GAO

United States General Accounting Office

Report to the Special Committee on

Aging, U.S. Senate

August 2000 MEDICARE AND

MEDICAID

Implementing State

Demonstrations for

Dual Eligibles Has

Proven Challenging

GAO/HEHS-00-94

Page 1 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Contents

Letter 3

Results in Brief 4

Background 6

Voluntary State Programs Have Limited Operational Experience

and Scope 10

Developing and Implementing Dual-Eligible Initiatives Has Been

a Lengthy Process 16

Conclusions 26

Agency Comments and Our Evaluation 27

Appendixes Appendix I: Examples of Advantages States See in Integrated

Care for Dual Eligibles 32

Appendix II: Descriptions of PACE, S/HMO I and II, and EverCare

Programs 33

Appendix III: Concepts Being Tested by States’ Integrated Care

Demonstrations for Dual Eligibles 37

Appendix IV: Description of Medicaid Integrated Care Programs

in Texas, Florida, and Colorado 39

Appendix V: BBA Changes to Medicare HMO Payment

Methodology 42

Appendix VI: GAO Methodology for Combining Part A and

Part B Risk Adjusters 44

Appendix VII: Comparison of Medicare Payments Under M+C,

PACE, and State Demonstration Programs 46

Appendix VIII:Comments From the Health Care Financing

Administration 47

Tables Table 1: Comparison of Key Characteristics of State Integrated Care

Programs 12

Table 2: Time (in Months) for Planning, Federal Review, and

Preparing for Implementation of Four State Waiver Requests 18

Table 3: GAO Analysis of Risk Adjusters for Programs Serving Dual

Eligibles 23

Table 4: Comparison of PACE, S/HMO, and EverCare 35

Table 5: 1999 Risk Adjusters for Programs Serving Dual Eligibles 44
Contents

Page 2 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Table 6: Payments Under M+C, PACE, and State Demonstrations That

Serve Frail Dual Eligibles Living in the Community, for a

75-Year-Old Female Residing in Each Location in Calendar

Year 1999 46

Abbreviations

BBA Balanced Budget Act of 1997

CCN Continuing Care Networks

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

HMO health maintenance organization

M+C Medicare+Choice

MedPAC Medicare Payment Advisory Commission

MOU memorandum of understanding

MSHO Minnesota Senior Health Options

OMB Office of Management and Budget

PACE Program for All-Inclusive Care for the Elderly

SCO Senior Care Options

S/HMO Social Health Maintenance Organization
Page 3 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

United States General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-281823 Letr

August 18, 2000

The Honorable Charles E. Grassley

Chairman

The Honorable John B. Breaux

Ranking Minority Member

Special Committee on Aging

United States Senate

The Honorable Ron Wyden

United States Senate

Hoping to expand the scope of earlier provider-initiated demonstrations,

states have been seeking federal waivers since the early 1990s to use

managed care approaches to integrate the delivery of acute and long-termcare services for certain “dual eligibles”—low-income Medicare

beneficiaries who also qualify for full Medicaid benefits.1 Dual eligibles

often receive their Medicare and Medicaid benefits from two different sets

of providers. In part, this situation stems from the different rules under

which the two programs operate and the fact that Medicaid pays for

services not covered by Medicare, reducing the incentive for dual eligibles

to enroll in a Medicare managed care plan. While some states require or

allow dual eligibles and other Medicaid beneficiaries to enroll in a managed

care plan to receive Medicaid benefits, Medicare beneficiaries (including

dual eligibles) cannot be required to do so in order to receive Medicare

benefits. In fact, an estimated 97 percent of dual eligibles receive their

Medicare benefits under Medicare’s fee-for-service option. To foster the

delivery of benefits in a more integrated fashion, some states are exploring

the pooling of separate Medicaid and Medicare payments and making one

managed care plan responsible for the delivery of all covered services. The

theory is that the managed care plan will have an incentive—a perbeneficiary payment—to provide the most appropriate care in the most

1

The term “dual eligible” is sometimes applied to other low-income Medicare beneficiaries

who do not qualify for full Medicaid coverage under state income standards but who receive

Medicaid coverage of Medicare cost-sharing requirements.
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Page 4 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

cost-effective setting.2 However, states have often raised concerns about

the length of the federal review process for these complex initiatives—

initiatives that raise important financing issues.

Concerned about the apparent limited experience to date with states’

integrated care initiatives, you asked us to determine (1) the status and key

features of state initiatives to integrate care for dual-eligible beneficiaries

and (2) factors that have contributed to the length of the waiver negotiation

process and implementation time frames. To address these issues, we

interviewed program officials in seven states that sought federal approval

for integrated care demonstrations: Colorado, Florida, Massachusetts,

Minnesota, New York, Texas, and Wisconsin. We obtained a federal

perspective on these initiatives from officials at the Health Care Financing

Administration (HCFA), the agency within the Department of Health and

Human Services (HHS) responsible for their review and approval, and from

officials at the Office of Management and Budget (OMB) who establish

rules for federal financial participation. We also interviewed providers

either participating in integration initiatives or planning to enroll dual

eligibles, and advocates for dual-eligible beneficiaries. In addition, we

reviewed (1) pertinent documents related to integrated care initiatives,

such as state waiver proposals and the terms and conditions that

accompanied federal approval, and (2) the available research on dual

eligibles, including information on the Program for All-Inclusive Care for

the Elderly (PACE) and other provider-initiated demonstrations that served

as a point of departure for state integrated care programs. We performed

our work between May 1999 and April 2000 in accordance with generally

accepted government auditing standards.

Results in Brief Currently, two states are enrolling a small number of dual eligibles in

limited geographic areas into integrated care programs, and two additional

states plan to implement programs by 2001. Officials in these four states

view their initial efforts as stepping stones and plan to make their programs

more widely available. Since the 1995 approval of an integrated care

program in Minnesota, the states of Wisconsin and New York also have

received federal approval to integrate Medicaid and Medicare services for

dual eligibles. HCFA and Massachusetts are working toward final approval

2

App. I describes some of the advantages states see in integrated care programs for dualeligible beneficiaries.
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Page 5 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

of that state’s program.3 The Minnesota and Wisconsin demonstrations

have operated for over 3-1/2 years and 1-1/2 years, respectively, and

currently serve about 4,200 dual eligibles in 12 counties. New York expects

to begin implementation in May 2001 in the Rochester area. Massachusetts

has a goal of statewide enrollment with an implementation target date of

early 2001. States are emphasizing service delivery in beneficiaries’ homes

and targeting different segments of the dual-eligible population compared

with PACE, which enrolls only frail individuals—that is, people who are at

risk of nursing home placement. The demonstrations in Minnesota and

New York are open to all dual eligibles over the age of 65—both community

residents and those in nursing homes. In contrast, Wisconsin’s program

focuses on the noninstitutionalized—individuals who are at risk of nursing

home placement and are either elderly or younger and physically disabled.

Two states are contracting or plan to contract with health plans that had no

prior experience in bearing financial risk, such as hospital-based plans and

community-based long-term-care organizations; Wisconsin is also

contracting with PACE sites. All plans in states with approved programs

are nonprofit, including the three participating health maintenance

organizations (HMO) in Minnesota.

Important factors associated with states’ decisions about pursuing

integrated care programs for dual eligibles are the complexity of planning

and implementing a demonstration and the extended time frames needed

to do so. At present, states need to undertake considerable planning before

waiver submission and then again after approval to bring health plans on

board and to prepare for actual enrollment. Finding the overall challenges

too great, Florida and Texas dropped the idea of integrating Medicare and

Medicaid services and instead are developing projects integrating Medicaid

acute- and long-term-care services only. Colorado is now pursuing a

program that avoids the use of waivers altogether. States have criticized the

length of the process required to gain federal approval for their initiatives.

In states with approved programs, the federal waiver review process

ranged from over 1 year to over 3 years. Though some delays were

associated with HCFA’s 1997 reorganization and the heavy new demands on

the agency as a result of 1997 legislation, HCFA has taken action to try to

speed up the review process.

3

In April 2000, HCFA and Massachusetts signed a memorandum of understanding (MOU)

that establishes terms and conditions and defines the federal and state roles and

responsibilities in implementing an integrated care program. The MOU reflects the

commitment of both parties to implementing a demonstration program. A number of steps

need to be taken prior to final approval and implementation.
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Difficulty in reaching agreement on an appropriate Medicare payment

methodology for integrated care programs was an important factor that

delayed the approval of state waiver applications. The challenge has been

to agree on payment rates that adequately compensate health plans for

differences in frailty among dual eligibles while meeting OMB’s

requirement that Medicare demonstrations not increase federal Medicare

expenditures from what they would have been without the demonstration.

In contrast to Medicare, which pays managed care plans a rate based on the

average cost of dual eligibles, adjusted for demographic differences, HCFA

and OMB’s approach to demonstrations has generally been to establish a

separate, higher rate for frail dual eligibles and a lower rate for healthier

dual eligibles. On the basis of the PACE precedent, single, higher payment

rates for frail dual eligibles were approved for Minnesota, Wisconsin, and

Massachusetts. Only New York’s demonstration is exploring the variability

in costs among frail dual eligibles by establishing several rates rather than a

single payment rate. For now, Wisconsin and Massachusetts have agreed to

rates that they believe may not be adequate to cover the costs of serving

disabled and frail dual eligibles, respectively, but are continuing to work

toward establishing higher rates. Medicare’s move toward a new diagnosisbased risk-adjustment methodology raises concerns for state

demonstrations because research has shown that the methodology tends to

underestimate the costs of frail beneficiaries. This situation underscores

the importance of learning from these four state demonstrations so that

their experience may inform similar initiatives that other states may be

considering.

Background While Medicare and Medicaid generally cover different populations, an

estimated 2.5 million low-income individuals are dually eligible for full
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Page 7 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Medicaid coverage and services covered by Medicare.4 For such dual

eligibles, Medicaid also covers Medicare part B premiums. Medicare, the

federal health insurance program for elderly and disabled Americans,

covered an estimated 39 million beneficiaries at a projected cost of $233.4

billion in fiscal year 1999.5 Medicare is financed by a combination of payroll

taxes, beneficiary premiums, general revenue, and interest on trust fund

assets. On the other hand, Medicaid serves certain low-income

beneficiaries and is jointly funded by state and federal revenues. In fiscal

year 1998, the federal government paid 57 percent of Medicaid’s $177.1

billion cost to cover about 40.5 million beneficiaries. Subject to certain

federal statutory requirements as well as HHS guidance and review, each

state designs and administers its own Medicaid program by (1) setting

income and asset eligibility requirements, (2) selecting which optional

beneficiary groups and services to cover, and (3) determining the scope of

and payments for mandatory and optional services.

Medicaid fills in Medicare coverage gaps for its low-income elderly and

some of its younger physically disabled beneficiaries.6 Medicare covers

their acute-care needs, such as hospitalizations and physician services, but

generally does not pay for long-term care, except when it is accompanied

4

The total number of dual eligibles was about 6.5 million in 1996 and included Medicare

beneficiaries who do not qualify for full Medicaid coverage. The Congress established three

programs to assist Medicare beneficiaries with incomes above the qualifying level for full

Medicaid coverage. Under the Qualified Medicare Beneficiary program, Medicaid pays

Medicare premiums, deductibles, and coinsurance for individuals with incomes at or below

100 percent of the federal poverty level. Under the Specified Low-Income Medicare

Beneficiary program, Medicaid pays the Medicare part B premium for individuals with

incomes above 100 percent but less than 120 percent of the federal poverty level. Finally, the

Qualifying Individuals program, which operates with fixed funding for a 5-year period

beginning in 1998, assists individuals on a first-come, first-served basis; Medicaid is required

to pay the Medicare part B premium for beneficiaries with incomes at least 120 percent but

less than 135 percent of the poverty level and to provide a small rebate of Medicare

premiums for beneficiaries with incomes at least 135 percent but less than 175 percent of

the federal poverty level. See Low-Income Medicare Beneficiaries: Further Outreach and

Administrative Simplification Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999),

p. 4.

5

This estimate is based on Congressional Budget Office projections. After subtracting

beneficiary premiums, the fiscal year 1999 Medicare net cost to the government was

projected to be $210 billion. Disabled Americans qualify for Medicare after they receive cash

disability benefits under title II of the Social Security Act for 24 months.

6

In 1995, the cost-sharing liability for Medicare-covered services averaged about $760 per

beneficiary. For those living at the poverty level, this cost represented about 10 percent of

income ($7,470) for a single person and 15 percent of income ($10,030) for a couple. (See

GAO/HEHS-99-61, p. 1.)
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Page 8 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

by a need for skilled care, either in an institution or in a beneficiary’s home.

Medicaid covers long-term-care services delivered either in a nursing home

or, at state option, in the community and provides benefits generally not

covered by fee-for-service Medicare, such as prescription drugs. The extent

of Medicaid coverage for dual eligibles, however, differs across states. Drug

coverage and community-based care may be limited or unavailable in some

states for certain populations but more comprehensive in others. Some

services are covered by both programs. For example, dual eligibles can

obtain services under the Medicare home health and skilled nursing facility

benefits that are similar to long-term-care services paid for by Medicaid.

When a benefit is covered by both programs, such as post-acute skilled

nursing facility care or home health services, Medicare is the primary

payer. Because of pressures in both programs to control costs, the overlap

in benefits has, at times, resulted in tension between state and federal

officials as to which program should cover certain services.

Most Medicare beneficiaries may choose between two different delivery

systems—a fee-for-service model, in which individuals receive services

from the providers of their choice who are paid separately for each service,

and an HMO option, in which all covered services must be obtained from a

participating health plan that is paid a fixed per-person, per-month fee

(capitation). The Balanced Budget Act of 1997 (BBA) created the

Medicare+Choice Program (M+C) to reflect steps taken to encourage the

wider availability of HMOs and the participation of other types of

coordinated care plans. As of June 1, 1999, about 18 percent of Medicare

beneficiaries were enrolled in a Medicare HMO, while the remaining 82

percent were in the program’s fee-for-service option. About 97 percent of

dual eligibles receive their Medicare benefits on a fee-for-service basis.

States also use both fee-for-service and managed care for Medicaid

beneficiaries. About 54 percent of Medicaid beneficiaries, primarily lowincome families, are enrolled in managed care either on a voluntary basis,

like Medicare, or through mandatory state programs. Some states have

mandatory programs that require dual eligibles to receive Medicaid

services from a managed care plan.

Dual eligibles, both those with full Medicaid coverage and those for whom

Medicaid only provides assistance regarding Medicare cost-sharing, are

among the most vulnerable Medicare beneficiaries. Although some dual

eligibles are relatively healthy, many have substantially greater health care

needs and fewer resources to meet those needs than the average Medicare

beneficiary. By definition, dual eligibles are poor: most had annual incomes

below $10,000, and one-fifth had annual incomes under $5,000 in 1997.
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Almost 40 percent of dual eligibles are minorities. Compared with

Medicare-only beneficiaries, dual eligibles are more likely to

• be female;

• live in a nursing home;

• have a serious disease or chronic condition such as stroke, diabetes,

mental disorder, or incontinence;

• suffer from serious functional limitations, both physical and cognitive;

and

• have less access to a regular source of care or preventive services and

make greater use of emergency room services.

Dual eligibles were estimated to represent 17 percent of Medicare

beneficiaries in 1997, but they accounted for about 28 percent of Medicare

expenditures that year. Similarly, they accounted for 19 percent of the

Medicaid population but 35 percent of Medicaid expenditures, primarily

because of their higher use of nursing home care.7 Medicare and Medicaid

expenditures for dual eligibles were an estimated $113 billion in 1997. The

nonelderly disabled and persons aged 85 and older—who are more likely to

be dually eligible—are the fastest growing segments of the Medicare

population.

Since the early 1990s, states have expressed interest in experimenting with

managed care approaches that integrate services for Medicare

beneficiaries who are eligible for full Medicaid benefits. In addition to cost

savings, states are attempting to (1) address the fragmentation in delivery

systems, (2) ensure access to primary and preventive care, (3) improve

accountability for health outcomes, (4) provide incentives for the

appropriate use of medical services, and (5) reduce administrative

differences between Medicare and Medicaid. To integrate Medicare and

Medicaid services, states have generally sought federal waivers of certain

Medicare and Medicaid requirements. Currently, there are two relevant

federal waiver authorities. Section 222(b) of the Social Security Act

Amendments of 1972 provides authority for demonstrations that

experiment with the Medicare payment methodology. Section 1115 of the

Social Security Act authorizes demonstrations that test Medicaid

7

William D. Clark and Melissa M. Hulbert, “Research Issues: Dually Eligible Medicare and

Medicaid Beneficiaries, Challenges and Opportunities,” Health Care Financing Review

(Winter 1998).
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Page 10 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

program innovations.8 A long-standing federal policy for the approval of

such demonstrations is that they be budget neutral—that expenditures

under the waiver be no higher than they would be without a waiver.

Experimentation with approaches to coordinate the delivery of acute- and

long-term care under a capitation arrangement dates back to the 1970s. The

Congress has authorized four demonstration programs since then: (1)

PACE, (2) two generations of the Social Health Maintenance Organization

program (S/HMO I and S/HMO II), and (3) EverCare. These demonstrations

vary in the extent to which they serve dual eligibles: while 96 percent of

PACE enrollees were dual eligible in 1997, S/HMO and EverCare enrollment

of dual eligibles represented 5 to 6 percent and 70 to 75 percent of

enrollees, respectively. PACE targets frail individuals and attempts to keep

them out of nursing homes, while EverCare focuses on improving

outpatient services for beneficiaries who already reside in nursing homes.9

S/HMO expands the traditional Medicare benefit package by adding some

long-term-care benefits. Compared with PACE, S/HMOs provide more

limited long-term-care benefits. (App. II compares and contrasts these

demonstration programs.)10

Voluntary State

Programs Have Limited

Operational

Experience and Scope

Four states have obtained or soon expect to obtain approval to establish

Medicaid/Medicare integrated care demonstrations for dual eligibles. Only

the demonstrations in Minnesota and Wisconsin are operational—for 3-1/2

years and 1-1/2 years, respectively. These two programs are currently small,

operating in a total of 12 counties, with enrollment of about 4,200. In

addition to frail, elderly dual eligibles, healthier dual eligibles are often

eligible to enroll in these voluntary programs. Several states also plan to

enroll non-dual Medicaid- or Medicare-only beneficiaries. Developing plan

capability to integrate care is a challenge because participating plans have

8

Currently, section 222(b) is codified at 42 U.S.C. 1395b-1(a)(1)(A). Despite its new

codification, most health care professionals—including HCFA—continue to refer to the

authority as a 222 waiver. The 1115 waiver is codified at 42 U.S.C. 1315(a).

9

Individuals who are determined to be at risk of nursing home placement, that is, “nursinghome-certifiable,” are considered frail. Generally, frail individuals require assistance with

daily activities such as bathing or dressing. States are responsible for making these

eligibility assessments using state standards.

10For a more detailed discussion of these demonstrations, see Medicare Payment Advisory

Commission (MedPAC), Report to the Congress: Selected Medicare Issues, ch. 5

(Washington, D.C.: MedPAC, June 1999).
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limited experience in providing the broad range of services covered under

the demonstrations. Because of program complexities and the lengthy

waiver-approval process, several other states that considered pursuing

similar demonstration initiatives decided instead to focus on integrating

Medicaid acute- and long-term-care services.

Few State Programs Are

Operational; Scope and

Enrollment Are Currently

Small

The first state integrated care program—Minnesota Senior Health Options

(MSHO)—was approved in 1995 after almost 4 years of development and

negotiation with HCFA and OMB over federal waivers. Implemented in

1997, MSHO became an important model for other state initiatives. Since

MSHO, HCFA also has approved the Wisconsin Partnership Program,

which was fully implemented in January 1999, and the Monroe County,

New York, Continuing Care Networks (CCN), which plans to begin

enrolling beneficiaries in May 2001. A fourth program, Massachusetts’

MassHealth Senior Care Options (SCO), is expected to receive final

approval and begin implementation by early 2001.

Program officials in Minnesota, Wisconsin, and New York told us that the

modest size of their voluntary programs—operating or scheduled to

operate in 13 counties with an overall enrollment goal of about 16,400

beneficiaries—is only a starting point.11 They consider these

demonstrations to be the basis for larger projects that may eventually

expand to other locations or cover additional populations. MSHO, the

largest operational program, has an enrollment goal of 4,000. As of April

2000, the program had enrolled 3,435 beneficiaries in seven counties in the

metropolitan Minneapolis-St. Paul area.12 Minnesota has requested HCFA’s

approval to expand eligibility to include younger, disabled dual eligibles

under age 65. With enrollment of 782 as of March 2000, Wisconsin officials

received federal approval to raise the Partnership enrollment cap from

1,200 to 2,400 in the five counties that enroll beneficiaries. New York’s goal

is to enroll 10,000 participants in Monroe County, the area adjacent to

Rochester. Massachusetts is the only demonstration with an initial goal of

statewide enrollment. State officials hope to enroll up to 42,400 dual

11HCFA has granted some states waivers that allow mandatory enrollment in Medicaid

managed care programs. Medicare beneficiaries’ enrollment in managed care plans is

entirely voluntary.

12Minnesota has permission to operate MSHO in seven metropolitan area counties. It

currently lacks a provider network in one county (Carver), but dual eligibles in that county

are eligible to enroll in MSHO using a network in an adjacent county.
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eligibles during the first 5 years of the program. The scope of the SCO

program will ultimately depend on the willingness of plans across the state

to participate. Table 1 compares key characteristics of these four states’

integrated care programs.

Table 1: Comparison of Key Characteristics of State Integrated Care Programs

State initiatives

Operational

Approved but not

operational Pending

Program name Minnesota Senior Health

Options (MSHO)

Wisconsin Partnership

Program

Continuing Care

Networks (CCN)

MassHealth: Senior Care

Options (SCO)a

Location 7 metropolitan counties

around Minneapolis/St.

Paul (Anoka, Carver,

Dakota, Hennepin,

Ramsey, Scott,

Washington)b

5 counties—2 urban

(Dane, Milwaukee) and 3

rural (Chippewa, Dunn,

Eau Claire)

Monroe County, New York

(Rochester area)

Statewide (dependent on

qualified bidders/provider

network participation)

Approval date/operational status

Date approved April 1995 October 1998 September 1999 Pending

Date operational February 1997 January 1999 May 2001 (projected) Early 2001 (projected)

Eligible population 1. Dual eligibles aged 65

or older.

2. As of fall 2000, planned

expansion to individuals

under age 65 with

physical disabilities.c

1. Frail elderly aged 55 or

older at risk of nursing

home placement who are

Medicaid-only or dual

eligibles.

2. People ages 18 to 65

with physical disabilities

at risk of nursing home

placement who are

Medicaid-only or dual

eligibles.

1. Dual eligibles aged 65

or older.

2. Medicare beneficiaries.

1. Dual eligibles aged 65 or

older.

2. Medicaid beneficiaries aged

65 or older who are not

Medicare-eligible.

Enrollment

Cap/goal 4,000 goal 2,400 cap (increased

from 1,200 as of Mar.

2000)

10,000 goal 42,400 goal in first 5 years (40

percent of 106,000

MassHealth seniors)

Current

enrollment

3,435 average monthly

enrollment as of April

2000d

782 enrolled as of March

2000

Enrollment expected to

begin in May 2001

Enrollment expected to begin

in early 2001
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Page 13 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

a

In April 2000, HCFA and Massachusetts signed an MOU that established terms and conditions and

defined the federal and state roles and responsibilities in implementing an integrated care program.

The MOU reflects the commitment of both parties to implementing a demonstration program. A

number of steps need to be taken before final approval and implementation.

b

MSHO is authorized to operate in 7 counties, but currently there are no networks in Carver County.

c

The fall 2000 expansion is for Medicaid contracts only. Before expansion is allowed for Medicare,

Minnesota needs to complete the transition from its section 1115 waiver and request an amendment to

the current Medicare 222 waiver.

d

Since the inception of MSHO, Minnesota has served over 6,000 enrollees. Because of their overall

frailty, many enrollees died while in the program.

e

These 32 organizations attended a series of technical assistance sessions on the Massachusetts

program held between February and October 1999.

f

Appendix III summarizes the concepts HCFA is testing with these demonstration programs.

g

Although Wisconsin has a section 1115 Medicaid waiver for its Partnership Program, New York and

Massachusetts eventually opted to use a different, nonwaiver authority—section 1915(a), which allows

voluntary programs for dual eligibles and is not subject to OMB’s budget-neutrality policy. Because of

continuing negotiations with OMB over Medicaid budget neutrality, Minnesota has received approval to

Health plan characteristics

Number of

plans/type of

organization

Three participating

nonprofit HMOs. Most

plans are contracting with

newly formed geriatric

care systems to provide

all or part of the MSHO

benefit package.

Four Partnership

providers who are all

nonprofit

community-based

organizations

One local nonprofit

provider-based health

system, which includes

hospitals, nursing homes,

and a PACE program (a

second health system

withdrew from the

demonstration in Feb.

2000)

32 organizations (including

hospital networks, PACE

providers, and Medicare

HMOs) have expressed

interest in becoming SCOse

Unique featuresf 1. 76 percent of enrollees

live in nursing homes.

2. Plans are responsible

for the first 180 days of

nursing home care for

community enrollees.

1. Model is similar to

PACE, but without

restrictions on primary

physician or use of day

care.

2. Two providers are

PACE sites.

3. Includes the younger,

physically disabled.

4. Operates in some rural

areas

1. Is testing a capitation

payment model that is

risk-adjusted for

functional status of

enrollees.

2. Will use a local

provider-based health

system.

3. Will enroll dual eligibles

and Medicare

beneficiaries in the same

plan.

1. HCFA has an MOU with

state to jointly select and

contract with SCOs.

2. Enrollment broker will enroll

and disenroll beneficiaries.

3. Has a goal of being a

statewide program.

Waivers

Medicaidg Section 1115 approved in

1995 but recently

switched to 1915(a) and

1915(c) combination

Section 1115 Section 1915(a) and

1915(c) combination

Section 1915(a)

Medicare Section 222 Section 222 Section 222 Section 222

State initiatives

Operational

Approved but not

operational Pending
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switch from its 1115 waiver to a combination of 1915(a) authority and a 1915(c) waiver. The 1915(c)

waiver allows states to provide home and community-based services to individuals at risk of nursing

home placement and permits Minnesota to access some special eligibility provisions such as

protection against spousal impoverishment.

State Programs Also

Enrolling Healthier Dual

Eligibles

Initiatives in Minnesota, Wisconsin, New York, and Massachusetts are

attempting to expand on earlier, provider-initiated demonstrations,

particularly the PACE model. State initiatives differ from PACE in that not

all enrollees are frail and that service delivery occurs outside of the adult

day care center. Generally, states are designing their voluntary programs to

appeal to a broader population, including healthier dual eligibles and even

Medicare-only beneficiaries. The programs in Minnesota, New York, and

Massachusetts offer the option of enrollment to any dual eligible over age

65, both those in the community (the healthy as well as the frail) and those

in nursing homes. In contrast to the other state initiatives, Wisconsin’s

Partnership Program enrolls frail, elderly dual eligibles aged 55 or older

and dual eligibles with physical disabilities under age 65. Frail dual eligibles

are those whom the state has assessed as at risk of nursing home

placement. Three states also include some non-dual eligibles in their

programs. In New York’s CCN program, all Medicare beneficiaries are

eligible to enroll. A state official told us that since the program is voluntary,

having a larger enrollment base makes it easier to attract health plans. In

Massachusetts, a small number of Medicaid-only beneficiaries over age 65,

primarily immigrants who do not qualify for Medicare, will also be eligible

for the program.13 In Wisconsin, Medicaid recipients who meet the

program’s other eligibility criteria may enroll.

Most Participating Health

Plans Have Limited

Experience in Providing a

Range of Covered Services

Developing plan capability to integrate care for dual eligibles is a challenge

for implementing demonstrations. The eight health plans involved in the

approved demonstrations in Minnesota, Wisconsin, and New York include

hospital-based plans, community-based long-term-care organizations,

PACE sites, and HMOs. All eight participating plans we reviewed are

nonprofit entities, including three HMOs located in Minnesota, a state that

13Most Americans aged 65 or older are entitled to participate in Medicare. These individuals

(or their spouses) established their entitlement during their working careers by paying the

Hospital Insurance payroll tax on earnings covered by either the Social Security or railroad

retirement systems for at least 40 quarters.
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Page 15 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

requires such plans to be nonprofit.14 At the outset of the demonstration

programs, few of the participating plans had the ability to offer both acuteand long-term-care services. As a result, most plans had to either acquire

the needed capability or subcontract with other providers to fill gaps in

their networks. Some are small, nontraditional providers and did not

participate previously in the Medicare program. Plans are at significant

financial risk because they are responsible for the entire range of services.

In general, these programs include few “carve outs,” and plans are

expected to show flexibility in providing any services that keep enrollees

out of nursing homes and hospitals.15

Three States Ultimately

Focused on Integrating

Medicaid Services

Three of the seven states we reviewed—Colorado, Florida, and Texas—

modified their original plans and focused only on integrating Medicaid

acute- and long-term-care services. Each of these states considered

establishing a program to integrate Medicare and Medicaid services for

dual eligibles modeled on Minnesota’s approach. Although Colorado’s dualeligible demonstration for Mesa County was approved in July 1997, the

state dropped the Medicare portion over a year later because of concern

that the plan would lose money if it accepted HCFA’s proposed Medicare

payment rate rather than the cost-based payment it was receiving.16 Texas

and Florida narrowed their programs, in part to avoid the time associated

with obtaining section 1115 and section 222 waivers. In addition, Texas

preferred a program with mandatory enrollment. While this is possible in

Medicaid, HCFA cannot waive the requirement that dual-eligible Medicare

beneficiaries have the freedom to choose whether to join a health plan to

obtain their Medicare benefits. Texas is currently implementing an

initiative in Harris County that requires mandatory enrollment of Medicaid

beneficiaries and offers an inducement for dual eligibles to enroll

voluntarily in the same HMO for their Medicare services. Florida is

focusing on capitating home and community-based services and, when

14HMOs participating in MSHO typically subcontract with care systems that tend to be

owned by provider groups—clinics, hospitals, and long-term-care providers. Most of these

care systems are organized as for-profit enterprises, even though many of the hospitals and

long-term-care providers that sponsor them have nonprofit status. These care systems are

locally based and not owned by out-of-state companies.

15Benefits not the responsibility of the managed care plan are referred to as “carved out.”

16Under a cost contract, Medicare pays the reasonable cost the entity incurs in furnishing

covered services (less the estimated value of beneficiary cost-sharing).
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Page 16 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

necessary, nursing home care for dual eligibles aged 65 or older in two

counties. (See app. IV for more information on these state initiatives.)

Developing and

Implementing DualEligible Initiatives Has

Been a Lengthy

Process

States have criticized the length of the process required to gain federal

approval for integrated care demonstrations, which ranged from 16 months

to over 3 years. In part, the length of the negotiation process was due to (1)

temporary delays that occurred around the time of HCFA’s 1997

reorganization, (2) the BBA’s imposition of a heavy new workload on the

agency, and (3) BBA Medicare payment changes. HCFA has since

undertaken initiatives intended to speed up the review process. But

focusing on negotiations with HCFA and OMB overlooks other factors that

contributed to the time required to launch these complex initiatives—the

actual development of the proposal and the need to contract with health

plans. These two tasks added considerable time to the overall process.

Ensuring that demonstrations did not increase federal Medicare

expenditures also tended to prolong negotiations. At issue is the

appropriate payment factor for frail dual eligibles. Though HCFA and OMB

believe that federal financial interests are best protected by using risk

adjusters that reflect variability in the costs of frail dual eligibles who may

enroll, this approach is reflected in only one of four state demonstration

programs—New York’s. On the basis of precedents established by earlier

provider-initiated demonstrations, Minnesota, Wisconsin, and

Massachusetts each negotiated a single risk adjuster for frail dual

eligibles.17 The debate over risk adjusters for Wisconsin and Massachusetts

is not over, since both states view the payment rates as inadequate.

Furthermore, HCFA has reserved the right to substitute a more appropriate

risk adjuster in the waiver agreements negotiated to date.

17In Massachusetts, the risk adjuster for frail dual eligibles varies by gender.
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Page 17 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Waiver Development and

Contracting Remain TimeConsuming, but HCFA Has

Taken Steps to Address

Negotiation Time Frames

Federal review and approval account for only a portion of the total time

involved in crafting and implementing an integrated care demonstration.

For example, MSHO was under review for about 16 months, but it was in

the planning stage for more than 2 years before Minnesota formally

submitted its request for a demonstration waiver (see table 2). In addition,

after receiving approval in early 1995, the state spent about 2 years

negotiating contracts with health plans and taking the other steps

necessary to implement the program. As with Minnesota, several years

elapsed between Massachusetts’ preparation of a concept paper and its

submission of a waiver application. New York officials pointed out that

state and provider issues can also add time to the development of a waiver

proposal. The CCN program was formally approved in September 1999, but

officials anticipate enrollment will not begin until 19 months later to allow

time to develop a contract with a local health system and to build the

necessary enrollment, payment, and data-reporting systems. During the 32

months that Wisconsin’s waiver application was under review, the state

worked with community-based organizations that had expressed interest in

participating in the program. These organizations initially operated under

partial capitation to help them transition to accepting full financial risk.18

Because this transition period coincided with waiver negotiations, about 2

months elapsed between HCFA approval and the phase-in of plan

responsibility for Medicare-covered services. In commenting on a draft of

this report, HCFA noted that operational differences between Medicaid and

Medicare add an additional element of complexity to demonstrations.

Considerable effort has been made to understand and then try to

streamline various administrative systems that must be in place for these

demonstrations to begin.19

18These organizations actually enrolled dual eligibles in 1996, operating under an existing

home and community-based services waiver as prepaid health plans with hospital,

laboratory, and X-ray services carved out and paid on a fee-for-service basis. Medicare

services for enrollees were also paid on a fee-for-service basis.

19Enrollment, marketing, evidence of coverage contracts, provider contracts, grievance and

appeals systems and rights, benefit definition and coordination, and other key systems and

policies must be worked through between each state and HCFA.
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Page 18 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Table 2: Time (in Months) for Planning, Federal Review, and Preparing for

Implementation of Four State Waiver Requests

a

As of June 2000.

Source: Interviews with program officials.

According to state and federal officials, HCFA’s July 1997 reorganization

and new BBA workload demands unintentionally lengthened the review

process. Initially, the reorganization, combined with turnover among

experienced staff, resulted in delays while new responsibilities and chains

of command were being worked out. The timing of the reorganization also

coincided with enactment of the BBA, which placed additional demands on

HCFA management because of the significant number of Medicare and

Medicaid initiatives that the agency was directed to develop and

implement. Moreover, because of changes in Medicare’s HMO program and

the initiation of new payment methodologies for some Medicare benefits,

state officials had to evaluate the BBA’s effect on the financing and

operation of their demonstration programs. Appendix V describes the BBA

changes to the Medicare HMO payment methodology.

State planning

prior to waiver

submission Federal review

Implementation

(time between

approval and

enrollment)

Minnesota (MSHO) 26 16 21

Wisconsin

(Partnership

Program)

12 32 2

New York (CCN) 29 40 19

(based on estimated

enrollment date)

Massachusetts

(SCO)

30 36a Awaiting final

approval and

implementation
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Page 19 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Subsequent to these events, HCFA and OMB took several steps to speed up

the review and approval process and to improve overall communications

with state officials. For example, HCFA determined that an existing

nonwaiver authority, section 1915(a), can be used instead of 1115 waivers

to integrate the financing of acute- and long-term-care demonstration

projects. Section 1915(a) allows voluntary Medicaid programs that only

require HCFA approval of health plan contracts and are not subject to the

budget neutrality policy.20 In commenting on a draft of this report, officials

in Minnesota, New York, and Massachusetts said that the use of the 1915(a)

authority had not resolved their concern about OMB’s budget neutrality

policy on the Medicaid side and that the 1915(a) option limits their ability

to expand eligibility to, for example, higher-income individuals at risk of

entering a nursing home. Minnesota stressed that, given predicted

financing problems with the Medicare program and the projected increase

in the elderly population, experimentation with building comprehensive

chronic care delivery systems should be a higher priority for the federal

government. HCFA is also testing a new approach to working with the

states. HCFA and Massachusetts have signed an MOU that establishes a

partnership in developing an integrated care demonstration. Under this

agreement, HCFA and Massachusetts will jointly select and contract with

the participating health plans, which should facilitate program

implementation.

Developing a Medicare

Payment Methodology for

Frail Dual Eligibles Has

Been Difficult for Some

States

Securing federal and state agreement on how much Medicare will pay

health plans has taken considerable time and effort. HCFA and OMB have

attempted to ensure that Medicare pays no more for dual eligibles who

voluntarily enroll in an integrated care demonstration than it would have

paid had these beneficiaries remained in the fee-for-service program. Most

state integrated care demonstrations are open to all dual eligibles, which

raises the issue of how to adjust payments for the anticipated costs of dual

eligibles who actually join the demonstration. Medicare’s payment

methodology normally pays health plans on the basis of the average cost of

all dual eligibles, adjusted for certain demographic factors that affect

health costs. This process of adjusting the average rate up or down for

different enrollee characteristics is known as risk adjustment. State and

federal officials have to reach agreement about the health status

20HCFA must approve health plan capitation rates, which may not exceed the upper

payment limit—that is, what would have been paid for an equivalent population in fee-forservice.
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Page 20 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

characteristics and associated service costs of those who might be

attracted to the demonstrations.

The approach taken by HCFA and OMB recognizes that frail dual eligibles

are more expensive than their healthier counterparts. Wisconsin and

Minnesota use the PACE risk adjuster for frail enrollees, while

Massachusetts plans to use a variation of the S/HMO I adjuster. Only the

payment methodology in the New York demonstration attempts to reflect

the variability in the cost of frail dual eligibles by establishing three

different payment categories. To compensate for higher payments for frail

dual eligibles, two of the three states using a single risk adjuster are

required to use a lower payment rate than the M+C rate for nonfrail dual

eligibles. HCFA said that because of an oversight, Minnesota was not

required to use a lower payment for nonfrail dual eligibles.

Wisconsin and Massachusetts are concerned about the adequacy of their

payment rates. Wisconsin is enrolling younger, physically disabled dual

eligibles who, it believes, are considerably more expensive than frail PACE

enrollees. Massachusetts analyzed Medicare and Medicaid claims data to

support its request for a higher risk adjuster for frail dual eligibles than was

ultimately approved, but OMB was skeptical about this analysis. Medicare’s

move toward a new diagnosis-based risk-adjustment methodology, as

mandated by the BBA, has raised concerns that it might be applied to

specialized programs such as PACE and state demonstrations. Research

has shown that the new methodology tends to underestimate the costs of

frail beneficiaries, who are a disproportionate share of these programs’

enrollees.

Dual Eligibles Are More Costly

Than the Average Beneficiary

Medicare policy for persons enrolling in HMOs is to pay the plans no more

than what the program would have paid had that person received services

in the traditional fee-for-service program.21 To accomplish this, rates paid to

HMOs have been based on the average program costs for fee-for-service

beneficiaries. However, costs vary dramatically across individuals. To

protect HMOs that serve many individuals with above-average costs and to

protect the Medicare program from situations in which many individuals

21In fact, the Medicare payment rate for plans was initially set at 95 percent of the average

fee-for-service cost so that the program would benefit from savings that health plans could

generate. However, Medicare HMOs have generally been overpaid, because beneficiaries

who enrolled have been healthier than the average beneficiary. See Medicare+Choice:

Reforms Have Reduced, but Likely Not Eliminated, Excess Plan Payments (GAO/HEHS-99-

144, June 18, 1999).
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Page 21 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

with below-average costs join HMOs, these average rates are adjusted to

reflect the expected cost of actual enrollees. This risk adjustment is

achieved by multiplying the average rate by a factor that adjusts the rate

paid either up or down. For example, because older persons are expected

to have higher costs, a plan is paid 1.26 times the average for an 85-year-old

male beneficiary who joins the plan. Dual eligibles have also been

demonstrated to have higher costs, so plans are paid even more—2.22

times the average—if the 85-year-old male enrollee is a dual eligible. The

Medicare HMO payment for dual eligibles is based on the estimated

average cost of this population—including both healthier and sicker dual

eligibles. While dual eligibles are, on average, more costly to serve than

other Medicare beneficiaries, there is considerable variability. Some dual

eligibles are relatively healthy and seek few medical services during the

course of a year, while others’ medical expenditures more closely resemble

costs for the Medicare program as a whole. Finally, a segment of the dualeligible population is much more expensive than the average dual-eligible

beneficiary. Even among frail dual eligibles, costs vary considerably.

HCFA and OMB Have Approved

a Variety of Frailty Risk

Adjusters

Relying on the precedent set by PACE, HCFA and OMB recognize that frail

dual eligibles are more expensive than their healthier counterparts. In

granting states a higher risk adjuster for frail dual eligibles, HCFA and OMB

have generally lowered the payment for healthier dual eligibles. However,

HCFA officials told us that, because of an oversight, what they

characterized as a “long-standing approach” was not applied to

Minnesota.22 As a result, health plan payments for healthier dual eligibles in

Minnesota equal what is paid for all dual eligibles under M+C. While

Minnesota, Wisconsin, and Massachusetts use a single risk adjuster for frail

dual eligibles, New York’s CCN program uses several risk adjusters that

attempt to reflect differences in impairment among frail dual eligibles.

Recognizing the differential costs to serve individuals with greater needs,

PACE established a precedent for higher Medicare payments for frail dual

eligibles. Because PACE enrolls only frail individuals, rather than a cross

section that includes healthier dual eligibles, it was necessary to develop a

special risk-adjustment factor for its enrollees. The PACE factor of 2.39

represents a “best estimate” based on 1983 negotiations and available data.

After about 15 years of implementation experience and a number of HCFAsponsored research projects, the extent to which the PACE risk adjuster

22S/HMO I was the first demonstration to implement lower payment rates for communitydwelling, nonfrail plan members in 1985.
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Page 22 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

accurately pays for the frail dual eligibles enrolled in the program remains

unclear.23

Table 3 presents our analysis of risk adjusters used for dual eligibles

enrolling in M+C HMOs, PACE, and the demonstrations in Minnesota,

Wisconsin, New York, and Massachusetts. Appendix VI describes the

methodology used in this analysis. Minnesota and Wisconsin use the PACE

risk adjuster for frail dual eligibles, which applies the same factor

regardless of age or gender. The risk adjusters negotiated by Massachusetts

for frail dual eligibles are those used by the S/HMO I demonstration and

vary only by enrollee gender.24 Finally, New York’s system adjusts for the

level of impairment (using three categories) and the gender of the enrollee.

Enrollees must be nursing-home-certifiable to be considered frail. In

MSHO, only about 170 of the approximately 3,400 enrolled dual eligibles

are classified as frail elderly living in the community. All of the 782

individuals enrolled in Wisconsin’s Partnership Program as of March 2000

are frail elderly or younger disabled individuals at risk of nursing home

placement. To illustrate how these different risk adjusters affect payments

under different demonstrations, appendix VII compares the Medicare

payments for nursing-home-certifiable enrollees in PACE and state

demonstration programs with the payment under M+C for a hypothetical

dual-eligible beneficiary.

23In 1983, HCFA and On Lok, the precursor of the PACE program, agreed on a rate that is

between the expenditures of an expensive comparison population enrolled in fee-forservice—who were assumed to be nursing-home-certifiable on the basis of their pattern of

service use—and the average spending for less costly beneficiaries living in nursing homes.

Post-1983 research studies have examined the appropriateness of the PACE rate. The

conclusions have been mixed. Studies using older data tend to confirm the PACE rate but

show considerable variation in spending for frail persons—ranging from 1.66 for the least

costly nursing-home-certifiable beneficiary up to 4.0 for individuals with severe disabilities

or recent hospitalizations. On the other hand, studies using more recent data suggest that

the comparison population is more expensive and that therefore the PACE rate may be too

low. A 1997 study noted that more recent data reflect the sharp increase in Medicare home

health payments since a court decision in 1988 struck down HCFA’s interpretation of the

home health benefit as inconsistent with the Medicare statute. (See Gruenberg and others,

An Examination of the Impact of the Proposed New Medicare Capitation Methods on

Programs for the Frail Elderly (Cambridge, Mass.: Long Term Care Data Institute, Jan. 1999),

pp. 42-3, and An Examination of the Cost-Effectiveness of PACE in Relation to Medicare

(Cambridge, Mass.: DataChron Health Systems, Inc., Jan. 1997).

24While the M+C payment includes a 5-percent discount off the base rate to reflect the

anticipated savings from HMOs, the Congress authorized an exception to this methodology

for the S/HMO I demonstration. Massachusetts will use the S/HMO I risk adjuster, but it will

be multiplied by the discounted M+C base rate.
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Page 23 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Table 3: GAO Analysis of Risk Adjusters for Programs Serving Dual Eligibles

Note: To simplify comparisons, we combined the Medicare part A (hospital services) and part B

(physician and outpatient services) risk adjusters into one number. These risk adjusters apply to either

healthier dual eligibles or those determined to be at risk of nursing home placement but still living in the

community. A different risk adjuster is used for dual eligibles who reside in nursing homes.

a

The M+C risk adjuster for dual eligibles is based on the estimated average cost of this population, and

therefore makes no separate adjustment for frailty. However, M+C payments for dual eligibles do vary

according to the age and gender of the enrollee.

b

Frail includes both elderly and younger disabled individuals who are at risk of nursing home

placement.

Source: GAO calculations, based on approved risk adjusters for each program.

Male Female

M+C HMOsa

Frail and nonfrail dual eligibles 65-69 years old 1.13 0.91

Frail and nonfrail dual eligibles 85+ years old 2.22 1.74

PACE

All enrollees (only frail persons living in the

community may enroll)

2.39 2.39

Minnesota (MSHO)

Frail dual eligibles (all ages) 2.39 2.39

Nonfrail dual eligibles 65-69 years old 1.13 0.91

Nonfrail dual eligibles 85+ years old 2.22 1.74

Wisconsin (Partnership Program)

All enrollees (only frail persons may enroll)b 2.39 2.39

Massachusetts (SCO)

Frail dual eligibles (all ages) 2.71 2.42

Nonfrail dual eligibles 65-69 years old 1.01 0.83

Nonfrail dual eligibles 85+ years old 2.11 1.51

New York (CCN)

Frail (all ages)

With mild impairment 1.66 1.66

With moderate impairment 2.81 2.50

With severe impairment 3.57 3.04

Nonfrail dual eligibles 65-69 years old 1.01 0.83

Nonfrail dual eligibles 85+ years old 2.11 1.51
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Page 24 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Wisconsin and Massachusetts

Are Concerned About Adequacy

of Frailty Adjuster for Their

Demonstration Programs

Wisconsin and Massachusetts program officials told us that they are

concerned about the adequacy of the Medicare payments approved for

certain dual eligibles.25 Both states view the agreements reached with

HCFA and OMB on Medicare payments as temporary. In the meantime,

Massachusetts plans to subsidize health plan payments to make up for

what they perceive as a Medicare shortfall.

Wisconsin. Wisconsin’s Partnership Program is unique in that two of the

four sites are enrolling younger, physically disabled dual eligibles. A

Partnership official believes that this group is much more expensive to

serve than frail, elderly dual eligibles. However, the state lacked supporting

data to justify a risk adjuster higher than the 2.39 PACE rate.26 Using data

based on sites’ experience with enrolling this population, the state hopes to

demonstrate to HCFA and OMB that Medicare’s cost of serving younger,

disabled dual eligibles requires a risk adjuster closer to 4.0. A state official

acknowledged the complexity of the task and indicated that the state plans

to collect data over the next 18 months to make its case.

Massachusetts. On the basis of the state’s analysis of merged Medicaid and

Medicare data, Massachusetts concluded that the cost of serving frail dual

eligibles requires a risk adjuster of 4.03. OMB officials told us that they had

serious reservations about the state’s analysis. In particular, they were

skeptical about the high proportion of total expenditures for frail dual

eligibles that the state attributed to Medicare—about 78 percent. In

contrast, national data show that Medicaid and Medicare expenditures for

dual eligibles are about evenly divided between the two programs.

Moreover, Massachusetts analyzed data for the period from July 1, 1994, to

June 30, 1995. Changes mandated by the BBA in 1997 have lowered

Medicare expenditures on home health and thus altered the relative

contribution of Medicare. These changes were not reflected in the older

data analyzed by the state. Massachusetts acknowledged this shortcoming

but noted that post-BBA data were not available.

Another federal concern involved Massachusetts’ inability to account for

variability in the costs of the frail dual eligibles who actually enrolled in the

25Massachusetts accepted the HCFA/OMB offer to use the S/HMO I risk adjuster on an

interim basis.

26PACE enrollees must be 55 years or older, but on average they are 80 years old. Medicare

beneficiaries under age 65 have not been allowed to enroll in S/HMO I but are enrolled in

S/HMO II.
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program. Massachusetts proposed applying the same high-frailty adjuster

to all nursing-home-certifiable dual eligibles, even though research has

shown considerable variation in the costs of such beneficiaries.

Massachusetts officials argued, however, that their program would appeal

primarily to sicker dual eligibles who have the most to gain from bettercoordinated care. The state lacked assessment data on dual eligibles that

would allow differentiation of the relative frailty of those deemed to be

nursing-home-certifiable.

Massachusetts agreed to HCFA and OMB’s proposal to use, on an interim

basis, the S/HMO I risk-adjustment methodology that pays a higher rate

than PACE for the frail elderly.27 However, the state believes that the

S/HMO I risk adjuster still underpays for nursing-home-certifiable dual

eligibles. The state has a strategy for augmenting the Medicare portion of

the capitation payment to health plans that enroll the frail elderly. In

contrast to its original plan to focus enrollment on persons living in the

community, Massachusetts now plans to make a concerted effort to enroll

beneficiaries who are already in nursing homes because research related to

the PACE program has shown that nursing home beneficiaries have lower

Medicare expenditures. Having more nursing home beneficiaries enrolled

will provide funds to subsidize the Medicare cost of nursing-homecertifiable beneficiaries.28

Research Suggests That New

Diagnosis-Based Risk Adjuster

for Medicare Would Underpay

for Frail Dual Eligibles Enrolled

in Specialized Programs

In 1999, the Secretary of Health and Human Services deferred application

of a new diagnosis-based risk adjuster to specialized programs such as

PACE and the Minnesota integrated care demonstration. The new BBAauthorized risk-adjustment system for M+C HMOs, for which phase-in

began in January 2000, initially will use diagnoses from hospital encounter

data to adjust payments (see app. V for details on the implementation

schedule). States have been concerned about the applicability of this

approach to demonstration programs because research has shown that

while the new diagnosis-based risk adjusters improve the overall accuracy

of Medicare payments to health plans, they tend to underestimate the cost

27Massachusetts declined HCFA’s suggestion that the state become a test site for the new

diagnosis-based risk adjusters that are under development for Medicare HMOs.

28As of fiscal year 1999, there were 37,397 dual eligibles in nursing homes in Massachusetts.
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Page 26 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

for plans concentrating on frail beneficiaries.29 Moreover, the

underestimation of the cost increases when the population served is more

functionally limited and thus tends to cost more. MedPAC concurred with

the deferral and further recommended that HHS undertake research to

identify factors influencing the costs of care for frail beneficiaries and

other beneficiaries to determine what changes are needed to improve M+C

claims-based risk adjustment for frail beneficiaries, including an

assessment of data needed to support improvements in M+C riskadjustment systems. Risk adjusters for such special populations need to

account for the potentially greater severity of individual conditions and the

multiplicity of conditions these persons may have. While state concerns

have been temporarily addressed, uncertainty remains, because in

approving the demonstration programs HCFA has explicitly reserved the

right to substitute a “more appropriate” Medicare payment methodology

for the MSHO, Partnership Program, and CCN demonstrations if one is

developed.

Conclusions Despite broader interest, only three states have received approval to

implement integrated care demonstrations for dual eligibles. Currently,

state programs are small in both geographic coverage and enrollment.

Undertaking such demonstration programs requires a strong commitment

on the part of states, given the considerable front-end planning needed

prior to submitting a waiver proposal and the lengthy postapproval efforts

to bring on-line health plans capable of integrating the delivery of acuteand long-term-care services. Some states have expressed concern about

the length of the federal review process, which was prolonged by

negotiations between federal and state officials over the Medicare payment

methodology. Several states are using the PACE risk adjuster, which, after

15 years, still has not been validated, and which does not reflect differences

in the costs of frail beneficiaries. Only one approved state demonstration is

designed to test multiple payment categories that attempt to take into

account the variations in costs of frail dual eligibles. Medicare’s move

toward a new diagnosis-based risk-adjustment methodology raises

concerns for state demonstrations because research has shown that the

methodology tends to underestimate the costs of frail beneficiaries. This

29Gregory C. Pope and others, “Evaluating Alternative Risk Adjusters for Medicare,” Health

Care Financing Review, Vol. 20, No. 2 (Winter 1998), and Leonard Gurenberg and others, An

Examination of the Impact of the Proposed New Medicare Capitation Methods on Programs

for the Frail Elderly (Cambridge, Mass.: Long Term Care Data Institute, Jan. 1999).
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Page 27 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

situation underscores the importance of learning from these four state

demonstrations so that their experience may inform similar initiatives that

other states may be considering.

Agency Comments and

Our Evaluation

Comments on a draft of our report were provided by the Administrator of

HCFA; the Branch Chief, Health Financing Branch, Health Division, OMB;

the Director of Program Development, Massachusetts State Department of

Health; the Director of Minnesota Senior Health Options, Minnesota

Department of Human Services; the Director of the Division of Program

Development and Initiatives, New York State Department of Health; the

Project Manager, Wisconsin Partnership Program; and two academic

experts.

HCFA HCFA agreed with the report’s overall findings and conclusions but

commented on our description of its efforts to identify an appropriate

payment methodology for frail dual eligibles. HCFA stated that it has

engaged in a large body of research in an attempt to find an appropriate

payment methodology. Because recent research has uncovered numerous

problems with the use of “frailty” measures for payment purposes, HCFA

believes that defining a payment methodology for integrated care

demonstrations may require moving beyond the common notion of using

survey-based functional status, or “frailty,” as a risk adjuster. Therefore, it

is seeking to refine the frailty approach or find an alternative riskadjustment methodology for plans that enroll special populations. We agree

that a narrow conceptualization of frailty is unlikely to be sufficient and

that clinical assessments are preferable to survey-based information. In

fact, many states determine frailty by conducting a face-to-face assessment

of an individual’s need for assistance with daily living, not by relying on

surveys or questionnaires. Risk adjusters for such special populations need

to account for the potentially greater severity of individual conditions and

the multiplicity of conditions frail individuals may have. We have revised

the report to more fully portray HCFA’s research efforts and have clarified

the refinements of risk-adjustment methods needed for these populations.

HCFA also acknowledged that difficulties in defining an appropriate

payment methodology significantly contributed to the amount of time

taken for states to obtain program approval. However, HCFA stressed the

importance of the BBA payment changes and noted that they further

complicate negotiations with states. We agree and have highlighted the

BBA changes in the report. At HCFA’s suggestion, we have also expanded
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the discussion on the effect of operational differences between Medicare

and Medicaid programs on the length of the approval process. (HCFA’s

comments are included in app. VIII.)

States and Expert

Reviewers

Minnesota provided extensive comments on the draft report, some of

which were echoed by officials from New York and Massachusetts and our

expert reviewers. Most reviewers believed that the report should have (1)

described in more detail the budget neutrality issues raised by integrated

care demonstrations, (2) placed less emphasis on PACE, (3) discussed

more fully state program objectives, and (4) discussed additional issues

that add to the complexity of implementing these demonstrations. We have

modified the report where appropriate to reflect these comments, and we

further discuss the first two areas in the following paragraphs.

Budget Neutrality Policy Although the states generally recognized that HCFA and OMB contend with

legitimate issues in establishing reimbursement rates for integrated care

demonstrations, they suggested either that the flexibility around these

issues is insufficient or that OMB’s policy needs to be reconsidered.

Massachusetts and Minnesota officials criticized HCFA and OMB’s policy

on Medicare budget neutrality, which requires the use of M+C rates rather

than historical fee-for-service costs as the basis for comparison. States

expressed concerns with both the base rate used to determine

reimbursement rates for the demonstrations and the risk adjusters applied

to those rates.

While acknowledging the link between M+C payment rates and fee-forservice spending prior to the BBA, officials from Massachusetts and

Minnesota nonetheless took issue with the decision to base payments on

M+C rates and argued that historical fee-for-service spending would be a

more appropriate basis for measuring budget neutrality. They noted that

dual-eligible beneficiaries are not typically enrolled in M+C plans because

Medicaid pays their Medicare cost-sharing and gives them access to

medications and other services not covered by Medicare. Similarly, M+C

plans have little incentive to encourage enrollment among frail dual

eligibles because of this population’s relatively high costs, which may not

be fully reflected in current M+C payment policy. OMB, however, used the

M+C base rates and focused the negotiations on what it considered to be

the most important issue—developing appropriate risk adjustors for a

voluntary program designed to appeal to frail beneficiaries.
B-281823

Page 29 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Massachusetts officials stated that the methodology used to compute M+C

rates makes the rates too low for determining budget neutrality. First, they

said that M+C rates are automatically discounted by 5 percent below

estimated fee-for-service costs, in part to adjust for favorable selection in

M+C plans. However, the 5-percent reduction in payments was not

designed to offset favorable selection but rather to capture some of the

projected cost savings from the more efficient provision of care in managed

care plans. OMB officials said that the process of developing risk adjustors

for the Massachusetts demonstration took into consideration the fact that

M+C base rates were discounted to reflect the anticipated efficiencies of

managed care delivery systems. Moreover, favorable selection may be the

result not only of plans’ marketing practices but also of enrollee selfselection, which may still occur in the integrated care setting. Second,

Massachusetts officials stated that a BBA provision (known as blending)

would slow the rate of growth of payments in high-cost areas (such as

Massachusetts) and reduce variation in payments across counties.

However, a slowdown in fee-for-service spending growth has postponed

the implementation of this provision. Thus, only minor blending occurred

in 2000, and no blending will occur in 2001 or as long as fee-for-service

spending growth remains low.

PACE The states and the expert reviewers said that the draft report

overemphasized PACE and overstated its importance as a starting point for

their demonstrations. They concluded that we were suggesting that PACE

should be viewed as an alternative to states’ demonstrations. The report

presents information on PACE to provide important context with respect to

states’ demonstrations—both differences and similarities. States, we noted,

are going beyond the PACE model because it serves only the frail elderly

who meet state criteria for nursing home placement and it relies on adult

day care centers, which some elderly find too restrictive. We stressed that

state demonstrations, unlike PACE, also are serving (1) healthier dual

eligibles and (2) nursing home residents. States believe that the former may

become frail and thus benefit from preventive health care and screening,

while the latter could benefit now from better management of primary care

and acute-care services. Finally, the report points out a similarity between

state and provider-initiated demonstrations—the use of the PACE and

S/HMO precedent to negotiate similar risk adjusters for frail enrollees.

All those commenting on the report also provided technical comments,

which we incorporated when appropriate.
B-281823

Page 30 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

As agreed with your staffs, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days after its

issue date. We will then send copies to the Honorable Donna E. Shalala,

Secretary of Health and Human Services; the Honorable Nancy-Ann Min

DeParle, Administrator of HCFA; appropriate congressional committees;

and others upon request.

If you or your staffs have any questions, please call me at (202) 512-7118 or

Walter Ochinko, Assistant Director, at (202) 512-7157. Other major

contributors to this report include Sally Kaplan, Carmen Rivera-Lowitt,

Susanne Seagrave, and Shari Sitron.

Kathryn G. Allen

Associate Director, Health Financing and

Public Health Issues
Page 31 GAO/HEHS-00-94 State Dual-Eligible Demonstrations
Page 32 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix I

Examples of Advantages States See in Apendxies

Integrated Care for Dual Eligibles ApendxiI

Sources: Minnesota Senior Health Options and the Wisconsin Partnership Program.

Advantage Example

Continuity of care In order for Mary to live in her own home, her daughter

arranged for support services covered by Medicaid. Mary fell

and broke her hip and was in the hospital for 4 days. When she

came home, she needed additional services. For the new

services, Medicare paid instead of Medicaid, so her health

care workers also changed. In an integrated care program,

Mary would have had a care coordinator to help arrange for her

care before, during, and after her hospital stay. Thus, Mary

would have been able to keep the same workers.

Nontraditional benefits Alice, who is 81 and lives in her own home, has severe arthritis

of the spine. The integrated care program coordinator found

that Alice has been sleeping in a recliner for over a year

because she had been unable to lie flat in a bed. Alice was

very uncomfortable in the recliner and was not sleeping well.

The care coordinator ordered a hospital bed, which made a big

difference in Alice’s comfort. She is sleeping better because

she can change her position during the night and her pain has

been lessened.

Interdisciplinary team The interdisciplinary team approach ensures care coordination

across systems that currently operate independently. The team

coordinates all aspects of care and targets points of

intersection, where the health care system traditionally breaks

down, to coordinate transitions between service providers. The

interdisciplinary team knows all aspects of a participant’s care

plan, preventing situations where two or more different

systems prescribe duplicative or contradictory treatments.

Participants’ involvement in decision-making ensures a high

degree of satisfaction.
Page 33 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix II

Descriptions of PACE, S/HMO I and II, and

EverCare Programs ApendxiI

This appendix describes four provider-initiated demonstration programs.

Table 4 compares and contrasts these programs.

PACE In 1983, the Congress directed HHS to approve the necessary waivers for

On Lok Senior Health Services in San Francisco. On Lok originated as an

adult day care center in 1971, but over time it added capacity to integrate

health and social services. The Congress authorized PACE as a

demonstration in 1986 to replicate the delivery system pioneered by On

Lok. An expansion from 10 to 15 PACE sites was approved 4 years later.

The BBA transformed PACE from a demonstration with a fixed number of

sites to a permanent program under Medicare, granting states the option of

offering PACE to their Medicaid enrollees.1 As of April 2000, there were 25

PACE sites serving about 6,000 enrollees, with additional locations, known

as “pre-PACE” sites, participating under Medicaid capitation only.

PACE seeks to maintain the frail elderly in the community. Enrollment is

open to all individuals aged 55 years or older who meet states’ standards

for being at risk of nursing home placement and reside in the area served

by the PACE sites.2 Such individuals are commonly referred to as “frail”

because they have difficulty performing daily activities such as bathing or

dressing and are thus at risk of nursing home placement. In fact, PACE

enrollees require human assistance with an average of three activities

1

HCFA is in the process of issuing implementing regulations to reflect the BBA changes. The

PACE interim final rule, published November 24, 1999, in the Federal Register, does not

specify the frailty factors to be used in determining Medicare and Medicaid payment rates

for PACE sites. The frailty factor used to calculate the Medicare payment rate must be

specified in the PACE agreement. The monthly Medicaid capitation payment amount must

also be specified in the PACE program agreement and take “into account the comparative

frailty of PACE participants.”

2

Though 96 percent of PACE enrollees are dual eligibles, eligibility for both Medicaid and

Medicare is not a participation requirement. States’ assessments of individuals vary

considerably in terms of (1) their nursing home eligibility criteria; (2) whether state

standards require a specific number and types of impairment or rely on the judgment of the

individual responsible for the assessment; and (3) their sophistication, including whether

they document degrees of impairment.
Appendix II

Descriptions of PACE, S/HMO I and II, and

EverCare Programs

Page 34 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

of daily living.3 On average, enrollees are 80 years old. Health and longterm-care services are paid for on a capitated basis and provided primarily

in adult day health centers, participants’ homes, or inpatient facilities as

needed. A multidisciplinary team of physicians, nurses, social workers,

physical and occupational therapists, and others manage enrollee care. In

structure, PACE resembles a small, staff-model HMO, in which doctors are

employees of the health plan. Most of the PACE sites are quite small. While

enrollment ranges from 39 to almost 900, more than one-half of the sites

serve under 200 enrollees and only two serve more than 500.

S/HMO I and II S/HMO I, which has been in operation since 1985, tests a model intended to

integrate acute, chronic and long-term care, and social services provided

through capitated HMOs. All enrollees are entitled to basic Medicare

benefits and expanded benefits (such as prescription drugs and

eyeglasses). In addition, enrollees determined to be at risk of

institutionalization—commonly referred to as nursing-home-certifiable—

under state Medicaid standards are entitled to a long-term-care benefit. The

Congress mandated the second-generation S/HMO II demonstration in

1990. It is similar to the S/HMO I in many ways, but it refines the targeting

of at-risk beneficiaries, financing methods, and benefit design of the S/HMO

model. HCFA chose six organizations to participate, but only one is

currently active. S/HMO II incorporates practices developed by

geriatricians into the operations of the plans, such as comprehensive

geriatric assessments for certain patients, treatment of functional

problems, and an interdisciplinary team approach. Both S/HMO I and

S/HMO II include a case management component that emphasizes

community-based services and coordination of nursing home and nonnursing home care. Enrollment in S/HMO I and S/HMO II as of April 2000

was 81,718.

EverCare EverCare, a subsidiary of United Health Care, began operating in 1993 with

the primary goal of providing better case management for permanent

3

Activities of daily living include bathing, dressing, feeding, toileting, and transferring. On

average, PACE beneficiaries suffer from 7 to 8 major medical diagnoses and exhibit some

degree of cognitive impairment. Over half of enrollees receive human assistance with

walking. Finally, nearly 90 percent require assistance in taking medications, and almost all

enrollees are dependent on assistance for meal preparation, shopping, housework, and

other such activities.
Appendix II

Descriptions of PACE, S/HMO I and II, and

EverCare Programs

Page 35 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

nursing home residents. As of April 2000, EverCare had enrolled 10,725

nursing home residents. Unlike PACE and S/HMO, EverCare does not

expand the Medicare benefit package significantly. EverCare assigns a

physician and geriatric nurse practitioner to nursing home residents to

provide primary care in the nursing home. The program provides these

services to reduce residents’ use of hospital and emergency room care. The

demonstration also is intended to improve the quality of care and health

outcomes and to develop practice guidelines.

Table 4: Comparison of PACE, S/HMO, and EverCare

PACE S/HMO EverCare

Number of sites 25 in 13 statesa 3 S/HMO Ib; 1 S/HMO IIc 6

Approval/enrollment dates

Approved 1983 On Lok; 1986 PACE replication;d

and in 1997, the BBA made PACE a

permanent Medicaid state plan option

1984 S/HMO I; 1990 S/HMO II 1992

Enrollment commenced 1983 On Lok; 1990 for PACE replication

sites

1985 S/HMO I;1996 S/HMO II 1993

Eligible population Frail, elderly persons aged 55 or older

who meet states’ standards for nursing

home placement and reside in the area

served by the PACE organization. PACE

enrollees require human assistance with

an average of 3 activities of daily living.

S/HMO I and II: Individuals over

65 years of age who are entitled

to Medicare part A and part B. In

addition, S/HMO II also enrolls

disabled individuals under age

65.

Permanent nursing home

residents. Enrollees require

assistance with an average

of 4 to 5 activities of daily

living.

Enrollment

Cap Some states establish a maximum

number of enrollees

Cap for all sites: 324,000 None

Current enrollment 6,000 enrolled (as of Dec. 1999) S/HMO I: 46,458; S/HMO II:

35,260 (as of Apr. 2000)

10,725 (as of Apr. 2000)

Health plan characteristics 25 plans. One-third are freestanding,

community-based provider entities. The

balance are health systems, community

health centers, or larger long-term-care

providers. PACE resembles a small, staffmodel HMO, in which interdisciplinary

team members are employees of the

health plan.

Total of 4 HMOs. S/HMO I has 3

plans. S/HMO II has 1 plan

(Health Plan of Nevada).

1 HMO—United

HealthCare
Appendix II

Descriptions of PACE, S/HMO I and II, and

EverCare Programs

Page 36 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

a

The 13 states are Mass. (5); Calif. (4); N.Y. (4); Ohio (2); Wisc. (2); and Colo., Md., Mich., Ore., S.C.,

Tenn., Tex., and Wash. with one site each.

b

The three S/HMO I sites are Medicare Plus II in Portland, Ore.; Elderplan in Brooklyn, N.Y.; and SCAN

Health Plan in Long Beach, Calif.

c

HCFA initially selected 6 sites, but only 1 (in Nevada) is currently active.

d

On Lok, the PACE precursor, was authorized in 1983 and came under full capitation that year. In 1986,

the Congress authorized frail elderly demonstrations to replicate On Lok. These programs became

known as PACE and in essence On Lok became the first PACE site. No additional sites became

operational until 1990.

Sources: PACE, MedPAC, and HCFA officials.

Unique features Program generally requires that enrollees

attend the adult day health center and use

only the plan’s providers. The BBA made

PACE a permanent program under

Medicare, giving states the option of

offering PACE to their Medicaid enrollees

by amending their state Medicaid plans

and gradually expanding the authorized

number of PACE sites.

S/HMO I offers basic Medicare,

expanded benefits (such as

prescription drugs and

eyeglasses), and communitybased long-term care. The latter

is only available to nursinghome-certifiable enrollees.

S/HMO II plans incorporate

practices developed by

geriatricians into the operations

of the plans, such as

comprehensive geriatric

assessments for certain patients,

treatment of functional problems,

and an interdisciplinary team

approach.

Physician and nurse

practitioners assigned to

provide primary care in

nursing homes to reduce

use of hospital and

emergency room care.

Providers supply geriatric

services, coordinate care,

communicate with families,

and oversee hospital care.

Program does not cover

prescription drugs or longterm nursing home care,

but uses capitation

payment that is sometimes

increased above Medicare

amounts to encourage

physician visits.

Waivers

Medicaid Section 1115 Section 222 Section 222

Medicare Section 222

PACE S/HMO EverCare
Page 37 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix III

Concepts Being Tested by States’ Integrated

Care Demonstrations for Dual Eligibles ApendxiI

HCFA summarized the key concepts being tested by state integrated care

demonstrations as follows.

Minnesota: Minnesota Senior Health Options (MSHO), approved April 1995:

• How is care delivered to dual-eligible beneficiaries through the

integration of Medicare and Medicaid administrative requirements and

processes as administered by the state? How are managed care

organizations, the state, HCFA, and beneficiaries affected?

• How well do complex network arrangements deliver integrated

Medicare and Medicaid services and care coordination to dual-eligible

beneficiaries, including frail elderly community-dwelling and

institutionalized members?

Wisconsin: Wisconsin Partnership Program, approved October 1998:

• How does the independent practice model of Partnership compare with

the PACE model with respect to utilization, costs, and outcomes of

care?

• How successful is the Partnership model for serving people with

physical disabilities?

• How successful is the Partnership model as a model for rural health care

delivery for elderly and physically disabled people?

New York: Continuing Care Networks (CCN), approved September 1999:

• How well does a functionally based payment model predict the costs of

services for beneficiaries?

• How effective is the CCN model in integrating services for frail elderly

beneficiaries in the context of overall plan enrollment of both Medicareonly and dual-eligible members, who may or may not be frail?

• How effective are innovative service delivery care management

strategies that involve a combination of private and public financing for

community long-term-care benefits?

• How effective are provider-based networks at delivering integrated care

for Medicare and dual-eligible beneficiaries?

Massachusetts: MassHealth Senior Care Options Demonstration (SCO),

awaiting final approval as of June 2000:

• Can states and HCFA evolve a more efficient administrative capability

for implementing a demonstration?
Appendix III

Concepts Being Tested by States’ Integrated

Care Demonstrations for Dual Eligibles

Page 38 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

• In two phases of financing, how will risk-adjusted payment systems be

implemented and will these systems lead to improvement in predicting

the costs of frail elderly beneficiaries?

• Will these changes benefit plans by making their costs more predictable

and help beneficiaries by reducing the temptation of plans to avoid

enrolling sicker, higher-cost beneficiaries?

• Does a coordinated enrollment process through an enrollment broker

enhance consumer choice and understanding of the program?

• How effective are SCO models that emphasize geriatric expertise in

both care planning and service delivery? How effective is the use of

social and community support services in avoiding inappropriate

nursing home placement of beneficiaries? Do innovative coordinatedcare models result in the delivery of better, more cost-effective care?

• What efficiencies in program administration were gained from the

competitive selection of contractors and 3-way contracts between SCO

and federal and state governments?
Page 39 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix IV

Description of Medicaid Integrated Care

Programs in Texas, Florida, and Colorado ApendxiIV

This appendix describes three state programs that integrate health care

financing and delivery for Medicaid services only. These states originally

attempted to integrate Medicare and Medicaid acute- and long-term-care

services, but for various reasons changed their initial plans.

Texas’ Star+Plus

Program (Operational)

In 1995, the state legislature required the Texas Health and Human Services

Commission to pilot a cost-neutral model for the integrated delivery of

acute- and long-term-care services for aged and disabled Medicaid

recipients. Program officials originally planned on a fully integrated,

mandatory program but then learned that an integrated care program

cannot be mandated on the Medicare side. In addition, officials began to

understand how complicated and time-consuming the process would be.

Eventually, a combination 1915(b) and 1915(c) waiver, which mandated

participation and capitated acute- and long-term-care services on the

Medicaid side, was approved in January 1998.1

The targeted population is almost 60,000 aged and disabled Medicaid

recipients in Harris County, Texas (Houston area). Provision of services

began when the federal government approved waivers in January 1998, and

enrollment became mandatory for Medicaid recipients in April 1998. As of

December 1999, there were 54,873 enrollees—about half of whom were

dual eligibles. An enhanced prescription drug benefit is available to dual

eligibles who choose the same HMO for both Medicare and Medicaid

services. Otherwise, coverage is limited to three prescriptions per month.

As a result of limited marketing, only 300 enrollees had opted for this

incentive. All enrollees have a choice of three HMOs, one of which also

enrolls Medicare beneficiaries.

Florida’s Long-TermCare Community

Diversion Pilot Project

(Operational)

Florida submitted a waiver application to HCFA in November 1996 for its

Long-Term-Care Community Diversion Pilot Project. The state originally

wanted both a section 1115 Medicaid waiver and a section 222 Medicare

waiver, but after discussions with HCFA, Florida decided not to integrate

Medicare with Medicaid services because of the time it had taken other

states to negotiate and obtain such waivers. Instead, the state chose to use

1

Under section 1915(b), a state can mandate enrollment in a managed care plan. The 1915(c)

waiver was required to allow Texas to incorporate services provided under its 1994 home

and community-based services waiver.
Appendix IV

Description of Medicaid Integrated Care

Programs in Texas, Florida, and Colorado

Page 40 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

a 1915(c) waiver that allows HMOs to be paid a capitated rate for nursing

home and community-based services. The waiver was approved in March

1997.

The project now operates in the Orlando area with one HMO and in the

Palm Beach area with two HMOs. Participants must be 65 years or older,

meet Medicaid financial eligibility requirements, be nursing home

certifiable, meet special clinical eligibility criteria, and be eligible for

Medicare benefits. As of June 2000, enrollment in the Orlando area was 375

and in the Palm Beach area 325. All of the enrollees are dual eligibles.

Colorado’s Integrated

Care and Financing

Project (Not

Operational)

Rocky Mountain HMO approached Colorado about integrating acute- and

long-term-care services in 1994—at the same time the state also began

considering a similar initiative. Unlike most HMOs that are paid a capitated

rate prospectively, Rocky Mountain is a cost-based Medicare HMO whose

payments are settled after the fact. Rocky Mountain had a prominent share

of the Mesa County market, including enrollment of more than half of the

dual-eligible residents. As of March 20, 1999, there were 2,090 dual eligibles

in Mesa County, 1,111 of which were enrolled in Rocky Mountain HMO. The

state and Rocky Mountain HMO had estimated enrolling 7,720 Medicaidonly and dual-eligible beneficiaries in Mesa County.

The Integrated Care and Financing Project anticipated using a section 1115

Medicaid waiver and a section 222 Medicare waiver. Although financing

issues were still being worked out, the state received HCFA approval on

July 1, 1997. After approval, negotiations continued on a Medicare

reimbursement methodology. Ultimately, however, HCFA and Colorado

were unable to reach agreement. As a result, the state dropped the

Medicare aspect of its project and focused on the integration of Medicaid

acute- and long-term-care services using a section 1115 waiver.

HCFA approved Colorado’s 1115 waiver in October 1999.2 About a month

later, Rocky Mountain announced its withdrawal from the integrated care

program because of disagreements with the state over its Medicaid

2

A factor that delayed approval of the Colorado program in 1999 was the need to address

new mandatory criteria for including children with special needs in its waiver.
Appendix IV

Description of Medicaid Integrated Care

Programs in Texas, Florida, and Colorado

Page 41 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

contract. Colorado now plans to establish an integrated care program in

Denver without the use of Medicare and Medicaid waivers/authorities.
Page 42 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix V

BBA Changes to Medicare HMO Payment

Methodology ApendxiV

Before the BBA changed the rate-setting process for fiscal year 1998, the

monthly amount Medicare paid plans for each plan member was tied

directly to local spending in the fee-for-service program. In general terms,

the pre-BBA rate-setting methodology worked as follows. Every year,

HCFA estimated how much it would spend in each county to serve the

“average” fee-for-service beneficiary. It would then discount that amount by

5 percent under the assumption that HMOs provided care more efficiently

than the unmanaged fee-for-service program. 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; disability

status; and residence in an institution, such as a skilled nursing facility.1

The BBA substantially changed the method used to set the payment rates

for Medicare HMOs. As of January 1, 1998, plan payment rates for each

county are based on the highest rate resulting from three alternative

methodologies: a minimum amount ($379.84 in 1999); a minimum increase

over the previous year’s payment rate (equal to 2 percent); or a blend of

historical fee-for-service spending in a county and national average costs,

adjusted for local price levels.2 The changes were intended to address

criticisms of the preceding payment system by loosening the link between

local fee-for-service spending increases and plan payment rate increases in

each county. The blending provision, in particular, will eventually move all

rates closer to a national average by providing for larger payment increases

in low-rate counties and smaller payment increases in high-rate counties. In

addition, the establishment of a minimum payment rate was meant to

encourage plans to offer services in areas that historically have had low

payment rates and few participating plans—primarily rural counties.

1

Separate rates are calculated for (1) beneficiaries who qualify for Medicare because of a

disability (under age 65) and (2) the elderly. Separate rates are also set for beneficiaries with

end-stage renal disease (kidney failure).

2

Because of low growth in Medicare spending, and BBA’s limit on aggregate health plan

payments and minimum payment requirements, no county received a blended rate in 1998

or 1999. According to HCFA actuaries, the blending provision could not be funded because

the BBA’s minimum payment requirements resulted in total plan spending that exceeded the

BBA’s required limit on total health plan payments by $95 million in 1998 and $80 million in

1999. Blending occurred for the first time in 2000.
Appendix V

BBA Changes to Medicare HMO Payment

Methodology

Page 43 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

The BBA also directed the Secretary of Health and Human Services to

develop and implement a better risk-adjustment method to adjust plan

payments, beginning January 1, 2000. The interim health-based riskadjustment methodology, based on the Principal In-Patient-Diagnostic Cost

Group model, uses only hospital inpatient data to gauge beneficiary health

status. Under this system, payments are still adjusted as well for

beneficiary age, sex, original reason for Medicare eligibility (such as

disability), and Medicaid enrollment. The adjustment for beneficiary

residence in an institution has been eliminated from the methodology.

HCFA proposes to phase in the new interim risk adjustment system slowly.

In 2000 and 2001, only 10 percent of health plans’ payments will be based

on the new system. This percentage is scheduled to increase to no more

than 20 percent in 2002 and is unspecified after this year.3 Eventually, HCFA

intends to implement a more accurate risk adjuster that uses medical data

from additional health care settings and providers, such as physician

offices and hospital outpatient departments.

3

This revised phase-in schedule is outlined in the Medicare, Medicaid, and State Children’s

Health Insurance Program Adjustment Act of 1999.
Page 44 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix VI

GAO Methodology for Combining Part A and

Part B Risk Adjusters ApendxiVI

To make it easier to compare risk adjusters across programs, we combined

separate part A and part B factors where applicable. Only the risk adjuster

for the PACE program uses a single factor. The following formula shows

our methodology for computing the single factors. Table 5 contains the

actual part A and part B factors.

For example, the 1999 part A rate for Hennepin, Minnesota, was $242.11

and the part B rate was $179.90. The risk adjuster reported in table 3 for

nonfrail dual-eligible males 65 to 69 years old is given by the following:

Table 5: 1999 Risk Adjusters for Programs Serving Dual Eligibles

Male Female

Part A Part B Part A Part B

M+C HMOs

Frail and nonfrail dual eligibles 65-69 years old 1.15 1.1 0.8 1.05

Frail and nonfrail dual eligibles 85+ years old 2.6 1.7 2.1 1.25

PACE

All enrollees (only frail persons living in the community may

enroll) 2.39 2.39 2.39 2.39

Minnesota (MSHO)

Frail dual eligibles (all ages) 2.39 2.39 2.39 2.39

Nonfrail dual eligibles 65-69 years old 1.15 1.1 0.8 1.05

Nonfrail dual eligibles 85+ years old 2.6 1.7 2.1 1.25

Wisconsin (Partnership Program)

All enrollees (only frail persons may enroll) 2.39 2.39 2.39 2.39
Appendix VI

GAO Methodology for Combining Part A and

Part B Risk Adjusters

Page 45 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Massachusetts (SCO)

Frail dual eligibles (all ages) 2.88 2.49 2.88 1.79

Nonfrail dual eligibles 65-69 years old 1.02 0.99 0.69 1.01

Nonfrail dual eligibles 85+ years old 2.54 1.54 1.84 1.07

New York (CCN)

Frail (all ages)

With mild impairment 1.75 1.53 1.75 1.55

With moderate impairment 2.98 2.57 2.98 1.86

With severe impairment 3.82 3.23 3.82 1.98

Nonfrail dual eligibles 65-69 years old 1.02 0.99 0.69 1.01

Nonfrail dual eligibles 85+ years old 2.54 1.54 1.84 1.07

Male Female

Part A Part B Part A Part B
Page 46 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix VII

Comparison of Medicare Payments Under

M+C, PACE, and State Demonstration

Programs ApendxiVI

To illustrate how different risk adjusters affect payments under various

demonstrations, table 6 compares the Medicare payments under M+C,

PACE, and state demonstration programs for a hypothetical frail dualeligible enrollee living in the community. M+C HMOs are paid based on the

average cost of all dual eligibles—both healthier and frail. Thus, their

payments for frail dual-eligible enrollees are lower than payments based on

separate risk adjusters for frail-only dual eligibles. In addition, table 6

reflects differences in the base payment rates due to differences in local

health care costs.

Table 6: Payments Under M+C, PACE, and State Demonstrations That Serve Frail

Dual Eligibles Living in the Community, for a 75-Year-Old Female Residing in Each

Location in Calendar Year 1999

Source: GAO analysis, based on HCFA’s M+C rate data and interviews with states’ officials.

Program Monthly payment

Minnesota (Hennepin County)

M+C HMOs $575.93

PACE 1,008.60

MSHO 1,008.60

Wisconsin (Dane County)

M+C HMOs 526.86

PACE 922.66

Partnership Program 922.66

New York (Monroe County)

M+C HMOs 584.93

PACE 1,024.35

CCN

Low impairment 713.51

Medium impairment 1,072.59

High impairment 1,301.07

Massachusetts (Suffolk County)

M+C HMOs 904.88

PACE 1,584.67

S/HMO I 1,681.54

SCO 1,601.47
Page 47 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

Appendix VIII

Comments From the Health Care Financing

Administration ApendxiVI
Appendix VIII

Comments From the Health Care Financing

Administration

(101785) Letr Page 48 GAO/HEHS-00-94 State Dual-Eligible Demonstrations

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