Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 9, 1999, WEDNESDAY
SECTION: IN THE NEWS
LENGTH:
3947 words
HEADLINE: PREPARED STATEMENT OF
WILLIAM
J. SCANLON
DIRECTOR
HEALTH FINANCING AND PUBLIC HEALTH ISSUES
HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION
UNITED STATES GENERAL
ACCOUNTING OFFICE
BEFORE THE SENATE FINANCE COMMITTEE
SUBJECT - MEDICARE + CHOICE
BODY:
Impact of
1997 Balanced Budget Act Payment Reforms on Beneficiaries and Plans
Mr.
Chairman and Members of the Committee:
We are pleased to be here as you
discuss the impact of payment reforms in the Balanced Budget Act of 1997 (BBA)
on the Medicare+Choice program. The BBA's creation of Medicare+Choice represents
one important means of helping to address the growing challenge of financing the
Medicare program. Collectively, BBA reforms are expected to lower program
spending by $386 billion over the next 10 years.
In creating the
Medicare+Choice program, the BBA furthered the use of a choice-based managed
care model of providing Medicare benefits, Prior to the BBA, Medicare's managed
care model was limited largely to health maintenance organizations (HMO). The
BBA expanded beneficiaries' health plan options, both by encouraging the wider
availability of HMOs across areas and by permitting other types of health plans
to participate in Medicare. The BBA also sought to pay health plans more
appropriately than Medicare had done under the program's previous HMO payment
formula. A decade of research by GAO and others found that, instead of saving
the government money as intended, the managed care program that preceded
Medicare+Choice overpaid health plans in the aggregate---estimated to be several
billions of dollars beyond what would have been paid had the enrolled
beneficiaries been served under Medicare's traditional fee-for-service program.
Some health plan and industry representatives believe that BBA's payment
changes were too severe, citing plan withdrawals from Medicare+Choice as
evidence of BBA's adverse effects. This hearing provides an opportunity to
examine the overall effect to date of BBA payment reforms affecting
Medicare+Choice plans. My statement today will focus on whether BBA reforms have
improved Medicare's ability to pay health plans more appropriately and whether
recent experience implementing these reforms suggests the need for
modifications. These remarks are based on GAO's prior and ongoing work on
Medicare+Choice.
In summary, the net effect of BBA payment revisions has
been to reduce but not fully eliminate excess payments to health plans. Some of
the provisions, such as the reduced annual updates, have already been
implemented, while others, such as the health-based risk
adjustment system, will be phased in over time.
Despite industry
alarm over the increase in plan withdrawals in 1999, our work suggests that
sweeping amendments to the BBA are not yet warranted for several reasons. First,
the net effect of BBA reforms on plans has been modest to date. Cuts in rate
increases, for example, have held down per capita payment growth by only a
little more than 1 percent. Second, data submitted by plans themselves indicate
that at least some plans can provide the traditional Medicare package of
benefits, offer some additional benefits, and make a profit even if they are
paid less than they are today. For example, according to their own data, plans
serving the Los Angeles area can provide the traditional Medicare package of
benefits for about 79 percent of what they are currently paid. Third, the
withdrawals we observed this year were not a reaction to BBA rate reductions
alone. Market forces appear to have played a larger role.
Because of cuts in
rate increases and expected improvements in risk adjustment,
the BBA's health plan payment reforms will reduce aggregate excess payments. As
a consequence, some Medicare+Choice plans may reduce supplemental benefits and
rethink their participation in the Medicare program. The continuing challenge
for the Congress is to strike the appropriate balance between containing
Medicare spending and fostering growth in Medicare+Choice.
BACKGROUND
Medicare's use of prepaid health plans, which typically have a financial
incentive to hold down costs, is intended to save the government from
unnecessary spending on Medicare services without compromising the provision of
covered benefits. In addition, from the beneficiary's perspective, these plans
can be an attractive alternative to traditional Medicare because they usually
offer more benefits and lower out-of-pocket costs. All plans serving Medicare
beneficiaries are required to provide Medicare's statutorily covered benefits,
and many provide additional services--such as outpatient prescription drugs,
routine physical exams, hearing aids, and eyeglasses--that are not covered under
traditional Medicare. In exchange for these advantages, beneficiaries give up
their freedom to choose any provider.
As of March 1, 1999, about 6.7 million
people---or 17 percent of Medicare's 39 million beneficiaries--were enrolled in
300 health plans, most of which were prepaid.2 Prepaid plans receive for each
beneficiary a fixed monthly amount--called a capitation rate- regardless of what
a beneficiary's care actually costs. The remaining 83 percent of Medicare
beneficiaries receive health care on a fee-for- service basis, where providers
are paid for each covered service they deliver.
Although Medicare's pre-BBA
managed care program attracted an increasing number of beneficiaries, it had
several serious shortcomings. First, it was overly expensive for the government.
During the decade preceding BBA, a mounting body of research showed that
government payments to HMOs for their Medicare enrollees exceeded spending for
similar beneficiaries in the traditional fee-for-service (FFS) program, even
though plan payment rates were discounted by 5 percent from estimated FFS
levels. This excess spending resulted from faulty calculation of the base rate
and inadequate adjustments to that rate for the healthier-than-average
population enrolled in Medicare's prepaid plans. In addition, HMOs were not
available everywhere. In 1996, more than 25 percent of beneficiaries lived in
areas not served by HMOs. Widely disparate payment rates across geographic areas
contributed to this variability in access and to sizable differences in
supplemental benefits. Finally, the program did not include options, such as
preferred provider organizations, that had become popular in the private sector
because they offered cost management but were more flexible than HMOs.
The
BBA changed the capitation rate formula used to compensate the prepaid plans.
Among several changes, the BBA required that the Health Care Financing
Administration (HCFA), the agency responsible for administering Medicare,
improve Medicare's current risk adjuster--the mechanism designed to adjust a
plan's capitation rates upward or downward to reflect the extent to which an
enrollee's expected health care costs differ from the average beneficiary's. As
we have previously reported, Medicare's current risk adjuster cannot
sufficiently raise or lower rates because it is based primarily on demographic
factors such as age and sex, which alone are poor predictors of an individual's
health care costs.
To illustrate: under Medicare's current risk
adjuster, a plan would receive the same payment for two enrollees of the same
age and sex, even if one is expected to incur only minimal health care costs for
treatment of occasional minor ailments and the other is expected to require
expensive treatment for a serious chronic condition.
Without the use of
health status factors to make better adjustments, Medicare generally
overcompensates health plans because they tend to enroll beneficiaries who are
healthier than average. Our 1997 study on payments to California HMOs, which
enrolled more than a third of Medicare's managed care population; found that
health plan enrollees had expected costs that were more than 16 percent below
those for demographically similar beneficiaries in traditional Medicare.3 Such
"favorable selection" by Medicare's prepaid health plans--that is, their
tendency to attract healthier-than-average enrollees--is not surprising. People
with chronic or severe illnesses may not be attracted to HMOs because they have
established relationships with providers and feel a need for easy access to
specialists. Moreover, given the inadequacy of Medicare's risk adjuster to
lower--or raise-- payments appropriately, plans could put themselves out of
business if they attracted significant numbers of high-cost beneficiaries.
UNDER BBA, MEDICARE'S PAYMENTS TO HEALTH PLANS LIKELY REMAIN EXCESSIVE IN
THE AGGREGATE
Beginning in 1998, BBA substantially changed the method used
to set Medicare+Choice plan payments. Some of the new payment provisions will
tend to reduce excess payments. The most important of these is a new
health-based risk adjustment system, to be implemented in two
stages, with an interim adjuster to be introduced in 2000 followed by a more
comprehensive adjuster in 2004. Substantial excess payments may persist,
however, because other BBA provisions tended to incorporate some of the excess
that existed in 1997 into the current rates.
One way the BBA will reduce the
excess in Medicare's managed care payments is by holding down per capita
spending increases for 5 years. Specifically, BBA sets the factor used to update
managed care payment rates to equal national per capita Medicare growth minus a
specified percent: 0.8 percent in 1998 and 0.5 percent in each of the following
4 years. Although these across-the-board reductions can help produce savings,
the cumulative reduction of less than 3 percent is considerably smaller than the
prior estimates of excess payments, which generally exceed 10 percent. Moreover,
this approach does not address the problem that the excess payments can vary
among geographic areas and plans. In our study of California plans, we found
that excess payments tended to be much higher in some counties than others.
The BBA also provides for a methodological approach known as "blending,"
which is designed to reduce the geographic disparity in payment rates and
encourage more widespread plan participation.4 Blending will work to move all
rates closer to a national average by providing for larger payment increases in
low rate counties and smaller payment increases in high rate counties. According
to a 1997 study by the Physician Payment Review Commission (now the Medicare
Payment Advisory Commission), there is some evidence that excess payments are
more likely to occur in high payment rate counties.5 Thus, blending may
indirectly reduce excess payments by holding down payment increases in high rate
counties.
A more targeted reduction in plan payments resulted from the BBA
provision to "carve out" of the rate that portion that previously constituted
Medicare's subsidy to teaching hospitals for graduate medical education (GME).
Beginning in 1999, the BBA removes an increasing portion of the Medicare
capitation payment attributable to GME and instead requires HCFA to pay teaching
hospitals caring for Medicare+Choice plan enrollees directly. This provision was
designed to address the concern that the capitation rates incorporated Medicare
payments designed to cover GME expenditures, even when plans did not pass such
amounts along to teaching hospitals in their payments to these facilities.
When implementation of BBA is complete, however, excess payments may not be
fully eliminated. Because the law specified that 1997 county rates be used as
the basis for all future county rates beginning in 1998, the BBA froze in place
prior excess payments. As we reported in 1997, HCFA's then current methodology
resulted in county rates that were generally too high.6 In addition, excess
payments are built into the current rates because BBA did not allow HCFA to
adjust the 1997 county rates for previous forecast errors. Such adjustments had
been a critical component of the pre-BBA rate-setting process. HCFA actuaries
now estimate that the forecast error resulted in 1997 managed care rates that
were too high by 4.2 percent. While BBA permits HCFA to correct forecasts in
future years, it did not include a provision that would have allowed HCFA to
correct its forecast for 1997. Consequently, about $1.3 billion in overpayments
were built into plans' annual payment rates for 1998. This error will be
compounded as managed care enrollment grows.
BBA's mandated health-based
risk adjustment system is the provision that most directly
targets the excess payment problem. The BBA requires HCFA to implement,
beginning January 1, 2000, a method to base plan payments on beneficiaries'
health status. HCFA's proposed interim health-based risk
adjustment method uses only hospital inpatient data to gauge
beneficiaries' health status but still represents a major improvement over the
current method.7 For the first time, Medicare's prepaid health plans can expect
to be paid more for serving beneficiaries with serious health problems and less
for serving relatively healthy ones.
Nevertheless, HCFA proposes to phase in
the new interim risk adjustment system slowly. 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. In 2004, HCFA intends to
implement a more finely tuned risk adjuster that uses medical data from
physician offices, skilled nursing facilities, home health agencies, and other
health care settings and providers--in addition to inpatient hospital data. This
improved risk adjustment system cannot be
implemented currently because many plans say they do not have the capability to
report such comprehensive information. 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.
RECENT EXPERIENCE SUGGESTS SWEEPING ACTION NOT WARRANTED IN THE SHORT TERM
Announcements of plan withdrawals in the last year have prompted debate
about whether to revise certain BBA provisions governing Medicare+Choice. As we
recently reported, several factors suggest that such revisions could be
premature,s First, although an unusually large number of managed care plans left
the program in 1999, a number of plans have applied to enter the program or
expand their participation. Data on approved and pending Medicare plans as of
January 1999 show that, nationwide, beneficiary access to prepaid plans is
likely to increase slightly this year. Although for some localities withdrawals
have meant significantly diminished or no access, only 1 percent of previously
covered managed care enrollees were left without any Medicare+Choice plan
option.
Second, it would be inaccurate to conclude that lower payment rates
alone were responsible for these plan withdrawals. The current movement of plans
in and out of Medicare is likely to be a normal reaction to market competition
and conditions. While new payment rates were certain to have been considered in
plans' decisions to withdraw from certain geographic areas, other
factors--including recent entry into the market, low enrollment, and the
presence of large competitors--likely played a role as well. Supporting this
conclusion is the fact that plan withdrawals were not limited to low payment
rate counties: 10 of the 11 counties with the highest payment rates were
affected by the withdrawals. Moreover, a number of new plans either have
approved or pending applications to participate in the program. If all
applicants are approved, slightly more beneficiaries will have access to a
Medicare+Choice plan in 1999 than had access to one in 1998 before the
withdrawals occurred.
Third, recent data show that, despite the BBA's
lowering of rate increases, Medicare's payments to plans still exceed the plans'
cost of providing the traditional Medicare package and plans can continue to
provide benefits well beyond that. Most Medicare+Choice plans do not charge
beneficiaries a separate monthly premium and charge only a small copayment for
each outpatient service.9 Nearly all plans offer coverage for routine physical,
eye, and hearing exams. Most provide coverage for outpatient prescription
drugs.10 Some provide dental care. In contrast, Medigap policies----of which
there are 10 standard types--generally cost beneficiaries about $95 or more a
month in premiums, while 7 of the 10 standard Medigap policies do not cover
outpatient prescription drugs. Those Medigap policies offering a drag benefit
require a $250 deductible with a 50-percent copayment and an upper limit on
payments.
Many prepaid health plans have had considerable latitude
in offering benefits because Medicare pays more than it costs them to provide
the traditional FFS benefit package, even after accounting for allowable
profits.11 Under Medicare's payment terms, when a plan's estimated cost to
provide the FFS package of benefits is less than projected payments, the plan
must use the difference--an amount known as "savings"--to enhance its benefit
package by adding benefits or reducing fees.12 In 1997, plan savings averaged
nearly 13 percent of payments. Consequently, plans were required to provide
additional benefits worth $60 per member per month.
Although the
relationship between plans' costs and their Medicare payments may have changed
since 1997, our analysis of 1999 data submitted by plans serving Los Angeles
county suggests that their costs continue to be well below Medicare payments. On
average, Los Angeles plans could provide the traditional package for about 79
percent of the current payment amount. They complied with Medicare's
requirements by using the approximately $117 per beneficiary per month
difference between Medicare payments and their costs to provide additional
benefits. This amount of additional benefits may be higher than the national
average because of the historically high payment rates in the area. However, the
example of Los Angeles illustrates that, 2 years after BBA's payment reforms
were implemented, some plans receive payments that far exceed their costs of
providing the traditional FFS benefit package.
Plans may choose, for
competitive or other reasons, to exceed Medicare's minimum requirements and
further enhance their benefit packages. In 1997 nationally, plans on average
added more than $33 in extra benefits per member per month--in addition to the
$60 in required additional benefits. The Los Angeles plans added an average of
$21 per beneficiary per month in extra benefits during 1999. Although all Los
Angeles plans offer some extra benefits, the dollar amount varies by plan from
$0.43 per beneficiary per month to almost $80 per beneficiary per month. The
ability of plans to provide additional benefits (both required and voluntary)
suggests that planned cuts in rate increases are not likely to threaten the
typical plan's ability to earn a profit while providing a benefit package that
is more comprehensive than the one available in Medicare FFS.
CONCLUDING
OBSERVATIONS
In creating the Medicare+Choice program, BBA substantially
changed the way plan payments are determined. Some plan and industry
representatives have suggested that BBA's payment reforms were too severe. They
point to the recent plan withdrawals to back up their claims that the
Medicare+Choice program is in danger of floundering. We believe, for a number of
reasons, that these concerns must be viewed in a broader context, as follows:
- The effect on plan payments to date has been modest and, on average, has
removed only a portion of excess payments built into the base rates.
- Data
submitted by plans suggest that many of them can provide the FFS package of
benefits, offer some additional benefits, and make a profit even if they are
paid less than they are today.
- The withdrawals we observed this year
appear to have been influenced by external market conditions not fully
attributable to Medicare+Choice provisions.
Decisions to modify
Medicare+Choice need to balance industry concerns about the BBA's changes to
health plan payment rates against a reasoned assessment of the program's purpose
and a systematic analysis of the BBA's impact. Medicare managed care was
instituted to save the program money. Although HMO payments before BBA were
discounted by 5 percent from what was paid for traditional Medicare
beneficiaries, methodological shortcomings led to Medicare's HMO enrollees
costing the program and taxpayers more. The excess payments benefited plans and
their enrollees as plans offered additional benefits like prescription drug
coverage.Adjusting plan payments so that the program pays no more for a
Medicare+Choice enrollee than for a traditional Medicare beneficiary with
equivalent health status is going to mean smaller payments and most likely lower
profits for plans as well as fewer supplementary benefits for enrollees. These
consequences raise for the Congress the question of whether the BBA's payment
changes should be modified to protect plans and the fraction of the Medicare
beneficiary population enrolled---even if that protection results in Medicare's
spending more on the Medicare+Choice beneficiary than for the traditional
Medicare beneficiary.
Mr. Chairman, this concludes my prepared statement. I
will be happy to answer any questions you or the other Members of the Committee
may have.
FOOTNOTES:
1 For the purposes of this statement, the term HMO
refers to plans with Medicare risk contracts, which accounted for about 90% of
Medicare managed care enrollment in 1997. Prior to the BBA, Medicare managed
care plans also incuded cost contract HMOs and health care prepayment plans. 2
About 90 percent of the 6.7 million Medicare beneficiaries were enrolled in
managed care plans that receive fixed monthly payments. The remainder were
enrolled in plans that are reimbursed for the costs they incur, less the
estimated value of beneficiary cost-sharing.
3 (Medicare HMOs: HCFA Can
Promptly Eliminate Hundreds of Millions in Excess Payments (GAO/HEHS-97-16, Apr.
25, 1997). This is consistent with a 1996 study by HCFA researchers finding that
health plan enrollees had costs roughly 12 to 14 percent below the average
beneficiary's. (Riley and others, HCFA Review. 1996.)
4 Because of
BBA-mandated budget neutrality and minimum payment constraints, no county
received a blended rate in 1998 or 1999. Blending will occur for the first time
in 2000.
5 Physician Payment Review Commission, 1997 Annual Report to the
Congress.
6 GAO/HEHS-97-16.
7 Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess Payments Overall While Making Them
Fairer to Individual Plans (GAO/T-HEHS-99-72, Feb. 25, 1999).
8 Medicare
Managed Care Plans: Many Factors Contribute to Recent Withdrawals; Plan Interest
Continues (GAO/HEHS-99-91, Apr. 27, 1999).
9 Beneficiaries who wish to
participate in the Medicare+Choice program must pay the Medicare part B premium
of $45.50 per month.
10 GAO/HEHS-99-91
11 The accuracy of the cost data
submitted by plans is unknown. Recent reports by the Department of Health and
Human Services Office of the Inspector General suggest that the administrative
cost component reported by some HMOs may be too high. See Administrative Costs
Submitted by Risk-Based Health Maintenance Organizations on the Adjusted
Community Rate Proposals Are Highly Inflated (A-14-9700202), Department of
Health and Human Services, Office of the Inspector General, July 1998.
12
Alternatively, plans may deposit the amount in a benefit stabilization fund for
use in future years. Before 1998, plans had a third option of returning the
savings to Medicare. Historically, however, plans have enhanced their benefit
packages in an attempt to attract members.
END
LOAD-DATE: June 10, 1999 
