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Medicare+Choice Rates -- 45 Day Notice

Changes in Methodology Since 1999 Rates: Risk Adjustment

A. Background

Since 1985, Medicare payments to risk contracting Health Maintenance Organizations (HMOs) for aged and disabled beneficiaries have been based on actuarial estimates of the per capita cost Medicare incurs paying claims on a fee-for-service (FFS) basis in a beneficiary's county of residence. (Medicare's costs in paying claims for beneficiaries with end-stage renal disease are not considered in these county estimates, but are treated separately on a statewide basis.) These county estimates have been adjusted for the demographic composition of that county (age, gender, Medicaid eligibility status, working aged status, and institutional status) in order to produce a figure representing the costs that would be incurred by Medicare on behalf of an average Medicare beneficiary living in that county. These county per capita payment rates, adjusted for the average beneficiary, have been published annually as the county rate book. Prior to January 1998, monthly payments to HMOs for each enrollee were based on this county rate book amount, adjusted for the enrollee's demographic factors. This methodology is known as the "Adjusted Average Per Capita Cost" (AAPCC) methodology, and HMOs with Medicare contracts under section 1876 of the Social Security Act (the Act) were paid on this basis between 1985 and 1997.

In enacting the new Part C of Title XVIII to create the Medicare+Choice program, the Congress provided, in a new section 1853 of the Act, for a new methodology for paying organizations that enter into Medicare+Choice (M+C) contracts. Under this new methodology, the equivalent of the above-described county rate book (that is, the county-wide amount that is adjusted by an individual enrollee's demographic status to determine the final payment amount) is based on the greatest of three amounts. The first amount is a new blended payment rate methodology that would combine local and national rates in setting county rates. The second amount is a new minimum specified rate amount (for example, $367 per month per enrollee in 1998). The third amount is based on a 2 percent increase over the prior year's rates, with the rate book for 1997 serving as the baseline. As in the case of the AAPCC methodology described above, monthly payments are the county rates under section 1853 of the Act, adjusted for the demographic status of each enrollee. Under section 1876(k)(3) of the Act, the new Medicare+Choice payment methodology under section 1853 of the Act applies to existing HMO contracts under section 1876 for 1998. This methodology continues to apply to these same organizations in 1999 to the extent that they have entered into Medicare+Choice contracts.

Section 1853(a)(3) of the Act requires the Secretary to develop and implement a new risk adjustment methodology to be used to adjust the county-wide rates under section 1853 of the Act to reflect the expected relative health status of each enrollee. This new methodology, which must be implemented by January 1, 2000, will replace the current method of adjusting county-wide rates based only demographic factors of age, gender,Medicaid eligibility, working aged status, and institutional status. The goal is to pay Medicare+Choice organizations based on better estimates of their enrollees' health care utilization relative to the fee-for-service (FFS) population.

While the Medicare+Choice legislation mandates the implementation of risk adjustment in general, the legislation provides the Secretary with broad discretion to develop a risk adjustment methodology that would "account for variations in per capita costs based on health status and other demographic factors." The Medicare+Choice legislation (section 1853(a)(3)(B) of the Balanced Budget Act) allowed for the collection of data other than inpatient hospital data only on or after July 1, 1998. This provision envisioned that a hospital-only system would be implemented initially, both because it seemed more feasible for plans to produce inpatient data only in the short term, and because the effect of a hospital-only system on payments would be smaller than a system based on comprehensive encounter data. (The Medicare+Choice regulations further provided that we would collect physician, outpatient hospital, SNF, or HHA data no earlier than October 1, 1999. See 42 CFR 422.257(b)(2)(i).) In previous public meetings on encounter data requirements, organizations have been briefed on the Principal Inpatient Diagnostic Cost Group (PIP-DCG) risk assessment model, created by HHS-sponsored researchers at Health Economics Research, Inc., Boston and Brandeis Universities, and the Harvard School of Medicine. The model has been updated using 1995 and 1996 Medicare data, and refined to exclude selected diagnoses and one day hospital stays. A preliminary risk adjustment methodology was published in theSeptember 8, 1998 Federal Register. We received 34 letters commenting on the preliminary methodology. The remainder of this advance notice outlines our approach for implementation of risk adjusted payments on January 1, 2000, discussing both the risk adjustment methodology and the proposed risk adjustment payment model. This notice reflects several changes to the methodology in response to comments on the preliminary methodology.

In the development of all risk adjustment payment models, there are two tasks that must be performed: (1) the estimation of the risk adjustment model, and (2) application of the risk adjustment model to a payment system. The estimation of the PIP-DCG model is described first.



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