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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