred if they had remained in fee-for-service; (3) research has shown the costs of those remaining in fee-for-service to be higher on average than the likely costs of HMO enrollees; (4) 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; (5) GAO's proposed modification is designed to fix that problem; (6) GAO developed a way to estimate HMO enrollees' expected fee-for-service costs using information available to HCFA; and (7) GAO's approach produces a county rate that represents the costs of all Medicare beneficiaries and could result in hundreds of millions of dollars in savings to Medicare.