U.S. GOVERNMENT PRINTING OFFICE

55–155CC WASHINGTON : 1999

MEDICARE+CHOICE: AN EXAMINATION OF THE

RISK ADJUSTER

HEARING

BEFORE THE

SUBCOMMITTEE ON

HEALTH AND ENVIRONMENT

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

FEBRUARY 25, 1999

Serial No. 106–10

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT

MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

Vice Chairman

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

BART STUPAK, Michigan

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Archer, Diane, Executive Director, Medicare Rights Center ........................ 67

Bertko, John, Principal, Reden & Anders, Ltd .............................................. 98

Discenza, Judith A., Vice President, Blue Cross and Blue Shield of Florida ................................................................................................................... 79

Hash, Michael, Deputy Administrator, Health Care Financing Administration ............................................................................................................ 7

Johnson, Kirk, Senior Vice President, CNA Health Partners ...................... 102

Margulis, Heidi, Vice President, Government Affairs, Humana, Inc ........... 89

Miller, Ann, Member, AARP Board of Directors ............................................ 61

Scanlon, William J., Director, Health Financing and Public Health Issues,

Health, Education, and Human Services Division, General Accounting

Office .............................................................................................................. 42

Schub, Craig, President, Secure Horizons USA ............................................. 84

Wegner, Nona Bear, Senior Vice President, The Seniors Coalition ............. 70

Wilensky, Gail R., Chair, Medicare Payment Advisory Commission ........... 35

(III)

(1)

MEDICARE+CHOICE: AN EXAMINATION OF

THE RISK ADJUSTER

THURSDAY, FEBRUARY 25, 1999

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2322, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Stearns, Deal,

Bilbray, Whitfield, Coburn, Lazio, Shadegg, Pickering, Bryant,

Brown, Waxman, Green, Strickland, Barrett, and Eshoo.

Staff present: Tom Giles, majority counsel; Dan Boston, majority

professional staff; Jason Lee, majority professional staff; Penn

Crawford, legislative clerk; Bridgette Taylor, minority counsel; and

Amy Droskoski, minority professional staff.

Mr. BILIRAKIS. The hearing will come to order. Good morning.

In the Balanced Budget Act of 1997, the Congress created the

Medicare+Choice Program to provide Medicare beneficiaries with

new choices of private health care plans. I supported those efforts

because I believe that all seniors should be given the right to

choose their own health coverage. Medicare+Choice offers new private health plan options to Medicare beneficiaries.

Seniors, as we know, may still select existing Medicare fee-forservice or they may now choose a Medicare+Choice health plan. In

addition, a new payment method for health plans participating in

the Medicare+Choice Plan was created by HCFA. This new payment methodology will be the focus of today’s hearing. Prior to

BBA 97, payments to Medicare managed care plans were based on

the adjusted average per capita cost which we fondly always refer

to as the AAPCC.

This was a monthly payment to Medicare risk HMO’s that considered the cost of providing services to Medicare beneficiaries

through the traditional Medicare program. However, HCFA and

others were concerned that the AAPCC was an inaccurate representation of the true cost for HMO enrollees. Most studies indicate that healthier Medicare beneficiaries enroll in risk plans leading many to conclude that HMO’s participating in the Medicare

Program were receiving excessive AAPCC payments. Due to these

valid concerns, BBA 97 mandated that HCFA implement a model

which considered beneficiary health status when determining payment.

2

On January 15, 1995, HCFA announced the details of this new

payment model, better known as a risk adjuster. The HHS Secretary is required to implement this risk adjustment methodology

by January 1, 2000. In general terms, the risk adjustment considers a person’s diagnosis in 1 year and predicts additional costs

that the person will incur the following year. For example, an individual who has appendicitis 1 year, is not expected to have higher

than average health costs the following year.

Therefore, such an encounter is not taken into consideration by

the risk adjustment model. However, if someone has a stroke,

above-average costs are predicted an a plan would receive a larger

payment to cover the additional health care costs of this stroke patient. Currently Medicare pays health plans a fixed monthly payment for each beneficiary based largely on the fee-for-service, Medicare reimbursement for each county in the United States.

Risk adjustment adds diagnostic information to the payment calculation and significantly improves, we think, the accuracy of predicting expected costs. So overall this new system allows the market place to create new private health care options and provides

beneficiaries with the information they need to make informed

choices. For many, Medicare HMO’s cover their deductibles, co-payments and other cost sharing, thus eliminating the need to purchase expensive Medigap insurance.

Most HMO’s also provide beneficiaries, as we know, with extra

benefits such as pharmaceutical drugs, eyeglasses, etcetera. The

number of Medicare beneficiaries who enroll in HMO’s has grown

substantially with approximately 6.5 million enrollees in 1997.

With the establishment of the Medicare+Choice Program this number is expected to grow even higher. I am pleased that the Administration has chosen to phase in the risk adjuster methodology in

order to minimize any negative consequences to the plans.

Or even more important, to our Nation’s seniors. Similarly, I am

also pleased that HCFA has been flexible with health plans on

many of the new BBA 97 compliance standards. For instance,

HCFA’s willingness to move the ACR date for this year from May

1, to July 1, was beneficial to both the plans and the beneficiaries.

However, there are still many questions that must be addressed on

HCFA’s development of this new payment methodology. And of

course we all are particularly interested in the real world impact

on seniors and their health plans.

Over the past few months, a significant number of health plans

have terminated our contracts with Medicare, upsetting the lives of

more than 300,000 beneficiaries. In my home State of Florida,

nearly 60,000 seniors have been impacted in more than 25 separate

counties. I am deeply concerned about this matter, I think we all

are. And want to work with HCFA, fellow Members of Congress

and the health plans on a viable solution. And of course holding

this hearing is the first step toward resolving this serious problem,

we trust.

Over the next several months it will be critical for Congress,

HCFA, beneficiaries and private plans to work together in a cooperative manner to make the Medicare+Choice Program work. Now

having said this, I am sure the whole country knows by now that

there is a bi-partisan Medicare Commission which may or may not

3

come up with a proposed solution to the long term care financing

problems of Medicare. I am not sure whether I can say I am optimistic or pessimistic at this point.

A few days ago I was more optimistic than I am today. But I suppose that no matter what we might ultimately come up with if do,

and certainly this Congress has to. If the Commission does not. In

all probability the risk adjustment process will probably, will still

be the one that will be in effect and I am sure that Mr. Hash will

expand upon that. So I do want to conclude by welcoming our first

witness, Mike Hash, the Deputy HCFA Administrator. Mike has

testified before us before, but more importantly, I think he has provided distinguish service to this subcommittee for a number years

on the issues of Medicare and health care reform.

And Michael, we look forward to your testimony. I know that

your knowledge of the Medicare program will clarify the issues behind this complex risk adjustment model. Let us hear now, the

ranking member and my very good friend, Mr. Brown.

Mr. BROWN. Thank you, Mr. Chairman. Thank you for arranging

today’s hearing on risk adjustment. I would also like to thank Mike

Hash, Bill Scanlon and the many other distinguished witnesses

who have joined us today. Risk adjustment in Medicare is not an

option, it is a necessity. Effective risk adjustment means more equitable payment across Choice+ Plans and the right distribution of

payments between Choice+ and traditional Medicare.

The ultimate beneficiary is the Medicare enrollee. Proper risk adjustment promotes the right level of care for enrollees with different health needs. Just as proper risk adjustment strengthens

the link between payments and costs, a risk adjustment mechanism that poorly predicts actual costs, weakens that link. Our discussion today will, I hope, shed light on the effectiveness of the proposed risk adjustment methodology, so that we can move forward

toward a better calibrated payment system.

Risk adjustment is a quality issue, an equity issue and a fiscal

issue. I am glad we will look more closely at that topic today.

Thank you.

Mr. BILIRAKIS. And I thank the gentleman. Mr. Whitfield.

Mr. WHITFIELD. First, Mr. Chairman, thank you very much. All

of us are quite anxious about this hearing today. It is obviously a

very important subject. I have always been amazed at HCFA because it has been my experience as a layman that everything that

HCFA does, and I don’t mean to be critical, seems to be pretty archaic and byzantine to me. So when they come up with these new

formulas, it is always quite enlightening.

And we recognize the importance of the risk adjusters because

we want to provide incentives for plans to enroll the sickest patients and not disenroll them. So I think all of us are looking forward to the testimony that will be provided today and I yield back

the balance of my time.

Mr. BILIRAKIS. And I thank the gentleman. Mr. Bryant, opening

statement.

Mr. BRYANT. Thank you Mr. Chairman. My fellow members of

the committee, good morning. I do want to welcome our guests and

thank the witnesses who are appearing before us today. I appreciate you taking your time to be with us and certainly look forward

4

to hearing your testimony this morning. I am not alone in thinking

that Medicare is one of the most important issues Congress will

face this year.

We do owe to the millions of American seniors who depend on

Medicare for health care expense, to make sure the program is solvent in the future and that it serves them well. We can all agree

that protecting the financial stability is crucial. However, in addition to stabilizing the cost of Medicare, I believe it is also important to examine the effects, the changes Congress made in the Balanced Budget Act are having.

We must also examine the effects of HCFA’s implementation of

those changes and effects that it will have on private health plans

participating in the Medicare+Choice. I want to be sure that the

seniors in Tennessee and across America have choices when it

comes to health care coverage. Now having said that, I have come

to the hearing today with an open mind. I look forward to hearing

the different parties represented here today and what you have to

say with regard to Medicare+Choice risk adjuster. Thank you

again, Mr. Chairman, and I yield back.

Mr. BILIRAKIS. I thank the gentleman. The gentleman from Ohio,

I know you are just barely catching your breath, but you are more

than welcome to make an opening statement.

Mr. STRICKLAND. Thank you. Thank you, Mr. Chairman. Recently Mr. Hash, there was a headline in the Dayton, Ohio paper

that read, Seniors Ill Over Anthem Exit. Company losses are forcing it out of the HMO market in some counties. The article goes

on to describe the story of a senior, Dodie Armstrong, who received

her cancellation notice before her health care coverage membership

even took effect.

Ms. Armstrong had gone to a meeting in April of last year to

learn about Senior Advantage, the health maintenance organization that Anthem Blue Cross and Blue Shield was marketing aggressively to Medicare beneficiaries. The speaker at this meeting

did not mention that Anthem had asked for Federal approval to

withdraw Senior Advantage from Ms. Armstrong’s community, yet

they were still promotion their health care plan.

Even more troubling this incident was not an isolated one that

was happening to seniors across the country. In my rural Ohio district, the median annual income for individuals over age 65 is

$19,096. Given the high out-of-pocket health care costs born by senior citizens with chronic health problems, even with Medicare coverage, the HMO option is attractive to many southern Ohioans because it is affordable. These people simply cannot afford to incur

additional costs of $1,000 to $2,000 a year in health care cost because their primary health care plan decides they are no longer a

profitable market sector.

As we all know, the Balanced Budget Act of 1997, implements

the risk adjustment formula to address the adverse selection issue.

While many people have shown concerns over the quality of daily

use to determine the formula and the actual short and long term

implications of this approach, I believe risk adjusters begin to address a serious matter that needs to be resolved quickly. If I can

just share one observation. A physician in Ohio has recently exVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00007 Fmt 6633 Sfmt 6633 X:\HSECOM\55155 txed01 PsN: txed01
5

pressed concern that his older patients are extremely upset about

the availability or lack of it, of affordable health care.

He believes that as a result of this uncertainty, he will begin to

see more seniors with anxiety, depression, chest pains and other

problems triggered by stress. Even for those seniors who can still

manage to cover their health care costs without the HMO, the

money spent on health care takes away from money otherwise

budgeted for groceries, electricity and rent. For a vulnerable population stress, which has a very significant influence on overall

health, could become a life-threatening matter. The time is right

for us to pursue options that make it more likely that managed

care entities will not only make but will honor commitments to the

most vulnerable among us.

I am eager to work toward redirecting the focus of HMO’s away

from profit motives and toward the focus of providing quality, affordable health care to everyone. And I believe that risk adjusters

just may be the first step that will enable them to do so. Having

said that, I look forward to hearing from you. Thank you.

Mr. BILIRAKIS. The gentleman from Texas, Mr. Green, for an

opening statement.

Mr. GREEN. Thank you, Mr. Chairman. And I want to thank you

for calling the hearing this morning because this is the first hearing this session on what I consider one of the more important

issues. Not in Medicare, the global issue, but also in

Medicare+Choice it was created to give more options and more

beneficiaries more health care options. Particularly many seniors

chose Medicare HMO’s because of the additional benefits, especially

the prescription drug benefit.

In a recent survey of drug costs in my own district showed that

seniors without any prescription drug benefit were paying almost

double what HMO’s and other preferred customers pay. Unfortunately the Medicare+Choice Program seems to be, at best, falling

well short of our goals. Hundreds of thousands of seniors live in

areas that are not served by HMO’s and many more were dropped

from their HMO when they decided, when it was decided Medicare

simply wasn’t profitable enough to continue covering those seniors.

Of course that statement lies in direct contrast to what a recent

GAO Report says that the Medicare HMO on the average are still

being paid, being overpaid because they typically recruit and serve

healthier seniors. And that is why a full implementation of the risk

care adjuster is important. It is the only way to make sure that

HMO’s are paid for what they do and who they serve. If a specific

HMO wants to only cover healthy patients, then they should only

be paid as much as that HMO, as an HMO that is willing to provide to care to sicker patients.

However, the recent withdrawal of so many HMO’s from the

Medicare Program raises legitimate questions on whether these

HMO’s are being overpaid by Medicare or if in their minds they are

not just being overpaid enough. I look forward to hearing from our

distinguished witnesses today and I thank you for being here. Mr.

Chairman, I yield back my time.

Mr. BILIRAKIS. Mr. Waxman, no opening statement?

Mr. WAXMAN. I will pass.

[Additional statements submitted for the record follow:]

6

PREPARED STATEMENT OF HON. JOHN SHADEGG, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF ARIZONA

Mr. Chairman, I commend you for holding this hearing. Medicare+Choice is a program which is significant to many of the people who are over-65 and reside in and

around my district, Phoenix. Changes which are made to this program, be they to

beneficiaries directly or to plans and their operations, are important to my constituents. Given the expectation that the number of people in Arizona aged 65 and over

will grow by 34% between 1998 and 2010, effects of changes to the Medicare+Choice

program are particularly significant.

Let me restate the importance of the Medicare+Choice program in Arizona: Arizona has 10 Medicare HMOs, and Medicare enrollment in these ‘‘risk HMOs’’ as a

percentage of total beneficiaries is 39%. This is almost three times the national average of 15%. Changes to this program affects nearly a quarter-million people in Arizona.

For the past few years, a great deal of attention has been given to the need to

reform Medicare, improving its solvency and making it operate in a more efficient

manner. While the President has proposed setting aside 15% of surplus to ‘‘save’’

Medicare, I am skeptical of his ideas. Also, we need to think and act in a way to

make Medicare run in a more efficient manner. And, we have done that, in the Balanced Budget Act of 1997 with the proposal to more properly risk adjust payments

to Medicare HMOs.

It is for this reason that I support the concept which passed in the Balanced

Budget Act of 1997—to find a better methodology for the payment of Medicare

HMOs and prevent overpayment of these companies relative to the risk and expenses incurred by enrollees using their services. We need to find ways to improve

incentives for plans to provide high quality health care services, but also to seek

out ever greater cost savings to be passed on to Medicare, and ultimately, taxpayers.

Let me also say that I support other proposals to improve the efficiency of Medicare. Phoenix has recently been chosen as a test site for the Competitive Pricing

Demonstration Project, to improve the setting of Medicare+Choice reimbursement

rates.

I commend HCFA for phasing in these changes over a 5 year period and recognize

that Congress may have tied HCFA’s hands with respect to only collecting hospital

encounter data for use in this program. However, I have significant concerns about

the implementation of the methodology which HCFA has recently proposed. In its

proposal, HCFA has chosen a route which only uses outpatient encounter data in

the fifth and final year of the transition period, rather than phasing it in sooner,

not later.

I want to highlight how this program may impact non-hospital programs such as

long term care facilities and other providers that focus on keeping the elderly out

of hospitals. EverCare is a skilled nursing facility which presently operates a successful demonstration program nationally, which includes sites in Phoenix. As a result of using only hospital encounter data and not phasing in the use of outpatient

data, EverCare may face the prospect of closing down its facilities after 2000. Under

Medicare+Choice rules, also, if EverCare closes its facilities, it will not be able to

re-enter a market for 5 years. Certainly, having companies like EverCare leave the

Medicare+Choice program and forcing its residents to look elsewhere will be an outcome that benefits no one.

During this hearing I look forward to hearing from HCFA and its plans to improve the transition to the risk adjustment methodology, especially from 2000 to

2001 How will it begin to use outpatient data? I also look forward to hearing from

the health plans and beneficiaries who will be affected by this program.

Thank you and I yield back the balance of my time.

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you, Mr. Chairman.

I am pleased that the Health and Environment Subcommittee is holding this

hearing today. The Medicare+Choice program stands as one of Congress’ most significant achievements.

Prior to the Balanced Budget Act of 1997, America’s seniors were faced with an

ailing Medicare program. Just as troubling, Medicare was a program that offered

its beneficiaries little freedom to obtain truly responsive and effective coverage.

The Medicare+Choice program changed all that. The explicit intent of this program is to give seniors access to more choices than ever before, so that they can

get better coverage than ever before.

7

That is why it is so vitally important that Congress ensure that the risk adjustment model developed by HCFA for the Medicare+Choice program meets not only

the letter of the law, but also the spirit in which Congress intended these changes

in plan payments. I am pleased that the Administration has chosen to phase-in this

new payment methodology to minimize any potential negative consequences to the

plans.

Similarly, I am also pleased that HCFA is showing greater flexibility in helping

plans meet many of the new BBA ’97 compliance standards. For instance, their willingness to move the ACR date for this year from May 1 to July 1, is good for both

the plans and the beneficiaries.

As we will hear today, early efforts by HCFA to write Medicare+Choice regulations have been widely viewed as too onerous and prescriptive. Last Fall, a number

of insurance providers dropped out of the market. We cannot let this pattern repeat

itself.

I am pleased that the Agency is taking steps to rewrite portions of these regulations. And I would encourage them to continue doing so.

This Committee takes a dim view of regulations that exceed their statutory basis.

That is why I hope we will continue this series of formal inquiries by this Committee into this important program and its implementation.

Again, Mr. Chairman, thank you for convening this hearing today.

Mr. BILIRAKIS. Thank you, I would appreciate that. The opening

statements, of course, of all members of the subcommittee are,

without objection, made a part of the record. Mr. Hash, I am going

to set the clock for 10 minutes. Obviously your written statements

are part of the record, please share your knowledge with us.

STATEMENT OF MICHAEL HASH, DEPUTY ADMINISTRATOR,

HEALTH CARE FINANCING ADMINISTRATION

Mr. HASH. Thank you, Mr. Chairman. Congressman Brown, distinguished members of the subcommittee, I want to thank you for

this opportunity to come and discuss our efforts to pay

Medicare+Choice Plans accurately and fairly. The Balanced Budget

Act, as has been pointed out here this morning, requires Medicare

risk adjust payments starting January 1, 2000. That means we

must base our payments to plans on the health status of their enrollees.

We believe this is a vast improvement over the current payment

method. Risk adjustment will increase payment to plans for their

sickest enrollees, and thus curtail what many have perceived as

the disincentives to enroll these beneficiaries. It will also lower

payments for healthier enrollees of managed care plans. Risk adjustment is an essential component of the Medicare+Choice Program.

We want to thank, at the outset here, the health plans who are

contracting with Medicare, for their cooperation in providing the

data that is essential and needed for this important advancement

in payment policy. And we want to continue working with plans to

resolve any remaining data issues. The law requires us to begin

risk adjustment, as I said, on January 1, 2000. However, we believe

we must proceed in an incremental and prudent fashion.

So we have decided to phase in the risk adjustment over a 5-year

period to prevent disruptions to beneficiaries or to the

Medicare+Choice Program and health care plans. In the first year,

only 10 percent of the payment to health plans will be based on

this new risk adjustment. First we must base the risk adjustment

on in-patient data alone, that is where we are starting. But by

2004, we will be using data on all health care encounters including

8

out-patient services, physician office visits and so forth to implement a comprehensive risk adjustment.

Later this year we will be issuing a schedule for health plans and

the methods for reporting this wider base of encounter data that

I referred to. If we could base risk adjustment on more comprehensive health care data now, we would. But that cannot be done at

this time. But even with that limitation, we believe that risk adjustment, based on in-patient data alone, will increases the accuracy of our payments to Medicare+Choice Plans by five-fold.

Plans themselves have raised concerns about risk adjustment

based on in-patient data alone, suggesting that it could create perverse incentives for unnecessary hospitalizations. We therefore

have taken a number of steps in designing our payment and risk

adjustment to prevent inappropriate hospital admissions or attempts to inflate data submitted for use in risk adjustment payments.

It is essential to stress, I think that risk adjustment will not and

cannot be budget neutral. The whole reason for proceeding with

risk adjustment is that the Medicare Program has not been paying

plans accurately and properly. There is substantial evidence, which

you will be hearing about in the course of today’s testimonies, that

we overpay plans because payments are not now currently adjusted

for the health care status or expected health care costs of enrollees

in managed care plans.

Studies by the Physician Payment Review Commission, PPRC,

now MedPAC, the Congressional Budget Office, Mathematica Policy Research and many others, have all found that Medicare has

been paying far too much because plans tend to enroll healthier,

low-cost beneficiaries. If risk adjustment were budget-neutral,

Medicare and the Taxpayers who fund it, would continue to lose

billions of dollars of each year on managed care payment.

Accurate risk adjustments inevitably and appropriately must

change aggregate payments to managed care plans. Actual savings

will vary according to the extent that less healthy beneficiaries enroll in Medicare+Choice Plans. Risk adjustment significantly

changes the incentives and could well lead to the enrollment of

beneficiaries with greater health care needs and that could lead to

higher payments for health plans who enroll such individuals.

Overall we project that payment to plans on average in the year

2000, will change by less than 1 percent of total managed care payments. Phasing in the risk adjust also substantially buffers the

plans from any financial impact that they are likely to experience.

Without a transition, Medicare savings for a full risk adjustment

or without a phase in would have been $1.4 billion or more in the

first year, in the year 2000. And as much as $4.5 billion over the

full 5 years.

We will closely monitor the impact of the risk adjustment on

beneficiaries and plans and continue to work with them to refine

and improve this methodology. But clearly we believe we must

start now. Mr. Chairman, I want to thank you for this opportunity

to come before you and to talk about this important change in the

way we pay Medicare health plans that are serving our beneficiaries.

9

I look forward to responding to any questions that you or other

members of the subcommittee may have. Thank you very much.

[The prepared statement of Michael Hash follows:]

PREPARED STATEMENT OF MIKE HASH, DEPUTY ADMINISTRATOR, HCFA

Chairman Bilirakis, Congressman Brown, distinguished committee members,

thank you for inviting me here to discuss our efforts to pay health plans accurately

and fairly. The Balanced Budget Act of 1997 requires Medicare to ‘‘risk adjust’’ payments to Medicare+Choice organizations, starting January 1, 2000. That means we

must base payment to Medicare+Choice plans on the health status of their enrollees.

Risk adjustment is an essential component of the Medicare+Choice program, and

represents a vast improvement over the current payment method. It helps assure

that payments are appropriate and curtail the disincentive for plans to enroll sicker

beneficiaries.

Under risk adjustment, data on individual beneficiaries use of health care services

in a given year will be used to adjust payment for each beneficiary enrolled in a

Medicare+Choice plan the following year. The payment adjustments are based on

the average total cost of care for individuals who had the same diagnoses in the previous year. In order to prevent disruptions to beneficiaries and health plans, we will

phase this change in over five years. Initially, we will use data on inpatient hospital

stays and move in an orderly fashion, as envisioned in the Balanced Budget Act,

to use of data from other health care settings.

We would like to thank plans for their cooperation in providing the data needed

to implement this important advance.

Currently, some 6 million of Medicare’s 40 million beneficiaries have chosen to enroll in Medicare+Choice plans. Risk adjustment will increase payment to plans for

their sickest patients, and thus curtail the disincentive for plans to enroll these

beneficiaries. It also will lower payment to plans for their healthier patients. Risk

adjustment is an essential step forward for beneficiaries, taxpayers, and health

plans.

• Risk adjustment will help beneficiaries feel confident in all their Medicare+Choice

options. It will assure beneficiaries that Medicare pays plans the right amount

to provide all necessary care because payment to plans will take each enrollee’s

health status into account. That will help people with serious illnesses, such as

cancer or cardiovascular disease, who can benefit most from the coordination of

care health plans can provide.

• Risk adjustment will help taxpayers by addressing the main reason that Medicare

has lost rather than saved money on managed care. Many studies show that

health plans enroll Medicare beneficiaries who, on average, are much healthier

and therefore less costly than those who remain in traditional Medicare. This

‘‘favorable selection’’ of healthy beneficiaries has cost taxpayers $2 billion a

year, according to a 1997 report by Congress’ Physician Payment Review Commission (now part of the Medicare Payment Advisory Commission).

• Risk adjustment will help level the playing field among Medicare+Choice plans.

It will temper the risk of significant financial loss when plans enroll beneficiaries who have expensive care needs, and focus competition more on managing care than on avoiding risk. Risk adjustment also will help plans by alleviating concerns among beneficiaries that plans have financial incentives to

deny care.

Phasing-In Risk Adjustment

The law requires us to proceed with risk adjustment starting January 1, 2000,

and does not call for a transition. However, we believe we must implement these

changes in an incremental and prudent fashion, as was done with other new major

payment systems. We are, therefore, using flexibility afforded to us in the law to

phase in risk adjustment over 5 years to prevent disruptions to beneficiaries or the

Medicare+Choice program.

In the first year, only 10 percent of payment to plans for each beneficiary will be

calculated based on the new risk adjustment method based on inpatient hospital diagnoses. The remaining 90 percent will be based on the existing method for calculating plan payments, which are flat amounts per enrollee per month based on the

average cost to care for Medicare fee-for-service beneficiaries in each county and adjusted for basic demographic factors like age and sex. In 2001, 30 percent of payment amounts will be risk adjusted. In 2002, 55 percent of payment amounts will

be based on risk adjustment. In 2003, 80 percent of payment amounts will be based

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on risk adjustment. By 2004, we and health plans will be ready to use data from

all sites of care, not just inpatient hospital information, for risk adjustment. Then,

and only then, will payment to plans be 100 percent based on risk adjustment.

Using Inpatient Data

During the first year of data collection for risk adjustment, both the statute and

practical issues require that we use hospital inpatient data alone. About one in

every five Medicare beneficiaries is hospitalized in a given year. Data on these hospitalizations are relatively easy to gather, easy to audit, and highly predictive of future health care costs. We will use the data to pay plans more for beneficiaries hospitalized the previous year for conditions that are strongly correlated with higher

subsequent health care costs. While we will eventually be using a broader data base

for risk adjustment, that is simply not feasible at this time.

The Balanced Budget Act clearly stipulated that more comprehensive data on outpatient, physician, and other services could be collected only for services provided

on or after July 1, 1998. That was prudent, because it has been no small task for

plans to learn how to gather the inpatient data we are using for the initial phasein of risk adjustment. Requiring plans to provide additional data on outpatient, physician and other services would have been unduly burdensome at this time.

This year, we will issue a schedule and guidance to plans for reporting other encounter data, such as outpatient information. The schedule will provide sufficient

time for plans to gather accurate data and for HCFA to analyze and incorporate the

data into accurate risk adjusted payments. We are now confident that by 2004 we

will be using data on all health care encounters to assess beneficiary health status

for risk adjustment. If we could base risk adjustment on more comprehensive data

now, we would. But we cannot. The law requires us to move forward. And, even

with its limitations, this initial risk adjustment system based on inpatient data

alone will increase payment accuracy 5-fold.

The initial risk adjustment system uses only the approximately 60 percent of inpatient hospital diagnoses that are reliably associated with future increased costs.

For example, beneficiaries hospitalized for conditions such as heart attacks in aggregate are at higher risk of subsequent cardiovascular problems, and they consistently

have higher health care costs in the subsequent year. Hospitalizations for such diagnoses will lead to higher payments to plans in the following year under risk adjustment. Hospitalizations for acute conditions such as appendicitis, however, rarely

lead to increased subsequent care costs. They will not lead to higher payments

under risk adjustment.

The 60 percent of hospital admission diagnoses that are clearly associated with

increased subsequent care costs account for about 30 percent of all Medicare spending the following year. It is important to note that, while risk adjustment is initially

based only on inpatient data, the risk adjustment payments account for all costs of

care associated with each diagnosis. It is also important to note that risk adjustment is not cost-based reimbursement; it is reimbursement adjusted for projected

need based on health status in the previous year.

Determining Diagnosis Groups

The relevant diagnoses will be used to classify beneficiaries into 15 different cost

categories. One category is for beneficiaries who were not hospitalized the previous

year with relevant diagnoses. For beneficiaries included in any of the other categories, plans will receive an additional payment to cover the increased risk associated with diagnoses in that category.

Payment will continue to be adjusted for demographic factors, such as age, gender, county of residence, and whether a Medicare beneficiary is also a Medicaid beneficiary. We have revised these demographic factors for use with risk adjustment,

for example, by no longer including institutional status because the risk adjustment

methodology itself does a good job of predicting expenses for nursing home residents.

Medicare will calculate a score for each beneficiary to determine the payment that

will be made if they choose to enroll in a Medicare+Choice plan. For example, Medicare’s average payment per year to health plans is $5,800. Under risk adjustment,

payment for an 85-year-old man will on average be $6,414. It will be an additional

$2,060 if he is on Medicaid, another $1,207 if he is disabled, and $8,474 more if he

was admitted to the hospital for a stroke the previous year, for a total of $18,155.

The score for each beneficiary will be calculated annually, and will follow them if

they move from one health plan to another.

Protecting Program Integrity

Most health plans operate with integrity and play by the rules, and we doubt that

plans will compromise successful medical management programs that keep patients

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out of the hospital in order to game the risk adjustment system. However, plans

themselves have raised concerns that risk adjustment based on inpatient data alone

could create perverse incentives for unnecessary hospitalizations. We, therefore,

have taken solid steps to prevent gaming of the system with inappropriate hospital

admissions or attempts to inflate the data submitted for use in risk adjustment.

The risk adjustment system does not include hospital stays of just one day, in

order to help guard against inappropriate admissions. And it excludes diagnoses

that are vague, ambiguous, or rarely the principal reason for hospital admission. In

addition, we will use independent experts to assess the validity and completeness

of data plans submit to us by conducting targeted medical record reviews and site

visits. This will help ensure that plans do not ‘‘upcode,’’ or claim that hospital admissions were for more serious conditions that would result in higher payment.

Protecting Taxpayers

It is essential to stress that risk adjustment will not and cannot be budget neutral

if we intend to protect the Medicare Trust Fund and be fair to the taxpayers who

support our programs. The whole reason for proceeding with risk adjustment—and

specifically with risk adjustment that is not budget neutral—is that Medicare has

not been paying plans properly.

There is considerable evidence that we have overpaid plans and continue to overpay plans, in large part because payments are not adjusted for risk.

• The Physician Payment Review Commission, in its 1997 Annual Report to Congress, estimated that Medicare has been making up to $2 billion a year in excess payments to managed care plans. This Congressional advisory body notes

that, unlike the private sector where managed care has slowed health care cost

growth, managed care has increased Medicare program outlays. The Commission’s 1996 Report found that those who enroll in managed care tend to be

healthy and those who disenroll tend to be unhealthy, exacerbating Medicare

losses. • Mathematica Policy Research, which has conducted several studies on Medicare

HMOs, says care of Medicare beneficiaries in HMOs costs only 85 percent as

much as care for those who remain in traditional fee-for-service Medicare. That

is 10 percent less than the 95 percent of the average fee-for-service costs plans

were being paid. • The Congressional Budget Office has said managed care plans could offer Medicare benefits for 87 percent of Medicare fee-for-service costs, even though they

were paid 95 percent.

Congress also recognized that plans have been paid too little for enrollees with

costly conditions, and too much for those with minimal care needs. The simple demographic adjustments made now for age, gender, county of residence, Medicaid and

institutional status, do not begin to accurately account for the wide variation in patient care costs. Risk adjustment will.

The vast majority of beneficiaries enrolled in Medicare+Choice cost far less than

what Medicare pays plans for each enrollee. Medicare fee-for-service statistics make

clear why risk adjustment must not be budget neutral. More than half of all Medicare fee-for-service beneficiaries cost less than $500 per year, while less than 5 percent of fee-for-service beneficiaries cost more than $25,000 per year, according to the

latest available statistics for calendar year 1996. The most costly 5 percent account

for more than half of all Medicare fee-for-service spending.

Since Medicare+Choice enrollees tend to be healthier than fee-for-service Medicare beneficiaries, the ratio of high to low cost beneficiaries in health plans is even

more stark. Clearly, care for the overwhelming majority of Medicare enrollees costs

plans much less than what Medicare pays because our payments are predicated on

the average beneficiary cost of care, calculated by county. This average includes the

most expensive beneficiaries in fee-for-service, who generally do not enroll in managed care.

If risk adjustment was budget neutral, Medicare and the taxpayers who fund it

would continue to lose billions of dollars each year on Medicare+Choice. Accurate

risk adjustment inevitably and appropriately must change aggregate payment to

plans.

Budget neutral risk adjustment would cost taxpayers an estimated $200 million

in the first year of the phase-in, and $11.2 billion over 5 years if health plans maintained their current, mostly healthy mix of beneficiaries. It is important to stress

that actual savings to taxpayers from risk adjustment will vary to the extent that

less healthy beneficiaries enroll in Medicare+Choice plans, resulting in higher payments than health plans receive today.

The amount of payment change will vary among plans and depend on each plan’s

individual enrollees. Total payment may be higher for some plans as they enroll a

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mix of beneficiaries that is more representative of the entire Medicare population.

As part of our Medicare+Choice March 1 rate announcement, we will send a letter

to each health plan with an estimate of how payment will differ from what they are

paid now, based on their current mix of enrollees.

Overall, we project that payment to Medicare+Choice plans on average will

change by less than one percent in the first year. How it will change over time depends on the mix of beneficiaries in each plan. Risk adjustment significantly

changes incentives for plans and could well lead to enrollment of beneficiaries with

greater care needs. That could result in plans receiving higher payments than they

do now. Phasing in risk adjustment also substantially buffers the financial impact

on plans. The federal government is forgoing $1.4 billion in savings in the first year

and as much as $4.5 billion over the full 5 years because of the phase in.

Payment changes will be further buffered by an annual payment update for 2000

that our preliminary estimate suggests will be 5.2 percent. This is substantially

larger than projections that were made last year. The final figure will be released

March 1, 1999. This annual update is based on formulas set in law and projected

expenditures for Medicare that are included in the President’s fiscal year 2000

budget.

CONCLUSION

Risk adjustment is an essential step forward for Medicare, beneficiaries, taxpayers and the Medicare+Choice program. It will help Medicare pay plans fairly and

accurately. It will curtail disincentives to enroll less healthy beneficiaries. It will

help taxpayers and the Medicare Trust Fund start saving, rather than losing,

money on managed care. It will help level the playing field among plans. And it is

required by law.

We are aware of the magnitude of the impact of risk adjustment and are, therefore, phasing in implementation to avoid undue disruptions. We are also taking

proactive steps to prevent potential gaming of the system. We will closely monitor

the impact on beneficiaries and plans. We will continue to consult with beneficiary

groups, health plans and academic experts. Adjustments can be made each year as

we proceed.

But, clearly, we must proceed. Risk adjustment is too important to postpone and

too important to implement without a prudent phase-in that allows time for any

necessary refinements. Again, I thank you for inviting us here today to discuss this,

and I am happy to answer your questions.

Mr. BILIRAKIS. Thank you, Mr. Hash. Well, let me ask you a

question that is in the general, generic, category. And without

maybe oversimplifying the problem, it seems to me that many of

these managed care companies which are choosing not to continue

in the Medicare beneficiary area, are doing so mainly on the come,

so to speak. Or doing so because the risk adjustment is coming and

they don’t like what they see coming and what their obligations or

responsibilities are going to be.

Many of them have already told us they look upon the regulations as being too onerous in addition to the other responsibilities

that go along with it. What is your response to that?

Mr. HASH. Mr. Chairman, we think that the risk adjustment

methodology that we are going to phase in is actually a needed improvement to the management of the program. We think it is what

the Congress intended when it enacted the Balanced Budget Act.

We have spent a lot of time over the last year working with plans,

with other experts, with the Academy of Actuaries, with a whole

host of folks to actually design an appropriate and implementable

risk adjustment methodology and we think we have done that or

are about to do that.

And we don’t think that it would be appropriate to delay the

progress on bringing payments more in line with the expected cost

of the beneficiaries who choose to enroll in managed care plans.

The imbalance between what we are paying and the costs of the

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enrollees has been documented in study after study. And I think

if for no other reason, our fiduciary responsibility to the program

means that we should move ahead and make sure these payments

are accurate rather than continue with the significant overpayments that we have experienced.

Mr. BILIRAKIS. Well are beneficiaries being dropped, because programs or plans are pulling out of certain areas. I took a look at a

chart here somewhere and there are more beneficiaries impacted

by this in Florida, for instance. That concerns you, does it not?

Mr. HASH. It does.

Mr. BILIRAKIS. All right. Now what, if that concerns you, how is

HCFA planning to meet that concern? I mean, we have heard the

opening statements up here and we have heard a lot of complaints

on the AAPCC process. And risk adjustment appears to be, certainly make a lot more sense. I think roughly everybody seems to

think it is a good idea. But in the meantime, we have these problems.

We have these beneficiaries who basically have lost their choice.

They certainly could go back to fee-for-service, but they have lost

their choice. How will you respond to that and how is HCFA planning to respond to that? What are you plans and your strategy in

that regard?

Mr. HASH. Mr. Chairman, since the experience of last fall that

you and other members heard a lot about when plans decided not

to participate or at least to reduce the geographical areas that they

were going to participate in, we have been working with the plans

and with folks in the Congress, your staff as well, to analyze exactly what the reasons were for that non-participation. And you

may know, that last month, we published a regulation, an interim

final regulation, that addressed a number of concerns that plans

had raised about the regulations we published last summer, last

June, to implement the Medicare+Choice Program.

We think we have actually gone a significant way toward addressing the issues that plans identified as the reason for, at least

some of the reasons for, dropping out. I think it is important to recognize that there are a host of factors that influence a decision by

a health plan to withdraw from participation in Medicare. One of

the things I think that struck me as most interesting about the experience last fall was that as we look back on it, we determined

that about an equal percentage of health plans that had been participating in the Federal employees health benefit program also

dropped out of that program or chose not to participate for Federal

employees this coming year in some of the same markets that the

Medicare+Choice Plans withdrew from.

Presumably in addition to payment concerns, health plans look

at market situations, the penetration of their own plan, the competitive nature of the markets in which they are engaged. There

are a whole host of factors, only one of which presumably is Medicare payment and Medicare requirements. And we tried to address

some of the concerns that have been raised since last fall.

Mr. BILIRAKIS. So, in other words, you feel that many of, or at

least some of the clients’ decisions to withdraw aren’t necessarily

directly related to the proposed risk adjustment plan?

Mr. HASH. I believe that to be the case, Mr. Chairman.

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Mr. BILIRAKIS. All right. Let me ask you, were you or a member

or one of your representatives going to remain throughout the

entire——

Mr. HASH. Yes sir, yes sir.

Mr. BILIRAKIS. [continuing] and take notes?

Mr. HASH. Yes sir.

Mr. BILIRAKIS. Because we have a lot of the insurance representatives testifying later on.

Mr. HASH. Yes sir.

Mr. BILIRAKIS. Thank you very much. Mr. Brown to inquire.

Mr. BROWN. Thank you, Mr. Chairman. Mr. Hash, thank you for

your very informative testimony. Clearly part of the problem is we

don’t have enough information from many of these Medicare

HMO’s so we can make some of these decisions, but last, as you

know, some 400,000 people nationally have been dropped from

their Medicare HMO. United Health has dropped some 50,000. In

my home county of Lorraine, Ohio they dropped 2,000 people without appropriate notice. People read it in the newspaper and began

to call offices like mine and others.

But in counties nearby, Cuyahoga, Medina County, other counties, they didn’t drop people. I know because we don’t have all the

information, so perhaps you can’t answer this. But if we had had

a risk adjustment system like the one discussed today, would this

likely have happened?

Mr. HASH. Well, I think it is hard to say, as I said a moment

ago. There are many factors that go into the calculation about

whether to participate and which markets to participate in. To say

that if we had a full comprehensive risk adjustment in place, would

that have reduced the extent to which plans pulled out? I think in

some cases it probably would have. For plans who felt like they had

above-average health cost enrollees, more adequate payments for

the needs of those enrollees would have obviously helped to ameliorate their financial concerns about continuing to participate. But I

am not sure that would be the case in all plans. And the risk adjustment benefit depends on the nature of the kinds of individuals,

in terms of their expected health care costs, that are actually enrolled in the plan.

So, you know, for plans who withdrew because they felt like they

had a non-representative group of enrollees in the sense that their

health care costs were higher on average than the typical Medicare

beneficiary, those people would have been helped by a full risk adjustment.

Mr. BROWN. You had said that you don’t have, you can’t use comprehensive data to develop the risk adjuster. Is that because you

are not getting that data from HMO’s? You can’t gather the data

or you haven’t had time to process it and put a comprehensive

amount of data together to do it? What is the problem?

Mr. HASH. It is some of all of that, Mr. Brown. Risk adjustment

for plans and for us represents a new stage of our relationship. We

have not traditionally, in our contracts with managed care plans,

required them to report to us the clinical data on hospitalizations

or encounter data on out-patient services or clinic services. That

has not been a part of what they have been doing. So what we have

been trying to do is to build the data infrastructure.

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We started with, as the Congress said in the BBA, collecting inpatient hospital data. That is what we did beginning January 1,

1998. We are going to put in place the tools and the formats for

plans to report this broader array of data, but we think it takes

time. We want to work with the plans and give them the time to

do this. We want to prepare ourselves to make sure we can receive

that data properly. And that is why we have phased in the risk adjustment in the way we have.

Mr. BROWN. One final question. Congressman Stark has sent

some testimony to this committee, which in a moment I will ask

the chairman to enter into the record. In his testimony, he noted

that a letter from the HCFA Administrator describes a ‘‘little

known glitch in the Balanced Budget Act that overpays HMO’s $8

billion over 5 years and $31 billion over 10 years.’’ The HCFA Administrator ascribes this overpayment to a lower rate of medical inflation.

Would a risk adjustment have dealt with this, so that this overpayment would not have happened? Or if it would not have, is

there a way of doing risk adjustment and somehow roll this hedge

against inflation or really a reverse of that into it?

Mr. HASH. I think what happened, Mr. Brown, was we estimated

the updates that are required for updating the rates paid to managed care plans. And in the base year that now forms the basis for

rates for managed care plans, 1997, the statute in the BBA did not

included authority for us to correct any errors in that projection.

And as we look back on the estimates we made from 1997, we

determined that the overstatement was about 4 percent of what it

should have been in terms of the update to the rates. And we lack

the authority to correct what was built in, and that is, I think,

what Mr. Stark is referring to as built in and above inflation to the

rates. This would not actually be affected by the risk adjustment

methodology that we are talking about. It is a separate but important issue.

Mr. BROWN. And can we deal with that.

Mr. HASH. I don’t think actually that is——

Mr. BROWN. So that it is——

Mr. HASH. [continuing] that is a problem that can be dealt with

by the risk adjustment language. I think we would be happy to

work with you and others to see other avenues for dealing with it.

But I don’t think it can be dealt with through risk adjustment.

Mr. BROWN. Mr. Chairman, I would like to ask your honor’s consent to enter into the record Mr. Stark’s testimony?

Mr. BILIRAKIS. Without objection.

Mr. BROWN. Thank you, Mr. Chairman.

[The prepared statement of Hon. Pete Stark follows:]

PREPARED STATEMENT OF HON. PETE STARK, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF CALIFORNIA

Mr. Chairman, Members of the Committee: Congratulations on holding this hearing on this important issue. I would like to make three short points.

1) On behalf of the HMOs that have done the right thing and enrolled a fair and

representative proportion of the Medicare population—both the sick and the well—

I urge that Congress not consider legislation delaying the phase-in of the risk adjustor. Any delay will reward those who have avoided the sick and chronically ill, and

punish those who have sicker than average patients—and that is exactly the opposite of good health policy.

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By phasing in the risk adjustment, we have already hurt the best HMOs, and

given the industry a $4.7 billion gift (see attached table).

2) Second, we should not buy the argument of the for-profit HMOs that we are not

paying them enough. I would like to enter into the Record a summary of the ways

we have been overpaying Medicare HMOs. I would also like to enter a letter from

the HCFA Administrator that describes a little known ‘glitch’ in the Balanced Budget Act that overpays HMOs $8 billion over five years, and $31 billion over ten years.

This overpayment occurs because we took away the authority of HCFA to adjust for

overpayments in 1997. We paid plans a higher amount in 1997 than was justified

in light of the lower medical inflation which actually occurred. By allowing these

overpayments, we built into the budget base billions of dollars in extra payments.

As the Administrator’s letter makes clear, the other budget savings in the BBA do

not even correct for this mistake—let alone reduce the earlier, underlying overpayment to the Plans.

3) Most importantly, the testimony today of the fourth panel of private sector plans

shows—indeed proves—why the Premium Support plan being pushed by a majority

of the Bipartisan Commission on the Future of Medicare will not work

The President of PacifiCare Health Systems is testifying:

‘‘Unless Congress [delays risk adjustment/gives us more money] the number of

providers who refuse to contract with Medicare+Choice plans will increase, and

health plan withdrawals will continue at a more rapid pace.’’

The Vice President of Blue Cross and Blue Shield of Florida is testifying:

‘‘that HCFA’s current approach [to risk adjust] will ultimately cause health

plans to exit the program or significantly reduce benefits . . .’’

On behalf of the Health Insurance Association of America, the Senior Vice President of CNA Health Partners is testifying:

‘‘If the current reimbursement structure is not adjusted [i.e., pay us more

money] more Medicare+Choice organizations are likely to withdraw from areas

served and beneficiaries enrolled in the remaining plans will likely experience

premium increases or reduced benefits.’’

And the Vice President of Humana testifies:

‘‘Some plans have already decided to discontinue participation in the M+C program in one or more counties . . . it is likely more plans will go this route in the

next two years if the... risk adjustment system is implemented on the current

schedule.’’

In short, pay us more or we can’t offer extra benefits—in fact, we may not even

be able to stay in the program.

But as described in my second point above, we currently pay Medicare HMOs

more than we should. We pay the plans more for the people they enroll than we

would have paid if those people had stayed in Medicare Fee-For-Service. The taxpayer would actually save money if we abolished the Medicare+Choice program.

Unfortunately, the beneficiaries in these plans who have been getting extra benefits will lose, and that is why we need to improve the core Medicare program, so that

everyone has a drug benefit and catastrophic protection—and so that people do not

need to join an HMO to get extra benefits.

The Bipartisan Commission on the Future of Medicare’s majority is pushing the

idea that we can save Medicare hundreds of billions of dollars—as much as $475-

$850 billion in the year 2030—if we can only get more people to enroll in private

plans. (They have no proof of this savings; they just assume—assume—that private

plans will grow 1% per year less than Medicare fee-for-service over the next thirty

years. They assume this although the history of the last 11 years shows Medicare

and Premium Support growing at almost exactly the same rate—the FEHBP Premium Support model grew only 0.1% less than Medicare, not 1.0% less!)

But if plans say they cannot offer extra benefits at a time when we are overpaying

them, they certainly won’t be able to when Medicare actually starts saving money

by paying them more accurately for the people they enroll.

And if the plans can’t offer extra benefits, who in the world would want to join

a system that rationed their choices and services?

Premium Support won’t work to save Medicare—it is just a way to raise premiums on seniors and the disabled to force them into bare-bones, no-frills HMOs

that will offer no extra benefits. Indeed, more than half of all the savings projected

for the Breaux-Thomas Premium Support plan would come from higher payments

by beneficiaries.

I hope all the Members will consider the testimony of Panel 4 before they endorse

the Premium Support scheme.

The representatives of the managed care plans testifying today are, in fact, testifying that the Breaux-Thomas Premium Support plan will not work.

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Mr. BILIRAKIS. Mr. Whitfield.

Mr. WHITFIELD. Mr. Hash, I had noticed that a lot of these payments are going to be based upon a diagnostic cost grouping. And

under the existing payment system, I think, to hospitals there are,

and I am not sure I have this correct, but there are DRG

groupings.

Mr. HASH. That is correct.

Mr. WHITFIELD. Now are they the same as this diagnostic group?

Mr. HASH. They are not, Mr. Whitfield. What we have done in

the risk adjustment, is to identify what amounts to approximately

12 percent of all hospital admissions. We have indicated that for

enrollees that have an admission that falls into one of those categories, about 15 categories altogether, that will be an individual

for which a larger payment will be forthcoming to the plan.

The hospital in-patient DRG System is one which involves something like 480 or so separate DRG’s to cover the full array of conditions that might occasion someone to be hospitalized.

Mr. WHITFIELD. Okay so the, I noticed in the diagnostic groups,

there are 172 of those and so that is totally separate then from the

other, okay. And could you just briefly explain the way you are

going to use the diagnostic cost groups in determining the factor

that would be applied to patients?

Mr. HASH. Yes it is, the first step is to identify a subset of hospital admissions that are associated with high cost, both the probability of future hospitalizations, as well as in many cases, extensive outpatient care that is required. And, having identified people

who have a hospital admission in one of those categories that is associated with significant increased health care costs, then those individuals will be assigned a risk score, if you will, higher than the

average. This will translate into a payment on their behalf that

will be higher than the average payment the plan would otherwise

receive.

Mr. WHITFIELD. Okay. Okay, Mr. Chairman, I yield back the balance of my time.

Mr. BILIRAKIS. I thank the gentleman. Mr. Strickland.

Mr. STRICKLAND. Thank you, Mr. Chairman. Mr. Hash, given the

experience that some of my constituents have had in regard to losing coverage that they thought they had and could depend upon,

I just want your personal opinion, if you would be willing to offer

it. Do you think that HMO’s that market just seniors should have

an obligation, as a part of their marketing strategies, to provide a

disclaimer indicating to the seniors that this coverage may not be

there for them in the future. So that they can make whatever

choices they make with, after being fully informed as to what they

may face?

Mr. HASH. That is a difficult question, Mr. Strickland. I would

have to say, from the marketing point of view, such a disclaimer

in marketing materials, I think, would be viewed as a significant

impediment to the enrollment of Medicare seniors. On the other

hand, I recognize that the fact that plans can voluntarily come and

go in the Medicare Program. Actually, as you might know, if plans

withdraw from the Medicare+Choice Program from now on, they

are banned from coming back in the program for 5 years.

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So there is, how should we say, a much stronger disincentive for

a plan that is currently participating in the program to withdraw

if they expect to come back into the program any time in the near

future. So I think some of the ability of plans to come and go on

an annual basis, will be reduced by that protection in the BBA.

And one of the things we do require, we have a lot of requirements

related to the marketing materials, that plans reach out to senior

citizens.

And one of the requirements associated with marketing is that

they must disclose that they can terminate coverage. In other

words, they tell the beneficiaries that if they give them proper notice, that the plan may in fact withdraw from participation in the

Medicare Program. So that is actually part of the notice requirements that we impose in terms of the marketing materials that

they use.

Mr. STRICKLAND. Well apparently for many that, that information is not either being given or being recognized because so many

of my constituents made decisions in good faith, they gave up

Medigap coverage, they have pre-existing health care conditions

and then at a moment in time, they find that they do not have the

coverage that they, I mean that is what, I have always thought

that is what insurance is. Something that you can depend on.

If you can’t depend upon it, then it is not insurance, it is something else. And it just, it really troubles me that so many of our

most vulnerable citizens feel as if they have been manipulated or

misled and I was just wondering if there was something we could

do to make that less likely to happen in the future?

Mr. HASH. Well, I think I should point out why I think it is less

likely in the future. Last year was unique in the sense that it was

something of a transition year. Plans operating under the old system had the opportunity to give a notice 90 days before the end of

the year, October 1, that they would not be participating in the

new calendar year.

That has now changed under the BBA and plans have to indicate

to us earlier in the year about their commitment to be in, so that

when beneficiaries have a chance to make a choice in November of

each year. Plans will then be locked in for the coming year and

there won’t be this last minute kind of withdrawal from the program that we experienced last year. So I think the potential is

much less in the future.

Mr. STRICKLAND. Okay, and if I can ask one more quick question.

As a result of Mr. Waxman’s suggestion, I had a study done in my

district regarding prescription drug prices. And what we found was

that seniors who participate in HMO plans, that the drugs available to them are much cheaper than seniors who are not a part of

such a plan. The differential on five drugs was 107 percent. And

I am wondering, as you do this risk adjustment, if you factor in the

fact that HMO’s on average get much, much less costly drugs than

do non-HMO participating seniors?

Mr. HASH. I think the answer to that is a complicated one, Mr.

Strickland. But the brief answer would be, you know, that Medicare does not cover much in the way of drugs to begin with, so that

wouldn’t be reflected in our payments to managed care plans. With

respect to the drugs that we do cover under Medicare, which are

23

basically drugs often that are provided as part of an in-patient hospital stay, the cost of those drugs are reflected in the rates in the

sense that the way we cover them under the fee-for-service system.

They are built in there, but they are probably built in at a level

that is higher than the acquisition costs on the part of HMO’s, because many HMO’s obtain discounts and have group purchasing arrangements that provide, as you point out, more favorable drug

prices. And that data is not fully reflected in the rates that we pay.

Mr. STRICKLAND. And it seems as if some cost shifting may be

taking place from the HMO participant to the non-participating

senior.

Mr. HASH. Yes.

Mr. STRICKLAND. Thank you, Mr. Chairman, I am sorry I went

over.

Mr. BILIRAKIS. No problem. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. Mr. Hash, I have three

questions for you and I will one at a time, of course. The health

care plans have expressed concerns that it is difficult for them to

validate or replicate your risk adjustment calculations because

HCFA has not provided them with the formulas used for the components of the risk adjustment methodology. This lack of complete

information makes it difficult, if not impossible, for the health organizations to forecast revenues.

Will this information be provided to health plans and if so,

when?

Mr. HASH. Mr. Bryant, we want to work with the plans to resolve

any questions about data that is not available to them, because I

have heard the same sort of comments. Let me just say, as I indicated earlier, beginning last September, September 8 to be exact,

we published for comment the model, the risk adjustment model

and methodology that we were going to use. We got lots of comments from health plans and others.

We submitted it to the American Academy of Actuaries, who

have also reviewed and analyzed it. We met with the health plans

in the fall over this. On January 15, we sent a notice to all health

plans which indicated what the methodology was and provided information about the average risk scores that were being determined. On March 1, next week, we will be communicating with

every plan giving them information about their specific risk adjustment for the enrollees that they currently have.

They can use that information to prepare their submissions to us

later in the year about the benefits and premiums they are going

to charge. We will be giving them the software that we used to

group the patients into these various risk cells. We think we have

been very forthcoming, very transparent. To the extent there are

issues that plans feel that we have not given them, we would like

to talk to them about that.

We would be happy to try to work with them. But we think we

have been very forthcoming on the data front.

Mr. BRYANT. Thank you. And I know we will certainly hear from

some of those folks later on in this hearing. Earlier you have made

arguments that health plans have been overpaid for providing

health care services and that the risk adjustment method is needed

to correct this overpayment. However, the health care organizaVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00026 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
24

tions maintain that the data used to make this judgment is old

data from 1992, in fact.

Number one, I guess, is that a correct statement that it is from

1992? And number two, how can you state with certainty that

plans are currently overpaying using data from 7 years ago?

Mr. HASH. Mr. Bryant, I would say that there are a variety of

studies out there that have looked at the issue of the adequacy of

payments, proper payments to managed care plans. Some of those

studies go back as far as you are talking about. One as recently as

1997, by the Physician Payment Review Commission indicated that

they felt in the aggregate we were overpaying managed care plans

by $2 billion a year.

The General Accounting Office, which will be testifying following

me, has also done studies based on more recent information. So I

think actually there is a considerable amount of evidence of current

vintage that suggests that we are overpaying health plans.

Mr. BRYANT. Again, my final question. You alluded to some of

this information in your statement, I wish you would expand on

that. In terms of the transition, the concerns that the first 4 years

of, we haven’t finished the first 4 years of the 5 year phase in, concern only in-patient hospital data that would be used to predict future patient cost. Further, only hospital stays of 2 days or longer

will be included in the methodology.

I guess what we are looking for is more reasoning for this and

also that, as you said, there might be some perverse incentive involved here that would have health care providers admit beneficiaries who keep in the hospital longer to work this in. Again,

could you simply expand on why this was chosen?

Mr. HASH. Well, the first answer is, to your question, is that we

used in-patient data because the BBA laid out a schedule that said

we were to start collecting only in-patient hospital data, January

1, 1998, and to use that for the first part of the risk adjustment

beginning in the year 2000. That is the short answer for why we

are using in-patient data.

On the issue of whether our methodology creates an incentive for

inappropriate hospitalizations, I think what we have done in designing our methodology is to carve out from the admissions that

we are going to treat ones that are warranting a special payment,

discretionary admissions, admissions for conditions that are not associated, you know, with future health care.

For example, someone who has an appendectomy who may have

a very short hospital stay, that would be an admission which we

would not count as predictive of increased future costs.

Mr. BRYANT. When will you do this? Because again, I think our

whole——

Mr. HASH. That is——

Mr. BRYANT. [continuing] our whole purpose is to——

Mr. HASH. That is actually a part of the risk methodology that

we will be implementing next January.

Mr. BRYANT. But can you get these encounters, these other medical encounters, for the 4 years?

Mr. HASH. We are going to start collecting that data. We are

going to put out a schedule later this year and we will, our present

25

plan is, to implement the full risk adjuster based on the more comprehensive data in 2004.

Mr. BRYANT. Thank you.

Mr. BILIRAKIS. The gentleman’s time has expired. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. And Mr. Hash, the plans

that have withdrawn from the Medicare Program over the last 6

months claim to be losing money, however the GAO recently reported that even after the Balanced Budget Act, Medicare still

overpaid some of the plans. Were the plans that withdrew actually

losing money or were they not earning as much as they expected?

Mr. HASH. I actually have not been able to review the financial

conditions of the plans that withdrew, so I wouldn’t be in a position

to comment on their profitability or lack thereof. Clearly in some

of their statements about their reasons, they indicated that Medicare was no longer profitable to them.

Mr. GREEN. The risk adjustment is critical in preventing the

cherry picking of healthy beneficiaries and, but is it possible that

the basic payment levels are too low to meet the needs of seniors?

Mr. HASH. There has been a lot of talk about that, Mr. Green.

And I think the answer to that is that it depends on what part of

the country you are talking about, what kind of area. The BBA, as

you know, went a long way to try to narrow the range of payments

that Medicare makes to managed care plans by bringing up the

floor. It is now about $380 per person in the lowest areas.

And it also put in a blending methodology which in the first 2

years, 1998 and 1999, we were not able to actually implement because of budget neutrality limitations. But the newest data for the

year 2000, in terms of the update for managed care rates, indicates

that there will be about a 5.1 percent increase in managed care

rates. The effect of that will be to fund the blended rates in the

large number of counties around the country.

What that means is, for counties that are below the average, by

blending with the average, their rates will be brought up. So we

think that in lower payment areas, beginning in the year 2000,

there will be some additional help in terms of the adequacy of the

payment rates that are available for Medicare beneficiaries in private plans.

Mr. GREEN. And why wasn’t out-patient data included?

Mr. HASH. Well, because under the way the BBA laid out the requirement to move to risk adjustment, it required us to start collecting in-patient hospital data on or after January 1, 1998. That

is what we have done. We will be allowed to collect a broader array

of data, including the out-patient data and that is what we will use

for the comprehensive risk adjustment that will be put into effect

in 2004.

Mr. BILIRAKIS. Thank you, Mr. Green. Thank you, gentleman.

The vice chairman of the subcommittee, Dr. Coburn.

Mr. COBURN. Mr. Hash, good to see you again. Thank you, and

let me just remind you I am still waiting for some of that information on nursing homes.

Mr. HASH. Yes, actually Dr. Coburn, I signed the letter this

morning.

Mr. COBURN. Great, thanks. Do you feel comfortable that you

really have——

26

Mr. HASH. And one to you, Mr. Chairman, as well.

Mr. COBURN. Do you feel comfortable that you really have the

data right now, enough data based on what the experience is out

there, to put forward a risk adjuster?

Mr. HASH. Dr. Coburn, we do. We have collected data on over 1.2

million admissions between the period July 1, 1997, through June

30, 1998, for 5.5 million beneficiaries and we actually think we

have a very rich data base.

Mr. COBURN. And geographically distributed properly as well?

Mr. HASH. Yes, sir.

Mr. COBURN. Okay. I am interested in what Mr. Brown gave us

in terms of adjusting and I would be anxious to talk with you in

terms of trying to do the authority to get the adjustments made in

terms of that growth. Would it be possible for HCFA to develop

comparisons, say like from 1990 to the present to give the members

on the committee sort of a historical perspective on the number of

renewals and non-renewals on Medicare managed care?

In other words, we are seeing this big abrupt withdrawal now,

but how does that compare to historical changes and renewals and

non-renewals?

Mr. HASH. Last year was definitely much higher than any previous experience. I think I am correct and my colleagues will probably correct me here. For the years 1994, 1995 and 1996, we had

a total of 5 health plans that completely withdrew or reduced service areas. And obviously we had a much larger number last year,

99 either withdrew completely or reduced their geographical service

area. So last year was, by any means, much higher than any previous experience.

And in fact plans have been generally increasing in 1999, I am

told, to correct it here a little bit. In the mid-’80’s we had a very

large drop of plans who dropped out of the program. I will get you

the specific data on that.

[The following was received for the record:]

Medicare Plan Renewals/Non-renewals 1985-1998

Year Total Risk

Contracts

Nonrenewals Renewals Percentage

Non-renewing

1985 ..................................................................................................... 87 3 84 ....................

1986 ..................................................................................................... 149 7 142 5

1987 ..................................................................................................... 161 29 132 18

1988 ..................................................................................................... 154 34 120 22

1989 ..................................................................................................... 131 38 93 29

1990 ..................................................................................................... 96 14 82 15

1991 ..................................................................................................... 93 12 81 13

1992 ..................................................................................................... 96 8 88 8

1993 ..................................................................................................... 110 4 106 4

1994 ..................................................................................................... 148 1 147 1

1995 ..................................................................................................... 181 0 181 0

1996 ..................................................................................................... 241 2 239 1

1997 ..................................................................................................... 307 8 299 3

1998 ..................................................................................................... 346 45 301 13

Source: Medicare Managed Care Contract Plans Monthly Summary Reports.

Non-renewal rates peaked in 1988 and 1989.

The percentage of nonrenewals in 1998 was 14 versus 22 in 1988.

Prepared by the Office of Legislation, HCFA, March 1999.

27

Mr. COBURN. I think it would be real helpful for the members to

see it in terms of perspective. You know as you look at all this,

firms are going to either participate or not participate on this on

whether they can make any money in it. I mean that is what they

are in the business for. As you sit and look at that, how much

money should they make?

Mr. HASH. Well, I think again it is difficult to answer that precisely. I think the purpose of this risk adjustment methodology is

to try to say, with the payment policy we have now, we are clearly

not paying appropriately and that we need to change that and to

bring the payments more in line with the expected costs that enrollees are going to experience. And if that means that people have

lower than average costs, who are enrolled in managed care plans,

that is going to be a lower payment for them.

But for those who have sicker patients, it is going to be a higher

payment for them and we think that is an appropriate change.

Mr. COBURN. So could these firms expect in the future that now

the risk adjustment is out there and things are going along and

can they expect a crunch again? In other words, all of a sudden we

move more people into managed care and the costs rise a little faster than what they were and things start going up and they creep

a little bit. Are we going to come back through HCFA and say, well

you know, our risk adjuster is a little too high, we are growing a

little faster than what we thought too. And we are going to tighten

that up.

Because ultimately that is what it counts on. And I am interested in your perspective, because I know you all understand that

if they don’t make any money, they won’t be, I mean they may on

the short term. And I am not saying they are not making any

money. There was a wonderful report on PacifiCare that happened

to time with this hearing that is enlightening. But the point is at

some point we have to decide, with your help, how much is a good

rate of return for people who are offering this service?

Mr. HASH. I agree with that, Dr. Coburn. I mean we do have to

monitor very carefully participation by plans and the reasons they

are giving for the inadequacy of our payments, where that exists.

And pay attention to that. Because if we want choices for Medicare

beneficiaries we are going to have to pay adequately for it. I just

don’t have a ready answer to tell you what sort of changes might

be needed.

But one of the reasons we are phasing in this risk adjustment

is to not further destabilize the market for these plans and to minimize the changes of payments that will happen to plans. So that

at least in the short run, we shore up the market place for our

beneficiaries.

Mr. COBURN. Well is it your feeling, I know you may not be able

to have the knowledge on this. Is it your feeling that we had the

tremendous withdrawals in this because of the lack of a certain expectation coming? And that because there was a lack of an expectation of a fixed amount or an unknown out there in terms of being

able to predict what they were going to be able to do, we saw more

withdrawal than what we would have otherwise?

Mr. HASH. I think the anticipatory effects played a large role. I

think people were uncertain at the point they made their decision

28

about what the risk adjustment would be over time. I think they

were uncertain about the rate of increase in plan payments over

time in the aggregate. And that uncertainty certainly played a role

in the decision of many plans, I am sure, to withdraw.

Mr. COBURN. Thank you.

Mr. BILIRAKIS. Mr. Waxman to inquire.

Mr. WAXMAN. Thank you, Mr. Chairman. Mr. Hash, if we don’t

have an adequate risk adjuster, it seems to me we are encouraging

plans to try to skim and get the healthiest population in order to

make more money. Then we overpay them because we pay them

based on the amount that Medicare paid for the average population. If we can’t get a risk adjuster, we are overpaying them. Isn’t

that what we are faced with and why this committee and the Congress asked you to develop a risk adjustment?

Mr. HASH. That is correct, Mr. Waxman.

Mr. WAXMAN. We don’t want to overpay. We don’t want to give

an incentive for plans to try to refuse the sicker patients and only

go after the healthier patients. But it is not easy doing a risk adjuster, is it?

Mr. HASH. No, sir, it is not. It is very complicated.

Mr. WAXMAN. It is very complicated, but it is very necessary. But

let me just go beyond where we are today. There is a Medicare

Commission that is now looking at changing the Medicare Program. And if we don’t have a good, accurate risk adjuster under the

premium support system, which is what they are talking about

over there, what we are going to have, it seems to me, is a system

where people who go into a fee-for-service system are going to find

it unaffordable because they are going to have to pay more money.

Isn’t that the case? And why would that be the case, if it is?

Mr. HASH. It is the case. Well, I think there are several issues

there. But a premium support program, as I understand it, could

not function without a risk adjustment methodology. It just would

not work. And I think members of the Commission, Mr. Bilirakis,

who is a member of the Commission, have been through lots of discussions about that. So I think that is one of the reasons for what

we are doing here. If it turned out there were some kind of premium support approach introduced into Medicare, experience with

this risk adjustment is absolutely essential to making that——

Mr. WAXMAN. When you say it wouldn’t work. It would work——

Mr. HASH. Well——

Mr. WAXMAN. [continuing] it would produce some results that we

wouldn’t find very satisfying.

Mr. HASH. Correct.

Mr. WAXMAN. I mean after all if you pay a percent of the average

of the premiums for all plans, including fee-for-service, and you

don’t have any risk adjustment, if a plan is able to make a lot of

money and pay a lower amount because they have skimmed off a

healthier population, then they are going to drag down that average of all the plans.

And then, as a senior, when you want to go into a plan that has

a higher premium and costs more money, the government says, oh,

this is all we are going to give you for that. You are going to have

to come up with the difference because you are going into a plan

that is going to have a disproportionate amount of sicker patients,

29

it’s premium is higher, you get paid proportionately less for it. Isn’t

that the fear we would have?

Mr. HASH. That is correct. If you don’t have a risk adjustment

you are going to have significant adverse selection in the model

that you just described. And the affect of adverse selection is obviously that the plans who get the sicker individuals will have increasingly higher costs, higher premiums. And the individuals who

choose those kinds of plans, will have to pay more for them.

Mr. WAXMAN. Well it seems to me the stakes get higher and

higher. We better make sure we have some risk adjuster that

works, especially if we are even looking at a drastic, radical change

of the Medicare Program as is being discussed by this Commission.

We are having a tough enough time now, under the

Medicare+Choice Plan to make sure that we get a risk adjustment

that works.

Let me ask you about the prescription drug issue. The President

has said we ought to cover prescription drugs under Medicare.

Some people are saying we ought to cover prescription drugs under

Medicare only if people go into a managed care plan. What would

be your view of a system like that?

Mr. HASH. Well, I think the President has been very direct on

that point, Mr. Waxman. And his view and the view of the Administration is clearly that prescription drugs are a needed addition to

the Medicare Benefit Package and that they should be provided

across-the-board in the traditional fee-for-service program, as well

as any private managed care plans.

Mr. WAXMAN. Well wouldn’t some want to push people into managed care? Isn’t that mainly what people think we want to do? I

mean if we stack the deck without a risk adjuster and we cover

drugs only under managed care, aren’t we telling people, you don’t

really have a Medicare choice, you have a choice between a bunch

of managed care plans?

Mr. HASH. That certainly is one way to look at it, Mr. Waxman.

I think what we are trying to ensure is that we don’t have a situation where there are markers for plans that create adverse selection. Which gets to the same point you are making, which is if only

some plans offered prescription drugs to a senior and disabled population, they are going to inordinately attract, I think, a large number of those beneficiaries into those plans.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. COBURN. Yes sir, would you yield for one question for Mr.

Hash.

Mr. BILIRAKIS. Without objection, you can have an additional 30

seconds.

Mr. WAXMAN. Thirty seconds, okay.

Mr. COBURN. I just want to complement your political savvy. I

mean we are already debating something that isn’t out there yet

and it is really important. I really respect that because you are already setting the markers of where you don’t want the Commission

to go, which I praise you for. I think that is good. It is also very

smart politically. My question was——

Mr. WAXMAN. How about on policy grounds?

Mr. COBURN. No, I think it is better on political grounds than it

is policy. My question is——

30

Mr. WAXMAN. Are you ready to make the leap?

Mr. COBURN. Not with Mr. Waxman, it is not. Mr. Hash, the average paid on HMO yearly, versus the average consumed by nonHMO Medicare, could you give us those two numbers?

Mr. HASH. I think the average payment for a Medicare+Choice Organization is about $475. And the annual amount on the fee-forservice side I think is more like $5,000 or so a year, but I am

quickly dividing that to make it comparable to the $475, would

be——

Mr. COBURN. It is about $5,500?

Mr. HASH. Yes, roughly.

Mr. COBURN. So in essence, right now today, managed care is $500 more?

Mr. HASH. No, that is the annual amount per capita for Medi- care, about $5,500.

Mr. COBURN. And what is it on managed care?

Mr. HASH. It would be 475 times 12.

Mr. COBURN. Well, that is about $5,700.

Mr. HASH. Yeah.

Mr. COBURN. So it is comparable. Okay, thank you. And I thank

the gentleman for yielding.

Mr. BILIRAKIS. Mr. Deal to inquire.

Mr. DEAL. Thank you, Mr. Hash. With the risk adjustment factor

going in, are we still operating under the 95 percent cap?

Mr. HASH. You mean, I think you mean that we pay 95 percent

of the average fee-for-service costs.

Mr. DEAL. Is that still a limiting factor on the top side?

Mr. HASH. Yes, sir, it is.

Mr. DEAL. How do you deal with that if in fact the risk adjustment has the exact opposite effect of what we say managed care

has now. That is, is there going to be an incentive to select those

who are sicker because the risk adjustment in effect pays more. If

that occurs, how does the 95 percent figure into the mix? Are they

going to be penalized if they have a higher number of sicker patients as opposed to what the situation is now? How does that fit?

Mr. HASH. Well, the 95 percent in effect, gets you to what we

would say would be the base rate for managed care plans. And

what the risk adjustment does is to say, for that small subset of

enrollees who have these hospital episodes that fall into one of

these 15 categories, that the base rate will be increased by an

amount that roughly approximates what the data show are the expected health care expenditures in the following year for an individual who has such a hospital episode.

So I think, you know, the way those two things work together is

that 95 percent just gets you to the base rate that we actually pay.

The risk adjustment methodology identifies a subset of all the people who get the base rate and gives them an additional premium

associated with their expected health care costs for the coming

year.

Mr. DEAL. Okay. Will the assessment be made on an annual

basis, a per patient annual basis?

Mr. HASH. It will be.

Mr. DEAL. And it is prospective, in other words.

Mr. HASH. It is.

31

Mr. DEAL. You assess their situation in 1999, which would affect

their rate reimbursement for the year 2000?

Mr. HASH. That is correct.

Mr. DEAL. Are there any interim adjustments based on catastrophic illness, etcetera?

Mr. HASH. Well, the way the methodology works is that we are

actually basing the next year’s adjustment on the experience in the

year that is from the prior June/July period. Let me say that again.

For the year 2000, the data for the risk adjustment will be the hospital data that covers the period July 1, 1998, through June 30,

1999. So it is a period that is 6 months in advance of the beginning

of the calendar year. The other option that we considered was to

actually base it on the full calendar year prior to, which would

have required us to have a retroactive adjustment to the rates once

we got all the data in, calculated the risk scores and then made an

adjustment.

We put out both of those options last September in our proposal

to the public, and I think the vast majority of health plans suggested they wanted to have the 6 month approach that we have

adopted, that is where the full risk adjustment comes into effect,

but is not subsequently adjusted during the course of the year.

Mr. DEAL. Thank you, Mr. Chairman.

Mr. COBURN [presiding]. Mr. Barrett.

Mr. BARRETT. Thank you very much, Mr. Chairman. You have

touched, I think, in your written testimony and I apologize for not

being here, on your concerns about gaming the system. Could you

run through again what you are going to do to make sure that

there is going to be little gaming of the system?

Mr. HASH. Well, we don’t actually think there will be much of

that because, first of all, we have eliminated from consideration

discretionary hospital admissions, the 1-day stays. We think that

to the degree people are worried about inappropriate hospitalizations to qualify an individual for a high-risk score the likelihood of

that is not very large for a couple of reasons. One is the effect of

the risk adjustment is not immediate after the hospitalization. It

is in the year following the year in which the episode occurred.

And therefore there is some substantial uncertainty about

whether that individual will even be in that plan a year from now.

And second, to have admissions that were inappropriate, you would

have to also encourage physicians and individual beneficiaries to

undergo hospitalization which they traditionally are resistant to do.

So we actually think we have built in enough adjustments to our

system to mitigate against a possibility of any manipulation of the

data Mr. BARRETT. Thank you. I want to touch a little bit on the,

and you made reference to this in your comments about the disparity, the payment disparity. And I come from a State where

there is a concern that the payments are lower than they should

be. Can you talk about how in the first 2 years because of the Balanced Budget limitations, we were not able really to bring up the

floor. You would concur with that?

Mr. HASH. Well, the things that were supposed to happen as a

result of the BBA were three things. One, the floor was to be

raised. There was a minimum update of 2 percent each year. And

there were a series of blended rates that were being phased in over

32

the course of the 5 years of the BBA. What the statute says was,

you must do the floor and the 2 percent update and if there is any

money left over, you can actually fund the additional cost of a

blended approach.

It turned out that in the first 2 years, 1998 and 1999, the floor

came up, 2 percent was offered, but in no county that would otherwise have gotten a blended rate was that actually able to be——

Mr. BARRETT. For the 2 percent, did that go to everyone? So did

you actually have a situation——

Mr. HASH. Well, that was the minimum now——

Mr. BARRETT. Okay.

Mr. HASH. For people who were affected by the floor, we had pay- ments as low as about $220 a month. The floor was originally, I

think, $370. So people who went from $220 to $370, had a very

substantial, greater than 2 percent, gain. It is fair to say, however,

that in many of those counties there are not any managed care

plans.

So that from a plan perspective, the raising of the floor probably

didn’t affect a lot of plans because they weren’t serving areas

where the floor was raised

Mr. BARRETT. And I assume that you have studies that would

show where the plans are most prolific.

Mr. HASH. Oh, yes.

Mr. BARRETT. In other words, I am assuming that, I would be interested in getting some of that information.

Mr. HASH. Be happy to supply that.

Mr. BARRETT. Because intuitively I would think that a lot of

these areas that have the low reimbursement rates are going to,

not going to have this. So this becomes sort of an academic exercise

if we don’t have people who are providing these plans.

Mr. HASH. Well, I think it is fair to say that most of the penetration of managed care in the Medicare Program is in geographical

areas where the payments made by the Program are relatively

high. We do have that data and would be happy to share it with

you.

[The following was received for the record:]

Managed Care Penetration and Weighted Payment Rates for Counties, Sorted by Payment Decile,

1998

Payment Rate* Average

Payment**

Penetration Rate High Low

$783 ............................................................ $506 $587 26.31%

$506 ............................................................ $461 $487 19.18%

$461 ............................................................ $435 $446 13.97%

$435 ............................................................ $413 $422 11.53%

$413 ............................................................ $394 $403 11.95%

$393 ............................................................ $376 $386 8.80%

$376 ............................................................ $367 $371 6.73%

$367 ............................................................ $367 $367 4.67%

Note: In the above table, counties were sorted by the aged M+C payment rate (highest to lowest) and then divided into 10 equal groups. For example, the 1st decile represents the 10% of counties with the highest payment rates. The average payment for these counties is $587

and the penetration rate is approximately 26%. There are many factor’s that weigh on a plan’s decision to enter or leave a market. Payment

rate may be one factor.

* The bottom three deciles, representing plans receiving the floor payment, were combined into one group for analysis.

** Weighted by number of risk enrollees.

Source: HCFA, Office of Legislation, March 1999

33

Mr. BARRETT. And just to follow up on that. As I follow the Medicare Commission Reports that talk about prescription drug coverage and talk about maybe having more incentives for people who

are in HMO’s. Again, my concern is that we are leaving a lot of

people behind if the emphasis is going to be in that area. And there

are huge parts of this country where managed care just is simply

not interested in going because of that.

So all of a sudden we are looking at a multi-tiered system based

more on geography than anything else.

Mr. HASH. Well, I guess to respond to that I would say, that is

one of the reasons, at least as the President has looked at and

talked about the deliberations in the bi-partisan Commission, I

think he has been very outspoken about the need to maintain a defined, benefit package across-the-board for all Medicare beneficiaries regardless of whether they are in a private plan or in the

traditional fee-for-service program.

So in order to make sure that everywhere the beneficiaries have

a guarantee of a defined benefit package, including prescription

drugs. I mean that is a core, or should be a core feature of any

strengthening or improvement of the Medicare Program——

Mr. BARRETT. Okay, thank you.

Mr. COBURN. Mr. Barrett, did you want to request that he send

us that information?

Mr. BARRETT. Yes, please.

Mr. COBURN. If you would, Mr. Hash? Would you, Mr. Hash?

Mr. HASH. Be happy to.

Mr. COBURN. In terms of the comparison of rates and participation rates based on payments. The gentleman from Florida.

Mr. STEARNS. I thank you, Mr. Chairman. Mr. Hash, I have here

a document that is dated December 11, 1998, and I understand the

committee just recently got this. It is a list of risk plans not renewing or reducing services to areas for 1999. And going through this

I notice Florida is almost two pages here. And a lot of these counties are in my Congressional District, Clay, Baker, Lake, Marion,

but you even have Orange County here, which is Orlando.

You have Volusia County which is Daytona Beach. So you have

counties here like Clay, in my district, which is basically a lot of

working people. And yet all these HMO’s are leaving. So I guess,

for the record, tell me why they are leaving again?

Mr. HASH. Well, I think there are a variety of reasons, as I, you

might not have been here but I talked about this a little bit earlier.

And the variety of reasons includes plans’ decisions about their relative market position, their penetration in the market, and the

competitiveness of the market. Obviously, some of it has to do with

their anticipation of what Medicare rates are going to be like.

There was further uncertainty about what the risk adjustment

methodology, how that would affect them. There are a variety of

factors and they are not easily generalizable because each market,

I think, is very different. And I think the decisions that were made

in Florida are ones that are unique to the market place.

Mr. STEARNS. That is my main question. Is there something

about Florida that is different than other States?

Mr. HASH. No, no, when I said unique, I mean that the particular decision by a given plan to withdrawal completely or reduce

34

their service area is affected by the particular circumstances in

which they find themselves. That could be that they have a relatively small penetration into the Medicare market place and do

not feel, in terms of the numbers that they have been able to enroll, that it provides an adequate base in terms of taking the risk

on for this population.

Mr. STEARNS. Mr. Hash, in three of these which are in my Congressional District, there were no HMO’s. In other words, this

HMO that left was the only one.

Mr. HASH. Right.

Mr. STEARNS. There was no competition.

Mr. HASH. Right.

Mr. STEARNS. And they, when I talked to them, they always complain they are not getting enough money from you to make it

worthwhile and they want to see a reimbursement similar to what

Miami is getting. Is that a legitimate argument?

Mr. HASH. Well, I——

Mr. STEARNS. They say because there is less population, and the

cost of living is less. And Miami costs more, so Miami is getting

more. And so they go to Miami and they don’t go to——

Mr. HASH. The reasons the payments vary so dramatically in the

Medicare+Choice program have to do with the range and variation

in the Medicare costs. That is what really is at the base of what

the rate is in any given area. It is what has been the historical cost

experienced in terms of the price paid for services and the utilization patterns for services in that area.

In a place like Dade County, both price and utilization historically has been at the top of the list of Medicare utilization and

price across the country. That translates into among the very highest payment rates. In other areas of the country and other counties

even I am sure in the State of Florida, price and utilization rates

in the Medicare Program over time have been very much different

than what is going on in Dade County.

Mr. STEARNS. This is my last question, Mr. Chairman. I know we

have to vote. Maybe in one or two sentences, if you had the power

and you could make the decision today and you had the genie right

on your shoulder, what would you do in two sentences to make universal availability of HMO’s across this country in an affordable,

accessible way.

Mr. HASH. I think that is a question I can’t answer in one or two

sentences.

Mr. STEARNS. You have got a genie on your shoulder now.

Mr. HASH. But I would like to work with you to try to find the

answer to that.

Mr. STEARNS. You sound like a politician. Thank you, Mr. Chairman.

Mr. COBURN. I just want to confirm with you, Mr. Hash, that we

will get the comparison from 1990 to now on renewals/non-renewals, if you would. And your staff is going to remain here for the

rest? Okay, thank you very much.

Mr. HASH. Thank you, Mr. Chairman.

Mr. COBURN. And we will adjourn until I guess, until the chairman gets back. How is that?

[Brief recess.]

35

Mr. BILIRAKIS. The hearing will come to order. The second panel

will consist of Dr. Gail Wilensky, Chair of the Medicare Payment

Advisory Commission and Bill Scanlon. Mr. Scanlon is Director of

Health Financing and Public Health of the United States General

Accounting Office. Welcome, Dr. Wilensky and Mr. Scanlon. You

have been here before, both of you have and how.

Your written testimony is obviously a part of the record. We will

set the clock at 5 minutes. If you feel you have got to exceed that,

I don’t think we will shut you off. We will start off with Dr.

Wilensky.

STATEMENTS OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT ADVISORY COMMISSION; AND WILLIAM J. SCANLON,

DIRECTOR, HEALTH FINANCING AND PUBLIC HEALTH

ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, GENERAL ACCOUNTING OFFICE

Ms. WILENSKY. Thank you. Thank you very much, Chairman

Bilirakis and members of the subcommittee for inviting me to be

here. I am here in my role as Chair of the Medicare Payment Advisory Commission. I want to summarize a few thoughts that I would

like to leave you with following the discussion that went on in the

very interesting first panel.

The first point is just to remind you what the problem is that you

are trying to fix with regard to risk adjustment. And that is that

payments to plans have not reflected predictable differences—and

the emphasis on the predictable—in seniors’ health care spending.

And so what we have seen from HCFA is an attempt to make an

interim adjustment to the payment that relies on data from in-patient stays on the patients’ diagnosis as a better way to adjust payments to reflect the seniors’ health status.

We have already been using age and sex and their employment,

whether or not they are institutionalized and whether they are on

Medicaid. But as you well know, that has not been a very good way

to pick up other predictable differences based on their health care

status. Now the plans have taken a number of hits on their base

payment as a result of the Balanced Budget Act. And you are probably going to hear more about that later.

But I think it is important to distinguish between whether or not

the base payment to a plan is adequate or right—particularly as

a result of the various changes that have occurred from the Balanced Budget Act—and whether the relative payments between

plans and between the plans and traditional Medicare are right.

What this is supposed to accomplish, the risk adjustment, is to

make the relative payments right. You could agree on that and still

have an argument about whether the base has been hit too hard

or will be hit too hard in the future.

There has clearly been stronger reductions because of the stronger than anticipated reductions in fee-for-service spending from the

Balanced Budget Act and there have been a number of administrative requirements that have increased spending needs for the

plans, including some of the data reporting requirements that have

been put on them. And this risk adjustment, it appears, will also

reduce overall the payments to the plans. But it doesn’t address

the issue about the relative payments.

36

Third point is that the focus ought not to be thought of as punishing plans, but rather trying to provide incentives so that plans

who are willing to, or who want to take on chronically ill patients,

get paid appropriately so they can do that and have that payment

reflected in their premiums. Now there are some appropriate concerns that have been raised if they only use in-patient data.

They are basing the expenditures on what we know from fee-forservice data, and as I have talked about, it is one more hit, it looks

like overall. But the fact is I think HCFA has done the very best

that it could, given the requirements of beginning to implement

risk adjustment January 2000. As you know, they only have data

from the in-patient stay. They are phasing in the change. They will

phase it in over a several year period.

They are backloading the change, that is it is a little change in

the beginning. Most of the change occurs in the last few years. And

by the time they finish the phase in, full encounter data, that is

data from the out-patient setting, should be available. And that

will make it a much better risk adjustment. So in conclusion I

would like to say that while I think there can be some question

about some of the changes that have occurred this year, about

when the appropriate date is to ask health care plans to put in the

information on their premium and benefit combinations to maybe

move it a little later than it is now in statute in May.

There can be some questions raised about whether the requirements for reporting of data are too onerous or too costly or whether

the base payment is right. But the risk adjustment that has been

proposed by HCFA, I think is a very reasonable rule. I think by

having it phased in, by backloading the impact, by using full encounter data as soon as they can, they have really produced a very

reasonable rule. And I would urge you to proceed with it. Thank

you.

[The prepared statement of Gail R. Wilensky follows.]

PREPARED STATEMENT OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT ADVISORY

COMMISSION

Good morning Chairman Bilirakis and members of the Subcommittee. I am Gail

Wilensky, Chair of the Medicare Payment Advisory Commission (MedPAC). I am

pleased to be here this morning to discuss the issue of risk adjustment and the

Medicare+Choice program.

SUMMARY

The system used to adjust payments to Medicare’s risk-contracting plans and now

Medicare+Choice plans has been widely acknowledged to be inadequate because it

does not accurately reflect predictable differences in enrollees’ health spending. As

a result, Medicare has overpaid plans to care for relatively healthy enrollees and

underpaid plans to care for those in poorer health. Overall, payments have exceeded

plans’ costs of providing the basic Medicare benefit package.

A better risk adjustment system would improve payment equity across plans and

reduce Medicare’s overpayments to plans. The interim risk adjustment system proposed by the Health Care Financing Administration (HCFA)—which relies on principal diagnoses from inpatient hospital stays—is imperfect, but it represents a step

in the right direction by making payments correspond more closely to enrollees’

health needs. Moreover, many of the limitations of the proposed interim system

could be mitigated by moving to a system based on diagnosis data from all sites of

care. MedPAC supports HCFA’s efforts to do this effective for payments in 2004.

Adopting any new system of risk adjustment would introduce swings in payments

to plans. Accordingly, MedPAC supports the phase-in proposed by HCFA that backloads the impact.

37

RISK ADJUSTMENT AND WHY IT IS NEEDED

Risk adjustment is a term used to describe incorporating predictable differences

in health status and service needs into the capitation payments made to health

plans. When payments are risk adjusted, plans receive larger payments for their relatively sick enrollees and smaller payments for their healthier ones.

In Medicare, risk adjustment is intended both to make payments equitable across

Medicare+Choice plans and to account for differences in the mix of enrollees between the traditional fee-for-service program and the Medicare+Choice program. Put

another way, risk adjustment may be viewed as a means of encouraging health

plans to serve beneficiaries with severe or chronic illnesses by paying plans more

to care for them.

Medicare beneficiaries’ needs for health services—inpatient care, physician visits,

and so on—vary, and this variation has both a random component and a systematic

component. The random component reflects service needs that are, by definition, unpredictable, so that if there were no other differences among beneficiaries, risk adjustment would not be necessary. In such a situation, unexpectedly high costs for

some enrollees in a plan would be offset by unexpectedly low costs for other enrollees. Given sufficient numbers of enrollees, payments to plans would be correct on

average.

In fact, there are differences among beneficiaries that lead to systematic and predictable differences in their needs for health services. For example, older people use

more services than younger people, and people with severe or chronic illnesses use

more services than others. These predictable differences in the use of services—

whether they are predictable either by health plans or by enrollees themselves—introduce the potential for risk selection. If no adjustments are made to account for

these differences, plans will be overpaid for healthy enrollees and underpaid for sick

enrollees. Accordingly, they will have an incentive to enroll beneficiaries whose expected costs are below average, because they will still receive the average payment.

If plans act on this incentive and successfully attract relatively healthy beneficiaries, aggregate payments will be too high.

MEDICARE’S CURRENT SYSTEM OF RISK ADJUSTMENT

Currently, Medicare adjusts payments to private health plans to reflect only differences among enrollees in their demographic characteristics (age and sex), employment status, institutional status, and eligibility for Medicaid. This risk adjustment

system accounts for the relatively greater use of health services of older beneficiaries and those who are institutionalized, and the relatively lower expected costs

associated with working enrollees who have primary coverage through their employers. However, it does not account for variation due to differences in health status.

Until 1998, the original payment method paid 95 percent of expected fee-for-service

spending for beneficiaries with similar characteristics, which was intended to account for health plans’ ability to deliver care more efficiently. Now, payments are

based on updated 1997 rates.

Payment inequity and overpayment under the current system

A common complaint about the current system is that plans have experienced significant favorable risk selection—enrollment of relatively healthy beneficiaries—that

is not reflected in their payments. Because it does not take health status into account, the current system rewards organizations that attract healthier enrollees because it does a very poor job of accounting for predictable differences in health

spending. Plans are thus paid the same amount for two beneficiaries with identical

demographic characteristics, even though differences in their health status would

suggest that one will be much more costly than the other.

Empirical research supports the assertion that plans have experienced favorable

selection while their payments have been based on average risks within demographic groups. For example, Riley and colleagues (1996) found that in 1994 the

predicted costs of Medicare risk plan enrollees were 12 percent lower, on average,

than the predicted costs of fee-for-service enrollees with the same demographic characteristics. Because payments currently are adjusted only for demographic differences, even setting rates at 95 percent of the amount Medicare expected to spend

for a beneficiary in the fee-for-service program resulted in overpayments of as much

as 7 percent (Riley et al. 1996, Hill et al. 1992). Those overpayments are in part

why Medicare risk plans have been able to offer expanded coverage to enrollees.

Some favorable risk selection may be inevitable because the methods organizations use to recruit enrollees might not reach people with poor health status, such

as the institutionalized, or because healthy people may be less particular about

being able to see a specific physician. Moreover, even if selection to plans has been

38

favorable in the aggregate, that does not mean that all individual plans have experienced favorable selection. For example, one study shows that mortality and hospitalization rates rise as length of managed care enrollment increases (PPRC 1996).

This ‘‘regression towards the mean’’ means that in terms of their use of health services, managed care enrollees become more like fee-for-service beneficiaries over time.

Thus, plans that have participated in Medicare longest and have long-tenured enrollees may see less favorable selection.

Risk adjustment requirements in the Balanced Budget Act

In response to concerns about the current system, the Balanced Budget Act of

1997 (BBA) directed HCFA to develop a new risk adjustment system. The rationale

of the Congress for mandating the new system was to make Medicare’s payments

to Medicare+Choice organizations more accurately reflect predictable differences in

health spending by enrollees. This new system should improve Medicare+Choice by

making payments more equitable across plans and making them reflect the generally better health of Medicare+Choice enrollees as compared with fee-for-service

beneficiaries.

The BBA required the new risk adjustment system to use enrollees’ health status

and demographic characteristics to account for variations in their expected spending. It laid out a very tight time schedule, requiring HCFA to implement the system

by January 1, 2000.To meet that schedule, the agency must:

• publish a preliminary notice by January 15, 1999, describing the changes in methods and assumptions it will use to determine payment rates for 2000, compared

with those for 1999 (HCFA 1999);

• publish a final notice by March 1, 1999, on the payment rates for 2000 and the

risk and other factors it will use to adjust those payment rates; and

• submit a report to the Congress that describes the risk adjustment method it will

implement with the new payment rates, also by March 1, 1999.

While HCFA has supported research to develop improved risk adjustment methods for more than a decade, implementing the new system has required HCFA to

collect and analyze a substantial amount of new data in a short period of time. The

agency must measure not only the health status of beneficiaries enrolled in

Medicare+Choice plans, but health status and subsequent spending for beneficiaries

in the traditional fee-for-service program.

HCFA must collect data from Medicare+Choice organizations both to determine

monthly payments for each enrollee starting in 2000 and to inform Medicare+Choice

organizations about the anticipated effects of the new risk adjustment system.

HCFA must measure health status and spending for fee-for-service beneficiaries

for two reasons. First, the agency must estimate risk scores that measure relative

levels of expected spending for beneficiaries with different combinations of health

conditions and demographic characteristics. These scores require beneficiary-specific

data on health conditions, demographic characteristics, and annual Medicare spending for covered services that are currently available only for beneficiaries in the traditional fee-for-service program. Second, once the new risk scores are developed,

HCFA must adjust the per capita monthly payment rate for each county—the county rate book—to reflect the county’s expected level of per capita spending for a beneficiary with national average health and demographic characteristics.

To facilitate these tasks, the BBA permitted HCFA to collect encounter data—

which provide information similar to claims data—on hospital inpatient stays from

Medicare+Choice organizations, but not before January 1, 1998. Starting July 1,

1998, HCFA could collect encounter data from other providers of care such as physician offices, hospital outpatient departments, skilled nursing facilities, and home

health agencies. HCFA will be able to use the diagnoses reported in the encounter

data to develop indicators of beneficiary health status.

HCFA has indicated it has been meeting the time requirements of the BBA and

has collected almost complete hospital inpatient encounter data records from nearly

all organizations. A small number of organizations have supplied incomplete data,

and HCFA is working with them to get complete data. Some organizations are less

confident and believe the data generally are not complete due to systems problems.

However, the actual risk scores will be based on the next round of data collection,

which should afford an opportunity to work out existing problems.

HCFA’S PROPOSED INTERIM SYSTEM

The schedule outlined in the BBA restricted HCFA to adopt, at least initially, an

interim system in which health status will be measured using only hospital inpatient diagnoses. Before the Congress passed the BBA, HCFA argued that it needed

data as soon as possible to implement an improved risk adjustment system. HowVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00041 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
39

1 Inpatient diagnoses are based on encounter data submitted by organizations for current enrollees and on Medicare fee-for-service claims for new enrollees who were previously in the traditional program. Risk scores for beneficiaries who are newly eligible for Medicare and who enroll in a Medicare+Choice plan will be based solely on their demographic characteristics. This

is necessary because HCFA lacks a claims history for these beneficiaries. 2 In principle, risk scores could (perhaps should) be estimated using Medicare+Choice spending

patterns, but data on annual spending for covered services, which are needed to estimate expected spending given enrollees’ diagnoses and demographic characteristics, are not now available for Medicare+Choice enrollees.

ever, HCFA and the Congress recognized that Medicare+Choice organizations could

not establish systems for reporting data from sites of care other than hospital inpatient departments in time for implementation by January 1, 2000. Therefore, HCFA

indicated to the Congress it needed inpatient data by a particular date and left the

Congress to determine the remaining time frame.

Description of the proposed interim system

In the interim system, HCFA will determine payments to Medicare+Choice organizations according to the following process. First, HCFA will characterize beneficiaries by:

• age and sex;

• principal diagnoses associated with any inpatient hospital stays they had during

the previous year;1

• eligibility for Medicaid benefits during the previous year; and

• for aged beneficiaries, previous eligibility for Medicare on the basis of a disability.

Based on this classification, HCFA will determine prospective risk scores for

Medicare+Choice enrollees (see the Appendix for more detail). Risk scores are intended to measure enrollees’ expected spending in the forthcoming payment year

relative to that of the average beneficiary in the traditional fee-for-service program.

As in the current risk adjustment system, spending patterns in the traditional feefor-service program will be treated as a baseline, so the risk score associated with

each combination of demographic and health status factors will be estimated using

fee-for-service data.2

In the last step, HCFA will calculate payments for enrollees as the product of

three factors:

• the year 2000 payment amount for enrollees’ county of residence from the county

rate book;

• a factor that will adjust the county payment rate to reflect the change in risk

measurement methods; and

• the enrollees’ risk scores based on the interim system.

The county adjustment factors are needed to change the county payment amounts

so they are consistent with the new system. Under the current system, each county

payment rate is based on the updated 1997 payment rate, which reflects the current

expected fee-for-service spending per capita in the county for a beneficiary with the

national average demographic profile. Because the new risk adjustment system captures risk differences among beneficiaries more precisely than does the current system, HCFA needs to recalibrate the county amounts using the new adjusters. This

method will ensure that the county payment rates reflect the 1997 expected fee-forservice spending per capita in the county for a national average beneficiary, as

measured by the new system.

The interim system intended to improve payment equity

The interim risk adjustment system should be an improvement over the current

system because payments to organizations will more accurately reflect the predictable differences in health spending by their enrollees. If it works as intended, the

system will encourage organizations to compete on the basis of how effectively they

manage care and not reward plans for attracting favorable risks.

The interim system is consistent with the BBA’s objectives for risk adjustment.

First, it will encourage organizations to compete on factors other than risk selection

because the profits from favorable selection will be lower. Second, organizations may

have more resources for developing specialized care management programs for enrollees with serious conditions, which may lead to improvements in efficiency and

in the quality of care enrollees receive. Finally, aggregate overpayments to

Medicare+Choice organizations that result from enrolling healthier Medicare beneficiaries may be reduced.

40

3 In fact, there will be a lag of six months between collecting diagnosis data and calculating

risk scores. Thus, payments for calendar 2000 will be based on data collected between July 1,

1998 and June 30, 1999.

Potential concerns with the interim system

Despite these improvements over the current system, the interim system’s dependence on hospital inpatient diagnoses raises several potential concerns that policymakers should monitor closely.

Incentives to hospitalize inappropriately. Because organizations will receive higher

payments only for enrollees who have been hospitalized, the proposed system may

create incentives for Medicare+Choice organizations to hospitalize enrollees inappropriately. However, the impact of such incentives is likely to be mitigated by a number of factors.

• First, payments for enrollees’ hospital stays are based on their expected spending

in the year following the stay, so the incremental payment may be lower in

many cases than the hospitalization cost the organization incurred. • Second, organizations will not receive an increased payment until the calendar

year after a hospitalization, and then only if the hospitalized beneficiary remains enrolled in the same organization.3

• Finally, organizations would have to influence physicians to hospitalize more patients and to overcome resistance on the part of enrollees to being hospitalized.

To further counteract any incentive to hospitalize, HCFA will treat enrollees with

one-day inpatient stays and those with diagnoses for which hospitalization is discretionary the same as enrollees who were not hospitalized. HCFA considers a hospitalization to be discretionary if the principal diagnosis represents only a minor or

transitory disease or disorder, is rarely the main cause of an inpatient stay, or is

vague or ambiguous.

Adjustments based on fee-for-service patterns. A second potential problem is that

risk scores based on fee-for-service hospitalization patterns may understate the

riskiness of certain Medicare+Choice enrollees. This understatement will occur if

Medicare+Choice organizations substitute other sites of care in place of hospitalizations more frequently than do providers in traditional fee-for-service Medicare. If

this were true, Medicare+Choice enrollees with serious conditions would be hospitalized less often and would receive lower risk scores, on average, than fee-for-service

beneficiaries with comparable conditions and demographic characteristics.

How serious this problem could be is unclear. Hill and colleagues (1992) found

that Medicare managed care organizations did not reduce the hospitalization rate

relative to fee-for-service Medicare. But Medicare+Choice organizations have also

argued that they hospitalize comparable patients for shorter stays than do fee-forservice providers in traditional Medicare, and results from Hill and others support

this argument. To the extent organizations shorten hospital stays to one day,

HCFA’s proposal to treat enrollees with one-day stays the same as enrollees without

inpatient stays will compound any understatement caused by calibrating risk scores

based on fee-for-service data.

Potential for large changes in payments. A third issue is that implementing any

improvements in risk adjustment will often lead to changes in payments to some

individual plans that are much larger than the change in aggregate

Medicare+Choice payments. Under the interim system, these changes could affect

some Medicare+Choice organizations’ decisions to participate in some or all of the

market areas they serve for Medicare and disrupt Medicare+Choice coverage for

some beneficiaries.

Medicare+Choice organizations are understandably concerned about the effects of

HCFA’s new risk adjustment system on their future payments. Other things being

equal, adoption of this new system on January 1, 2000, will change payments for

individual organizations and reduce overall Medicare+Choice payments. However,

the full effects of the new system are somewhat uncertain because the data that

HCFA will use to determine payments to organizations in 2000 will not be available

until late in 1999 when enrollment data are available.

MedPAC has not yet made a comprehensive assessment of the impact of the new

system on specific plans. But the amounts involved will be significant. Based on preliminary data, HCFA estimates that if the new system were implemented immediately and if there were no changes in the composition of enrollment:

• variation in payments for individuals would range by a factor of about 25, compared with the current variation of about 6;

• additional payments would be made for about 12 percent of enrollees, and about

20 percent of total payments would be redistributed;

• aggregate plan payments would fall by 7.6 percent; and

41

4 Risk adjustment may reduce incentives for risk selection, but will not by itself create neutral

financial incentives to provide specific services. In its March 1998 Report to the Congress,

MedPAC recommended a large-scale demonstration of partial capitation or other methods that

would pay plans partly on the basis of a capitated rate and partly on the basis of payment for

services used. The Commission continues to support such a demonstration to test the merits of

supplementing risk adjustment with risk sharing. 5 As an example of how the blend will work in 2000, consider an organization that would

receive a monthly payment for an enrollee of $470 under the interim system and $500 under

the current system. In 2000, the blended monthly payment would be: (.10)x($470) + (.90)x($500)

= $497.

• payments to some plans could fall by 15 percent, whereas payments to others

could increase by 5 percent.

Inpatient data inadequate. Finally, some analysts have expressed concerns that

payments to Medicare+Choice organizations under the interim system will not fully

account for measurable and predictable differences in spending among their enrollees because there is diagnosis and health status information that is not reflected

in the demographic and hospital diagnosis data used. As a result, organizations that

attract seriously ill enrollees still will be underpaid, while those that attract healthy

ones will continue to be overpaid. This concern is valid, but the new system nonetheless represents a substantial improvement over the existing system.

MEDPAC’S RECOMMENDATIONS

In MedPAC’s Report to the Congress: Medicare Payment Policy that will be released next week, the Commission makes two recommendations that could mitigate

many of the concerns associated with a new risk adjustment system for

Medicare+Choice.4

Recommendation to use diagnosis data from all sites of care

Many of the problems cited for the proposed interim system could be mitigated

by replacing it with a permanent one in which health status is based on diagnoses

assigned during both inpatient hospital and other types of health care encounters.

Thus, MedPAC recommends that:

As quickly as feasible, the Secretary should develop the capability to use diagnosis data from all sites of care for risk adjustment.

In its January 15, 1999, 45-day risk adjustment notice, HCFA indicated it intends

to replace the interim system on January 1, 2004, with a comprehensive system

based on diagnoses from beneficiaries’ encounters with all major types of providers.

To make that possible, HCFA will require organizations to augment their hospital

inpatient data with information from enrollees’ encounters in physicians’ offices,

hospital outpatient departments, skilled nursing facilities, and home health agencies. However, this requirement will not be implemented before October 1, 1999.

Recommendation to phase in the interim system to cushion its effects on payments

MedPAC agrees with the Secretary’s plan to phase in the interim risk adjustment

system:

The Secretary’s plan to phase in the interim risk adjustment system—with a

method that uses a weighted blend of the payment amounts that would apply

under the interim system and those that would apply under the current system—is sound. The weight on the interim payment amounts should be back-end

loaded. That is, the weights should be relatively low in the first years so that

most organizations will not experience extreme changes in their total payments.

The phase-in should reduce the number of organizations that withdraw from the

Medicare+Choice program, but it also will slow the benefits of adopting the interim

risk adjustment system. In addition, the phase-in will raise Medicare spending because the reduction in payments that otherwise might occur under the interim system will not be fully realized.

Blended payments will be made during 2000 through 2003. In 2000, payments

will be calculated using 90 percent of the existing system and 10 percent on the interim system.5 Progressively lower weights will be assigned to the existing system

in 2001 through 2003. In 2004, payments will be based on full implementation of

a comprehensive risk adjustment system that uses data from all sites of care.

CONCLUSION

Changes in Medicare’s rules for private health plans participating in the program

have had both intended and unintended consequences. These changes, introduced in

conjunction with the new Medicare+Choice program, were designed to improve

Medicare’s risk contracting program by increasing the fairness of the distribution

42

of payments to health plans, by creating incentives to improve quality of care, and

by helping beneficiaries to make more informed choices. But taken together with

lower base payment updates attributable to the BBA and to unexpected slowing in

the growth of fee-for-service Medicare spending, the new rules may have made participation in Medicare less attractive from the plans’ perspective. Plans have expressed particular concerns about the combined impact of lower base payment updates under the BBA and possible decreases from that base as risk adjustment is

implemented.

Improving Medicare’s current risk adjustment system is essential. Risk adjustment is about getting relative payment rates right, so that payments for enrollees

in the Medicare+Choice program more closely match their expected costs. It is appropriate that the new system of risk adjustment be phased in, both to avoid any

instability that sudden swings in payments to health plans could have for their enrollees and to allow time for policymakers to assess how it is working, but the benefits of better risk adjustment should not be delayed more than necessary. While the

Commission recognizes that the transition to the new Medicare+Choice program has

been less smooth than many had hoped, we believe the issues raised during the

transition should be considered separately from the issue of improving Medicare’s

system of risk adjustment.

Mr. BILIRAKIS. Thank you, Doctor. Mr. Scanlon.

STATEMENT OF WILLIAM J. SCANLON

Mr. SCANLON. Thank you very much, Mr. Chairman and members of the subcommittee. I am pleased to be here today as you consider HCFA’s proposed risk adjuster for rates paid to

Medicare+Choice Plans. As you have heard from several sources,

Medicare’s current risk adjuster falls far short of its intended goal

of assuring appropriate payment for such plans. In 1997, we issued

a report on Medicare’s payments to HMO’s in California.

I think that the California study produced two findings which

are very relevant for today’s discussions. First of all, as other research has demonstrated for earlier time periods and using smaller

numbers of beneficiaries, we found that the combination of the

Medicare’s pre-Balanced Budget Act rate setting method and the

existence of favorable selection for HMO’s, led to excessive capitation rates.

These rates, based on the experience of a sicker population of

non-enrollees, were paying for the services needed by the healthier

population of enrollees. We estimated that $1 billion in overpayments, representing about 16 percent of the total payments, were

made to plans in 12 California counties. A quarter of these overpayments were attributable to computing each county’s average

rate using only the service experience of fee-for-service beneficiaries and not that of all beneficiaries.

Three-quarters of the overpayments was due to the failure of

Medicare’s risk adjuster to adequately lower those average rates to

be consistent with managed care enrollees, better health and lower

use of services. The second finding was that under Medicare’s preBalanced Budget Act rate setting method, excess payments were

continuing to grow with increased enrollment, rather than diminish, which many had speculated they would.

The reason was that as a county’s managed care population

grew, the concentrations of higher cost beneficiaries remaining in

fee-for-service also grew. Rates based on the sicker fee-for-service

populations resulted in increasingly excessive payments relative to

the average better health of the managed care population. Our

work specifically showed that HMO’s in counties with the highest

43

managed care penetration received a higher share of excess payments.

The Balanced Budget Act modified the method for setting county

rates, halting the spiral of increasing overpayments being built into

these average rates. However, in establishing 1997 levels as the

base, it is also clear that historical overpayments remain in today’s

capitation rates. The rates continue to be quite generous relative

to the expected use of medical services by Medicare’s managed care

population.

However, excess payments in the aggregate do not mean that

every plan is overpaid. A fundamental problem with Medicare’s

current risk adjustment method is that it puts plans enrolling high

cost beneficiaries at a competitive disadvantage. Demographic information alone is inadequate to predict an enrollee’s health care

cost. As a result, a current risk adjustment does not adequately

raise a plan’s capitation rate enough to pay appropriately for sicker

beneficiaries’ use of services.

As a practical matter, Medicare managed care plans receiving a

fixed payment per enrollee are not likely to go out of their way to

encourage Medicare’s frailest seniors to join their plans. We and

others have repeatedly called for a health-based adjuster, HCFA’s

proposed method using hospital and patient data, while not perfect,

is headed in the right direction.

HCFA has taken steps to ensure that the shortcomings associated with having to use these data are reduced. It was an appropriate step to seek expert clinical input to identify and exclude

from the risk adjustment calculations hospitalizations that were

more likely discretionary or not predictive of future costs. We also

find that HCFA’s phase in approach is prudent.

It avoids rapid payment changes that plans may find difficult

and that could adversely affect beneficiaries if plans respond by

suddenly altering their benefit packages or reconsidering their commitment to the Medicare+Choice Program. Nevertheless, because

having encountered data on Medicare managed care enrollees’ use

of services in all settings is critical to improving risk adjustment,

we urge that plans participating in Medicare+Choice collect and report these data to HCFA as soon as possible.

All plans may not be able to submit such data quickly, so it may

not be feasible to accelerate the transition to the comprehensive

risk adjusters currently planned for the year 2004. However, having full encounter data from some plans, may allow HCFA to assess the appropriateness of the interim risk adjusters and make

modifications during the transition period, if appropriate.

Overall, we believe that the new health-based risk adjuster system will help reduce overpayments to managed care plans and will

also make payments fairer to plans enrolling Medicare’s costliest

beneficiaries. Thank you, Mr. Chairman. I would be happy to answer any questions you or the members may have.

[The prepared statement of William J.. Scanlon follows.]

PREPARED STATEMENT OF WILLIAM J. SCANLON, DIRECTOR, HEALTH FINANCING AND

PUBLIC HEALTH ISSUES, HEALTH EDUCATION AND HUMAN SERVICES DIVISION, GAO

Mr. Chairman and Members of the Subcommittee: We are pleased to be here

today as you address the question of adjusting Medicare’s payments to managed

care plans in the Medicare+Choice program. Although the subject matter is techVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00046 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
44

1Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments

(GAO/HEHS-97-16, Apr. 25, 1997). 2 About 90 percent of the 6.8 million Medicare beneficiaries are enrolled in managed care

plans that receive fixed monthly capitation payments. The remainder are enrolled in plans that

are reimbursed for the costs they incur, less the estimated value of beneficiary cost-sharing.

nical, its implications are significant for Medicare’s greater use of managed care.

The Balanced Budget Act of 1997 (BBA) includes provisions designed to slow the

growth of Medicare payments overall. BBA also encourages the expansion of managed care in its creation of Medicare+Choice, designed to offer beneficiaries more

health plan options beyond those available through Medicare’s health maintenance

organizations (HMO). BBA provisions modify the method used to pay health plans,

and it is the details for implementing these provisions—representing billions of dollars in savings—that are under discussion here today.

Managed care plans receive from Medicare a fixed monthly payment, called a

capitation payment, for each beneficiary they enroll. Because the payment is fixed

per enrollee, regardless of what the plan spends for each enrollee’s care, health

plans lack the incentive to provide unnecessary services. However, the enrollment

of beneficiaries in managed care plans has not saved the government money as expected, mainly for two reasons. First, as we and others previously determined, Medicare’s capitation rates are excessive because payments are based on health care

spending for the average non-enrolled beneficiary, while the plans’ enrollees tend to

be healthier than average.1 Second, instead of diminishing as more beneficiaries enrolled in managed care, excess payments per enrollee continued to grow. To correct

these problems, BBA changed the rate-setting formula used by the Health Care Financing Administration (HCFA), the agency responsible for administering Medicare.

It required that most of the rate-setting provisions be in place in 1998 and required

that HCFA replace Medicare’s current risk adjuster—the mechanism that modifies

a plan’s average capitation rate to better reflect an enrollee’s expected medical

costs—with a new one to be implemented in 2000. The risk adjuster in place has

been widely criticized as a major factor in the HMO overpayment problem.

In considering Medicare’s new rate-setting method, my comments today will focus

on (1) the importance of improving the current risk adjustment method, (2) the implications of rate-setting changes implemented in 1998, and (3) the advantages and

drawbacks of HCFA’s proposed new interim risk adjuster. My comments are based

on information drawn from our issued work on this subject, supplemented by relevant published studies and interviews with HCFA officials.

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

• Studies by us and others show that methodological flaws have led to billions of

dollars in excess payments and inappropriate payment disparities.

• BBA provisions now in place may reduce, but not eliminate, excess payments; and

payment disparities persist that could jeopardize plan participation and access

to managed care for costlier seniors.

• The new risk adjuster required to be in place by 2000 is intended to improve estimates of health plan enrollees’ medical costs. Better cost estimates producing

fairer rates could reduce the unnecessary spending of taxpayer dollars while

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

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

new adjuster, thereby recognizing the need to avoid sharp payment changes that

could affect plans’ offerings and diminish the attractiveness of the Medicare+Choice

program to beneficiaries.

BACKGROUND

The long-term financial condition of Medicare is now one of the nation’s most

pressing problems. As the nation’s largest health insurance program, Medicare’s size

and impact on all Americans is significant. The program covers about 39 million elderly and disabled beneficiaries at a cost of more than $193 billion in fiscal year

1998. About 83 percent of the program’s beneficiaries receive health care on a feefor-service (FFS) basis, in which providers are reimbursed for each covered service

they deliver to beneficiaries. The rest, about 6.8 million people, are provided care

through more than 450 managed care plans, as of December 1, 1998.2

To extend the solvency of Medicare’s Hospital Insurance Trust fund beyond 2008,

BBA provided for substantial reforms in both the FFS and managed care compoVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00047 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
45

3Separate rates, using the same demographic traits, are calculated for beneficiaries who qualify for Medicare because of a disability (under age 65). Separate rates are also set for beneficiaries with end-stage renal disease (kidney failure). 4Technically, the law requires the Secretary of the Health and Human Services to develop,

report, and implement the health-based risk adjustment method. 5GAO-HEHS-97-16, Apr. 25, 1997. This is consistent with a 1996 study by HCFA researchers

finding that health plan enrollees had costs estimated at 12 to 14 percent below the average

beneficiary’s. (Riley and others, HCFA Review, 1996.)

nents of Medicare. BBA provisions are expected to achieve estimated Medicare savings that reduce the program’s average annual growth rate by more than 3 percent,

representing over $100 billion over 5 years.

One way in which BBA seeks to restructure Medicare is to encourage greater participation in Medicare+Choice. Under this program, BBA permits the creation of

new types of Medicare health plans, such as preferred provider organizations and

provider-sponsored organizations. BBA’s emphasis on Medicare+Choice reflects the

perspective that increased managed care enrollment will help slow Medicare spending while expanding beneficiaries’ options in choosing health plans.

BBA also sought to improve the method for setting managed care plans’ payment

rates. In general terms, the pre-BBA rate-setting methodology worked as follows.

Every year, HCFA estimated how much it would spend in each U.S. county to serve

the ‘‘average’’ FFS beneficiary. It would then discount that amount by 5 percent

under the assumption that the managed care plans provided care more efficiently

than the unmanaged FFS system. The resulting amount constituted a base county

rate to be paid to the plans operating in that county. Because some beneficiaries

were expected to require more health services than others, HCFA ‘‘risk adjusted’’

the base rate up or down for each beneficiary, depending on certain beneficiary

characteristics—specifically, age; sex; eligibility for Medicaid; employment status;

and residence in an institution, such as a skilled nursing facility.3

BBA’s new payment rate method seeks to address the two main factors contributing to excess payments: (1) the disparity in expected health costs between Medicare’s FFS and managed care populations built into each county’s base capitation

rates and (2) the failure of the risk adjuster to correct for that disparity on an individual enrollee level. BBA required that a county’s capitation rate equal the highest

of

• a blended capitation rate, which reflects a combination of local and national average FFS spending from 1997, updated for increases in national spending;

• the previous year’s county rate increased by 2 percent; or

• a minimum payment amount, called a floor, set equal to $367 in 1998 and updated each year.

Loosening the link between the current cost of Medicare’s FFS population and

counties’ base rates helps prevent the excess payments from continuing to increase

as more beneficiaries join managed care plans. BBA also acknowledges the need for

individual enrollee adjustments by requiring the development of a risk adjustment

method based on health status. The law requires that HCFA develop and report on

the new risk adjuster by March 1 of this year and the method be in place by January 2000.4

MEDICARE’S CURRENT RISK ADJUSTMENT METHOD FAILS TO PREVENT OVERPAYMENTS

AND APPROPRIATELY TARGET PAYMENTS TO PLANS

Risk adjustment is a tool to set capitation rates so that they reflect enrollees’ expected health costs as accurately as possible. This tool is particularly important

given Medicare’s growing use of managed care and the phenomenon of favorable selection—the tendency of managed care plans to attract a population of Medicare

seniors whose health costs are generally lower than those of the average program

beneficiary. Our 1997 study on payments to California HMOs, which enrolled more

than a third of Medicare’s managed care population, found that Medicare overpaid

plans by about 16 percent because HMO enrollees had costs that were lower than

the average beneficiary’s.5

Medicare’s current risk adjuster cannot sufficiently lower rates to be consistent

with the expected costs of managed care’s healthier population. The reason is that

Medicare’s risk adjuster relies on demographic factors such as age and sex, which

alone are poor predictors of an individual’s health care costs. For example, two beneficiaries can be demographically identical (same age and sex), but one may experience occasional minor ailments while the other may suffer from a serious chronic

condition. Without the use of health status factors to make that distinction, MediVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00048 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
46

6Physician Payment Review Commission, 1997 Annual Report to the Congress.

care’s risk adjuster produces excessive payments in compensating plans for their relatively lower cost enrollees.

The financial consequences of a poor risk adjuster are huge. In our 1997 study of California’s payment rates, we estimated that Medicare paid about $1 billion in

excess to health plans operating in the California in 1995. Shortly before we issued

our report, the Physician Payment Review Commission (PPRC), now a part of the

Medicare Payment Advisory Commission, estimated that annual excess payments to

Medicare HMOs nationwide could total $2 billion.

Some analysts have speculated that, with growing enrollment, health plans would

necessarily enroll a substantially larger share of less healthy beneficiaries, which

would raise plans’ costs and reduce Medicare’s excess payments. Our 1997 analysis,

however, showed that—rather than shrinking excess payments—the rapid growth in

Medicare managed care enrollment actually exacerbated the situation. The counties

with higher managed care enrollment had higher, not lower, excess payments. Data

indicated that the sickest beneficiaries tended to remain in FFS while the healthier

beneficiaries joined managed care plans. Excess payments grew with managed care

enrollment partly because HCFA based the payment rates on average FFS spending, which increased as the pool of FFS beneficiaries shrank and, as a group, became less healthy.

Better risk adjustment is also important for plans that may not be adequately

compensated for serving higher cost beneficiaries who enroll. Having enrollees who

are sicker than the average mix of Medicare beneficiaries can alter a plan’s costs

significantly. About 10 percent of Medicare beneficiaries account for 60 percent of

Medicare’s annual expenditures. Without adequate risk adjustment, plans with

more than their share of the costly beneficiaries are at a competitive disadvantage.

BBA PROVISIONS MAY REDUCE OVERPAYMENTS, BUT SUBSTANTIAL EXCESS LIKELY

REMAINS

BBA contains several provisions, implemented in 1998, that are designed to improve Medicare’s rate-setting method. Certain provisions seek to reduce excess payments and inappropriate geographic disparities. These changes represent steps in

the right direction but do not eliminate the need for a health-based risk adjuster.

Substantial excess payments likely persist, in part, because other BBA provisions

tended to incorporate the excess that existed in 1997 into the current rates.

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

Improved Risk Adjustment

BBA aims to reduce the excess in Medicare’s managed care payments in two

ways. First, BBA holds down managed care per capita spending increases for 5

years. Specifically, BBA sets the factor used to update managed care payment rates

equal to national per capita Medicare growth minus a specified percent: 0.8 percent

in 1998 and 0.5 percent in each of the following 4 years.

BBA also provides for a methodological approach known as ‘‘blending,’’ which may

help reduce excess payments. The blended rate set for each county combines that

county’s 1997 rate, updated for increases in national Medicare spending, and a national average. The blending formula is currently weighted heavily toward local

rates but will gradually change so that local and national rates will be weighted

equally in 2003. Over time, blending will reduce the substantial variation in county

payment rates that now exist. For, example, county rates ranged from a low of $380

to a high of $798 in 1999. Because of BBA-mandated budget neutrality and minimum payment constraints, no county received a blended rate in 1998 or 1999.

Blending is expected to occur for the first time in 2000.

Blending may help reduce excess payments because high-rate counties (where excess payments are estimated to be concentrated) will receive smaller annual increases relative to low-rate counties. Evidence on the relationship between county

payment rates and excess payments is provided in a 1997 PPRC study. PPRC reported that county payment rates tend to overestimate beneficiaries’ health care

costs in high-payment-rate areas and underestimate their costs in low-payment-rate

areas.6 PPRC found that a comprehensive health-based risk adjustment methodology would have lowered, for example, the average Miami-area payment rate from

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

Blending is a rather blunt tool for addressing the excess payment problem, however, and does not obviate the need for improved risk adjustment. As the PPRC results indicate, not all high-rate counties have rates that are too high and not all

47

low-rate counties have rates that are too low. For example, PPRC’s risk-adjustment

methodology would have reduced the average payments in rural Michigan (a relatively low-payment-rate area) from $346 to $334. Furthermore, not all plans in

high-rate counties may receive excess payments. Because payment rates are based

on the expected costs of beneficiaries in average health, plans that attract costly

beneficiaries may be underpaid by the current risk adjustment method.

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

Current Rate Structure

BBA specified that 1997 county rates be used as the basis for all future county

rates beginning in 1998. Although the law changed many aspects of the rate-setting

formula, this BBA provision had the effect of incorporating the excess payments

that existed in 1997 into all future rates.

As we testified before this Subcommittee in February 1997, HCFA’s then current

rate-setting methodology resulted in county rates that were generally too high. Simply put, instead of setting rates based on the expected cost of the average beneficiary in each county, the agency set rates based on the expected costs of serving

FFS beneficiaries. If the agency had included the expected costs of serving managed

care beneficiaries—who as a group tend to be healthier than FFS beneficiaries—the

overall county average would have been lower. About one-quarter of the $1 billion

in overpayments we estimated in our California study resulted from flaws in developing the county rate.

Excess payments are also built into current rates because BBA did not allow

HCFA to adjust 1997 county rates for previous forecast errors—a critical component

of the rate-setting process. Although the process for setting rates was extremely

complex and involved separate adjustments for each county, annual payment rate

updating was straightforward. Each fall, HCFA would forecast total Medicare

spending for the following year; the estimated percentage spending increase, from

the current year to the following year, was used to update the county rates. Before

applying the increase, however, HCFA corrected any forecast errors from previous

years. If HCFA discovered that previous forecasts had overestimated or underestimated the current spending, the update was appropriately adjusted.

HCFA actuaries now estimate, based on FFS claims data, that the 1997 managed

care rates were too high by 4.2 percent. BBA, in establishing a new methodology

for setting rates in 1998 and future years, specified that HCFA use the 1997 rates

as the basis for the new rates. While the law permits HCFA to correct forecasts in

future years, it did not include a provision that would have allowed HCFA to correct

its forecast for 1997. Consequently, about $1.3 billion in overpayments were built

into plans’ annual payment rates beginning in 1998.

HCFA’S PROPOSED RISK ADJUSTMENT APPROACH IMPROVES ON CURRENT METHOD AND

MINIMIZES DISRUPTION FOR PLANS AND BENEFICIARIES

HCFA’s proposed interim health-based risk adjustment method—to be implemented in 2000—represents a major improvement over the current method. For the

first time, Medicare managed care plans can expect to be paid more for serving

beneficiaries with serious health problems and less for serving relatively healthy

ones. The interim method relies exclusively on hospital inpatient data to measure

health status. Although it would be better to measure health status with complete

and reliable data from other settings, such as physicians’ offices, these data are not

yet available. In addition, HCFA’s decision to phase in the new method will likely

minimize disruptive plan pull-outs and altered benefit packages, which could occur

if payment rate changes were implemented too suddenly.

Proposed Risk Adjustment Method Based on Available Hospital Inpatient Data

The proposed method, known as the Principal Inpatient Diagnostic Cost Group

(PIP-DCG) method, would use hospital inpatient data to more accurately match

managed care payments to beneficiaries’ expected total Medicare costs. PIP-DCG

would assign each individual to 1 of 15 categories if during the prior year they had

been hospitalized for certain diagnoses. For example, a beneficiary who had been

hospitalized for congestive heart failure would be placed in one category, while a

beneficiary who had been hospitalized for a kidney infection would be placed in another. Those beneficiaries who were not hospitalized and those who were hospitalized for diagnoses not included in PIP-DCG—about 88 percent of all beneficiaries—

would be placed in the base category. The next year’s payment rate for each enrollee

would be determined by the category the individual was placed in and by certain

demographic data, such as age and sex. Rates for enrollees placed in one of the 15

prior hospitalization groups would be higher than rates for those in the base category with the same demographic characteristics.

48

HCFA anticipated potential concerns about a risk adjustment methodology based

on hospital inpatient data. Such an approach could reward plans that hospitalize

patients unnecessarily or, conversely, penalize efficient plans that provide care in

other, less costly settings. HCFA has attempted to address these concerns in several

ways.

First, PIP-DCG would assign individuals to prior hospitalization categories only

when the diagnosis is for a condition that normally requires hospitalization and is

linked to further medical costs in the following year. To determine which specific

diagnoses to include, HCFA relied on the advice of a clinical panel. The panel recommended that diagnoses associated with about one-third of hospital admissions be

excluded because they (1) could be ambiguous, (2) were for conditions that were

rarely the main cause for an inpatient stay, or (3) were not good predictors of future

health care costs. For example, a beneficiary hospitalized for appendicitis would not

be assigned to a higher cost category because that condition generally is not linked

to further medical costs in the next year. Also, HCFA’s proposal does not permit enhanced payments for hospital diagnoses associated with 1-day stays. These admissions may be more discretionary than admissions for longer stays.

Second, delaying an adjustment in payment until the following year discourages

unnecessary hospitalizations that would trigger an enhanced payment. Further, the

payment delay dampens any incentive to encourage higher cost enrollees who have

been hospitalized to switch plans, since the plan in which the beneficiary is a member the following year receives the payment.

The PIP-DCG method assumes that admission rates for beneficiaries of similar

health status are the same for FFS and managed care providers. Although the evidence on managed care admission rates is limited, findings presented by the American Association of Health Plans last month support this hypothesis. A study conducted for the Association found that hospital admission rates for managed care

plans and FFS plans were comparable. These findings are consistent with those of

a 1993 Mathematica Policy Research study on hospital admissions rates.

Gradual Implementation of Interim Method Will Minimize Impact on Health Plans

and Beneficiaries

HCFA proposes to phase in the new interim risk adjustment method slowly. In

2000, only 10 percent of health plans’ payments will be based on the new system.

This percentage will be increased each year until 2003, when 80 percent of plans’

payments will be based on the PIP-DCG risk-adjusted rate. In 2004, HCFA intends

to implement a more accurate risk adjuster that uses medical data from physicians’

offices, skilled nursing facilities, home health agencies, and other health care settings and providers—in addition to inpatient hospital data.

Although a gradual phase-in of the interim risk adjuster delays the full realization of Medicare savings, it also minimizes potential disruptions for both health

plans and beneficiaries. Rapid payment rate changes could strain the financial

soundness of some plans. Rapid rate changes could also adversely affect beneficiaries if plans respond by suddenly altering their benefit packages or reconsidering their commitment to the Medicare+Choice program.

If HCFA had comprehensive patient-level data from Medicare managed care

plans, it could adjust the PIP-DCG methodology to reflect any differences in practice

patterns between managed care and FFS providers. Although plans currently are

required to submit only hospital inpatient data, the agency intends to begin collecting more comprehensive data shortly. Therefore, it may be possible to refine the

PIP-DCG methodology before the implementation of the full risk adjustment in

2004.

CONCLUSIONS

The implementation of a new health-based risk adjustment system will lead to

major changes in Medicare managed care payments and will create more desirable

incentives. Plans attracting healthier beneficiaries will be paid less, whereas those

attracting costlier beneficiaries will be paid more. In more fairly compensating individual plans for the beneficiaries they enroll, the new method will reduce excess

payments and produce savings for taxpayers. The new method represents an interim step in the use of health-based risk adjustment. We believe that to facilitate

the introduction of an improved risk adjuster in 2004, plans should aggressively

pursue the collection and reporting of more comprehensive data on beneficiaries’

medical conditions.

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

49

Related GAO Products

Medicare Managed Care: Payment Rates, Local Fee-for-Service Spending, and Other Factors

Affect Plans’ Benefit Packages (GAO/HEHS-99-9R, Oct. 9, 1998).

Medicare HMO Institutional Payments: Improved HCFA Oversight, More Recent Cost Data

Could Reduce Overpayments (GAO/HEHS-98-153, Sept. 9, 1998).

Medicare HMOs: Setting Payment Rates Through Competitive Bidding (GAO/HEHS-97-154R,

June 12, 1997).

Medicare Managed Care: HMO Rates, Other Factors Create Uneven Availability of Benefits

(GAO/T-HEHS-97-133, May 19, 1997).

Medicare HMO Enrollment: Area Differences Affected by Factors Other Than Payment Rates

(GAO/HEHS-97-37, May 2, 1997).

Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments

(GAO/HEHS-97-16, Apr. 25, 1997).

Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by Improving Accuracy of

the County Rates (GAO/T-HEHS-97-82, Feb. 27, 1997).

Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO Payment Problem

(GAO/HEHS-96-21, Nov. 8, 1995).

Medicare: Changes to HMO Rate-Setting Method Are Needed to Reduce Program Costs (GAO/

HEHS-94-119, Sept. 2, 1994).

Medicare: Health Maintenance Organization Rate-Setting Issues (GAO/HRD-89-46, Jan. 31,

1989).

Mr. BILIRAKIS. Thank you Mr. Scanlon and Dr. Wilensky. Are

you both concerned that in some areas of the country risk adjustment may result in more plan withdrawals, on the assumption now

that a lot of the withdrawals are due to the forthcoming risk adjustment plan?

Ms. WILENSKY. I am concerned in that this will exacerbate the

problem we saw this year. But I think it may be possible to make

some changes that will reduce some of the likely that will occur.

As I mention in my testimony, part of the concern that we have

heard raised is that the Balance Budget Act required the premium

benefit combination to be reported in May, which is very early in

the year.

And that some of the plans found themselves in a position by

mid-summer where their expectations after one quarter were not

well met. And that when they attempted to make some adjustments in the early fall, they were unable to do so. One of the recommendations that MedPAC is making is to move that date a little

later. We understand it is a tradeoff with making sure that seniors

can get their information in a timely way, but 6 months seems a

little unduly long as a window.

And that that might help the plans be in a better position to

know the premium benefit tradeoffs. Second, we ought to make

sure that——

Mr. BILIRAKIS. The July 1, date, I guess, is now the firm date.

Ms. WILENSKY. Yes.

Mr. BILIRAKIS. Are you satisfied that it is——

Ms. WILENSKY. I think the July date was what we were thinking

about. I thought that required a statutory change. So it maybe

what has been agreed to informally, but I don’t know that. But if

that would go through, I think that would be a good improvement.

The second thing is whether the quality requirements are appropriate to the needs. In having been in that place, I have sympathy

with the interest and need for information. Making sure that the

requirements are not too burdensome and too costly is something

that ought to have some oversight.

And ultimately whether or not the payment is right. Particularly

the 95 percent after the full phase in of risk adjustment I think

would also be an appropriate reconsideration. None of those, in my

view, alters the appropriateness of risk adjustment. It is a problem.

50

You heard, Mr. Waxman, Mr. Brown, all of you on the committees,

discussing why having appropriate adjustments for the health status should be considered as a part of the plan.

I urge you not to try to fix one problem by altering the solution

of another.

Mr. SCANLON. We share the concern about the withdrawals of

plans and the reductions in service areas in different portions of

the country. And certainly the change in the rates may be a factor.

However, in looking at participation of plans in the past, we discovered that rates alone are not the sole determinate of how much

managed care penetration there is in an area.

We have low rate areas of this country in which there was very

extensive managed care participation on the part of Medicare beneficiaries in part because there was strong participation among nonMedicare, younger individuals in managed care. As Dr. Wilensky

indicated, there has been a series of changes that have occurred recently with respect to managed care participation. The fact that the

volume and the speed with which the changes have occurred is a

major factor in plans perhaps assessing their participation. This

may be a short term phenomenon.

We are doing work for this committee as well as for the Committee on Ways and Means and the Senate Finance Committee

looking at the change in plans’ participation and we will try to

identify, to the extent possible, how different factors have played

a role in affecting participation now. But I would also emphasize

that we are potentially in a period of transition.

In some respects the terms under which Medicare is purchasing

managed care have changed and managed care plans have to assess whether or not they can provide care, under those terms. But

frankly, they have been changed in ways that we have talked about

over the years that are positive from the program’s perspective.

These changes involve trying to align payment appropriately and

making sure that we have accountability for the care that we purchase.

Mr. BILIRAKIS. How close are you, Mr. Scanlon, to definitizing

the reasons why——

Mr. SCANLON. We are hoping to report to you by the end of next

month.

Mr. BILIRAKIS. By the end of March.

Mr. SCANLON. Right.

Mr. BILIRAKIS. Okay, now I guess you are doing that for Ways

and Means now?

Mr. SCANLON. We are doing it for you, Ways and Means and Finance.

Mr. BILIRAKIS. Okay.

Mr. SCANLON. All three committees, all three authorizing committees.

Mr. BILIRAKIS. Well that is, I think significant.

Ms. WILENSKY. Mr. Bilirakis, MedPAC is also attempting to monitor the counties in which change is occurring, withdrawal occurring. And as part of our June Report we will have whatever information is available to us. What has happened and any information

we have as to why there has been withdrawals and the effect that

it has had on the beneficiaries’ access to health care plans.

51

Mr. BILIRAKIS. We have had counties where there have been

withdrawals, but in many of those counties there are other options.

Ms. WILENSKY. Most of the counties.

Mr. BILIRAKIS. Under the fee-for-service. Most of those counties,

yes.

Ms. WILENSKY. Right.

Mr. BILIRAKIS. But there are some counties where there aren’t

any other options and that is significant information. Was that information requested of Mr. Hash? We have a break down by county

and we have the total. For instance, in Florida, 58,571 enrollees

are affected. But only 8,271, as I read this chart, are affected so

adversely that there aren’t any other choices.

So, there is no breakdown of that 8,271 by county so that we can

have some idea. I don’t know——

Ms. WILENSKY. HCFA would have that information. It is available by county.

Mr. BILIRAKIS. Is HCFA still here? All right, can we request that

information from you as soon as you can get it? And since you have

already broken out the 8,271, you must have that by county, I

would think? Good. If you could submit that to us, I would appreciate it. All right, thank you. Mr. Brown.

[The following was received for the record:]

Plans that Left Medicare or Reduced Their Service Area: Counties with No Other Managed Care

Option

(as of the contract year beginning January 1, 1999)

State County Name Contract Name Non-Renew orService Area

Reduction AAPCC Eligibles #Benes

Enrolled

California ................. Colusa ............ Health Net CA .............................. SAR ............ $514.42 2,557 209

California ................. Glenn ............. Health Net CA .............................. SAR ............ $452.95 4,155 483

California ................. Inyo ................ Cigna S. CA ................................. SAR ............ $419.87 3,916 162

California ................. Lassen ........... National Med, Inc ........................ Non-Renew $435.79 3,929 2

California ................. Modoc ............ National Med, Inc ........................ Non-Renew $401.19 1,760 23

California ................. Mono .............. Cigna S. CA ................................. SAR ............ $422.10 812 7

California ................. Monterey ........ Pacificare N. CA .......................... SAR ............ $493.50 43,324 4,325

California ................. Plumas ........... Health Net CA .............................. SAR ............ $517.82 3,996 63

California ................. Shasta ........... National Med, Inc ........................ Non-Renew $490.85 30,917 1,088

California ................. Sierra ............. Health Net CA .............................. SAR ............ $454.96 710 18

California ................. Siskiyou .......... National Med, Inc ........................ Non-Renew $412.28 9,761 275

California Total ....... ........................ ...................................................... .................... ................ 105,837 6,655

Delaware .................. Kent ............... Aetna—Del .................................. Non-Renew $411.14 15,892 760

Delaware .................. Kent ............... AmeriHealth HMO ........................ Non-Renew $411.14 15,892 263

Delaware .................. Kent ............... Optimum Choice .......................... Non-Renew $411.14 15,892 29

Delaware .................. Sussex ............ Aetna—Del .................................. Non-Renew $463.82 29,931 1,072

Delaware .................. Sussex ............ AmeriHealth HMO ........................ Non-Renew $463.82 29,931 869

Delaware .................. Sussex ............ Optimum Choice .......................... Non-Renew $463.82 29,931 379

Delaware Total ........ ........................ ...................................................... .................... ................ 59,862 3,372

Florida ...................... Citrus ............. AvMed .......................................... SAR ............ $463.64 35,278 1,391

Florida ...................... Gilchrist ......... AvMed .......................................... SAR ............ $476.67 2,031 409

Florida ...................... Glades ............ Humana Medical Plan, S. FL ...... SAR ............ $580.75 923 138

Florida ...................... Hendry ............ Humana Medical Plan, S. FL ...... SAR ............ $509.16 3,587 747

Florida ...................... Highlands ...... Humana/PCA ................................ SAR ............ $460.03 25,776 1,218

Florida ...................... Highlands ...... United Health Care FL ................. SAR ............ $460.03 25,776 172

Florida ...................... Marion ............ AvMed .......................................... SAR ............ $426.12 66,282 3,866

Florida ...................... Monroe ........... Humana Medical Plan, S. FL ...... SAR ............ $605.18 11,437 1,234

Florida ...................... Okeechobee .... Humana Medical Plan, S. FL ...... SAR ............ $720.81 6,845 1,970

Florida ...................... Polk ................ Aetna—FL ................................... SAR ............ $397.97 90,138 1,638

Florida ...................... Polk ................ Florida First Health Plans, Inc .... Non-Renew $397.97 90,138 0

Florida ...................... Polk ................ Humana/PCA ................................ SAR ............ $397.97 90,138 169

52

Plans that Left Medicare or Reduced Their Service Area: Counties with No Other Managed Care

Option—Continued

(as of the contract year beginning January 1, 1999)

State County Name Contract Name

Non-Renew or

Service Area

Reduction

AAPCC Eligibles #Benes

Enrolled

Florida ...................... Polk ................ United Health Care FL ................. SAR ............ $397.97 90,138 565

Florida ...................... Polk ................ CIGNA ........................................... SAR ............ $397.97 90,138 10

Florida Total ............ ........................ ...................................................... .................... ................ 242,297 13,527

Kentucky ................... Carroll ............ Southeastern United Medigroup .. SAR ............ $419.61 1,649 0

Kentucky ................... Gallatin .......... Southeastern United Medigroup .. SAR ............ $427.91 919 0

Kentucky ................... Grant .............. Southeastern United Medigroup .. SAR ............ $442.00 2,962 0

Kentucky ................... Hardin ............ Southeastern United Medigroup .. SAR ............ $506.02 10,965 0

Kentucky ................... Henry .............. Southeastern United Medigroup .. SAR ............ $466.06 2,481 0

Kentucky ................... Meade ............ Southeastern United Medigroup .. SAR ............ $508.52 2,198 0

Kentucky ................... Owen .............. Southeastern United Medigroup .. SAR ............ $379.84 1,332 0

Kentucky ................... Shelby ............ Southeastern United Medigroup .. SAR ............ $393.88 3,837 0

Kentucky ................... Spencer .......... Southeastern United Medigroup .. SAR ............ $449.11 1,212 0

Kentucky ................... Trimble ........... Southeastern United Medigroup .. SAR ............ $494.58 1,064 0

Kentucky Total ........ ........................ ...................................................... .................... ................ 28,619 0

Missouri ................... Gasconade ..... Group Health Plan ....................... SAR ............ $379.84 3,270 90

Missouri ................... Montgomery ... Group Health Plan ....................... SAR ............ $400.08 2,412 34

Missouri Total ......... ........................ ...................................................... .................... ................ 5,682 124

Minnesota ................ Goodhue ......... Medica Minn ................................ SAR ............ $379.84 7,170 72

Minnesota Total ...... ........................ ...................................................... .................... ................ 7,170 72

New Hampshire ....... Strafford ........ Aetna—NH .................................. Non-Renew $406.83 14,391 187

New Hampshire

Total.

........................ ...................................................... .................... ................ 14,391 187

New York .................. Broome ........... Welicare ....................................... SAR ............ $379.84 39,143 2,021

New York .................. Broome ........... Community Health Plan .............. Non-Renew $379.84 39,143 2,761

New York .................. Tioga .............. Community Health Plan .............. Non-Renew $379.84 7,431 364

New York Total ....... ........................ ...................................................... .................... ................ 46,574 5,146

North Dakota ........... McLean .......... Blue Cross & Blue Shield of

North Dakota.

Non-Renew $379.84 2,217 3

North Dakota ........... Mountrail ....... Blue Cross & Blue Shield of

North Dakota.

Non-Renew $379.84 1,351 0

North Dakota ........... Renville .......... Blue Cross & Blue Shield of

North Dakota.

Non-Renew $379.84 573 0

North Dakota ........... Ward .............. Blue Cross & Blue Shield of

North Dakota.

Non-Renew $387.06 8,337 9

North Dakota Total ........................ ...................................................... .................... ................ 12,478 12

Ohio .......................... Coshocton ...... Community Insurance OH ............ SAR ............ $413.89 6,155 692

Ohio .......................... Coshocton ...... Community Health OH ................. SAR ............ $413.89 6,155 0

Ohio .......................... Muskingum .... Community Health OH ................. SAR ............ $394.85 14,840 2

Ohio Total ................ ........................ ...................................................... .................... ................ 20,995 694

Oregon ...................... Hood River ..... Qualmed Oregon .......................... Non-Renew $379.84 2,743 258

Oregon ...................... Lincoln ........... Qualmed Oregon .......................... Non-Renew $379.84 9,925 121

Oregon ...................... Wasco ............ Qualmed Oregon .......................... Non-Renew $379.84 4,408 149

Oregon Total ........... ........................ ...................................................... .................... ................ 17,076 528

Texas ........................ Freestone ....... Pacificare TX ............................... SAR ............ $379.84 2,922 77

Texas ........................ Karnes ............ PCA TX ......................................... Non-Renew $379.84 2,566 2

Texas ........................ Limestone ...... Humana TX .................................. SAR ............ $379.84 4,371 5

Texas ........................ Mc Lennan ..... Humana TX .................................. SAR ............ $379.84 30,779 11

Texas ........................ Navarro .......... Pacificare TX ............................... SAR ............ $417.42 7,613 392

Texas ........................ Wilson ............ Humana TX .................................. SAR ............ $401.27 3,511 159

Texas Total .............. ........................ ...................................................... .................... ................ 51,762 646

Utah ......................... Davis .............. IHC Utah ...................................... Non-Renew $379.84 17,475 587

Utah ......................... Davis .............. Pacificare Utah ............................ Non-Renew $379.84 17,475 645

Utah ......................... Morgan ........... IHC Utah ...................................... Non-Renew $419.37 615 31

Utah ......................... Morgan ........... Pacificare Utah ............................ Non-Renew $419.37 615 9

Utah ......................... Salt Lake ....... IHC Utah ...................................... Non-Renew $381.21 80,489 5,229

Utah ......................... Salt Lake ....... Pacificare Utah ............................ Non-Renew $381.21 80,489 7,447

Utah ......................... Summit .......... Pacificare Utah ............................ Non-Renew $379.84 1,449 97

Utah ......................... Tooele ............. Pacificare Utah ............................ Non-Renew $418.57 3,013 139

Utah ......................... Utah ............... Pacificare Utah ............................ Non-Renew $382.96 25,599 2,383

Utah ......................... Wasatch ......... Pacificare Utah ............................ Non-Renew $379.84 1,324 61

53

Plans that Left Medicare or Reduced Their Service Area: Counties with No Other Managed Care

Option—Continued

(as of the contract year beginning January 1, 1999)

State County Name Contract Name

Non-Renew or

Service Area

Reduction

AAPCC Eligibles #Benes

Enrolled

Utah ......................... Weber ............. IHC Utah ...................................... Non-Renew $379.84 22,299 1,009

Utah ......................... Weber ............. Pacificare Utah ............................ Non-Renew $379.84 22,299 925

Utah Total ................ ........................ ...................................................... .................... ................ 152,263 18,562

Virginia .................... Albemarle ....... QualChoice VA ............................. Non-Renew $413.51 8,177 208

Virginia .................... Buckingham ... QualChoice VA ............................. Non-Renew $418.45 2,045 3

Virginia .................... Caroline ......... NYLCare—MDNA/DC .................... Non-Renew $433.45 3,032 106

Virginia .................... Charlottesville

City.

QualChoice VA ............................. Non-Renew $410.17 7,253 187

Virginia .................... Fauquier ......... NYLCare—MDNA/DC .................... Non-Renew $424.54 5,885 347

Virginia .................... Fluvanna ........ QualChoice VA ............................. Non-Renew $437.79 2,866 71

Virginia .................... Fredericksburg

City.

NYLCare—MDNA/DC .................... Non-Renew $453.99 8,080 239

Virginia .................... Greene ............ QualChoice VA ............................. Non-Renew $440.94 1,567 37

Virginia .................... King George ... NYLCare—MDNA/DC .................... Non-Renew $432.61 1,688 25

Virginia .................... Louisa ............ NYLCare—MDNA/DC .................... Non-Renew $456.03 3,626 47

Virginia .................... Louisa ............ QualChoice VA ............................. Non-Renew $456.03 3,626 50

Virginia .................... Madison ......... QualChoice VA ............................. Non-Renew $387.38 1,861 25

Virginia .................... Nelson ............ QualChoice VA ............................. Non-Renew $409.42 2,990 34

Virginia .................... Orange ........... QualChoice VA ............................. Non-Renew $414.43 5,301 50

Virginia .................... Richmond ....... NYLCare—MDNA/DC .................... Non-Renew $425.76 790 0

Virginia .................... Spotsylvania .. NYLCare—MDNA/DC .................... Non-Renew $452.25 3,917 102

Virginia .................... Stafford .......... NYLCare—MDNA/DC .................... Non-Renew $457.11 4,069 157

Virginia .................... Westmoreland NYLCare—MDNA/DC .................... Non-Renew $484.77 3,344 63

Virginia Total ........... ........................ ...................................................... .................... ................ 66,491 1,751

West Virginia ........... Monongalia .... HealthAmerica ............................. SAR ............ $502.11 9,711 0

West Virginia Total ........................ ...................................................... .................... ................ 9,711 0

Total for All States ........................ ...................................................... .................... ................ 841,208 51,276

Source: HCFA 12/98

Mr. BROWN. Thank you, Mr. Chairman. Dr. Wilensky, thank you

for joining us. Without risk adjustment a plan with sicker than average enrollees that offers high quality benefits can lose money. A

competing plan with healthier than average enrollees offering the

same high quality benefits could prosper and make money. Can

such a system work without risk adjustment?

Ms. WILENSKY. Not for very long. You run the risk of inappropriately rewarding plans because of their selection and inappropriately hurting plans because of either their intentional or unlucky

attraction of sick people. If you are going to appropriately reward

and incent plans for taking on sick people and giving sick people

an option of having coordinated care as a replacement for Medicare, you need to make this adjustment.

If you don’t get into trouble without making an adjustment, it is

just because you are lucky. The incentives are there to get yourself

in trouble. A very important step, it has been discussed for many

years, and HCFA is starting what I think is a reasonable process.

Mr. BROWN. So Medicare managed care really can’t work without

risk adjustment.

Ms. WILENSKY. What you may end up doing is having a health

care plan that contracts with an academic health center or a very

well-known health foundation or health care provider that itself attracts very sick people finding itself disadvantaged relative to a

health care plan that didn’t have such arrangements. That is not

54

a very good idea in terms of rewarding one and penalizing the

other.

It is not just Medicare/managed care. It is actually any kind of

replacement Medicare plan. If you allowed for private fee-for-service, which you actually did as part of the Balanced Budget Act, you

need to have risk adjustment any time there is a choice of a health

care plan. It is very similar to why you have a classification system

for paying hospitals.

If you paid hospitals the same amount, given somebody’s age,

and didn’t make any kind of adjustment for the diagnosis, you

would obviously overpay hospitals that admitted people with relatively minor health conditions. And you would underpay them if

they had by-pass surgery or valve replacement, et cetera. This is

really the same kind of adjustment. You acknowledge that health

status will predictably influence a patient’s use of expenditures and

it is the predictable difference that you try to compensate for.

Mr. BROWN. Mr. Scanlon, we have been hearing that HCFA

should wait to implement risk adjustment until we have a better,

a more complete set of data to incorporate into it. Now given

HCFA’s historic overpayment to managed care plans, I assume

waiting to implement risk adjustment will cost the Medicare Program a lot of money.

Do you have an idea how much HCFA will lose if risk adjustments, say, were delayed for 2 years?

Mr. SCANLON. The estimate of overpayment made by Physician Patient Review Commission was $2 billion. A risk adjuster, however, is not going to eliminate all of that overpayment. It is only

going to eliminate a fraction. My understanding of HCFA’s estimate of the cost through the transition is that it is roughly $1.4

billion, I think, that is going to be lost due to phasing this in as

opposed to immediately implementing it.

So it is somewhere in that ball park, I think, per year that we

are talking about. We defer to HCFA on more precise numbers for

that.

Mr. BROWN. Okay, thank you. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Whitfield.

Mr. WHITFIELD. Thank you, Mr. Chairman. Dr. Wilensky and

Mr. Scanlon, do we have any reason to anticipate that as a result

of this risk adjustment approach that some health maintenance organizations may become more specialized or make an effort to focus

more on the treatment of seriously ill Medicare patients? And then

from that, because of the efficiency and quality just make that sort

of a specialty that they would have of treating those kinds of patients?

Ms. WILENSKY. Well, we would like to assume we could get there.

I think in the beginning the adjustment probably isn’t all that good

that you would want to make that your overwhelming specialty.

But as we get better in making risk adjustments, it certainly

should allow plans that want to attract physicians and other health

care providers that treat seriously ill patients to do so and not feel

that they will be penalized. And that would not be the case now.

If you had a health care plan that specialized in the treatment

of AIDS patients or diabetics with multiple complications, they

would be hurt by our payment system.

55

Mr. SCANLON. I would agree. I think that we have seen in the

experience of the Medicaid Program which has somewhat more experience with risk adjustment that it does alleviate some of the

concerns of plans that might include within their networks a specialty center, like an academic medical center or a cancer center or

a group of physicians who provide care for people with AIDS.

Because without risk adjustment, many plans are fearful of having those types of providers in their network, feeling that they will

attract a disproportionate number of people with very high cost illnesses. With risk adjustment, more of these providers end up potentially in networks. That is a very positive. But I agree also that

it will take awhile before we may see a plan that specializes in providing such care.

Mr. WHITFIELD. And would there be any regulations or current

laws on the books that would prohibit an entity from pursuing

that. I mean, in other words could they say, well, we are not going

to take this Medicare patient because we want this one?

Ms. WILENSKY. No. It is not legal to make that kind of selection.

But you can indirectly influence who you are attractive to by which

groups of physicians or what hospitals you contract with. If you

contract with a cancer hospital or you contract with an academic

health center, particularly one that specializes in certain complicated treatments, you are going to be very attractive to sick people.

If you contract only with community hospitals that do little of

tertiary, quertesary medicine, you will be less attractive. So there

are ways to make it more or less attractive.

Mr. WHITFIELD. It seems to me that over the long term that

would be a positive benefit if you do have organizations that really

are specializing in particular areas. Would you all agree with that?

Ms. WILENSKY. I agree. Whether or not that happens will depend

on whether or not we will have a risk adjustment system that does

that. An idea that the Vice Chair of MedPAC, Joe Newhouse, has

raised is to try to make sure very sick patients continue to be attracted to plans through something called partial capitation, where

a portion of the payment that would go to the plan would reflect

actual use.

So that you would have maybe 20 percent of the payment for the

person reflect the actual use and 80 percent being a health adjusted risk payment, just to make sure that the very sickest, who

use a lot of resources, aren’t shunned by health care plans. I think

it would be much better if we had opportunities for very sick people

to have their care better coordinated than exists under current

Medicare.

Mr. WHITFIELD. I yield back the balance of my time.

Mr. BILIRAKIS. Mr Waxman, inquiries.

Mr. WAXMAN. Thank you, Mr. Chairman, I appreciate the testimony from both our witnesses. Both of you believe we ought to try

to develop a risk adjustment in order to make the Medicare+Choice

System work. HCFA is starting off looking at in-patient information. They are hoping to get more data on out-patient. They are

going to have 1 year and try to learn from that year to extrapolate

to the next. This is not easy work, is it, to develop a risk adjuster?

56

Ms. WILENSKY. No. They have been sponsoring research for at

least 10 years.

Mr. WAXMAN. Does that give you some caution about moving forward with changes that put more weight on a risk adjustment

working pretty well?

Ms. WILENSKY. Well, I think what HCFA has done by the phase

in and by the backwaiting of change, is a reasonable way to minimize disruptions and to have the biggest impact occur when you

should expect to have better data. One of the things that happens

when you introduce change is that you typically get better just by

doing it, which is one of the reasons I am eager to have them start.

Mr. WAXMAN. Mr. Scanlon, I would like your response to that

question, and let me put it differently. Government is not the best

in accomplishing management of very complicated systems. And

now we are going to have government involved in a very major way

to make adjustments between plans as to the severity of the illnesses of the population and a lot of other factors. This is complicated business.

Do you feel some sense that we ought to recognize that while we

would like to have risk adjustment, we may not achieve one that

works real well for some time, and therefore we ought to be a little

bit careful in moving in a direction where we expect it to work very

well?

Mr. SCANLON. Well, I think we should be extremely careful to

make sure that it works as well as we possibly can. But the reality

is we already have risk adjustment. We have a risk adjustment

system that is based on demographic characteristics and whether

someone is Medicaid eligible and whether someone is in an institution and whether someone is eligible because they are either aged

or disabled.

It is not working. Those factors explain about 1 percent of the

variation in medical costs. The hospital-based system is going to

explain about 5 percent of the variation in medical cost. It is an

improvement; it is not a solution. An all encounter system is going

to continue to improve this share of medical cost variation that we

can explain.

So I think that we really do need to push for moving toward that

better system. The phasing period here is critical. We have seen

HCFA as backloading the system. In this first year, we are only

going to adjust the cost by blending a 10-percent base on the new

risk adjuster and 90 percent based on the old.

Mr. WAXMAN. Let me interrupt you because I have limited time.

I don’t disagree with your testimony, that we need a risk adjuster.

What I am trying to figure out is how Mr. Bilirakis and Mr. Dingell

and others sitting on this Medicare Reform Panel make a judgment

when they are looking at the notion of premium support, and the

idea of a premium support is predicated on plans coming in and

bidding, and then basing the premium contribution on some percentage of the average of all the bids.

Unless we have a real good risk adjuster that works, we still

have a good chance that some plans are going to be able to bid very

low because they are still, in lots of clever ways, able to select out

a patient population that is a lower risk. And insofar as we have

some plans able to bid low, that is going to pull the average down.

57

So if we have a percent of an average premium that we are going

to say to people we’ll contribute for their Medicare selection, then

those who are sicker and older and maybe less prosperous, are

going to have to come up with a lot more money if they go into a

plan that takes care of them.

I don’t know if Mr. Whitfield was suggesting that some plans

might find it advantageous to take more sick people. I don’t think

it is ever going to be advantageous to have to spend more money

on a capitated population. So my concern is if people have to go

into a plan that is going to spend more money, they are going to

have to come up with a lot of money out of pocket in order to be

in that plan or be forced into whatever may be available to them.

So I am just worried that unless we know a risk adjustment

works, then we ought to be cautious about leaping into a whole

new system.

Mr. SCANLON. I don’t think we have made a leap in this situation.

Mr. WAXMAN. I am not talking about what we are doing now, I

am talking about what the Commission is talking about.

Mr. SCANLON. Right. And there is no question about what we

want——

Mr. WAXMAN. To move to enhance premium or premium support

or whatever they call it.

Mr. SCANLON. The more we rely on the risk adjuster the better

risk adjusters we need. I think that during this transition period,

we need to learn from this experience. We have been learning

about risk adjusters from the experience of the Medicaid Program,

from some experience in the private sector. This is really Medicare’s first attempt to try and do something that is health-based.

Mr. WAXMAN. My time is up. We have been researching this for

10 years. You say the more experience we have with a risk adjuster, the better we will be. I am just saying, we are not there yet

where we can say we know what really works. I want to be sure

that if we move into a whole new system of premium support that

we don’t act as if we had a risk adjustment that was working so

well that we are not going to leave a lot of people and plans in the

lurch.

Mr. SCANLON. I am not going to say that your concern is not

valid. But I would say we have been researching it for 10 years,

now we need to be using it and see if we can learn from the use

of it.

Mr. WAXMAN. While we are using it a lot of plans are closing

their doors.

Mr. SCANLON. Well, we are hoping that is not the full story

there.

Mr. BILIRAKIS. Mr. Shadegg.

Mr. SHADEGG. Thank you, Mr. Chairman. I will be brief. I think

I heard you just say that we have, in reality, a risk adjuster no

matter what, it already exists. This one wasn’t studied or calculated very well. We are now working on trying to study and calculate a new one. And in that regard let me ask, particularly you,

Mrs. Wilensky, but Mr. Scanlon if you want to comment I would

be interested in that as well.

58

The risk adjuster currently being used focuses on in-patient hospital data. It is clear the law requires that in the first year, but

then is not so clear as to the remaining years, yet it appears HCFA

is going to look at in-patient data for all, for four of the 5 years.

I guess I am interested in what information we will not capture by

looking at in-patient data. And what the affect of that might be

and what you think we should be looking at?

Ms. WILENSKY. Well, there is no question that there is an irony

about using in-patient only data to adjust payments to risk-based

plans. They have spent their whole being trying to alter the in-patient/out-patient mix of services to use more out-patient, not to rely

on in-patient. And so there clearly is an irony about having that

happen.

However, HCFA has attempted to mitigate the problems by not

looking at discretionary in-patient stays. By not looking at 1-day

stays. Although that could go either way. And by moving as quickly

as they feel possible to full encounter data. If it is possible to get

to full encounter data by year 3, that would be much better. The

sooner the better. And the fact that you are backloading it, helps

some.

It is not, by any means, a perfect way to go, but I think starting

the process will help. And moving as fast as humanly possible,

even if you don’t have full encounter data, to encounter data for

most plans would be a worthwhile tradeoff. I would also like to just

comment on the discussion we were having about the complexity.

It is true this will make it more complex, but remember relative

to what?

We have a Medicare Plan where government is involved in deciding 9,000 CPT Codes and 500 Admission Codes and a number of

post-acute payment rates. So it is a very complicated system that

we have. If we can make adjustments so that we give sick people

a chance to have a different kind of health care plan, I think it is

really worth pushing on. So I think you can mitigate some of the

concerns about in-patient only. But it is a fair issue.

Mr. SHADEGG. Mr. Scanlon.

Mr. SCANLON. We share the same views as Dr. Wilensky in

terms of this not being a perfect system. There is a lot of the variation in medical costs that will not be recognized. Pushing forward

is the key here as is trying, during this transition period, to accelerate what we know and whether or not adjustments are needed.

Mr. SHADEGG. I guess I would only conclude by saying, with regard to the question of going forward with the risk adjuster about

which we do not have perfect knowledge is probably true that on

a few occasions government has passed legislation without knowing

all of their unintended consequences. Mr. Chairman, I yield back.

Ms. WILENSKY. Even in Medicare.

Mr. SHADEGG. I yield back the balance of my time.

Mr. BILIRAKIS. Mr. Barrett to inquire, sir.

Mr. BARRETT. Thank you, Mr. Chairman. Mr. Scanlon, have you

been surprised, you talked about plans dropping out. Have you

been surprised by the number of providers that have dropped out?

Mr. SCANLON. We have been somewhat surprised but not totally.

We have made a significant number of changes to what is to be a

managed care plan within the Medicare Program. We saw in the

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mid 1980’s, a similar sort of high level of withdrawals as plans

were learning to be able to serve elderly beneficiaries, and some

were finding that this was more difficult than they originally

thought. And then after enrolling they decided to sort of leave

Medicare.

My sense is that what we will see is that some of those same

plans that chose to leave will come back into some areas, but not

necessarily into others. The market for managed care, frankly, is

in some turmoil today that didn’t exist a few years ago. We had a

period of very low inflation. We are not seeing premiums going up.

We have managed care plans reassessing their ability to serve, not

just Medicare, but as Mr. Hash indicated, FEHBP beneficiaries and

changing the terms that they are willing to provide private employers.

So I think that all of these things are going on. It is very hard

to sort out what the lessons are from something that is in this

much turmoil, but we are trying to do it to the extent we can now.

I do think we need to be cautious about changing our direction

which is sound in the sense that we feel that Medicare is moving

toward paying more appropriately and asking for accountability on

what is being purchased.

Mr. BARRETT. Same question, Dr. Wilensky?

Ms. WILENSKY. I was surprised, although I think part of the

change, the drop out, didn’t have to occur if HCFA had behaved

more like an Insurance Commissioner. Allow plans to come in, beat

them up, give them 15 or 20 percent of what they asked for in

terms of their second round of change, and we might have forestalled some of the withdrawal.

Part of it was some bad decisions on the part of some plans to

go into areas where they had too little infrastructure. It may also

have been a problem that plans used to think about a zero premium or a very small premium, but I think now they are looking

at a competitive Medigap alternative which is frequently $1,800 a

year.

And so it may well be possible to offer an attractive package with

a premium that is $30 or $50 a month more than they had been

offering. More than they would have been charging before. But far

less for a full package of Medigap benefits than is available as the

alternative. So I think there may have been some learning going

on. There may have been some bad expectations by the plans and

by seniors. And the plans may have made some strategic errors in

terms of how rapidly they went out into some of the areas.

But I am concerned. I think we have to watch what is going on.

It may be that some of the requirements have raised too much uncertainty, but I don’t think risk adjustment is the place to stop.

That is a very important change.

Mr. BARRETT. Were the decisions to pull out exclusively economic

decisions?

Ms. WILENSKY. Well my sense is—and I know you have panels

later from the health care plans who can tell you more—that plans

were quite reluctant to pull out. It is bad publicity, it doesn’t sit

well. Most of these plans didn’t leave entirely. They left some markets. At least most of the big companies stayed in Medicare in

some markets and left in other markets.

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My sense is that they were concerned that not only were they

losing money, or not making money in some markets, but they had

high degrees of uncertainty about whether things were going to get

better in the near term. In fact, some sensed that they were much

more likely to be hurt even more. And on those grounds, they left

the areas. I think it is economic, but not as little as saying, we

weren’t making enough money.

I think there was a sense that this is not something you want

to do. But if they didn’t do it this year, there is a 5-year stay out

period. So it was less costly to do it now than it will be in the future. That will be a much bigger decision.

Mr. BARRETT. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Thank you, Mr. Barrett. Well, the fact is that, the

many, some plans are withdrawing. The fact is that they are withdrawing in some areas where there are no other choices other than

going back to fee-for-service, which is very difficult for some people

because of their reasons for going to managed care in the first

place. Prescription drugs principally, I guess.

Now you have mentioned, Dr. Wilensky, that possibly taking a

look at the reimbursement rates in some areas and what not, and

the staff and I have talked and they have mentioned that too. I

guess the first thought that comes to my mind is would this be

maybe rewarding some, you mentioned bad public relations and the

fact that they didn’t very rashly withdraw, but they really were reluctant to withdraw. And I will accept that. But could this be rewarding some people maybe who should not have withdrawn?

Ms. WILENSKY. I think you need to know more about what happened and why it happened and what is likely to happen in the future. MedPAC is very concerned about this. We are going to monitor it. We think you need to monitor it. I don’t think any of us understand enough about what is going on to say throw more money

at the problem. We ought to look at the additional costs that we

are imposing on plans and we ought to be careful about what happens in the future.

But I don’t think there is evidence to date to suggest go in and

put more money to fix the problem.

Mr. BILIRAKIS. Is there something else that could be done,

maybe, whether it be in addition to that or lieu thereof in some

cases the data that is, how onerous is this data gathering?

Ms. WILENSKY. Well, I think that is an issue that, and it may

be one that GAO either has or could look at, which is the data that

are being required to be reported under the HCFA rules. Whether

it is as lean and as cost-effective a requirement as possible, whether there are some ways to lighten that burden. And perhaps along

with changing the date of the ACR reporting, that might be able

to keep some plans in. And encouraging a little more dialog between HCFA and some of the health care plans, although I know

that they engage in that.

It is important to have these options out there. It is not obvious

why you should have seen so much change early on. I am surprised. Ultimately there is a problem that in the high spending

areas where there have been a lot of health care plans, the slow

growth in the capitation payment is going to mean a big divergence

between what traditional Medicare spends in some of the south

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Florida counties and some of the California counties and what the

capitation plans get as their capitation rate.

And that is a mistake. That differential payment will continue

because traditional Medicare is going to be growing at 5 or 6 percent per year, per capita payments in these areas are probably

going to grow at the minimum of 2 percent per year. And you are

going to have to go back and try and get those in alignment. That

is probably the one thing you can plan on having to take up in the

next year or 2. Right now I don’t think we know much more than

that. But perhaps Bill would comment.

Mr. SCANLON. I think we do need to be very concerned about

what it is that we have asked the plans to do in terms of the reasonableness of the burden for participation. But at the same time,

we maybe also need to focus on whether or not the basic premise

that we are using, not just for the managed care portion of Medicare but with respect to many services as well. We have built our

payment methods on national averages.

What we have seen are withdrawals in certain areas and not

within others. We need maybe to ask ourselves, do we need a different but still rational basis upon which to base payment. It may

be that we do. Participation levels over the longer haul may be an

indicator that more regionalization is important. A similar kind of

concern may arise in the future with respect to physicians, who

have also experienced very significant changes in the payments

that they are receiving.

Ultimately, we need to think about our philosophy about setting

rates more generally rather than just for the Medicare managed

care program.

Mr. BILIRAKIS. Thank you. Mr. Brown? Mr. Barrett? Thanks so

very much. We appreciate your patience and your willingness to

help out. The next panel. Ann Miller, Member of the Board of Directors of AARP and Diane Archer, Director of the Medicare Rights

Center. Oh, I am sorry, I didn’t mean to leave out Ms. Wegner.

Nona Wegner, Senior Vice President of the Seniors Coalition. We

had the pleasure of her company just recently before this committee.

Your written testimony is a part of the record. We would prefer

that you would complement it orally. We will set the clock at 5

minutes and hopefully you will stay as close to it as you possibly

can.

Ms. Miller.

STATEMENTS OF ANN MILLER, MEMBER, AARP BOARD OF DIRECTORS; DIANE ARCHER, EXECUTIVE DIRECTOR, MEDICARE RIGHTS CENTER; AND NONA BEAR WEGNER, SENIOR

VICE PRESIDENT, THE SENIORS COALITION

Ms. MILLER. I am Ann Miller from Morro Bay, California. I am

a Member of the AARP’s Board of Directors. In 1997, AARP supported the BBA and its creation of Medicare+Choice. I am pleased

to be here today to present AARP’s views on Medicare+Choice, the

risk adjuster and other reform issues. Medicare+Choice was enacted to expand the health care options available to Medicare beneficiaries while at the same time maintaining affordable, quality

care in Medicare.

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Last fall’s unexpected disruption in Medicare HMO availability,

illustrates the magnitude of these changes and holds several lessons. First, while private sector options have been able to address

some glaring faults in original Medicare, such as the lack of prescription drug coverage and high out-of-pocket costs, these options

are not without their own shortcomings.

A private business can be more innovative and efficient. But if

it is not profitable, it will leave the market. Therefore, private market participation in Medicare must be structured to assure beneficiaries have stability in their health insurance coverage. Second,

the impact of the BBA has been and will continue to be significant.

It must be evaluated and understood before launching even a

greater Medicare Reform.

The Medicare HMO withdrawals last year displaced about

400,000 Medicare beneficiaries from their HMO’s. This unexpected

event created a lot of confusion and frustration as beneficiaries

struggled to find alternative HMO’s or returned to original Medicare. The HMO industry contends that the BBA payment methodology was the chief reason that plans pulled out of certain markets.

AARP does not have enough data to evaluate whether or not payments are adequate or fairly calculated, but such claims should be

carefully reviewed to ensure that we don’t return to the error of

overpayments to some plans.

We believe it is important for Congress, the Medicare Commission, HCFA, health plans and beneficiaries to understand what

caused last year’s withdrawals. In order to determine how to preserve enrollment stability for beneficiaries without undermining

the physical integrity of the program. Health plans have also reported that uncertainty about risk adjustment contributed to their

decisions to pull out of certain markets in 1998, and that could lead

to future withdrawals.

While we understand that the methods of risk adjustment are

imperfect, it is important that HCFA move forward by phasing in

the proposed risk adjuster to allow a smooth transition to more accurate payments for plans. The proposed phase in will soften the

economic impact on plans while implementing at least a partial solution. Another important issue is the Medicare Beneficiaries Education Campaign.

Medicare+Choice can realize its potential only if beneficiaries

have the knowledge that will enable them to be wise consumers in

the market place. We support HCFA’s efforts to educate beneficiaries and as a part of our effort to make Medicare+Choice work,

AARP has a campaign to educate our members about

Medicare+Choice. Congress must also do its part by providing sufficient resources so HCFA can carry out this challenging task.

And we strongly support increasing Medicare+Choice user fees to

$150 million. This increase is needed to assure that all aspects of

the education campaign can be carried out as Congress envisioned.

I want to emphasize the importance of fully understanding the

changes that have already been made under Medicare+Choice before we layer on new changes.

Let me assure you, however, that AARP does not believe that the

status quo in Medicare is acceptable. More must be done to assure

the program’s long term solvency and prepare Medicare for the reVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00065 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
63

tirement of the baby boomers. There are some fundamental principles that have guided Medicare, which AARP believes should be

the basis of any efforts to reform the program. I want just to highlight a few.

Medicare should continue to be available to all older and disabled

Americans despite health status or income. It should guarantee a

defined set of benefits with payments that keep pace with the cost

of the benefit package. Medicare should keep up the advances in

medicine. This means, among other things, including prescription

drug coverage in the Medicare benefit package. And changes in

Medicare financing and benefits should protect all beneficiaries, including those with low incomes, from burdensome out-of-pocket

costs.

AARP looks forward to continue to work with this committee and

your colleagues in the House and Senate on a bi-partisan basis to

improve on the Medicare+Choice Program. We also want to work

with you to advance a Medicare Reform Package. The status quo

in Medicare is not acceptable. But together we must ensure that

any reform package continues Medicare’s promise of quality, affordable health care. Thank you.

[The prepared statement of Ann Miller follows.]

PREPARED STATEMENT OF ANN MILLER, MEMBER, AARP BOARD OF DIRECTORS

Good morning Mr. Chairman and members of the Committee. I am Ann Miller

from Morro Bay, California. I am a member of the AARP Board of Directors and

come before you as a representative of a group whose large and diverse membership

includes millions of current and future Medicare beneficiaries. The Association supported the creation of the Medicare+Choice program as part of the Balanced Budget

Agreement in 1997 and we appreciate this opportunity to share the beneficiary perspective on the Medicare+Choice program today.

In 1997, Congress passed the Balanced Budget Act (BBA) that included sweeping

changes in the Medicare program. The BBA provided significant program savings

to extend Medicare’s solvency until 2008 and made several major changes affecting

the program’s beneficiaries. These changes included the creation of the

Medicare+Choice program through which four new health plan options are to become available to beneficiaries. The legislation also addressed when and how beneficiaries can enroll in health plans or Medigap plans, as well as what information

beneficiaries receive about those choices. In addition, as the changes mandated by

the BBA take effect, virtually every beneficiary will face higher out-of-pocket expenses for health care.

AARP supported the BBA and its creation of Medicare+Choice in order to accomplish the objective of expanding choice in the program while also protecting access,

affordability, and quality. We understood that extending the short term solvency of

the Medicare program required shared sacrifice from all who participate in the program—providers and beneficiaries alike. We also recognized that Medicare+Choice

would lay the foundation for essential longer term reform in the Medicare program.

Impact of BBA

Last fall’s unexpected disruption in Medicare HMO availability, however, serves

as a wake-up call to all who seek to bring private sector solutions to bear on Medicare’s problems. While private sector options have been able to remedy some glaring

faults in original Medicare, such as the lack of prescription drug coverage and high

out-of-pocket costs, these options are not without their own failings. When private

businesses are given the right to manage a beneficiary’s care in exchange for the

opportunity to earn a profit, several things can happen. On the plus side, the innovations in administrative efficiency and improved health care delivery could benefit

the patient with lower costs, better benefits, and better coordinated care. On the

minus side, patients may have less control over health care treatments, and no control over whether their chosen health care plan continues to be available from year

to year. It is a challenge to separate the positive from the negative, because the

same factors create both results. A private business can be more innovative and efficient, but if it is not profitable, the private business will leave (or not enter) the

64

market. The beneficiary who gained the extra benefits for a time, can lose in the

long run.

One of the lessons from the initial implementation of Medicare+Choice is that

every change to Medicare will have consequences, some predictable, some unanticipated. In fact, the disruption last year, which seemed enormous to those affected,

occurred before any new Medicare+Choice plans were available. Once new types of

private plans are offered, other issues are certain to arise. At this point, two things

are clear: first, private market participation in Medicare must be structured to assure

beneficiaries have stability in their health insurance coverage; and second, the impact

of the BBA is significant and it must be evaluated and understood in order to plan

the even greater changes needed to strengthen Medicare for the future.

Issues Arising from Medicare+Choice Implementation

Beginning late last fall, Medicare beneficiaries began to feel the effects of the program’s transformation. Medicare, like other health insurance programs, has always

been complex. But, with the advent of new choices, greater private sector involvement, and the accompanying need for information, it has become even more confusing. In order to protect beneficiaries’ choices, significant issues, such as payment

methodology, risk adjustment and public information and education, will need to be

addressed and understood as Medicare+Choice is implemented. We need to address

these needs and stabilize the Medicare+Choice program before greater changes take

place.

Payment Methodology/Medicare HMO Withdrawals—Last fall, about 400,000

beneficiaries found themselves displaced from their current HMOs when multiple

plans terminated their Medicare contracts. The majority of beneficiaries who lost

coverage had the option of joining another HMO in their area, but often that meant

changing doctors or losing extra benefits that had attracted them to the particular

HMO in the first place. Beneficiaries were also entitled to return to original fee-forservice Medicare, but for many that was not a preferred option. Often, these beneficiaries chose managed care because it both relieved them of the financial burden

of Medigap insurance payments and offered needed benefits, such as prescription

drugs, that are not covered by Medicare. Under the BBA, beneficiaries who lost

their HMO coverage and returned to original Medicare were given certain rights to

purchase—or repurchase—a Medigap policy, but they would have to bear the significant expense, generally in excess of $100 a month. Even if they can afford Medigap,

not all beneficiaries are protected by the rules. Disabled beneficiaries may not have

the right to purchase Medigap and no beneficiary is guaranteed the right to purchase a policy with drug coverage.

The Medicare HMO withdrawals at the end of 1998 affected 7 percent of all Medicare beneficiaries in managed care. While only 1 percent lost their managed care

option, all of these beneficiaries were deeply troubled, and the general disruption

in the HMO market could make other beneficiaries reluctant to join a Medicare

HMO in the future.

Several reasons have been put forward to explain the HMO withdrawals from

Medicare. The HMO industry contends that the BBA Medicare payment rates and

methodology was the chief reason that plans pulled out of certain markets. Whether

or not the payments are adequate or fairly calculated is an issue on which AARP

does not have enough data to permit us to evaluate the situation. We believe, however, that it is important for all stakeholders—Congress, the Medicare Commission,

HCFA, health plans and beneficiaries—to understand what caused last year’s rash

of HMO withdrawals in order to determine how to preserve enrollment stability for

beneficiaries without undermining the fiscal integrity of the program.

Most stakeholders agree that it is necessary to change deadlines of the

Medicare+Choice program to allow the program to function more smoothly and to

attempt to avoid a repeat of last year’s HMO withdrawal problem. We understand

that one proposal is to move the date for plans to file the Adjusted Community Rate

(ACR) from May 1 to July 1. This would allow Medicare+Choice plans to base their

next years’ benefits and premiums on two quarters of experience. We believe moving

the date of the ACR submission to no later than July is a reasonable accommodation

to the needs of managed care plans to set their rates based on recent data. AARP

continues to believe that plans have the responsibility to identify problems that may

affect rates as early as possible. If plans are going to operate responsibly as part

of Medicare and deal fairly with beneficiaries, they need to be aggressive in their

efforts to set rates appropriately. Changing the timeline for plan submission of ACR

data will not be without its impact on beneficiaries, however. It will necessitate adjustments in the information that can be included in the Medicare Handbook, which

will have to be carefully worked out in 1999.

65

Ultimately, the HMO withdrawal situation underscores the importance of original

Medicare. Regardless of the market decisions of private health plans, beneficiaries

need the security of knowing original Medicare and access to Medigap are there for

them.

Risk Adjustment—Health plans have also reported that uncertainty surrounding

new risk adjustment methodology contributed to their decisions to pull out of certain

markets in 1998, and beneficiaries fear a similar response by health plans this year.

In its 1996 Annual Report to Congress, the Physician Payment Review Commission estimated that HMOs received overpayments of about 5 to 6 percent per beneficiary because the populations they enrolled were healthier than the general Medicare population. In recognition of that, the BBA requires HCFA to implement a risk

adjustment method to set payment rates based on the ‘‘expected relative health status of each enrollee.’’ Risk adjustment is intended to ensure that health plans are

neither penalized for enrolling beneficiaries with chronic illnesses nor overcompensated for enrolling healthier beneficiaries. In theory, risk adjustment will make all

beneficiaries equally attractive to health plans regardless of their health status. The

BBA requires the system to be in place no later than January 1, 2000.

Last September, HCFA released a notice describing the risk adjustment method

it intends to implement. The new system will adjust payments to Medicare+Choice

plans for each Medicare beneficiary based on whether the individual’s ‘‘risk factor’’

is higher or lower than that of an average beneficiary. Specifically, payments to

Medicare+Choice plans will be risk adjusted by incorporating diagnosis information

into the payment methodology. The information used would be based on inpatient

hospital encounter data to determine payments to Medicare+Choice organizations

and, eventually, additional encounter data (outpatient hospital, physician services,

etc.) will be incorporated into the methodology as well.

We understand that the diagnosis-based or hospital data risk adjuster has several

advantages, including that it is more readily available, strongly correlated with future expenses, and verifiable through audit. On the other hand, this approach has

met with some criticism. Health plans argue that using hospital-only data to determine diagnosis penalizes plans that avoid hospitalizations, potentially creating inappropriate incentives to needlessly hospitalize Medicare beneficiaries. Also, it does

not recognize the cost of treating expensive illnesses that do not result in hospitalizations.

While we understand that available methods of risk adjustment are imperfect,

adding risk adjustment is still essential to derive a more accurate payment for

Medicare+Choice plans. If plans are to compete fairly in the Medicare market, it

will be necessary to minimize risk selection through improved risk adjustment.

Prior risk adjusters based on demographic factors are widely recognized to be inadequate to protect the Medicare system. AARP understands that HCFA intends to

address plans’ concerns about financial impact by phasing-in the implementation of

the diagnosis-based risk adjuster. AARP believes that it is important that HCFA

move forward with the proposed risk adjuster in order to allow a smooth transition

to more accurate payment for plans. Refinement of risk adjustment methodology

should continue, as Medicare cannot afford to wait for a perfect risk adjuster before

implementing at least a partial solution.

Medicare+Choice Information and Education—In supporting expansion of Medicare choices, AARP emphasized the importance of solid, consumer-friendly information so that beneficiaries can make informed decisions and select the best health

plan choices for them. But, we also recognize that educating beneficiaries so that

they understand the complex range of choices facing them is an enormous task. Recent research in five cities conducted for AARP by Dr. Judith Hibbard of the University of Oregon found that many beneficiaries were not able to make knowledgeable

choices even between the original Medicare fee-for-service program and Medicare

HMOs. As more Medicare options become available, this task will grow still more

difficult. In addition, for those beneficiaries who do select any of the new

Medicare+Choice options, they will need help in navigating within those options.

These challenges must be taken very seriously by HCFA, the Congress, health

plans, and groups like AARP.

AARP supported Medicare+Choice in order to give beneficiaries the full benefit of

innovations in health care delivery. However, Medicare+Choice can realize its potential only if beneficiaries acquire the knowledge that will enable them to exercise

their leverage as informed consumers in the marketplace. We support HCFA’s efforts to educate beneficiaries and have joined with the Agency as a partner in its

education campaign. AARP has also undertaken a campaign to educate our members about the Medicare+Choice program and the new options they may have available to them.

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We believe Congress, too, must do its part by providing sufficient resources to enable HCFA to carry out its challenging tasks. This year, for example, we anticipate

that HCFA will need to make changes in its beneficiary education campaign to reflect modifications in program timelines, like the ACR filing date, and to respond

to problems encountered last year. Medicare has found its $95 million appropriation—less than $3 per beneficiary—barely sufficient to carry out the education campaign. Presently the #800 line is operational only in the five pilot test states and

the full Medicare Handbook has been mailed only to those states. By the end of this

year, these services must be available nationwide. Therefore, we strongly support

the Administration’s proposed increase in Medicare+Choice user fees to $150 million. AARP believes this increase is needed to assure that all aspects of the education campaign can be carried out as Congress envisioned, including the #800 telephone assistance line with live operators as opposed to an automated response system.

Greater Medicare Reforms

As we’ve noted, Medicare+Choice is still in its infancy and many of the changes

enacted by the Balanced Budget Act are still phasing in. The overall affect of these

changes on beneficiaries, providers and the Medicare program itself is not yet clear

and there is much to be learned. The challenges and the successes of

Medicare+Choice will have important implications for broader reform of the Medicare program. The amount of ‘‘fine-tuning’’ now under discussion for

Medicare+Choice offers ample reason why larger-scale reforms in Medicare must be

made slowly and cautiously.

While we have stated the importance of understanding the impact of the changes

that have already been made before new changes are layered on top, this does not

mean that the status quo in Medicare is acceptable.

Medicare continues to face financial challenges which have to be addressed if the

program is to continue to remain strong for current and future beneficiaries. Equally important, Medicare’s benefits and delivery system need to be modified to live up

to the demands of 21st century medicine. That means that greater reforms are still

necessary. The Balanced Budget Act extended Medicare’s solvency only until 2008.

More must be done to ensure the program’s long-term solvency. The program must

also be prepared to handle the enormous number of baby boomers who are moving

towards retirement.

To this end, AARP believes that there are some fundamental tenets that have

guided Medicare and should be the basis of any efforts to reform the program:

• First and foremost, Medicare should continue to be available to all older and disabled Americans despite health status or income. Our nation’s commitment to

a system in which Americans contribute to the program through payroll taxes

during their working years and then are entitled to receive the benefits they

have earned is the linchpin of public support for Medicare. Toward that end,

AARP views it as unacceptable to create a situation where more Americans

would be uninsured by requiring people to wait until they are 67 to receive

Medicare.

• Medicare should guarantee a defined set of benefits with payments that keep pace

with the cost of the benefit package. Clearly defined benefits, across all plans,

provide an anchor on which health plan benefits and the government’s contributions are based. On the other hand, a defined contribution, with payments tied

to artificial budget targets rather than the cost of a benefit package, creates the

potential for both benefits and government payments to diminish over time. The

latter would leave beneficiaries more vulnerable to rising health care costs—

something over which individual Americans have little control.

• Medicare should keep up with advances in medicine and medical technology in

much the same way as do private and employer-provided insurance. This

means, among other things, modernizing Medicare’s defined benefit package to

include prescription drug coverage. Prescription drugs keep people healthy,

independent, and out of hospitals. Therefore, there should be a guarantee of

drug coverage across all Medicare plans. Without such coverage in every Medicare plan, there would be a greater tendency towards adverse selection of beneficiaries.

• Changes in Medicare financing and benefits should protect all beneficiaries—including those with low-incomes—from burdensome out-of-pocket costs. Medicare

beneficiaries should continue to pay their fair share of the cost of coverage, but

out-of-pocket costs must be kept affordable. The average beneficiary already

spends nearly 20 percent of his/her income out-of-pocket on health care. If costsharing is too high, Medicare’s protection would not be affordable and many

beneficiaries could be left with relatively few coverage options.

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• Medicare must have a stable source of financing that keeps pace with enrollment

and the costs of the program. Ultimately, any financing source will need to be

both broadly based and progressive. Additionally, AARP supports using an appropriate portion of the on-budget surplus to insure Medicare’s financial health

beyond 2008.

• As private insurance participation in Medicare expands, effective administration

of the program will be essential. The agency or organization that oversees Medicare must be accountable to Congress and beneficiaries for assuring access, affordability, adequacy of coverage, quality of care, and choice. This will require

things like: ensuring that a level playing field exists across all options; modernizing original Medicare fee-for-service so that it remains a viable option for

beneficiaries; improving the quality of care delivered to beneficiaries and ensuring that all health plans meet rigorous standards; and continuing to rigorously

attack waste, fraud, and abuse in the program.

AARP is awaiting the Medicare Commission’s report. We have reviewed the ‘‘premium support’’ proposal put forth by Senator Breaux. This proposal relies heavily

on the private insurance market to provide health insurance coverage to Medicare

beneficiaries. As discussed earlier, a step towards greater involvement of private

sector health plans in Medicare requires careful assessment and ample time to test

the potential impact on beneficiaries. Since many details of this particular proposal

are still sketchy it is premature for us to comment on it fully. As more information

becomes available, AARP will weigh the proposal—as we will any Medicare reform

plan—against the fundamental principles of the Medicare program described above.

In the meantime, AARP will continue to work with the Commerce Committee, and

your colleagues in the House and Senate to improve upon the Medicare+Choice program. We also want to work with you to advance a Medicare reform package. The

status quo in Medicare is not acceptable. But together we must ensure that any reform package continues Medicare’s promise of quality, affordable health care.

Mr. BILIRAKIS. Thank you very much, Ms. Miller. Before I recognize Ms. Archer, the Chair recognizes Mr. Brown.

Mr. BROWN. Ms. Miller, thank you. Congresswoman Lois Capps,

who is your Member of Congress, I believe, asked me to welcome

you. She could not be here today because of an illness in her family, but wanted to extend her greetings and thank you for traveling

all the way across the country.

Ms. MILLER. Well, thank you. Yes, Morro Bay is part of San Luis

Obispo County and I am in her district.

Mr. BROWN. And you definitely have a friend in the work she

does in this committee.

Ms. MILLER. Thank you.

Mr. BROWN. Thank you.

Mr. BILIRAKIS. Ms. Archer.

STATEMENT OF DIANE ARCHER

Ms. ARCHER. Thank you. My name is Diane Archer. I am the Executive Director of Medicare Rights Center, a national not-for-profit

organization based in New York. We help seniors and people with

disabilities on Medicare through telephone counseling, public education and policy work. I thank the Commerce Committee for this

opportunity to testify today.

MRC devotes considerable resources to counseling our clients on

how to choose a Medicare health plan. We tell people to choose

carefully because quality matters and quality varies. But we can’t

give callers information to help them choose among the many

Medicare plans based on the health care they offer. Good information on health plan quality is not available.

For now we know that many of our clients are forced to choose

a health plan based solely on out-of-pocket costs and additional

benefits. But a choice that doesn’t factor in quality, isn’t an inVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00070 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
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formed choice and doesn’t make for a competitive market place. To

help ensure that seniors and people with disabilities get good care

from their plans, they must be encouraged to compete on their

health performance.

As a Nation, we should measure the success of the market place

and Medicare on how well health plans treat seniors and people

with disabilities who need care the most. Currently 75 percent of

Medicare costs cover the health care needs of the sickest 10 percent

of the Medicare population. The Medicare Program was founded to

provide a safety net for these vulnerable seniors and people with

disabilities who would otherwise be uninsurable.

If we overlooked the health care needs of these people, Medicare

will no longer be the safety net it is intended to be. Risk adjusting

payments to health plans are essential if they are to compete for

members with costly health care needs. Because of the current payment system, some of the most vulnerable people on Medicare tell

us they fear they may not be able to get the care they need from

Medicare HMO’s.

And we have no evidence about particular health plans to allay

their fears. Unfortunately today, Medicare’s capitated payment system penalizes plans that develop and promote programs for people

with costly health care needs. If they attract too many people with

complex conditions, they can’t stay in business. As a result, health

plans don’t compete on the quality of health care they provide to

people with costly conditions.

And without good risk adjustment, the Federal Government

winds up wasting taxpayer dollars by overpaying HMO’s to enroll

healthy people. A better risk adjustment system will help the Medicare market place and provide an incentive for plans to enroll people with costly conditions. By the year 2000, plans will be paid

slightly more for enrollees who were hospitalized in the previous

year to account for higher average projected total cost in the current year.

The new system will begin to compensate those private Medicare

plans with higher numbers of members with costly needs. Today

choosing a private Medicare plan is not a matter of informed

choice, and it can be as risky as a trip to a Vegas slot machine.

We will know that the Medicare market place is meeting the health

care needs of those who need it the most when private Medicare

plans aggressively develop and advertise programs for people with

cancer, heart disease and other serious illnesses.

Risk adjustment will push the Medicare market in the right direction, encouraging health plans to compete against each other on

the quality of their product, health care, and improved risk adjustments should encourage full disclosure by health plans of their

treatment policies and enable people on Medicare to make informed

choices about which plan to join now for when they become sick

later. With risk adjustment the most vulnerable seniors and people

with disabilities on Medicare would not need to fear falling by the

Medicare wayside.

Instead, the Medicare Program could become a public/private

partnership that we can all be proud of and a legacy for future generations. Thank you.

[The prepared statement of Diane Archer follows.]

69

PREPARED STATEMENT OF DIANE ARCHER, EXECUTIVE DIRECTOR, MEDICARE RIGHTS

CENTER

My name is Diane Archer. I am the Executive Director of the Medicare Rights

Center, a national not-for-profit organization based in New York City. MRC helps

seniors and people with disabilities on Medicare through telephone counseling, public education, and public policy work. Under a contract with the New York State

Office for the Aging, with funding from the Health Care Financing Administration,

we operate New York State’s Health Insurance Assistance Program hotline. Each

year, we field approximately 50,000 hotline calls from people with Medicare questions and problems and provide direct assistance on a variety of Medicare issues to

more than 7,000 individual callers. I thank the Commerce Committee for this opportunity to testify on the need to risk adjust payments to private Medicare plans. Only

through risk adjustment will these plans have the incentive to develop and promote

programs for enrollees with costly conditions and to provide treatment information

that consumers need to make informed health care choices.

MRC devotes considerable resources to counseling our clients on how to choose a

Medicare health plan. Our counselors tell people to choose carefully because quality

matters and quality varies between plans. But, we cannot give callers information

to help them choose a private Medicare plan based on the health care they offer.

Good information about how private Medicare plans care for enrollees with costly

health care conditions is unavailable. For now, we know that many of our clients

are forced to choose a health plan based on out-of-pocket costs and additional benefits without factoring in quality. But a choice based solely on costs and benefits is

not an informed choice and does not make for a competitive marketplace. To help

ensure that seniors and people with disabilities get good care from their health

plans, health plans must be encouraged to compete on their health performance.

We as a nation should measure the success of the Medicare marketplace on how

well health plans treat those seniors and people with disabilities who need care the

most. Currently, 75% of Medicare costs cover the health care needs of the sickest

10% of the Medicare population. The Medicare program was founded to provide a

safety net for these vulnerable seniors and people with disabilities who would otherwise be uninsurable. If we overlook the health care needs of the most vulnerable

people on Medicare, Medicare will no longer be the safety net it is intended to be.

Risk adjusting payments to health plans is essential if they are to compete for

members with costly health care needs. As a result of the current payment system,

some of the most vulnerable people on Medicare tell us they fear they may not get

the care they need from Medicare HMOs. And we have no evidence about particular

plans to allay their fears. Unfortunately, today, Medicare’s capitated payment system penalizes plans that develop and promote programs for people with costly

health care needs. If they attract too many people with complex conditions, they will

go out of business. As a result, health plans do not compete on the quality of health

care they provide to enrollees with costly conditions. And without good risk adjustment, the federal government winds up wasting taxpayer dollars by overpaying

HMOs to enroll healthy people.

We believe that even the most basic risk adjustment will help the Medicare marketplace and provide an incentive for plans to enroll people with costly conditions.

By the year 2000, plans will be paid slightly more for enrollees who were hospitalized in the previous year to account for higher average projected total cost in the

current year. This new risk adjustment methodology is an improvement over the existing system because we know that people with costly health conditions like cancer,

congestive heart failure, and diabetes are more likely to need extended hospital

stays than other enrollees. The new system will no longer reward health plans with

a disproportionate number of healthy members. Rather, it will begin to compensate

those private Medicare plans with higher numbers of members with costly needs.

Today, choosing a private Medicare plan is not a matter of informed choice, and

it can be as risky as a trip to a Vegas slot machine. We will know that the Medicare

marketplace is meeting the health care needs of those who need it the most when

Medicare HMOs and other private Medicare health plans aggressively develop and

advertise programs for people with cancer, heart disease, and other serious illnesses. Because health plans want to attract as healthy a membership as possible,

they vie for clients with glossy pictures of seniors riding bikes and swinging on

swings with their grandchildren. Risk adjustment would push the Medicare market

in the right direction, encouraging health plans to compete against each other on

the quality of their product—health care. And, improved risk adjustment should encourage full disclosure by health plans of their treatment policies and enable people

on Medicare to make informed choices about which plan to join now for when they

become sick later. With risk adjustment, the most vulnerable seniors and people

70

with disabilities on Medicare would not need to fear falling by the Medicare wayside. Instead, the Medicare program could become a public-private partnership that

we can all be proud of, and a legacy for future generations. Thank you.

Mr. BILIRAKIS. Thank you, Ms. Archer. Ms. Wegner.

STATEMENT OF NONA BEAR WEGNER

Ms. WEGNER. I thank the committee for this opportunity for my

organization to be represented. The Seniors Coalition in a non-profit, non-partisan advocacy organization representing about 3 million

older Americans and their families. This hearing addresses a very

important health care issue of deep concern, not only to my members but to every senior citizen.

Over the last decade we have vigorously supported providing

Medicare beneficiaries with age-appropriate options so as to place

them on an equal footing with the products and services presently

available to younger consumers. We were very hopeful, and we still

are hopeful, that the Medicare+Choice provisions of the Balanced

Budget Amendment will do this.

But as of today, that has not happened. Clearly that was the intent of the passage of the legislation, but the choices which we expected to see available have not come to pass. We believe that

there are a number of important factors which have created this

problem and I would just like to mention two. First, we are told

and on behalf of our members, who inquired about and were told,

that the late issuing of HCFA’s first interim regulations significantly delayed the entry of products into the market place.

But second, concern over the risk adjuster is a factor which is acknowledged universally as being one of the issues. We acknowledge

and truly believe that a risk adjustment factor is critical in balancing affordability and profitability in the development of new

health care products. There are both anecdotal evidence as well as

the evidence presented today that justifies that. So we will not

quarrel with that idea.

But we do want to say that it is important to look at how that

risk adjustment is developed and whether or not it reflects accurately the market place balance that must occur for products to be

brought on line and consumers to have access to it. It certainly is

true that the Medicare+Choice options as envisioned in the BBA

would benefit seniors both economically and physically through better health care outcomes.

But for seniors who are economically vulnerable and physically

frail, as my co-panelist just said, perhaps more important than

choice is quality and availability of access to service. The harsh reality is that there are few products in the market place and seniors

have neither choice not cost-savings nor quality right now. I want

to digress just a moment, as I was invited to do, to say that we

are concerned that in a defined benefit program, that choice does

become a problem.

I just want to relate something that happened to me this week.

I had a member of my organization who lives in south West Virginia call me and his wife has Parkinson’s Disease. Whether it was

through the Michael J. Fox discussion of his surgery or not, he and

his wife investigated deep brain surgery. Her doctor recommended

that treatment for her, but it was not covered by Medicare.

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I don’t have an answer for him. I know that that is a naughty

problem that leads away from this issue, but in looking at what we

construct, we have to keep in mind that Medicare was created in

an environment in the 1960’s in which deep brain surgery was

never even envisioned, let along performed. What we see here in

all of this are growing pains in which we are trying to restructure

the system.

So we really encourage the restructuring of the system. We know

that the risk adjuster is a bridge to it. It may not be perfect and

I have one more thing I want to say. In which I say, I don’t think

it is. But we need to do that in order to move it forward. It is like

having a child with growing pains. We can’t stop raising the child.

We can’t stop and wait because Medicare must evolve to create a

health protection for seniors in the 21st century.

The medical advantages we have today and the way in which the

practice of medicine have evolved are far beyond anything that was

ever conceived in the original construction of the Medicare Plans.

Now let me return back to my other point that I want to make. Is

that we are very concerned that basing only, that basing the risk

adjuster only on in-patient hospital data has a negative consequence. I will stop there. Thank you.

[The prepared statement of Nona Bear Wegner follows.]

PREPARED STATEMENT OF NONA BEAR WEGNER, SENIOR VICE PRESIDENT, THE

SENIORS COALITION

Good morning. I am Nona Wegner, Senior Vice President of The Seniors Coalition,

a non-profit, non-partisan senior-citizen advocacy group here today on behalf of our

3 million members and supporters. Thank you for allowing me to speak to you on

this critical issue.

The Seniors Coalition has long promoted the concept of providing Medicare beneficiaries with options and alternatives similar to those available to younger health

care consumers. We were extremely hopeful that the Medicare+Choice provision of

the 1997 Balanced Budget Act would, at last, effect this change.

At this juncture, however, it would appear that neither the hopes of the Congress

who passed the measure, nor those of seniors who wanted new choices, have come

to pass. Certainly we realize that the late release date of HCFA’s interim regulations were one factor that has delayed the entry of products to the market place,

but we also believe that industry concern over the risk adjuster is another factor

of considerable importance.

We do understand and acknowledge that risk adjustment is necessary to the operation of a competitive marketplace. Alice Rosenblatt, then Chairperson of the Risk

Adjustment Work Group of the American Academy of Actuaries, in testimony to the

House Ways and Means Committee in 1997 noted: ‘‘Risk assessment and risk adjustment are methods intended by policymakers to promote competition the basis

of medical and administrative efficiency, rather than risk selection. She goes on to

say that the goals of risk adjustment include maintaining consumer choice, protecting the financial soundness of the system and compensating plans fairly for the

risks they assume.

Let me stop here and say I am not an actuary, nor am I here to present myself

in such a way. I am, however, a consumer, as are Seniors Coalition members, and

we are here to voice our concern that the current marketplace is not serving our

needs. Of course we want quality and affordability in healthcare services and delivery; these are as important as choice, if not more so. But when there are no products, we have neither choice, nor cost savings, nor quality.

In short, when the regulatory environment is such that companies hesitate to

bring products to the marketplace—products that are desperately needed—we must

ask why.

The question leads us to the heart of many of our concerns about Medicare and

the role of government in our healthcare decision making. Many other experts you

have here today will crunch the numbers. I, on the other hand, wish to briefly discuss the impact of this problem in human terms.

72

The Seniors Coalition has grave concerns about using inpatient hospitalization

data as the basis for the risk adjuster for three reasons:

1. It creates an incentive to game the system by hospitalizing seniors who might

otherwise be better served with outpatient treatment.

2. Increased hospitalization inevitably adds more cost to an already overburdened

Medicare system, worsening an already desperate financial crisis.

3. Reliance on such a model flies in the face of the way in which modern health

care delivery has evolved. Inpatient hospital care is no longer the treatment of

choice in for the treatment of many types of conditions resulting from acute

and/or chronic illnesses. Lack of recognition of this fact can lead to actually diminishing the quality of care given to older Americans.

In conclusion, we believe that four years is too long to wait for HCFA to develop

a formula for risk adjustment that takes into account the complexities and standards of practice in medicine today. We are concerned that such a model will not only

slow down the entry of new Medicare products to the marketplace but impact negatively upon the financial solvency of Medicare and far more importantly reduce the

quality and availability of services to Medicare beneficiaries.

Mr. BILIRAKIS. Well thank you, Ms. Wegner. And of course you

heard Dr. Wilensky agree with you and hopefully that, as time goes

on, will work itself out. Ms. Miller, when you say that seniors

should continue to pay their fair share, is that in relation to the

cost of the program or how much a senior can afford? I guess the

question goes to, are you advocating means testing the program?

Ms. MILLER. I think that we should have health care for all

Medicare beneficiaries regardless of their income, and whether they

can pay for it or not.

Mr. BILIRAKIS. Yes.

Ms. MILLER. Our actual goal is Medicare beneficiaries should be

able to choose the kind of medical health care option that best

meets their needs. And Medicare+Choice is a step toward providing

that choice.

Mr. BILIRAKIS. Yes, okay. But you have heard the problems with

the cost of the programs. And do you know what I mean by means

testing?

Ms. MILLER. Yes.

Mr. BILIRAKIS. All right. I mean right now under the current program you are talking about, let us say, with the Part B premiums,

the multi-millionaire pays no more than the poorest person. How

do you feel about that?

Ms. MILLER. AARP is not, at this point, I cannot speak for the

position on it. We have to look at all issues and respond for the

best area of our membership. So I would have to not respond.

Mr. BILIRAKIS. You are being a lawyer on me now, aren’t you?

Ms. MILLER. No, I am being honest.

Mr. BILIRAKIS. Do you have a personal opinion? I don’t mean on

behalf of the AARP. I don’t mean to put you on the spot, but you

may have a personal opinion.

Ms. MILLER. Absolutely. No, I don’t want to give you a personal

opinion, if I may take that option. Because there is too much involved here on both sides and it would have to be looked at.

Mr. BILIRAKIS. Ms. Archer, do you have any opinion.

Ms. ARCHER. I do.

Mr. BILIRAKIS. You know, if you can do it quickly.

Ms. ARCHER. Yeah, I am opposed to mean testing. The millionaires do pay a lot more in taxes than the low-income seniors. We

want a program that treats everybody equally, that makes everybody, satisfies everybody’s needs. Once you start means testing you

73

begin to create dissention in the program and I believe a lower

quality program.

Mr. BILIRAKIS. Ms. Wegner.

Ms. WEGNER. Traditionally my organization has opposed means

testing. We would look at an individual proposal, but, and I would

not speak about what my organization would do in the future, but

traditionally it was opposed.

Mr. BILIRAKIS. Interesting. You have all said that risk adjustment is essential. And yet you have sat through very patiently the

rest of the hearing and you have realized the problems that we

have with seniors basically being dropped from the program and

some of the blame, at least, is being attributed to the new risk adjustment. Do you feel that risk adjustment is so important that it

sort of overbalances? Do you know what I mean, Ms. Archer?

In other words, along with risk adjustment we have this problem. And it is a problem that we all consider very serious. How

would you respond to that?

Ms. ARCHER. I think I should raise one point that hasn’t been

raised today. My understanding is there are 9 million people on

Medicare today who can’t join an HMO even if they wanted to. So

that is the beginning of the issue. Risk adjustment, I don’t believe,

is going to do two things that we need it to do. That you need it

to do and consumers need it to do.

From your perspective it is going to save you literally billions of

dollars in overpayments to health plans. That is critical to preserving the Medicare Program. I think we all agree with that. And

from a consumer point of view, it is the only thing that I see that

we can do that will begin to encourage plans to want to try people

who are sick. To promote and develop programs for people who are

sick.

Mr. BILIRAKIS. So even if we can’t solve the immediate problem,

you feel that strongly about the risk adjustment process.

Ms. ARCHER. I do.

Mr. BILIRAKIS. Good. Ms. Wegner.

Ms. WEGNER. I would concur. We are concerned that despite the

safeguards, which I understand HCFA has tried to implement, that

there will be found a way to gain the system. And history has chosen, has told us that that has been the case. We are concerned

about the impact on patients about that. But we have to, the fact

that we don’t have a perfect system, doesn’t mean that we

shouldn’t move toward bettering it.

Mr. BILIRAKIS. And you all agree that choice is significant. So

you like the idea of additional choice.

Ms. ARCHER. I would say here that good choice is significant.

That in fact what is most significant to seniors is security, stability

and affordability. And if you have choice and a market place that

is in constant turmoil, that is not good. Choice and health plans

that aren’t doing right by their members, that is no good. Moreover, I would say seniors don’t need a lot of choice and don’t want

a lot of choice. They want some limited choice to guarantee affordability, security, comprehensive benefits.

Mr. BILIRAKIS. Ms. Archer, on Page 3 of your written statement

you say, ‘‘today choosing a private Medicare Plan is not a matter

of informed choice, but can be as risky as a trip to a Vegas slot maVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00076 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
74

chine.’’ And yet, I am sure you are aware that HCFA has invested

a lot of money in this document which is intended to inform seniors

and ensuring that they get the information needed in order to

make informed choices. Do you have any response to that?

Ms. ARCHER. I would say a few things. No. 1, if anybody has any

sort of notion of how they would pick a health plan today, let me

know, because I think HCFA would agree that it is just impossible

today. Because there are so many factors that we don’t understand

about each health plan. providers can come and go from one moment to the next. You join, your doctor is in the network, the next

thing that doctor is out.

The drugs that they cover can change from one day to the next.

You join because your drug is covered, it is no longer covered. The

plan terminates and it raises premiums enormously.

Mr. BILIRAKIS. So you don’t feel that HCFA, in spite of their effort is adequately——

Ms. ARCHER. Informing people?

Mr. BILIRAKIS. Yes.

Ms. ARCHER. It is not adequately informing people, but it doesn’t

have the tools to because the data is yet to be available. So I can’t

fault HCFA for only providing people with information that they

have available. The information that we need is just not yet available. We are making some progress with HEDIS data, Health Employer Data Information Set, information and CAHP’s data, Consumer Assessment of Health Plans data, which is beginning to

measure plan quality.

But again, like risk adjustment, we are only in the beginning

stages of that. So it is very hard for people to make an informed

choice about their health plan based on quality. On cost it is a little

bit easier.

Mr. BILIRAKIS. All right, thank you. I am sure my time has long

expired. Mr. Brown.

Mr. BROWN. Mr. Chairman, thank you. Ms. Miller, on prescription drugs there are lots of proposals out there now. Some in the

Medicare Commission want to extend coverage of prescription

drugs only to Medicare beneficiaries in HMO’s. Others want to see

universal coverage of all Medicare beneficiaries’ prescription drug

costs. Others want to see a catastrophic prescription drug plan.

Others want to start from the first dollar and put a limit on annual benefits. AARP, I know, supports some kind of prescription

drug coverage. What is your position precisely?

Ms. MILLER. Prescription drugs is good medicine, and I will give

you an example with me. Prescription drugs is exactly what is

keeping me well. I had a heart attack about 6 years ago, a mild

one. But the prescription drugs for high blood pressure has kept

me well and I depend on that. Prescription drugs is absolutely good

medicine.

Now we don’t have enough data yet from the Commission, it is

kind of sketchy, so that we can make any decisions along that line.

But we need to have prescription drugs as part of the traditional

Medicare package.

Mr. BROWN. So you do not support prescription drug coverage

only for Managed Care enrollees?

Ms. MILLER. No, it should be across the board.

75

Mr. BROWN. It should be across the board.

Ms. MILLER. Yes. But I am adding the fact that when things fall

out as far as the other plans are concerned and people are without

health care, then can then turn to their traditional Medicare and

hopefully have prescription drugs along with it. That fills a void.

Mr. BROWN. Okay, thank you. Ms. Archer, one quick question

and then a bit longer one. You mentioned that 9 million Medicare

beneficiaries cannot join an HMO. That is for geographic reasons,

generally?

Ms. ARCHER. Yes.

Mr. BROWN. Okay.

Ms. ARCHER. Yes.

Mr. BROWN. If I understood you correctly, you said there are disincentives in the current system, obvious disincentives, I think, for

plans to enroll higher cost people. Could you elaborate on how that

works?

Ms. ARCHER. Sure, I mean if a bunch of us got together and said,

we want to create the best HMO out there. We want to have the

best hospital affiliations, academic affiliations, best providers, we

are going to offer the best care for people with cancer. We would

go out and actively promote it. People with cancer or heart disease

would all join and we wouldn’t be paid adequately to service them.

We would be out of business very, very quickly. From a market

place perspective, the health plans are paid in a way where their

incentive is to steer clear from people with costly health care needs

in order to do well on the stock exchange.

Mr. BROWN. Okay. My concern is the converse: HMO’s marketing

only to the healthy. You are saying you are advertising to only get

the sickest people. Some HMO’s maybe just get a cross-section of

people but so often HMO’s seem to try to cream skim. Explain that

side of the coin to me?

Ms. ARCHER. I don’t know if you saw the Kaiser Family Foundation Report, but they did a whole analysis of this issue. But the ads

are usually of healthy people exercising, scuba diving and having

a lovely time of it and that is all well and good. But again, we

think that Medicare’s major important role is not to help the

healthy people get health care but to help the most vulnerable.

Mr. BROWN. Tell me more. Okay, I understand that philosophically. Tell me more about how they actually market. They run ads

with healthy people. Healthy people watch it on tv, they want to

join. Less healthy people may not want to join. But give me other

examples of how they promote favorable selection?

Ms. ARCHER. No, here is another way. If you call them and you

ask what they will do for you if you have cancer or heart disease

or some other costly illness. Or if you write them. We have written

them and asked them for treatment information. It is all proprietary. So if you are at all concerned about how you are going to

be treated, what treatment options are available to you, before you

join you are going to find that you can’t get a good answer from

the plan.

I think there was an article in the Washington Post recently

about a man in a Medicare HMO who had AIDS. He had been getting Protease Inhibitor from his Medicare HMO which was closing

down. He was trying to find information about other HMO’s that

76

would provide that drug. Which again, was going to keep him

going, and he couldn’t get it from those HMO’s. And for good reason, again. If they were to disclose it, they would be attracting too

many people with AIDS and they couldn’t afford to do that. So that

is a serious problem.

Mr. BROWN. There is certainly an incentive not to disclose it. And

there is also an incentive not to offer it.

Ms. ARCHER. That is exactly right. The better ones might offer

it, but if it is at all promoted, then they have to, they were going

to stop offering it. The ones who just are out there to make money

are not going to be promoting or setting up those kinds of programs.

Mr. BROWN. Thank you.

Mr. BILIRAKIS. Mr. Bryant.

Mr. BRYANT. Thank you, Mr. Chairman. Ms. Wegner, let me ask

you about some concerns that have been raised here today about

the phase in of the risk adjuster and the use of in-patient data and

the impact of these on the health plans. How would you, would you

elaborate actually on the effects of this adjuster would be on beneficiaries and the care provided to him.

Ms. WEGNER. As I pointed out in my testimony, I am not an Actuary, so I can’t give you a mathematical model. But as a representative as consumers and judging from history of other kinds

of regulatory implementation, there is a distinct, we think, predisposition for this system to be gained. So that hospitalization for

perhaps, and I know that the focus has been on a 1-day hospitalization, may not be that, but there will be a focus on hospitalization which is what we are concerned about.

And we have several concerns related to that. One is in-patient

hospitalization is the most costly means of treatment. It already

impacts negatively Medicare and its financial situation. Two, it is

not in the best interest of seniors. And three, it sort of flies in the

face of a medical model in which out-patient treatment procedures

have become the norm. One of my children had her entire knee replaced and it was done as out-patient surgery.

I was really reluctant. When the second child had it, it was exactly the best way to go. They were happier being at home and it

was much better. Now I am not saying my child is the same as a

senior, but there are great advantages to not promoting hospitalization. So all of those things make us very concerned when

there are other data available to look at treatment. I am sorry that

was such a long answer.

Mr. BRYANT. I wanted to ask all three of you three quick questions and I am sort of alone up here, so maybe we can go a little

bit over our time. But I will start with Ms. Miller and then Ms.

Archer and then Ms. Wegner. In terms of your organizations, No.

1, how many of your members, estimated obviously, would likely

join Medicare+Choice as a result of this new risk adjustment?

And second, are you concerned that there may be more of your

members in plans now that could conceivably see those plans that

they are in now cut services and withdraw as a result of this new

methodology? And third and finally, is there any resistance from

the more healthy members in these Medicare+Choice Plans now

who do not want to see the risk adjuster?

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Three sort of detached questions, but if you can recall those, if

you can answer those for me quickly. And if you need for me to remind you, I will happily do that.

Ms. MILLER. I don’t know the exact percentage, I am taking a

guess because we would have to get this from our staff.

Mr. BRYANT. Just your estimate.

Ms. MILLER. Okay, a ball park figure I would imagine it is probably in the 30 percent range that are in HMO’s. I don’t know how

many have, I can’t break that down for you. But I will go back to

the fact that our beneficiaries have to choose the medical plan that

works for them and their best options that satisfies their particular

needs. I will give you, again, an example.

I have Medicare and I have a Medigap policy. I don’t have prescription drugs. I find that the plan that has the prescription drugs

will cost more than if I buy my prescription drugs on my own. So

I stay with the plan that I have. However, what about the people

that cannot get the Medigap policy and need the prescription

drugs. We have to fill that gap. So that is why I say that prescription drugs added on to the traditional Medicare Plan is very, very

important so that all people can be benefited by it.

Mr. BRYANT. Mr. Chairman, can I have maybe 2 additional minutes to allow Ms. Archer to answer those questions?

Mr. BILIRAKIS. Sure.

Ms. ARCHER. I don’t know how many more are likely to join because of this beginning phase in risk adjustment. Although I think

many will join for affordability reasons. I think to the extent that

they are concerned about cuts in services and plan terminations,

they are already concerned. And I am not sure to what extent. Certainly I haven’t read much about risk adjustment in the papers.

That is going to be the issue for them.

It is going to be thinking about what they have read about over

the last few months about plan terminations. That is going to be

what slows down potentially enrollment in HMO’s. My understanding is that there has been a tremendous slow down in HMO

enrollment over the course of the last 4 months, in part because

of these plan terminations. Then I guess your final question was

resistance of healthy people to join plans?

I can’t see that at all. I think that for healthy people plans can

work very well and they are very affordable.

Mr. BRYANT. Thank you. Ms. Wegner, do you have any comments

above and beyond that?

Ms. WEGNER. Only that just that my membership has a smaller

percentage currently in HMO’s, and that may reflect geography

and availability or it may reflect a resistance to change. That I

don’t know, but it is an interesting question that we would like to

pursue.

Mr. BRYANT. Thank you all for our testimony.

Mr. BILIRAKIS. Ms. Miller, I just wanted to get clear. You have

the fee-for-service Medicare and you have Medigap policy. Your

Medigap policy does or does not cover prescription drugs?

Ms. MILLER. Does not.

Mr. BILIRAKIS. It does not.

Ms. MILLER. But there is an option.

Mr. BILIRAKIS. There are some Medigap policies that do?

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Ms. MILLER. Right. But in my particular case, when I figured it

out with all the deductions and what have you, it was a little less

expensive for me to keep the policy I have.

Mr. BILIRAKIS. And still pay for your prescription drugs?

Ms. MILLER. Right.

Mr. BILIRAKIS. Mr. Green.

Mr. GREEN. Thank you, Mr. Chairman. One of the, in fact, all of

the questions I think are good for this panel. One of the questions

I wanted to ask is that I am concerned about a lot of the low-income seniors that are beneficiaries, who there is assistance available for Medigap or Medicare supplements but they don’t always

know about them. In fact the story was that there was a pamphlet

sent out that displayed a notice to low-income seniors to be eligible

for assistance with premiums and cost-sharings.

And apparently the pamphlet was received and the State program was flooded with calls who need it. Are we doing as good a

job as we should on making sure seniors, poor seniors know that

this is available?

Ms. ARCHER. The answer is that it is actually been the State’s

responsibilities and that has been the problem. I think the Federal

Government would do a much better job of ensuring that low-income seniors knew about the qualified Medicare Beneficiary Program and other programs to help them with their costs. If Social

Security were responsible for handling these applications, my understanding in New York, for example, is that the State local offices, the local Medicaid offices which are required to process the

claims, were mistakenly turning down many of our clients because

they didn’t have Medicaid.

Well, the whole point of these programs is that you don’t need

to have Medicaid in order to qualify. Other States have incredibly

complicated application processes. With the QI2 Program which

only gives people $1.07 a month, I have heard from many, many

people in the States that it is just too costly to implement it. It

costs them more to implement than it does to give people the benefit.

So there are a lot of obstacles for people enrolling in these programs that I think could be alleviated if the Federal Government

took the application process on itself and had Social Security do it.

Mr. GREEN. Thank you. Any other comments?

Ms. WEGNER. Mr. Green, I just wanted to add that one of the,

I think, one of the barriers to the dissemination of information is

that the government always thinks of using dissemination only in

government channels. There are many other methods of communication using utility companies, using voluntary organizations,

and using other things in the not-for-profit sector and even in the

private sector for the dissemination of information.

It has a high probability of reaching low-income seniors, but

those channels are not utilized. I would argue that that approach

might be cheaper and perhaps as effective as well, and they are

often overlooked.

Mr. GREEN. Okay. So we have to do a better job and maybe instead of having 50 State programs doing this, having some kind of

standardization for the whole country so seniors will know that

these are available.

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Ms. MILLER. AARP tries very hard to educate our membership

on all issues. We have an 800 number, we have a website and

hopefully we can get to all people, not just our own membership,

through the website.

Mr. GREEN. Yeah. Although I have to admit I am a member of

AARP and I wish I could read the magazine, much less everything

else I get in the mail. And I know there is an effort to publicize

to the local chapters and I visit. But again, the membership is not,

compared to the numbers that we have.

Ms. MILLER. We have forums all across the country. We have our

volunteers from AARP to help get that message across.

Mr. GREEN. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Thank you, Mr. Green. Anything further, Mr.

Brown. You are excused. Thank you so very much for your patience

and for your consciousness in wanting to contribute. The last panel

consists of Mr. John Bertko, Principal with Reden and Anders,

Limited. Heidi Margulis, Vice President of Government Affairs for

Humana. Judy Discenza, Chief Actuary of the Blue Cross/Blue

Shield of Florida.

Craig Schub, I hope I haven’t mispronounced too badly, President

of Secure Horizons USA, Santa Anna, California. And Kirk Johnson, Senior Vice President of CNA Health Planners, Chicago, Illinois. Welcome, ladies and gentlemen and again thank you so very

much for your patience in sitting out there throughout this very

lengthy hearing knowing that you are going to be at the tail end.

And ordinarily at the tail end, unfortunately, we never have as

many members as we do right at the beginning. But it is certainly

not any indication of lack of interest, particularly on a day like this

where we have had the last vote unusually early, at 12:30.

So you know many are already on the airplane flying home. But

your testimony is very important to us and it is a part of the record

and certainly will be a factor in what we might do regarding this

problem. I guess we will start off, your testimony, your written testimony, as you know, is a part of the record and hopefully you

could just complement it with some oral testimony. Judy Discenza,

please kick it off, Ms. Discenza.

STATEMENTS OF JUDITH A. DISCENZA, VICE PRESIDENT,

BLUE CROSS AND BLUE SHIELD OF FLORIDA; CRAIG SCHUB,

PRESIDENT, SECURE HORIZONS USA; HEIDI MARGULIS,

VICE PRESIDENT, GOVERNMENT AFFAIRS, HUMANA, INC.;

JOHN BERTKO, PRINCIPAL, REDEN & ANDERS, LTD.; AND

KIRK JOHNSON, SENIOR VICE PRESIDENT, CNA HEALTH

PARTNERS

Ms. DISCENZA. Mr. Chairman and members of the subcommittee,

my name is Judy Discenza, I am Vice President and Actuary of

Blue Cross and Blue Shield of Florida. Risk adjustment is a process

that varies HMO reimbursements prospectively, as you know, depending on the expected health care needs of its members. This

concept is familiar to the insurance industry of course. Actuaries

always attempt to match revenues with risk as closely as possible.

The method scheduled to be used next year, though, could produce

outcomes quite different from what is desired and could ultimately

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cause additional plans to exit the market or reduce member benefits.

There are three reasons for this. First and foremost, as you have

heard earlier, the current approach to risk adjustment in biased

against managed care plans because it is based on in-patient data

only. Second, there are unresolved data and systems questions that

will accentuate the problems of implementing the method. And

third, it could lead to disproportionate reductions in payments to

plans.

For this reason, my company urges delaying the current risk adjustment approach so that HCFA and the industry can study, refine and test an improved model. We believe that a refined risk adjuster without the problems of an in-patient only approach, will ultimately help to expand beneficiaries’ choices. But implementing a

flawed interim solution, will only add to the volatility already affecting Medicare+Choice.

First, why is the approach flawed? The risk adjustment method

to be used for the first 4 years is a proxy for true risk assessment.

The substitute method uses, as we heard earlier, about 12 percent

of admission types to determine the health status of the entire enrolled population. That means that only those seniors who have

specific types of hospital stays factor into risk determination.

Those for whom hospital stays are shortened or avoided, are assumed to be in better than average health. Serious, chronic, costly

conditions can be totally ignored. Unfortunately also this approach

creates incentives for increased and unnecessary hospitalization,

exactly the opposite of what managed care tries to do. Perverse incentives happen largely because there is no risk adjustment score

for any member treated of a significant health care condition without a hospital admission of at least 2 days.

A risk adjustment method should aid our health care system by

encouraging efficient use of health care services. It should not provide incentives for increased hospitalization, tempting plans to

shift their limited dollars into much less productive types of treatments. That is the main reason we urge revising the current plan

to allow for full study, refinement and testing in a Medicare managed care environment using both in-patient and ambulatory care.

The method, not the concept, is faulty because it is incomplete

and because it will be counterproductive. In addition to those flaws

though, we face unresolved data and systems issues. Perhaps the

most serious of them is the Y2K problem. As you know, Medicare

sees Y2K compliance as important enough to suspend a number of

initiatives, including some of those mandated by Congress, to free

resources to deal with Y2K systems issues.

A similar problem exists for plans in attempting to collect the

data needed to implement a risk adjustment system. It takes major

systems changes to gather, format and report all of the encounter

data that will be needed for risk adjustment. We still have not received the guidance from HCFA regarding the planned October

submission of ambulatory encounter data. Plans cannot afford to

divert Y2K resources this year.

Finally, at the same time that risk adjustment method creates

incentives to hospitalized patients and after 2 years of 2 percent

caps on payment increases, HCFA estimates that this proposal will

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produce 5 year payment reductions for Medicare+Choice plans of

over $11 billion. Even with the proposed phase in, some of the

plans that would otherwise be capped at 2 percent, could see their

year 2000 payment increase entirely offset.

In Florida, for example, the 2 percent cap on revenues has applied in every county where our program exists. That means that

the original 95 percent of AAPCC, I have got maybe one more point

if I could continue?

Mr. BILIRAKIS. Please, please proceed.

Ms. DISCENZA. Thank you. Have already been reduced to an average of 89 percent. To continue this process and then overlay risk

adjustment, will continue to widen the gap between fee-for-service

and Medicare+Choice reimbursement. That will bring the reimbursement down to about 85 percent of AAPCC, not the 95 percent

that we have been most familiar with.

And in fact if, when the full risk adjustment, even on the in-patient is implemented, it could drive some areas of our State down

to in between 70 and 75 percent. Thank you very much.

[The prepared statement of Judith A. Discenza follows.]

PREPARED STATEMENT OF JUDITH A. DISCENZA, VICE PRESIDENT, BLUE CROSS AND

BLUE SHIELD OF FLORIDA

Mr. Chairman and members of the subcommittee, I am Judith A. Discenza, Vice

President and Actuary for Blue Cross and Blue Shield of Florida. Our Health Options plan is a large Medicare risk contractor with an enrollment of approximately

123,000 Medicare beneficiaries.

I appreciate the opportunity to testify before the Subcommittee today on how

HCFA’s current approach to implementing risk adjustment will heighten already existing threats to the Medicare+Choice (M+C) program. As a result of constrained

payments and the business risks of implementing the regulations, more than

500,000 Medicare beneficiaries were affected when health plans in 1998 scaled back

their service or decided not to participate. The result is that Medicare beneficiaries

were left with fewer, not more, health plan choices. Because of uncertainty related

to regulation and reimbursement around Medicare+Choice and in large part, uncertainty around the risk adjustment methodology, continued volatility in

Medicare+Choice is likely.

In light of the existing serious issues surrounding Medicare+Choice, we urge delaying the current risk adjustment approach and encourage HCFA to work with the industry to study, refine, and test a risk adjustment model. While we support efforts

to devise and apply more effective methods of risk adjustment, we are concerned

that HCFA’s current approach will ultimately cause health plans to exit the program or significantly reduce benefits for three reasons:

• First, HCFA’s current approach is flawed because it only uses inpatient data;

• Second, HCFA’s current approach is fraught with unresolved data and systems

questions, all of which will accentuate the problems of implementing an inherently biased risk adjustment methodology; and

• Third, even in the first year of the phase-in, HCFA’s current approach could lead

to significant proportionate reductions in payments to plans, particularly in

areas that have been capped at 2 percent for several years running.

I shall now address these points in more detail.

I. THE CURRENT RISK ADJUSTMENT METHOD IS FLAWED BECAUSE IT RELIES ON

INPATIENT DATA

Currently, HCFA is proposing that a proxy be used for true risk assessment. The

substitute methodology is based only on inpatient hospital data.

Using only inpatient stays of two days or more will also create an incomplete picture of a plan’s health risks. For example, any attempt to identify diabetics by using

hospitalization data will almost certainly miss most of them. One would need data

on physician visits, or better yet, pharmacy data, to identify beneficiaries with diabetes.

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Relying on hospital stays of two or more days means that only those seniors who

have specific types of hospital stays provide the sole means of determining health

status for the entire enrolled population. Those for whom hospital stays are shortened or avoided are assumed to be in better than average health.

The proxy being implemented also creates a situation in which inpatient stays

could increase, driving up medical costs. The method presents problems because a

key objective of managed care is to focus on prevention and thereby minimize the

frequency of hospitalization. A hospital-based risk adjuster provides incentives for

increased and unnecessary hospitalization and provides disincentives for plans that

successfully minimize the need for hospitalization.

A primary goal of the health care system is to provide appropriate care at the appropriate time to individuals. Much of the health services and clinical research of

the past 10 years has focused on excess capacity in the health care system and the

resulting overuse of health care services. Blue Cross and Blue Shield of Florida is

concerned with overuse of services. An appropriate risk adjustment methodology, by

providing appropriate reimbursement and incentives, will aid our health care system by encouraging efficient use of health care services. However, risk adjustment,

which provides incentives for increased hospitalization, will have the opposite effect.

The penalty results from the absence of a risk adjustment ‘‘score’’ for any member

treated for a serious condition without a hospital admission of two or more days.

For example, a member who undergoes an angioplasty in an outpatient clinic will

not receive a ‘‘score’’ for having a serious condition, even though his or her care was

as effective as a fee-for-service (FFS) beneficiary treated as an inpatient. The only

way that a health plan gets ‘‘credit’’ for enrolling a high-risk beneficiary is if the

beneficiary is admitted to a hospital.

Further heightening the incentive against appropriate care is the exclusion of

short-stay admissions from risk adjustment scoring. Excluding one-day stays from

the payment model is questionable. As an example, an individual with a particular

diagnosis who is enrolled in Medicare FFS may be hospitalized for three days. An

individual with the same diagnosis enrolled in a M+C plan may be hospitalized for

only one day, then moved to a sub-acute facility (for which no ‘‘score’’ is credited).

When short stay admissions are eliminated from the risk adjustment process, M+C

plans may be penalized in that they receive no additional payment for treating

these patients because the patients did not have a qualifying inpatient admission.

An additional problem is the exclusion of low frequency, but potentially high-cost,

admissions due to sample size limitations. The interim risk adjustment method does

not include diagnoses that occur among fewer than 1,000 Medicare beneficiaries—

even if these conditions are associated with extraordinary medical costs. Thus, a

plan that enrolls a beneficiary with one of these rare, high-risk conditions would not

receive credit for needed care.

Over the years managed care has capitalized on new technologies and advancements in medical treatments to keep people out of the hospital. Hospital stays have

decreased substantially over this period. Rather than move the trend in the opposite

direction, we urge revising the current risk adjustment plan to allow for full study,

refinement, and testing in a Medicare managed care environment.

There are two lessons which we can learn from the current examples of systems

which use risk adjustment: 1) because they do not cover individuals over 65, they

do not provide complete models for the Medicare+Choice population; and 2) they all

either use or recognize the need to move to a full encounter model. In Washington

State, the covered population includes public employees and non-Medicare retirees,

and uses a risk adjustment model that is based on both inpatient hospital and ambulatory data. In Minneapolis, the covered population includes those who are less

than 65 and also uses a risk adjustment model that is based on both inpatient hospital and ambulatory data. In California, the covered population includes those less

than 65 and utilizes an inpatient only risk adjustment model, but recognizes the

need to move to a full encounter model as data becomes available.

II. THE CURRENT RISK ADJUSTMENT APPROACH CONTAINS UNRESOLVED

IMPLEMENTATION PROBLEMS

Compounding the conceptual problems of HCFA’s current risk adjustment method

are unresolved implementation problems that stem largely from two issues:

(1) The limited ability that health plans have to validate the risk adjustment calculations or replicate the model; and

(2) Data and systems complications, particularly surrounding year 2000 compliance.

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Limited Validation/Replication ability

A major factor in an organization’s decision to offer a Medicare+Choice plan is the

ability of the organization to forecast revenues. Health plans face significant uncertainties because it is difficult to validate or replicate HCFA’s risk adjustment calculations. Additionally, because HCFA has not yet disclosed the formulas used for

components of the risk adjustment process it is impossible to replicate the analyses.

Data and Systems Complications—The most important systems issues revolve

around the Year 2000 (Y2K) problem. Plans are currently making a major effort to

ensure that ‘‘Y2K’’ does not disrupt services for their Medicare and non-Medicare

enrollees. Medicare sees Year 2000 compliance as so important that it has suspended a number of initiatives—including initiatives mandated by Congress—to free

resources to deal with Y2K systems issues. At least 15 HCFA initiatives have been

delayed or modified due to Y2K concerns:

• The implementation of SNF consolidated billing.

• The implementation of new payment systems for ambulatory surgical centers and

hospital outpatient services.

• The implementation of new payment methods for home health agencies.

The purpose of these actions is to minimize the number of system changes that

might interfere with the ability of contractors to make sure that information systems are ready for the Year 2000 and are able to process claims without interruption. A similar problem exists for the data needed to implement a risk adjustment

system. We have not received guidance from HCFA regarding the planned October

submission of ambulatory encounter data. It is vital to have information such as the

required fields, implementation instructions, and data format requirements with

sufficient time for system changes well before the data is required to be submitted.

The burden of system changes around these new requirements comes at a particularly bad time in relation to system changes for Y2K

A related issue is what will happen in the event of a computer systems failure.

There is a possibility of computer systems failure anywhere in the process—i.e., in

the transfer of data, in the processing of data, etc. Computer failures related to the

Year 2000, particularly for hospitals that must transfer data to plans or directly to

fiscal intermediaries are special concerns. As the HCFA Administrator noted in recent testimony before the House Ways and Means Subcommittee on Health:

‘‘Health care providers must be Year 2000 compliant in order to bill us properly

and continue to provide high quality care and service to Medicare beneficiaries... Our monitoring indicates that some... providers could well fail. We

are providing assistance to the extent that we are able, but that likely will not

be enough. This matter is of urgent concern, and literally grows in importance

with each passing day.’’

The current risk adjustment method contains unresolved data and information

systems issues. For example, it is unclear how plans will be able to check for completeness of data arriving at HCFA for risk adjustment. Plans will face challenges

in checking for data completeness—they may have trouble with fiscal intermediaries

or with the editing process. In addition, plans may have difficulty getting data on

all services, particularly from capitated providers. The detail of the data or the process at this time is insufficient to provide confidence that all data are being transmitted, received and used appropriately.

III. SIGNIFICANT REDUCTIONS IN PAYMENTS TO PLANS

HCFA estimates that this risk adjustment proposal will produce five-year payment reductions for Medicare+Choice plans of $11.2 billion. Such reductions are

likely to reduce the health plan choices available to beneficiaries and the benefits

that these plans can offer.

Even with HCFA’s proposed phase-in—in which only 10 percent of the risk adjustment effect kicks in—some of the plans that are again capped at 2 percent could

see their year 2000 payment increase entirely offset. In 1998 and 1999, virtually all

Medicare beneficiaries lived in areas that receive 2 percent payment increases; we

expect that millions of Medicare beneficiaries will again see plans in their areas receive 2 percent in 2000. HCFA estimates that this risk adjustment method could

trim as much as 2 percent from some plans’’ payments. In addition, all

Medicare+Choice plans are required to pay a user fee to defray the costs of HCFA’s

informational campaign, which will probably be about 0.4 percent. Thus, despite acceleration in private sector health care costs in 2000, some M+C plans might actually see a decrease if HCFA implements this risk adjustment method in 2000.

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IV. CONCLUSION

Congress created the Medicare+Choice program in the Balanced Budget Act of

1997 (BBA) to expand the types and number of private health plans offered to Medicare beneficiaries. However, as a result of constrained payments and the business

risks of the implementing regulations, health plan options and choices have not expanded significantly; in fact, they have contracted in many areas. The premature

adoption of a risk adjustment method will only intensify the volatility of the

Medicare+Choice program.

Blue Cross and Blue Shield of Florida believes that a refined risk adjuster—without the inherent bias of the inpatient-only approach—can further the objective of

expanding the choices available to Medicare beneficiaries. However, prematurely implementing interim solutions could well work against this objective.

As stated in the beginning of this testimony, we urge delaying the current risk

adjustment approach to give more time to study, refine, and test a valid risk adjustment model in a Medicare managed care environment. We look forward to a continued dialogue with HCFA to ensure a proper approach to risk adjustment and, hence,

the viability of the Medicare+Choice program.

Thank you for the opportunity to speak with you on this important issue.

Mr. BILIRAKIS. Mr. Schub, is that correct? Naturally, I am going

to get it wrong.

Please proceed.

STATEMENT OF CRAIG SCHUB

Mr. SCHUB. Thank you, Mr. Chairman and members of the subcommittee. Thank you for this opportunity to comment on the

issues related to the implementation of the Medicare+Choice risk

adjuster provisions of the Balanced Budget Act. I am Craig Schub,

President of Secure Horizons USA. That is PacifiCare’s health plan

for seniors. PacifiCare provides health coverage for 3.5 million individuals in 10 States.

Through Secure Horizons we serve nearly 1 million Medicare

beneficiaries, the largest Medicare enrollment nationwide. The preceding Panelists and those to come will detail the technical and

methodological problems that plague the risk adjusters and threaten the goals of the Medicare Risk Program, but I would like to

focus my remarks on the cumulative impact of these problems on

providers and beneficiaries.

Given our experience in 1998 and 1999, where we saw an exodus

from the Medicare+Choice Program, PacifiCare is very concerned

that providers leaving networks and health plans, exiting from

Medicare+Choice, could continue and become particularly acute in

mid 2000 without corrective action. This will leave beneficiaries

with fewer choices for coverage and greater out-of-pocket cost. Our

Medicare Provider Networks have become fragile in some areas as

payment is stretched thinner and thinner.

We have also experienced difficulty attracting new providers to

our Medicare Networks. The reason, the lower payment differential

between Medicare+Choice and our prime competitor, which is the

fee-for-service system. It is increasing. The proposed risk adjuster

further widens the differential by adjusting payments, often already discounted payment schedule that is currently less than 95

percent.

And I understand that is different as has been previously stated

today. HCFA asserts that the proposed risk adjuster merely affects

health plans, not the providers and beneficiaries. It ignores the latest and predominant provider models and contracting methods.

Namely, the health plans contract with local provider groups on a

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percentage of premium capitation basis. Over the preceding years,

this model had expanded the provider choices for beneficiaries.

It has given physicians autonomy in treating their patients within a competitive and accountable delivery system. PacifiCare contracts with over 350 medical groups that represent over 66,000

physicians and hospitals. And we pay them a contractually defined

percentage of the per member premium. PacifiCare estimates that

in the first year of implementation, risk adjusters will reduce the

cost to the company of up to $64 million. But that money otherwise

would have gone directly to providers, paid for health prevention

programs, such as those that identify, that provide mammography

screening for early identification of breast cancer, diabetes management and other quality management programs.

Even more problematic is the fact that reduced provider payment

will be the direct result of not having hospitalized more of their patients in lieu of more cost-effective alternatives. The end result is

that providers as well the plan are paid less than is warranted by

the benefits and the actual severity of the illness that the plan carries.

This clearly affects the willingness of providers to participate in

Medicare+Choice Plans. But most importantly, it is the beneficiary

who is going to experience reductions. Where no providers will contract at the premium rate paid by Medicare+Choice, no choice exists. And for seniors who are enrolled in a plan that is no longer

available, benefits they once received at no cost must now be paid

for through expensive Medigap Plans or out of their own pockets.

Seniors that can and do remain in a Medicare+Choice may see

their benefits reduced or co-payments increased. The beneficiary

impact is especially troublesome when one considers that a larger

percentage of lower and middle income beneficiaries enroll in

Medicare+Choice Plans. Additionally, the nature of patients’ specific risk adjustment raises the questions of privacy that I do not

believe have been seriously explored.

Today seniors are satisfied getting more benefits and better care

from HMO’s as demonstrated in even recent HCFA studies. That

is why, in an effort to not further jeopardize the choices envisioned

by the BBA, PacifiCare proposes a delay in the implementation of

the risk adjusters until we can achieve the following three objectives. One, a fair and sound methodology is developed. Two, adequate HCFA information systems are in place. And three, a stable

and predictable and timely process is established for determining

risk adjuster payment rates. Thank you.

[The prepared statement of Craig Schub follows.]

PREPARED STATEMENT OF CRAIG SCHUB, PRESIDENT, SECURE HORIZONS USA, ON

BEHALF OF PACIFICARE HEALTH SYSTEMS

I. INTRODUCTION

Mr. Chairman and members of the Subcommittee, thank you for this opportunity

to comment on issues related to the implementation of the Medicare+Choice risk adjuster provisions of the Balanced Budget Act of 1997 (BBA). I am Craig Schub,

President of Secure Horizons USA, PacifiCare Health Systems’ Medicare plan.

PacifiCare is based in Santa Ana, California and provides health coverage for more

than 3.5 million individuals in ten states—Arizona, California, Colorado, Kentucky,

Nevada, Ohio, Oklahoma, Oregon, Texas, and Washington—and the territory of

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Guam. Through Secure Horizons, we enroll nearly one million Medicare beneficiaries—the largest Medicare enrollment nationwide.

With the passage of the BBA, Congress created the new Medicare+Choice program to spur competition, expand health care choices for seniors, and extend the

solvency of the Medicare Trust Fund. PacifiCare was, and continues to be, pleased

to have a significant role in supporting these goals. However, Congress’ intent simply will not be realized if the Medicare+Choice program is permitted to stay on its

current course. Unless Congress takes corrective action, the number of providers

who refuse to contract with Medicare+Choice plans will increase, and health plan

withdrawals will continue at a more rapid pace. Beneficiaries will be left with fewer

choices for health coverage, disruptions due to changes in the availability of providers, greater out-of-pocket costs, and higher Medigap premiums for those who are

forced to return to the traditional Medicare fee-for-service program.

The risk adjuster, as proposed by HCFA, is one of the most troubling factors that

threaten the stability of the Medicare+Choice program. It poses two fundamental

problems: 1) it exacerbates the cumulative impact of payment reductions to

Medicare+Choice plans; and 2) it creates unworkable and burdensome administrative processes that increase plan costs and raise the likelihood of inaccurate payment. Taken together, these problems will widen the growing disparity between

payment to Medicare+Choice plans and reimbursement under fee-for-service. This

will make it difficult for Medicare+Choice plans to operate in certain markets and

to maintain the level of benefits and services to which beneficiaries have become accustomed. It is unrealistic for HCFA or Congress to assume that a disparity of this

magnitude will have no adverse impact on providers, delivery of services, or health

care options for seniors.

II. THE PAYMENT BACKDROP

The BBA established a new payment formula for Medicare+Choice plans. Plans

receive the highest of a minimum payment floor, a phased-in blend of national and

local rates, or an annual minimum two percent payment update. The BBA also limited the annual rate of growth in Medicare+Choice to Medicare fee-for-service

growth minus 0.8 percent in 1998 and fee-for-service growth minus 0.5 percent from

1999 to 2002. These provisions were estimated to achieve $22.5 billion in budgetary

savings over five years. In fiscal years 1998 and 1999, HCFA assessed a $95 million user fee on

Medicare+Choice plans to fund the education campaign for 100 percent of the Medicare beneficiaries, even though only approximately 15 percent of the Medicare population are in Medicare+Choice plans. Depending upon the year, this user fee reduced

the minimum update by 18%-25% for many plans. This is essentially an additional

tax imposed on the plans. HCFA is asking for authority to assess a fee of $150 million in FY2000, despite the fact that the BBA only authorizes a $100 million user

fee for 2000.

It is against this backdrop of significant payment reductions that the risk adjuster

is imposed. According to HCFA’s own calculations, the risk adjuster, which will be

phased in beginning in January 2000, will reduce payments to Medicare+Choice

plans by an additional $11.2 billion (or 7.6%).

III. KEY METHODOLOGICAL FLAWS OF THE RISK ADJUSTER

A. Ignores Budget Neutrality

By providing for implementation of a risk adjuster in BBA, Congress intended to

improve payment accuracy by paying plans less to take care of healthier individuals

and more to care for sicker individuals. The BBA included a budget neutrality requirement that applies to Medicare+Choice payment provisions, including the risk

adjuster. HCFA, however, refuses to implement the risk adjuster in a budget-neutral manner. Its methodology is designed to extract additional savings ($11.2 billion)

from Medicare+Choice plans in contravention of the budget agreement.

B. Improperly Relies on Inpatient Data Only

HCFA’s initial risk adjuster model attempts to correlate health status with individual patient diagnoses based only on inpatient admissions. This ignores the fact

that advances in medicine provide for treatment of many serious diseases in outpatient settings. For example, the care for a cancer patient has changed dramatically from inpatient-based to outpatient-based with better results. Many cancer patients require few, if any, hospitalizations, but they do require costly medications

and services. Yet, under the proposed risk adjuster, they would be counted as

‘‘healthy’’ patients, and their plans and providers would not receive an appropriate

adjustment to cover their expensive treatments.

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Moreover, the HCFA model establishes a financial incentive to hospitalize beneficiaries. Although this is unlikely to affect the manner in which the vast majority

of health plans deliver care, it does create a perverse incentive that is not in the

best interests of the beneficiary or the ultimate payor—the federal government.

We do not believe it was Congress’ intent to penalize health plans for providing

patients with the services most appropriate for their conditions. Nor is it good public

policy to incentivize costly and inappropriate hospitalizations. In order for a risk adjuster model to differentiate between good medical management and health status,

it must include diagnoses of beneficiaries in the outpatient and ambulatory settings,

as well as the inpatient setting.

C. Excludes One-Day Hospital Stays

The HCFA model improperly excludes encounter data from one-day hospital stays.

As with the reliance on inpatient data, exclusion of one-day hospitalizations creates

perverse incentives. It encourages providers to lengthen hospitalizations to two days

which would not be desirable from a quality or efficiency perspective.

D. Ignores Investments in Initiatives to Improve Member Health

Health plans typically engage in numerous efforts designed to improve the health

of its members, such as preventive services, disease management, wellness programs, chronic care initiatives, and quality measurement and reporting. To the extent that these programs are successful in improving health outcomes (e.g., preventing a heart attack), the health plan will receive lower payments from HCFA.

Again, the methodology results in a bias against health plans. The costs associated

with these quality-of-care programs are real, but because they are invisible, plan

revenue ultimately will decrease. Consequently, plans will be less able to continue

to build upon these innovations in health care management and delivery.

E. Excludes an Institutional Adjustment

By excluding an institutional adjustment from the risk adjuster methodology,

HCFA will be overpaying for institutionalized beneficiaries and underpaying for all

others. Since health plans tend to enroll fewer institutionalized members, the result

is a negative bias in Medicare+Choice payments.

F. Misstates Cost in the Year of Death

Providers who incur significant costs in caring for a beneficiary in the last year

of life will not get paid for these costs under HCFA’s proposed methodology. This

is because the payment will not be determined until eighteen months after the

death in many cases. Unless a beneficiary is still in the program at the time of payment, the payment will not be directed to the plan in which he or she was enrolled.

IV. KEY SYSTEMS ISSUES

A. HCFA’s Information Systems are Insufficient and in Some Cases, Inoperable

HCFA’s information systems are unable to accept, process, or manipulate correctly

much of the data that health plans already have submitted. For example, a system

change implemented in October 1998 has prevented HCFA from tracking beneficiaries who have moved from plan to plan, thus understating inpatient costs for

those members. The problem is so acute that despite its statutory duty to provide

plans with payment estimates for January 1, 2000, by March 1st of this year, HCFA

has informed plans that they should rely on their own estimates for purposes of developing their benefit packages. It is our understanding from HCFA that hospitalizations of up to one-third of PacifiCare’s members in California (added as a

result of a recent merger) may not be included in its risk adjustment payment calculation due to problems with HCFA’s information systems and processing of plan

encounter data.

HCFA is struggling to meet the challenges of Year 2000 compliance, and this is

adversely affecting its ability to properly implement the risk adjuster. The situation

is not likely to improve in the near future. This raises serious questions about the

integrity of the data upon which HCFA relies and the accuracy of the resulting payment adjustments. Prior to using a data set for the development of payment rates,

HCFA has an obligation to assure itself and those who will be paid under the system that the data is of the highest integrity. Tests should be performed to challenge

the validity of the data in each of the key variables used in the payment process.

The data also should be reconciled to other sources within HCFA to assure that it

is complete and accurate. Moreover, HCFA has a fiduciary as well as administrative

responsibility to advise Congress on systems that do or do not work when advancing

from theory to operations, particularly when something as fundamental as payment

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for Medicare services is at stake. It is unclear whether HCFA has undertaken these

critical verification and disclosure functions.

B. HCFA’s Data Requirements Impose Excessive Burdens and Costs on Plans

The HCFA risk adjuster data requirements are extraordinary, forcing plans to divert resources away from health care services for members in order to pay for expensive information systems and operations. To date, plans have not been provided

sufficiently detailed information to reconcile data records or ensure accuracy. As a

result, plans cannot determine whether or not HCFA will pay appropriately.

V. IMPACT ON PROVIDERS AND BENEFICIARIES

HCFA’s assumption that the proposed risk adjuster merely affects health plans

ignores the reality of the latest provider models and contracting methods—namely,

contracting with local provider groups on a ‘‘percent of premium capitation’’ basis.

Formative work on appropriate plan payment levels and diagnostic cost groups were

based on less sophisticated delivery models as opposed to those that are commonly

in place today in mature managed care markets. While more traditional provider

models survive, the most rapid and stable growth in managed care has been built

on contracting with local providers.

If inpatient diagnoses under-represent the true illness burden of many managed

care seniors, then the providers who care for them necessarily feel the impact of the

proposed risk adjuster. PacifiCare contracts with over 350 medical groups and hospitals and pays them a contractually defined percentage of the per-beneficiary premium. PacifiCare estimates that in the first year of implementation, risk adjuster

reductions will cost the company up to $64 million. Approximately $54 million of

this amount will be borne by its providers. The end result is that the providers, as

well as the plan, are paid less than is warranted by the actual severity of the illness

burden of the plan’s members. This clearly affects the willingness of providers to

participate in Medicare+Choice plans.

Reduced Medicare+Choice payments already have adversely affected PacifiCare’s

ability to renegotiate provider contracts; implementation of the proposed risk adjuster will exacerbate the situation. For example, in late 1998, many providers concluded that Medicare+Choice payments for 1999 were inadequate to support the

continued delivery of quality health care services. They opted to return to traditional Medicare because fee-for-service payment was more lucrative. In total,

PacifiCare exited 25 counties in five states, affecting 17,632 beneficiaries. And we

were not alone. For 1999, nearly 100 plans withdrew from some of their

Medicare+Choice markets, affecting 500,000 beneficiaries.

By encouraging the migration of expensive patients back to fee-for-service Medicare, the risk adjuster defeats Congress’ stated purpose of ensuring more choice,

competition, and savings through the efficiencies and quality management of

Medicare+Choice plans. Seniors also experience a financial burden. Benefits they

once received at no cost must now be paid for through expensive Medigap plans or

out of their own pockets. Seniors that do remain in a Medicare+Choice plan may

see their benefits reduced and/or their co-payments increased. The beneficiary impact is especially troublesome when one considers that larger percentages of lower

and middle income beneficiaries enroll in Medicare+Choice plans. Predictable and

accurate payments are essential to patient protection, provider financial stability,

and the ability of health plans to serve more markets.

VI. CONCLUSION

There are numerous other BBA implementation problems that impact reimbursement and Medicare+Choice plan operations. We have attached as an exhibit to this

testimony a brief description of some of these issues. The risk adjuster must be considered in the context of all of the implementation problems because their cumulative effect seriously threatens the viability of the Medicare+Choice program.

In addition to the specific recommendations mentioned above, PacifiCare proposes

a further delay in implementation of the risk adjuster until the following conditions

are met:

1) A fair methodology is developed;

2) Adequate HCFA information systems are in place to ensure complete and accurate data; and

3) A stable, predictable, and timely process is established for determining risk-adjusted payment rates in a budget-neutral manner.

PacifiCare appreciates this opportunity to present this testimony to the Subcommittee. We look forward to continuing to work with Congress and HCFA to ensure the successful implementation of the Medicare+Choice program.

89

Mr. BILIRAKIS. Thank you, sir.

Ms. Margulis.

STATEMENT OF HEIDI MARGULIS

Ms. MARGULIS. Thank you, Mr. Chairman. In 1997, Congressional leaders had a vision. To deliver more health care benefits to

Medicare beneficiaries at lower cost by providing them with the

same kinds of private health care choices you and I have. Mr.

Chairman, members of the committee, I am Heidi Margulis, I represent Humana, a company who covers 500,000 Medicare+Choice

beneficiaries.

Beneficiaries for whom we are privileged and proud to be providing more benefits, including prescription drug coverage, preventive services and disease management programs that are demonstrably improving the health and well-being of those seniors.

We support your vision and the goals of the BBA and are here

to discuss how the proposed risk adjustment payment methodology

affects Medicare beneficiaries blurs the vision you had in 1997.

Let me state for the record, Humana supports risk adjustment

done correctly. I have three key messages today about the risk adjustment methodology. First, HCFA should adopt a risk adjustment

methodology that reflects the perspective health care needs of patients. Second, HCFA’s current risk adjustment proposal is based

on insufficient data that will cause seniors harm and should be reevaluated prior to implementation.

And last, Congress and HCFA should delay this risk adjustment

proposal and set a course to implementing one with adequate and

supportable data. The new risk adjustment proposal which reduces

payments to plans by billions more than you intended will have

significant consequences on the availability of M+C Plans for seniors. This proposed payment reduction comes on the heels of three

other significant payment reductions, both intended and unintended; an 8-percent reduction relative to fee-for-service, payment

reductions due to the removal of graduate medical education, and

the payment of user fees for beneficiary information materials.

Risk adjustment methods can be implemented either to save

money or in a budget neutral manner. The method HCFA plans to

use does indeed save money for Medicare, but it does so by taking

the money out of the pockets of beneficiaries by unnecessarily reducing payments and undermining seniors access to choice.

The combination of risk adjustment and these payment reductions together may lead to more health plans withdrawing from the

program leaving some seniors with fewer or in some cases, no

Medicare HMO choices. I don’t believe that was your intent and I

urge you to evaluate the current proposal for risk adjustment.

There are reliable and accurate ways to develop risk adjusters that

correctly reflect the future health care costs of beneficiaries.

Humana previously worked with the State of California in developing risk adjusters for the health insurance plan of California, the

HIPC.

Experience taught us that cooperation, communication and a

simulation for any major payment change, worked for both government and beneficiaries. We have been involved in risk adjustment

work group discussions with HCFA for some time and have shared

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perspectives on the effect of various risk adjustment models and

how the private sector risk adjusts. We believe that together we

can develop a workable risk adjustment methodology to ensure that

payments to plans are accurate and truly reflect the future health

care costs of our members.

We need time and HCFA’s continued cooperation and understanding of what will and will not practically work in the market

place and ask for your assistance in that. In my written testimony

and others, you have heard about the complications caused by

HCFA’s proposed methodology. Let me highlight just one. Current

model relies exclusively on in-patient hospital data. No data on

services provided outside the hospital or in other institutional settings are used.

Therefore it rewards hospitalizing patients, a trend that has dramatically changed over the past several years. Private health plans

work to keep people out of the hospital by stressing prevention and

the best practices of disease management. As a Humana example,

we are recognized nationally as a leader in disease management

programs from diabetes to complex chronic conditions to chronic

heart failure.

As part of these programs members collaborate with their caregiver to coordinate care, hopefully avoiding hospitalizations. Patients like these programs and health outcomes are measurably improved. These trends should be the mainstay for the

Medicare+Choice Program as well. The methodology proposed by

HCFA penalizes plans that have these disease management programs because there will be fewer hospitalizations.

Disease management programs aren’t free, we bear the cost of

these innovative treatment programs. Based on our experienced in

our congestive heart failure program, we expect to reduce an estimated 2,300 hospital admissions for our 4,000 beneficiaries enrolled in this program. Under the new methodology, we will lose

$12,000 per admission, a $28 million loss which could translate

into—may I, I am close to the end.

Mr. BILIRAKIS. Please continue.

Ms. MARGULIS. [continuing] In prescription drug coverage for all

seniors in a market. Congress and HCFA should take additional

time to determine a risk adjustment method. I urge you to delay

the implementation of this proposed risk adjustment methodology

for at least 1 year and stop the phase in of a flawed system. Become an active participant in helping us get this done correctly for

the 6 million seniors who have made this choice and for those who

wish to make this choice. Thank you.

[The prepared statement of Heidi Margulis follows.]

PREPARED STATEMENT OF HEIDI MARGULIS, VICE PRESIDENT OF GOVERNMENT

AFFAIRS, HUMANA, INC.

Introduction

Good morning, Mr. Chairman. I am Heidi Margulis, Vice President of Government

Affairs at Humana, Inc. I am pleased to be here this morning to talk with you about

the effects of risk adjustment on Medicare+Choice organizations. Humana has been

an active participant in the Medicare program since the mid 1980’s—we currently

provide coverage for over 500,000 Medicare+Choice enrollees and are committed to

continued participation in this program. We have also been active in the discussions

that have occurred between managed care plans and HCFA on the topic of risk adjustment.

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1 Iezzoni, LI, et al. ‘‘Paying more fairly for capitated care,’’ New England Journal of Medicine,

339(26), December 24, 1998, pp. 1933-38. 2Medicare+Choice Rates—45 Day Notice, http://www.hcfa.gov/stats/hmorates/45d1999/

45d.htm. 3See ‘‘Health Risk Assessment and Health Risk Adjustment, Crucial Elements in Effective

Health Care Reform,’’ Monograph Number One, American Academy of Actuaries, May 1993 for

a more detailed explanation. 4 Bertko, J. and Hunt, S. ‘‘Case Study: The Health Insurance Plan of California,’’ Inquiry,

1998, 35:148-153.

One of HCFA’s goals in implementing a risk adjustment system 1,2 for

Medicare+Choice is to ensure that Medicare payments to health plans are accurate

and that they reflect the health care needs of enrolled members. We believe that

this is a laudable goal and are committed to working with HCFA and other interested parties in this endeavor. Payments that are risk adjusted based on health care

diagnostic data appear to be, on the surface, an improvement over the current methodology, but only if designed fairly and implemented correctly. My testimony addresses the issues that Humana has identified and the potential effects of risk adjustment on Humana’s 500,000 enrollees, and the Medicare+Choice program.

Risk Assessment and Risk Adjustment

It may be helpful to first describe the difference between risk assessment and risk

adjustment. Risk assessment is a means of determining objectively how much an individual or a subgroup differs in cost from the average of the entire group. Individuals who are projected to incur more costs for medical services are considered relatively high risks (and, thus, have higher risk scores) than those who are expected

to incur lower costs.3 Risk assessment can be accomplished using only demographic

data, with diagnostic information, or through use of health status surveys.

Risk adjustment may be called ‘‘health-based payment.’’ It is a process that can

be used to determine the amount of funds that should be allocated to account for

the differences in risk characteristics. While all covered individuals should be allocated a ‘‘base’’ or minimum payment, only for those enrollees with high risk characteristics should a health plan receive additional risk adjustment transfers.

Brief Actuarial History of Risk Adjustment

Health plan actuaries have been using various forms of risk adjustment for years

for pricing premiums for health insurance coverage. Age/sex rating, experience rating, and tier rating have been components of the methods used to determine premiums to be charged for a specific category of individuals. The insurance industry’s

practice of health underwriting has been based on the ability to appropriately

project next year’s costs based on current claims experience (for large employer

groups), or on past medical conditions along with age and sex (for individuals), or

on a combination (for small employer groups). This type of cost and illness information has been used in a way that is generally similar to how the new health risk

adjustment methods operate.

Humana has had actual experience with some of the early adopters of risk adjustment methods. One of the best-designed early ‘‘natural experiments’’ was the Health

Insurance Plan for California (the ‘‘HIPC’’), a small group purchasing pool.4 The

HIPC implemented an inpatient-data risk adjuster for the 1996/97 contract year,

after two years of development and simulation. Humana’s small employer division,

Employers Health Insurance, participated in the HIPC as one of two original PPOs

and was actively involved in the design and implementation of the HIPC’s risk adjustment method. Humana and the HIPC learned several lessons as we progressed

from the ‘‘good idea’’ stage to full implementation, including:

• A full and open process between vendors (health plans) and the payment agency

(the HIPC’s parent, California’s Managed Risk Medical Insurance Board) was

very helpful in designing a practical method;

• Any new data collection process will have flaws which only ‘‘trial and error’’ can

uncover and which can then be corrected; and

• A simulation period for a brand new payment method is invaluable for learning

the details of the approach and for evaluating the ‘‘real world’’ impact (on premiums and behavior).

What HCFA Did—Right and Wrong

I will turn now to a few specific comments about the proposed risk adjustment

system. In its efforts to implement a risk adjustment system, HCFA has considered

and responded to several critical issues. First, HCFA realized that given a January

1, 2000 implementation date, the use of inpatient data (while imperfect) is the only

practical option. Second, HCFA has adopted a prospective payment method, using

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5 Ellis, RP, Pope, GC, Iezzoni, LI, et al. ‘‘Diagnosis-based risk adjustment for Medicare capitation payments,’’ Health Care Financing Review,’’ 17(3), 1996, pp. 101-28. 6 Iezzoni, LI, et al. ‘‘Paying more fairly for capitated care.’’

7Medicare+Choice Rates—45 Day Notice, http://www.hcfa.gov/stats/hmorates/45d1999/

45d.htm.

a 6-month data lag. This means that payments to a health plan will be made based

on information that at most is between 6 and 18 months old. Third, HCFA plans

to implement the system using a ‘‘back-loaded’’ transition approach, somewhat limiting the degree to which health plan payments are affected in the early years of

the transition period.

The system that HCFA plans to implement uses the Principal Inpatient Diagnostic Cost Group (‘‘PIP-DCG’’) model, which groups diagnostic data according to expected cost.5 This model has been extensively tested on Medicare fee-for-service data

alone. However, it relies exclusively on inpatient hospital data; no data on services

provided outside the hospital are used. There are several shortcomings to a system

that uses only inpatient data, including a payment bias against Medicare+Choice

plans.

Many managed care organizations have implemented programs to treat patients

on an outpatient basis when appropriate. For example, Humana has developed several disease management programs for our enrollees—ranging from asthma to diabetes to complex chronic conditions to congestive heart failure. As part of these programs, our health plan enrollees collaborate with their caregivers to manage their

care, often eliminating or shortening inpatient stays and improving health status.

High levels of patient satisfaction are associated with these programs as well as reduced costs. When health plans implement programs that manage care and keep enrollees out of the hospital, they bear the full cost of those programs. Without such

programs, enrollees would be more likely to be hospitalized, an outcome that is costly and unnecessary as the hospital may no longer be the most effective setting for

such care. The PIP-DCG risk adjustment method penalizes plans that have such

disease management systems because such plans will have fewer inpatient admissions.

The proposed risk adjustment system also excludes ‘‘short’’ hospital stays, those

that are shorter than two days. In so doing, HCFA again penalizes those health

plans that are able to provide treatment during a short inpatient stay. As an example, an individual with a particular diagnosis who is enrolled in Medicare FFS must

be hospitalized for three days prior to discharge to a sub-acute care facility. An individual with the same diagnosis enrolled in a Medicare+Choice plan may be hospitalized for only one day, then moved to a sub-acute facility (which is not part of the

inpatient hospital). The Medicare+Choice plan would not receive any additional payment for the treatment of this individual, since the patient did not have a qualifying

inpatient admission.

There is a similar problem for conditions that can be treated equally well on an

inpatient or outpatient basis—so called ‘‘discretionary diagnoses.’’ In these cases,

health plans are only paid if the condition is treated on an inpatient basis. While

the PIP-DCG system does make some effort to exclude such cases,6 some discretionary diagnoses are still included on the final list of diagnostic groups that lead

to additional payment above the base payment amount such as many types of congestive heart failure. It is unlikely that there will be a large scale effort on the part

of health plans to move care back into the hospital to increase payment. However,

a very real potential effect is that health plans will be less likely to be innovative—

either to invest in new disease management programs or in new technologies that

would allow patients to be treated on an outpatient basis.

There are also technical shortcomings to the proposed risk adjustment system.

First, there is a difference in the time period used to calibrate the PIP-DCG model

and what will actually be used to pay health plans. The current model was developed using data from one calendar year to predict expenses for the immediate next

calendar year (i.e., calendar 1995 data were used to predict calendar year 1996 expenses). In HCFA’s 45-day notice,7 a 6-month time lag for the actual implementation of the PIP-DCG model is described—this model will use data from a 12-month

period (July 1-June 30) to predict expenses for the year beginning six months later

(i.e., data from July 1, 1998-June 30, 1999 will be used to predict year 2000 expenses) using the original, ‘‘no lag’’ risk weights. A more appropriate technical solution would be for a different set of risk weights to be used; these weights would be

calibrated to incorporate the 6-month time lag.

Another technical issue relates to the criteria that were used to determine whether a particular diagnosis would be included in the group of diagnoses that lead to

increased payments for health plans. To be included, at least 1,000 beneficiaries in

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the original sample had to have the diagnosis. Such a decision rule helps to stabilize

payments in the model; however, by setting a minimum threshold, admissions with

very high costs may be excluded and plans will not receive any additional payment

for these very high cost cases.

Risk Adjustment Implementation Issues

There are several important issues related to the implementation of the proposed

risk adjustment system. One of the reasons we are reluctant to have risk adjusted

payments implemented this year is that we have received insufficient information

from HCFA on the details of the risk adjustment process. For plans to have confidence in the risk adjustment system that HCFA implements, we must be able to

understand the system and be able to replicate HCFA’s results. To this end, we believe that HCFA must disclose all of the formulas used in the risk adjustment process—we cannot replicate results given with the information we have received thus

far.

To date, HCFA has not disclosed all of the formulas used for the various components of the risk adjustment process even though plans have asked for this information for several months. As one example, a re-scaling factor is used to transform the

current AAPCC county ratebook into the new risk county ratebook that forms the

basis for calculating an individual’s risk-adjusted payment. Thus far, HCFA has

only provided a brief description of this formula—not all the components of the formula. Months ago, the American Association of Health Plans (AAHP), the industry’s

trade association, and others submitted to HCFA a list of desired information that

would allow plans to make the same kinds of calculations that HCFA is making.

A summary of the types of information needed is included in one of the attachments

to this testimony.

HCFA has indicated that when it does release data to the health plans on March

1st, it will do so on a summary basis. Again, this will not allow plans to compare

their own results with those of HCFA—the plans need individual data to determine

whether they are using the same data and whether they are applying the risk adjustment technology appropriately. We understand that HCFA has faced a daunting

time schedule in attempting to implement a risk adjustment system for January 1,

2000 and believe that they could do more to disclose relevant information to health

plans if they had more time.

Many of the key implementation issues relate to the gathering, transmission, and

analysis of data. Each health plan submits its data to a fiscal intermediary, which

in turn submits the data to HCFA. To date, plans have not been able to confirm

that the data submitted to HCFA are being transmitted, received and used correctly

or whether there are other systems’ issues HCFA has identified. If there are HCFA

or fiscal intermediary systems problems that need to be fixed, plans are concerned

those fixes may be delayed due to Year 2000 compliance issues. There may be as

yet undetected problems in the data transfer process, potentially leading to incorrect

payments to plans.

While Humana is generally pleased with the performance of its Fiscal Intermediary, Palmetto Government Benefit Administrators, we have had to work out

several time-consuming processes to understand the nature of the Medicare FFS

edit ‘‘error messages’’ that became part of the process. This happens, we believe, because HCFA is forcing the ‘‘square peg’’ of managed care data into the ‘‘round hole’’

of a Fiscal Intermediary’s FFS information system. Here are just a few of our issues:

• Inability to obtain a relevant list of error codes. If we had obtained a list with

the coding logic that creates an error message, we would correct the problems

at the source of the error and avoid further submissions with these so-called

errors.

• The Fiscal Intermediary provides errors grouped in an almost useless format—by

provider. We need to have a more ‘‘user-friendly’’ or managed care-relevant

error report—such as returning our own list with the error reason annotated

in the same format.

• There are a lot of claims—Beginning March 1, we will be submitting encounter

data in batches of 11,000 every two weeks—because of capacity constraints at

the Fiscal Intermediary. Humana is being forced to build a special program just

to organize the error list electronically to allow reconciliation and correction.

The HCFA contractor that combines all of the Fiscal Intermediaries’ claims has

its own turnaround and through-put issues. As reported to me by our staff, error

edits can take between one day and three weeks for each batch. The process of informing us of errors is incredibly inefficient, as demonstrated by the following:

• The HCFA contractor ‘‘kicks out’’ one error at a time on a claim and then returns

it. When corrected for that specific error, the contractor may then find another

94

8 1986 Annual Report to Congress: Impact of the Medicare Hospital Prospective Payment System, Health Care Financing Administration, May 1989. 9Presentation to Congressional staff by the Health Care Financing Administration on January

14, 1999. 10 Brown, R.S., Bergeron, J.W., Clement, D.G., Hill, J.W., and Retchin, S.M., ‘‘Does Managed

Care Work for Medicare? An Evaluation of the Medicare Risk Program for HMOs,’’ Princeton,

NJ: Mathematica Policy Research, Inc., December 1993.

error on the same claim and return it again. This process is repeated until all

codes on a claim have been accepted. • Each separate error requires a new claim line, which then clogs up our claim system with unnecessary claims history. • We cannot obtain the logic behind the edits to identify and fix the source of the

errors and are forced to continue this awkward, time-consuming, and costly

process. This is just one example of where resources are used for unnecessary

administrative costs rather than for patient care.

There are related problems with HCFA’s own system (Common Working File). We

received a 22,000-page report to be reconciled. Although most of these claims were

accepted, we understand that some of the remainder may have ‘‘disappeared.’’

These are just a few examples of our frustrations and concerns about the startup phase of this new data collection process. While HCFA has made a valiant attempt to prepare for start-up, there are still too many unresolved issues. Among

them, our Chief Financial Officer must ‘‘attest’’ to the accuracy of our data submissions. He takes this responsibility seriously and is greatly concerned about the remaining problems. Second, any loss of data unfairly penalizes health plans since

most hospital admissions create additional payments for sick members. Missing

data means reduced payments in 2000. Each qualifying missed claim represents approximately $1,900 to $26,500.

Phase-In of Risk Adjustment

HCFA included a phase-in schedule for the risk adjustment system. A transition

approach has a long history in the Medicare program—such rules were used for the

implementation of Medicare’s Prospective Payment System (PPS) and ResourceBased Relative Value System (RBRVS). During the transition for PPS, for example,

hospitals received a blend of a hospital-specific payment rate and a Federal payment

rate. In the first year of the transition, hospital payments were more heavily

weighted toward the hospital’s own costs, while toward the end of the transition,

hospital payments were more heavily weighted toward the Federal payment rate.8

Effects of Risk Adjustment

As many Subcommittee Members and staff may know from a HCFA briefing on

January 14, 1999, preliminary estimates by HCFA analysts indicate that HCFA’s

fully phased-in PIP-DCG risk adjuster would reduce payments to health plans for

the 195 plans that were measured.9 It must be noted that a risk adjustment method

can be designed to be budget-neutral; HCFA, however, has released a method that

apparently is intended to reduce payments to health plans even further than intended by Congress.

There are two main issues related to the impact on health plans: (1) Should the

new risk adjuster be budget neutral? and (2) Are the results of PIP-DCG risk adjustment method biased because of the reliance on only inpatient data?

Although HCFA analysts and other researchers 10 have previously submitted studies using Medicare Fee For Service data indicating concerns about overpayment of

health plans in excess of 10%, HCFA’s own impact assessment using actual preliminary health plan data showed a payment reduction of 7.6% for a typical month. Because this analysis used the initial submission of somewhat incomplete admission

data, the actual payment reduction impact is likely to be less than 7% with better

data. Reducing the PIP-DCG method’s biases would likely eliminate more of the preliminary estimate of overpayment.

Some or all of this overpayment issue has already been addressed. Implementation of a risk adjuster that is not budget-neutral would be the sixth reduction in

payment to health plans relative to FFS Medicare. The first reduction is the longestablished 5% reduction in the payment to health plans relative to the average FFS

payment—a reduction that is continued through use of the 1997 county ratebooks

under the BBA. This reduction was originally made to assure savings in the Medicare Risk program. The second reduction is the five year phase-in of a ‘‘growth reduction’’ of 2.8% under BBA, which is an arbitrary payment reduction. The third

reduction, while not intended as a reduction, is related to decreasing the geographic

payment disparity between high and low cost counties which affects counties where

the majority of beneficiaries reside. The fourth reduction is reduced payments to

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11Wennberg, J.E., Freeman, J.L., Shelton, R.M., and Bubolz, T.A., ‘‘Hospital Use and Mortality among Medicare Beneficiaries in Boston and New Haven,’’ New England Journal of Medicine, 321(17):1168-73, October 26, 1989. 12 Ellis, R., and Ash, A. ‘‘Refining the Diagnostic Cost Group Model: A Proposed Modification

to the AAPCC for HMO Reimbursement,’’ February 1988, report prepared for the Health Care

Financing Administration.

FFS providers—an indirect reduction—and the fifth reduction, also not intended to

be a reduction, is the unfair imposition of a ‘‘user fee’’ to cover the cost of beneficiary

education materials for all beneficiaries—not just those in managed care. Finally,

HCFA has proposed a risk adjustment implementation that further reduces payments to Medicare+Choice contractors, rather than using risk adjustment to allocate

proper funding to health plans that enroll sicker members. We strongly recommend

that risk adjustment be implemented on a budget-neutral basis to avoid ‘‘double jeopardy’’ of multiple payment reductions.

The other major issue is the bias against managed care health plans through use

of HCFA’s version of the PIP-DCG method. There are several areas where this bias

will have an effect on payments. The following are examples:

• HCFA’s elimination of ‘‘short stay’’ admissions from the PIP-DCG model payments.

Humana, like most Medicare+Choice contractors has successfully reduced the

length of stay at acute facilities. The elimination from payment ‘‘scoring’’ of hospital stays of less than two days penalizes health plans that have reduced hospital costs. For Humana’s senior and disabled members, 22% of hospital visits

were in the ‘‘short stay’’ category, based on a recent study. While many of these

stays will be for less serious conditions, the effect of the elimination was approximately a 1.5% reduction in payment. In contrast, there is much less incentive in Medicare FFS to achieve significant reductions in length of stay given

Medicare’s requirement of a 3-day stay prior to discharge to a sub-acute care

facility.

• HCFA’s inclusion in PIP-DCG payments of certain conditions that are more commonly treated in FFS medicine by an inpatient admission. There is a wide variation in treatment practice across the U.S.11 and great efforts by health plans

to appropriately treat members in the lowest cost setting. Since this setting is

more frequently an outpatient clinic or physician office, conditions that are

‘‘site-of-treatment discretionary’’ should be moved to the ‘‘base’’ payment category, so health plans are not penalized (by failing to trigger additional payments associated with a PIP-DCG group) through shifting patients to these less

expensive ambulatory sites. Using definitions of discretionary conditions from

an older study by members of the DCG research team,12 our consultants found

that keeping these discretionary conditions in the PIP-DCG model could reduce

payments to health plans by 1% to 3%.

• A perverse incentive created by use of only inpatient admissions rather than more

complete diagnostic data. Humana recognizes the practical need to begin risk

adjustment with only inpatient data. While pragmatic issues may mandate the

use of an inpatient data method at the start, health plans should not be penalized at every decision point. If some of the biases can be corrected, then health

plans will be paid more appropriately for providing care in a cost effect manner.

We would point out that this practical approach penalizes the ‘‘good deeds’’ that

health plans accomplish, such as preventing heart conditions. For example, Humana

has over 3,900 members in a disease management program to prevent or reduce

Congestive Heart Failure (CHF). Our specialists estimate that 60% of admissions

linked to CHF can be eliminated—therefore, we hope to eliminate all admissions

next year for 2,300 of the 4,000 seniors in the program. However, if all these members are Medicare+Choice members, we will then lose about $12,000 per admission

by not triggering the additional payment for PIP-DCG 16—for a total of about $28

million. On a per-person basis in the region affected, reimbursement would be reduced by about $100 per member per year. We may need to reduce members’ prescription drug benefits by nearly 33% to offset this revenue loss.

Possible effects of inappropriate implementation of risk adjustment on our

Medicare+Choice enrollees could be significant. While the phase-in reduces concerns

in the first year, the amount of payment reduction that may be incorrect in the second year is frequently greater than a health plan’s entire profit/surplus margin. One

or more consequences will occur: health plans will reduce supplemental benefits,

premiums will be charged or increased, or health plans will exit counties that are

currently marginal or difficult markets. The recent study in JAMA about ‘‘spillover’’

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13 Baker, L. ‘‘Association of Managed Care Market Share and Health Expenditures for Feefor-Service Medicare Patients,’’ Journal of the American Medical Association, 1999, 281: 432-437. 14 Bertko, J. and Hunt, S. ‘‘Case Study: The Health Insurance Plan of California.’’

effects of Managed Care points out the savings that would be eliminated from FFS

Medicare without the beneficial presence of health plans.13

Administrative Cost Concerns

The cost of adapting to risk adjustment is just one of many administrative costs

resulting from the Balanced Budget Act (BBA). Although Humana has begun to estimate these costs, we continue to collect and submit new data, adapt our rating

and budget processes, revise provider contracts, products, enrollment systems and

communication materials, collect data for newly mandated clinical studies and train

providers and staff. To provide some idea of the magnitude of the administrative

costs, we turn to the issue of provider contracting. Humana has over 128,000 separate providers of all types—physicians, hospitals, labs, DME vendors, etc. Because

of BBA changes, we are in the process of re-contracting with a significant number

of those providers—providers in whose offices we are concurrently auditing medical

records for the purposes of HEDIS and clinical studies and securing data to meet

regulatory requirements for physician incentive arrangements. The average cost of

just re-contracting runs about $34 per hour and 3 hours of effort, for an average

contract cost of roughly $100. Including the costs for drafting and regulatory agency

filing of contract forms, we estimate provider re-contracting costs will exceed $3.2

million.

Beyond risk adjustment, the HCFA’s BBA regulations have imposed extensive

new requirements for oversight, additional clinical studies for quality measurement,

and other compliance requirements. As an example, the two required Medicare clinical studies for each Humana Medicare+Choice plan requires an expenditure of

$75,000 per plan for data collection alone. Current accreditation costs for Humana

requires an expense of between $300,000 and $1.5 million.

Request for Deferral of Risk Adjustment

We would ask that risk adjustment using inpatient data for the Medicare+Choice

program be deferred for at least one year due to lack of disclosure of necessary

methodological and formula-related information to plans, data collection issues,

known and unknown HCFA and Fiscal Intermediary systems issues and the potential adverse effects this payment method could have on beneficiaries and health

plans. To date, health plans have submitted detailed claims data to HCFA and

HCFA is in the process of analyzing those data. As you may know, due to provisions

in the Balanced Budget Act of 1997, Medicare payments to health plans have increased in many counties by only 2% in the previous two years, a level below the

cost increases that many health plans have experienced. As a result, increased payment uncertainty due to a new risk adjustment system will exacerbate what is already a difficult situation for many health plans. Some plans have already decided

to discontinue participation in the M+C program in one or more counties. In spite

of the phase-in of risk adjusters, it is likely more plans will go this route in the next

two years if the PIP-DCG risk adjustment system is implemented on the current

schedule.

As an alternative to implementation of the proposed system on January 1, 2000,

we suggest that over the next year, HCFA continue to analyze data submitted by

the health plans and conduct a simulated risk adjustment. This would allow hospitals, health plans, HCFA and its contractors enough time to improve their data

reporting systems so as to ensure proper payment. A similar timeframe for implementation was used in California for the Health Insurance Plan of California

(HIPC), a small-group purchasing cooperative.14 We strongly believe that a simulation of risk adjustment over the next year would provide invaluable information to

participating health plans and to HCFA.

Conclusion

Humana supports the move towards a risk-adjusted payment system but only

after several key risk adjustment method issues are resolved and data collection

processes are improved significantly. We urge you and HCFA to defer implementation of the new risk adjustment system for at least one year to allow this improvement. We understand that HCFA faced a daunting schedule and believe that the

Agency could do more to disclose relevant information to health plans if it had more

time. As an alternative to implementing the proposed system on January 1, 2000,

we suggest that over the next year, HCFA continue to gather and analyze data submitted by the health plans, conduct a simulated risk adjustment, and work towards

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improving the entire data process. This would allow all parties sufficient time to improve their data reporting systems so as to ensure proper payment. We strongly believe the additional time would allow health plans and HCFA to obtain valuable experience and information, allowing all to have greater faith that the new risk adjustment system is an improvement and is being implemented correctly.

This concludes my prepared testimony. I would be happy to answer any questions

you may have.

Request for Data to Understand HCFA’s Proposed PIP-DCG Risk Adjustment Method

Risk adjustment is correctly recognized as a major change in payment methodology. As such, all components of the method must be fully understood by health

plans as well as HCFA. At this point, the conceptual components of the method have

been published and are beginning to be understood. However, many of the calculations and much of the underlying data remain in the ‘‘black box’’ used by HCFA.

The HMO industry requires access to all of the calculations and data, including access to all of the demographic data now used (e.g., data on the new ‘‘originally disabled’’ status), diagnostic data needed to create the PIP scores and the calculations

which create the ‘‘re-scaling’’ factors needed to convert the current AAPCC county

ratebook into the new county ‘‘risk’’ ratebooks.

Data, Formulas and Examples Required

The following data, formulas or examples are needed to fully work through the

risk adjustment method and its implementation process:

1. HCFA should provide a detailed illustration of every formula and calculation used

to determine the results of applying the risk adjustment method. For example,

HCFA should provide examples of calculations for health plans in five counties

(e.g., large urban county, suburban county, rural county, and very small rural

county) showing exactly how the rescaling factors are calculated and how the

risk scores of illustrative health plans would be calculated.

2. HCFA should provide detailed descriptions of how the various BBA provisions

(e.g., the floors, blend, removal of GME and budget neutrality) will apply to the

two separate rate books (the ‘‘old’’ AAPCC and the new risk ratebooks) and provide examples of when one ratebook would replace another (e.g., if the floor

using the new risk ratebook would be larger than the floor using the old

AAPCC ratebook).

3. HCFA should provide access to all the Fee For Service demographic information

in a county (in a confidential format) so that health plans can replicate the rescaling factor calculations. This would include providing appropriate designation

of ‘‘originally disableds,’’ Working Aged, Medicaid eligibles (under both the old

and new rules) and institutionalized (under the old AAPCC rules) in a format

that would allow health plans to calculate the old county ratebook portion of

the rescaling factor and the demographic components of the new county risk

ratebook.

4. HCFA should provide access for several counties (e.g., 10 counties in various geographic regions) to the full diagnostic data that were used to calculate the PIPDCG scores for those counties. While this data may be part of the very large

100% Medicare FFS data set that is available, providing the 10-county amount

in a useable format and size would be very helpful. In addition, it would be useful to have HCFA provide the actual calculation illustrations for each of the 10

counties (i.e., the distribution of PIP-Groups and diagnoses as an intermediate

step to allow confirmation of the results).

5. HCFA should provide access to all of the demographic data of a health plan’s own

members required to compute the PIP-DCG scores under the new method. At

this time, health plans do not have access to records regarding ‘‘originally disabled’’ status and prior Medicaid status (in some cases, such as recent enrollees). In addition, Working Aged status is generally not well-documented. We

would like to obtain a better idea of how the Working Aged files are maintained.

6. HCFA should provide any impact analysis of removing short stays (i.e., admissions of less than two days length) and a list of diagnoses that are disproportionately affected.

7. HCFA should provide detailed illustrations and data for the development of the

‘‘new beneficiary’’ category of payment factors.

8. HCFA should provide more detail about the kinds of data transmission and analysis problems that have emerged for each health plan’s data submission. Because of anecdotal evidence, many health plans have concerns that data were

submitted, collected, transmitted or analyzed in an inadequate manner. To date,

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the very brief summary letter mailed by HCFA on December 11, 1998 is somewhat helpful in understanding the magnitude but of very little help in finding

and focusing on one-time or systematic problems.

9. HCFA should provide a briefing on any data backlog problems that have surfaced

at any of the six Fiscal Intermediaries, at HCFA’s risk analysis contractor or

at the agency itself.

The following chart provides a summary indication of the kinds of data and calculation illustrations still likely to be needed after March 1st.

Data and Information Needed from HCFA for Risk Adjustment Analysis

Data/Information Needed Available 1/15? Available 3/1? Available 1/1/2000?

Detailed description of every procedure and

step of risk adjustment calculations used

by HCFA.

No ................................ No ................................ No

Detailed description and examples of how

HCFA is interpreting BBA provisions for

floors, blending, 2% min. etc.

No ................................ No ................................ No

Electronic data file for all FFS demographic

data for each county, including Medicaid,

institutional, originally disabled, and Working Aged statuses to allow checking of the

demographic portion of the re-scaling factor.

No ................................ No ................................ No

Electronic file for all FFS members PIP scores

to allow checking of the risk portion of the

re-scaling factor.

Partial—only provided

county relative risk

scores; may need to

have an audit procedure.

N/A .............................. N/A

Electronic data file for demographic data for

all health plan members for each county,

including Medicaid, institutional, originally

disabled, Working Aged statuses.

No ................................ Summaries only—perhaps.A member-by-member

PIP and demographic score for

currently enrolled

members

Impact analysis of eliminating one-day stays:

types of diagnoses eliminated and the impact.

May be able to analyze

and try to assess.

No ................................ No

Detailed description, data and examples to

allow health plans to replicate calculation

of the re-scaling factors.

No ................................ No ................................ No

More detailed information about data problems and quality of data (e.g., comparisons

of frequencies of diagnoses) for health plan

submitted data.

No, other than the

12/11/98 letter

No ................................ No

Information about backlog and transmission

problems at the Fiscal Intermediaries or

into HCFA systems.

No ................................ No ................................ No

Detailed description of the method and calculations used to determine the ‘‘neutral’’

demographic factors for new Medicare entrants.

Very short description

provided.

No ................................ No

Mr. BILIRAKIS. Mr. Bertko, please proceed, sir.

STATEMENT OF JOHN BERTKO

Mr. BERTKO. Good afternoon, Mr. Chairman and members of the

committee. My name is John Bertko and I appreciate the opportunity to provide you with information about my experience with

risk adjustment using HCFA’s proposed Principal Inpatient Diagnostic Cost Group or PIP-DGC method.

I am a Principal with Reden and Anders, an actuarial consulting

and data analysis firm which is part of Ingenix, the information division of United Health Group. Over the past year, Reden and

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Anders has analyzed the affects of risk adjustment for many clients, including 15 large Medicare+Choice Contractors operating in

40 markets. I will be drawing upon that experience today to provide an actuary’s perspective on the effects and issues associated

with the proposed risk adjuster.

In my opinion, risk adjustment using diagnostic data represents

a step forward in making appropriate payments to

Medicare+Choice Contractors. Technically, payments using health

risk adjusters are somewhat more accurate than the current method. With a risk adjusted system, health plans will be paid more for

individuals with health problems and less for healthy individuals.

Also, use of risk adjustment helps achieve the policy goal of better matching payment to the needs of the covered population.

Under this PIP-DCG method, most enrollees will be assigned to the

healthy or base category. This means that health plans will receive

a base payment amount of approximately $5,000. Then HCFA will

analyze each enrollees medical encounters over the previous year

to see if that enrollee had an admission that falls into one of the

15 PIP-DCG categories that increase payments.

A qualified in-patient admission then creates a PIP score that is worth from $2,000 to $26,000 more in additional payments. Now,

because the PIP-DCG method relies exclusively on in-patient data,

as mentioned by most speakers today, it should be considered only

a first step. Analysts and Actuaries recognize the bias inherent in

a payment method that uses only in-patient data since payments

to health plans are reduced for keeping members out of the hospital.

However, in an in-patient data method is really the only practical first step and should be acceptable, but only if implemented

with care. While I believe that the overall design of the PIP-DCG

model is appropriate, there are several components of the model

that should be re-examined because of unnecessary payment bias.

As one example, HCFA and others have talked about that the decision to eliminate short stays, that is admissions of less than 2 days.

Thus if a person with a heart condition is treated during a 1-day

hospitalization and then sent to a sub-acute facility, no payment

other than the base payment is made. In fee-for-service Medicare

it is much more likely that this person will be hospitalized for 2

days or more adding to the payment bias. The second example involves conditions that can be treated either on an in-patient basis

or an out-patient basis, such as a physician office or clinic.

Again, for any treatment that occurs in a non-hospital setting,

health plans will not receive any payment over the base amount.

An option would be for HCFA to remove some of these discretionary conditions from the PIP-DCG model to reduce the payment

bias. Next, one of an Actuaries professional requirements is that he

or she be able to replicate the results of another Actuary’s work.

At this point, I am unable to say that I can perform a thorough

replication of HCFA’s work.

I agree with all of Mike Hash’s statements earlier, but I strongly

recommend that HCFA produce full disclosure and have open discussions with health plans and other interested parties about more

of the details. This involves disclosing all of the formulas used for

every component in the model and the research reports used to creVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00102 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
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ate the model. Health plans need to be able to fully test and understand the model’s operation. Last, implementation of the PIP-DCG

model requires creation of a new data transmittal an analysis process.

In this process, encounter data must be handed from hospitals to

health plans to fiscal intermediaries to HCFA like a runner’s

baton. If this data baton is dropped anywhere along the way,

health plans then are automatically penalized through payment reductions. There are many opportunities for errors and break downs

in the system. These include hospitals delaying correction of in-patient data errors. Plans having difficulty gathering data from

capitated providers who pay their own claims.

And many of the fiscal intermediaries having awkward or very

slow procedures in place to identify and report errors. My experience as an Actuary in California, with Colorado, with Washington

State, is that risk adjustment can be done correctly by taking the

time necessary to have all the components working right.

In summary, risk adjusted payments represent an improvement

over the current payment method, but only if the practical data

issues are first addressed and several components of HCFA’s model

are re-examined. HCFA staff are really to be commended for their

hard work and moving toward implementation on such a demanding timetable. I suggest, however, that implementation not occur

until HCFA and the health plans are satisfied that all the data

issues have been addressed and that several of these biases are reexamined and removed. Thank you.

[The prepared statement of John Bertko follows.]

PREPARED STATEMENT OF JOHN BERTKO, PRINCIPAL, REDEN & ANDERS, LTD; SAN

FRANCISCO

Good Morning, Mr. Chairman and Members of the Committee. I appreciate the

opportunity to provide you with information about my experience with risk adjustment for health plans using the Principal Inpatient Diagnostic Cost Group (or PIPDCG) method. I am a consulting actuary and Principal with Reden & Anders, Ltd.,

an actuarial consulting and data analysis firm, which is part of Ingenix, the information division of United Health Group. Reden & Anders’ risk adjustment clients

include 15 large Medicare+Choice contractors with operations in nearly 40 diverse

markets. Over the past year, we have been analyzing data from our clients, in an

effort to help them better understand how their payments for Medicare enrollees

will change as a result of the implementation of a risk adjustment system. I will

be drawing from this experience and providing an actuary’s perspective on the effects of and issues associated with the proposed PIP-DCG risk adjuster.

Risk Adjusted Payments Are an Improvement over the Current Method

In my opinion, risk adjusted payments using diagnostic data represent a step forward in making appropriate payments to Medicare+Choice contractors. Technically,

a payment system using health risk adjusters is somewhat more accurate than the

current payment system. This is especially true for groups of individuals with more

health problems—in most cases, health plans will spend more to treat these individuals and, as a result, deserve higher payments. Similarly, for groups of healthy individuals, risk-adjusted payments to health plans will be appropriately reduced. Use

of risk adjustment also helps to achieve the policy goal of better matching payment

to the needs of a covered population.

In any diagnosis-based risk adjustment method, each individual is assigned a ‘‘relative risk score’’ based on his or her past illness history. In comparison with the

average risk score of 1.00 for an entire population (both sick and healthy individuals), someone with a heart condition may have a relative risk score of 3.0, which

means we expect the person to have expenditures that are three times the average

next year. By contrast, a healthy 70 year-old male may have a risk score of .70,

meaning that we would expect his expenditures for the next year to be only about

70% of the average of the group.

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Under the PIP-DCG method, most enrollees (i.e., those who do not have a qualifying inpatient stay) will be assigned to the ‘‘healthy’’ (base) category. This means

that health plans will receive a base payment amount (approximately $5,000 for

these individuals). The base payment varies by age and gender, as well as by disability, welfare, and working aged status. HCFA will analyze each enrollee’s medical

encounters over the previous year to determine whether the enrollee had an admission that falls into one of the 15 PIP-DCG categories with increased payments. An

inpatient admission creates a PIP-DCG score that is worth from $2,000 to $26,000

per year in additional payments.

Because the PIP-DCG method relies only on inpatient data, it should be considered a first step, or a ‘‘Work in Progress,’’ but an important improvement over the

current method—which uses only age, gender, and status (disability, institutionalization, welfare or Working Aged status) for payments. Other methods that use data

from both the inpatient and outpatient settings (‘‘full’’ data methods) are under development and are being used in some settings (e.g., by the Buyers Health Care Action Group in Minneapolis). HCFA has indicated that it plans to use both inpatient

and outpatient data for risk adjustment beginning in 2004.

Analysts and actuaries recognize the bias inherent in a payment method that uses

only inpatient data, since Managed Care plans are penalized for keeping members

out of the hospital. However, an inpatient data-based method is the only practical

first step and should be acceptable, if implemented with care. The inpatient method

should also be thought of as a natural transition to a method that uses both inpatient and outpatient data. This is because the relative risk scores that are calculated

using only inpatient data are, generally, closer to the average for the group (1.00)

than risk scores calculated using ‘‘full’’ data methods, thus reducing the effects on

payment to health plans. On the other hand, health plans that successfully treat

high-cost conditions in an ambulatory setting will be penalized, since no additional

payment will be provided for high-cost individuals who have not had an admission.

PIP-DCG Model Still Needs Refinement

While I believe that the PIP-DCG model overall is well-designed and has been

tested extensively on the Medicare population, there are several components of the

model that should be re-examined. As noted above, any inpatient-data risk adjuster

will be biased against Managed Care plans because of their ability to eliminate

some inpatient admissions. Although this circumstance must be accepted during a

transition phase, other components of the HCFA model add to this bias. As one example, HCFA has chosen to eliminate ‘‘short stays’’ or admissions with a length of

stay of less than two days from contributing to an enrollee’s risk score. Thus, if a

person with a heart condition is treated during one day and then sent to a Skilled

Nursing Facility, the health plan will receive only the base payment for that enrollee, since the enrollee did not have a qualifying inpatient admission. In FFS

Medicare, it is much more likely that this person will be hospitalized two days or

more, adding to the payment bias. Similarly, there are other conditions that can be

treated either on an inpatient basis or an outpatient basis (in a physician office or

clinic). Again, for any treatment that occurs in a non-hospital setting, health plans

will not receive any payment over the base amount. The result would be that the

relative risk scores for enrollees in Managed Care plans would be lower than the

relative risk scores of Medicare FFS enrollees. One way to address this problem

would be for HCFA to remove some of these conditions from the PIP-DCG model.

HCFA Needs to Disclose Data and Methods

One of an actuary’s professional requirements is that he or she be able to replicate

the findings of another actuary’s work. To date, we have analyzed data for our clients, using our ‘‘best guess’’ regarding the various formulas and components of the

PIP-DCG Model. Therefore, at this point, I am unable to perform a thorough replication. I strongly recommend that HCFA provide full disclosure and have open discussions with health plans, consultants, academics, and other interested parties. This

involves disclosing all of the formulas used for every component of the model, as

well as providing access to data in HCFA’s files about beneficiary status and health

conditions so that health plans can test and fully understand the model’s operation.

Implementation Issues

Implementation of the PIP-DCG payment method has required the creation of a

new data transmittal and analysis process. As part of this process, encounter data

must be handed from hospitals to health plans to Fiscal Intermediaries to HCFA

or its contractor. If the ‘‘data baton’’ is dropped anywhere along the way, then

health plans are penalized automatically through lower payments. For example,

sometimes hospitals make mistakes regarding an inpatient admission and attribute

it to the wrong health plan. We have heard reports of hospitals delaying correction

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of errors, with the result being that health plans cannot submit corrected encounter

records. Some plans may have difficulty gathering data from capitated providers

who pay their own claims. Many of the Fiscal Intermediaries have awkward or slow

processes in place to identify and report errors. As a result, health plans can spend

an inordinate amount of time trying to fix errors. If the Fiscal Intermediaries were

more forthcoming with what triggered errors, the health plans could correct the errors before submitting data to the Fiscal Intermediaries. HCFA has at least a few

small problems in its systems for making use of encounter data. With the lack of

sufficient feedback on the data errors, health plans are unable to confirm that data

being used by HCFA matches their internal records.

Summary

Risk-adjusted payments represent an improvement over the current AAPCC payment method, but only if practical data issues are first addressed and several components of HCFA’s PIP-DCG method are re-examined. HCFA staff are to be commended for their hard work in moving towards implementation on such a demanding timetable. I suggest that implementation not occur, however, until HCFA and

health plans are certain that all biases are removed from the model and important

data process issues are corrected.

Mr. BILIRAKIS. Mr. Johnson.

STATEMENT OF KIRK JOHNSON

Mr. JOHNSON. Thank you, Mr. Chairman and members of the

committee. I am Kirk Johnson, Senior Vice President of CNA

Health Partners, a subsidiary of a multi-line insurance carrier,

CNA. I am testifying today on behalf of the Health Insurance Association of America, which CNA is a member. HIA members include

companies currently serving as Medicare+Choice carriers, companies who are considering doing it and companies who have withdrawn from the program.

Although CNA has a significant involvement in health care, it is

the largest professional liability insurer in the country and we administer the second largest of the Federal employee health benefit

plans, the Mailhandlers Plan. CNA does not itself have a Medicare

Risk Plan or Medicare+Choice product. CNA Health Partners, however, is a management services organization, a partner for doctors,

hospitals and integrated delivery systems who have become Medicare Risk Plans as HMO or who take downstream risks from other

risk plans and Contractors like those here today, or who desire to

become PSO’s, Provider Service Organizations.

PSO’s, as you know, were created by the Balanced Budget Act of

1997. They were supposed to offer to Medicare beneficiaries a competitive alternative to traditional HMO’s and to fee-for-service providers. The Medicare+Choice law has not yet done what it is intended to do. It has not created more competition or more choices

for Medicare beneficiaries. It has not yet rationalized the payment

mechanism so that there is predictability and fairness.

It has not yet made it possible for doctors, hospitals and integrated delivery systems to directly contract with HCFA to offer

their own plans. Indeed, the Act has made it less likely that they

will subcontract on a risk basis with existing plans today. The reason is only partly concerns about the risk adjustment formula, although we have them. In fact, behind me are charts which show

how the disparity in payments to fee-for-service versus risk plans

will grow by 2003 under the current formula.

The primary reason providers are not in this business are the

very ones which you have heard from the established national

Medicare risk plans. It is difficult for the government to be both

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a purchaser and a regulator. It cannot pay less than the rate of

medical inflation on the one hand, and at the same time add significant new regulatory requirements, procedures and restrictions

on a plans ability to make essential market adjustments.

No one would expand into or enter into this market. It is particularly unlikely that providers will do that. Providers, doctors and

hospitals do not have either the scale, the big networks or the sophisticated claims and information infrastructure of the national

plans. There were less than a handful of PSO’s under the new BBA

provisions last year.

Congress and the regulatory system gave PSO’s very little help.

In fact for many providers, and we represent a substantial number

of them who have PSO aspirations, the program appeared to be

going backwards. For example, the mandated expedited appeal procedures which entitle every Medicare beneficiary to a formal appeal

virtually any time he or she disagrees with a physician’s treatment

recommendation.

It turns a common medical matter for which a second opinion

would be an obvious remedy, into an expensive, administrative,

legal adversary one. The requirement that every detail of a plan be

approved and then frozen well in advance of the effective date.

What will amount to, on the average, of 2 percent reimbursement

increases for most plans at a time when medical inflation is three

times that. Finally, the important and necessary risk adjustment

for providers is particularly necessary.

Providers are going to attract patients who know them best, the

sick ones. But it should not be done in a way that reduces overall

reimbursement, and it should not add substantially to the already

serious regulatory burdens on them. Health care costs are going to

go up, perhaps dramatically. There is no way and it would be immoral if not illegal to do so, to manage out of the system the evergrowing technology gains that save life and enhance its quality,

even though they will inexorably add to the cost.

Creating new competitive alternatives as the BBA did, was the

right approach. Particularly the opportunity for providers to accept

financial accountability, directly or in partnership with the plans.

I think most would agree that doctors, now the ones who are licensed to practice medicine, will have to find the next round of savings and efficiencies in medicine. They can do it now because of the

innovations in medical technology and the incentive to take financial accountability, but they have precisely the same concerns

about the execution of the BBA as the existing Medicare Plans

have. Thank you.

[The prepared statement of Kirk Johnson follows.]

PREPARED STATEMENT OF KIRK JOHNSON, SENIOR VICE PRESIDENT, CNA HEALTH

PARTNERS, ON BEHALF OF THE HEALTH INSURANCE ASSOCIATION OF AMERICA

Mr. Chairman and members of the Committee, I am Kirk Johnson, Senior Vice

President of CNA Health Partners. I am testifying today on behalf of the Health

Insurance Association of America (‘‘HIAA’’). As the preeminent health insurance

trade association, HIAA is the principal voice of the broadest spectrum of the health

insurance industry. HIAA represents over 265 members that include commercial insurers, health maintenance, preferred provider and managed care organizations and

businesses that provide products and services to the health insurance industry. Together, HIAA members provide health, long-term care, supplemental, and disability

income insurance coverage to more than 110 million Americans. Association memVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00106 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
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1The budget for fiscal year 2000 includes funding original fee-for-service Medicare that reflects anticipated increases in medical costs over a five year period of 27% and an increase in

the Federal Employee Health Benefit Program of about 50%. Estimates of the likely growth for

Medicare+Choice plans in high paying counties for the same period is less than 10%.

bers include companies currently serving as Medicare+Choice managed care contractors, companies who are considering offering new Medicare+Choice options, and

companies that have recently withdrawn from the Medicare+Choice program, giving

us a unique perspective on the issues under review by this Committee. CNA Health

Partners is a company assisting new or developing Medicare+Choice organizations.

I am pleased to have this opportunity to discuss the implementation of the

Medicare+Choice program with you and to share a few of our principle concerns.

HIAA and CNA Health Partners believe that the Medicare+Choice program represents an essential component in the government’s effort to ensure the financial

survival of the Medicare program and to meet the health care needs of the baby

boom generation as we move into the 21st Century. HIAA applauds the Commerce

Committee for its role in shaping these bold Medicare reforms through the Balanced

Budget Act of 1997. Recent developments, however, suggest that the Committee’s

work is not yet done. To ensure the promise of the reform, and to facilitate beneficiary choice under the Medicare program, additional legislative and policy modifications must be made.

CONCERNS ABOUT LOW ANTICIPATED MEDICARE+CHOICE ORGANIZATION PAYMENT RATE

INCREASES

1. Limits on Annual Increases in Capitation Rates and Concerns Regarding the New

Proposed Risk Adjustment Methodology Threaten the Continued Attractiveness of

the Medicare+Choice Program to Beneficiaries and Providers.

a. Most Plans Will Experience Cost Increases From Medical Inflation That Exceed

Payment Increases During the Coming Year.—Perhaps the greatest threat to the

success of the Medicare+Choice program is the collective impact of changes in Medicare’s payment methodology enacted by the BBA. In order to achieve a successful

partnership between the federal government and Medicare+Choice organizations,

program rules must: (1) allow payment rates that recognize and adjust for the actual costs of providing health care and permit necessary investment in clinical and

operational improvements, and (2) incorporate financial incentives to reward those

Medicare+Choice organizations that achieve the government’s economic, clinical and

operational objectives.

As set forth in Section 1853(c) of the BBA, Medicare+Choice organizations will be

paid the greater of:

(a) a blended capitation rate, which is the sum of a percentage of the area-specific

capitation rate and a percentage of the national Medicare+Choice capitation rate

(the percentage balance will change over time until it reaches a 50/50 blend in

2002); or

(b) a minimum amount, which is $379.84 per enrollee per month in 1999; or

(c) a minimum percentage increase for 1998 equal to an increase of 2 percent of

the 1997 Adjusted Average Per Capita Cost (‘‘AAPCC’’) rate for the particular county, with increases of 2 percent in each subsequent year.

Due to a budget neutrality requirement, the blended capitation rate was not available in 1998 or 1999. The Health Care Financing Administration (HCFA) anticipates, however, that the blend will apply for the first time in the year 2000. While

the majority of counties will receive blended payments, it is HIAA’s understanding

that approximately 30 percent of counties will continue to receive the floor amount

and 11 percent of counties will receive the minimum two percent increase.

The practical result, based on actual Medicare+Choice enrollment, is that

Medicare+Choice organizations serving a majority of Medicare beneficiaries enrolled

in such organizations will receive rate increases of the minimum 2 percent or only

slightly more. For many—if not all—of these organizations, this increase would not

be sufficient to cover the increased cost of providing mandated services, given projected medical inflation 1. This, combined with the fact that many Medicare+Choice

organizations experienced significant losses in 1998 (and anticipate additional losses

in 1999), forecasts trouble for the program.

Indeed, inadequate reimbursement rates largely were responsible for the retrenchment of Medicare+Choice plans last Fall. At that time, some of the most respected Medicare+Choice organizations in the country withdrew from states and

counties with low capitation rates. Other withdrawals occurred in low enrollment

areas even though capitation rates were above average. As reported, 42 health plans

decided to withdraw from the Medicare+Choice program and 53 plans decided to cut

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2 In addition to the 5 percent reduction in payment from fee-for-service costs which existed

prior to the BBA, the increase in payment to Medicare+Choice organizations under both the

blended rate and the floor will not fully reflect anticipated medical inflation. A reduction of 0.8

percent was made in 1998 and reductions of 0.5 percent are to be included in 1999 through

2002. The cumulative effect of these reductions will be that even the blended rate adjustment

will be inadequate. This, coupled with the insufficient increases in the minimum rate, will undermine Congressional intent to encourage growth of Medicare+Choice options for seniors in low

cost areas. 3Medicare+Choice organizations essentially pay a ‘‘head tax’’ (i.e., an amount based on the

number of Medicare+Choice enrollees in their plan) to support the public information program.

back their services. In all, about 400,000 Medicare beneficiaries were effected. To

put this in perspective, HCFA averaged two Medicare risk contract cancellations per

year from 1993 through 1997.

The use of the blended rate for some Medicare+Choice plans for the first time in

2000 is clearly a step in the right direction in terms of ensuring fair and adequate

reimbursement. However, HIAA strongly believes that additional adjustments are

necessary to attract and maintain the number and diversity of Medicare+Choice organizations necessary to establish a sound and attractive market-based alternative

to the traditional fee-for-service program.

Accordingly, HIAA urges Congress to reconsider the artificial and arbitrary limits

on capitation rate increases set forth in the BBA. Specifically, HIAA suggests that

annual increases in Medicare+Choice payment rates be sufficient to fully cover medical inflation experienced in the local markets. Because local employer health plans

and other commercial customers have a tremendous incentive to keep costs down,

they will positively affect the inflation rate in each market. If the current reimbursement structure is not adjusted, more Medicare+Choice organizations are likely

to withdraw from areas served and beneficiaries enrolled in the remaining plans

will likely experience premium increases or reduced benefits. Finally, as

Medicare+Choice plans leave the market, the original Medicare program (with its

higher per capita costs) will have more beneficiaries and put additional strain on

both the Part A Trust Fund and the budget.

b. The New Risk Adjustment Methodology Will Substantially Reduce Payments to

Medicare+Choice Organizations.—Change in the Medicare+Choice payment calculations is all the more necessary because the risk adjustment process which HCFA

is implementing is expected to substantially reduce aggregate payments to

Medicare+Choice plans while adding additional administrative requirements and expenses. According to preliminary HCFA estimates, total Medicare+Choice plan revenues for the year 2000 are projected to be $200 million less than they would have

been under the Adjusted Average Per Capita Cost (‘‘AAPCC’’) payment method and

$6.3 billion less in 2004. As a result, some plans will see even their minimum two—

percent increase eroded in 2000 as the risk adjustment methodology is phased in.

Thus, what began as a straightforward effort to more accurately compensate plans

for the health care costs of their particular members will, unexpectedly, result in

an overall reduction in funds to Medicare+Choice organizations.

This development runs counter to HIAA’s understanding of Congressional intent,

i.e., that the savings resulting from the percentage reduction 2 in plan payments for

years 1998 through 2002 was intended to be in lieu of any net program savings from

risk adjustment. (Indeed, the Congressional Budget Office did not score any projected savings in connection with the risk adjustment program under BBA 97). The

new methodology, and huge projected revenue reductions, underscores HIAA’s concerns regarding the inadequacy of plan payments under Medicare+Choice. To the

extent that the proposed HCFA risk adjustment methodology translates into a significant overall decrease in payments for the Medicare+Choice program, it will undoubtedly be an additional deterrent to program participation. Accordingly, HIAA

urges Congress to require HCFA to modify the risk adjustment methodology so that

aggregate payments to Medicare+Choice plans for 2000 and beyond are based on aggregate BBA adjustments, making the risk adjustment process budget neutral.

c. The User-Fee ‘‘Tax’’ on Medicare+Choice Organizations for Beneficiary Education is Inequitable and Reduces Even Further Payments to Medicare+Choice Organizations.—HIAA strongly supports educating and informing Medicare beneficiaries

about all coverage options, including the Medicare+Choice program, and supplying

beneficiaries with straightforward, unbiased information to help them choose appropriate coverage. That said, we are concerned that the BBA, to support beneficiary

education activities for all 37 million beneficiaries, places a ‘‘user fee tax’’ on

Medicare+Choice organizations only.3 The educational campaign is a benefit to all

Medicare beneficiaries. Indeed, initial information suggests that the toll-free number

HCFA established last year with funds from the $95 million dollar ‘‘tax’’ assessed

upon Medicare+Choice organizations primarily fielded calls from beneficiaries seekVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00108 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
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4Our projections utilize September 1998 enrollment figures, a 1998 Price Waterhouse report

on Medicare Capitated Payments, and reflect HCFA’s assumption for the average cost to

Medicare+Choice plans of risk adjustment. 5Lost savings, based on the difference in projected per capita payments to HCFA vs.

Medicare+Choice, multiplied by the potential Medicare+Choice enrollment less 75 percent of current enrollment. 6We recognize that HCFA may prefer a date earlier than November 1 in order to collect information for the annual public information campaign. We believe that HCFA’s public information

objectives can be met while permitting Medicare+Choice organizations to submit ACRs on the

old schedule. Working with third party publishers, including daily newspapers, HCFA could

more than adequately distribute plan specific information to beneficiaries in a timely fashion.

ing information about the fee-for-service program. Considerations of equity dictate

that the educational program—which informs beneficiaries about basic program

benefits and requirements—be funded from the Medicare trust fund, or another

broad-based source of revenue, as are other such essential program functions.

We note that this tax, which is .355% of the total monthly payments to each

Medicare+Choice plan in 1999, further exacerbates the problems outlined above concerning inadequate reimbursement. Indeed, when the user fee tax is combined with

potential large revenue reductions from risk adjustment, some existing

Medicare+Choice plans will see little or no increase in their payment rates from

1999 to 2000 even though HCFA is using a phase-in of an interim risk-adjustment

methodology.

The cumulative effect of these three payment reductions will vary depending upon

the relationship of the current payment, current benefits, and the number of beneficiaries enrolled.

In your district, Chairman Bilirakis, there were 139,000 beneficiaries enrolled in

Medicare risk plans (or 32 percent of Medicare beneficiaries). We project 4 that

Medicare+Choice plans will receive only 51.4 percent or half of the increase per capita relative to Medicare fee for-service increases. We also project an increase in the

65+ population from 482,000 in 1998 to 533,000 in 2003. If Medicare+Choice options

are withdrawn or have less perceived value by then, a reduction of Medicare+Choice

enrollment to 75 percent of existing numbers would reduce the savings from BBA

for 2003 by $77.7 million 5 from your district alone.

HIAA has calculated the impact of BBA’s payment policies, including risk adjustment, for the counties of each member of this subcommittee. A composite of your

district’s projected payments has been delivered to your office. As examples of these

projections, attached to our testimony are the projections for Chairman Bilirakis’

district and Representative Brown’s district.

2. The May 1 Deadline for Filing ACRs Has Created Serious Problems in the Administration of the Medicare+Choice Program and Should Be Changed to November

1.

The BBA moved the deadline by which Medicare+Choice plans must submit their

adjusted community rate (ACR) proposals from November 1 to May 1. This was

done in order to allow HCFA sufficient time to approve rates and include this rate

information in the materials to be distributed to beneficiaries as part of the educational campaign. The problem with this time frame is two-fold. First, by submitting proposals seven months in advance of the actual effective date (i.e., January

1), plans place themselves at substantial risk that health care costs will rise in unexpected ways in the latter half of the year and thus not be captured in the proposals. This is what occurred last year, contributing to the decision by many

Medicare+Choice organizations to not renew their Medicare+Choice contracts for

1999, or to reduce their service areas. Also, proposals submitted by May 1st are

based on relatively limited claims experience with the Medicare beneficiary population enrolled in the more rapidly growing plans and are thus less likely to be accurate predictors of costs than proposals based on a longer period of time.

Accordingly, HIAA proposes moving the ACR deadline to November 1 or as close

to that date as operationally possible.6

In regulations published earlier this month, HCFA ‘‘recognize[d] the difficulties

inherent to estimating the cost of a benefit package for 2000 based on at most 4

months of experience under the 1999 benefit package,’’ but indicated that it had no

discretion in this matter due to the statutory mandate. The President’s fiscal year

2000 budget includes a proposal that would extend the deadline for ACR submissions until July 1. HCFA strongly supports this proposal. Given the importance of

this issue to Medicare+Choice organizations, and the concerns involved, HIAA urges

the Committee to take steps to put in place a permanent workable deadline for ACR

submissions and suggests that an ACR date of November 1.

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3. Congress Should Return to the Previous Policy Allowing Flexible Benefits and Premiums Within a Service Area.

Historically, Medicare risk contractors were able to offer different benefit or

charge structures within a given contracted service area. For example, modified benefit packages were often developed and offered in a subset of the contracted service

area. While Medicare beneficiaries residing in the segmented service area were offered a uniform array of benefits at a uniform price, uniformity was not required

across the entire service area. This flexibility was important because it allowed contractors to adjust their benefit package and premium structure to take into account

differences in capitated payment rates received, which varied by county.

In the BBA, Congress mandated a new policy requiring that organizations offer

uniform benefits and premiums throughout a service area, despite varying payment

levels. Under the Medicare+Choice regulations, an organization may offer multiple

plans and propose different services areas for each plan. (Were this not the case,

organizations would be discouraged from expanding to outlying rural counties that

typically offer lower reimbursement rates.) This regulatory policy allows

Medicare+Choice organizations to achieve results similar to the original flexible benefit policy, but only at significant additional expense. Instead of one ACR being filed

for a broad service area with benefits modified to reflect anticipated revenues, as

used to be the case, multiple ACRs must be generated for separate Medicare+Choice

plans by each organization, and reviewed and approved by HCFA. The Congressional mandate thus imposes significant administrative costs on the organizations

and the agency, with absolutely no benefit to beneficiaries. Therefore, HIAA urges

Congress to repeal the uniform benefits and premium provisions of the BBA.

IN MANY PLACES THE REGULATIONS ARE OVERLY RIGID AND DEMANDING SO THEY

BECOME AN IMPEDIMENT TO SMALL AND/OR RURAL MEDICARE+CHOICE ORGANIZATIONS

1. The Quality Assurance Approach is Misguided.

HIAA believes that some form of quality standards are important to any marketbased approach to Medicare. Without quality standards, or some other performance

measurement, the added costs of maintaining quality will be difficult to present fairly although over time, it will be obvious. That being said, HIAA has serious concerns

about the breadth and depth of the onerous quality assessment, performance improvement and performance measurement standards developed by HCFA.

a. Performance Measures Should Vary More by Type of Plan—As an initial matter,

we believe that performance measures should be designed to fit the services offered

by various types of plans. HCFA, however, has essentially embraced a ‘‘one size fits

all’’ approach. As a result, it is unlikely that Medicare+Choice PPO plans that offer

a broad choice of providers to beneficiaries (but are loosely ‘‘managed’’) will be able

to meet the quality requirements. Similarly, the extensive quality-related requirements applied to MSA plans and private fee-for-service plans are likely to deter the

necessary investment required before these types of plans can be offered. The bottom line is that the HCFA regulations are so inflexible that few options other than

existing managed care arrangements with large numbers of beneficiaries can be developed. As a result, beneficiary choice will suffer, and a key goal of the Congress’

work on BBA will have been defeated. In rural areas with no existing private health

plan options, these regulations effectively preclude any chance that new choices will

develop under most reasonable financial scenarios.

b. The Extensive Data Collection Proposed Is Not Necessary—Second, the extensive

data collection and reporting efforts required under the regulations will add significant administrative costs to Medicare+Choice organization operations. We question

whether these costs are justified or desirable, and whether the quality assurance

goals might not be met just as well through alternative approaches. HIAA strongly

believes that consumers, not government officials, should dictate through their plan

choices the extent and nature of quality improvement, balanced against costs. Under

this approach, organizations that are responsive to consumer preferences would be

rewarded with greater market share. Fewer government resources would be required for oversight.

HCFA could, however, play a central role in ensuring that minimum standards

are met and encouraging quality initiatives through flexible, incentive-based standards established by contracts. HCFA is to be congratulated for posting beneficiary

satisfaction survey results and other such information on the Medicare internet site

(www.medicare.gov). In HIAA’s view, this would be far superior to the current practice of setting detailed regulatory mandates which run the risk of leading to micromanaging and encouraging uniformity at the price of creative experimentation.

In trying to determine the cost of the extensive data collection effort proposed,

HIAA notes that many health care organizations, particularly those with loosely

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managed network-style delivery systems (such as PPOs) do not currently have the

capability to capture or report performance data at the level being proposed. The

BBA’s limitations on increases in capitation rates means that outside sources will

be required to fund system upgrades. Even if financially possible, the time required

for procurement, installation, training, and validation are not consistent with

HCFA’s scheduled implementation and reporting requirements for Medicare+Choice

plans. As a result, these quality assessment requirements will be a significant deterrent to expanding senior’s choices as potential new plans decide not to participate

in the Medicare+Choice program. At the very least, HIAA believes that organizations making a good faith effort to meet the regulatory requirements should be provided a transition period where penalties would not be imposed. This is particularly

important given plan efforts to address Year 2000 computer issues.

c. The ‘‘Deemed Status’’ Program Should Be Implemented Immediately.—Most

Medicare+Choice organizations already adhere to rigorous quality assurance review

by nationally accredited health care organizations. HCFA has provided by regulation that Medicare+Choice organizations may be ‘‘deemed’’ to meet quality assessment and performance improvement requirements if judged to do so by a national

accreditation organization approved by HCFA and applying HCFA’s standards for

assessing compliance. This approach has much merit. It would allow plans to work

with reviewers who already are familiar with their operations, creating obvious efficiencies and potential cost-savings. HCFA has failed, however, to establish procedures to implement the ‘‘deemed status’’ process. To date, HCFA has not designated

any national accreditation organization for this purpose, nor has it issued policy

guidance on how this process will work. HIAA urges Congress to direct HCFA to

promptly institute a procedure for awarding deemed status since this process has

the potential to reduce some of the substantial costs associated with HCFA’s extensive quality assurance measures.

2. The Proposed Risk Adjustment Policy is Ill-Conceived.

On January 15, 1999, HCFA announced its methodology for implementing the

risk adjustment mandate set forth in the BBA. While HIAA believes that improved

risk adjustment is an appropriate and essential long-term goal for the program, we

have serious concerns regarding the current HCFA proposal, which calls for the initial use of only inpatient hospital data. During the Administration’s proposed 5-year

phase-in period, plans would receive capitated payments based on a blend of payment amounts under the current demographic system and the interim (PIP-DCG)

risk adjustment methodology. For the year 2000, for instance, the HCFA plan calls

for a separate capitated payment rate for each enrollee based 90 percent on the demographic method and 10 percent on the risk adjustment methodology. By 2004,

payment rates would be based on comprehensive risk adjustment using full (i.e., inpatient and other) encounter data and the demographic method would not be used.

HIAA’s concerns with this proposal are both practical and programmatic.

First, the practical. The time frame for implementation outlined by HCFA is simply far too short. Given the significant technological considerations involved, it is

unreasonable for the agency to require that all Medicare+Choice organizations be

able to provide physician, outpatient hospital, skilled nursing facility and home

health data beginning as early as October 1, 1999. (HCFA has not yet identified a

specific date by which this information must be provided, creating additional uncertainty.) The collection, verification, transmission and analysis of ‘‘representative’’ encounter data is a complicated endeavor. Capturing this data in a valid, accurate and

transferable manner will be a major challenge for most plans. Indeed, some HIAA

member companies that currently contract with HCFA do not have the technical capability to capture and transmit encounter data other than inpatient encounters.

Nor do our members with PPO and similar network-style delivery systems have the

capability to do so. They are simply not organized in a manner that will allow them

to collect this level of data.

Even if the capital for such purposes can be arranged, HCFA’s proposed time

frame is insufficient to allow Medicare+Choice organizations to procure and install

the required systems. Procuring systems that can accomplish these tasks requires

very careful planning and assessment, review of the capabilities of competing technologies and vendors. Time is needed to install the systems, modify provider contracts if necessary to ensure adequate reporting to the Medicare+Choice plan, train

the staff (both at the Medicare+Choice organization and provider locations) and

verify and validate the data. All of these steps must be carefully executed or the

system will fail. These obstacles to compliance cannot simply be wished away. Moreover, the imposition of these costs on all Medicare+Choice plans will make the development of rural plans even more difficult because they will continue to have

fewer beneficiaries enrolled compared to plans in other areas.

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The process by which information is communicated to, and received by, HCFA is

likely to present significant technological problems as well, if past experience is any

guide. HIAA members have experienced, and continue to experience, problems in

ensuring that accurate inpatient hospital data is transmitted via Medicare fiscal

intermediaries to HCFA.

Difficulties can also be expected as HCFA attempts to manipulate significant

amounts of data for the first time using the proposed PIP-DCG risk adjustment

model. The methodology developed by HCFA is complicated and requires numerous

steps. The process is yet untested. HCFA faces a monumental task in getting the

PIP-DCG system to work. We are awaiting the opportunity to review the plan-specific effects of the data collected to date. Moreover, as HCFA acknowledges, ‘‘the

PIP-DCG model is [simply] an interim step towards implementation of a comprehensive risk adjustment model (i.e., one which uses diagnoses from all sites of service.)’’

HIAA strongly believes that the ambitious time frame proposed by the agency rests

on a flawed premise: namely, that all of the anticipated technological and methodological problems can be resolved in the five-year window.

HIAA’s doubts in this regard are heightened by the fact that planned implementation coincides, at least initially, with agency efforts to ensure Year 2000 readiness,

both internally and in connection with Medicare+Choice organizations and other

contractors. If HCFA transitions to risk adjustment before the necessary fixes are

made and before reliable data are gathered and properly analyzed, the consequences

could be catastrophic for individuals enrolled in Medicare+Choice plans, as well as

the Medicare managed care program generally.

As if all this were not reason enough to delay implementation, HIAA has significant programmatic concerns regarding the proposed risk adjustment model. First,

HIAA is concerned that variations resulting from excessive payments under the

original Medicare fee-for-service program have been incorporated into the risk adjustment calculation. Additional, unnecessary hospitalizations that have occurred

within the original Medicare Part A fee-for-service program, despite HCFA’s attempt to fight this, are still significant. As a result, Medicare+Choice organizations

will receive lower payments through the proposed risk adjustment methodology.

HCFA should not penalize the managed care portion of Medicare for the program’s

failure to limit false or fraudulent claims and medically unnecessary hospitalizations. One approach to avoid this, would be to limit the use of risk adjustment so

that the total amount paid to all Medicare+Choice plans is not reduced but instead

redistributed among Medicare+Choice plans only.

Second, recognizing the fact that most federal agencies rely on sampling, HCFA’s

expectation of reported data on all individuals seems excessive. Given that even the

more comprehensive risk adjuster will not be able to fully reflect all differences,

HIAA believes that Congress should require HCFA to reexamine the use of planbased sampling to reduce the administrative burden on the plans, reduce the potential for errors in the start-up phases, and increase the privacy of each individual’s

sensitive medical information.

Third, HIAA strongly believes that it is poor public policy to base risk adjustment—even temporarily—on inpatient hospital data only. Such an approach, even

with the adjustments that HCFA has made to its initial risk adjustment proposal,

would reward Medicare+Choice plans with excessive hospital use, and penalize

plans that have effectively reduced inpatient hospitalizations and focused on providing more care on an outpatient basis. The incentives created by a risk adjustment methodology based exclusively on inpatient hospital data could result in increased inappropriate hospital use, increased avoidable costs, and a set back in the

effort to realize greater efficiency in the health care system. Beneficiaries enrolled

in plans with a relatively high proportion of members who receive care for expensive

chronic illnesses outside the hospital setting would be particularly harmed.

For all these reasons, HIAA urges HCFA to delay the implementation date of risk

adjustment beyond January 1, 2000. Since HCFA believes it does not have the authority to do this, Congress should revise the implementation date. While the effort

to collect encounter data should proceed in a careful and deliberate manner, changes

in payment methodology based on risk adjustment should not be implemented until

complete and reliable encounter data are available. To ensure the validity of the

data and a viable risk adjustment process, Congress should direct HCFA to (1) conduct a demonstration project aimed at validating the proposed methodology and (2)

identify less costly and less data intensive ways of performing risk adjustment.

SUMMARY AND CONCLUSION

If the Medicare program is to be sustained for the next generation of beneficiaries

and beyond, it is crucial that the federal government employ every strategy approVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00112 Fmt 6633 Sfmt 6621 X:\HSECOM\55155 txed01 PsN: txed01
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priate to enhance quality health care options for beneficiaries and encourage the development of lower cost options rather than relying on punitive regulations which

will reduce choice and funnel more people into the highest cost option—fee-for-service Medicare. The Medicare+Choice program already is at an early crossroad where

improvements can allow it to flourish but neglect of necessary change will doom it

to failure. It would be more wise, in the long run, for the government to employ

market-oriented strategies to ensure that there are Medicare+Choice options available to beneficiaries and to create incentives for private health insurers and providers to deliver value in the context of the Medicare program. Because it is a critical building block in this market-based strategy, Medicare+Choice must be successful.

In summary, HIAA believes that the prospects for success will be greatly improved if the following steps are taken with respect to the Medicare+Choice program:

• Adjust the payment structure so that increases cover medical inflation; • Issue revised regulations to reduce costly administrative burdens on small, rural

and non-HMO plans; • Change the due date of ACRs to November 1 to eliminate unnecessary risk; • Delay and revise the proposed risk adjustment model to reduce the cost of reporting and system development; and • Modify the role of risk adjustment so that overall revenues to the

Medicare+Choice program are not reduced, but simply reallocated among based

on the health status of enrollees.

A final word of caution: Congress must act quickly to direct HCFA to change

course in the manner outlined and to find ways to reduce the regulatory burden of

participating in the Medicare+Choice program if it wants the program to succeed.

The time frames for critical decisions relating, for instance, to system investments

are very short, particularly given HCFA’s anticipated risk adjustment schedule.

Thus, if Congress is to make adjustments to the program, it should act now.

Thank you, Mr. Chairman. I would be happy to answer any questions you may

have at this time.

Mr. BILIRAKIS. Thank you, Mr. Johnson. Thanks to all of you.

Ms. Discenza, has Blue Cross/Blue Shield of Florida withdrawn

from any county?

Ms. DISCENZA. No, sir, none at all.

Mr. BILIRAKIS. Why have you all chosen not to do it when so

many others have?

Ms. DISCENZA. Our whole business is confined to Florida. And to

ignore the seniors market in Florida would be a big mistake for us.

We actually even have more customers under our Medigap products right now than we do under our Medicare+Choice. So we think

that that market is one that we must value over the long term, but

I will confess that we thought very seriously last fall.

Mr. BILIRAKIS. I was about to commend you. Go ahead, no.

Ms. DISCENZA. We did think very seriously about certain locations. Because honestly, not just the risk adjusters but the 2 percent cap with costs going up at 5 or 6 percent.

Mr. BILIRAKIS. Is that a bigger problem for you all, the 2 percent

cap for that period of time versus the risk adjusters? You know risk

adjustment is something, you heard the testimony earlier, is something that HCFA has been considering and working on for 10

years. And some of you say that you would like to see a year’s

delay. You know, it would be interesting to find out what an extra

year would do when you have already been, it has already been

worked on for a 10-year period of time?

I suppose there may be a little more out-patient information

available and ambulatory-type information over a year’s time. But

let me ask you again, Ms. Discenza, I didn’t mean to cut you off.

Did you have something else?

Ms. DISCENZA. No, that is okay.

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Mr. BILIRAKIS. Could you explain in a little more detail how payments to Medicare+Choice Plans have ended up being so far below

the traditional fee-for-service program?

Ms. DISCENZA. In the initial part of the program, the 95 percent

was chosen to recognize the fact that HMO’s should have better

overall experience, and when the Balanced Budget Amendment

passed, that difference was widen. Widen because the reimbursement has been going up for all of our counties by 2 percent a year,

when our costs are going up five or six.

Well that means that the 95 percent went to, say, 92 least year

and to about 89 this year. Let us say to 86 or even 85 next year,

and maybe combining that with the question that you asked a

minute ago, risk adjusters or the reductions in overall payments,

it is the combination of the two that really hurts us. That if we are

already at 85 percent and the studies that I have read say that

Medicare+Choice people have health improvements that average

even 10 percent from the average population.

We are already pushed below that 10, and then to have the prospect of full risk adjuster implementation drive that down even further is, our concern is.

Mr. BILIRAKIS. Now Blue Cross/Blue Shield is a non-profit?

Ms. DISCENZA. We are a not-for-profit mutual that pays Federal

income tax.

Mr. BILIRAKIS. I won’t try to figure that one out.

Ms. DISCENZA. I won’t either.

Mr. BILIRAKIS. Let me ask a question, I think you mentioned you

wanted the opportunity to be able to work with HCFA in trying to

devise a better, in your eyes, risk adjustment program. Well, let me

ask the question. Have you been approached, have any of you been

approached by HCFA? Do you have to work with HCFA?

Ms. MARGULIS. Yes.

Mr. BILIRAKIS. Okay. What has happened? Your advice has been

ignored? Tell me a little bit.

Ms. MARGULIS. Mr. Chairman, we have been working with HCFA

over a period of time on this payment methodology, and there are

basically two issues, I will give two examples. The first is that

while the loss specifies the use of in-patient hospital data and such

other data as the Secretary requires.

Mr. BILIRAKIS. And we recognize that that is really not the best

way to approach it.

Ms. MARGULIS. Correct. But HCFA had the opportunity along the

way, as we shared our information with them, to make some different choices that would not have created as large a bias against

the managed care plans. And I would list a couple of those for you.

The first is, I believe, Mr. Bertko referred to short stays. As you

may be aware, managed care plans have significantly more 1-day

stays. That is probably due to the fact that we treat our beneficiaries in an out-patient setting and into these management programs.

Second, by using in-patient hospital data, it does not recognize

those other in-patient settings, such as skilled-nursing facilities,

where we may take someone with a diagnosis who has been in the

hospital for 1 day and transfer them to a skilled-nursing facility.

We have that data, we could have provided that data to HCFA.

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Third, with regard to those conditions that could be treated on an

in-patient or out-patient basis, while HCFA did make some inroads in agreeing that those could be considered discretionary conditions, there is some others, for example, in the chronic heart failure area that are still left in that bias against us.

So we have worked with them. The second area, if I might talk

about that is, for months we have asked HCFA to supply us with

the data necessary to replicate the formulas to be able, as Mr.

Bertko said, to go back and recalculate the formulas and the information that HCFA has. They have not supplied us with that information. Sorry for the long answer. I probably could go on.

Mr. BILIRAKIS. Well, I think, again, I think it was you who talked

about disease management programs. You make a good point in

that regard. Certainly the Y2K is something that maybe we haven’t

considered adequately. I have, after Mr. Brown finishes up, I am

sure Humana is anticipating a question from a Floridian.

Ms. MARGULIS. Absolutely.

Mr. BILIRAKIS. Mr. Brown.

Mr. BROWN. There seems to be a lot of Floridians on this panel.

Is that my imagination?

Mr. BILIRAKIS. Ms. Margulis is from Louisville, Kentucky, by the

way.

Mr. BROWN. Yeah, but there is still one. Thank you. Mr. Chairman, I am a little perplexed by all this. You know I represent a

district in northeast Ohio. Two counties in my district United

Health Care disenrolled 2,000 people in each county. Gave sort of

cavalier notice to them by publishing something in the newspaper.

Then I read in the paper that the CEO of United Health Care made $68 million last year. I read in the Los Angeles Times, Orange County edition, the county where Mr. Schub’s company is, I

think. PacifiCare Health Systems, No. 1 operator of Medicare HMO

said fourth quarter operating profits more than tripled as it left

some markets and cut costs. You see executive salaries skyrocketing in this business.

You see huge marketing costs with full page ads in expensive big

city newspapers. Then I read that more and more of you are dropping senior citizens in some counties, because you are just not getting enough money to cover them. But in counties next door you

are staying because beneficiaries there are profitable. And then Mr.

Schub’s testimony says, unless Congress takes corrective action,

the number of providers who refuse to contract with

Medicare+Choice plans will increase and health plan withdrawals

will continue at a more rapid pace. All within the context of bigger

executive salaries, good profits for PacifiCare, expensive marketing

campaigns. And you want the Medicare Commission to give you

more money. That’s what I don’t understand, Mr. Schub.

Mr. SCHUB. I think maybe I would start, Mr. Brown, with just

a comment that the industry has been going through a lot of

change through the preceding years. In that period of change,

health plans have been profitable and unprofitable, and our company as well. Last year we had some significant write downs from

markets that were, were literally out of control.

So the news release you saw was a company that has gotten

itself to a little more than 2 percent after tax profit margin, with

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a lot of hard work and see ourselves as a stable company right

now. We are committed to the Medicare business. We take our seniors to be our No. 1 priority. The health improvement our seniors

and the success of our provider partners is what our company is

about.

We have to earn more than, we have to have some retained earnings to be able to apply capital and expand the program. We believe that a slightly more than 2 percent after tax margin, is an

acceptable margin when you consider the fact that any not-for-profit hospital has to maintain at least twice that to simply maintain

their bond rating and borrow money. So all organizations in health

care have to have some sort of a margin after tax.

As it relates to executive compensation, we bench mark ourselves

against other industries. I can’t speak for United, but I know that

within PacifiCare we bench mark ourselves against other industries and are not excessive in terms of executive compensation. To

the point, last year there were no bonuses paid, simply because of

the fact that the company did not perform.

Mr. BROWN. Mr. Bertko, you mentioned in your testimony that

HCFA’s proposed risk adjustment model is an improvement over

the status quo. You said payments to health plans would be more

accurate. Tell us some of the deficiencies in the current AAPCC

rate, if you would?

Mr. BERTKO. Yes, I will. First off, I think many of the previous

speakers have said that in general the age, gender and status ones

basically overpay for folks that are very healthy and do underpay

by some considerable amount for folks who are in the sickest quartile or quintile. So that is the main feeling of it. It doesn’t recognize

the real needs of the population. And in this case, by using this

part of diagnostic data, you are able to better match, not perfectly,

but better match up what the payment would be versus what the

needs of the population are.

Mr. BROWN. So risk adjustment clearly is preferable to AAPCC,

I mean there is no doubt about that?

Mr. BERTKO. Yes. And again, I think the only thing I would add

there is that the data streams and the mechanics that go with it

have to be in the right shape when you start it up.

Mr. BROWN. I have one other question. Ms. Discenza, HCFA says

that managed care plans are experiencing favorable selection. Most

managed cares plans disagree with that notion. If HCFA says that

many of you are experiencing favorable selection and many of you

disagree with that statement, does that mean that you have better

data or tools than HCFA does to assess beneficiaries’ health status?

Ms. DISCENZA. Actually the studies that I have seen I don’t think

the majority of us would question that in fact people who choose

to join HMO’s usually have had better past health care results

than people who choose not to join HMO’s. That is true not in just

the seniors’ market but in the under 65 market as well. That is

something though that tends to happen more often when a program is new than when it is very mature.

If we look at, for example, the under 65 population today with

as broad an HMO enrollment as there is today, there is not, the

gap between those who will choose an HMO and those who don’t

is narrowing. I personally do not question at all the studies that

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show that those who join, the seniors who join an HMO were easily

in 10 percent, 5 to 10 percent better health in the year before the

joined.

Mr. BROWN. So that would, that would certainly argue for a risk

adjustment?

Ms. DISCENZA. There is no question that risk adjusters, done correctly, are appropriate.

Mr. BILIRAKIS. So what you are saying is that risk adjustment

can be beneficial as well as the opposite for your company, right?

Ms. DISCENZA. Risk adjusters, done appropriately.

Mr. BILIRAKIS. Done correctly.

Ms. DISCENZA. The problem is that if we started off, as I mentioned earlier, with 95 percent with a 5-percent reduction in the beginning of the Medicare, what was called Medicare Risk Program,

that has now moved down to below 90. And if we move with risk

adjusters down from there, it seems to me we could well be double

counting this purported healthiness of the Medicare+Choice enrollment.

Mr. BILIRAKIS. Mr. Bryant, would you like to inquire?

Mr. BRYANT. Thank you, Mr. Chairman. I will ask maybe one or

two of you if you want to answer this. Many health plans have developed specialized programs and provide high quality care in settings other than hospitals to members who otherwise would have

been treated as an in-patient setting. Can you provide an example

of such a program that you have and how it is penalized by HCFA’s

new risk adjustment method? And I have got a CNA question.

Ms. MARGULIS. Mr. Bryant, we have a congestive heart failure

program that covers approximately 4,000 beneficiaries in our market. We anticipate this next year that we will be able to reduce

hospital admissions by 2,300 of those beneficiaries. Each one of

those avoided hospitalizations is $12,000, which will result in a potential $28 million loss. And if I put that on a per beneficiary basis,

that could mean that we would have to reduce prescription drug

coverage in those markets for beneficiaries.

Mr. BRYANT. Did you get any comfort this morning from Mr.

Hash. I think, I thought I heard him say that they were going to

try to use other provider, medical encounters fairly soon. Although

I understood it was going to be 3 or 4 years, 5 years perhaps. But

I thought I heard him say that that was going to be more immediate.

Ms. MARGULIS. No sir, unless we have some sort of delay where

we can go back and perhaps make some adjustments, test the data.

A page from the California HPIC would be to step back, make sure

that we can accurately correct and process the data and simulate

the payment method so that we can make corrections.

What I would say too, and I have heard a lot people here today

say this. We are talking about implementing a risk adjustment system done correctly. But I would say to the members of the committee, this is now being done on top of a pile of other reductions

that has already, in essence, taken away any favorable selection

that there would have been.

So we are very cognizant of that and concerned that we won’t be

able to offer the kinds of additional benefits that attract people to

our programs. If we don’t go back and correct some of the errors

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and flaws that we think this current process has. And to implement, as many of the Panelists spoke about, we are only implementing 10 percent of this new payment methodology. We think it

is wrong to implement a flawed system. It means the second year

is only, the problems are only exacerbated.

Mr. BRYANT. You know, what I hear you saying is that while the

rhetoric is there that they want competition in private sector market place to work, the regulations and the implementation is making it, these items are making it very difficult for you to compete

and operate. Would that be a yes or no?

Mr. JOHNSON. It would be a yes. A large part of it is the uncertainty, a And the anxiety, particularly for providers, who are going

at risk. In a fee-for-service world, the risk is minimal and you can

control some of that by working harder, doing more procedures,

whatever. In a capitated world where you are really trying to be

organized, coordinating care and take all comers. Most of the provider plans we represent are not-for-profits who are doing this in

the community because there is an access issue.

For those continued uncertainty about how the regulations are

going to hit them next year or in 6 months, without the flexibility

to adapt, is just causing them to say, no, let us not do it. And on

balance, these systems offer improvements. At least they offer a

different kind of care and a choice. Which really ought to be in the

system, but for providers it is not, they are not going to do it.

It is just the regulatory system, the uncertainly about how these

adjustments are going to affect them, a And risk adjustments

should help providers. We will attract a disproportionate number

of sick patients if we have a good reputation in our community. But

we don’t know whether being efficient about it, reducing in-patient

stays, is going to actually hurt us or help us in the formula. And

we don’t know whether we can get all the data together to actually

produce what is needed by HCFA in the timeframe required.

Mr. BRYANT. Mr. Schub.

Mr. SCHUB. If I could just add to that, thank you Mr. Bryant.

The point that was raised before by the chairman, that predictability is a big issue, a And the simplicity of understanding, you

can’t serve two masters. And that is what the comments that were

just made refer to. That physicians, they generally practice one

style of medicine and they need to know what the game is and

what you want them to do. And they can demonstrate significant

changes in health care cost reductions while maintaining quality

and satisfaction. But at this point, they are getting very confused.

Mr. BILIRAKIS. Well thanks, Mr. Bryant. Just one comment here.

For instance, Humana, I don’t mean to pick on you but I have already told you——

Ms. MARGULIS. It has been done before.

Mr. BILIRAKIS. Humana has pulled out or reduced services in 14

Florida counties. That plan pulled out or reduced services more

than any other plan in our State. None of that took place in my

Congressional District, I suppose that was more of a coincidence

than anything else. But you know, your timing, not only Humana’s

but I think managed care’s timing stinks, quite frankly. I mean you

are under attack these days. I don’t think a 2-percent profit margin

in wrong.

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This is America. If the stockholders of United, is it, don’t care

about their CEO receiving a $65 million salary last year, then I am

not going to care about it. But if in fact I see that that company

has pulled out and really putting in jeopardy a lot of Medicare

beneficiaries, then that is going to concern me. You have said you

will work with HCFA. You have said that HCFA has been respondent in some degrees and not respondent in others.

I don’t know. Are you going to basically force us to do what most

of us don’t want to do? And that is to mandate that you continue

to cover some of these Medicare beneficiaries in some of our, well,

in America? You could be leading toward that. And I don’t think

you want that. And I guarantee you I don’t want that. But you

know, we have got people out there who have complained to us.

Now maybe some of them would, some of these plans would have

withdrawn anyhow in the normal course of events.

But as I said, your timing is rotten and it seems to me that, you

know, I get the feeling that you are using this risk adjustment as

rationale. And you are using it, basically I made the comment in

my opening statement about on the come. Risk adjustment is coming and you are not happy with the way it seems to be devised by

HCFA. You are pulling out and you feel that maybe that is going

to be beneficial to work with HCFA to improve it.

But it may work the other way around. And I would really hate

to see that, but it could happen. Do you have any comment, Ms.

Margulis? I guess I should at least give you that opportunity.

Ms. MARGULIS. Yes sir. Yes, we also, I might say, thought the

timing was very poor as well. Let me say first that we have been

in the Medicare Risk and now Medicare+Choice Program for 13

years.

Mr. BILIRAKIS. Any you are heavy in the Tampa Bay area in

Florida.

Ms. MARGULIS. Clearly, clearly. And we bought a troubled, you

may remember, plan back in 1987.

Mr. BILIRAKIS. I remember.

Ms. MARGULIS. And had troubles for many years.

Mr. BILIRAKIS. And that is why I say, I don’t know that. I should

question a 2-percent return or whatever the case may be. I don’t

do that.

Ms. MARGULIS. I think what I would want to say to you is that

we have been a long, long-term participant in this program. We believe in it. We would like to be in every Florida county. The situation last year was unusual for us. You may recall last year we acquired a large company in Florida, Physician Corporation of America. There were issues in some of those counties that were related

to an acquisition and integration. One of the requirements for us

to remain in this program is to have adequate provider health care

delivery systems and adequate networks, a And in many cases we

were unable to have that kind of network that we could offer an

affordable, quality product.

Mr. BILIRAKIS. Why, because of the current, because of the current AAPCC or what? What was the reason?

Ms. MARGULIS. Related to a variety of considerations, a And I believe Mr. Hash and several people said that withdrawals are due

to many conditions in a market. Let me say this, that the promulVerDate 22-SEP-99 14:20 Sep 23, 1999 Jkt 010199 PO 00001 Frm 00119 Fmt 6633 Sfmt 6602 X:\HSECOM\55155 txed01 PsN: txed01
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gation of the Medicare+Choice rules, the timing of that plus the notification deadline for non-renewals and the thought that if we

could change the environmental situation in many of those counties

in 1999 or 2000, we could go back to those counties.

I think a number of our decisions were based on that.

Mr. BILIRAKIS. I am sorry, what do you mean by environmental?

Ms. MARGULIS. If, when pulling out in October, there is no 5 year

penalty for going back, s So we would have an opportunity, if we

could build an adequate network and realize that we would be able

to cover our costs for providing services that would attract beneficiaries to our plans, we could go back. I think what I want to say

long term is that it is our intent to be a long-time participant in

this program.

We want to work on, not only a payment methodology that

doesn’t every year put Congress in the position of having a formula

fight, b But also one that can deliver additional benefits to seniors

and to all beneficiaries to join this program. The risk adjustment

methodology we feel, if implemented correctly and based on adequate and sufficient data, will help. As I mentioned before, not on

top of a whole lot of other payment reductions so that we can no

longer be attractive to people in the fee-for-service sector to select

us.

Mr. BILIRAKIS. Well, all right. I want to publicly commend

HCFA, gentleman, there may be more than just you here, sir, I

don’t know. But the point is I have asked that they have a representative here to listen to all this, they have, and I think that

is good. But you have also heard that there might be openness for

more work with these people. As much as we may try, the risk adjustment seems to be something that everybody thinks is a good

idea, but you say it has to be done right.

I don’t know what doing it right is or isn’t. But you know we

have beneficiaries out there who have lost a choice, a very important choice. And we have to respond to them.

And I think you all have got to realize that. Hopefully you do.

I have nothing further. Do you have anything further, Mr. Brown?

Well, thank you so very much. Again, I appreciate your patience.

[Whereupon, at 2:16 p.m., the subcommittee was adjourned.]