Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 25, 1999, THURSDAY
SECTION: IN THE NEWS
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4452 words
HEADLINE: PREPARED STATEMENT OF
DR. GAIL
WILENSKY
CHAIR
MEDICARE PAYMENT ADVISORY COUNCIL
BEFORE THE
HOUSE COMMERCE COMMITTEE
HEALTH AND THE ENVIRONMENT
SUBCOMMITTEE
BODY:
Good morning Chairman Bilirakis
and members of the Subcommittee. I am Gail Wilensky, Chair of the Medicare
Payment Advisory Commission (MedPAC). I am pleased to be here this morning to
discuss the issue of risk adjustment and the Medicare+Choice
program.
SUMMARY
The system used to adjust payments to Medicare's
risk-contracting plans and now Medicare+Choice plans has been widely
acknowledged to be inadequate because it does not accurately reflect predictable
differences in enrollees' health spending. As a result, Medicare has overpaid
plans to care for relatively healthy enrollees and underpaid plans to care for
those in poorer health. Overall, payments have exceeded plans' costs of
providing the basic Medicare benefit package.
A better risk
adjustment system would improve payment equity across plans and reduce
Medicare's overpayments to plans. The interim risk adjustment
system proposed by the Health Care Financing Administration (HCFA)-which relies
on principal diagnoses from inpatient hospital stays-is imperfect, but it
represents a step in the right direction by making payments correspond more
closely to enrollees' health needs. Moreover, many of the limitations of the
proposed interim system could be mitigated by moving to a system based on
diagnosis data from all sites of care. MedPAC supports HCFA's efforts to do this
effective for payments in 2004.
Adopting any new system of risk
adjustment would introduce swings in payments to plans. Accordingly,
MedPAC supports the phase-in proposed by HCFA that back-loads the impact.
RISK ADJUSTMENT AND WHY IT IS NEEDED
Risk
adjustment is a term used to describe incorporating predictable
differences in health status and service needs into the capitation payments made
to health plans. When payments are risk adjusted, plans receive larger payments
for their relatively sick enrollees and smaller payments for their healthier
ones.
In Medicare, risk adjustment is intended both to make
payments equitable across Medicare+Choice plans and to account for differences
in the mix of enrollees between the traditional fee-for-service program and the
Medicare+Choice program. Put another way, risk adjustment may
be viewed as a means of encouraging health plans to serve beneficiaries with
severe or chronic illnesses by paying plans more to care for them.
Medicare
beneficiaries' needs for health services-inpatient care, physician visits, and
so on-vary, and this variation has both a random component and a systematic
component. The random component reflects service needs that are, by definition,
unpredictable, so that if there were no other differences among beneficiaries,
risk adjustment would not be necessary. In such a situation,
unexpectedly high costs for some enrollees in a plan would be offset by
unexpectedly low costs for other enrollees. Given sufficient numbers of
enrollees, payments to plans would be correct on average.
In fact, there are
differences among beneficiaries that lead to systematic and predictable
differences in their needs for health services. For example, older people use
more services than younger people, and people with severe or chronic illnesses
use more services than others. These predictable differences in the use of
services- whether they are predictable either by health plans or by enrollees
themselves-introduce the potential for risk selection. If no adjustments are
made to account for these differences, plans will be overpaid for healthy
enrollees and underpaid for sick enrollees. Accordingly, they will have an
incentive to enroll beneficiaries whose expected costs are below average,
because they will still receive the average payment. If plans act on this
incentive and successfully attract relatively healthy beneficiaries, aggregate
payments will be too high. MEDICARE'S CURRENT SYSTEM OF RISK
ADJUSTMENT
Currently, Medicare adjusts payments to private health
plans to reflect only differences among enrollees in their demographic
characteristics (age and sex), employment status, institutional status, and
eligibility for Medicaid. This risk adjustment system accounts
for the relatively greater use of health services of older beneficiaries and
those who are institutionalized, and the relatively lower expected costs
associated with working enrollees who have primary coverage through their
employers. However, it does not account for variation due to differences in
health status. Until 1998, the original payment method paid 95 percent of
expected fee-for-service spending for beneficiaries with similar
characteristics, which was intended to account for health plans' ability to
deliver care more efficiently. Now, payments are based on updated 1997 rates.
Payment inequity and overpayment under the current system
A common
complaint about the current system is that plans have experienced significant
favorable risk selection-enrollment of relatively healthy beneficiaries-that is
not reflected in their payments. Because it does not take health status into
account, the current system rewards organizations that attract healthier
enrollees because it does a very poor job of accounting for predictable
differences in health spending. Plans are thus paid the same amount for two
beneficiaries with identical demographic characteristics, even though
differences in their health status would suggest that one will be much more
costly than the other.
Empirical research supports the assertion that plans
have experienced favorable selection while their payments have been based on
average risks within demographic groups. For example, Riley and colleagues
(1996) found that in 1994 the predicted costs of Medicare risk plan enrollees
were 12 percent lower, on average, than the predicted costs of fee-for-service
enrollees with the same demographic characteristics. Because payments currently
are adjusted only for demographic differences, even setting rates at 95 percent
of the amount Medicare expected to spend for a beneficiary in the fee-for-
service program resulted in overpayments of as much as 7 percent (Riley et al.
1996, Hill et al. 1992). Those overpayments are in part why Medicare risk plans
have been able to offer expanded coverage to enrollees.
Some favorable risk
selection may be inevitable because the methods organizations use to recruit
enrollees might not reach people with poor health status, such as the
institutionalized, or because healthy people may be less particular about being
able to see a specific physician. Moreover, even if selection to plans has been
favorable in the aggregate, that does not mean that all individual plans have
experienced favorable selection. For example, one study shows that mortality and
hospitalization rates rise as length of managed care enrollment increases (PPRC
1996). This "regression towards the mean" means that in terms of their use of
health services, managed care enrollees become more like fee-for-service
beneficiaries over time. Thus, plans that have participated in Medicare longest
and have long- tenured enrollees may see less favorable selection.
Risk adjustment requirements in the Balanced Budget Act
In response to concerns about the current system, the Balanced Budget Act of
1997 (BBA) directed HCFA to develop a new risk adjustment
system. The rationale of the Congress for mandating the new system was to make
Medicare's payments to Medicare+Choice organizations more accurately reflect
predictable differences in health spending by enrollees. This new system should
improve Medicare+Choice by making payments more equitable across plans and
making them reflect the generally better health of Medicare+Choice enrollees as
compared with fee-for-service beneficiaries.
The BBA required the new
risk adjustment system to use enrollees' health status and
demographic characteristics to account for variations in their expected
spending. It laid out a very tight time schedule, requiring HCFA to implement
the system by January 1, 2000. To meet that schedule, the agency must: --
publish a preliminary notice by January 15, 1999, describing the changes in
methods and assumptions it will use to determine payment rates for 2000,
compared with those for 1999 (HCFA 1999); -- publish a final notice by March 1,
1999, on the payment rates for 2000 and the risk and other factors it will use
to adjust those payment rates; and -- submit a report to the Congress that
describes the risk adjustment method it will
implement with the new payment rates, also by March 1, 1999.
While HCFA has
supported research to develop improved risk adjustment methods
for more than a decade, implementing the new system has required HCFA to collect
and analyze a substantial amount of new data in a short period of time. The
agency must measure not only the health status of beneficiaries enrolled in
Medicare+Choice plans, but health status and subsequent spending for
beneficiaries in the traditional fee-for-service program.
HCFA must collect
data from Medicare+Choice organizations both to determine monthly payments for
each enrollee starting in 2000 and to inform Medicare+Choice organizations about
the anticipated effects of the new risk adjustment system.
HCFA must measure health status and spending for fee-for-service
beneficiaries for two reasons. First, the agency must estimate risk scores that
measure relative levels of expected spending for beneficiaries with different
combinations of health conditions and demographic characteristics. These scores
require beneficiary-specific data on health conditions, demographic
characteristics, and annual Medicare spending for covered services that are
currently available only for beneficiaries in the traditional fee-for-service
program. Second, once the new risk scores are developed, HCFA must adjust the
per capita monthly payment rate for each county-the county rate book- to reflect
the county's expected level of per capita spending for a beneficiary with
national average health and demographic characteristics.
To facilitate these
tasks, the BBA permitted HCFA to collect encounter data-which provide
information similar to claims data-on hospital inpatient stays from
Medicare+Choice organizations, but not before January 1, 1998. Starting July 1,
1998, HCFA could collect encounter data from other providers of care such as
physician offices, hospital outpatient departments, skilled nursing facilities,
and home health agencies. HCFA will be able to use the diagnoses reported in the
encounter data to develop indicators of beneficiary health status.
HCFA has
indicated it has been meeting the time requirements of the BBA and has collected
almost complete hospital inpatient encounter data records from nearly all
organizations. A small number of organizations have supplied incomplete data,
and HCFA is working with them to get complete data. Some organizations are less
confident and believe the data generally are not complete due to systems
problems. However, the actual risk scores will be based on the next round of
data collection, which should afford an opportunity to work out existing
problems.
HCFA'S PROPOSED INTERIM SYSTEM
The schedule outlined in the
BBA restricted HCFA to adopt, at least initially, an interim system in which
health status will be measured using only hospital inpatient diagnoses. Before
the Congress passed the BBA, HCFA argued that it needed data as soon as possible
to implement an improved risk adjustment system. However, HCFA
and the Congress recognized that Medicare+Choice organizations could not
establish systems for reporting data from sites of care other than hospital
inpatient departments in time for implementation by January 1, 2000. Therefore,
HCFA indicated to the Congress it needed inpatient data by a particular date and
left the Congress to determine the remaining time frame.
Description of the
proposed interim system
In the interim system, HCFA will determine payments
to Medicare+Choice organizations according to the following process. First, HCFA
will characterize beneficiaries by:
-- age and sex;
-- principal
diagnoses associated with any inpatient hospital stays they had during the
previous year; Inpatient diagnoses are based on encounter data submitted by
organizations for current enrollees and on Medicare fee-for-service claims for
new enrollees who were previously in the traditional program. Risk scores for
beneficiaries who are newly eligible for Medicare and who enroll in a
Medicare+Choice plan will be based solely on their demographic characteristics.
This is necessary because HCFA lacks a claims history for these beneficiaries.
-- eligibility for Medicaid benefits during the previous year; and
--
for aged beneficiaries, previous eligibility for Medicare on the basis of a
disability.
Based on this classification, HCFA will determine prospective
risk scores for Medicare+Choice enrollees (see the Appendix for more detail).
Risk scores are intended to measure enrollees' expected spending in the
forthcoming payment year relative to that of the average beneficiary in the
traditional fee-for-service program. As in the current risk
adjustment system, spending patterns in the traditional fee-for-service
program will be treated as a baseline, so the risk score associated with each
combination of demographic and health status factors will be estimated using
fee-for-service data. In principle, risk scores could (perhaps should) be
estimated using Medicare+Choice spending patterns, but data on annual spending
for covered services, which are needed to estimate expected spending given
enrollees' diagnoses and demographic characteristics, are not now available for
Medicare+Choice enrollees.
In the last step, HCFA will calculate payments
for enrollees as the product of three factors: -- the year 2000 payment amount
for enrollees' county of residence from the county rate book; -- a factor that
will adjust the county payment rate to reflect the change in risk measurement
methods; and -- the enrollees' risk scores based on the interim system.
The
county adjustment factors are needed to change the county payment amounts so
they are consistent with the new system. Under the current system, each county
payment rate is based on the updated 1997 payment rate, which reflects the
current expected fee-for-service spending per capita in the county for a
beneficiary with the national average demographic profile. Because the new
risk adjustment system captures risk differences among
beneficiaries more precisely than does the current system, HCFA needs to
recalibrate the county amounts using the new adjusters. This method will ensure
that the county payment rates reflect the 1997 expected fee-for-service spending
per capita in the county for a national average beneficiary, as measured by the
new system.
The interim system intended to improve payment equity
The
interim risk adjustment system should be an improvement over
the current system because payments to organizations will more accurately
reflect the predictable differences in health spending by their enrollees. If it
works as intended, the system will encourage organizations to compete on the
basis of how effectively they manage care and not reward plans for attracting
favorable risks.
The interim system is consistent with the BBA's objectives
for risk adjustment. First, it will encourage organizations to
compete on factors other than risk selection because the profits from favorable
selection will be lower. Second, organizations may have more resources for
developing specialized care management programs for enrollees with serious
conditions, which may lead to improvements in efficiency and in the quality of
care enrollees receive.
Finally, aggregate overpayments to
Medicare+Choice organizations that result from enrolling healthier Medicare
beneficiaries may be reduced.
Potential concerns with the interim system
Despite these improvements over the current system, the interim system's
dependence on hospital inpatient diagnoses raises several potential concerns
that policymakers should monitor closely.
Incentives to hospitalize
inappropriately. Because organizations will receive higher payments only for
enrollees who have been hospitalized, the proposed system may create incentives
for Medicare+Choice organizations to hospitalize enrollees inappropriately.
However, the impact of such incentives is likely to be mitigated by a number of
factors.
-- First, payments for enrollees' hospital stays are based on their
expected spending in the year following the stay, so the incremental payment may
be lower in many cases than the hospitalization cost the organization incurred.
-- Second, organizations will not receive an increased payment until the
calendar year after a hospitalization, and then only if the hospitalized
beneficiary remains enrolled in the same organization. In fact, there will be a
lag of six months between collecting diagnosis data and calculating risk scores.
Thus, payments for calendar 2000 will be based on data collected between July 1,
1998 and June 30, 1999.
-- Finally, organizations would have to influence
physicians to hospitalize more patients and to overcome resistance on the part
of enrollees to being hospitalized.
To further counteract any incentive to
hospitalize, HCFA will treat enrollees with one-day inpatient stays and those
with diagnoses for which hospitalization is discretionary the same as enrollees
who were not hospitalized. HCFA considers a hospitalization to be discretionary
if the principal diagnosis represents only a minor or transitory disease or
disorder, is rarely the main cause of an inpatient stay, or is vague or
ambiguous.
Adjustments based on fee-for-service patterns. A second potential
problem is that risk scores based on fee-for-service hospitalization patterns
may understate the riskiness of certain Medicare+Choice enrollees. This
understatement will occur if Medicare+Choice organizations substitute other
sites of care in place of hospitalizations more frequently than do providers in
traditional fee- for-service Medicare. If this were true, Medicare+Choice
enrollees with serious conditions would be hospitalized less often and would
receive lower risk scores, on average, than fee-for-service beneficiaries with
comparable conditions and demographic characteristics.
How serious this
problem could be is unclear. Hill and colleagues (1992) found that Medicare
managed care organizations did not reduce the hospitalization rate relative to
fee-for-service Medicare. But Medicare+Choice organizations have also argued
that they hospitalize comparable patients for shorter stays than do
fee-for-service providers in traditional Medicare, and results from Hill and
others support this argument. To the extent organizations shorten hospital stays
to one day, HCFA's proposal to treat enrollees with one-day stays the same as
enrollees without inpatient stays will compound any understatement caused by
calibrating risk scores based on fee-for- service data.
Potential for large
changes in payments. A third issue is that implementing any improvements in
risk adjustment will often lead to changes in payments to some
individual plans that are much larger than the change in aggregate
Medicare+Choice payments. Under the interim system, these changes could affect
some Medicare+Choice organizations' decisions to participate in some or all of
the market areas they serve for Medicare and disrupt Medicare+Choice coverage
for some beneficiaries.
Medicare+Choice organizations are understandably
concerned about the effects of HCFA's new risk adjustment
system on their future payments. Other things being equal, adoption of this new
system on January 1, 2000, will change payments for individual organizations and
reduce overall Medicare+Choice payments. However, the full effects of the new
system are somewhat uncertain because the data that HCFA will use to determine
payments to organizations in 2000 will not be available until late in 1999 when
enrollment data are available.
MedPAC has not yet made a comprehensive
assessment of the impact of the new system on specific plans. But the amounts
involved will be significant. Based on preliminary data, HCFA estimates that if
the new system were implemented immediately and if there were no changes in the
composition of enrollment:
-- variation in payments for individuals would
range by a factor of about 25, compared with the current variation of about 6;
-- additional payments would be made for about 12 percent of enrollees, and
about 20 percent of total payments would be redistributed;
-- aggregate plan
payments would fall by 7.6 percent; and
-- payments to some plans could fall
by 15 percent, whereas payments to others could increase by 5 percent.
Inpatient data inadequate. Finally, some analysts have expressed concerns
that payments to Medicare+Choice organizations under the interim system will not
fully account for measurable and predictable differences in spending among their
enrollees because there is diagnosis and health status information that is not
reflected in the demographic and hospital diagnosis data used. As a result,
organizations that attract seriously ill enrollees still will be underpaid,
while those that attract healthy ones will continue to be overpaid. This concern
is valid, but the new system nonetheless represents a substantial improvement
over the existing system.
MEDPAC'S RECOMMENDATIONS
In MedPAC's Report to
the Congress: Medicare Payment Policy that will be released next week, the
Commission makes two recommendations that could mitigate many of the concerns
associated with a new risk adjustment system for
Medicare+Choice. Risk adjustment may reduce incentives for risk
selection, but will not by itself create neutral financial incentives to provide
specific services. In its March 1998 Report to the Congress, MedPAC recommended
a large-scale demonstration of partial capitation or other methods that would
pay plans partly on the basis of a capitated rate and partly on the basis of
payment for services used. The Commission continues to support such a
demonstration to test the merits of supplementing risk
adjustment with risk sharing.
Recommendation to use diagnosis data
from all sites of care
Many of the problems cited for the proposed interim
system could be mitigated by replacing it with a permanent one in which health
status is based on diagnoses assigned during both inpatient hospital and other
types of health care encounters. Thus, MedPAC recommends that:
As quickly as
feasible, the Secretary should develop the capability to use diagnosis data from
all sites of care for risk adjustment.
In its January 15,
1999, 45-day risk adjustment notice, HCFA indicated it intends
to replace the interim system on January 1, 2004, with a comprehensive system
based on diagnoses from beneficiaries' encounters with all major types of
providers. To make that possible, HCFA will require organizations to augment
their hospital inpatient data with information from enrollees' encounters in
physicians' offices, hospital outpatient departments, skilled nursing
facilities, and home health agencies. However, this requirement will not be
implemented before October 1, 1999.
Recommendation to phase in the interim
system to cushion its effects on payments MedPAC agrees with the Secretary's
plan to phase in the interim risk adjustment
system:
The Secretary's plan to phase in the interim risk
adjustment system- with a method that uses a weighted blend of the
payment amounts that would apply under the interim system and those that would
apply under the current system-is sound. The weight on the interim payment
amounts should be back-end loaded. That is, the weights should be relatively low
in the first years so that most organizations will not experience extreme
changes in their total payments.
The phase-in should reduce the number of
organizations that withdraw from the Medicare+Choice program, but it also will
slow the benefits of adopting the interim risk adjustment
system. In addition, the phase-in will raise Medicare spending because the
reduction in payments that otherwise might occur under the interim system will
not be fully realized.
Blended payments will be made during 2000 through
2003. In 2000, payments will be calculated using 90 percent of the existing
system and 10 percent on the interim system. As an example of how the blend will
work in 2000, consider an organization that would receive a monthly payment for
an enrollee of $470 under the interim system and $500 under the current system.
In 2000, the blended monthly payment would be: (.10)x($470) + (.90)x($500) =
$497. Progressively lower weights will be assigned to the existing system in
2001 through 2003. In 2004, payments will be based on full implementation of a
comprehensive risk adjustment system that uses data from all
sites of care.
CONCLUSION
Changes in Medicare's rules for private health
plans participating in the program have had both intended and unintended
consequences. These changes, introduced in conjunction with the new
Medicare+Choice program, were designed to improve Medicare's risk contracting
program by increasing the fairness of the distribution of payments to health
plans, by creating incentives to improve quality of care, and by helping
beneficiaries to make more informed choices. But taken together with lower base
payment updates attributable to the BBA and to unexpected slowing in the growth
of fee-for-service Medicare spending, the new rules may have made participation
in Medicare less attractive from the plans' perspective. Plans have expressed
particular concerns about the combined impact of lower base payment updates
under the BBA and possible decreases from that base as risk
adjustment is implemented.
Improving Medicare's current
risk adjustment system is essential. Risk
adjustment is about getting relative payment rates right, so that
payments for enrollees in the Medicare+Choice program more closely match their
expected costs. It is appropriate that the new system of risk
adjustment be phased in, both to avoid any instability that sudden
swings in payments to health plans could have for their enrollees and to allow
time for policymakers to assess how it is working, but the benefits of better
risk adjustment should not be delayed more than necessary.
While the Commission recognizes that the transition to the new Medicare+Choice
program has been less smooth than many had hoped, we believe the issues raised
during the transition should be considered separately from the issue of
improving Medicare's system of risk adjustment.
END
LOAD-DATE: February 27, 1999