Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
October 01, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 9414 words
HEADLINE:
TESTIMONY October 01, 1999 WILLIAM J. SCANLON DIRECTOR HEALTH, EDUCATION, AND
HUMAN SERVICES DIVISION HOUSE WAYS AND MEANS HEALTH MEDICARE
BALANCED BUDGET ACT REVISIONS
BODY:
GAO United
States General Accounting Office Testimony Before the Subcommittee on Health,
Committee on Ways and Means, House of Representatives October 1, 1999 Better
Information Can Help Ensure That Refinements to BBA Reforms Lead to Appropriate
Payments Statement of William J. Scanlon, Director Health Financing and Public
Health Issues Health, Education, and Human Services Division Mr. Chairman and
Members of the Subcommittee: I am pleased to be here today as you discuss the
effects of the Balanced Budget Act of 1997 (BBA) on the Medicare program. BBA
set into motion significant program changes to both modernize Medicare and rein
in spending. The act's constraints on providers' fees, increases in beneficiary
payments, and structural reforms together were projected to lower Medicare
spending by $386 billion over the next 10 years. Although some BBA provisions
are in effect, data relevant to their impact are generally limited to date-,
other provisions have not yet been fully phased in. As a result, the act's full
effects on providers, beneficiaries, and taxpayers will remain unknown for some
time. BBA's Medicare provisions were enacted in response to rapid program
spending growth that was neither sustainable nor readily linked to demonstrated
changes in beneficiary needs. The act's payment reforms represented bold steps
to control Medicare spending by changing the financial incentives inherent in
payment methods that, prior to BBA, did not reward providers for delivering care
efficiently. To date, the Congress has remained steadfast in the face of intense
pressure to roll back certain BBA payment reforms while waiting for evidence
that demonstrates the need for modifications. Calls for BBA changes come at a
time when federal budget surpluses and lower-than-expected growth 'in Medicare
outlays could make it easier to accommodate higher Medicare payments. However,
as the Comptroller General cautioned last week, the surpluses are merely
projections that could fall short of expectations, and the imperative remains to
find the reforms that will make Medicare -sustainable and affordable for the
longer term. My comments today focus on payment reforms affecting certain
providers in Medicare's traditional fee-for-service program and providers in
Medicare's managed care program. Specifically, I will discuss the effects on
three providers of post-acute care services- home health agencies (HHA), skilled
nursing facilities (SNF), and providers of outpatient rehabilitation therapy-and
on the health plans participating in the Medicare+Choice program. In brief, some
providers of post-acute care and health plans in the Medicare+Choice program may
have to rethink their business strategies as a result of BBA payment reforms,
which seek to make Medicare a more efficient and prudent purchaser.
Imperfections in the design of BBA-mandated payment systems require attention,
and better information can help policymakers, distinguish between desirable and
undesirable consequences. Based on such knowledge, refinements can help ensure
that payments are not only adequate in the aggregate but are also fairly
targeted to protect individual beneficiaries and providers. Our issued and
ongoing studies of various payment methods are instructive in this regard, and a
summary of our results to date follows. - Home health care: Our work indicates
that (1) the reductions in the number of HHAs and changes in utilization were
consistent with the objectives of the interim payment system to control the
rapid growth that had preceded BBA and (2) appropriate access to Medicare's home
health benefit has not been impaired. However, the prospective payment system
(PPS) is a more appropriate tool for the long term than the interim payment
system, because it is intended to adjust payments for differences in beneficiary
needs. As we examine the challenges of designing a PPS, we are finding that that
the PPS will likely require further adjustments after it is implemented as more
information on home health costs, utilization, and users becomes available. -
SNF care: A PPS was implemented beginning in July 1998 with a 3- year transition
to fully prospective rates, giving providers time to adjust to the new system.
Our ongoing work suggests that factors in addition to the PPS have contributed
to fiscal difficulties for some corporations operating SNFs. Nevertheless,
certain modifications to the PPS may be appropriate to ensure that payments are
targeted to patients who require more costly care. The potential access problems
that may result if Medicare underpays for high-cost cases could lead to
beneficiaries' staying in acute care hospitals longer, rather than foregoing
care altogether. HCFA is aware of this potential targeting problem and is
working to develop a solution. - Caps on coverage of outpatient rehabilitation
them: In 1999, BBA established an annual $1,500 per-beneficiary cap on payments
for outpatient physical therapy and speech/language pathology services combined
and a separate $1,500 cap on outpatient occupational therapy. The caps reflect a
legitimate need to constrain service use. For the vast majority of outpatient
therapy users, the caps are unlikely to curtail access to services. Only a small
share of beneficiaries receiving therapy services are high users. Further, most
outpatient therapy users will likely have access to hospital outpatient
departments, which are not subject to the $1,500 caps. -In addition, owing to
HCFA's partial approach to enforcing the caps, noninstitutionalized
beneficiaries can avoid having the caps curtail service coverage by switching
providers. Whether the caps restrict coverage for a small share of nursing home
residents is less straightforward. A need-based payment system could help better
target payments toward beneficiaries who genuinely require more services than
allowed under the current dollar limits. - Payments to Medicare+Choice health
plans: Several BBA provisions address the long-recognized problem of excess
payments to Medicare+Choice plans. Some provisions have begun to be phased in,
such as reducing the annual rate updates; others have not yet become effective,
such as the use of a risk adjustment method based on
beneficiary health status. The net effect of the implemented revisions has been
modest and, on average, have likely removed only a portion of excess payments
built into the base rates. Moreover, the recent and upcoming rounds of plan
withdrawals from Medicare are not, as the industry has argued, fully
attributable to Medicare's lowered payment rates. The evidence emerging from
recent rounds of withdrawals suggests that market share, enrollment size, and
competition from other health plans factor into a plan's decision to participate
in Medicare. Critical to making Medicare+Choice payment modifications are the
establishment of an appropriate base rate and of a risk
adjustment method that pays more for serving beneficiaries with serious
health problems and less for serving relatively healthy individuals. BACKGROUND
The Medicare program consists of two parts: "hospital insurance," or part A,
which covers inpatient hospital, skilled nursing facility, hospice, and certain
home health care services; and "supplementary medical insurance," or part B,
which covers physician and outpatient hospital services, outpatient
rehabilitation services, home health services under certain conditions,
diagnostic tests, and ambulance and other health services and supplies. Growth
in Medicare Spending for Home Health Care During much of the 1990s, home health
care was one of Medicare's fastest growing benefits; between 1990 and 1997,
Medicare spending for home health care rose at an annual rate of 25.2 percent.
Several factors accounted for this spending growth, most notably the relaxation
of coverage guidelines. In response to a 1988 court case, a change in the
coverage guidelines essentially transformed the benefit from one that focused on
patients needing short-term care after hospitalization to one that also serves
chronic, long-term-care patients.2The loosening of coverage and eligibility
criteria contributed to an increase in the number of beneficiaries receiving
services and the volume of services they received. Associated with this rise in
utilization was an almost doubling in the number of Medicare-certified HHAs to
10,524 by 1997. Also contributing to the historical rise in home health care
spending were a payment system that provided few incentives to control how many
visits beneficiaries received and lax Medicare oversight of claims. As we noted
in a previous report, even when controlling for diagnoses, substantial
geographic variation existed in the provision of home health care, with little
evidence that the differences were warranted by patient care needs. Additional
evidence indicates that at least some of the high use and the large variation in
practice represented inappropriate billings and unnecessary care. Medicare
oversight declined at the same time that spending mounted, contributing to the
likelihood that inappropriate claims would be paid. To begin to control
spending, BBA implemented an interim payment system for HHAs beginning October
1, 1997. A PPS 'is scheduled to be implemented for all HHAs on October 1, 2000.
Growth in Medicare Spending For SNF Care As required by BBA, on July 1, 1998,
SNFs began a 3-year transition to a PPS, under which providers are paid a
prospective rate for each day of care. Previously, SNFs were pal id the
reasonable costs they incurred in providing Medicare-covered services. Although
there were limits on the payments for the routine portion of care (that is,
general nursing, room and board, and administrative overhead), payments for
ancillary services, such as rehabilitative therapy, were virtually unlimited.
Because higher ancillary service costs triggered higher payments, facilities had
no incentive to provide these services efficiently or only when necessary. Thus,
between 1992 and 1995, daily ancillary costs grew 18.5 percent a year, compared
to 6.4 percent for routine service costs. Moreover, new providers were exempt
from the caps on routine care payments for up to their first 4 years of
operation, which encouraged greater participation in Medicare. implementation by
I year, eliminating any transition period. Growth in Medicare Spending for
Outpatient Rehabilitation Therapy Services Rehabilitation therapy comprises a
substantial portion of the post-acute-care services provided by SNFs and other
providers, such as rehabilitation therapy agencies and comprehensive outpatient
rehabilitation facilities. Between 1990 and 1996, payments for outpatient
rehabilitation therapy alone rose at an average rate of 18 percent a year,
compared to 9.7 percent average growth rate for the same period for overall
Medicare spending. BBA reforms were designed to control both the price and
volume of therapy services provided in outpatient settings-the former by a fee
schedule and the latter by per-beneficiary coverage caps. Specifically, BBA
limits coverage for outpatient therapy to $1,500 per beneficiary for physical
therapy and speech/language pathology services, with a separate $1,500 per-
beneficiary limit for occupational therapy. Hospital outpatient departments are
exempt from these coverage limits. Historical Overpayments to Medicare Health
Plans BBA sought to moderate Medicare's payments to managed care plans because
beneficiaries who joined Medicare managed care cost-not saved-the government
money. That is, the government was paying more to cover beneficiaries in managed
care-an estimated several billion dollars more-than it would have if these
individuals had remained in the traditional fee-for-service program. Medicare
payments to managed care plans have been estimated to be too high by as much as
16 percent.7 Beginning in 1998, BBA made several changes to the method used to
set Medicare+Choice plan payments, not all of which will reduce excess payments.
Among other things, BBA required a new risk adjustment method-a
mechanism for adjusting payment rates on the basis of a beneficiary's expected
annual health care costs. It will be implemented in two stages. Beginning in
2000, HCFA plans to phase in an interim method based on inpatient hospital data;
in 2004 it plans to implement a more comprehensive method incorporating
additional medical data from other settings. The interim risk
adjustment, if fully phased in, would reduce payments by 7 percent. BBA
also reduced updates to health plan payment rates for a 5-year period ending
2002, for a cumulative rate reduction of less than 3 percent. However, the
effect of these reductions is substantially moderated because BBA used 1997
payment rates as the foundation for rates in 1998 and future years. According to
HCFA actuaries, a forecast error caused the 1997 rates to be an estimated 4.2
percent too high and, consequently, aggregate plan payments in 1998 were $1.3
billion too high. The excess payments resulting from this forecast error will
increase over time with managed care enrollment because it is built into the
base rate.8 LITTLE EVIDENCE TO DATE OF IMPAIRED ACCESS TO HOME HEALTH SERVICES,
BUT FUTURE PAYMENT SYSTEM WILL REQUIRE REFINEMENTS BBA's new payment policies
addressing rapid spending growth for home health care included the establishment
of an interim payment system, which is currently in effect, and a requirement to
replace that system with a PPS by October 2000. Our published and ongoing
studies discuss the effects of these BBA payment reforms and concerns about
their design and implementation. Concerns have been raised about 1he-effect of
the interim system, but, as we reported in May 1999, there was little evidence
that appropriate access to Medicare's home health benefit has been impaired.9
The pre-BBA payment system had controls for payments per visit but left volume
unchecked. Since enactment of BBA, home health agencies have been paid under the
interim payment system, which attempts to control the costs and total volume of
services. Indeed, our work indicates that overall home health utilization the
first 3 months of 1998 was below that in 1996 when Medicare spending for home
health services nearly peaked. Moreover, the sizeable variation in utilization
across counties has narrowed, a change consistent with the incentives of the
interim payment system. Although these changes occurred at the time that about
14 percent of HHAs closed their doors to Medicare business, we found little
evidence that beneficiary access to services was inappropriately curtailed.
Nevertheless, a home health PPS is a more appropriate payment tool because it
can align payments with patient needs. Under PPS, payments will reflect the
needs of the agencies' current beneficiaries rather than historical spending
patterns. However, our ongoing work on this subject shows that a number of
design issues remain, and the payment system will likely require continued
adjustments even after implementation next year. It appears that HCFA intends to
pay HHAs a per-episode rate for each 60-day period during which a patient
receives services. Such per- episode payments are designed to balance competing
goals of controlling service provision while giving HHAs flexibility to vary the
intensity or mix of services delivered during the episode. Evidence indicates
that HHAs do lower their costs in response to prospective payments for an
episode of care. Whether they will inappropriately cut care remains to be seen.
Under this prospective payment approach, HHAs also have incentives to increase
the number of episodes of care provided, which could escalate, rather than
constrain, Medicare spending. HCFA will need to adequately monitor service
provision to ensure that beneficiaries receive the care they need and the number
of episodes are not inappropriately increased. The design of the case-mix
adjustment mechanism is critical to adequately pay for patients with high
service needs, yet not overpay for others with lower needs. Designing this
mechanism requires detailed information about services and beneficiary
characteristics, and such information is currently available only for a sample
of users. Furthermore, the wide geographic and agency-level variation in service
use indicates that standards of care are not well- defined, nor are the criteria
for who should use the benefit. As a result, the factors that will be used under
PPS for grouping patients with similar resource needs may not adequately
distinguish among types of home health patients, and the PPS payment adjuster
that will be associated with each patient group may not reflect appropriate cost
differences. Systematic errors could result in overpayments for some
beneficiaries and underpayments for others. Underpayments could lead to impaired
access. Large variations in historic spending patterns mean that a PPS, which
will be based on average payment amounts, will undoubtedly cause payment levels
to rise for certain HHAs and fall for others. Although the PPS may incorporate
an outlier policy-that is, extra payments for extremely costly cases-additional
mechanisms to moderate payment changes may be appropriate. For example, an
"inter" policy to reduce the payment for a patient who receives few services may
be warranted, particularly given the fact that multiple episode payments may be
made for a single beneficiary. Policies addressing both extremes of service use
could protect the access of beneficiaries with high needs and protect Medicare
from overpaying for low-cost cases. A risk- sharing method, to account for cost
differences across agencies, could provide further protection against
underpayments or overpayments. Given the heterogeneous use of this benefit and
the unresolved PPS design issues, moderating payments through risk- sharing
might be warranted, even though such a mechanism would weaken HHAs' incentives
to provide care more efficiently. AGGREGATE PAYMENTS TO SNFs ARE ADEQUATE, BUT
REFINEMENTS NEEDED TO HELP MATCH PAYMENTS TO PATIENTS SERVICE NEEDS Despite
industry charges to the contrary, SNF payment rates under BBA are likely to
provide sufficient, or even generous, compensation for providers. Nevertheless,
the distribution of these payments may be out of balance, because the current
case- mix adjustment method may not adequately ensure that providers serving
high-cost beneficiaries are paid enough and that those serving low-cost
beneficiaries are not paid too much. Under the new PPS, SNFs receive a payment
for each day of covered care provided to a Medicare-eligible beneficiary. By
establishing fixed payments and including all services provided to beneficiaries
under the per them amount, the PPS attempts to provide incentives for SNFs to
deliver care more efficiently. Under the PPS, SNFs that previously boosted their
Medicare ancillary payments--either through higher use rates or higher
costs-will need to modify their practices more than others. Scaling back the use
of these services, however, may not necessarily affect the quality of care.
There is little evidence to indicate that the rapid growth in Medicare spending
was due to a commensurate increase in Medicare beneficiaries' need for services.
Recent industry reports have questioned the ability of some organizations that
operate SNF chains to adapt to the new PPS. Indeed, Medicare payment changes
have been blamed for one corporation's filing for protection under bankruptcy
law and the potential for another to similarly file. However, our ongoing work
suggests that the PPS should not have an untoward impact on most SNFs and is
only one of many factors contributing to the poor financial performance of these
corporations. For most SNFs Medicare patients constitute a relatively small
share of their business. In addition, the PPS rates are being phased in, to
allow time for facilities to adapt to. the new payment system, and most of the
payments are still tied to each facility's historical costs. However, heavy
investments in the nursing home and ancillary service businesses in the years
immediately before the enactment of BBA, both to expand their acquisitions and
upgrade facilities to provide higher-intensity services, has created
difficulties for some corporations. Now under tighter payment constraints for
both their SNF and ancillary service operations, these debt-laden enterprises
will not be able to rely on overly generous Medicare payments. Thus, while PPS
does represent a constraint on Medicare revenue and SNFs will have to adapt, the
performance of some large post-acute providers is a reflection of many Medicare
payment policy changes and strategic decisions made during a period when
Medicare was exercising too little control over its payments. We are gathering
additional information and will report soon on the effect of the PPS on SNF
solvency and beneficiary access to care. We believe that overall payments to
SNFs are adequate. In fact, we and the Department of Health and Human Services
Inspector General (HHS IG) are concerned that the PPS rates Medicare pays may be
too generous. Most of the data used to establish these rates-from 1995 cost
reports-have not been audited and are likely to include excessive ancillary
costs due to the previous system's incentives and the lack of appropriate
program oversight. We are also concerned that payments for individual
beneficiaries could be inappropriately too high or low because of certain PPS
design problems. The first of these involves the patient classification system.
The classification system was based on a small sample of patients and, because
of the age of the data, may not reflect current treatment patterns. As a result,
it may aggregate patients with widely differing needs into too few payment
groups that do not distinguish adequately among patients' resource needs. In
addition, the variation in non-therapy ancillary services costs does not appear
to have been adequately accounted for in the payment rates, which may
inappropriately compress the range in payments. Accordingly, access problems or
inadequate care could result for some high-cost beneficiaries. Hospitals have
reported an increase in placement problems due to the reluctance of some
facilities to admit certain beneficiaries with high expected treatment costs,
which will increase hospital lengths of stay for these patients. HCFA is aware
of the limitations of the patient classification system and is working to refine
the system to more accurately reflect patient differences. Another concern is
that the current patient classification system preserves the opportunity for
SNFs to increase their compensation by supplying unnecessary services. A SNF can
benefit by manipulating the services provided to beneficiaries, rather than
increasing efficiency. For example, by providing certain patients an extra
minute of therapy over a defined threshold, a facility could substantially
increase its Medicare payments without a commensurate increase in its costs.
WIDESPREAD EFFECT OF OUTPATIENT THERAPY CAPS DOUBTFUL, BUT NEED-ADJUSTED PAYMENT
LIMITS WOULD BE BETTER Questions have been raised about a BBA coverage
restriction for a third group of post- acute-care services-outpatient
rehabilitation therapy. Together with a fee schedule that replaces reasonable
cost reimbursement for these services, BBA established an annual $1,500
per-beneficiary cap on payments for outpatient physical therapy and
speech/language pathology services combined and a separate $1,500
per-beneficiary cap on outpatient occupational therapy. Services provided by
hospital outpatient departments are exempt from the per-beneficiary caps.
Rehabilitation therapy providers have raised concerns that the $1,500 limits
will arbitrarily curtail necessary treatments for Medicare beneficiaries,
particularly victims of stroke, hip injuries, or multiple medical incidents
within a single year. These concerns have led to several legislative proposals
to include various exceptions to the caps or eliminate them altogether. Our
ongoing work on this topic suggests that eliminating the caps without
substituting other controls could undermine BBA's comprehensive strategy for
restricting payments for outpatient therapy services. Controlling the price for
each unit of service- as is done with the new requirement that outpatient
therapy providers be paid using Medicare's physician fee schedule-may not
necessarily control Medicare expenditures if utilization rises. This is
particularly likely, given the price and utilization controls established
through PPSs on other providers of rehabilitation therapy. Thus, the
per-beneficiary caps serve to limit the volume of services provided. For the
vast majority of beneficiaries, the coverage caps are unlikely to curtail access
to needed services. An analysis by the Medicare Payment Advisory Commission
shows that, in 1996, most users (86 percent) did not exceed $1,500 in payments
for physical therapy and speech/language pathology services or for occupational
therapy. Moreover, as the fee schedule likely reduces payments for many
providers, the proportion of beneficiaries that are unaffected by the caps could
be even higher in 1999 because beneficiaries could receive more services before
reaching the per-beneficiary caps than under the former cost-based system. Even
for beneficiaries exceeding $1,500 in payments under the fee schedule,
mitigating factors exist. First, under the BBA exemption, Medicare beneficiaries
have no limits on coverage for rehabilitation therapy provided by hospital
outpatient departments, which are widely available nationwide. In addition, the
caps will initially not be applied as specified in BBA. Implementing the caps
involves many programming changes to Medicare's automated information systems
that HCFA is unable to undertake concurrent with its year 2000 preparation
efforts. As a result, HCFA's claims processing contractors will be unable to
track therapy payments on a per-beneficiary basis. Instead, effective January 1,
1999, HCFA employed a transitional approach to implementing the caps. Under this
approach, each provider of therapy services is responsible for tracking its
billings for each Medicare patient and stopping them at the $1,500 threshold.
The consequence of this partial implementation is that noninstitutionalized
beneficiaries may switch to a new provider when they have reached the $1,500
limit under their current provider. The effect of the per-beneficiary caps on
nursing home residents is less clear. HCFA's policy explicitly states that the
hospital outpatient department exemption does not apply to those therapy
services furnished to nursing facility residents. Moreover, the ability of
beneficiaries to switch outpatient providers under HCFA's partial implementation
approach is, practically speaking, not available to nursing facility residents.
Under new billing requirements, the nursing facility in which the beneficiary
resides is required to bill for outpatient therapy provided to the resident,
regardless of the entity that actually delivered the service. Therefore, unlike
their noninstitutionalized counterparts, nursing facility residents cannot
switch providers to restart the $1,500 coverage allowance. Under these
circumstances, some nursing home residents-like those needing extensive
rehabilitation therapy resulting from such conditions as stroke or hip
fractures-could be vulnerable to out-of-pocket costs for therapy. Even the risk
for these more vulnerable beneficiaries may be moderated, however, because
nursing home residents seeking therapy for such conditions would likely receive
a complement of rehabilitation services as a SNF inpatient-before the outpatient
therapy coverage limit begins to apply. For example, individuals suffering a
stroke or undergoing hip replacement would likely spend at least 3 days in an
acute care hospital, which, combined with the need for daily skilled nursing
care or therapy, would make them eligible for a Medicare-covered SNF stay of up
to 100 days, during which they would likely receive therapy services. After
their Medicare coverage period ends, nursing facility residents can continue to
receive outpatient therapy services under Medicare part B, subject to the
coverage limits. BBA mandates that HCFA develop a classification system based on
diagnosis to determine differences in patients' therapy needs and propose
possible alternatives to the caps in a report due January 1, 2001. This report
will be significant in that a need-based system could help ensure adequate
coverage for those beneficiaries requiring an extraordinary level of services
and prevent overprovision to those requiring only limited amounts.
MEDICARE+CHOICE REMAINS RELATIVELY INEXPENSIVE FOR BENEFICIARIES, BUT IMPROVED
RISK ADJUSTMENT NEEDED TO TARGET PAYMENTS APPROPRIATELY
Developing appropriate refinements to BBA reforms affecting Medicare+Choice
requires consideration of several aspects of Medicare's managed care program. At
the moment, plan withdrawals from Medicare+Choice in 1999, and recent
announcements that additional plans will withdraw in 2000, have prompted debate
about whether BBA reforms have resulted in inadequate payment rates. At the same
time, our published and ongoing work indicates that Medicare managed care
payments to health plans likely continue to exceed the cost of providing
Medicare-covered benefits. Our analysis of the 1999 withdrawals showed that
payment rates alone could not explain plans' participation decisions.
Withdrawals were not limited to low payment rate counties. The data suggested
that local market conditions affected plans' participation in a county. A plan
was more likely to withdraw from counties it had recently entered, where its
enrollment was low, or where its market share was small relative to other plans
serving the same county. Although our final analysis will not be available for a
few weeks, our preliminary assessment suggests that similar factors help explain
the pattern of the 2000 withdrawals. Plan withdrawals may well reflect a normal
market correction spurred by a changing business environment. Prior to BBA,
health plans could expand into new areas with relatively little risk because
overgenerous Medicare rates provided protection from the ill consequences of
small enrollment or large competitors. Between 1993 and 1998, the number of
plans and enrollees tripled. However, as BBA slowed payment growth, health plans
may have reevaluated their expansion decisions, making such factors as potential
enrollment, market share, and competition a key part of plans' decisions to
withdraw from certain geographic areas. A local example illustrates the
importance of nonpayment factors in plans participation decisions. In 1996, Blue
Cross' Free State health plan in Maryland-which until that time had served only
some of the state's large urban counties--extended service statewide. Free State
recently announced, however, that beginning in 2000 it would substantially
reduce its geographic service area. The plan is withdrawing from 17 rural and
small urban counties even though BBA will increase the average base rate in
those counties by nearly 6 percent next year. In contrast, the large urban
counties will receive only a 2.4 percent average rate increase, but Free State
will continue its Medicare participation in these counties. According to
industry representatives, it is difficult for health plans to serve counties
with few providers and enrollees because providers have little incentive to
discount their fees and plans cannot spread risk over a large enrollment base.
Although we cannot know with certainty, these factors may have influenced Free
State's decision to discontinue service in Caroline County and 16 other rural
and small urban Maryland counties. For example, in Caroline County Free State
faced no competitors, had enrolled 19 percent of the beneficiaries, and would
have received a 7.5 percent Medicare rate increase in 2000. However, less than
4,700 beneficiaries live in the county and Free State's 19 percent market share
represented an enrollment of less than 900 beneficiaries. In contrast, the plan
will continue to serve seven counties where the number of beneficiaries ranges
from about 15,200 to 116,600. In addition to our work on plan withdrawals, our
assessment of BBA payment changes indicates that, relative to the cost-of
providing the package of traditional Medicare benefits, payments to health plans
remain excessive. For one thing, plans annually receive a billion-plus-dollar
overpayment in aggregate as a consequence of BBA's terms for setting the base
payment rate. This problem, owing to an uncorrected forecast error, will be
built into future base rates because BBA has not provided explicit authority for
HCFA to correct the forecast error. In our June 1999 report, we suggested that
the Congress consider certain modifications to Medicare's base payment rates to
health plans to eliminate, among other things, the excess payments resulting
from the 1997 uncorrected forecast error. Moreover, payments continue to exceed
plans' costs of providing Medicare-covered services. In 1999, the average plan
was required to provide $54 in extra benefits per member per month so that
projected Medicare payments would not exceed the plan's projected costs and
normal profits, In addition, the average plan voluntarily provided another $54
in benefits per member per month. The additional benefits can be reflected not
only in coverage for services, but also in reduced beneficiary cost sharing. For
example, in 1999 most plans did not charge a monthly premium and charged only a
small copayment for outpatient services. In 2000, enrollment in a
Medicare+Choice plan will remain a relatively inexpensive way for a beneficiary
to obtain prescription drug coverage in many areas. On average, plans will
charge beneficiaries $16 per month in premiums and most will offer prescription
drug coverage. Beneficiaries will be charged a copay for prescription drugs that
will average about $17 for brand name drugs and $7 for generic drugs. In
contrast, the average monthly premium for private supplemental insurance
policies (Medigap) offering, among other things, prescription drug coverage
ranges from $136 to $194 per month in 1999. Moreover, those Medigap policies
require a $250 deductible with a 50- percent copayment. Given that Medicare has
spent more for the generally healthier beneficiaries enrolled in Medicare+Choice
plans than for the generally sicker beneficiaries in traditional Medicare, the
need to have payments better reflect beneficiaries' expected health care costs
is critical. HCFA's new risk adjustment method, based on
certain health status measures, is scheduled for phased implementation in 2000
and represents a major improvement over the current method. For the first time,
Medicare managed care plans can expect to be paid more for serving beneficiaries
with serious health problems and less for serving relatively healthy ones. The
method scheduled for implementation in 2004 will be an improvement over the
method used in 2000 because it is intended to include better health status
measures derived from more comprehensive data not currently available. HCFA's
plan to phase in the 2000 risk adjustment method slowly is
designed to balance the needs of taxpayers and beneficiaries. In 2000, only 10
percent of health plans' payments will be adjusted using the new method. This
proportion will be increased each year until 2003, when 80 percent of plans'
payments will be adjusted using the interim system. Although a gradual phase-in
of the interim risk adjuster delays the full realization of Medicare savings, it
also minimizes potential disruptions for both health plans and beneficiaries. In
2004, HCFA intends to implement a more finely tuned risk adjuster that uses
medical data from physician offices, outpatient departments, and other health
care settings and providers-in addition to the inpatient hospital data on which
the interim adjuster is based. This more comprehensive risk
adjustment system cannot be implemented currently because many plans
say they do not have the capability to report such comprehensive information.
CONCLUSION In conclusion, BBA payment reforms seek to curb unnecessary Medicare
spending. As the reforms begin to have their intended effects, pressure is
building to return to more generous payment policies. Evidence to date shows
that BBA is moving Medicare in the right direction but that adjustments will be
needed along the way. These adjustments should be based on thorough,
quantitative assessments so that misdiagnosed problems do not lead to misguided
solutions. With the health care of seniors and the tax dollars of al I Americans
at stake, it will be prudent to uphold new payment policies that exact -
efficiencies but make adaptations when substantiated evidence supports the need
to do so. Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or other Members of the Subcommittee might have.
LOAD-DATE: October 5, 1999 
