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[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Appendices]
[Appendix E. Medicare+Choice]
[From the U.S. Government Printing Office, www.gpo.gov]

 
                      APPENDIX E. MEDICARE+CHOICE

                                CONTENTS

Introduction
Overview of the Medicare+Choice Program
  Current Status of the Medicare+Choice Program
Trends in Medicare+Choice Plan/Contract Availability and 
        Enrollment
  Availability of Medicare Managed Care Plans/Contracts
  Medicare Managed Care Terminations, 1999-2000
  Enrollment Trends for Medicare Managed Care
  Enrollment Patterns in Urban and Rural Locations
  Regional and Geographic Variations in Enrollment
  Contracts by Plan Model
Rules for Enrollment in Medicare+Choice Plans
Medicare+Choice Payments to Plans
  Blended Rates
  Minimum Payment (Floor) Rate
  Minimum Percentage Increase
  Exclusion of Payments for Graduate Medical Education
  Budget Neutrality
  National Growth Percentage
Variations in Medicare+Choice Payment Rates
  County Payment Rates
  Geographic Payment Rate Variations
Risk Adjustment
Adjusted Community Rates
  Additional or Supplemental Benefits
  Coverage for Prescription Drugs
Medicare+Choice Premiums
  Beneficiary Protections
  Plan Standards
  Demonstrations Authorized by the Balanced Budget Act
References

                              INTRODUCTION

    Medicare has a longstanding history of offering its 
beneficiaries an alternative to the traditional fee-for-service 
program, in which a payment is made for each individual 
Medicare-covered service provided to a beneficiary. Beginning 
in the 1970s, private health plans were allowed to contract 
with Medicare on a cost-reimbursement basis. In 1982, 
Medicare's Risk Contract Program was created, allowing private 
entities, mostly health maintenance organizations (HMOs), to 
contract with Medicare. In exchange for a preset monthly per 
capita payment from Medicare, private health plans agreed to 
furnish all Medicare-covered items and services to each 
enrollee. By 1997, 15 years after the start of the Risk 
Contract Program, Medicare managed care covered more than 5 
million people or about 14 percent of beneficiaries.
    Then, in 1997, Congress passed the Balanced Budget Act of 
1997 (BBA, Public Law 105-33), replacing the Risk Contract 
Program with the new Medicare+Choice (M+C) Program. The M+C 
Program established new rules for beneficiary and plan 
participation, along with a new payment methodology. The M+C 
Program was designed to expand the availability of health plans 
in markets where access to managed care plans was limited or 
nonexistent, and to offer new types of health plans in all 
areas. The M+C Program has not been as successful at expanding 
coverage as originally envisioned, and as a result, enrollment 
has grown moderately to about 16 percent of the Medicare 
population, or over 6 million beneficiaries.
    Most recently, Congress enacted legislation in order to 
address some of the issues arising from the BBA changes. The 
Balanced Budget Refinement Act of 1999 (BBRA, Public Law 106-
33) changed the M+C Program in an effort make it easier for 
Medicare beneficiaries and plans to participate in the program.
    This appendix describes the current status of the M+C 
Program, as revised by the BBRA, along with the rules and 
standards under which the program operates. Data for 1998 and 
preceding years covers the Medicare Risk Contract Program and 
beginning in 1999, data covers the M+C Program.

                OVERVIEW OF THE MEDICARE+CHOICE PROGRAM

    In order to increase enrollment in Medicare managed care, 
and to allow beneficiaries access to similar options available 
in the non-Medicare market for meeting their health care needs, 
the M+C Program offers a diverse assortment of managed care 
plans. M+C options include not only coordinated care plans, but 
also private fee-for-service plans, and on a demonstration 
basis a combination of a medical savings account (MSA) plan and 
contributions to an M+C MSA. Coordinated care plans are plans 
that provide a full range of services in exchange for a per 
capita payment, the most typical of which is the HMO. An HMO is 
a type of managed care plan primarily owned and operated by 
insurers, that acts as both the insurer and the provider of 
health care services to an enrolled population. The BBA also 
allows for contracts with provider-sponsored organizations 
(PSOs), which are coordinated care plans owned and operated by 
providers, as well as preferred provider organizations (PPOs), 
which are groups of doctors and hospitals that contract with an 
insurer to offer their services on a fee-for-service basis at 
negotiated rates that are lower than those charged to 
nonenrollees. PPOs do not traditionally have primary care 
gatekeepers, who oversee health care services provided by a 
plan.
    Alternatively, a beneficiary may select a private fee-for-
service plan, that covers enrollees through a private indemnity 
health insurance policy for which the Health Care Financing 
Administration (HCFA) makes per capita payments to the insurer 
for each enrollee. The insurer then reimburses hospitals, 
doctors, and other providers at a rate determined by the plan 
on a fee-for-service basis without placing the providers at 
financial risk. It also does not vary rates based on 
utilization and does not restrict the selection of providers 
among those who agree to the plan's terms and meet the 
necessary qualifications.
    Finally, the demonstration MSA plans reimburse Medicare-
covered services after a specified high deductible is met. The 
difference between the premium for the high-deductible plan and 
the applicable M+C per capita payment would be placed into an 
account for the beneficiary to use to meet medical expenses 
below the deductible.
    However, to date no Medicare beneficiary has enrolled in an 
MSA and there are no contracts for PPOs. Two PSOs are available 
to beneficiaries, one in Oregon and the other in New Mexico. 
The PSO in New Mexico obtained a Federal waiver from State 
licensing requirements to contract directly with Medicare. 
Beginning July 1, 2000, a private fee-for-service plan will be 
available to Medicare beneficiaries in 17 States (Alaska, 
Idaho, Kentucky, Minnesota, Nebraska, New Mexico, Nevada, 
Oregon, South Dakota, Tennessee, and Utah, along with selected 
counties in Arkansas, Louisiana, Mississippi, Ohio, Texas, and 
West Virginia). Enrollees may see any Medicare-approved 
provider who agrees to furnish services under the plan's terms 
and conditions of payment.
    In addition to expanding options for Medicare managed care 
coverage, the BBA also substantially restructured the system 
for setting Medicare payment rates. Under the M+C Program, the 
per capita rate for a payment area is set at the highest of 
three amounts. The new payment structure will be phased in and 
is designed to reduce the variation in payments across the 
country by increasing payments in areas with traditionally low 
payments and slowing the rate of growth in areas with higher 
payments. Although variations in payments have been somewhat 
reduced, substantial payment differentials remain nationwide.
    Initially, M+C payments were also adjusted for demographic 
risk factors, such as age, gender, and coverage by Medicaid to 
account for variations in health care costs. The BBA required 
the Secretary of the U.S. Department of Health and Human 
Services (DHHS) to develop a method for risk adjusting payments 
which includes health status in order to account for a larger 
share of the variation in costs. The method established by the 
Secretary adjusts for health status based on diagnoses for 
prior year inpatient hospitalizations. Phase-in of these 
health-based risk adjusters began in January 2000. However, the 
BBRA slowed down the Secretary's planned phase-in schedule and, 
as a result, a smaller portion of M+C payments than originally 
intended will be adjusted for the health status risk factors 
through 2002.
    The BBRA made several other revisions to the M+C Program. 
It effectively raised future payments to plans by decreasing 
the scheduled reduction in the national per capita M+C growth 
percentage and by reducing the user fee that plans are required 
to provide DHHS for enrollment and other beneficiary 
activities. It established bonus payments for plans that enter 
areas where no other plan is in operation to encourage 
participation in rural areas. It moved the deadline for plans 
to submit their adjusted community rate (ACR) proposals from 
May 1 to July 1 of each year, and allowed plans to segment 
their service areas along county lines, in order to better 
match revenues to cost. It also reduced the quality assurance 
program requirements for PPOs.

             Current Status of the Medicare+Choice Program

    Achieving the goals of the M+C Program has been difficult, 
in part because the goal to control Medicare spending may have 
dampened interest by managed care entities in developing new 
markets, adding plan options, and maintaining their current 
markets. This cautious behavior may partially be a reaction to 
a slowdown in the rate of increase for both Medicare managed 
care payments and Medicare traditional fee-for-service 
payments.
    Further, beneficiaries in rural areas still have limited 
access to managed care plans and enrollment growth has slowed 
across all geographic areas. Beneficiaries have also been 
offered less generous benefit packages and fewer options for 
zero or low monthly M+C premiums. Obstacles relating to data 
collection and quality improvement requirements may make it 
more difficult for some plans to meet these requirements, 
therefore further discouraging participation in the Medicare 
Program. Finally, as plans withdraw from the M+C Program, 
enrolled beneficiaries are forced to choose new M+C plans, 
while others are left without any access to Medicare managed 
care. Even among those who still have an option to choose a 
health plan, some beneficiaries have selected Medicare's fee-
for-service program because they are concerned that additional 
plan withdrawals could be disruptive to their health care 
coverage.
    By March 2000, M+C plans were available to about 72 percent 
of the 39 million Medicare beneficiaries, and about 16 percent 
of all beneficiaries chose to enroll in one of over 260 
available M+C plans. The rapid growth rate of Medicare managed 
care enrollment in the 1990s has leveled off since the 
implementation of the M+C Program, and there was even a small 
decline in enrollment in 2000. Despite this recent trend, in 
their March 2000 baseline, the Congressional Budget Office 
projects that M+C enrollment will almost double by 2010, 
covering 31 percent of the Medicare population, or about one 
out of every three Medicare beneficiaries.
    Enrollment is widely segmented across the country, however, 
with the majority of enrollees in just four States--California, 
New York, Florida, and Pennsylvania. Not surprisingly, Medicare 
beneficiaries in urban areas have greater access to plans. 
While 99 percent of beneficiaries in center cities have access 
to at least one plan, this number declines to less than 10 
percent in the most rural areas.

  TRENDS IN MEDICARE+CHOICE PLAN/CONTRACT AVAILABILITY AND ENROLLMENT

         Availability of Medicare Managed Care Plans/Contracts

    The Medicare+Choice (M+C) Program began operation on 
January 1, 1999,\1\ as authorized by BBA 1997. By March 2000, 
over 260 HMOs had contracted with HCFA under the M+C 
Program.\2\ Over time, the number of plans choosing to 
participate in Medicare managed care has fluctuated. From 1987 
to the early 1990s many plans terminated existing contracts, 
decreasing the number of available plans from 161 in 1987 to 93 
in 1991. Then, the trend shifted as the number of Medicare risk 
plans began increasing in 1992, more than tripling from 110 in 
1993 to 346 participating plans in 1998. With the 
implementation of the M+C Program in 1999, the downward cycle 
of contract availability began once again, as several M+C 
contracting organizations withdrew from the Medicare Program 
(or reduced the size of their service area). As shown in chart 
E-1, these reductions have resulted in fewer providers of 
Medicare managed care under the M+C Program than previously 
existed, dropping from a high of 346 plans in 1998 to 263 
contracts as of March 2000.
---------------------------------------------------------------------------
    \1\ Although most of the components of the M+C Program were 
effective in 1999, the M+C payment structure was implemented in 1998.
    \2\ The BBA changed the designation of ``plans,'' beginning in 
1999. The old definition of ``plans'' is now referred to as 
``contracts'' and each contracting M+C organization may offer several 
different ``plans.'' In 2000 there are about 800 plans available 
through over 260 M+C contracts. For example, the M+C organization may 
offer one plan providing only the basic Medicare-covered benefits and 
other plans that also include optional supplemental benefits.
---------------------------------------------------------------------------

             Medicare Managed Care Terminations, 1999-2000

    Since the implementation of the M+C Program, a significant 
number of managed care organizations have either terminated 
contracts or reduced their service area, as shown in table E-1. 
The contract terminations and service area reductions in 
January 1999 affected about 407,000 (6.5 percent) of the more 
than 6 million Medicare beneficiaries enrolled in managed care, 
leaving 50,000 (less than 1 percent) of the M+C population 
without any access to M+C plans. About half of the 
beneficiaries who had access to other M+C plans chose a new 
plan, while the other half chose Medicare fee-for-service. In 
total, 372 counties were affected by the withdrawals or service 
area reductions and 72 counties lost access to Medicare managed 
care. Then in January 2000, additional contract terminations 
and service area reductions affected 327,000 (5 percent) of M+C 
enrollees in 329 counties, some of whom had also been affected 
the previous year. This cycle of contract changes left 79,000 
(1.3 percent) of the managed care enrollees in 105 counties 
without access to any other M+C plan. Initial reports of 
contract terminations for 2001 indicate that about 934,000 M+C 
enrollees may be affected in 2001. As plans withdraw from 
areas, they not only affect current plan enrollees, but they 
also affect both current Medicare fee-for-service beneficiaries 
and newly eligible Medicare beneficiaries who are entitled to 
enroll in an available managed care plan if they choose to do 
so.

              Enrollment Trends for Medicare Managed Care

    While the number of plans/contracts participating in 
Medicare managed care has fluctuated over time, the actual 
number of individuals enrolled in Medicare managed care 
continued to increase until recently. The most rapid growth 
occurred prior to implementation of the M+C Program in 1999. As 
shown in chart E-2, in 1990 only about 3 percent of Medicare 
beneficiaries were enrolled in the managed care program, but by 
1998 this figure had in-

  CHART E-1. NUMBER OF MANAGED CARE PLANS/CONTRACTS PARTICIPATING IN 
                          MEDICARE, 1987-2000

    Note._Medicare managed care plans include risk plans 
through 1998 and Medicare+Choice contracts beginning in 1999.

    Source: Prepared by the Congressional Research Service 
based on December Health Care Financing Administration Medicare 
Managed Care Contract (MMCC) Monthly Reports, 2000 data from 
March.

   TABLE E-1.--MEDICARE+CHOICE CONTRACT TERMINATIONS AND SERVICE AREA
                               REDUCTIONS
------------------------------------------------------------------------
                                                 Effective    Effective
                                                  January      January
                                                    1999         2000
------------------------------------------------------------------------
Terminations..................................           45           41
Service area reductions.......................           54           58
Enrollees who could not stay in their plan....      407,000      327,000
Enrollees in counties without any access to          50,000       79,000
 plans........................................
------------------------------------------------------------------------
Source: Medicare Payment Advisory Commission (2000).

 CHART E-2. PERCENT OF BENEFICIARIES ENROLLED IN MEDICARE MANAGED CARE 
                 PLANS, ACTUAL AND PROJECTED, 1990-2010

    Note._Medicare managed care plans include risk plans 
through 1998 and Medicare+Choice plans beginning in 1999.

    Source: Prepared by the Congressional Research Service 
based on Medicare Payment Advisory Commission (1997), chart 3; 
Health Care Financing Administration, Medicare Managed Care 
Reports, December 1998, December 1999 and March 2000; and 
Congressional Budget Office March 2000 baseline for 
projections.

creased significantly to 16.1 percent of Medicare 
beneficiaries. Since the implementation of the M+C Program, 
enrollment growth has slowed and today is only moderately 
higher than the 1998 level; reaching 16.7 percent of 
beneficiaries in December 1999, and declining slightly to 16.4 
percent by March 2000. Still, the Congressional Budget Office 
projects that enrollment in M+C plans will reach about 22 
percent of all beneficiaries by 2005 covering about 9 million 
enrollees, and 31 percent by 2010, covering about 14 million 
enrollees. Increased M+C enrollment will occur, in part, as 
younger non-Medicare individuals, currently enrolled in and 
familiar with HMOs, become eligible for the Medicare Program.
    Although over 260 M+C organizations participate in 
Medicare, enrollment in any individual plan is available only 
to those beneficiaries living in a specific service area. Plans 
define a service area as a set of counties and county parts, 
identified at the zip code level.\3\ As a result, not all 
Medicare beneficiaries have access to an M+C plan. As of 2000, 
Medicare managed care is available in only 35 percent of 
counties (table E-2). However, while 65 percent of counties did 
not offer M+C plans in 2000, most Medicare beneficiaries had 
access to an M+C plan. This occurred because the population and 
plans are not distributed equally across counties, but rather 
they are concentrated in the more urban counties. In December 
1999, only 28 percent of all Medicare beneficiaries lived in a 
zip code that had no access to an M+C plan (table E-3). Among 
the 72 percent of beneficiaries with access to the M+C Program, 
over 60 percent had a choice of at least two plans; 27 percent 
had a choice of two to four plans and 34 percent had five or 
more plans available to them.
---------------------------------------------------------------------------
    \3\ M+C organizations can vary premiums, benefits, and cost sharing 
across individuals enrolled in a plan, so long as these are uniform 
within segments of a service area. A segment is defined as one or more 
counties within the plan's service area.

           TABLE E-2.--COUNTIES WITH AND WITHOUT MEDICARE MANAGED CARE PLANS, SELECTED YEARS 1997-2000
----------------------------------------------------------------------------------------------------------------
                                                                1997               1999               2000
                                                        --------------------------------------------------------
                                                          Number             Number             Number
                                                            of     Percent     of     Percent     of     Percent
                                                         counties           counties           counties
----------------------------------------------------------------------------------------------------------------
Counties with plans....................................       740     24         896     29       1,095     35
Counties without plans.................................     2,387     76       2,231     71       2,049    65
----------------------------------------------------------------------------------------------------------------
Note.--Puerto Rico is excluded from the analysis. Medicare managed care plans include risk plans through 1998
  and Medicare+Choice plans beginning in 1999.

Source: Medicare Payment Advisory Commission computations based on Health Care Financing Administration public
  data; Congressional Research Service analysis of Health Care Financing Administration data for 2000.

  TABLE E-3.--PERCENT DISTRIBUTION OF MEDICARE BENEFICIARIES BY MANAGED
       CARE PLANS AVAILABLE IN THEIR AREA, SELECTED YEARS 1995-99
------------------------------------------------------------------------
                                                               December
      Number of plans available        June 1995  June 1997      1999
------------------------------------------------------------------------
None.................................         45         33           28
One..................................         16          9           11
Two to four..........................         26         24           27
Five or more.........................         14         34          34
------------------------------------------------------------------------
Note.--Medicare managed care plans include risk plans through 1998 and
  Medicare+Choice plans beginning in 1999.

Source: Table prepared by the Congressional Research Service based on
  Medicare Payment Advisory Commission (1998, Chart 2-10), and
  unpublished data from Mathematica Policy Research, Inc. (1999).

            Enrollment Patterns in Urban and Rural Locations

    Patterns of M+C enrollment are not uniform across urban and 
rural locales, as shown in chart E-3. The geographic areas are 
defined as follows:
  --Center city--central counties of metropolitan areas of at 
        least 1 million population;
  --Other metropolitan--either fringe counties of metropolitan 
        areas of at least 1 million population or counties of 
        metropolitan areas up to 1 million population;

   CHART E-3. PERCENT OF MEDICARE BENEFICIARIES AND MEDICARE+CHOICE 
         ENROLLEES IN URBAN AND RURAL LOCATIONS, DECEMBER 1999

    Source: Prepared by the Congressional Research Service 
based on Mathematica analysis of Health Care Financing 
Administration data.

  --Nonmetropolitan, adjacent--urban population of at least 
        2,500 adjacent to a metropolitan area;
  --Nonmetropolitan, nonadjacent--an urban population of at 
        least 2,500, not adjacent to a metropolitan area; and
  --Rural--completely rural (no places with a population of 
        2,500 or more).
    Most M+C enrollees reside in center cities; about 68 
percent of the M+C population as of December 1999. However, a 
smaller proportion, only 56 percent of all Medicare 
beneficiaries reside in the center city. In all other 
geographic areas, from other metropolitan to rural areas, the 
percentage of M+C enrollees is less than the percentage of 
Medicare beneficiaries. Thus, a larger proportion of the 
Medicare population in the city chooses to enroll in managed 
care than in all other geographic areas. This occurs because of 
a combination of interrelated factors, such as availability of 
M+C plans and payment rates.
    As shown in chart E-4, access to M+C plans is much greater 
in urban areas than in rural areas. Only 1 percent of 
beneficiaries in center cities have no access to M+C plans. 
Among the 99 percent of Medicare beneficiaries with access to 
such plans, 71 percent have a choice of at least five different 
plans and 25 percent have a choice of two to four plans. By 
contrast, Medicare beneficiaries living in rural or 
nonmetropolitan nonadjacent areas rarely have even a single 
plan available to them, leaving most of these beneficiaries 
(almost 90 percent) with no access to plans. Among the 
beneficiaries in these areas who have access to Medicare 
managed care, most have only one available plan.

            Regional and Geographic Variations in Enrollment

    In addition to rural and urban variations, enrollment 
patterns also vary on a regional basis. M+C enrollment is much 
higher in western and southwestern States, as shown in chart E-
5. In particular, over one-third of the beneficiaries in 
Arizona (38 percent) and California (39 percent) are in M+C 
plans. The highest levels of enrollment in eastern States are 
in Rhode Island (40 percent), Florida (28 percent), 
Pennsylvania (27 percent) and Massachusetts (23 percent). In 
contrast, 13 States have no (or marginal) plan enrollment, and 
an additional 18 States have between 2 and 10 percent of their 
Medicare beneficiaries enrolled in an M+C plan.
    M+C enrollees are far more concentrated geographically than 
Medicare beneficiaries as a whole. In fact, four States account 
for over half of all M+C enrollment: California, Florida, 
Pennsylvania, and New York. These four States, alone, account 
for 53 percent of all M+C enrollees, but they are home to only 
29 percent of all Medicare beneficiaries. Table E-4 compares 
the percentage of M+C enrollment to the percentage of the total 
Medicare population for each of these four States.

    CHART E-4. PERCENT VARIATION IN NUMBER OF MEDICARE+CHOICE PLANS 
   AVAILABLE TO MEDICARE BENEFICIARIES IN URBAN AND RURAL LOCATIONS, 
                             DECEMBER 1999

    Source: Prepared by the Congressional Research Service 
based on Mathematica analysis of Health Care Financing 
Administration data.

                        Contracts by Plan Model

    In addition to regional and geographic variation, M+C plans 
also vary by contract model and plan ownership. M+C contract 
models include independent practice associations (IPAs), group 
models, and staff models. Plan ownership can either be for-
profit or nonprofit. Table E-5 displays the distribution of M+C 
plans by plan contract model and type of ownership.
    The majority of M+C contracts are for IPA models. An IPA is 
a managed care organization that contracts with physicians in 
solo

       CHART E-5. PERCENT OF MEDICARE BENEFICIARIES ENROLLED IN 
                 MEDICARE+CHOICE, BY STATE, MARCH 2000

    Note._State numbers represent percents.

    Source: Prepared by the Congressional Research Service 
based on Medicare Managed Care Contract Reports, March 2000.

TABLE E-4.--PERCENT OF MEDICARE+CHOICE ENROLLEES AND MEDICARE POPULATION
                      RESIDING IN FOUR STATES, 2000
------------------------------------------------------------------------
                                                              Percent of
                                                  Percent of     total
                      State                        total M+C   Medicare
                                                  enrollment  population
------------------------------------------------------------------------
California......................................          24          10
Florida.........................................          12           7
Pennsylvania....................................          10           6
New York........................................           7           7
                                                 -----------------------
      Total.....................................          53         29
------------------------------------------------------------------------
Source: Prepared by the Congressional Research Service based on Health
  Care Financing Administration Managed Care Contract Reports, March
  2000.

practice or with associations of physicians that, in turn, 
contract with their member physicians to provide health care 
services. Many physicians in IPAs have a significant number of 
patients who are not IPA enrollees. Group model managed care 
organizations contract with one or more group practices of 
physicians to provide health care services, and each group 
primarily treats the plan's members. Staff model managed care 
organizations employ health providers, such as physicians and 
nurses, directly. The providers are employees of the plan and 
deal exclusively with their enrollees. The great majority of 
M+C contracts are with for-profit organizations. As of March 
2000, 65 percent of contractors were with for-profit entities.

                         TABLE E-5.--MEDICARE+CHOICE CONTRACTS BY PLAN MODEL, MARCH 2000
----------------------------------------------------------------------------------------------------------------
                                                                               Percent                  Percent
                                                                   Number of      of       Number of       of
                                                                   contracts  contracts    enrollees   enrollees
----------------------------------------------------------------------------------------------------------------
Model:
    IPA..........................................................       168         64      4,027,304        65
    Group........................................................        81         31      1,533,845        25
    Staff........................................................        14          5        614,994        10
Ownership:
    Profit.......................................................       182         69      4,068,248        65
    Nonprofit....................................................        81         31      2,152,895       35
----------------------------------------------------------------------------------------------------------------
Source: Prepared by the Congressional Research Service based on Health Care Financing Administration Medicare
  Monthly Contract Reports, March 2000.

             RULES FOR ENROLLMENT IN MEDICARE+CHOICE PLANS

    Medicare beneficiaries are eligible to enroll in any M+C 
plan that serves their area, with the following restrictions: 
(1) beneficiaries must be entitled to benefits under part A of 
Medicare and enrolled in part B of Medicare, and (2) 
beneficiaries who qualify for Medicare solely on the basis of 
end-stage renal disease (ESRD) may not enroll in an M+C plan 
(however, an enrolled beneficiary who later develops ESRD may 
continue to remain enrolled in that plan).
    In general, M+C organizations are required to enroll 
eligible individuals during election periods, and they cannot 
deny enrollment on the basis of health status related factors. 
These factors include: health status, medical condition 
(including both physical and mental illnesses), claims 
experience, receipt of health care, medical history, genetic 
information, evidence of insurability (including conditions 
arising out of acts of domestic violence) and disability. 
However, an organization may deny enrollment if it has reached 
the limits of its capacity. Organizations may only terminate an 
enrollee's election for failure to pay premiums on a timely 
basis, disruptive behavior, or because the plan ends for all 
M+C enrollees.
    The Secretary is authorized to collect a user fee from each 
M+C organization for use in carrying out enrollment and 
information dissemination activities for the program as well as 
the health insurance and counseling assistance program. The fee 
is based on the ratio of the organization's number of Medicare 
enrollees to the total number of Medicare beneficiaries.
    Through 2001, individuals are able to make and change 
election to an M+C plan on an ongoing basis. Beginning in 
2002,\4\ elections and changes to elections will be available 
on a more limited basis. Individuals will be able to make or 
change elections each November, during the annual coordinated 
election period. In addition, current Medicare beneficiaries 
may also change their election at any time during the first 6 
months of 2002 (or the first 3 months of any subsequent year). 
Although individuals are limited to only one change during this 
6 (or 3) month period, this limit does not apply to either 
changes made during the annual coordinated election period in 
November or to special enrollment periods. Special enrollment 
periods are provided for limited situations such as an enrollee 
who changes place of residence. For newly eligible aged 
beneficiaries, their 6 (or 3) month period for making elections 
or changes to elections begins once the individual is eligible 
for an M+C plan.
---------------------------------------------------------------------------
    \4\ Institutionalized beneficiaries will continue to have access to 
ongoing open enrollment for purposes of enrolling in an M+C plan or 
changing from one M+C plan to another.
---------------------------------------------------------------------------
    Any request to enroll or disenroll in an M+C plan made 
after the 10th of the month will not be effective until the 1st 
day of the 2d calendar month thereafter. Additional election 
periods (called special election periods) will apply to newly 
eligible aged (not disabled) Medicare beneficiaries and 
beneficiaries who experience certain events, such as their plan 
terminating its Medicare contract.
    Furthermore, beneficiaries enrolled in an M+C plan that 
terminates its contract with Medicare are guaranteed access to 
certain Medicare supplemental insurance policies (i.e., 
``Medigap'' policies) within either 63 days from the date: (1) 
they receive notice from their M+C organization that their plan 
is leaving the program; or (2) coverage is terminated. A plan 
leaving a payment area (typically a county) may also offer 
enrollees in that county the option of continuing enrollment in 
the plan, so long as the enrollee agrees to obtain all basic 
services through plan providers located in other counties.

                   MEDICARE+CHOICE PAYMENTS TO PLANS

    The BBA substantially restructured the system for setting 
the rates by which Medicare pays plans, beginning in 1998.\5\ 
In general, Medicare makes monthly payments in advance to 
participating health plans for each enrolled beneficiary in a 
payment area (typically a county). The Secretary of DHHS is 
required to determine annually, and announce by March 1 in the 
year before the calendar year affected, the annual M+C per 
capita rate for each payment area, and the risk and other 
factors to be used in adjusting such rates. Payments to M+C 
organizations are made from the Medicare Trust Funds in 
proportion to the relative weights that benefits under parts A 
and B represent of the actuarial value of Medicare benefits.
---------------------------------------------------------------------------
    \5\ Prior to enactment of the BBA, payments for care of Medicare 
beneficiaries in risk health maintenance organizations (HMOs) were 
based on the adjusted average per capita costs (AAPCC). The AAPCC 
represented a monthly payment to cover the cost of treatment in a 
Medicare risk HMO. It was calculated according to a complex formula 
based on the cost of providing Medicare benefits to beneficiaries in 
the fee-for-service portion of the Medicare Program. The per capita 
payment was set at 95 percent of the AAPCC, and was adjusted for 
certain demographic characteristics of HMO enrollees. Payments based on 
the AAPCC varied widely across the country. Additionally, county 
payments fluctuated, year to year.
---------------------------------------------------------------------------
    The major factors for determining Medicare's annual M+C per 
capita rates are summarized in table E-6. The annual M+C per 
capita rate for a payment area (for a contract for a calendar 
year) is set at the highest of one of three amounts calculated 
for each county:
 1. A rate calculated as a blend of an area-specific (local) 
        rate and a national rate,

     TABLE E-6.--MAJOR FACTORS FOR DETERMINING MEDICARE PAYMENTS TO
                          MEDICARE+CHOICE PLANS

            Factor               Rule established in either the BBA 1997
                                              or BBRA 1999

  ............................

------------------------------------------------------------------------

------------------------------------------------------------------------
Blend of local and   General...............  Transition over 6 years to
 national rates                               50-50 blend of local and
                                              national rates. National
                                              rates are adjusted for
                                              differences in input
                                              prices.
                     1998..................  90 percent local, 10
                                              percent national
                     1999..................  82 percent local, 18
                                              percent national
                     2000..................  74 percent local, 26
                                              percent national
                     2001..................  66 percent local, 34
                                              percent national
                     2002..................  58 percent local, 42
                                              percent national
                     2003 and after........  50 percent local, 50
                                              percent national
Minimum payment      1998..................  Minimum of $367 (or 150
 (``floor'') rate                             percent of 1997 payment
                                              outside the United States)
                     1999 and after........  Previous year's payment
                                              times annual percentage
                                              increase ($380 for 1999,
                                              $402 for 2000, and $415
                                              for 2001)
Minimum percent      1998..................  102 percent of 1997 AAPCC
 increase                                     payment rate
                     1999 and after........  102 percent of prior year's
                                              rate
Graduate medical     General...............  GME payments excluded (from
 education (GME)                              blended rate only) in
 and                                          equal increments over 5
 disproportionate                             years. Disproportionate
 share hospital                               share hospital payments
 payments                                     not excluded.
Budget neutrality    General...............  Total M+C payments may not
                                              exceed what would have
                                              been spent if payments
                                              were entirely based on
                                              local rates (except no
                                              rate can be reduced below
                                              the floor or minimum)
National growth      1998..................  Increase in Medicare per
 percentage                                   capita expenditures minus
                                              0.8 percentage points
                     1999-2001.............  Increase in Medicare per
                                              capita expenditures minus
                                              0.5 percentage points
                     2002..................  Increase in Medicare per
                                              capita expenditures minus
                                              0.3 percentage points
                     After 2002............  Increase in Medicare per
                                              capita expenditures
Risk adjustment      2000-2001.............  10 percent health status,
                                              90 percent demographic
                     2002..................  Up to 20 percent health
                                              status, at least 80
                                              percent demographic
                     2003 and after........  Phase-in not specified in
                                              law. In 2004, Secretary of
                                              DHHS plans to implement a
                                              new risk adjustment method
                                              based on inpatient and
                                              outpatient settings.
------------------------------------------------------------------------
Source: Congressional Research Service analysis of provisions in the
  Balanced Budget Act of 1997 and the Balanced Budget Refinement Act of
  1999.

 2. A minimum payment (or floor) rate, or
 3. A rate reflecting a minimum increase from the previous 
        year's rate.
    Each part of the system is described in more detail 
below.\6\
---------------------------------------------------------------------------
    \6\ Payment rates for disabled and ESRD beneficiaries are set using 
a similar method as that for aged beneficiaries except that ESRD rates 
are calculated on a statewide basis.
---------------------------------------------------------------------------

                             Blended Rates

    The blended per capita rate shifts county rates gradually 
away from solely local (generally county) rates, which reflect 
the wide variations in fee-for-service costs, toward a national 
average rate. Blending is designed to reduce payments in 
counties where the AAPCCs historically were higher than the 
national average rate, and to increase payments in counties 
where AAPCCs were lower. The blended rate is defined as the 
weighted sum of:
  --a percentage of the annual area-specific M+C per capita 
        rate for the year for the payment area, and
  --a percentage of the input-price adjusted annual national 
        M+C per capita rate for the year.
    The component of the blend determined by the area-specific 
(local) rate is based on the 1997 AAPCC for the payment area 
with two adjustments. First, the area-specific rate is reduced 
to remove an amount corresponding to graduate medical education 
(GME) \7\ payments. Second, rates are updated each year by a 
national growth percentage (described below).
---------------------------------------------------------------------------
    \7\ Medicare pays for both the direct and indirect costs of GME. 
Direct payments include payment for expenses such as salaries of 
residents, interns and faculty. The indirect adjustment accounts for 
factors not directly related to education which may increase the costs 
in teaching hospitals, such as more severely ill patients and increased 
testing.
---------------------------------------------------------------------------
    The component of the blend determined by the national rate 
is the weighted average of all local area-specific rates. This 
component of the blend is adjusted to reflect differences in 
certain input prices, such as hospital labor costs, by a 
formula stated in the law. The Balanced Budget Act (BBA) allows 
the Secretary to change the method for making input-price 
adjustments in the future.
    Under current law, the percentage in the blend assigned to 
the area-specific rate is reduced in increments over 6 years 
from 90 percent in 1998 to 50 percent in 2003, while the 
corresponding percentage for the national component is 
increased from 10 percent to 50 percent. In 2003, the blended 
rate will be based on 50 percent of the area-specific rate and 
50 percent of the national, input-price adjusted rate. Each 
year, the blended rates may be raised or lowered to achieve 
budget neutrality (explained below).

                      Minimum Payment (Floor) Rate

    Each county is also subject to a floor rate, designed to 
raise payments in certain counties more quickly than would 
occur through the blend alone. The minimum rate is $402 for 
2000 and will be $415 for 2001. As required by law, each year 
this payment amount is increased by a measure of growth in 
program spending (see discussion of national growth percentage, 
below). The 2001 rate, announced in March 2000, will set the 
M+C payment rate at the floor rate in about one-third of all 
counties.

                      Minimum Percentage Increase

    The minimum increase rule protects counties that would 
otherwise receive only a small (if any) increase. In 1998, the 
minimum rate for any payment area was 102 percent of its 1997 
AAPCC. For each subsequent year, it will be 102 percent of its 
annual M+C per capita rate for the previous year.

          Exclusion of Payments for Graduate Medical Education

    Payments for GME are excluded or ``carved out''' of the 
payments to M+C plans over 5 years. GME payments are only 
excluded from the blended rate but not from the floor rate or 
minimum increase levels. Specifically, in determining the local 
rate prior to determining the blended rate, amounts 
attributable to payments for GME costs were deducted from the 
1997 payment amount. The percent of GME payments excluded began 
at 20 percent in 1998, rising in equal amounts until it is 
fully deducted in 2002. Payments for disproportionate share 
hospitals \8\ are not carved out.
---------------------------------------------------------------------------
    \8\ Disproportionate share hospital payments are a payment 
adjustment for the higher costs that hospitals incur as a result of 
serving a large number of low-income patients.
---------------------------------------------------------------------------

                           Budget Neutrality

    Once the preliminary rate is determined for each county, a 
budget neutrality adjustment is required to determine final 
payment rates. This adjustment is made so that estimated total 
M+C payments in a given year will be equal to the total 
payments that would be made if payments were based solely on 
area-specific rates. A budget neutrality adjustment may only be 
applied to the blended rates because rates cannot be reduced 
below the floor or minimum increase amounts. As a result of 
this limitation, it is not always possible to achieve budget 
neutrality. The law makes no provision for achieving budget 
neutrality after all county rates are assigned either the floor 
or minimum increase. When this situation occurred for the 1998, 
1999, and 2001 rates, HCFA chose to waive the budget neutrality 
rule rather than the floor or minimum rate rules. While the 
cost of waiving budget neutrality was not significant in 1998 
and 1999 (less than $100,000 each year), it is estimated to 
cost about $1 billion in 2001.

                       National Growth Percentage

    The national per capita M+C growth percentage is defined as 
the projected per capita increase in total Medicare 
expenditures minus a specific reduction set in law. Because 
this increase is tied to total Medicare expenditures, it 
maintains a link between Medicare fee-for-service and managed 
care spending. In 1998, the reduction was 0.8 percentage 
points, from 1999 through 2001 it is 0.5 percentage points, and 
in 2002 the Balanced Budget Refinement Act (BBRA) set the 
reduction at 0.3 percentage points. There is no reduction after 
2002. Starting with the 1999 M+C payments, adjustments were 
also made for errors in the previous years' spending 
projection.
    The national growth percentage for 2001, after the 
reduction and adjustments, is -1.3 percent. This figure \9\ is 
based on a 6.0 percent projected per capita increase in total 
Medicare expenditures, a -0.5 percent reduction set by the BBA, 
and a -6.5 percent adjustment for errors in the previous years' 
projection of spending (1998-2000). However, the adjustment for 
1998 errors (in the calculation of the previous years' 
projections of spending) is excluded when updating the floor 
rates. This results in an overall increase of 3.3 percent to be 
used for calculating the floor rate, for 2001, as opposed to 
the -1.3 percent national growth percentage.
---------------------------------------------------------------------------
    \9\ Numbers are not exact, due to rounding.
---------------------------------------------------------------------------

              VARIATIONS IN MEDICARE+CHOICE PAYMENT RATES

    A Medicare+Choice (M+C) payment area is defined as a county 
or equivalent area specified by the Secretary. (In the case of 
individuals with ESRD, the M+C payment area is each State, or 
other payment areas as the Secretary specifies.) Upon request 
of a State for a contract year, the Secretary will redefine 
Medicare+Choice payment areas in all or a portion of the State 
to: (1) a single statewide payment area; (2) a metropolitan 
system; or (3) a single payment area consolidating 
noncontiguous counties (or equivalent areas) within a State.

                          County Payment Rates

    As noted above, each county rate is set at the highest 
amount calculated under three rules (blend, minimum increase, 
or floor), and then adjusted for budget neutrality. Because of 
the low national growth percentage in 1998 and 1999, no county 
rate was set by the blended rate rule after applying the budget 
neutrality adjustments (chart E-6). In 2000, the national 
growth percentage was sufficiently large (5 percent), so that 
payments in 60 percent of counties were based on the blended 
rate rule. However, the national growth percentage for 2001 
will be -1.3 percent, as previously discussed. Therefore, in 
2001, no county will be paid using the blended rate rule and 
about one-third of all counties will be set at the floor, with 
the remainder receiving the minimum 2 percent increase.
    Calculations for selected 2001 county payment rates are 
shown in table E-7. The table shows the calculation under the 
three rules, as well as the rates before and after any budget 
neutrality adjustments. For the six counties selected, before 
application of budget neutrality, there are four whose rates 
are set using the minimum increase amount (Los Angeles, 
California; Dade, Florida; Hennepin, Minnesota; and Fairfax, 
Virginia), one set at the floor (Arthur, Nebraska), and one set 
at the blended rate (Haines, Alaska). Among the six selected 
counties, the budget neutrality adjustment can only be applied 
to Haines, Alaska, whose rate was initially set using the blend 
and then reduced to the minimum increase amount by the budget 
neutrality adjustment. For the 2001 payment rates, the 
adjustment to the blended rate across all affected counties was 
insufficient to completely achieve budget neutrality. However, 
if the budget neutrality adjustment had been smaller, then 
rates for these counties would have been set between the 
minimum increase and blended amounts.

   CHART E-6. RULE USED TO DETERMINE COUNTY PAYMENT RATES, 1998-2001

    Source: Congressional Research Service analysis of Health 
Care Financing Administration data.

                   Geographic Payment Rate Variations

    Large variation in county payment rates was one of the 
motivating forces behind changes enacted in the BBA. The M+C 
payment method is designed to reduce this variation. However, 
in order for more of this variation across counties to be 
reduced, two events must occur: (1) the national growth rate 
must be sufficiently large, so that a greater number of M+C 
payments to plans are based on the blend rate rather than the 
floor or minimum rate; and (2) the blended rate must be 
weighted more by the national, rather than the area-specific 
rate. Additionally, as more M+C payments are based on the 
blend, the budget neutrality adjustment will diminish.

                   TABLE E-7.--CALCULATION OF MONTHLY PAYMENT RATES FOR SAMPLE COUNTIES, 2001
----------------------------------------------------------------------------------------------------------------
                                                        Calculation using each of the     Determination of rates
                                                            three separate rules        ------------------------
                                                    ------------------------------------             Actual rate
                       County                                                              Before       (after
                                                       Minimum                Blend (90    budget       budget
                                                       update       Floor       : 10)    neutrality   neutrality
                                                                                         adjustment  adjustment)
----------------------------------------------------------------------------------------------------------------
Los Angeles, CA....................................     $673.86     $415.01     $628.71     $673.86      $673.86
Dade, FL...........................................      809.90      415.01      705.95      809.90       809.90
Hennepin, MN.......................................      466.81      415.01      454.01      466.81       466.81
Fairfax, VA........................................      469.66      415.01      460.36      469.66       469.66
Arthur, NE.........................................      409.64      415.01      313.29      415.01       415.01
Haines, AK.........................................      432.37      415.01      434.29      434.29       432.37
----------------------------------------------------------------------------------------------------------------
Source: Congressional Research Service analysis of Health Care Financing Administration data.

    Examining variations across all counties, chart E-7 shows 
that the substantial range above and below the average payment 
rate is expected to continue through 2001. For example, in 
1997, the average payment rate weighted by the number of 
Medicare beneficiaries in each county was $467. The lowest 
rates in the country were $221 in two rural Nebraska counties 
(Arthur and Banner counties). The highest rates in 1997 were 
$767 and $748, respectively, in Richmond County, New York 
(Staten Island), and Dade County, Florida (Miami). Examining 
the variation, from highest to lowest payments, the range was 
$546 in 1997. By 2001, the floor rate will reach $415, and the 
highest rate (Richmond County) will be $831, with an average 
payment rate of $524 and a range of $416.
    Payment rates vary geographically, as well, with higher 
payments generally occurring in more urban areas (chart E-7). 
The 2001 floor rate mostly affects rural counties, but it will 
raise rates for some urban counties as well. Because no county 
will receive the blended rate in 2001, large variations in 
payment rates will not be significantly reduced. Therefore, 
payments will continue to be higher in urban areas and lower in 
the most rural areas. The 2001 average payment is $595 in 
central urban counties, $100 above that for other urban 
counties, $136 above that for rural-urban fringe counties, and 
$150 above that for other rural counties. The range within each 
of the urban-rural categories remains substantial as well.

    Payment rates range widely regionally, as well as 
geographically, as shown in table E-8. For example, plans 
serving Miami will be paid an average of $810 per month in 
2001, compared with $467 in Minneapolis. But even within a 
region, there can be wide variation in payment rates. The 2001 
payment rate for Dade County in Southern Florida is almost $200 
more than the rate for Palm Beach County. Furthermore, plans 
competing in the same market may receive substantially 
different payments for beneficiaries who live on opposite sides 
of a county boundary. As illustrated in the Washington, DC, 
metropolitan area, these differing payment levels may affect 
plan participation and enrollment. The BBA will eventually 
reduce some of this variation, but generally not until 
increases are high enough to support blended rates.

 TABLE E-8.--MONTHLY PAYMENT RATES FOR AGED ENROLLEES IN SELECTED AREAS,
                                  2001
------------------------------------------------------------------------
                                                                Payment
                            County                                rate
------------------------------------------------------------------------
Washington, DC-Maryland-Virginia:
    Prince George's County, MD...............................       $652
    Washington, DC...........................................        632
    Montgomery County, MD....................................        546
    Alexandria City, VA......................................        512
    Arlington County, VA.....................................        511
    Falls Church City, VA....................................        508
    Fairfax City, VA.........................................        483
    Loudoun, VA..............................................        478
    Fairfax County, VA.......................................        470
Minneapolis-St. Paul, MN metropolitan area:
    Ramsey (St. Paul)........................................        480
    Hennepin (Minneapolis)...................................        467
    Anoka....................................................        462
    Dakota...................................................        448
    Washington...............................................        437
    Carver...................................................        428
    Scott....................................................        415
Southern Florida:
    Dade (Miami).............................................        810
    Broward (Ft. Lauderdale).................................        704
    Palm Beach...............................................        613
Southern California:
    Los Angeles..............................................        674
    Orange...................................................        622
    San Bernardino...........................................        577
    Riverside................................................       565
------------------------------------------------------------------------
Source: Health Care Financing Administration.

    Chart E-8 compares average payment rates for two groups: 
(1) the hypothetical rate if all Medicare beneficiaries were 
enrolled in M+C plans; and (2) the rate for beneficiaries 
currently enrolled in M+C plans. The average payment rate 
across all beneficiaries is lower than the average for actual 
M+C enrollees because M+C enrollment tends to concentrate in 
areas with higher payment rates. If enrollment were higher 
across all areas of the country, especially in low-payment 
rural areas, the actual average M+C payment would be lower and 
thus closer to the beneficiary average.

 CHART E-8. COMPARISON OF AVERAGE MONTHLY AGED MEDICARE+CHOICE PAYMENT 
  RATES FOR ALL BENEFICIARIES AND CURRENTLY ENROLLED MEDICARE+CHOICE 
                      BENEFICIARIES, 2000 AND 2001

    Source: Congressional Research Service analysis of Health 
Care Financing Administration data.

                            RISK ADJUSTMENT

    M+C payments are also risk adjusted to control for 
variations in the cost of providing health care among Medicare 
beneficiaries. For example, if sicker and older patients all 
sign up for one M+C plan, risk adjustment is designed to 
compensate the plan for their increased health expenses. The 
former Medicare Risk Contract Program adjusted the AAPCCs for 
demographic risk factors, and when the M+C Program was 
implemented, it also used these demographic risk adjusters. 
Demographic risk adjusters include adjustments for age, gender, 
working status, Medicaid coverage, whether the beneficiary 
originally qualified for Medicare on the basis of disability, 
and institutional (nursing home) status.
    Each aged Medicare beneficiary can be categorized according 
to these demographic factors, as shown in table E-9. Separate 
demographic adjustments are made for part A and part B of the 
Medicare Program (part A adjustments apply to about 57 percent 
of the payment and part B adjustments apply to the remaining 43 
percent). The payment to the M+C plan for an individual is 
adjusted by the relevant factors. For example, the part A share 
of the payment to an M+C plan for a male beneficiary, aged 75-
79 who was

        TABLE E-9.--MEDICARE DEMOGRAPHIC ONLY BASED RISK ADJUSTMENT FACTORS FOR AGED BENEFICIARIES, 2001
----------------------------------------------------------------------------------------------------------------
                                                                                         Noninstitutional
                                                                                --------------------------------
                        Sex and age group                         Institutional                Non-     Working
                                                                                  Medicaid   Medicaid     aged
----------------------------------------------------------------------------------------------------------------
                                                                            Part A--hospital insurance
                                                                 -----------------------------------------------
Male:
    65-69.......................................................         1.75         1.15       0.65       0.40
    70-74.......................................................         2.25         1.50       0.85       0.45
    75-79.......................................................         2.25         1.95       1.05       0.70
    80-84.......................................................         2.25         2.35       1.20       0.80
    85 and older................................................         2.25         2.60       1.35       0.90
Female:
    65-69.......................................................         1.45         0.80       0.55       0.35
    70-74.......................................................         1.80         1.05       0.70       0.45
    75-79.......................................................         2.10         1.45       0.85       0.55
    80-84.......................................................         2.10         1.70       1.05       0.70
    85 and older................................................         2.10         2.10       1.20       0.80
                                                                      Part B--supplementary medical insurance
                                                                 -----------------------------------------------
Male:
    65-69.......................................................         1.60         1.10       0.80       0.45
    70-74.......................................................         1.80         1.35       0.95       0.65
    75-79.......................................................         1.95         1.55       1.10       0.80
    80-84.......................................................         1.95         1.70       1.15       0.90
    85 and older................................................         1.95         1.70       1.15       1.00
Female:
    65-69.......................................................         1.50         1.05       0.70       0.40
    70-74.......................................................         1.65         1.15       0.85       0.55
    75-79.......................................................         1.65         1.25       0.95       0.70
    80-84.......................................................         1.65         1.25       0.95       0.75
    85 and older................................................         1.65         1.25       1.00       0.85
----------------------------------------------------------------------------------------------------------------
Note.--Values indicate the multiplier used for a beneficiary with a particular set of characteristics; average
  beneficiary has a multiplier of 1.00. A separate set of risk adjusters is used for disabled beneficiaries.

Source: Health Care Financing Administration.

not working, not in an institution and not on Medicaid would be 
increased by 5 percent (multiplied by 1.05 as shown in the 
table). The part B share of the payment for that same 
beneficiary would be multiplied by a factor of 1.10. For an 
individual of the same age, who was institutionalized, the 
payment would be multiplied by 2.25 for the part A share and 
1.95 for the part B share.
    However, these demographic risk adjusters account for only 
a very limited portion of the variation in health care costs, 
and as a result, the BBA required the Secretary of the U.S. 
Department of Health and Human Services (DHHS) to develop a new 
risk adjustment mechanism that would also account for 
variations in health status. Beginning in January 2000, the 
Health Care Financing Administration implemented this new risk 
adjustment mechanism built on 15 principal inpatient diagnostic 
cost groups (PIP-DCGs) in order to predict incremental costs 
above the average.\10\ Table E-10 displays the 15 PIP-DCGs 
including the various diagnoses in each category. Payments are 
adjusted based on inpatient data using the PIP-DCG adjuster and 
demographic factors (tables E-11a and b), so that this new 
system accounts for both demographic and health status 
variations. Under this mechanism, the per capita payment made 
to a plan for an enrollee is adjusted if that enrollee had an 
inpatient stay during the previous year. Separate 
demographically-based payments are used for aged persons newly 
eligible for Medicare, newly disabled Medicare enrollees, and 
others without a medical history.
---------------------------------------------------------------------------
    \10\ In a March 1999 report to Congress, HCFA calculated that the 
PIP-DCG model offered a substantial improvement in explaining 
variations in health spending over the demographic risk adjustment 
model. The demographic adjusters were estimated to explain about 1 
percent of the variation in health spending among individuals, while 
the PIP-DCG model was estimated to explain about 6 percent of 
individual variation.
---------------------------------------------------------------------------
    The BBRA slowed down the implementation of the Secretary's 
proposed phase-in schedule of this new system through 2002. 
Plans were concerned, because this new risk adjustment 
methodology reduces aggregate M+C payments; slowing down its 
implementation lessens the reduction. In 2000 and 2001, 10 
percent of payments will include risk adjustment using the PIP-
DCG method and 90 percent will be based solely on the older 
demographic method. In 2002, up to 20 percent of the payments 
will be adjusted under the new system, with the remainder of 
the payment based on adjustments under the old method. After 
2002, the splits are not set in law, although the Secretary 
originally planned to: (1) base 80 percent of payments on the 
PIP-DCG system in 2003; and (2) develop a new risk adjustment 
system for 2004 and beyond that would incorporate both 
inpatient and outpatient diagnoses, in order to account for 
more of the variation in health status.
    The following illustration examines calculations of risk 
factors in 2001, based on two scenarios: (1) the 
demographically-based risk adjustment system used prior to 
2000, and (2) the actual system in place for 2001, using a 
combination of 10 percent of the new health status based system 
and 90 percent of the old demographically-based system. 
Comparing these two scenarios provides an evaluation of the 
impact of including adjustments for health status on M+C 
payments.

             TABLE E-10.--DIAGNOSES INCLUDED IN EACH PIP-DCG
------------------------------------------------------------------------

------------------------------------------------------------------------
PIP-DCG 29
    HIV/AIDS \1\                      Blood, lymphatic cancers/neoplasms
                                       \2\
PIP-DCG 26
    Metastatic cancer \2\             Brain/nervous system cancer \2\
PIP-DCG 23
    Liver/pancreas/esophagus cancer   End-stage liver disorders
     \2\
    Cardiorespiratory failure and     Decubitus and chronic skin ulcers
     shock
PIP-DCG 20
    Diabetes with chronic             Coma and encephalopathy
     complications
    Aspiration pneumonia              Renal failure/nephritis
PIP-DCG 18
    Cancer of placenta/ovary/uterine  Paralytic and other neurologic
     adnexa \2\                        disorders
    Blood/immune disorders            Gram-negative/staphylococcus
                                       pneumonia
PIP-DCG 16
    Chronic obstructive pulmonary     Mouth/pharynx/larynx/other
     disease                           respiratory cancer \2\
    Lung cancer \2\                   Cirrhosis, other liver disorders
    Congestive heart failure          Atherosclerosis of major vessel
PIP-DCG 14
    Septicemia (blood poisoning)/     Adrenal gland, metabolic disorders
     shock
    Delirium/hallucinations           Paranoia and other psychoses
    Anxiety disorders                 Personality disorders
    Degenerative neurologic           Spinal cord injury
     disorders
PIP-DCG 12
    Tuberculosis                      Pleural effusion/pneumothorax/
                                       empyema
    Pulmonary fibrosis and            Stomach, small bowel, other
     bronchiectasis                    digestive cancer \2\
    Rectal cancer \2\                 Cancer of bladder, kidney, urinary
                                       organs
    Benign brain/nervous system       Diabetes with acute complications/
     neoplasm                          hypoglycemia coma
    Inflammatory bowel disease        Drug/alcohol psychoses
    Bone/joint infections/necrosis    Dementia
    Rheumatoid arthritis and          Major depression/manic and
     connective tissue disease         depressive disorders
    Epilepsy and other seizure        Cerebral hemorrhage
     disorders
    Stroke                            Peripheral vascular disease
PIP-DCG 11
    Gastrointestinal hemorrhage       Gastrointestinal obstruction/
                                       perforation
    Paroxysmal ventricular            Bacterial pneumonia
     tachycardia
    Cellulitis and bullous skin
     disorders
PIP-DCG 10
    Colon cancer \2\                  Schizophrenic disorders
    Postmyocardial infarction         Unstable angina
    Vertebral fracture without        Kidney infection
     spinal cord injury               Thromboembolic vascular disease
PIP-DCG 9
    Other cancers \2\                 Pancreatitis/other pancreatic
                                       disorders
    Acute myocardial infarction       Transient cerebral ischemia
    Fractures of skull/face           Pelvic fracture
    Internal injuries/traumatic       Hip fracture
     amputations/third degree burns
PIP-DCG 8
    Cancer of uterus/cervix/female    Artificial opening of
     genital organs \2\                gastrointestinal tract status
    Valvular and rheumatic heart      Hypertension, complicated
     disease
    Coronary atherosclerosis          Angina pectoris
    Atrial arrhythmia                 Precerebral arterial aneurysm
    Aortic and other arterial         Asthma
     aneurysm
    Brain injury                      Peptic ulcer
PIP-DCG 7
    Central nervous system            Abdominal hernia, complicated
     infections
    Alcohol/drug dependence
PIP-DCG 6
    Cancer of prostate/testis/male
     genital organs \2\
PIP-DCG 5
    Ongoing pregnancy with            Ongoing pregnancy with no or minor
     complications                     complications
    Breast cancer \2\
PIP-DCG 4
    No or excluded \3\ inpatient      Completed pregnancy with major
     admissions                        complications
    Miscarriage/terminated pregnancy  Ectopic pregnancy
    Completed pregnancy with          Completed pregnancy without
     complications                     complications (normal delivery)
------------------------------------------------------------------------
\1\ Includes principal and secondary inpatient diagnosis of HIV/AIDS.
\2\ Includes principal diagnoses and secondary diagnoses when the
  principal diagnosis is chemotherapy.
\3\ Excluded admissions are for those conditions that would not be
  likely to (or could not) reoccur in the following year, such as
  appendicitis or fractures of a lower limb.

Source: Health Care Financing Administration, 1999, Appendix 2.

    Three beneficiaries were considered; each was male, aged 
75. The illustration assumes that none of these beneficiaries 
was disabled, institutionalized, covered by Medicaid, or 
working. Because the system is prospective, hospitalization in 
the prior year, 2000, will determine the health status 
adjustment factor used in 2001. The first beneficiary was not 
hospitalized in 2000. The second was hospitalized in 2000, with 
a diagnosis of kidney infection (PIP-DCG code 10), while the 
third was hospitalized with a diagnosis of lung cancer (PIP-DCG 
code 16).
    As shown in the scenarios below, monthly payments to plans 
for beneficiaries with no prior year hospitalization will be 
lower using the new risk adjustment methodology, compared with 
payments using the old demographically-based methodology. In 
2000 and 2001, only 10 percent of the payments will be based on 
the new methodology, with the bulk of the payment, 90 percent, 
based on the old demographic-only adjusters. Payments for 
beneficiaries with no prior year hospitalization will decline 
even more, as a larger percentage of the payment is based on 
the new risk adjusters. Alternatively, for any enrollee with a 
prior year hospitalization, payments under the new system will 
be higher than payments under the old risk-based system.

  TABLE E-11a.--MEDICARE DEMOGRAPHIC RISK ADJUSTMENT FACTORS, FOR AGED
          BENEFICIARIES WITH ONE OR MORE YEARS EXPERIENCE, 2001
------------------------------------------------------------------------
                                                    Previously
                   Age                      Base     disabled   Medicaid
------------------------------------------------------------------------
Male:
     65-69..............................     0.541      0.415      0.440
    70-74...............................     0.705      0.398      0.457
    75-79...............................     0.907      0.334      0.461
    80-84...............................     1.077      0.287      0.445
    85-89...............................     1.258      0.237      0.404
    90-94...............................     1.376      0.189      0.331
    95 and older........................     1.357      0.141      0.242
Female:
     65-69..............................     0.453      0.605      0.433
    70-74...............................     0.588      0.576      0.440
    75-79...............................     0.747      0.519      0.454
    80-84...............................     0.918      0.415      0.423
    85-89...............................     1.096      0.313      0.327
    90-94...............................     1.162      0.232      0.231
    95 and older........................     1.128      0.152      0.168
------------------------------------------------------------------------
Source: Health Care Financing Administration.

 TABLE E-11b.--MEDICARE HEALTH STATUS BASED RISK ADJUSTMENT FACTORS, FOR
       AGED BENEFICIARIES WITH ONE OR MORE YEARS EXPERIENCE, 2001
------------------------------------------------------------------------
                       PIP-DCG group                            Factor
------------------------------------------------------------------------
29.........................................................        5.189
26.........................................................        4.375
23.........................................................        3.823
20.........................................................        3.392
18.........................................................        2.656
16.........................................................        2.438
14.........................................................        2.000
12.........................................................        1.662
11.........................................................        1.271
10.........................................................        1.170
9..........................................................        0.915
8..........................................................        0.822
7..........................................................        0.697
6..........................................................        0.458
5..........................................................       0.375
------------------------------------------------------------------------
Source: Health Care Financing Administration.

Scenario 1: Demographically-based risk adjustment (old system)
    Under the old risk adjustment system in place prior to 
2000, a plan's payment was adjusted to reflect the gender and 
age of the enrollee. The same adjustments were assigned to all 
male beneficiaries ages 75-79, who were not disabled, 
institutionalized, covered by Medicaid, or working, regardless 
of health status. As shown in table E-9, separate demographic 
adjustments are made for parts A and B of the Medicare Program, 
as follows:
  --Part A coverage increased by 5 percent (i.e., 1.05 percent 
        of the payment), and
  --Part B coverage increased by 10 percent (i.e., 1.10 percent 
        of the payment).
    The adjustment for part A applies to about 57 percent of 
the payment and the adjustment for part B applies to the 
remaining 43 percent, resulting in a weighted adjustment of 
about 1.072 to each county payment, regardless of health 
status.
    As shown below, using the demographically-based method, 
payments to plans for these three beneficiaries will only vary 
across counties and not within counties, from a low of $445 per 
month per beneficiary in Arthur, NE (one of the counties with 
floor payments in 2001) to a high of $890 per month per 
beneficiary in Richmond, NY (the county with the highest M+C 
rate nationwide in 2001).

          CALCULATION OF MONTHLY PAYMENT RATE UNDER SCENARIO 1
------------------------------------------------------------------------
                                          Reason for hospitalization (if
                                                   any) in 2000
                                        --------------------------------
                                                      Kidney      Lung
                                                    infection    cancer
                                            None     (PIP-DCG   (PIP-DCG
                                                       10)        16)
------------------------------------------------------------------------
Factors:
    Medicare part A....................       1.05       1.05       1.05
    Medicare part B....................       1.10       1.10       1.10
                                        --------------------------------
      Total weighted adjustment (based       1.072      1.072      1.072
       on a weight of 57 percent for
       part A and 43 percent for part
       B)..............................
Adjusted monthly payment in selected
 counties:
    Richmond, NY.......................       $890       $890       $890
    Dade, FL...........................        868        868        868
    Hennepin, MN.......................        500        500        500
    Arthur, NY.........................        445        445        445
------------------------------------------------------------------------
Source: Congressional Research Service analysis of data from the Health
  Care Financing Administration.

Scenario 2: Phased-in health status based risk adjustment (using a 
        combination of 10 percent of the new system and 90 percent of 
        the old system)
    Scenario 2 represents the expected payment for 2001 when 
risk adjustment is based on 10 percent of the new health status 
method and 90 percent of the old demographic method. The 
factors used to calculate the adjustment under the new 
methodology are found in tables E-11a and b. For each 
beneficiary, there is a single adjustment for demographics (no 
split between parts A and B of Medicare). The base adjustment 
for a 75-year-old male who is not disabled, not a Medicaid 
beneficiary and was not hospitalized during the previous year 
is 0.907. Adjustments for prior year hospitalizations are added 
to the base adjustment. However, only 10 percent of the payment 
for each of the three beneficiaries would be based on the 
following applicable adjustment:
  --0.907 for no prior year hospitalization,
  --0.907 + 1.170 = 2.077 for kidney infection (PIP-DCG 10), 
        and
  --0.907 + 2.438 = 3.345 for lung cancer (PIP-DCG 16).
    The remaining 90 percent of the payment is risk adjusted 
using the old methodology (i.e., 90 percent of the 1.072 
adjustment for demographics, found in scenario 1).
    As shown below, payments to plans for these three 
beneficiaries range from a low of $438 for a beneficiary in 
Arthur, NY, with no prior year hospitalization to a high of 
$1,062 in Richmond, NY, for a beneficiary with a prior year 
hospitalization for lung cancer.

          CALCULATION OF MONTHLY PAYMENT RATES UNDER SCENARIO 2
------------------------------------------------------------------------
                                          Reason for hospitalization (if
                                                   any) in 2000
                                        --------------------------------
                                                      Kidney      Lung
                                                    infection    cancer
                                            None     (PIP-DCG   (PIP-DCG
                                                       10)        16)
------------------------------------------------------------------------
Factors:
    Old method (demographic)...........      1.072      1.072      1.072
    New method (health status).........      0.907      2.077      3.345
Adjusted monthly payment in selected
 counties:
    Richmond, NY.......................       $872       $963     $1,062
    Dade, FL...........................        884        934      1,028
    Hennepin, MN.......................        494        551        613
    Arthur, NY.........................        438        486        539
------------------------------------------------------------------------
Source: Congressional Research Service analysis of data from the Health
  Care Financing Administration.

                        ADJUSTED COMMUNITY RATES

    Medicare+Choice (M+C) plans are required to include all 
Medicare covered services. In some circumstances, plans may 
also be required to offer additional benefits or reduced cost 
sharing to their beneficiaries. The basic benefit package 
includes all of the Medicare-covered benefits (except hospice 
services) as well as the additional benefits, as determined by 
a formula which is set in law. The adjusted community rate 
(ACR) mechanism is the process through which health plans 
determine the minimum amount of additional benefits they are 
required to provide to Medicare enrollees and the cost sharing 
they are permitted to charge for those benefits. This system 
was in place for the Risk Contract Program and continued with 
only a few changes under the M+C Program.
    No later than July 1 of each year, each M+C organization is 
required to submit to the Secretary of DHHS, for each of its 
M+C plans, specific information about premiums, cost sharing, 
and additional benefits (if any). Under Medicare's rules, a 
plan may not earn a higher return from its Medicare business 
than it does in the commercial market. The Secretary reviews 
this information and approves or disapproves the premiums, cost 
sharing amounts, and benefits. The Secretary does not have the 
authority to review the premiums for either medical savings 
account (MSA) plans or private fee-for-service plans.
    Beneficiaries share in any projected cost savings between 
Medicare's per capita payment to a plan and what it would cost 
the plan to provide Medicare benefits to its commercial 
enrollees. To accomplish this, plans must either provide 
reduced cost sharing or additional benefits to their Medicare 
enrollees that are valued at the difference between the 
projected cost of providing Medicare-covered services and the 
expected revenue for Medicare enrollees.\11\ Plans can choose 
which additional benefits to offer, however, the total cost of 
these benefits must at least equal the ``savings'' from 
Medicare-covered services.\12\
---------------------------------------------------------------------------
    \11\ Alternatively, under the ACR process, plans may also charge a 
premium if they demonstrate higher ``costs,'' rather than ``saving'' 
for providing the basic benefit package.
    \12\ Plans may also offer extra benefits, beyond the ``additional'' 
benefits required to spend the ``savings'' calculated in the ACR 
process. These extra benefits are referred to as ``supplemental'' 
benefits. Plans are permitted to charge Medicare enrollees the expected 
cost of these supplemental benefits, plus the national average amount 
of beneficiary cost sharing for Medicare-covered services. Plans can 
collect these payments through a combination of copayments and 
premiums, but premiums cannot exceed the difference between total 
allowable beneficiary cost sharing (premiums plus copayments) and 
expected copayments. Plans may choose to waive part or all of this 
allowable premium for all enrollees.
---------------------------------------------------------------------------

                  Additional or Supplemental Benefits

    Nearly all plans offer some benefits to enrollees beyond 
those in traditional Medicare (chart E-9). For example, in 
December 1999, 98 percent of M+C enrollees were offered vision 
care as part of their lowest premium package, 95 percent were 
offered routine physicals, and 84 percent were offered some 
coverage of prescription (outpatient) drugs. Hearing care was 
offered to four out of five enrollees. Other services offered 
include preventive dental care, podiatry, and chiropractic 
services. While plans may offer even more services, those shown 
in chart E-9 are the most frequently offered benefits.

                    Coverage for Prescription Drugs

    One of the advantages of Medicare managed care, over 
traditional fee-for-service Medicare, is that most plans 
included some prescription drug coverage. However, according to 
HCFA data, M+C prescription drug coverage has become less 
generous over time. Although the number of beneficiaries with 
access to plans offering drug coverage remained about the same 
from 1999 to 2000, the value of that benefit declined. Plans 
are simultaneously decreasing the amount of covered drug 
spending while also increasing out-of-pocket costs. Most plans 
(86 percent) will limit drug benefits in 2000 and an increasing 
number of plans will set annual benefit limits at $500 or less 
(21 percent of plans in 1999 and 32 percent of plans in 2000). 
Furthermore, only 18 percent of plans in 2000 will offer drug 
coverage above a $2,000 level.
    All plans require some level of copayment for prescription 
drug coverage in 2000 and the copayment amount has increased. 
About 20 percent of beneficiaries were offered plans with 
copayments averaging $5 or less for generic drugs in 1999, 
compared to 3 percent in 2000. As shown in table E-12, the 
average copayment level will increase by 21 percent for brand 
name drugs and 8 percent for generic drugs, between 1999 and 
2000.

CHART E-9. PERCENT OF MEDICARE+CHOICE ENROLLEES OFFERED BENEFITS BEYOND 
 TRADITIONAL MEDICARE COVERED SERVICES, IN THE LOWEST PREMIUM PACKAGE 
                            AVAILABLE, 1999

    Source: Chart prepared by the Congressional Research 
Service based on Mathematica analysis of Health Care Financing 
Administration data.

 TABLE E-12.--AVERAGE COPAYMENT LEVELS IN MEDICARE+CHOICE PLANS WEIGHTED
                      BY ENROLLMENT, 1999 AND 2000
------------------------------------------------------------------------
                                                 Brand name    Generic
                                                 copayment:   copayment:
                     Year                        enrollment   enrollment
                                                  weighted     weighted
                                                  average      average
------------------------------------------------------------------------
1999..........................................       $14.34        $6.88
2000..........................................        17.30         7.42
Percent increase 1999 to 2000.................           21           8
------------------------------------------------------------------------
Note.--This chart includes data from plans with any level of drug
  coverage in the basic plan.

Source: Health Care Financing Administration data.

                        MEDICARE+CHOICE PREMIUMS

    Plans are permitted to charge enrollees additional out-of-
pocket fees, such as premiums and coinsurance, depending on 
which plan the individual elects. However, organizations may 
decide to offer zero-premium plans.\13\ If Medicare's per 
capita payment to a plan exceeds its costs (a ``savings'' in 
the terms of the ACR), the plan may choose to add only enough 
benefits to match the savings, allowing no additional premium 
under the ACR rules. Another rationale for waiving premiums is 
to stay competitive in local markets. In this latter case, the 
plan may not be at risk of taking a loss on its Medicare 
business because profits and overhead based on commercial rates 
are included in its allowed costs under the ACR calculation.
---------------------------------------------------------------------------
    \13\ All M+C enrollees (as well as fee-for-service Medicare 
beneficiaries enrolled in part B) are required to pay the Medicare part 
B monthly premium. The monthly premium was set at $45.50 for 1999 and 
remained the same for 2000.
---------------------------------------------------------------------------
    Comparing 1999 to 2000, there has been a decline in both 
the percentage of beneficiaries with access to any M+C plans 
and the number of zero premium plans available to Medicare 
beneficiaries. More than 3 million Medicare beneficiaries lost 
access to at least one zero premium plan, decreasing the 
percentage of beneficiaries with access to any plan that does 
not charge a premium from about 85 percent in 1999 to 77 
percent in 2000. The impact on rural areas was even greater, 
especially since these individuals have fewer opportunities for 
enrolling in the M+C Program and fewer choices among plans. 
Among those with access to Medicare managed care, zero premium 
plans will be available to 40 percent of the beneficiaries in 
rural areas in 2000, compared to 63 percent in 1999.
    For beneficiaries with access to only one plan, increases 
in premiums may be especially severe because their only 
alternative is Medicare fee-for-service. As shown in table E-
13, in 2000, many of these beneficiaries will lose access to 
zero premium plans, no one who pays a premium will pay less 
than $20 and an increasingly large number will pay premiums 
over $80.

               TABLE E-13.--MEDICARE BENEFICIARY POPULATION (TOTAL), WITH ACCESS TO ONLY ONE PLAN
----------------------------------------------------------------------------------------------------------------
                                                                   Year 1999                   Year 2000
                     Minimum premium                     -------------------------------------------------------
                                                          Beneficiaries    Percent    Beneficiaries    Percent
----------------------------------------------------------------------------------------------------------------
Zero....................................................       803,162          31.6       599,553          28.4
$0.01-$19.99............................................        17,614           0.7             -           0.0
$20.00-$39.99...........................................       467,284          18.4       410,662          19.5
$40.00-$59.99...........................................       716,662          28.2       683,029          32.4
$60.00-$79.99...........................................       499,095          19.6       220,237          10.4
$80.00-$99.99...........................................        39,742           1.6       195,432          9.3
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration data.

                        Beneficiary Protections

    The M+C Program includes requirements designed to limit 
beneficiaries' financial liability and to assure beneficiaries 
of certain rights and remedies. M+C significantly changed 
provisions included with the Risk Contract Program, relating to 
beneficiary liability, access to emergency medical services, 
and quality assurance.
 Beneficiary financial liability
     Enrollees in M+C coordinated care plans are likely to 
experience the least amount of out-of-pocket costs (compared to 
other M+C options). For them, the amount of cost sharing per 
enrollee (including premium) for covered services can be no 
more than the actuarial value of the deductibles, coinsurance, 
and copayments under traditional Medicare (table E-14). Neither 
a contracting nor a noncontracting physician, hospital, or 
other provider can impose balance billing charges on 
coordinated care enrollees. Coordinated care plans must pay 
noncontracting providers at least the same amount they would 
have received if the enrollee was in traditional Medicare, 
including allowed balance billing amounts.
     The rules for private fee-for-service plans and MSA plans 
are different (table E-14). Generally, contract providers will 
be allowed to bill enrollees in private fee-for-service plans 
up to 15 percent above the fee schedule the plan uses. In 
contrast to traditional Medicare, this privilege extends to all 
categories of providers, including hospitals. The term 
``contract provider'' refers to providers who have entered into 
an explicit agreement with a plan establishing payment amounts 
for services rendered to the plan's enrollees. A provider can 
be deemed to have a contract with an M+C private fee-for-
service plan if, before furnishing services to the enrollee of 
such a plan, the provider: (1) received a notice of the 
individual's enrollment in a private fee-for-service plan and 
had been informed of the terms and conditions of the plan's 
payment or (2) if the provider was given reasonable opportunity 
to obtain such information. For MSA plans, unlimited balance 
billing is allowed, regardless of whether the deductible has 
been met. Plans could determine whether they count these 
amounts toward the deductible.

                 TABLE E-14.--BENEFICIARY COST SHARING AND PROVIDER REIMBURSEMENT UNDER MEDICARE+CHOICE PLANS FOR BASIC BENEFIT PACKAGE
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Item                            Coordinated care plan                   Private fee-for-service plan                  MSA plan
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beneficiary out-of-pocket costs       Premium and actuarial value of other cost  The actuarial value of the cost sharing    A deductible of no more than
 (premium plus any deductibles,        sharing (for example, coinsurance) on      (not including the premium) on average     $6,000 (indexed for
 coinsurance, and copayments).         average cannot exceed the actuarial        cannot exceed the actuarial value of       inflation). Amounts above
                                       value of the cost sharing applicable on    cost sharing on average under              traditional Medicare
                                       average under traditional Medicare.        traditional Medicare.                      payments (including
                                                                                                                             coinsurance) do not have to
                                                                                                                             be counted toward
                                                                                                                             satisfying the deductible.

Beneficiary liability for balance     Beneficiaries are not liable for any       Contract providers can bill 15 percent
 billing.                              balance billing amounts.                   above the private fee schedule (or other
                                                                                  provider reimbursement amount).
                                                                                                                            Balance billing is allowed

Medicare+Choice plan payment          Contract providers are paid fees or rates
 obligation to physicians,             that are privately negotiated by the
 hospitals, and other providers.       plan with them.
                                                                                 Contract providers are paid private fees
                                                                                                                            Above the deductible, plan

Medicare+Choice payments received by  Contract providers receive payments based
 physicians, hospitals, and other      on a privately negotiated fee schedule.
 providers.
                                                                                 Contract providers receive payments based
                                                                                                                            Providers receive payments

--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Research Service and Medicare Payment Advisory Commission analysis of provisions in the Balanced Budget Act of 1997.

 Access to emergency services
     Each M+C plan must ensure access to emergency services for 
emergency medical conditions, using the prudent layperson 
standard. This definition states that an emergency medical 
condition is one manifesting itself by acute symptoms of 
sufficient severity (including severe pain) that a prudent 
layperson, who possesses an average knowledge of health and 
medicine, could reasonably expect the absence of immediate 
medical attention to result in: (1) placing the health of the 
individual in serious jeopardy (and in case of a pregnant 
women, her health or that of her unborn child); (2) serious 
impairment to bodily functions, or (3) serious dysfunction of 
any bodily organ or part.
 Quality standards
    M+C plans must have a quality assurance program that: (1) 
stresses health outcomes and provides data permitting 
measurement of outcomes and other indices of quality; (2) 
monitors and evaluates high volume and high risk services and 
the care of acute and chronic conditions; (3) evaluates the 
continuity and coordination of care that enrollees receive; (4) 
is evaluated on an ongoing basis as to its effectiveness; (5) 
includes measures of consumer satisfaction, and (6) provides 
the Secretary with certain information to monitor and evaluate 
the plan's quality. Only certain coordinated care plans (not 
private fee-for-service, preferred provider organizations, and 
nonnetwork MSA plans) have to comply with other quality 
assurance requirements, such as providing for internal peer 
review, establishing written protocols for utilization review, 
and establishing mechanisms to detect under and over 
utilization.
     Most M+C organizations must obtain external review of the 
quality of their inpatient and outpatient services and of their 
response to written complaints about poor quality of care from 
an independent quality review and improvement organization 
(such as a peer review organization or PRO). The external 
review requirement does not apply to private fee-for-service 
plans and nonnetwork MSA plans that do not have utilization 
review programs.
    The Secretary is required to ensure that the external 
review activities do not duplicate the review activities 
conducted as part of the accreditation process. The Secretary 
may waive the external review requirement if she determines 
that the organization has consistently maintained an excellent 
record of quality assurance and compliance with other M+C 
requirements. Plans may be deemed to have met all these 
requirements if they are accredited by an organization approved 
by the Secretary, according to statutory requirements.
 Grievances and appeals
     An M+C organization must have meaningful procedures for 
hearing and resolving grievances between the organization and 
enrollees. It also must maintain a process for determining 
whether an individual enrolled within the plan is entitled to 
receive a health service and the amount (if any) that the 
individual must pay for the service. These determinations must 
be made on a timely basis, appropriate to the urgency of the 
situation. The explanation of the determination of a denial of 
coverage must be in understandable language and state the 
reasons for the denial. A description of the reconsideration 
and appeals processes must be provided.
     Upon request by the enrollee, the organization generally 
will have to provide for reconsideration of a determination. 
The reconsideration must occur within a time period specified 
by the Secretary, but (except where an expedited process is 
appropriate) no longer than 60 days after receipt of the 
request. A reconsideration of a denial of coverage based on 
lack of medical necessity must be made by a physician with 
appropriate expertise who was not involved in the initial 
determination.
     An enrollee in an M+C plan or a physician may request an 
expedited determination or reconsideration. If the request is 
made by a physician, an M+C organization is required to 
expedite the determination or reconsideration if the request 
indicates that the normal time frame for making the 
determination or reconsideration could seriously jeopardize the 
life or health of the enrollee or the enrollee's ability to 
regain maximum function.

                             Plan Standards

 Minimum enrollment requirements
     The M+C standards and requirements draw extensively from 
those under the Risk Contract Program. Contracts with M+C 
organizations are made for at least 1 year and are 
automatically renewable in the absence of notice by either 
party of intention to terminate. Organizations must have at 
least 5,000 individuals (or 1,500 in the case of a PSO) who are 
receiving health benefits through the organization or at least 
1,500 individuals (or 500 in the case of a PSO) who are 
receiving health benefits if the organization primarily serves 
individuals residing outside of urbanized areas.
State preemption
    The Secretary established, by regulation, standards for M+C 
organizations and plans. In certain areas, these Federal 
standards preempt any State law or regulation with respect to 
M+C plans to the extent such law or regulation is inconsistent 
with the Federal standards. State standards that are preempted 
are: (1) benefit requirements, (2) requirements relating to 
inclusion or treatment by providers, and (3) coverage 
determinations (including related appeals and grievance 
processes).
 Organizational and financial requirements
    In general, an M+C organization must be organized and 
licensed under State law as a risk-bearing entity eligible to 
offer health insurance or health benefits coverage in each 
State in which it offers an M+C plan. An M+C organization must 
assume full risk for Medicare benefits on a prospective basis. 
However, an organization may obtain insurance or make other 
arrangements to cover: (1) aggregate costs in excess of a level 
specified by the Secretary; (2) medically necessary services 
provided by nonnetwork providers; and (3) no more than 90 
percent of the amount by which its costs exceed 115 percent of 
its income. The organization also may make arrangements with 
physicians or other health care professionals and health care 
institutions to assume all or part of the financial risk on a 
prospective basis for the provision of Medicare benefits by 
these individuals and entities.
Provider-sponsored organizations
    Special rules apply to provider-sponsored organizations 
(PSOs). A PSO is defined as a public or private entity that is 
established or organized and operated by a health care provider 
or group of affiliated providers. A PSO must provide a 
substantial proportion of health care under an M+C contract 
directly through the provider or affiliated group of providers. 
The affiliated providers must share, directly or indirectly, 
substantial financial risk with respect to Medicare benefits 
and have at least a majority financial interest in the entity.
     A PSO may seek a waiver of State law by filing an 
application with the Secretary by no later than November 1, 
2002. The waiver will be effective for 3 years and is not 
renewable. The Secretary will have to approve the waiver 
application if the State denied the PSO's licensing application 
based on its failure to meet solvency requirements that are the 
same as the Federal ones or that the State imposed as a 
condition of approval procedures or standards regarding 
solvency that were different from those applied under Federal 
law. Waivers are also available if the State fails to act on a 
substantially complete license application within 90 days.
     A waiver granted to a PSO will depend on the 
organization's compliance with all State consumer protection 
and quality standards insofar as such standards: (1) would 
apply to the organization if it were licensed under State law; 
(2) are generally applicable to other M+C organizations and 
plans in the State; and (3) are consistent with the Federal 
standards established under the act. Certain State standards 
will be preempted as they apply to PSOs and M+C plans more 
generally. The Secretary is required to report by December 31, 
2001 on whether the waiver process should be continued after 
December 31, 2002. The report must consider the impact of the 
waiver process on beneficiaries and the long-term solvency of 
Medicare.
     The Secretary established final standards related to 
financial solvency and capital adequacy of organizations 
seeking to qualify as PSOs. In establishing the standards for 
PSO solvency, the Secretary was required to take into 
consideration any standards developed by the National 
Association of Insurance Commissioners specifically for risk-
based health care delivery organizations.
 Provider protections and requirements
    Each M+C organization is required to establish reasonable 
procedures relating to the participation of physicians in any 
M+C plan it offers. The procedures include: (1) providing 
notice of the rules regarding participation; (2) providing 
written notice of adverse participation decisions; and (3) 
providing a process for appealing adverse decisions. The 
organization must consult with contracting physicians regarding 
the organization's medical policy, quality, and medical 
management procedures. The use of gag clauses (restricting 
communications between providers and their patients) is 
prohibited. The use of physician financial incentive plans is 
also limited. (A financial incentive plan is any compensation 
arrangement between the organization and a physician or 
physician group that may directly or indirectly have the effect 
of reducing or limiting services provided to enrollees.)
 Protections against fraud
    M+C requires contractors to comply with various disclosure 
and notification requirements. M+C organizations are required 
to report financial information to the Secretary, including 
information demonstrating that the organization is fiscally 
sound, a copy of the financial report filed with HCFA 
containing information on ownership, and a description of 
transactions between the organization and parties in interest.
     The Secretary is also required to audit annually the 
financial records of at least one-third of the M+C 
organizations (including data relating to utilization, costs, 
and computation of the ACR). In addition, the Secretary has the 
right to inspect or otherwise evaluate the quality, 
appropriateness, and timeliness of services, as well as the 
organization's facilities, if there is reasonable evidence of 
need for such inspection. Also, the Secretary has the right to 
audit and inspect any books and records that pertain either to 
the ability of the organization to bear the risk of potential 
financial loss or pertain to services performed or 
determinations of amounts payable under the contract. M+C 
contracts must require the organization to provide and pay for 
advance written notice to each enrollee of a plan termination, 
along with a description of alternatives for obtaining 
benefits. They must also require that organizations notify the 
Secretary of loans and other special financial arrangements 
made with subcontractors, affiliates, and related parties.
 Sanctions and termination of contracts
    The Secretary is authorized to carry out specific remedies 
in the event that an M+C organization: (1) fails substantially 
to provide medically necessary items and services required to 
be provided, if the failure adversely affects the individual; 
(2) imposes premiums on individuals that are in excess of those 
allowed; (3) acts to expel or refuses to reenroll an individual 
in violation of Federal requirements; (4) engages in any 
practice that would have the effect of denying or discouraging 
enrollment (except as permitted by law) of eligible individuals 
whose medical condition or history indicates a need for 
substantial future medical services; (5) misrepresents or 
falsifies information to the Secretary or others; (6) fails to 
comply with rules regarding physician participation; or (7) 
employs or contracts with any individual or entity that has 
been excluded from participation in Medicare. The remedies 
include civil money penalties, and suspension of enrollment 
until the Secretary is satisfied the deficiency has been 
corrected and is not likely to recur. A noncomplying plan can 
also be terminated from participation in M+C if the Secretary 
determines that the organization: (1) fails substantially to 
carry out the contract; (2) is carrying it out in a manner 
substantially inconsistent with the efficient and effective 
administration of M+C; or (3) no longer substantially meets M+C 
conditions.

          Demonstrations Authorized by the Balanced Budget Act

     The Balanced Budget Act (BBA) authorized several 
demonstrations in conjunction with the M+C Program. The most 
important of these are an MSA option for Medicare beneficiaries 
and a test of whether savings can be achieved by setting 
payments to plans through competitive pricing of plan premiums.
 Medical savings account (MSA) demonstration
     The BBA authorized a demonstration to test the feasibility 
of MSAs for the Medicare Program. However, to date, no Medicare 
beneficiaries are enrolled in a Medicare MSA.
     The M+C option is a combination of an MSA plan providing 
health insurance with an annual deductible initially limited to 
$6,000 and an M+C MSA. Under the terms of the demonstration, 
new enrollments will not be allowed after 2002 or after the 
number of enrollees reaches 390,000.
     MSA plans are not available to certain low-income or 
disabled individuals, among others. When enrolled in an MSA 
plan, individuals will not be able to have other health 
insurance (including Medigap policies), with some exceptions, 
and they must reside in the United States for at least half the 
year. Individuals will be able to disenroll from an MSA plan 
only during an annual election period or under special 
circumstances.
     MSA plans provide reimbursement for items and services 
covered under parts A and B of Medicare, though only after the 
enrollee incurs countable expenses equal to the annual 
deductible (limited to $6,000, indexed for inflation). 
Countable expenses include at least those payable by Medicare 
under parts A and B as well as the deductibles, coinsurance, 
and copayments the enrollee would have paid under those parts. 
At a plan's option, other expenses (such as prescription drugs 
or charges that exceed what Medicare would have paid) may also 
be counted.
     After the deductible is met, the plan must reimburse at 
least 100 percent of parts A and B expenses (the provider 
charges) or 100 percent of what Medicare would have paid for 
these expenses without regard to deductibles or coinsurance, 
whichever is less. Providers delivering services to those with 
MSA plans are not subject to balance billing limitations, and 
the plans are not required to pay any balance billing charges, 
though some might do so (see table E-14).
     Contributions to an M+C MSA are made annually from the 
enrollee's capitation rate after the MSA plan insurance premium 
has been paid. Contributions to accounts are exempt from taxes, 
as well as account earnings. Withdrawals are likewise not taxed 
nor subject to penalties if they are used to pay unreimbursed 
enrollee medical expenses that are deductible under the 
Internal Revenue Code. However, qualified withdrawals cannot be 
made to pay insurance premiums other than for long-term care 
insurance, continuation coverage (such as COBRA), or coverage 
while an individual is receiving unemployment compensation.
     Nonqualified withdrawals are included in the individual's 
gross income for tax purposes. Withdrawals are also subject to 
an additional 50-percent penalty to the extent they exceed the 
amount by which the account balance on December 31 of the prior 
year is greater than 60 percent of the MSA plan deductible for 
the year of withdrawal. For example, if the account balance on 
December 31 were $3,500 and the plan deductible the next year 
were $5,000, the amount that could be withdrawn for 
nonqualified purposes without the penalty is $500 (that is, 
$3,500 minus 60 percent of $5,000). The 50-percent penalty will 
not apply in cases of death or disability. Account balances at 
death will be subject to various tax treatments depending on 
their disposition.
     If MSA plan enrollees switch to another M+C option or 
traditional Medicare, they will be able to maintain their 
account and use it to pay qualified medical expenses. No 
additional contributions will be allowable unless enrollees 
elect an MSA plan again.
 Medicare competitive pricing demonstration
     Under its demonstration authority, HCFA attempted to 
initiate a project to determine whether changes in methods for 
paying health plans, specifically a shift to some form of 
negotiated rates, would have the effect of increasing the 
efficiency and economy of providing Medicare services through 
coordinated care plans. HCFA's plan called for the application 
of competitive bidding as a method for establishing payments 
for risk contract health maintenance organizations (HMOs) in 
either the Baltimore or the Denver area. Through a combination 
of court and legislative decisions, these demonstrations have 
been terminated.
     BBA 1997 required the Secretary of the U.S. Department of 
Health and Human Services (DHHS) to establish a demonstration 
project under which payments to M+C organizations in certain 
areas are determined in accordance with a competitive pricing 
methodology.
     The Secretary was required to designate, in accordance 
with recommendations of the newly created Competitive Pricing 
Advisory Committee (CPAC), up to seven Medicare payment areas 
in which the project would be conducted. The BBA defined the 
composition and responsibilities of the CPAC, which will 
terminate in 2004. The CPAC is required to recommend to the 
Secretary four specific areas to be included.
     For each Medicare payment area in the project, the 
Secretary was to (in accordance with recommendations of the 
CPAC), establish the benefit design among plans, structure the 
method for selecting plans, establish methods for setting the 
price to be paid to plans, and provide for the collection and 
dissemination of plan information.
    However, both the Balanced Budget Refinement Act (BBRA) as 
well as the Consolidated Appropriations Act of 2000 altered the 
terms of this demonstration. The Appropriations Act disallowed 
any finding of the demonstration for 2000 in Arizona and parts 
of Kansas and Missouri. The BBRA delays implementation of the 
project until January 1, 2002, or, if later, 6 months after 
CPAC submits reports on: (1) incorporating original fee-for-
service Medicare into the demonstration; (2) quality activities 
required by participating plans; (3) the viability of expanding 
the demonstration project to a rural site; and (4) the nature 
of the benefit structure required from plans that participate 
in the demonstration. The Secretary is also required, subject 
to recommendations by CPAC, to allow plans that make bids below 
the established government contribution rate, to offer 
beneficiaries rebates on their part B premiums.

                               REFERENCES

Health Care Financing Administration. (1999, March). Proposed 
        method of incorporating health status risk adjusters 
        into Medicare+Choice payments  (Report to Congress). 
        Washington, DC: Author.
Medicare Payment Advisory Commission. (1997, October). Medicare 
        risk-plan participation and enrollment: A chart book. 
        Washington, DC: Author.
Medicare Payment Advisory Commission. (1998, July). Health care 
        spending and the Medicare program: A data book. 
        Washington, DC: Author.
Medicare Payment Advisory Commission. (2000, March). Report to 
        Congress: Medicare payment policy. Washington, DC: 
        Author.
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