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

 
APPENDIX E - MEDICARE+CHOICE

CONTENTS

Introduction
Overview of the Medicare+Choice Program
	Current Status of the Medicare+Choice Program
Trends in Medicare+Choice Plan/Contract Availability and Enrollment
	Availability of Medicare Managed Care Plans/Contract
	Medicare Managed Care Terminations
	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
	Bonus Payments
Risk Adjustment
	Risk Adjustment Method in Place for 2003
	New Risk Adjustment Method in Place for 2004
Adjusted Community Rates
	Additional or Supplemental Benefits
	Coverage for Prescription Drugs
Medicare+Choice Premiums
	Beneficiary Protections
	Beneficiary Financial Liability
	Quality Standards
	Information and Disclosure Requirements
Grievances and Appeals
Access to Services
Current Program Standards and Contract Requirements
	Minimum Enrollment Standards
	State Preemption
Organizational and Financial Requirements
Provider Protections and Requirements
Protections Against Fraud
Sanctions and Terminations of Contracts
Medicare+Choice Options
	Private Fee-for-Service Plans
Preferred Provider Organization Demonstration   
Reasonable Cost Contracts
Program for All Inclusive Care of the Elderly (PACE)
Social Health Maintenance Organization Demonstration
Medical Savings Account Demonstration
Medicare Competitive Pricing Demonstration

INTRODUCTION

	Medicare has a long-standing history of offering its 
beneficiaries an alternative to the traditional fee-for-service 
program, in which a payment is made for each individual Medicare-
covered service provided to a beneficiary. Beginning in the 1970s, 
private health plans were allowed to contract with Medicare on a 
cost-reimbursement basis.  In 1982, Medicare's risk contract program 
was created, allowing private entities, mostly health maintenance 
organizations (HMOs), to contract with Medicare.  In exchange for a 
preset monthly per capita payment from Medicare, private health plans 
agreed to furnish all Medicare-covered items and services to each 
enrollee.  By 1997, 15 years after the start of the risk contract 
program, Medicare managed care covered more than 5 million people 
or about 14 percent of beneficiaries.

	In 1997, Congress passed the Balanced Budget Act of 1997 
(BBA, P.L. 105-33), replacing the risk contract program with the 
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 successful at expanding 
coverage, and the initial moderate growth through 1999, which 
increased M+C enrollment to about 17 percent of beneficiaries, 
has since taken a downward turn.  In March 2003 about 12 percent 
of the Medicare population (4.7 million enrollees) remained in 
the M+C program, compared to the  14 percent of the Medicare 
population who were enrolled in Medicare managed care prior to 
the enactment of BBA.  

	The 106th Congress enacted legislation in order to address 
some issues arising from the BBA changes.  The Balanced Budget 
Refinement Act of 1999 (BBRA, P.L. 106-113) as well as the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (BIPA P.L. 106-554) amended the M+C program in an 
effort to increase reimbursement and to make it easier for 
Medicare beneficiaries and plans to participate in the program.  

	The 107th Congress passed The Public Health Security and 
Bioterrorism Preparedness and Response Act (P.L. 107-188) which 
included a few temporary changes to deadlines in the Medicare+
Choice program.  Additionally, the 107th Congress considered, but 
was not able to reach agreement on major legislative changes to 
the Medicare+Choice program. The House passed H.R. 4954 on 
June 28, 2002, a bill that would have increased M+C payments in  
2003 and 2004 and then in 2005 would have created a new Medicare+
Choice competition program and a demonstration program. Two bills 
were introduced in the Senate that also would have made major 
changes to the M+C program.  S. 3018 (introduced by the Senators 
Baucus and Grassley et al.) contained provisions similar to H.R. 
4954 to increase M+C payments 2003 and 2004.  S. 2729 (introduced 
by Senator Grassley et al. - the tripartisan bill) would have 
based payments in M+C on competitive bids by plans.  Neither bill 
was passed by the Senate.  The 108th Congress is considering similar 
options to revise the M+C program.

	This appendix describes the current status of the M+C 
program, as amended, along with the rules and standards under which 
the program operates. Data for 1998 and preceding years covers the 
Medicare risk contract program and beginning in 1999, data covers 
the M+C program.

OVERVIEW OF THE MEDICARE+CHOICE PROGRAM

	In order to increase enrollment in Medicare managed care, and 
to allow beneficiaries access to similar options available in the 
non-Medicare market for meeting their health care needs, the M+C 
program was created to offer a diverse assortment of managed care 
plans.  M+C options include not only coordinated care plans, but also 
private fee-for-service plans, and, on a demonstration basis, a 
combination of a medical savings account (MSA) plan and contributions 
to an M+C MSA.  Coordinated care plans are plans that provide a full 
range of services in exchange for a per capita payment, the most 
typical of which is the HMO.  An HMO is a type of managed care plan 
primarily owned and operated by insurers that acts as both the 
insurer and the provider of health care services to an enrolled 
population.  The BBA also allows for contracts with provider-
sponsored organizations (PSOs), which are coordinated care plans 
owned and operated by providers, as well as preferred provider 
organizations (PPOs), which are groups of doctors and hospitals that 
contract with an insurer to offer their services on a fee-for-service 
basis at negotiated rates that are lower than those charged to non-
enrollees.  Unlike other managed care plans, PPOs do not 
traditionally have primary-care gatekeepers, who oversee health 
care services.

	Alternatively, a beneficiary may select a private fee-for-
service (PFFS) plan that covers enrollees through a private indemnity 
health insurance policy for which the Centers for Medicare and 
Medicaid Services (CMS) 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 any additional financial risk. 
It also does not vary rates based on utilization.  Enrollees may see 
any Medicare-approved provider who agrees to furnish services under 
the plan's terms and conditions of payment.

	Finally, the demonstration MSA plans reimburse enrollees for 
their expenses for Medicare-covered services after a specified high 
deductible is met. The difference between the premium for the high-
deductible plan and the applicable M+C per capita payment would be 
placed into an account for the beneficiary to use to meet medical 
expenses below the deductible.

	However, to date no Medicare beneficiary has enrolled in an 
MSA. Three PPOs serve 2,241 beneficiaries through the M+C program.  
PPOs are more widely available through a demonstration program, with 
56,677 enrollees as of March 2003.  On July 1, 2000, a private fee-
for-service (PFFS) plan, Sterling Life Insurance Company, became 
available to Medicare beneficiaries. Beginning January 2003, a 
second PFFS plan, Humana, Inc. also become available to Medicare 
beneficiaries.  As of March 2003 there were  20,761 enrollees in 
the two PFFS plans throughout the country./1/ Additionally, there are 
another 1,748 enrollees in a PFFS demonstration program.

 	In addition to expanding options for Medicare managed care 
coverage, the BBA also substantially restructured the system for 
setting Medicare payment rates to private plans.  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 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 also were 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 Health and Human Services (HHS) to develop a method 
for risk adjusting payments to include health status, in order to 
account for a larger share of the variation in costs. The interim 
method established by the Secretary adjusted for health status based 
on diagnoses for prior year inpatient hospitalizations.  Although 
phase-in of these health-based risk adjusters began in January 2000, 
the BBRA slowed down the Secretary's planned phase-in schedule.  
Further refinements included in BIPA extended the current risk-
adjustment methodology through 2003 and then, beginning in 2004, a 
new methodology based on disease grouping will be phased-in based 
on data from inpatient hospitals and ambulatory settings.  This 
system will be fully phased in beginning in 2007.

	The BBRA and BIPA made several other revisions to the M+C 
program, raising M+C payments to plans and providing bonus payments 
for certain plans that enter areas where no other plan is in 
operation to encourage participation in rural areas.  The BBRA moved 
the deadline for plans to submit their adjusted community rate (ACR) 
proposals from May 1 to July 1 of each year, and allowed plans to 
segment their service areas along county lines, in order to better 
match revenues to costs.  Additional changes in BIPA permit M+C plans 
to offer reduced Medicare Part B premiums beginning in 2003 and 
revised payments for End Stage Renal Disease (ESRD) M+C enrollees.

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 partially may be a reaction to a slowdown in the rate of 
increase for Medicare managed care payments, the initial slowdown in 
spending for Medicare traditional fee-for-service payments following 
the passage of the BBA, and the uncertainty about the future of the 
payments or organization of the M+C program.

	Further, beneficiaries in rural areas still have limited 
access to managed care plans and enrollment growth has slowed or 
declined across all geographic areas.  Beneficiaries also have 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, further discouraging participation 
in the Medicare program.  M+C plans increasingly have noted that in 
addition to concerns about payment amounts, the regulatory 
requirements are burdensome and make it difficult for them to 
participate in the program.  

	As plans withdraw from the M+C program, some enrolled 
beneficiaries are forced to choose new M+C plans, while others are 
left without any access to Medicare managed care. They are forced 
to return to Medicare's fee-for-service program.  Even among those 
who still have an option to choose another 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.

	In 2003, M+C plans are available to about 59 percent of the 
more than  (40 million) Medicare beneficiaries, and in March 2003 
about 12 percent of all beneficiaries chose to enroll in one of the 
146 (includes two PFFS plan) available M+C plans. The rapid growth 
rate of Medicare managed care enrollment in the 1990s leveled off 
and although enrollment initially increased moderately with the 
implementation of the M+C program, by March 2003 enrollment was 
two percentage points below pre-BBA enrollment. The Congressional 
Budget Office (CBO) projects that M+C enrollment will decline 
moderately through 2008, when it will reach about 9 percent of the 
Medicare population and then slowly decline to about 8 percent by 
2013.  CBO estimates that in 2003 Medicare will spend $35.9 billion 
for all Medicare group plans, (including M+C and other private 
Medicare arrangements, such as demonstrations).  By 2013 the 
projected spending for Medicare group plans will increase to 
$46.9 billion.   

	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 
92 percent of beneficiaries in center cities have access to at 
least one plan, only 6 percent have access in the most rural areas.

TRENDS IN MEDICARE+CHOICE PLAN/CONTRACT AVAILABILITY AND ENROLLMENT

AVAILABILITY OF MEDICARE MANAGED CARE PLANS/CONTRACT
	
	The M+C program began operation on January 1, 1999,/2/ as 
authorized by the BBA.  By March 2003, there were 146 M+C contracts 
with CMS under the M+C program./3/  Over time, the number of M+C 
contracts has fluctuated.  From 1987 to the early 1990s many risk 
plans terminated existing contracts, decreasing the number of 
available plans from 161 in 1987 to 93 in 1991. The trend shifted 
as the number of Medicare risk plans began increasing in 1992, more 
than tripling from 110 in 1993 to 346 in 1998.  With the 
implementation of the M+C program in 1999, the downward cycle of 
availability began once again, as several M+C organizations withdrew 
from the Medicare program (or reduced the size of their service 
area). As shown in ChartE-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 
(267 contracts) in 2000 and then to 146 as of March 2003. 
MEDICARE MANAGED CARE TERMINATIONS 

	Since the implementation of the M+C program, a substantial 
number of managed care organizations either have 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 51,000 
(less than 1 percent) of all M+C enrollees 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.  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 also had been affected 
the previous year. This cycle of contract changes left 79,000 
(1.3 percent) of all managed care enrollees in 105 counties without 
access to any other M+C plan.  

	Prior to the passage of BIPA, CMS released information about 
contract terminations, effective January 2001.  Those figures were 
expected to affect about 934,000 M+C enrollees, leaving almost 
159,000 of these enrollees with no access to Medicare managed care.  
After the passage of BIPA, M+C organizations were given an 
opportunity to reconsider their earlier decision and as a result 
four M+C organizations decided to return to the program. In total 
these organizations had provided serviced to approximately 13,000 
beneficiaries in 2000, covering 11 counties.  In five counties, 
there were no other M+C plans offered.   Despite the changes made 
to contract terminations after BIPA, this series of contract 
terminations affected more beneficiaries than the combined total 
for the previous 2 years.  Nationwide, just two managed-care 
companies, AETNA and CIGNA, accounted for about half of the total 
number of beneficiaries affected by these withdrawals.
	
TABLE E-1--MEDICARE+CHOICE CONTRACT TERMINATIONS AND SERVICE AREA 
REDUCTIONS

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

	For contract renewals effective on January 1, 2002, 36 plans
reduced their service area and 22 did not renew their contract.  
This round of withdrawals affected more than 536,000 M+C enrollees, 
leaving about 38,000 without access to any M+C plan.  For an 
additional 52,000 individuals, their only M+C option was the Sterling 
private-fee-for-service plan and they had no access to any other 
type of M+C plan, such as an HMO.  For contract renewals effective

CHART E-1--NUMBER OF MANAGED CARE PLANS/CONTRACTS PARTICIPATING 
IN MEDICARE, 1987-2003

 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

January 2003, nine plans terminated their contracts, and 24 reduced 
their service area, affecting 215,000 enrollees and leaving 29,000 
with no M+C options. For 3,000 enrollees, their only option was a 
PFFS plan and for another 3,000 their only option was the PPO 
demonstration program.  Plans withdrawing from the M+C program affect 
not only current M+C enrollees, but also affect both current Medicare 
fee-for-service beneficiaries and newly eligible Medicare 
beneficiaries who might choose to enroll in an available managed care 
plan.

ENROLLMENT TRENDS FOR MEDICARE MANAGED CARE

	While the number of plans/contracts participating in Medicare 
managed care has fluctuated over time, the percent of beneficiaries 
enrolled in Medicare managed care continued to increase until 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 increased significantly to 16 percent of Medicare 
beneficiaries, covering just over 6 million enrollees. Since the 
implementation of the M+C program, enrollment growth increased 
through 1999, but today has declined below the 1998 level; reaching 
almost 17 percent of beneficiaries in December 1999 (6.3 million 
enrollees), declining slightly to 16 percent  (6.2 million enrollees) 
by December 2000, and to about 12 percent (5.6 million enrollees) by 
March 2003. CBO projects that enrollment in M+C plans will reach 
about 9 percent of all beneficiaries by 2008 covering about 3.9 
million enrollees.  CBO projects that by 2013 M+C will have the same 
number of enrollees, 3.9 million; however, because of the growth in 
the overall Medicare population, the percentage of enrollees in M+C 
actually will decline to about 8 percent of all Medicare 
beneficiaries.  

	Enrollment in any individual plan is open 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./4/ As a result, not all Medicare beneficiaries 
have access to an M+C plan.  As of 2003, Medicare managed care 
was available in only 17 percent of counties (Table E-2). However, 
while 83 percent of counties did not offer M+C plans in 2003, 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 January 2003, only 41 percent of all Medicare 
beneficiaries lived in an area that had no access to an M+C plan 
(Table E-3).  Among the 59 percent of beneficiaries with access to 
the M+C program, 40 percent had a choice of at least two plans; 
30 percent had a choice of two to four plans and another 10 percent 
had five or more plans available to them.  By comparison, in December 
1999, not only did more beneficiaries have access to an M+C plan, but 
they also had more choices.

TABLE E-2 --COUNTIES WITH AND WITHOUT MEDICARE MANAGED CARE PLANS, 
SELECTED YEARS 1997-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

TABLE E-3--PERCENT DISTRIBUTION OF MEDICARE BENEFICIARIES BY 
MANAGED CARE PLANS (AVAILABLE IN THEIR AREA, 1995-2003)

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

CHART E-2--PERCENT OF BENEFICIARIES ENROLLED IN MEDICARE MANAGED CARE 
PLANS, ACTUAL AND PROJECTED, SELECTED YEARS 1990-2013

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

ENROLLMENT PATTERNS IN URBAN AND RURAL LOCATIONS

CHART E-3--PERCENT OF MEDICARE BENEFICIARIES AND 
MEDICARE+CHOICE ENROLLEES IN URBAN AND RURAL 
LOCATIONS, 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

	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:

1.  Central urban - central counties of metropolitan areas of at 
least 1 million population;

2.  Other urban - either fringe counties of metropolitan areas of at 
least 1 million population or counties of metropolitan areas up to 
1 million population;	

3.  Urban/rural fringe - urban population of at least 2,500 adjacent 
to a metropolitan area;

4.  Other rural- includes urban population of at least 2,500, not 
adjacent to a metropolitan area, and rural areas (defined as places 
with a population of less than 2,500).

	Most M+C enrollees reside in central urban areas; about 
69 percent of the M+C population as of 2003.  However, a smaller 
proportion, only 39 percent of all Medicare beneficiaries reside in 
the central urban areas. In all geographic areas, except central 
urban 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 plan benefits.

	As shown in Chart E-4, access to M+C plans is much greater 
in urban areas than in rural areas.  Only about 8 percent of 
beneficiaries in central urban areas lack access to M+C plans. Among 
the 92 percent of Medicare beneficiaries with access to such plans, 
40 percent have a choice of at least five different plans and another 
40 percent have a choice of two to four plans.  By contrast, Medicare 
beneficiaries living in rural areas rarely have even a single plan 
available to them, leaving most of these beneficiaries (about 
94 percent) with no access to plans.  Among the beneficiaries in 
these areas who have access to Medicare managed care, about 2 percent 
have a choice of two to four plans and 4 percent have access to only 
one 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.  
Approximately 30 percent of the beneficiaries in Arizona, 33 percent 
of the beneficiaries in California, and 28 percent of the 
beneficiaries in Oregon are in M+C plans.  The highest levels of 
enrollment in the eastern states are in Rhode Island (34 percent), 
Florida (19 percent), Pennsylvania (23 percent) and Massachusetts 
(18 percent).  In contrast, 22 states have no (or marginal) plan 
enrollment, and an additional 13 states have between 2 percent and 
10 percent of their Medicare beneficiaries enrolled in an M+C plan, 
which is lower than the U.S. average enrollment of 12 percent of 
beneficiaries.
	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 account for 59 percent of all M+C 
enrollees, but they are home to only 30 percent of all Medicare 
beneficiaries.  Table E-4 compares the percent of M+C enrollment to 
the percent of the total Medicare population for each of these four 
states.

CHART E-4--PERCENT IN VARIATION IN NUMBER OF MEDICARE+CHOICE PLANS 
AVAILABLE TO MEDICARE BENEFICIARIES IN URBAN AND RURAL LOCATIONS,  
JANUARY 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

CHART E-5--PERCENT OF MEDICARE BENEFICIARIES ENROLLED IN 
MEDICARE+CHOICE, BY STATE, MARCH 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

TABLE E-4 --SHARES OF MEDICARE+CHOICE ENROLLMENT AND 
MEDICARE POPULATION RESIDING IN FOUR STATES, MARCH 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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 IPAs models. An IPA 
is a managed care organization that contracts with physicians in 
solo practice or with associations of physicians that, in turn, 
contract with their member physicians to provide health care 
services. Many physicians in IPAs have a significant number of 
patients who are not IPA enrollees.  Group model managed care 
organizations contract with one or more group practices of 
physicians to provide health care services, and each group 
primarily treats the plan's members.  Staff model managed care 
organizations employ health providers, such as physicians and 
nurses, directly.  The providers are employees of the plan and 
deal exclusively with their enrollees.  The great majority 
of M+C contracts are with for-profit organizations.  As of March 
2003, 66 percent of contractors were with for-profit entities. 

TABLE E-5--MEDICARE+CHOICE CONTRACTS BY PLAN MODEL, 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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 state renal disease (ESRD) 
may not enroll in an M+C plan.  Two exceptions apply to individuals 
with ESRD:  1) a beneficiary enrolled in an M+C plan who later 
develops ESRD may continue to remain enrolled in that plan; and 2) 
if a plan terminates its contract or reduces its service area (for 
an enrollee this is referred to as an involuntary termination), 
ESRD enrollees may enroll in another  M+C plan.  The second 
exception is retroactive for an involuntary termination 
occurring on or after December 31, 1998. 
	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 terminate an enrollee's 
election only 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 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 2004,/5/ individuals are able to make and change 
election to an M+C plan on an ongoing basis.  Beginning in 2005, 
elections and changes to elections will be available on a more 
limited basis./6/ Individuals will be able to make or change 
elections each November, during the annual coordinated election 
period. In addition, current Medicare beneficiaries also may 
change their election at any time during the first 6 months of 
2005 (or 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 either to 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 election 
begins once the individual is eligible for an M+C plan. Special 
election periods also apply to newly eligible aged (not disabled) 
Medicare beneficiaries.  BIPA required that beginning in June 2001 
requests to enroll or disenroll in an M+C plan are effective on the 
first day of the next calendar month. (Prior to the passage of BIPA,
requests to enroll or disenroll in an M+C plan made after the 10th 
of the month were not effective until the first day of the second 
subsequent calendar month.) 
	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 portion of its 
service area may offer enrollees the option of continuing enrollment 
in the plan, only if there is no other M+C plan offered in the 
affected area at that time.  However, the plan may require the 
enrollee to obtain all basic (except for emergency or urgently 
needed care) services exclusively at the facilities designated by the 
organization within the plan's service area.
	A further protection made available with the passage of BIPA 
extended the period for Medigap enrollment for M+C enrollees 
affected by termination of coverage during their "trial period."  
(The trial period allows individuals to try out Medicare managed 
care for 12 months, while guaranteeing them access to a Medigap plan 
if they chose to return to Medicare fee-for-service). For individuals 
enrolled in an M+C plan during their initial 12-month trial period, 
their trial period begins again if they re-enrolled in another M+C 
plan because of an involuntary termination.  During this new trial 
period, they retain their rights to enroll in a Medigap policy; 
however the total time for a trial period cannot exceed 2 years from 
the time they first enrolled in an M+C plan.

MEDICARE+CHOICE PAYMENTS TO PLANS

	The Balanced Budget Act substantially restructured the 
system for setting the rates by which Medicare pays plans, beginning 
in 1998./7/ 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 HHS is required 
to determine annually, and announce by the second Monday in May for 
2003 and 2004 (and then not later than March 1 for subsequent years) 
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 (approximately 56 percent: and 44 percent, 
respectively).

	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:

-  A rate calculated as a blend of an area-specific (local) rate and 
a national rate,

-  A minimum payment (or floor) rate, or

-  A rate reflecting a minimum increase from the previous year's 
rate. Each part of the system is described in more detail below./8/
For a more detailed analysis of M+C payments, see CRS Report RL30587,  
Medicare+Choice Payments.

BLENDED RATES

	The blended per capita rate was intended to shift 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 was designed to reduce payments in 
counties where the adjusted average per capita costs (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)/9/ 
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 labor costs, by a formula stated in the law.  
The 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 was reduced in increments over 6 years from 
90 percent in 1998 to 50 percent in 2003, while the corresponding 
percentage for the national component was increased from 10 percent 
to 50 percent.  In 2003 and beyond, the blended rate is 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 also is subject to a floor rate, designed to 
raise payments in certain counties more quickly than would occur 
through the blend alone. Initially, the BBA provided for a floor 
rate that would apply to all counties within the United States; for 
2000 this minimum rate was $402 per month. A separate minimum also 
was established for areas outside (i.e., territories) the United 
States. Beginning March 2001,/10/ BIPA established multiple floor 
rates, based on population and location. For 2001, the floor was 
$525 for aged enrollees within the 50 states and the District of 
Columbia residing in a Metropolitan Statistical Area (MSA) with a 
population of more than 250,000. For all other areas within the 
50 states and the District of Columbia, the floor was $475. For 
any area outside the 50 states and the District of Columbia, the 
$525 and $475 floor amounts also were applied, except that the 
2001 floor could not exceed 120 percent of the 2000 floor amount. 
As required by law, these payment amounts are increased annually 
by a measure of growth in program spending (see discussion of 
national growth percentage, below). In 2002, the floor was $553 
for the larger MSAs and $500 for the smaller MSAs.  The 2003 
floors are lower than the 2002 floors; $548 for the larger MSAs 
and $495 for the smaller MSAs./11/  In 2003, M+C payments in only 
6 counties are based on the floor payments, because these counties 
were able to change their designation from a low floor county 
payment area to a high floor county payment area./12/ The 2003 
payment to M+C organizations in these counties is based on the 
floor payment of $548.  For 2004, the floor amounts will be 
$592 for larger MSAs and $536 for smaller MSAs. 

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 1999 and 2000, the increase was  102 percent of the annual M+C 
per capita rate for the previous year. BIPA applied a 3 percent 
minimum update for 2001, beginning in March for subsequent years, 
the minimum increase returned to an annual January update of an 
additional 2 percent over the previous year's amount. The minimum 
percentage increase is the only positive update for 2003 M+C 
payments./13/

EXCLUSION OF PAYMENTS FOR GRADUATE MEDICAL EDUCATION

	Payments for Graduate Medical Education (GME) are excluded 
or "carved out" of the payments to M+C plans, phased-in over 5 years. 
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. 
Beginning in 2002, GME payments were set to be fully deducted each 
year.  However, the GME "carve out" will not occur in a year in 
which no payment is based on the blended rate, because this carve 
out applies only to the blended rate and not to either the minimum 
percentage increase or the floor rate.  Payments for disproportionate 
share hospitals (DSH)/14/ are not carved out.

BUDGET NEUTRALITY

	Once the preliminary rate is determined for each county, a 
budget neutrality adjustment is required by law 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 be applied only 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, 2001, 2002, and  2003 rates, the Centers for 
Medicare and Medicaid Services (CMS) 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), the estimated cost was 
about $1 billion in 2001, $900 million in 2002, $2.9 billion in 
2003, and $1.1 billion in 2004.

NATIONAL GROWTH PERCENTAGE

	The national per capita M+C growth percentage is defined 
as the projected per capita increase in total Medicare expenditures
minus a specific reduction set in law.  Because this increase is 
tied to total Medicare expenditures, it maintains a link between 
Medicare fee-for-service and managed care spending. In 1998, the 
reduction was 0.8 percentage points, from 1999 through 2001 it was  
0.5 percentage points, and in 2002 the BBRA set the reduction at 
0.3 percentage points.  There is no reduction after 2002. Starting 
with the 1999 M+C payments, adjustments also were made for errors 
in the previous years' spending projection. 
	The national growth percentage for 2001, after the 
reduction and adjustments, was -1.3 percent.  However because BIPA 
set the floor rates in 2001, the national growth percentage was not 
used to calculate the floor rate in 2001.  It was used only to 
calculate the blend rate for 2001.
	For 2002, the estimated national growth percentage increase 
over the pre-BIPA payment amount (used for January and February 2001) 
was 8.3 percent./15/ This figure was based on a 5.6 percent projected 
per capita increase in total Medicare expenditures, a 0.3 percentage 
point reduction, a minus 0.3 percent adjustment for errors in the 
previous years' projection of spending (1998-2001), and an increase 
of 3.2 percent to account for the impact of BIPA. The increase used 
to calculate the floor payment for 2002 was 5.3 percent, reflecting 
only the projected per capita increase in total Medicare expenditures 
of 5.6 percent and the 0.3 percentage point reduction. There was no 
adjustment for prior years' errors, as the floor amounts were reset 
by the amounts established in BIPA.
	For 2003, the projected national growth percentage increase 
is actually a decrease of 2.9 percent.  This decrease reflects a 
0.9 percent increase in per capita costs and a negative 3.8 percent 
adjustment for prior years' errors. The -2.9 percent factor is used 
to update the 2002 blend rate.  The 2003 update for the floor is -1 
percent, reflecting the same 0.9 percent increase in per capita 
costs, but only a 1.9 percent decrease for prior year error in 2002 
estimates./16/ Because both of these updates are negative, the 
minimum percentage increase is the only positive update for 2003, 
yielding the highest M+C payment for most counties.
	The projected national growth percentage increase in 2004 is 
9.5 percent. This increase reflects a 3.7 percent increase in per 
capita costs and a positive 5.6 percent adjustment for prior years' 
errors.  The 9.5 percent factor is used to update the 2003 blend 
rate.  The 2004 update for the floor is 8.2 percent, reflecting the 
same 3.7 percent increase in per capita costs, but only a 4.3 percent 
increase for prior year error in 2003 estimates.

BONUS PAYMENTS

	BBRA established a bonus payment to encourage new M+C plans 
to enter counties that otherwise would not have a participating plan.  
The first plan to enter a previously unserved county (or an area 
where all organizations announced their withdrawal from the area as 
of October 13, 1999) would receive a 5 percent added payment during 
their first year and a 3 percent added payment during their second
year.  BIPA further extended these bonus payments for M+C plans to 
include areas for which notification had been provided, as of October 
3, 2000, that no plans would be available January 1, 2001.  For 2003,  
6 M+C contracts qualified for these bonus payments for some of the 
counties located in the following States; Maryland, Missouri, New 
York, Virginia, and Puerto Rico, as well as for some counties in
States served by the Sterling Private Fee-for-Service Plan./17/

RISK ADJUSTMENT

	M+C payments are 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 its increased 
health expenses.  By 2004, three different risk adjustment methods 
will have been used to adjust Medicare+Choice payment rates:

-  Demographic method (through 1999);

-  Principal Inpatient Diagnostic Cost Group (PIP-DCG), which uses 
hospital inpatient and demographic data (2000-2003); and

-  CMS Hierarchical Condition Category Risk Adjustment Model 
(CMS-HCC), which uses ambulatory, inpatient; and demographic 
data (beginning in 2004).

	The former Medicare risk contract program adjusted the AAPCCs 
for demographic risk factors, and when the M+C program was 
implemented, it also used only these demographic risk adjusters until 
2000. 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-7.  Separate 
demographic adjustments are made for Part A and Part B of the 
Medicare program (Part A adjustments apply to about 56 percent of 
the payment and Part B adjustments apply to the remaining 44 
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 
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.
	These demographic risk adjusters account for only a very 
limited portion of the variation in health care costs. As a result, 
the BBA required the Secretary of HHS to develop a new risk 
adjustment mechanism that also would consider variations in health 
status.  Beginning in January 2000, the Centers for Medicare and 
Medicaid Services (CMS) 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./18/ Table E-8 displays the 15 PIP-DCGs including the 
various diagnoses in each category.  Per capita payments to plans 
are adjusted based on inpatient data using the PIP-DCG adjuster, 
for those enrollees with an inpatient stay during the previous 
year. Additionally, adjustments are made for demographic factors 
(see Table E-9), so that this new system accounts for both 
demographic and health-status variations.
	The BBRA slowed down the implementation of the Secretary's 
proposed phase-in schedule of this new system through 2002, and 
BIPA made further revisions to the risk adjustment system. (Plans 
were concerned because this new risk adjustment methodology reduces 
aggregate M+C payments; slowing down its implementation lessens the 
reduction.)  Through 2003, 10 percent of payments will include 
introduction of risk adjustment using the PIP-DCG method and 
90 percent will be based solely on the older demographic method.  
	One further change required by BIPA, although temporary, 
fully implemented risk adjustment based on inpatient hospital 
diagnoses for an individual who had a qualifying congestive heart 
failure inpatient diagnosis between July 1, 1999 and June 30, 2000, 
if that individual was enrolled in a coordinated care plan offered 
on January 1, 2001.  This applied for only 1 year, beginning on 
January 1, 2001.  This payment amount was excluded from the 
determination of the budget neutrality factor./19/

RISK ADJUSTMENT METHOD IN PLACE FOR 2003 

	The following illustration examines calculations of risk 
factors in 2003, based on two scenarios:  1) the demographically-
based risk adjustment system in place prior to 2000, and 2) the 
actual system in place for 2003, which uses a combination of 10 
percent of the current health-status-based system and  90 percent 
of the old demographic-based system. Comparing these two scenarios 
provides an evaluation of the impact of the different risk 
adjustment methodologies on M+C payments.
	Three beneficiaries are considered; each is male, aged 75.  
The illustration assumes that none of these beneficiaries is 
disabled, institutionalized, covered by Medicaid, or working. Because 
the system is prospective, hospitalization in the prior year, 2002, 
would determine the health-status adjustment factor used in 2003. 
The first beneficiary was not hospitalized in 2002. The second 
was hospitalized in 2002, 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 current risk adjustment methodology, compared with payments 
using the old demographically-based methodology. Through 2003, 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 more comprehensive risk adjusters.  
Alternatively, for any enrollee with a prior year hospitalization, 
payments under the new system will be higher than payments under the 
old demographic-only based system.  In 2004, the new risk adjustment 
methodology will begin to be phased in, taking into account data from 
both inpatient and ambulatory settings.

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

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                 	
TABLE E-7--MEDICARE DEMOGRAPHIC-ONLY RISK ADJUSTMENT FACTORS FOR AGED 
BENEFICIARIES, 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

TABLE E-8--DIAGNOSES INCLUDED IN EACH PIP-DCG 

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

TABLE E-9--MEDICARE DEMOGRAPHIC AND HEALTH-STATUS BASED RISK 
ADJUSTMENT FACTORS, FOR AGED BENEFICIARIES WITH ONE OR MORE 
YEARS OF EXPERIENCE, 2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Scenario 1:  Demographically-Based Risk Adjustment (old system)

Under the old risk adjustment system in place prior to 2000, a plan's 
payment was adjusted to reflect the gender and age of the enrollee. 
The same adjustments were assigned to all male beneficiaries ages 75 
to 79, who were not disabled, institutionalized, covered by Medicaid, 
or working, regardless of health status. As shown in Table E-7 
separate demographic adjustments are made for Part A and Part 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 56 percent of the payment 
and the adjustment for Part B applies to the remaining 44 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 vary only across 
counties and not within counties, from a low of $547 per month per 
beneficiary in Arthur, NE to a high of $935 per month per beneficiary 
in Richmond, NY (the county with the highest Medicare+Choice rate 
nationwide in 2003).

Calculation of Monthly Payment Rate Under Scenario 1

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

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 2003 when risk 
adjustment is based on 10 percent of the health-status method and 
90 percent of the old demographic method.  The factors used to 
calculate the adjustment under this methodology are found in Table 
E-9.  For each beneficiary, there is a single adjustment for 
demographics (no split between Parts A and B of Medicare). The base 
adjustment for a 75 year old male who is not disabled, not a Medicaid 
beneficiary, and was not hospitalized during the previous year is 
0.907.  Adjustments for prior year hospitalizations are added to the 
base adjustment. However, only 10 percent of the payment for each of 
the three beneficiaries would be based 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 $539 for a beneficiary in Arthur, 
NE with no prior year hospitalization to a high of $1,134 in 
Richmond, NY for a beneficiary with a prior year hospitalization 
for lung cancer.

Calculation of Monthly Payment Rates Under Scenario 2

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

NEW RISK ADJUSTMENT METHOD IN PLACE FOR 2004

	As required by BIPA, beginning in 2004, a new risk adjustment 
method will be used to account for more of the variation in health 
care expenditures than is accounted for using prior methods. The new 
model, the CMS Hierarchical Condition Category Risk Adjustment Model 
(CMS-HCC), incorporates data from both inpatient hospital and 
ambulatory settings, as well as demographic factors./20/ The CMS-HCC 
model categorizes approximately 3,300 International Classification 
of Disease (ICD-9) codes into approximately 800 disease clusters, 
and further aggregates those into 64 disease categories. The CMS-HCC 
also includes several condition-interactions/21/ and demographic 
factors, such as age, sex, Medicaid eligibility, and original 
disability status. Table E-10 displays a list of disease groups, 
interactions, and demographic factors included in the CMS-HCC model.  

TABLE E-10--MEDICAL CONDITIONS, MEDICAL CONDITION INTERACTIONS, AND 
DEMOGRAPHIC FACTORS INCLUDED IN THE CMS HIERARCHIAL CONDITION 
CATEGORY RISK ADJUSTMENT MODEL FOR 2004

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

	The payment for an aged beneficiary under the CMS-HCC model 
is calculated by summing all of the relevant condition adjustment 
factors for the prior year with the demographic adjustment factors 
and multiplying that sum by the average payment rate for the 
beneficiary's county of residence. Any event which occurs during 
the year would be incorporated into the risk adjusted payment for 
the following year.  Unlike the PIP-DCG method, which allows only 
one inpatient diagnosis to modify the payment rate, in general, the 
CMS-HCC model takes into account multiple diagnoses./22/ For example, if 
in the previous year, a beneficiary has been diagnosed with 
congestive heart failure, a hip fracture, and cancer, all of these 
conditions would be factored into the risk adjustment for the 
beneficiary's 2004 payment.  The new risk adjustment will be phased 
in at a rate of 30 percent in 2004, 50 percent in 2005, 75 percent 
in 2006, and 100 percent beginning in 2007.  The portion of the 
payment not weighted by the CMS-HCC will be weighted by the 
demographic-only method.  

ADJUSTED COMMUNITY RATES

	M+C plans are required to include all Medicare-covered 
services.  In some circumstances, plans also may 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.
	In general, no later than July 1 of each year, each M+C 
organization is required to submit to the Secretary of HHS, for each 
of its M+C plans, specific information about premiums, cost sharing, 
and additional benefits (if any). However, as specified below, this 
deadline has been and will continue to be shifted through 2004. 
Because BIPA was enacted after the July deadline, there was a special 
timeline devised for 2001. Plans that previously provided notice 
of their intention to terminate contracts or reduce their service 
area for 2001 had until January 18, 2001 to rescind their notice and 
submit ACR information. Further, any M+C organization that would 
receive higher capitation payments as a result of BIPA was required 
to submit revised ACR information by January 18, 2001. Plans could 
only reduce premiums, reduce cost sharing, enhance benefits, utilize 
stabilization funds, or stabilize or enhance beneficiary access to 
providers (as long as this did not result in increased beneficiary 
premiums, increased cost-sharing, or reduced benefits). Any 
regulations that limited stabilization fund amounts were waived, 
with respect to ACR submissions.  
	For 2002, an M+C organization's deadline for notifying CMS 
of its intention to renew its contract as well as a final ACR 
submission was extended to September 17, 2001.  M+C organizations 
only had to submit a one-page summary on July 2, 2001 and this was 
not binding on the organization. CMS announced this extension in 
order to give organizations more time to gather data for forecasting 
costs.  As part of the Public Health Security and Bioterrorism 
Preparedness and Response Act (P.L. 107-188) Congress legislated the 
deadline change for 2002, and further, set the deadline for 2003 and 
2004 at no later than the second Monday in September.  Under current 
law, the deadline will return to July 1st of each year, beginning in 
2005.
	Under Medicare's rules, a plan may not earn a higher return 
from its Medicare business than it does in the commercial market. 
The Secretary reviews this information and approves or disapproves 
the premiums, cost-sharing amounts, and benefits. The Secretary does 
not have the authority to review the premiums for either MSA plans 
or private fee-for-service plans. Beginning May 1, 2001 ACR 
submissions are reviewed by the CMS Chief Actuary.

	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 provide either 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./23/ Additionally, beginning in 2003, plans also may 
reduce the Medicare Part B premium./24/  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./25/ Plans may also place the additional funds in a 
stabilization fund or return funds to the Treasury. 

ADDITIONAL OR SUPPLEMENTAL BENEFITS

	Nearly all plans offer some benefits to enrollees beyond 
those in traditional Medicare (Chart E-6).  For example, in 2002, 
about 87 percent of M+C enrollees were offered vision care as 
part of their lowest premium package, 100 percent were offered 
routine physicals, and about 72 percent were offered some coverage 
of prescription (outpatient) drugs.  Hearing care was offered to 
slightly more than half of all enrollees.  Other services offered 
included preventive dental care, podiatry, and chiropractic services. 
While plans may offer even more services, those shown in Chart E-6 
are the most frequently offered benefits. Chart E-6 shows that the 
percent of enrollees offered these benefits has declined for all 
services, except routine physicals between 1999 and 2002. However, 
this figure does not show how the generosity of benefits or the 
level of cost sharing may have declined over the time period.  

	TABLE E-11--M+C ENROLLEES WITH DRUG COVERAGE IN 
A BASIC PLAN, 1999-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

COVERAGE FOR PRESCRIPTION DRUGS

	One of the advantages of Medicare managed care, over 
traditional fee-for-service Medicare, is that most plans include some 
outpatient prescription drug coverage. However, according to CMS data, 
currently fewer enrollees have M+C prescription drug coverage and 
among those with coverage, the drug benefit has become less generous 
over time. As shown in Table E-11, about 84 percent of enrollees had 
prescription drug coverage through a basic plan in 1999, declining to 
about 69 percent by 2003.  Plans are simultaneously decreasing the 
amount of covered drug spending while also increasing out-of-pocket 
costs.  As shown in Table E-12, very few plans had no limits  
(1.4 percent) on drug benefits in 2003 and an increasing number of 
plans set annual benefit limits at $500 or less (10.6 percent of 
plans in 1999 compared to 53.4 percent of plans in 2003).
	As shown in Table E-13, almost all plans required some level 
of copayment for prescription drug coverage in 2003 and the copayment 
amount has increased over time.  About 92 percent of beneficiaries 
were offered plans with copayments of $10 or less (including no 
copayments) for generic drugs in 1999, compared to 77 percent in 
20030.  For brand name drugs, the percentage of enrollees with 
increased required copayment amounts over time has been even greater.  
In 1999, 14 percent of enrollees paid more than a $20 copay for 
brand name drugs, compared to over 73 percent in 2003.

TABLE E-12--PERCENT OF ENROLLEES WITH AN ANNUAL DRUG 
CAP IN BASIC M+C PLANS, WEIGHTED BY ENROLLMENT, 1999-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

TABLE E-13--PERCENT OF M+C ENROLLEES BY PRESCRIPTION 
DRUG CO-PAYMENTS, WEIGHTED BY ENROLLMENT, 1999-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

MEDICARE+CHOICE PREMIUMS

	In addition to the Part B premium, 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.  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, requiring 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.

CHART E-6--PERCENT OF M+C ENROLLEES OFFERED BENEFITS 
BEYOND TRADITIONAL MEDICARE COVERED SERVICES, IN THE 
LOWEST PREMIUM PACKAGE AVAILABLE 1999 AND 2002

 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

 	 Between 1999 and 2003, the percentage of beneficiaries 
nationally with access to a zero premium plan has declined. As shown 
in Table E-14, the availability of these plans nationally dropped in 
half, from over 60 percent to just under 30 percent. Although, the 
data for urban and rural areas were available only through 2001, the 
trend seems to indicate that the impact on rural areas was even 
greater, especially since these individuals had fewer opportunities 
for enrolling in the M+C program and fewer choices among plans.

TABLE E-14--PERCENT OF MEDICARE BENEFICIARIES WITH ACCESS TO A 
ZERO-PREMIUM M+C PLAN, BY AREA, 1999-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

	Table E-15 shows the distribution of M+C enrollees by the 
monthly premium amount.  Between 2000 and 2003, the percent of 
enrollees in zero premium plans declined significantly, so that the 
majority of Medicare enrollees were no longer enrolled in zero 
premium plans.  At the same time, the percent of enrollees paying 
over $50 in monthly premiums increased from 7 percent to 35 percent.  
In 2003, 0.2 percent of all M+C beneficiaries (or 9,129 individuals) 
were enrolled in plans that reduced their monthly Part B premium, 
while 4.2 percent of all beneficiaries had access to such a plan.  
For comparison, a recent study (see http://caregivers-usa.org/news/weiss--medigap.html) found that average Medigap premiums ranged 
widely, with the national average Medigap premium rate in 2003 for 
a 65-year-old female for all plans being $1,412, or nearly $120 per 
month.

BENEFICIARY PROTECTIONS

	The M+C program includes requirements designed to limit 
beneficiaries' financial liability and to assure beneficiaries of 
certain rights and remedies. Beneficiary protections or rights 
include established beneficiary liability standards, quality 
standards, information and disclosure requirements, a grievance 
and appeals process, and access to services.

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). Cost sharing per enrollee (including premiums) 
for covered services cannot be more than the actuarial value of the 
deductibles, coinsurance, and copayments under traditional Medicare 
(Table E-16). However, while the total of cost sharing is limited, 
the plan may set different amounts for specific services, such as a 
lower (or higher) deductible for hospital inpatient services or 
skilled nursing care services. Enrollees in an M+C coordinated care 
plan cannot be charged additional balanced billing amounts by any 
providers./26/
	The rules for private fee-for-service (PFFS) plans and PPO 
demonstration plans are different (Table E-16). 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./27/ In contrast to traditional Medicare, this privilege 
extends to all categories of providers, including hospitals. For 
the PPO demonstration project, the terms of each individual 
demonstration proposal specify if, and to what extent, providers 
may balance bill.

QUALITY STANDARDS

	M+C plans must have a quality assurance program focused on 
outcomes for services it provides to enrollees. M+C regulations 
established guidelines for organizations to examine the continuity 
and coordination of care. These quality standards focus on items 
such as high volume, high risk, acute care and chronic care services.  
The program must provide the Secretary with information to monitor 
and evaluate the plan's quality. Only certain M+C plans (not PFFS, 
PPOs, and PPO demonstration plans if so specified in their proposal) 
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 overutilization.
	Additionally, most Medicare+Choice organizations are subject 
to external review for both the quality of their service and their 
response to written complaints about poor quality of care. M+C plans 
may use Peer Review Organizations (PROs), which also are used for 
these functions in traditional fee-for-service Medicare. Private 
fee-for-service plans and PPO Demonstration Plans (if specified in 
their proposal) that do not have utilization review programs are 
exempt from this requirement.
	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 requirements (except in the case of complaints about quality) 
for organizations with an excellent record of quality and compliance 
with other Medicare+Choice requirements. Plans may be 

TABLE E-15--DISTRIBUTION OF M+C ENROLLEES, BY BASIC PREMIUM LEVELS, 
2000-2003

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

deemed to have met all these requirements if they are accredited by 
an organization approved by the Secretary, according to statutory 
requirements.

INFORMATION AND DISCLOSURE REQUIREMENTS

	The M+C program requires the Secretary to provide for 
activities to disseminate certain information to Medicare 
beneficiaries so that they may make informed choices about their 
Medicare coverage. This information includes notice of an open 
season, a list of plans and plan options, a general description 
of the benefits covered under traditional Medicare, a description of 
grievance and appeals procedures, and comparative plan information 
(such as benefits, premiums, service area, and quality and 
performance indicators).
	When an M+C organization terminates its contract with CMS, 
it must provide and pay for advance written notice to each of its 
enrollees, along with a description of alternatives for obtaining 
benefits.  
	Further, M+C organizations must disclose to each enrollee (at 
time or enrollment and at least annually) information on their 
service area, benefits, the number, mix, and distribution of 
providers, out-of-area coverage, emergency coverage, supplemental 
benefits, prior authorization rules, plan grievance and appeals 
procedures, and the quality assurance program. Other information is 
available upon request, such as information on procedures used by the 
organization to control utilization of services and expenditures.

	GRIEVANCES AND APPEALS

	An M+C organization must have 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. A denial of coverage explanation must 
state the reasons for the denial, in understandable language, and 
also must provide information about the reconsideration and appeal 
processes.
	An enrollee may request a 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.  M+C organizations must 
expedite a physician's request for a determination or 
reconsideration, if the physician indicates that the normal time 
frame could seriously jeopardize the life or health of the enrollee 
or the enrollee's ability to regain maximum function.

ACCESS TO SERVICES

	Each plan must make benefits available and accessible to its 
enrollees within the service area with reasonable promptness, and 
must ensure continuity in providing benefits. This care must be 
available, when necessary, 24-hours 7 days per week.

Coverage of emergency services for emergency medical conditions is 
subject to 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 woman, her health or that 
of her unborn child); 2) serious impairment to bodily functions; or 
3) serious dysfunction of any bodily organ or part. M+C organizations 
are financially responsible for emergency and urgently needed 
services.  There is no prior authorization requirement for these 
services and no requirement that services must be obtained within 
the M+C organization. Further, the physician treating the enrollee 
must decide when the enrollee may be considered stabilized for 
transfer or discharge. That decision is binding on the M+C 
organization.

CURRENT PROGRAM STANDARDS AND CONTRACT REQUIREMENTS

MINIMUM ENROLLMENT STANDARDS

	Contracts between M+C organizations and CMS are made for at 
least 1 year and are automatically renewable, unless either party 
gives notice to terminate the contract.  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.  These minimum requirements may 
be waived during the first 3 years of the contract, if the 
organization can demonstrate to CMS that it can administer and 
manage an M+C contract and also manage the level or risk required 
under the contract.

 STATE PREEMPTION

	Federal standards for M+C plans preempt any inconsistent 
state law or regulation with respect to:  1) benefit requirements - 
including cost-sharing requirements or summaries and schedules of 
benefits; 2) requirements relating to inclusion or treatment by 
providers; 3) coverage determinations - including related appeals 
and grievance processes; and 4) marketing materials. No premium, 
tax, fee, or other similar assessment may be imposed on a plan by 
any State.

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. A Medicare+Choice organization must assume 
full risk for Medicare benefits on a prospective basis.  However, 
this doesn't preclude an organization from obtaining insurance or 
making other arrangements to cover certain costs, such as medically 
necessary services provided by non-network providers and part of the 
costs exceeding its income.  The organization also may make 
arrangements with providers to assume some or all of the financial 
risk for covered benefits they provide; however, PFFS organizations 
cannot put providers at risk.

PROVIDER PROTECTIONS AND REQUIREMENTS 

	Each M+C organization (other than a PFFS) must establish 
physician participation procedures that provide:  1) notice of the 
participation rules; 2) written notice of adverse participation 
decisions; and 3) a process for appealing adverse decisions. The 
organization must consult with contracting physicians regarding the 
organization's medical policy, quality, and medical management 
procedures.  
	Although plans may include providers only to the extent 
necessary to meet the needs of their enrollees, they cannot 
discriminate with respect to providers who are acting within the 
scope of their license or certification under applicable state law, 
solely on the basis of such license or certification. Restricting 
communications between providers and their patients (a gag clause) 
is prohibited.  The use of physician financial incentive plans, 
(compensation arrangements between organizations and individual or 
groups of physicians that may reduce or limit services) is also 
limited. 

PROTECTIONS AGAINST FRAUD

	M+C organizations also must comply with disclosure and 
notification requirements.  They must report financial information 
to the Secretary covering ownership, transactions between the 
organization and parties in interest, and evidence that they are 
fiscally sound.
	The Secretary must conduct annual audits of the financial 
records of at least one-third of the M+C organizations (including 
data relating to utilization, costs, and computation of the adjusted 
community rate).  In addition, the Secretary has the right to examine 
the quality, appropriateness, timeliness of services, ability to bear 
risk of a plan, as well as the organization's facilities, if 

TABLE E-16--BENEFICIARY COST SHARING AND PROVIDER REIMBURSEMENT 
UNDER MEDICARE+CHOICE PLANS FOR BASIC BENEFIT PACKAGE

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

there is reasonable evidence of need for such inspection. M+C 
organizations must notify the Secretary of loans and other special 
financial arrangements made with subcontractors, affiliates, and 
related parties.

SANCTIONS AND TERMINATIONS OF CONTRACTS

	In certain circumstances, such as a plan that fails to carry 
out its contract, the Secretary may impose civil monetary penalties, 
temporary suspension of enrollment or even termination of a contract. 
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 in 
excess of those allowed; 3) acts to expel or refuses to reenroll an 
individual in violation of stated 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; 7) employs or contracts with any individual 
or entity that has been excluded from participation in Medicare; or 
8) terminates its contract other than at an appropriate time after 
providing appropriate notice.

MEDICARE+CHOICE OPTIONS

	In addition to the coordinated care plans typically 
associated with managed care, the M+C program offers a variety of 
optional arrangements, either through a standard program arrangement 
or on a demonstration basis.

PRIVATE FEE-FOR-SERVICE PLANS

	Private fee-for-service (PFFS) plans are one of the new types 
of private plans available to Medicare beneficiaries as a result of 
the Balanced Budget Act of 1997./28/ A PFFS plan has three defining 
characteristics that distinguish it from other Medicare+Choice 
options: 1) it allows any provider to participate who is both 
lawfully authorized to serve Medicare beneficiaries and who accepts 
the plan's terms of payment; 2) it pays providers at a rate 
determined on a fee-for-service basis without placing providers at 
financial risk; and 3) it does not vary payment rates based on how 
often a particular service is provided.
	PFFS plans, like traditional Medicare, allow providers to 
deliver medical care without joining a network.  Providers are paid 
on a fee-for-service basis so they do not accept financial risk or 
reduced payments and, they do no face incentives to either limit 
services or limit referrals to specialists. Providers under PFFS 
plans may bill enrollees up to 15 percent more than the plan's 
allowable rate, while providers in other types of M+C plans may not 
"balance bill."/29/ Moreover, PFFS plans have fewer restrictions on 
balance billing than traditional fee-for-service Medicare. Unlike 
Medicare providers; however, PFFS providers can lose reimbursements 
if the PFFS plan becomes insolvent.
	Beneficiaries choosing a PFFS plan can choose any provider 
who is willing to provide services and who accepts the PFFS plan's 
terms of payment. The beneficiary must inform the provider of his 
or her enrollment in the PFFS plan.  The PFFS plan may offer
additional benefits beyond those covered under traditional Medicare, 
but also may charge an additional premium for these services. If 
providers choose not to accept a PFFS plan, beneficiary choice 
would be limited, much as it would be under a network.
	Currently, Sterling Life Insurance Company and Humana Inc. 
offer the only Medicare PFFS plans./30/ They operate in 27 
States,/31/ 
over half of all United States counties, and are available to about 
37 percent of all Medicare beneficiaries.  Sterling and Humana 
primarily serve rural counties that previously did not have a M+C 
option.  Possible reasons for serving those areas are: 1) on average, 
Medicare+Choice rates are higher than the average cost of traditional 
Medicare in those counties; 2) an organization receives a bonus  
(5 percent the first year and 3 percent the second year/32/) for 
serving counties not served by any other Medicare+Choice plan; 3) 
PFFS does not require a network of providers, which is difficult to 
assemble in rural areas; and 4) for Sterling, its parent company has 
specialized in serving rural areas.  Both organizations pay providers 
the same rate they would receive from traditional Medicare, and 
prohibit balance billing.
	Sterling provides very few additional benefits beyond the 
required Medicare benefit package.  It provides worldwide emergency 
hospital care, but does not provide coverage for outpatient 
prescription drugs, eye exams, hearing aids, or glasses. For 2003, 
Sterling enrollees must pay between $88 and $108 in monthly premiums 
depending on where they live, in addition to the standard Medicare 
Part B premium of $58.70.  Humana provides a limited drug benefit 
under one of its plans, but few additional benefits. Humana enrollees 
pay $19 in monthly premiums, except for those in DuPage, Illinois who 
pay $89 per month, in addition to the Part B premium. Humana 
enrollees have an out-of-pocket limit of $5,000. PFFS enrollees might 
experience lower (or higher) cost sharing under either Sterling and 
Humana than under fee-for-service Medicare, depending on the exact 
quantity and mix of services that they use.
	As of March 2003, approximately 21,000 of the over 14 million 
Medicare beneficiaries who had access to a PFFS plan chose to enroll 
in one. Though most of the 27 States served by a PFFS plan have 
received some enrollment, the highest proportion of enrollees live 
in Louisiana (16 percent), Texas  (15 percent), Washington (13 
percent), Illinois (9 percent), and Pennsylvania  (8 percent). About 
two-thirds of PFFS enrollees did not have a choice of another 
Medicare+Choice plan. 
   	As PFFS plans have been available only since July 2000, it 
will take some more time to determine:  1) their ability and desire 
to remain in the M+C program; 2) the impact of these kinds of plans 
on beneficiary and provider satisfaction; and 3) the relative cost of 
PFFS plans compared to other M+C options as well as fee-for-service.

PREFERRED PROVIDER ORGANIZATION DEMONSTRATION

	On April 15, 2002, CMS announced a 3-year Preferred Provider 
Organization (PPO) demonstration project within the M+C program. A 
PPO is a type of managed care plan arrangement under which insurers 
contract with doctors and hospitals who agree to provide their 
services on a fee-for-service basis at negotiated rates which are 
lower than those charged to non-enrollees. PPOs are not a new option 
for the M+C program as they have been able to serve beneficiaries 
since the passage of BBA.  However, in 2003, only three PPOs 
participate in the M+C program. The PPO demonstration differs from 
standard PPOs in that it is designed to test whether or not changes 
in payment rates, risk sharing, and administrative requirements will 
encourage greater plan participation./33/ First, while PPO plans 
outside of the demonstration are paid under the regular M+C payment 
system, plans in the PPO demonstration are paid the largest of either 
the M+C payment rate, or 99 percent of per capita fee-for-service in 
the county (excluding all graduate medical education expenditures).  
Second, non-demonstration PPO plans are at full financial risk for 
higher-than-expected medical costs accrued by their enrollees. Plans 
in the PPO demonstration have the option of sharing financial risk 
with CMS, according to a risk-sharing agreements which may vary from 
plan to plan. A risk-sharing agreement defines a target medical loss 
ratio, or the percent of revenue devoted to providing medical 
services. Plans are at financial risk if their actual medical loss 
ratio is 2 percentage points above or below the target. Beyond 
2 percentage points, CMS and the plan share the risk according to 
their agreement, though CMS is never at risk for more than 80 percent 
of the amount beyond 2 percentage points from the target. The risk-
sharing agreements are symmetrical, so if the actual medical loss 
ratio is less than 2 percentage points from the target, CMS shares 
in the excess profit, and if it is more than 2 percentage points 
from the target, CMS shares in the additional costs. The third 
difference between a PPO within and outside of the demonstration 
pertains to quality assurance requirements.  PPOs outside of the 
demonstration must comply with the same quality assurance 
requirements as health maintenance organizations (HMOs). PPOs in the 
demonstration, however, may comply with the "less prescriptive 
quality requirements" required of private fee-for-service plans./34/ 
The higher payment rate, the risk sharing agreements, and the 
decreased quality assurance requirements may encourage greater plan 
participation, though to what extent it will encourage participation 
is uncertain.  
	PPOs participating in the demonstration must offer 
beneficiaries the standard Medicare fee-for-service benefits, and 
they may offer additional benefits such as prescription drugs. CMS 
expects the monthly premium and cost sharing of the demonstration 
plans to be higher than those of M+C HMOs, but less than the 
premiums of Medicare supplemental insurance policies. Beneficiaries 
enrolled in a PPO may seek care from any provider, though they have 
a financial incentive to use doctors and hospitals in the PPO's 
network. For some beneficiaries, the additional benefits (if offered) 
and greater provider choice may be worth the higher cost sharing 
required under the demonstration plans.
	In 2003, PPO demonstration plans are offered by 17 
organizations in  23 States, with an enrollment of 56,667 as of 
March 2003 - the first 3 months of the program.  Approximately 11 
million beneficiaries in 243 counties have access to one of the 
demonstrations, of which about 2.2 million already are enrolled in a 
Medicare+Choice plan.  The organizations offering the PPO 
demonstrations have chosen to offer them primarily in areas that 
already are being served by M+C organizations, possibly to capitalize 
on their existing provider networks, or because of favorable market 
conditions.  Only 4 percent of beneficiaries in the PPO demonstration 
service area do not have another M+C option. 
	For 80 percent of counties served by a PPO demonstration in 
2003, the M+C payment rate is higher than 99 percent of fee-for-
service expenditures in the county, thus plan payment rates will be 
based on the M+C rate./35/ PPO demonstration plans serving the 
remaining 20 percent of counties will be paid the 99 percent of FFS 
rate, which is higher than the M+C rate.

REASONABLE COST CONTRACTS

	The BBA included provisions to phase out the reasonable cost 
contracts. Cost-based contracts are paid on the basis of the 
reasonable cost actually incurred to provide Medicare covered 
services to enrollees.  Reasonable cost contract plans are paid a 
monthly interim per capita rate for each Medicare enrollee. Total 
monthly payments are determined by multiplying the interim per 
capita rate by the number of the enrollees, plus or minus adjustments 
made by CMS. Further adjustments may be made at the end of the 
contract period to reconcile interim payments with reimbursement 
amounts payable for services furnished to Medicare enrollees 
during that period.  Since the passage of BBA, the contracts have 
been extended and currently, the Secretary cannot extend or renew 
a reasonable cost reimbursement contract for any period beyond 
December 31, 2004. As of March 2003, there were over 334,000 
Medicare enrollees in cost contract plans.
	A Health Care Prepayment Plan (HCPP) is another type of 
managed care arrangement created prior to the BBA.  HCPPs cover only 
Part B services of Medicare.  HCPPs are a specific type of cost-based 
plan which is either  1) sponsored by a union or an employer, or 2) 
does not provide or arrange for the provision of any inpatient 
hospital services.  HCPPs are responsible for the organization, 
financing, and delivery of covered Part B services on a prepayment 
basis./36/ In March 2003, 15 HCPPs provided Part B services to 
101,728 enrollees.

PROGRAM FOR ALL INCLUSIVE CARE OF THE ELDERLY (PACE)

	The Program of All-Inclusive Care for the Elderly (PACE) was 
created as a demonstration project in Omnibus Budget Reconciliation 
Act (OBRA) of 1986.  The Secretary was required to grant waivers of 
certain Medicare and Medicaid requirements to community-based 
organizations to provide health and long-term care services on a 
capitated basis to frail elderly persons at risk of being 
institutionalized.  BBA made PACE a permanent part of Medicare and 
a State option for the Medicaid program. 
	The PACE model was developed to address the needs of long-
term care clients, providers, and payers.  PACE providers receive 
monthly Medicare and Medicaid capitation payments for each eligible 
enrollee.  The Medicare portion of the provider payment is based on 
the M+C capitation rate with a frailty adjuster.  PACE providers 
assume full financial risk for participants' care, without limits 
on amount, duration, or scope of services.  As of March 2003, there 
were about 2,000 Medicare enrollees in PACE plans.  

SOCIAL HEALTH MAINTENANCE ORGANIZATION DEMONSTRATION

	The Deficit Reduction Act of 1984 established a 3-year Social 
Health Maintenance Organizations (SHMO) demonstration to provide 
prepaid, capitated payments for integrated health and long-term care 
services. Payments are based on adjustments to the M+C capitation 
rate. The demonstration has been extended several times.    

MEDICAL SAVINGS ACCOUNT DEMONSTRATION

	The Balanced Budget Act authorized a demonstration to test 
the feasibility of medical savings accounts for the Medicare program.  
The M+C option combined a health insurance plan with a large 
deductible and an M+C MSA. Contributions to an M+C MSA would be made 
annually from the enrollee's capitation rate after the plan's 
insurance premium had been paid. These contributions as well as 
account earnings would be exempt from taxes. Withdrawals used to pay 
unreimbursed enrollee medical expenses (that are deductible under the 
Internal Revenue Code) would not be taxed. New enrollments would be 
allowed after 2002 or after the number of enrollees reached 390,000. 
However, no private plans established an M+C MSA for Medicare 
beneficiaries before the deadline.

MEDICARE COMPETITIVE PRICING DEMONSTRATION

	Under its demonstration authority, CMS attempted to initiate 
a project to determine if negotiated rates could increase the 
efficiency and economy of providing Medicare services through 
coordinated care plans.  CMS's initial plan called for the 
application of competitive bidding as a method for establishing 
payments for risk contract HMOs in either the Baltimore or the 
Denver area. Through a combination of court and legislative 
decisions, these demonstrations have been terminated.
	The Balanced Budget Act of 1997 required the Secretary of HHS 
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 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. The first
two sites chosen were Phoenix, Arizona, and Kansas City, 
Kansas/Kansas City, Missouri.	However, both the BBRA and the 
Consolidated Appropriations Act of 2000 altered the terms of this 
demonstration.  The Appropriation Act disallowed any funding of 
the demonstration for 2000 in Arizona and parts of Kansas and 
Missouri.  The BBRA delayed implementation of the project until 
January 1, 2002 or, if later, 6 months after CPAC submits reports 
on:  1) incorporating original fee-for-service Medicare into the 
demonstration; 2) quality activities required by participating 
plans; 3) the viability of expanding the demonstration project 
to a rural site; and 4) the nature of the benefit structure 
required from plans that participate in the demonstration. The 
Secretary also is required (subject to CPAC recommendations) to allow 
plans that make bids below the established government contribution 
rate to offer beneficiaries Part B premium rebates.
	CPAC submitted its report to Congress in January 2001. In its 
report, CPAC highlighted several lessons learned from the competitive 
bidding demonstrations.  Though the demonstrations never were 
implemented, CPAC noted that the preliminary stages were completed 
expeditiously and without administrative difficulties.  The latest 
round of demonstrations showed how benefits could be standardized 
under competitive bidding, particularly a prescription drug benefit.   
Area Advisory Committees (AAC) for each area helped to develop a 
standardized benefit which reflected local market characteristics 
and the views of the various stakeholders.  However, according to 
CPAC, the proposed demonstration project underestimated the 
importance of educating and communicating with health plans, health 
care providers, and other stakeholders.  Further, because the 
demonstrations never were implemented, they did not provide 
information about whether competitive bidding would result in more 
efficient Medicare+Choice payments./37/

1  For a more detailed analysis of PFFS plans see CRS Report RL31122, 
Medicare+Choice: Private Fee-for-Service Plans, by Paulette Morgan 
and Madeleine Smith.

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

3 The BBA changed the designation of "plans", beginning in 1999. The 
old definition of "plans" is now referred to as "contracts" and each 
contract may include several different "plans". In Mar. 2003 there 
were about 442 plans available through 146 M+C contracts. For 
example, the M+C organization may offer one plan providing only the 
basic Medicare-covered benefits and other plans that also include 
optional supplemental benefits.

4  M+C organizations can vary premiums, benefits, and cost-sharing 
across individuals enrolled in a plan, so long as these are uniform 
within segments of a service area.  A segment is defined as one or 
more counties within the plan's service area.

5  Prior to the passage of the Public Health Security and Bioterrorism 
Preparedness and Response Act (P.L. 107-188), individuals were able to 
make and change elections on an ongoing basis only through 2002.

6  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.

7  Prior to enactment of the BBA, payments for care of Medicare 
beneficiaries in risk health maintenance organizations (HMOs) were 
based on the adjusted average per capita costs (AAPCC). The AAPCC 
represented a monthly payment to cover the cost of treatment in a 
Medicare risk HMO. It was calculated according to a complex formula 
based on the cost of providing Medicare benefits to beneficiaries in 
the fee-for-service portion of the Medicare program. The per capita 
payment was set at 95 percent of the AAPCC, and was adjusted for 
certain demographic characteristics of HMO enrollees. Payments based 
on the AAPCC varied widely across the country.  In addition, county 
payments fluctuated year to year.

8  A state may request a geographic adjustment to a payment area to 
establish a single statewide M+C area, a metropolitan based system, 
or the consolidation into a single area of noncontiguous counties.  
For disabled and ESRD beneficiaries, payment rates are set using a 
similar method as that for aged beneficiaries, except that ESRD rates 
are calculated on a statewide basis. Beginning in January 2002, 
BIPA required that the Secretary increase the M+C payment rates for 
enrollees with ESRD to reflect the demonstration rate (including the 
risk-adjustment methodology) of social health maintenance 
organizations' (SHMO) ESRD capitation demonstrations. The revised 
rates increased the base rate by 3 percent and also included 
adjustments for age and sex factors.  Beginning January 2005, CMS 
plans to incorporate M+C enrollees with ESRD into the new risk 
adjustment model (using a ESRD specific version of the model) in an 
effort to further align payments with the method used in the ESRD 
SHMO demonstration.

9  Medicare pays for both the direct and indirect costs of GME. 
Direct payments include payment for expenses such as salaries of 
residents, interns, and faculty. The indirect adjustment accounts for 
factors not directly related to education which may increase the 
costs in teaching hospitals, such as more severely ill patients and 
increased testing.

10 Generally, increases in M+C payments are effective on January 1 
of each year.  However, the changes resulting from BIPA were 
effective on March 1, 2001.  As a result, M+C plans were paid at a 
pre-BIPA rate for January and February of 2001, and then beginning in 
March the new rates went into effect.  In future years, increases are 
effective on January 1.

11  See discussion of national growth percentage for an explanation 
of how the adjustment for prior year's errors actually lowers the 
floor payments in 2003.

12   M+C payments for five of these counties were set at the lower 
floor rate in 2002, while payments for the sixth county were set at 
the minimum update rate in 2002.  Regardless of their actual 2002 
payment amount,  the high floor amount yields the highest M+C payment 
for each of these six counties in 2003.

13  If the Secretary determines that a change in the Medicare covered 
benefits would result in a significant increase in cost to M+C plans, 
the Secretary is required to adjust appropriately the M+C payments to 
reflect this greater cost.  In 2004, an adjustment of 0.2 percent 
will be added to M+C payments to account for changes in Medicare 
coverage.  The 0.2 percent adjustment will result in a 2.2 percent 
increase above the 2003 payment for counties receiving the minimum 
percentage increase payment in 2004.

14  DSH payments are a payment adjustment for the higher costs that 
hospitals incur as a result of serving a large number of low income 
patients. 

15  Because BIPA increased M+C payments beginning in March 2001, CMS 
calculated a revised national growth  percentage of 4.9 percent for 
2002 to be applied to these new BIPA payment levels. The difference 
between the revised national growth percentage increase and the 
original increase is the 3.2 percent increase for BIPA adjustments.  
It was not necessary to include this 3.2 percent adjustment in the 
revised increase, as it was already reflected in the Mar. 1, 2001 
payment levels.16  Because BIPA reset the floor payments in 2001, 
adjustments will only be made for prior year errors occurring in 
2002 and beyond.

17  Sterling qualified for a bonus in some of the counties located 
in Alaska, Arizona, Iowa, Illinois, Montana, Oklahoma, Pennsylvania, 
South Carolina and Washington State. (For a more detailed discussion 
of Medicare private fee-for-service plans, See CRS Report, RL31122, 
Medicare+Choice Private Fee-for-Service Plans, by Paulette Morgan 
and Madeleine Smith.) 

18 In a March 1999 report to Congress, CMS calculated that the 
PIP-DCG model offered a substantial improvement in explaining 
variations in health spending over the demographic risk adjustment 
model.  The demographic adjuster model was 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.  According to CMS, the new CMS-HCC model 
described below is estimated to explain approximately 9.8 percent of 
the variation in health care spending among individuals.

19 This payment adjustment is different from CMS's initiative for 
the "Extra Payment in Recognition of the Costs of Successful 
Outpatient Congestive Heart Failure Care."

20 On May 25, 2001 CMS announced that M+C organizations would not 
be required to submit hospital outpatient or physician encounter 
data for dates of service prior to July 1, 2002. Data collection 
requirements and procedures were revised to reduce administrative 
burden, and data collection began in July 2002.  Data collected 
between July 1, 2002 and June 30, 2003 will be used to calculate 
risk adjustment factors for CY2004 M+C payments.

21 Separate adjustment factors are listed for certain combinations 
of conditions, such as diabetes and congestive heart failure, 
because the cost of treating a beneficiary with the combination is 
greater than could be accounted for by the sum of the two separate 
risk adjustment factors.

22 If a beneficiary's illness progresses within a disease process, 
such as diabetes with increasing severity, only the most costly 
diagnosis made for the beneficiary will be applied to the payment 
rate.

23  Alternatively, under the ACR process, plans also may charge a 
premium if they demonstrate higher "costs", rather than "savings" 
for providing the basic benefit package. For the basic benefit 
package and any required additional services in an M+C plan, the 
beneficiary premium and actuarial value of the deductibles, 
coinsurance, and copayments on average to enrolled individuals may 
not exceed the actuarial value of the deductibles, coinsurance, and 
copayments that would be applicable on average to individuals 
entitled to Part A and enrolled under Part B if they were not in an 
M+C plan.
24  All M+C enrollees (as well as FFS 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 2000, $50 for 2001, $54 for 
2002 and $58.70 for 2003.  Beginning in 2003, an M+C organization may 
elect to reduce its M+C payment up to 125 percent of the annual 
Part B premium.  However, only 80 percent of this amount can be used 
to reduce an enrollee's actual Part B premium.  This has the effect 
of returning up to 100 percent of the beneficiary's Part B premium.  
The reduction applies uniformly to each enrollee in the plan. Plans 
must include information about Part B premium reductions as part of 
the required information that is provided to enrollees for comparing 
plan options.

25 Plans may also offer extra benefits beyond the "additional" 
benefits required to spend the "savings" calculated in the ACR 
process.  These extra benefits are referred to as "supplemental" 
benefits.  Plans are permitted to charge Medicare enrollees the 
expected cost of these supplemental benefits, plus the national 
average amount of beneficiary cost sharing for Medicare-covered 
services.  Plans can collect these payments through a combination of 
cost sharing and premiums, but the sum of the premiums and the 
actuarial value of the deductibles, coinsurance and copayments for 
such benefits may not exceed the adjusted community rate for these 
benefits.  Plans may choose to waive part or all of this allowable 
premium for all enrollees.

26 Coordinated care plans must pay a noncontracting provider at 
least the same amount they would have received if the enrollee was in 
traditional Medicare, including allowed balance billing amounts.  
A "contract provider" is a provider who enters into an explicit 
agreement with a plan establishing payment amounts for services 
rendered to the plan's enrollees.  A non-contracting provider also 
may provide services, but does not have an explicit agreement with 
the plan.

27 The two PFFS plans currently offered in the M+C program do not 
allow providers to balance bill.

28 For a more detailed analysis of PFFS plans, see CRS Report 
RL31122, Medicare+Choice: Private Fee-for-Service Plans, by 
Paulette Morgan and Madeleine Smith.

29 Both of the PFFS plans currently available to beneficiaries 
(Sterling and Humana) do not allow providers to balance bill 
enrollees.

30 Beneficiaries in Sterling's service area were able to enroll as of 
July 2000. Beneficiaries in Humana's service area were able to enroll 
as of January 2003. In addition to the two standard PFFS plans, there 
is also a PFFS demonstration plan available in 2003, with 1,748 
enrollees as of March 2003.

31 A PFFS plan is available to beneficiaries in all or part of the 
following States:  Alaska, Arizona, Arkansas (part), Delaware, Idaho, 
Illinois, Iowa, Kentucky, Louisiana (part), Minnesota, Montana (part), 
Nebraska, Nevada, New Mexico, North Dakota (part), Ohio (part), 
Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota (part), 
Tennessee (part), Texas (part), Utah, Washington, West Virginia (part), 
and Wisconsin.

32 While bonus payments may have been an incentive for PFFS plans in 
previous years, these bonus payments will no longer be available to 
plans beginning in 2004.

33  42 U.S.C. 1395b-1(a)(1)(A) grants the Secretary of Health and 
Human Services the authority to conduct demonstration projects to 
determine if changes in methods of payment would increase the 
efficiency and economy of health services.

34  Solicitation for Proposals for Medicare Preferred Provider 
Organization (PPO) Demonstrations in the Medicare+Choice program 
[CMS-4042-N].

35 Information on FFS expenditures per county can be found at
[http://www.cms.hhs.gov/healthplans/research/ppodemo.asp], last 
accessed March 31, 2003.

36 42 C.F.R. 417.800.  

37 For more information about Competitive Bidding, please see CRS 
Report RL31434 Medicare+Choice:  Using Competitive Bidding to 
Determine Payments, by Christopher J. Sroka.

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