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601 New Jersey Avenue, N.W. • Suite 9000 

Washington, DC 20001 

202-220-3700 • Fax: 202-220-3759 

www.medpac.gov

Glenn M. Hackbarth, J.D., Chairman

Robert D. Reischauer, Ph.D., Vice Chairman 

Mark E. Miller, Ph.D., Executive Director

M+C payment rates compared with county Medicare 

per capita fee-for-service spending (revised)

The purpose of this report is to present data on 

the level of Medicare+Choice (M+C) payment 

rates relative to the spending on similar 

beneficiaries in Medicare’s traditional fee-forservice program.

Before the Balanced Budget Act of 1997 

(BBA), payment rates for private plans were set 

at 95 percent of a county’s per beneficiary 

spending under the traditional FFS program. 

The BBA instituted a new method for 

calculating payment rates for the M+C program 

that broke the direct link to county-level FFS 

spending. Under the BBA (and two subsequent 

acts), rates were the highest of three formula 

prongs; fixed dollar amounts or “floors,” a 

minimum guaranteed increase (2 percent) from

prior year county rates, or a blend of local and 

national rates. The floor rates and the blended 

rates were updated using the rate of increase in 

national FFS spending. The two floor rates vary 

with the characteristics of a county. One floor 

applies to large urban areas, defined as 

metropolitan statistical areas containing more 

than 250,000 residents. The other floor rate 

applies to all other counties. 

The Medicare Prescription Drug, Improvement, 

and Modernization Act of 2003 (MMA), altered 

the payments in several ways. The minimum 

update is now the greater of either 2 percent or 

the rate of projected national FFS spending 

growth (6.3 percent for 2004). In addition there 

are more blended rates for 2004. Finally, 

beginning in March 2004, a fourth prong is 

added to the formula—100 percent of the 

county’s per capita FFS spending. For the 

fourth prong, FFS spending includes spending 

for indirect medical education (IME), even 

though the Medicare program will also continue 

to make IME payments to hospitals directly for 

M+C patients. 

For 2004, M+C payment rates will be higher 

than, or equal to, average FFS spending in all 

counties. We find that about half (53 percent) 

of all Medicare beneficiaries and M+C enrollees

(45 percent) live in counties where the M+C 

payment rates exceed average Medicare FFS 

spending by more than 5 percent in 2004. Table 

1 illustrates the distribution of counties, 

Medicare beneficiaries, and M+C enrollees by 

the ratio of M+C payment rates to average 

Medicare FFS spending. 

Table 1. Distribution of counties, Medicare beneficiaries, 

and M+C enrollees by the relationship between M+C 

payment rates and fee-for-service spending, 2004 

Ratio of M+C rates to county Medicare M+C 

per beneficiary FFS spending Counties beneficiaries enrollees

Total 100% 100% 100%

100-105 35 47 55 

105-110 13 17 19 

110-120 21 18 15 

120 and above 31 18 12 

Note: M+C (Medicare+Choice), FFS (fee-for-service). Totals may not sum to

100 due to rounding. 

Source: MedPAC analysis of payment and county spending data from CMS.

Across all counties, Medicare is paying M+C 

plans an average of 107 percent of what it 

would cost to cover the current mix of M+C 
enrollees under the traditional fee-for-service 

Medicare program. This estimate (along with 

all the other estimates in this report) assumes 

that the average health risk of the M+C and 

traditional enrollees are the same, other than 

those differences accounted for by demographic 

characteristics. If, as CMS has found, M+C 

plans enroll a less costly population than would 

be accounted for by demographics, Medicare 

would be paying M+C plans more than 107 

percent of Medicare’s spending under FFS. 

The “100 percent of FFS” prong of the payment 

formula ensures that no county will have M+C 

payment rates below its average FFS spending. 

In fact, because of the additional payments 

made on behalf of M+C patients by the 

Medicare program directly to hospitals for IME, 

payments to plans in “100 percent of FFS” 

counties average 102 percent of the cost of 

covering demographically similar beneficiaries. 

(Table 2) 

Table 2. Distribution of Medicare beneficiaries and M+C 

enrollees and the ratio of M+C payment rates to 

fee-for-service spending, by county characteristics, 2004 

Ratio of M+C rates to 

County Medicare M+C county per beneficiary

characteristics beneficiaries enrollees FFS spending 

Total 100% 100% 107% 

 

2004 payment category 107 

 “100% FFS” 38 40 102 

 Blend 4 8 111 

 Large urban floor 26 26 116 

 Other floor 20 3 123 

 Minimum update 12 23 105 

Urban 77 97 107 

Rural 23 3 111 

 

GME as share of 

 FFS spending 

 Low 27 20 103 

 Average 45 48 107 

 High 27 32 109 

Note: M+C (Medicare+Choice), FFS (fee-for-service), GME (graduate medical 

education). The large urban floor applies to counties within metropolitan areas 

with more than 250,000 residents. The other floor applies to all other counties. 

Totals within county categories may not sum to 100 due to rounding. 

Source: MedPAC analysis of payment and county spending data from CMS. 

Payment rates for enrollees in “blend” counties 

(most of whom are in areas of northern 

California with a relatively high hospital price 

index) average 111 percent of FFS payment. 

By design, the payment formula’s floors are set 

higher than FFS spending in many counties. 

Medicare pays 116 percent of FFS spending for 

enrollees in floor counties in large urban areas 

and 123 percent of FFS spending in floor 

counties in other areas. By contrast, in nonfloor counties Medicare pays 104 percent of 

average FFS spending. 

The minimum update component of the rate 

formula prevents county rates from declining, 

even if other portions of the formula would 

otherwise lower rates. Payment rates for 

enrollees in counties set by the minimum update 

average 105 percent of FFS costs for 

demographically similar beneficiaries. A good 

example of this rate protection occurs for 

counties with relatively high FFS hospital 

payments for graduate medical education 

(GME). Before the BBA, GME costs were 

included in the calculation of average FFS 

spending. The BBA removed (after a phase-in) 

GME costs from the calculation, and Medicare 

now pays teaching hospitals directly for GME 

for M+C enrollees. In many counties, the 

minimum update requirement has prevented 

rates from falling to account for the removal of 

the GME costs. As the proportion of FFS 

spending in a county accounted for by GME 

payments increases, so does the ratio of M+C 

payments to FFS costs, ranging from 103 

percent of FFS for counties with a relatively 

small proportion of GME spending to 109 

percent of FFS for counties with relatively high 

proportions of spending devoted to GME. 

Staff Contact 

Scott Harrison 

(202) 220-3700 

April 8, 2004