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APPENDIX E – MEDICARE+CHOICE 

CONTENTS 

Introduction 

Overview of the Medicare+Choice Program 

 Current Status of the Medicare+Choice Program 

Trends in Medicare+Choice Plan/Contract Availability and Enrollment 

 Availability of Medicare Managed Care Plans/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 
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 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 
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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 providersponsored 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 feefor-service basis without placing the providers at any additional financial risk. It 

also does not vary rates based on utilization. Enrollees may see any Medicareapproved provider who agrees to furnish services under the plan’s terms and 

conditions of payment. 
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 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 

 

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. 
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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-forservice 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. 
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 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 

 

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.
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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 

Effective 

January 

1999 

Effective 

January 

2000 

Pre-BIPA 

Effective 

January 2001 

Effective 

January 

2002 

Effective 

January 

2003 

Terminations 45 41 65 22 9 

Service area reductions 54 58 53 36 24 

Number of enrollees before 

withdrawals 6,056,000 6,347,000 6,242,000 5,600,000 4,939,000 

Total enrollees affected 407,000 327,000 934,000 536,000 215,000 

Affected enrollees with no 

access to any plan 51,000 79,000 159,000 38,000 29,000 

Affected enrollees with 

access limited to PFFS plan NA NA NA 52,000 3,000 

Affected enrollees with 

access limited to 

Demonstration PPO plan 

NA NA NA NA 3,000 

Note: Enrollee counts rounded to the nearest thousand and enrollee count before January 2002 

withdrawals represents data from March 2003. 

NA – Not available. 

Source: Prepared by the Congressional Research Service (CRS) based on data from the CMS. 

 

 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 

0

50

100150200250300350400

1987 1989 1991 1993 1995 1997 1999 2001 2003

Year

Note: Medicare Managed Care plans include risk plans through 1998 and Medicare+Choice contracts beginning in 1999. 

Source: Prepared by the Congressional Research Service based on December CMS Medicare managed Care Contract (MCCC) Monthly Reports; 2003 data from March. 

Plans 
E-9 

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. 

 

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. 
E-10 

TABLE E-2 --COUNTIES WITH AND WITHOUT 

MEDICARE MANAGED CARE PLANS, 

SELECTED YEARS 1997-2003 

Existing plans in county No existing plans in county 

Year 

Number of 

counties % Number of counties % 

1997 740 24% 2,387 76% 

1999 896 29% 2,231 71% 

2000 1,095 35% 2,049 65% 

2001 636 20% 2,509 80% 

2002 575 18% 2,570 82% 

2003 549 17% 2,597 83% 

Note: Does not include PFFS plans, demonstration plans, cost plans, or plans serving Puerto Rico. 

Medicare managed care plans include risk plans through 1998 and M+C plans beginning in 1999. 

Source: MedPAC Computations based on CMS public data for 1997 and 1999; CRS analysis of 

CMS data for 2000-2003. 

TABLE E-3--PERCENT DISTRIBUTION OF 

MEDICARE BENEFICIARIES BY MANAGED CARE PLANS 

(AVAILABLE IN THEIR AREA, 1995-2003) 

Number of 

plans 

available 

June 

1995 

June 

1997 

December 

1999 

February 

2001 

February 

2002 

January 

2003 

None 45% 33% 28% 36% 39% 41% 

One 16% 9% 11% 12% 18% 19% 

Two to four 26% 24% 27% 37% 33% 30% 

Five or 

more 14% 34% 34% 14% 10% 10% 

Note: Does not include PFFS plans, demonstration or cost plans, or plans serving Puerto Rico. 

Medicare managed care plans include risk plans through 1998 and M+C plans beginning in 1999. 

Totals may not add due to rounding. 

Source: Prepared by CRS based on MedPAC Chart Book, July 1998, Chart 2-10, Mathematica 

analysis of CMS data for 1999, and CRS analysis of CMS data for 2001, 2002 and 2003. 
CHART E-2--PERCENT OF BENEFICIARIES ENROLLED IN MEDICARE MANAGED CARE PLANS, ACTUA

AND PROJECTED, SELECTED YEARS 1990-2013

0%2%4%6%8%

10%12%14%16%18%

1990 1992 1994 1996 1998 2000 2002 2008 2013 

Year 

Note: Medicare Managed Care Plans include risk plans through 1998 and Medicare+Choice plans beginning in 1999. 

Source: Prepared by CRS based on MedPAC Chart Book, October 1997, chapter 3. CMS, Medicare Managed Care Reports, December 1998, 

1999, 2000, 2001, 2002, 2003 and CBO March 2003 Baseline for projections for 2008 and 2013. 

Percent 
E-12 

ENROLLMENT PATTERNS IN URBAN AND RURAL LOCATIONS 

CHART E-3--PERCENT OF MEDICARE BENEFICIARIES AND 

MEDICARE+CHOICE ENROLLEES IN URBAN AND RURAL 

LOCATIONS, 2003 

 Percent

 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; 

0%

10%

20%

30%

40%

50%

60%

70%

Central Urban Other Urban Urban/Rural Fringe Other Rural

Medicare+Choice enrollees

Medicare beneficiaries

S db b d d Source: Prepared by CRS based on CMS data. 
E-13 

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. 
E-14 

CHART E-4--PERCENT IN VARIATION IN NUMBER OF 

MEDICARE+CHOICE PLANS AVAILABLE TO MEDICARE 

BENEFICIARIES IN URBAN AND RURAL LOCATIONS, 

JANUARY 2003 

 Percent 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 plans 1 plan 2 to 4 plans 5 or more plans

Central Urban

Other Urban

Urban-Rural Fringe

Other Rural

Source: Prepared by CRS based on CMS data from Medicare compare 

database. 
CHART E-5--PERCENT OF MEDICARE BENEFICIARIES ENROLLED IN MEDICARE+CHOICE

BY STATE, MARCH 2003 

Note- State numbers represent percents. Source: Prepared by CRS based on Medicare Managed Care Contract Reports, March 2003. 
E-16 

 

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 

Number of 

Contracts 

Percent of 

Contracts 

Number of 

Enrollees 

Percent of 

Enrollees 

Model 

 IPA 76 54 2,585,090 57 

 Group 55 39 1,482,730 33 

 Staff 11 8 474,595 10 

Ownership 

 Profit 96 66 2,635,306 57 

 Non Profit 49 34 1,960,335 43 

Source: Prepared by CRS based on CMS, Medicare Managed Care Contract Report, March 2003. 

TABLE E-4 --SHARES OF MEDICARE+CHOICE ENROLLMENT AND 

MEDICARE POPULATION RESIDING IN FOUR STATES, MARCH 2003

State % of Total M+C Enrollment % of Total Medicare Population 

California 28 10 

Florida 12 7 

Pennsylvania 10 5 

New York 9 7 

Total 59 30 

Note – Numbers may not add due to rounding 

Source: Prepared by CRS, based on CMS, Managed Care Contract Reports, March 2003. 
E-17 

 

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 

 

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. 
E-18 

 

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 

 

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. 
E-19 

 

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 

 

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 
E-20 

 

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 areaspecific 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 

 

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 
E-21 

 

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 

 

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. 
E-22 

 

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 preBIPA 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 

 

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. 
E-23 

 

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); 

 

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.) 
E-24 

 

 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 

 

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.
E-25 

 

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 

 

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.”
E-26 

 

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

Factor Rule established in BBA 97, BBRA 99, or BIPA 

Blend of local and 

national rates 

General: Transition over 6 years to 50-50 blend of local and national 

rates. National rates are adjusted for differences in input prices. 

1998 .....................90 percent local, 10 percent national 

1999 .....................82 percent local, 18 percent national 

2000 .....................74 percent local, 26 percent national 

2001 .....................66 percent local, 34 percent national 

2002 .....................58 percent local, 42 percent national 

2003 and after ......50 percent local, 50 percent national 

Minimum payment 

(“floor”) rate 

1998 ......................Minimum of $367 (or 150 percent of 1997 payment 

outside U.S.). 

1999 and after .......Previous year’s payment times annual percentage 

increase, except for 2001 when the amount was 

set in law ($380 for 1999, $402 for 2000, and 

$525/$475 for 2001-or 120 percent of 2000 

payment outside U.S., $553/$500 for 2002, 

$548/$495 for 2003 and $592/$536 for 2004.) 

Minimum percent 

increase 

1998 ......................102 percent of 1997 AAPCC payment rate 

1999 to 2000 .........102 percent of prior year’s rate 

2001 ......................103 percent of prior year’s rate 

2002 and after .......102 percent of prior year’s rate 

GME and DSH 

payments 

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

in equal increments over 5 years, fully phased in 

by 2002. DSH payments not excluded. 

Budget neutrality General..................Total M+C payments may not exceed what would 

have been spent if payments were entirely based 

on local rates (except no rate can be reduced 

below the floor or minimum). 

National growth 

percentage 

1998 ......................Increase in Medicare per capita expenditures 

(MPCE) minus 0.8 percentage points 

1999-2001.............Increase in MPCE minus 0.5 percentage points 

2002 ......................Increase in MPCE minus 0.3 percentage points 

2003 and after Increase in MPCE per capita expenditures 

Risk Adjustment 1998-1999.............100% demographic 

2000-2003.............10% health status 

2004 ......................30% inpatient and ambulatory, 70% demographic 

2005 ......................50% inpatient and ambulatory, 50% demographic 

2006 ......................75 inpatient and ambulatory, 25% demographic 

2007 and after .......100% inpatient and ambulatory 

Source: Congressional Research Services analysis of provisions in BBA, BBRA, and BIPA. 
E-27 

 

TABLE E-7--MEDICARE DEMOGRAPHIC-ONLY RISK ADJUSTMENT 

FACTORS FOR AGED BENEFICIARIES, 2003 

Part A - Hospital Insurance 

Non-institutional 

Gender and 

Age Group Institutional 

Medicaid Non-Medicaid Working aged 

Male 

65-69 1.75 1.15 0.65 0.40 

70-74 2.25 1.50 0.85 0.45 

75-79 2.25 1.95 1.05 0.70 

80-84 2.25 2.35 1.20 0.80 

85 and older 2.25 2.60 1.35 0.90 

Female 

65-69 1.45 0.80 0.55 0.35 

70-74 1.80 1.05 0.70 0.45 

75-79 2.10 1.45 0.85 0.55 

80-84 2.10 1.70 1.05 0.70 

85 and older 2.10 2.10 1.20 0.80 

Part B - Supplementary Medical Insurance 

Non-institutional 

Gender and 

Age Group Institutional 

Medicaid Non-Medicaid Working aged 

Male 

65-69 1.60 1.10 0.80 0.45 

70-74 1.80 1.35 0.95 0.65 

75-79 1.95 1.55 1.10 0.80 

80-84 1.95 1.70 1.15 0.90 

85 and over 1.95 1.70 1.15 1.00 

Female 

65-69 1.50 1.05 0.70 0.40 

70-74 1.65 1.15 0.85 0.55 

75-79 1.65 1.25 0.95 0.70 

80-84 1.65 1.25 0.95 0.75 

85 and over 1.65 1.25 1.00 0.85 

Note: Values indicate the multiplier used for a beneficiary with a particular set of characteristics; 

average beneficiary has a multiplier of 1.00. A separate set of risk adjusters is used for disabled 

beneficiaries under the age of 65. 

Source: Centers for Medicare and Medicaid Services. 
E-28 

 

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

PIP-DCG 29 

HIV/AIDS1................................................... .. Blood, Lymphatic Cancers/Neoplasms2

PIP-DCG 26 

Metastatic Cancer2 ....................................... .. Brain/Nervous System Cancer2

PIP-DCG 23 

Liver/Pancreas/Esophagus Cancer2 ............. .. End Stage Liver Disorders 

Cardio-Respiratory Failure and Shock ........ Decubitus and Chronic Skin Ulcers 

PIP-DCG 20 

Diabetes with Chronic Complications......... Coma and encephalopathy 

Aspiration Pneumonia.................................. Renal Failure/Nephritis 

PIP-DCG 18 

Cancer of Placenta/Ovary/Uterine Adnexa... Paralytic and Other Neurologic Disorders 

Blood/Immune Disorders............................. Gram-Negative/Staphylococcus Pneumonia 

PIP-DCG 16 

Chronic Obstructive Pulmonary Disease..... Mouth/Pharynx/Larynx/Other Respiratory Cancer2

Lung Cancer2

................................................ Cirrhosis, Other Liver Disorders 

Congestive Heart Failure ............................. Atherosclerosis of Major Vessel 

PIP-DCG 14 

Septicemia (Blood Poisoning)/Shock.......... Adrenal Gland, Metabolic Disorders 

Delirium/Hallucinations............................... Paranoia and Other Psychoses 

Anxiety Disorders ........................................ Personality Disorders 

Degenerative Neurologic Disorders ............ Spinal Cord Injury 

PIP-DCG 12 

Tuberculosis................................................. Pleural Effusion/Pneumothorax/Empyema 

Pulmonary Fibrosis and Bronchiectasis ...... Stomach, Small Bowel, Other Digestive Cancer2

Rectal Cancer2

.............................................. Cancer of Bladder, Kidney, Urinary Organs 

Benign Brain/Nervous System Neoplasm... Diabetes with Acute Complications/Hypoglycemia Coma 

Inflammatory Bowel Disease ...................... Drug/Alcohol Psychoses 

Bone/Joint Infections/Necrosis.................... Dementia 

Rheumatoid Arthritis and Connective Tissue 

Disease ......................................................... Major Depression/Manic and Depressive Disorders 

Epilepsy and Other Seizure Disorders......... Cerebral Hemorrhage 

Stroke ........................................................... Peripheral Vascular Disease 

PIP-DCG 11 

Gastrointestinal Hemorrhage ....................... Gastrointestinal Obstruction/Perforation 

Paroxysmal Ventricular Tachycardia .......... Bacterial Pneumonia 

Cellulitis and Bullous Skin Disorders 

PIP-DCG 10 

Colon Cancer2 .............................................. Schizophrenic Disorders 

Post-Myocardial Infarction.......................... Unstable Angina 

Vertebral Fracture Without Spinal Cord 

Injury............................................................ Kidney Infection Thromboembolic Vascular Disease 

PIP-DCG 9 

Other Cancers2 ............................................. Pancreatitis/Other Pancreatic Disorders 

Acute Myocardial Infarction........................ Transient Cerebral Ischemia 

Fractures of Skull/Face ................................ Pelvic Fracture 

Internal Injuries/Traumatic 

Amputations/Third Degree Burns ............... Hip Fracture 
E-29 

 

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

PIP-DCG 8 

Cancer of Uterus/Cervix/Female Genital 

Organs2

........................................................... Artificial Opening of Gastrointestinal Tract Status 

Valvular and Rheumatic Heart Disease......... Hypertension, Complicated 

Coronary Atherosclerosis .............................. Angina Pectoris 

Atrial Arrhythmia........................................... Precerebral Arterial Aneurysm 

Aortic and Other Arterial Aneurysm............. Asthma 

Brain Injury.................................................... Peptic Ulcer 

PIP-DCG 7 

Central Nervous System Infections ............... Abdominal Hernia, Complicated 

Alcohol/Drug Dependence 

PIP-DCG 6 

Cancer of Prostate/Testis/Male Genital 

Organs2

PIP-DCG 5 

Ongoing Pregnancy with Complications....... Ongoing Pregnancy with No or Minor Complications 

Breast Cancer2

 

PIP-DCG 4 

No or Excluded3

 Inpatient Admissions ......... Completed Pregnancy with Major Complications 

Miscarriage/Terminated Pregnancy............... Ectopic Pregnancy 

Completed Pregnancy with Complications ... Completed Pregnancy without Complications (Normal 

Delivery) 1

 Includes principal and secondary inpatient diagnosis of HIV/AIDS. 

2

 Includes principal diagnoses and secondary diagnoses when the principal diagnosis is chemotherapy. 

3

 Excluded admissions are for those conditions that would not be likely to (or could not) re-occur the 

following year, such as appendicitis or fractures of the lower limb. 

Source: Health Economics Research, Inc. 
E-30 

 

TABLE E-9--MEDICARE DEMOGRAPHIC AND HEALTH-STATUS BASED 

RISK ADJUSTMENT FACTORS, FOR AGED BENEFICIARIES WITH ONE OR 

MORE YEARS OF EXPERIENCE, 2003 

Demographic Adjusters Gender 

Age Base Previously disabled Medicaid 

65-69 0.541 0.415 0.440 

70-74 0.705 0.398 0.457 

75-79 0.907 0.334 0.461 

80-84 1.077 0.287 0.445 

85-89 1.258 0.237 0.404 

90-94 1.376 0.189 0.331 

Male 

95+ 1.357 0.141 0.242 

 

65-69 0.453 0.605 0.433 

70-74 0.588 0.576 0.440 

75-79 0.747 0.519 0.454 

80-84 0.918 0.415 0.423 

85-89 1.096 0.313 0.327 

90-94 1.162 0.232 0.231 

Female 

95+ 1.128 0.152 0.168 

 Health Status Adjusters 

 PIP-DCG group Factor 

29.......................................................................5.189 

26.......................................................................4.375 

23.......................................................................3.823 

20.......................................................................3.392 

18.......................................................................2.656 

16.......................................................................2.438 

14.......................................................................2.000 

12.......................................................................1.622 

11.......................................................................1.271 

10.......................................................................1.170 

9.........................................................................0.915 

8.........................................................................0.822 

7.........................................................................0.697 

6.........................................................................0.458 

5.........................................................................0.375 

Source: CMS 
E-31 

 

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

Reason for hospitalization (if any) in 2002

Factors None 

Kidney 

Infection 

(PIP-DCG 10) 

Lung Cancer 

(PIP-DCG 16) 

Medicare Part A 1.05 1.05 1.05 

Medicare Part B 1.10 1.10 1.10 

Total weighted adjustment 

(based on a weight of 56 

percent for Part A and 44 

percent for Part B) 

1.072 1.072 1.072 

 Adjusted monthly payment in selected counties

Richmond, NY $935 $935 $935 

Dade, FL $912 $912 $912 

Hennepin, MN $605 $605 $605 

Arthur, NE $547 $547 $547 
E-32 

 

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

 Reason for hospitalization (if any) in 2002

Factors None Kidney infection

 (PIP-DCG 10) 

Lung cancer 

 (PIP-DCG 16) 

 Old method 

(demographic) 1.072 1.072 1.072 

Current method (healthstatus) 0.907 2.077 3.345 

 Adjusted monthly payment in selected counties

Richmond, NY $921 $1,023 $1,134 

Dade, FL $898 $998 $1,106 

Hennepin, MN $595 $661 $733 

Arthur, NE $539 $598 $663 
E-33 

 

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-interactions21 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 

Variable Description Community Factor Institutional Factor 

Disease groups 

HCC1 HIV/AIDS 0.685 1.344 

HCC2 Septicemia/Shock 0.890 0.946 

HCC5 Opportunistic Infection 0.652 1.344 

HCC7 Metastatic Cancer, Acute 

Leukemia 1.464 0.540 

HCC8 Lung, Upper Digestive Tract, and 

Other Severe Cancers 1.464 0.540 

HCC9 Lymphatic, Head and Neck, 

Brain, and Other Major Cancers 0.690 0.452 

HCC10 Breast, Prostate, Colorectal and 

Other Cancers and Tumors 0.233 0.259 

HCC15 Diabetes with Renal or Peripheral 

Circulatory Manifestations 0.764 0.612 

HCC16 Diabetes with Neurologic or 

Other Specified Manifestations 0.552 0.612 

HCC17 Diabetes with Acute 

Complications 0.391 0.612 

HCC18 Diabetes with Ophthalmologic or 

Unspecified Manifestations 0.343 0.612 

HCC19 Diabetes without Complications 0.200 0.255 

 

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.
E-34 

 

TABLE E-10--MEDICAL CONDITIONS, MEDICAL CONDITION 

INTERACTIONS, AND DEMOGRAPHIC FACTORS INCLUDED IN THE 

CMS HIERARCHIAL CONDITION CATEGORY 

RISK ADJUSTMENT MODEL FOR 2004-continued

Variable Description Community Factor Institutional Factor 

HCC21 Protein-Calorie Malnutrition 0.922 0.427 

HCC25 End-Stage Liver Disease 0.900 0.268 

HCC26 Cirrhosis of Liver 0.516 0.268 

HCC27 Chronic Hepatitis 0.359 0.268 

HCC31 Intestinal Obstruction/Perforation 0.408 0.268 

HCC32 Pancreatic Disease 0.445 0.268 

HCC33 Inflammatory Bowel Disease 0.307 0.268 

HCC37 Bone/Joint/Muscle 

Infections/Necrosis 0.496 0.495 

HCC38 

Rheumatoid Arthritis and 

Inflammatory Connective Tissue 

Disease 

0.322 0.285 

HCC44 Severe Hematological Disorders 1.011 0.448 

HCC45 Disorders of Immunity 0.830 0.448 

HCC51 Drug/Alcohol Psychosis 0.353 0.221 

HCC52 Drug/Alcohol Dependence 0.265 0.221 

HCC54 Schizophrenia 0.543 0.221 

HCC55 Major Depressive, Bipolar and 

Paranoid Disorders 0.431 0.221 

HCC67 Quadriplegia/Extensive Paralysis 1.181 0.098 

HCC68 Paraplegia 1.181 0.098 

HCC69 Spinal Cord Disorders/Injuries 0.492 0.098 

HCC69 Spinal Cord Disorders/Injuries 0.492 0.098 

HCC70 Muscular Dystrophy 0.386 0.098 

HCC71 Polyneuropathy 0.268 0.098 

HCC72 Multiple Sclerosis 0.517 0.098 

HCC73 Parkinsons and Huntingtons 

Disease 0.475 0.098 

HCC74 Seizure Disorders and 

Convulsions 0.269 0.098 

HCC75 Coma, Brain 

Compression/Anoxic Damage 0.568 0.098 

HCC77 Respirator 

Dependence/Tracheostomy Status 2.102 1.415 

HCC78 Respiratory Arrest 1.429 1.415 

HCC79 Cardio-Respiratory Failure and 

Shock 0.692 0.289 

HCC80 Congestive Heart Failure 0.417 0.176 

HCC81 Acute Myocardial Infarction 0.348 0.288 

HCC82 Unstable Angina and Other Acute 

Ischemic Heart Disease 0.348 0.288 

HCC92 Specific Heart Arrhythmias 0.266 0.187 

HCC95 Cerebral Hemorrhage 0.392 0.151 

HCC96 Ischemic or Unspecified Stroke 0.306 0.151 

HCC100 Hemiplegia/Hemiparesis 0.437 0.098 

HCC101 Cerebral Palsy and Other 

Paralytic Syndromes 0.164 0.098 
E-35 

 

TABLE E-10--MEDICAL CONDITIONS, MEDICAL CONDITION 

INTERACTIONS, AND DEMOGRAPHIC FACTORS INCLUDED IN THE 

CMS HIERARCHIAL CONDITION CATEGORY 

RISK ADJUSTMENT MODEL FOR 2004-continued

Variable Description Community Factor Institutional Factor 

HCC104 Vascular Disease with 

Complications 0.677 0.509 

HCC105 Vascular Disease 0.357 0.114 

HCC107 Cystic Fibrosis 0.376 0.230 

HCC108 Chronic Obstructive Pulmonary 

Disease 0.376 0.230 

HCC111 Aspiration and Specified 

Bacterial Pneumonias 0.693 0.463 

HCC112 Pneumococcal Pneumonia, 

Empyema, Lung Abscess 0.202 0.463 

HCC119 

Proliferative Diabetic 

Retinopathy and Vitreous 

Hemorrhage 

0.349 0.995 

HCC130 Dialysis Status 3.076 3.112 

HCC131 Renal Failure 0.576 0.420 

HCC132 Nephritis 0.273 0.420 

HCC149 Chronic Ulcer of Skin, Except 

Decubitus 0.484 0.262 

HCC150 Extensive Third-Degree Burns 0.962 0.248 

HCC154 Severe Head Injury 0.568 0.248 

HCC155 Major Head Injury 0.242 0.248 

HCC157 Vertebral Fractures without 

Spinal Chord Injury 0.490 0.098 

HCC158 Hip Fracture/Dislocation 0.392 0.000 

HCC161 Traumatic Amputation 0.843 0.248 

HCC164 Major Complications of Medical 

Care and Trauma 0.262 0.263 

HCC174 Major Organ Transplant Status 0.722 0.882 

HCC176 Artificial Openings for Feedings 

or Elimination 0.790 0.882 

HCC177 Amputation Status, Lower 

Limb/Amputation Complications 0.843 0.248 

Disabled/disease interactions 

D-HCC5 Disabled and Opportunistic 

Infections 0.789 0.000 

D-HDD44 Disabled and Severe 

Hematological Disorders 0.893 0.000 

D-HCC51 Disabled and Drug/Alcohol 

Psychosis 0.509 0.000 

D-HCC107 Disabled and Cystic Fibrosis 1.861 0.000 

Disease interactions 

INT1 Diabetes Mellitus and Congestive 

Heart Failure1 0.253 0.207 

INT2 Diabetes Mellitus and 

Cerebrovascular 0.125 0.000 

INT3 Congestive Heart Failure and 

Chronic Obstructive Pulmonary 0.241 0.372 
E-36 

 

TABLE E-10--MEDICAL CONDITIONS, MEDICAL CONDITION 

INTERACTIONS, AND DEMOGRAPHIC FACTORS INCLUDED IN THE 

CMS HIERARCHIAL CONDITION CATEGORY 

RISK ADJUSTMENT MODEL FOR 2004-continued

Variable Description Community Factor Institutional Factor 

INT4 

Chronic Obstructive Pulmonary 

and Cerebrovascular and 

Coronary Artery 

0.079 0.000 

INT5 Renal Failure and Congestive 

Heart Failure1 0.234 0.000 

INT6 

Renal Failure and Congestive 

Heart Failure and Diabetes 

Mellitus1

0.864 0.000 

Medicaid and originally disabled interactions with age and sex 

Medicaid female, disabled 0.221 0.000 

Medicaid female, aged 0.183 0.000 

Medicaid male, disabled 0.115 0.000 

Medicaid male, aged 0.184 0.000 

Originally disabled female 0.236 0.000 

Originally disabled male 0.148 0.000 

Demographic factors: 

Men, age 0-34 0.068 1.104 

Men, age 35-44 0.120 1.104 

Men, age 45-54 0.190 1.104 

Men, age 55-59 0.270 1.104 

Men, age 60-64 0.342 1.104 

Men, age 65-69 0.346 1.450 

Men, age 70-74 0.453 1.238 

Men, age 75-79 0.577 1.211 

Men, age 80-84 0.657 1.209 

Men, age 85-89 0.790 1.241 

Men, age 90-94 0.901 1.049 

Men, age 95+ 1.035 0.836 

Women, age 0-34 0.117 1.064 

Women, age 35-44 0.197 1.064 

Women, age 45-54 0.214 1.064 

Women, age 55-59 0.265 1.064 

Women, age 60-64 0.375 1.064 

Women, age 65-69 0.307 1.164 

Women, age 70-74 0.384 1.179 

Women, age 75-79 0.483 0.992 

Women, age 80-84 0.572 0.938 

Women, age 85-89 0.665 0.880 

Women, age 90-94 0.795 0.789 

Women, age 95+ 0.805 0.581 1

 These interaction terms are not additive; a beneficiary's payment will be based on the most severe, 

but not multiple diagnoses. All other interaction terms are additive. 

Source: CMS, http://www.cms.hhs.gov/healthplans/rates/2004/cover-exhibit-1.asp 

 The payment for an aged beneficiary under the CMS-HCC model is 

calculated by summing all of the relevant condition adjustment factors for the 
E-37 

 

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 CMSHCC 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. 

 

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.
E-38 

 

 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, costsharing 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 Medicarecovered 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 Medicarecovered services.25 Plans may also place the additional funds in a stabilization 

fund or return funds to the Treasury. 

 

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. 
E-39 

 

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 

2001 2001 

 1999 2000 

(pre-BIPA) (post-BIPA)

2002 2003 

Number of 

enrollees 4,947,098 4,437,416 3,771,551 3,832,308 3,480,000 3,140,000 

% of 

enrollees 84% 72% 69% 70% 71% 69% 

Source: Centers for Medicare and Medicaid Services (CMS) data. 

COVERAGE FOR PRESCRIPTION DRUGS

 One of the advantages of Medicare managed care, over traditional fee-forservice 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-ofpocket 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). 

 

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. 
E-40 

 

 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 

Annual drug cap 1999 2000 2001 2002 2003 

$500 or less 10.6% 20.8% 28.2% 50.1% 53.4% 

$501-$1000 36.4% 38.0% 21.5% 26.4% 35.2% 

$1001-$2000 27.2% 32.9% 34.8% 18.5% 16.7% 

$2001 or more 4.1% 3.4% 5.2% 2.9% 3.4% 

No cap 21.7% 14.9% 10.4% 2.2% 1.4% 

Note: Plans with generic-only benefits are classified as having a benefit limit of less than $500 per 

year. 

Source: Mathmatica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold, 

"Medicare+Choice Plans to Continue to Shift More Costs to Enrollees," April 2003. 

TABLE E-13--PERCENT OF M+C ENROLLEES BY PRESCRIPTION 

DRUG CO-PAYMENTS, WEIGHTED BY ENROLLMENT, 1999-2003 

 1999 2000 2001 2002 2003 

Generic 

None 7.60% 7.10% 7.80% 7.10% 5.10% 

$10.00 or less 84.40% 90.40% 83.40% 73.10% 71.90% 

$10.01 or more 8.00% 2.50% 8.80% 19.80% 23.00% 

Brand-name 

None 6.30% 5.50% 2.40% 0.00% 0.70% 

$10.00 or less 35.90% 19.80% 21.70% 4.60% 5.70% 

$10.01 to $20.00 43.80% 54.30% 43.60% 14.80% 20.10% 

$20.01 or more 14.00% 20.40% 32.30% 80.60% 73.50% 

Source: Mathematica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold, 

“Medicare+Choice Plans Continue to Shift More Costs to Enrollees,” April 2003.

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 
E-41 

 

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 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Chiropractor

Podiatry

Preventive dental

Hearing care

Prescription drugs

Physical exams

Vision care

Percent of Medicare+Choice Enrollees

2002 1999

Source: Chart prepared by CRS based on Mathematica Analysis of CMS data. Lori Achman, and 

Marsha Gold, “Trends in Medicare+Choice Benefits and Premiums, 1999-2002,” The 

Commonwealth Fund. 
E-42 

 

 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 

Area 1999 2000 2001 2002 2003 

National 61% 53% 39% 32% 29% 

Urban areas 75% 66% 50% NA NA 

Rural areas 14% 9% 4% NA NA 

NA - Not available. 

Source: MedPAC analysis of Medicare Compare data from CMS website, August 1999, January 

2000, and February 2001; CMS analysis 2002 and 2003. 

 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 
E-43 

 

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 feefor-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 

 

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

Enrollees with reduced 

Part B premium 

Enrollees in zero 

premium plan 

Enrollees in $0.01 to 

$20.00 premium plan 

Enrollees in $20.01 to 

$50.00 premium plan

Enrollees in over $50.00 

Date premium plan 

# % # % # % # % # % 

June 2000 NA NA 3,735,524 61% 783,611 13% 1,168,828 19% 426,388 7% January 20011 NA NA 2,465,295 45% 636,100 12% 1,517,169 28% 856,569 16% 

March 2002 NA NA 2,020,351 41% 238,272 5% 1,131,794 23% 774,305 32% March 2003 9,129 0.20% 1,738,980 38% 59,335 1% 1,150,192 25% 1,606,617 35% NA - Not available. 

1 Post-BIPA premium levels. 

Source: Mathematica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold, “Medicare+Choice Plans Continue to Shift Mor

Costs to Enrollees,” April 2003.
E-45 

 

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. 
E-46 

 

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 
E-47 

 

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

Item Coordinated Care Plan Private Fee-for-Service PPO demonstration 

Beneficiary out-ofpocket costs (premium plus any deductibles, coinsurance, and copayments) 

Premium and actuarial value of other cost sharing (for example, coinsurance) on average cannot exceed the actuarial value of the cost sharing applicable on average under traditional Medicare. 

The actuarial value of the cost sharing (not including the premium) on average cannot exceed the actuarial value of cost sharing on average under traditional Medicare. 

Plans may propose to waive any M+C statutes, regulations or policies related to premiums, cost-sharing, payments to plans, such as actuarial equivalence. Beneficiaries may face cost sharing that can be higher than FFS. 

Beneficiary liability for balance billing 

Beneficiaries are not liable for any balance billing amounts. 

Contract providers can bill 15 percent above the private fee schedule (or other provider reimbursement amount). Noncontract providers cannot balance bill beneficiaries. 

Balanced billing requirements may vary by plan and are specified in each individual demonstration application. In the demonstration application, plans should describe the procedure for enrollee complaints relating to balance billing requests from providers. 
Medicare+Choice plan 

payment obligation to physicians, hospitals, and other providers 

Contract providers are paid fees or rates that are privately negotiated by the plan with them. Noncontract providers must accept as payment in full Medicare’s fee schedule (or other Medicare reimbursement rate) including the allowed balance billing amounts (if any) allowed under Medicare. 

Contract providers are paid private fees (or rates) minus beneficiary cost sharing amounts. Fee schedule or rates must be as generous as Medicare unless plan has a sufficient number and range of provider contracts. Noncontract providers same as for noncontract providers in coordinated care plans. 

Contract providers are paid fees or rates that are privately negotiated by the plan with them. Plans pay FFS out of network. 

Plans accept full risk of all costs beyond the monthly capitated payment made by CMS on behalf of the beneficiary 

Same as for Coordinated Care Plans. 

Plans have the option of sharing financial risk with CMS, according to the particular risk sharing agreement made between the plan and CMS. 

Enrollee choice of providers generally restricted to a closed network 

Enrollees may seek care from any provider willing to accept the plan’s terms and conditions of participation. The plan does not provide enrollees with a financial incentive for choosing particular providers. 

Enrollees may seek care from any willing provider, but they have a financial incentive to seek care from providers in the plan’s network. 

Source: Congressional Research Service and Medicare Payment Advisory Commission Analysis. 
E-50 

 

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-forservice 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 

 

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. 
E-51 

 

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 year32) 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 

 

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.
E-52 

 

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 feefor-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 

 

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. 
E-53 

 

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 feefor-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. 

 

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.
E-54 

 

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. 

 

36 42 C.F.R. 417.800. 
E-55 

 

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. 
E-56 

 

 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 

 

37 For more information about Competitive Bidding, please see CRS Report RL31434 

Medicare+Choice: Using Competitive Bidding to Determine Payments, by Christopher J. Sroka.