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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 costreimbursement 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

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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 nonMedicare 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 feefor-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 selecVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01180 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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tion of providers among those who agree to the plan’s terms and

meet the necessary qualifications.

Finally, the demonstration MSA plans reimburse Medicarecovered 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

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1 Although most of the components of the M+C Program were effective in 1999, the M+C payment structure was implemented in 1998.

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

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2The 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 Medicarecovered benefits and other plans that also include optional supplemental benefits.

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.

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 inVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01183 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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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 January 1999Effective January 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 plans ........... 50,000 79,000

Source: Medicare Payment Advisory Commission (2000).

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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

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3M+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.

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.

TABLE E–2.—COUNTIES WITH AND WITHOUT MEDICARE MANAGED CARE PLANS,

SELECTED YEARS 1997–2000

1997 1999 2000

Number of

counties

PercentNumber of

counties

PercentNumber of

counties

Percent

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

Number of plans available June 1995 June 1997 December 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).

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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.

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—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.

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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

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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

State

Percent of

total M+C

enrollment

Percent of

total Medicare 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 organizaVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01190 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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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.

tions. As of March 2000, 65 percent of contractors were with forprofit entities.

TABLE E–5.—MEDICARE+CHOICE CONTRACTS BY PLAN MODEL, MARCH 2000

Number

of contracts

Percent

of contracts

Number of

enrollees

Percent

of 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

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5Prior 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.

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.

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.

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,

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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 national

rates

General ........... Transition over 6 years to 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

(‘‘floor’’) rate

1998 ............... Minimum of $367 (or 150 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 increase1998 ............... 102 percent of 1997 AAPCC payment rate

1999 and after 102 percent of prior year’s rate

Graduate medical education (GME)

and disproportionate

share hospital payments

General ........... GME payments excluded (from blended rate only)

in equal increments over 5 years. Disproportionate share hospital payments not excluded.

Budget neutralityGeneral ........... 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

percentage

1998 ............... Increase in Medicare per 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 adjustment2000–2001 ..... 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.

1194

6Payment 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. 7Medicare 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.

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

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).

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.

1195

8Disproportionate 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.

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.

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 feefor-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.

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9 Numbers are not exact, due to rounding.

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.

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

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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

1198

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

County

Calculation using each of the three separate

rules

Determination of rates

Minimum update Floor Blend

(90 : 10)

Before budget

neutrality adjustment

Actual rate

(after budget

neutrality 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.

1199

1200

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

County Payment

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 enVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01200 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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rollment 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

1202

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

Sex and age group Institutional

Noninstitutional

Medicaid Non-Medicaid

Working

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.

1203

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.

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.

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.

1204

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 2 End-stage liver disorders

Cardiorespiratory failure and shock Decubitus and chronic skin ulcers

PIP–DCG 20

Diabetes with chronic complications Coma and encephalopathy

Aspiration pneumonia Renal failure/nephritis

PIP–DCG 18

Cancer of placenta/ovary/uterine

adnexa 2

Paralytic and other neurologic disorders

Blood/immune disorders Gram-negative/staphylococcus pneumonia

PIP–DCG 16

Chronic obstructive pulmonary disease Mouth/pharynx/larynx/other respiratory

cancer 2

Lung cancer 2 Cirrhosis, other liver disorders

Congestive heart failure Atherosclerosis of major vessel

PIP–DCG 14

Septicemia (blood poisoning)/shock Adrenal gland, metabolic disorders

Delirium/hallucinations Paranoia and other psychoses

Anxiety disorders Personality disorders

Degenerative neurologic disorders Spinal cord injury

PIP–DCG 12

Tuberculosis Pleural effusion/pneumothorax/empyema

Pulmonary fibrosis and bronchiectasis Stomach, small bowel, other digestive

cancer 2

Rectal cancer 2 Cancer of bladder, kidney, urinary organs

Benign brain/nervous system neoplasmDiabetes with acute complications/hypoglycemia coma

Inflammatory bowel disease Drug/alcohol psychoses

Bone/joint infections/necrosis Dementia

Rheumatoid arthritis and connective

tissue disease

Major depression/manic and depressive

disorders

Epilepsy and other seizure disorders Cerebral hemorrhage

Stroke Peripheral vascular disease

PIP–DCG 11

Gastrointestinal hemorrhage Gastrointestinal obstruction/perforation

Paroxysmal ventricular tachycardia Bacterial pneumonia

Cellulitis and bullous skin disorders

PIP–DCG 10

Colon cancer 2 Schizophrenic disorders

Postmyocardial infarction Unstable angina

Vertebral fracture without spinal cord

injury

Kidney infection

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

1205

TABLE E–10.—DIAGNOSES INCLUDED IN EACH PIP–DCG—Continued

Internal injuries/traumatic amputations/third degree burnsHip fracture

PIP–DCG 8

Cancer of uterus/cervix/female genital

organs 2

Artificial opening of gastrointestinal

tract status

Valvular and rheumatic heart disease Hypertension, complicated

Coronary atherosclerosis Angina pectoris

Atrial arrhythmia Precerebral arterial aneurysm

Aortic and other arterial aneurysm Asthma

Brain injury Peptic ulcer

PIP–DCG 7

Central nervous system infections Abdominal hernia, complicated

Alcohol/drug dependence

PIP–DCG 6

Cancer of prostate/testis/male genital

organs 2

PIP–DCG 5

Ongoing pregnancy with complications Ongoing pregnancy with no or minor

complications

Breast cancer 2

PIP–DCG 4

No or excluded 3 inpatient admissions Completed pregnancy with major complications

Miscarriage/terminated pregnancy Ectopic pregnancy

Completed pregnancy with complicationsCompleted pregnancy without 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,

1206

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

Age Base Previously

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

1207

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

None

Kidney

infection

(PIP–DCG

10)

Lung cancer

(PIP–DCG

16)

Factors:

Medicare part A ............................................ 1.05 1.05 1.05

Medicare part B ............................................ 1.10 1.10 1.10

Total weighted adjustment (based on a

weight of 57 percent for part A and

43 percent for part B) ......................... 1.072 1.072 1.072

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 disVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01207 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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abled, 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

None

Kidney

infection

(PIP–DCG

10)

Lung cancer

(PIP–DCG

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

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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. 12Plans 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 Medicarecovered 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.

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

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

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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.

1211

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.

TABLE E–12.—AVERAGE COPAYMENT LEVELS IN MEDICARE+CHOICE PLANS WEIGHTED

BY ENROLLMENT, 1999 AND 2000

Year

Brand name

copayment: enrollment

weighted average

Generic copayment: enrollment weighted

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.

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.

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TABLE E–13.—MEDICARE BENEFICIARY POPULATION (TOTAL), WITH ACCESS TO ONLY

ONE PLAN

Minimum premium

Year 1999 Year 2000

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 feefor-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 PACK

Item Coordinated care plan Private fee-for-service plan MSA plan

Beneficiary out-of-pocket costs(premium plus any deductibles, coinsurance, and copayments).

Premium and actuarial value ofother cost sharing (for example,coinsurance) on average cannotexceed the actuarial value of thecost sharing applicable on average under traditional Medicare.

The actuarial value of the costsharing (not including the premium) on average cannot exceedthe actuarial value of cost sharingon average under traditional Medicare.

A deductible of no more th$6,000 (indexed for inflatioAmounts above traditional care payments (including cance) do not have to be cotoward satisfying the deducOnce deductible is met, MSwould have to pay for all Mcare-covered expenses inclucost sharing. Plans are allocharge beneficiary for servicovered by Medicare (for exvery long hospital stays or mental treatments).

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

Noncontract providers cannot balance bill beneficiaries.

Balance billing is allowed would not be subject to anits, regardless of whether tductible has been met.

TABLE E–14.—BENEFICIARY COST SHARING AND PROVIDER REIMBURSEMENT UNDER MEDICARE+CHOICE PLANS FOR BASIC BENEFIT PACKA

Continued

Item Coordinated care plan Private fee-for-service plan MSA plan

Medicare+Choice plan payment obligation to physicians, hospitals,and other providers.

Contract providers are paid feesor rates that are privately negotiated by the plan with them.Noncontract providers must acceptas payment in full Medicare’s feeschedule (or other Medicare reimbursement rate) including the allowed balance billing amounts (ifany) allowed under Medicare.

Contract providers are paid private fees (or rates) minus beneficiary cost sharing amounts. Feeschedule or rates must be as generous as Medicare unless planhas a sufficient number andrange of provider contracts.Noncontract providers same as fornoncontract providers in coordinated care plans.

Above the deductible, plan burses provider for traditioMedicare amounts includinsurance.

Medicare+Choice payments received by physicians, hospitals,and other providers.

Contract providers receive payments based on a privately negotiated fee schedule.Noncontract providers receive payments based on traditional Medicare payment systems, includingallowable balance billing (paid bythe plan).

Contract providers receive payments based on a private feeschedule and can collect up to 15percent additional from the beneficiary.Noncontract providers same as fornoncontract providers in coordinated care plans.

Providers receive payments on their charges.After the beneficiary’s deduis met, the plan’s payment based on traditional Medicpayment systems, but unlimbalance billing is allowed.

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

1215

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

1216

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

1217

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

1218

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.

1219

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

1220

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 SecVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01220 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.020 WAYS3 PsN: WAYS3
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retary 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.