Copyright 1999 Federal News Service, Inc.
Federal News Service
FEBRUARY 25, 1999, THURSDAY
SECTION: IN THE NEWS
LENGTH:
2786 words
HEADLINE: PREPARED STATEMENT OF
MR. MIKE
HASH
MEDICARE
DEPUTY ADMINISTRATOR
HEALTH CARE FINANCING
ADMINISTRATION
BEFORE THE HOUSE COMMERCE COMMITTEE
HEALTH AND THE ENVIRONMENT SUBCOMMITTEE
BODY:
Chairman Bilirakis, Congressman Brown, distinguished committee members,
thank you for inviting me here to discuss our efforts to pay health plans
accurately and fairly. The Balanced Budget Act of 1997 requires Medicare to
"risk adjust" payments to Medicare+Choice organizations, starting January 1,
2000. That means we must base payment to Medicare+Choice plans on the health
status of their enrollees.
Risk adjustment is an essential
component of the Medicare+Choice program, and represents a vast improvement over
the current payment method. It helps assure that payments are appropriate and
curtail the disincentive for plans to enroll sicker beneficiaries.
Under
risk adjustment, data on individual beneficiaries use of health
care services in a given year will be used to adjust payment for each
beneficiary enrolled in a Medicare+Choice plan the following year. The payment
adjustments are based on the average total cost of care for individuals who had
the same diagnoses in the previous year. In order to prevent disruptions to
beneficiaries and health plans, we will phase this change in over five years.
Initially, we will use data on inpatient hospital stays and move in an orderly
fashion, as envisioned in the Balanced Budget Act, to use of data from other
health care settings.
We would like to thank plans for their cooperation in
providing the data needed to implement this important advance.
Currently,
some 6 million of Medicare's 40 million beneficiaries have chosen to enroll in
Medicare+Choice plans. Risk adjustment will increase payment to
plans for their sickest patients, and thus curtail the disincentive for plans to
enroll these beneficiaries. It also will lower payment to plans for their
healthier patients. Risk adjustment is an essential step
forward for beneficiaries, taxpayers, and health plans.
-- Risk
adjustment will help beneficiaries feel confident in all their
Medicare+Choice options. It will assure beneficiaries that Medicare pays plans
the right amount to provide all necessary care because payment to plans will
take each enrollee's health status into account. That will help people with
serious illnesses, such as cancer or cardiovascular disease, who can benefit
most from the coordination of care health plans can provide.
-- Risk
adjustment will help taxpayers by addressing the main reason that
Medicare has lost rather than saved money on managed care. Many studies show
that health plans enroll Medicare beneficiaries who, on average, are much
healthier and therefore less costly than those who remain in traditional
Medicare. This "favorable selection" of healthy beneficiaries has cost taxpayers
$2 billion a year, according to a 1997 report by Congress' Physician Payment
Review Commission (now part of the Medicare Payment Advisory Commission).
--
Risk adjustment will help level the playing field among
Medicare+Choice plans. It will temper the risk of significant financial loss
when plans enroll beneficiaries who have expensive care needs, and focus
competition more on managing care than on avoiding risk. Risk
adjustment also will help plans by alleviating concerns among
beneficiaries that plans have financial incentives to deny care.
Phasing-In
Risk Adjustment The law requires us to proceed with
risk adjustment starting January 1, 2000, and does not call for
a transition. However, we believe we must implement these changes in an
incremental and prudent fashion, as was done with other new major payment
systems. We are, therefore, using flexibility afforded to us in the law to phase
in risk adjustment over 5 years to prevent disruptions to
beneficiaries or the Medicare+Choice program.
In the first year, only 10
percent of payment to plans for each beneficiary will be calculated based on the
new risk adjustment method based on inpatient hospital
diagnoses. The remaining 90 percent will be based on the existing method for
calculating plan payments, which are flat amounts per enrollee per month based
on the average cost to care for Medicare fee-for-service beneficiaries in each
county and adjusted for basic demographic factors like age and sex. In 2001, 30
percent of payment amounts will be risk adjusted. In 2002, 55 percent of payment
amounts will be based on risk adjustment. In 2003, 80 percent
of payment amounts will be based on risk adjustment. By 2004,
we and health plans will be ready to use data from all sites of care, not just
inpatient hospital information, for risk adjustment. Then, and
only then, will payment to plans be 100 percent based on risk
adjustment.
Using Inpatient Data During the first
year of data collection for risk adjustment, both the statute
and practical issues require that we use hospital inpatient data alone. About
one in every five Medicare beneficiaries is hospitalized in a given year. Data
on these hospitalizations are relatively easy to gather, easy to audit, and
highly predictive of future health care costs. We will use the data to pay plans
more for beneficiaries hospitalized the previous year for conditions that are
strongly correlated with higher subsequent health care costs. While we will
eventually be using a broader data base for risk adjustment,
that is simply not feasible at this time.
The Balanced Budget Act clearly
stipulated that more comprehensive data on outpatient, physician, and other
services could be collected only for services provided on or after July 1, 1998.
That was prudent, because it has been no small task for plans to learn how to
gather the inpatient data we are using for the initial phase-in of risk
adjustment. Requiring plans to provide additional data on outpatient,
physician and other services would have been unduly burdensome at this time.
This year, we will issue a schedule and guidance to plans for reporting
other encounter data, such as outpatient information. The schedule will provide
sufficient time for plans to gather accurate data and for HCFA to analyze and
incorporate the data into accurate risk adjusted payments. We are now confident
that by 2004 we will be using data on all health care encounters to assess
beneficiary health status for risk adjustment. If we could base
risk adjustment on more comprehensive data now, we would. But
we cannot. The law requires us to move forward. And, even with its limitations,
this initial risk adjustment system based on inpatient data
alone will increase payment accuracy 5-fold.
The initial risk
adjustment system uses only the approximately 60 percent of inpatient
hospital diagnoses that are reliably associated with future increased costs. For
example, beneficiaries hospitalized for conditions such as heart attacks in
aggregate are at higher risk of subsequent cardiovascular problems, and they
consistently have higher health care costs in the subsequent year.
Hospitalizations for such diagnoses will lead to higher payments to plans in the
following year under risk adjustment. Hospitalizations for
acute conditions such as appendicitis, however, rarely lead to increased
subsequent care costs. They will not lead to higher payments under risk
adjustment.
The 60 percent of hospital admission diagnoses that
are clearly associated with increased subsequent care costs account for about 30
percent of all Medicare spending the following year. It is important to note
that, while risk adjustment is initially based only on
inpatient data, the risk adjustment payments account for all
costs of care associated with each diagnosis. It is also important to note that
risk adjustment is not cost-based reimbursement; it is
reimbursement adjusted for projected need based on health status in the previous
year.
Determining Diagnosis Groups The relevant diagnoses will be used to
classify beneficiaries into 15 different cost categories. One category is for
beneficiaries who were not hospitalized the previous year with relevant
diagnoses. For beneficiaries included in any of the other categories, plans will
receive an additional payment to cover the increased risk associated with
diagnoses in that category.
Payment will continue to be adjusted for
demographic factors, such as age, gender, county of residence, and whether a
Medicare beneficiary is also a Medicaid beneficiary. We have revised these
demographic factors for use with risk adjustment, for example,
by no longer including institutional status because the risk
adjustment methodology itself does a good job of predicting expenses
for nursing home residents.
Medicare will calculate a score for each
beneficiary to determine the payment that will be made if they choose to enroll
in a Medicare+Choice plan. For example, Medicare's average payment per year to
health plans is $5,800. Under risk adjustment, payment for an
85- year-old man will on average be $6,414. It will be an additional $2,060 if
he is on Medicaid, another $1,207 if he is disabled, and $8,474 more if he was
admitted to the hospital for a stroke the previous year, for a total of $18,155.
The score for each beneficiary will be calculated annually, and will follow them
if they move from one health plan to another.
Protecting Program Integrity
Most health plans operate with integrity and play by the rules, and we doubt
that plans will compromise successful medical management programs that keep
patients out of the hospital in order to game the risk
adjustment system. However, plans themselves have raised concerns that
risk adjustment based on inpatient data alone could create
perverse incentives for unnecessary hospitalizations. We, therefore, have taken
solid steps to prevent gaming of the system with inappropriate hospital
admissions or attempts to inflate the data submitted for use in risk
adjustment.
The risk adjustment system does not include hospital
stays of just one day, in order to help guard against inappropriate admissions.
And it excludes diagnoses that are vague, ambiguous, or rarely the principal
reason for hospital admission. In addition, we will use independent experts to
assess the validity and completeness of data plans submit to us by conducting
targeted medical record reviews and site visits. This will help ensure that
plans do not "upcode," or claim that hospital admissions were for more serious
conditions that would result in higher payment.
Protecting Taxpayers It is
essential to stress that risk adjustment will not and cannot be
budget neutral if we intend to protect the Medicare Trust Fund and be fair to
the taxpayers who support our programs. The whole reason for proceeding with
risk adjustment - and specifically with risk
adjustment that is not budget neutral - is that Medicare has not been
paying plans properly.
There is considerable evidence that we have overpaid
plans and continue to overpay plans, in large part because payments are not
adjusted for risk.
-- The Physician Payment Review Commission, in its 1997
Annual Report to Congress, estimated that Medicare has been making up to $2
billion a year in excess payments to managed care plans. This Congressional
advisory body notes that, unlike the private sector where managed care has
slowed health care cost growth, managed care has increased Medicare program
outlays. The Commission's 1996 Report found that those who enroll in managed
care tend to be healthy and those who disenroll tend to be unhealthy,
exacerbating Medicare losses.
-- Mathematica Policy Research, which has
conducted several studies on Medicare HMOs, says care of Medicare beneficiaries
in HMOs costs only 85 percent as much as care for those who remain in
traditional fee-for-service Medicare. That is 10 percent less than the 95
percent of the average fee-for-service costs plans were being paid.
-- The
Congressional Budget Office has said managed care plans could offer Medicare
benefits for 87 percent of Medicare fee-for-service costs, even though they were
paid 95 percent.
Congress also recognized that plans have been paid too
little for enrollees with costly conditions, and too much for those with minimal
care needs. The simple demographic adjustments made now for age, gender, county
of residence, Medicaid and institutional status, do not begin to accurately
account for the wide variation in patient care costs. Risk
adjustment will.
The vast majority of beneficiaries enrolled in
Medicare+Choice cost far less than what Medicare pays plans for each enrollee.
Medicare fee-for-service statistics make clear why risk
adjustment must not be budget neutral. More than half of all Medicare
fee-for-service beneficiaries cost less than $500 per year, while less than 5
percent of fee-for-service beneficiaries cost more than $25,000 per year,
according to the latest available statistics for calendar year 1996. The most
costly 5 percent account for more than half of all Medicare fee-for-service
spending.
Since Medicare+Choice enrollees tend to be healthier than fee-for-
service Medicare beneficiaries, the ratio of high to low cost beneficiaries in
health plans is even more stark. Clearly, care for the overwhelming majority of
Medicare enrollees costs plans much less than what Medicare pays because our
payments are predicated on the average beneficiary cost of care, calculated by
county. This average includes the most expensive beneficiaries in
fee-for-service, who generally do not enroll in managed care.
If
risk adjustment was budget neutral, Medicare and the taxpayers
who fund it would continue to lose billions of dollars each year on
Medicare+Choice. Accurate risk adjustment inevitably and
appropriately must change aggregate payment to plans.
Budget neutral
risk adjustment would cost taxpayers an estimated $200 million
in the first year of the phase-in, and $11.2 billion over 5 years if health
plans maintained their current, mostly healthy mix of beneficiaries. It is
important to stress that actual savings to taxpayers from risk
adjustment will vary to the extent that less healthy beneficiaries
enroll in Medicare+Choice plans, resulting in higher payments than health plans
receive today.
The amount of payment change will vary among plans and depend
on each plan's individual enrollees. Total payment may be higher for some plans
as they enroll a mix of beneficiaries that is more representative of the entire
Medicare population. As part of our Medicare+Choice March 1 rate announcement,
we will send a letter to each health plan with an estimate of how payment will
differ from what they are paid now, based on their current mix of enrollees.
Overall, we project that payment to Medicare+Choice plans on average will
change by less than one percent in the first year. How it will change over time
depends on the mix of beneficiaries in each plan. Risk
adjustment significantly changes incentives for plans and could well
lead to enrollment of beneficiaries with greater care needs. That could result
in plans receiving higher payments than they do now. Phasing in risk
adjustment also substantially buffers the financial impact on plans.
The federal government is forgoing $1.4 billion in savings in the first year and
as much as $4.5 billion over the full 5 years because of the phase in.
Payment changes will be further buffered by an annual payment update for
2000 that our preliminary estimate suggests will be 5.2 percent. This is
substantially larger than projections that were made last year. The final figure
will be released March 1, 1999. This annual update is based on formulas set in
law and projected expenditures for Medicare that are included in the President's
fiscal year 2000 budget.
CONCLUSION Risk adjustment is an
essential step forward for Medicare, beneficiaries, taxpayers and the
Medicare+Choice program. It will help Medicare pay plans fairly and accurately.
It will curtail disincentives to enroll less healthy beneficiaries. It will help
taxpayers and the Medicare Trust Fund start saving, rather than losing, money on
managed care. It will help level the playing field among plans. And it is
required by law.
We are aware of the magnitude of the impact of risk
adjustment and are, therefore, phasing in implementation to avoid undue
disruptions. We are also taking proactive steps to prevent potential gaming of
the system. We will closely monitor the impact on beneficiaries and plans. We
will continue to consult with beneficiary groups, health plans and academic
experts. Adjustments can be made each year as we proceed.
But, clearly, we
must proceed. Risk adjustment is too important to postpone and
too important to implement without a prudent phase-in that allows time for any
necessary refinements. Again, I thank you for inviting us here today to discuss
this, and I am happy to answer your questions. # # #
END
LOAD-DATE: February 27, 1999
