Medicare Managed Care

Medicare provides managed care plans with a fixed monthly payment, called a capitation payment, for each beneficiary they enroll. However, the enrollment of beneficiaries in managed care plans has yet to save the government money, mainly for two reasons. First, 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. Second, instead of diminishing as more beneficiaries enrolled in managed care, excess payments per enrollee continued to grow. To solve these problems, the Balanced Budget Act of 1997 changed the rate setting formula used by the Health Care Financing Administration (HCFA), which runs 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 has been widely criticized as a major factor in the health maintenance organization overpayment problem. This testimony discusses (1) the important of improving the current risk adjustment 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.

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.