Copyright 1999 Federal News Service, Inc.
Federal News Service
JUNE 9, 1999, WEDNESDAY
SECTION: IN THE NEWS
LENGTH:
3470 words
HEADLINE: PREPARED TESTIMONY OF
ROBERT
B. CUMMING, MAAA, FSA
MEMBER, RISK ADJUSTOR WORK GROUP
AMERICAN ACADEMY
OF ACTUARIES
BEFORE THE SENATE COMMITTEE ON FINANCE
SUBJECT - "MEDICARE+CHOICE" JUNE 09, 1999
BODY:
The American Academy of Actuaries is the public policy organization for
actuaries practicing in all specialties within the United States. A major
purpose of the Academy is to act as the public information organization for the
profession. The Academy is non-partisan and assists the public policy process
through the presentation of clear and objective actuarial analysis. The Academy
regularly prepares testimony for Congress, provides information to federal
elected officials, comments on proposed federal regulations, and works closely
with state officials on issues related to insurance. The Academy also develops
and upholds actuarial standards of conduct, qualification and practice, and the
Code of Professional Conduct for all actuaries practicing in the United
States.Good morning Chairman Roth and members of the committee. My name is Bob
Cumming and I am a principal with the actuarial consulting firm of Milliman
& Robertson in Minneapolis. I am appearing today in my capacity as a
representative of the Risk Adjustors Work Group of the American Academy of
Actuaries (Academy). Our work group was formed at the request of the Health Care
Financing Administration (HCFA) to complete an actuarial review of the health
status risk adjustment methodology the agency will use starting
on January 1, 2000 to pay Medicare+Choice health plans.
As you are aware,
the use of a health status risk adjustment formula is required
by the Balanced Budget Act of 1997 (BBA). That law directed HCFA to report to
Congress on the proposed risk adjustment method and, further,
provides for, "an evaluation of such method by an outside, independent actuary
of the actuarial soundness of the proposal." (BBA, Section 1853). Last fall, the
Health Care Financing Administration asked the American Academy of Actuaries to
perform this evaluation. The Academy appointed a volunteer work group consisting
of health actuaries who are either consultants to or staff members with health
plans and health insurers to review HCFA's proposal. A list of the members of
the work group is attached to my testimony. Our analysis was included as part of
the agency's report to Congress which was issued on March 1. The Academy's work
was provided pro bono, although HCFA did reimburse the members for travel
expenses associated with the meetings of the work group.
HCFA's Proposal
Currently, HCFA's payment rates for Medicare+Choice plans are adjusted to
reflect the risk characteristics of the plans' participants as defined by the
demographic factors of age, gender and the beneficiary's status
(institutionalized or non-institutionalized; Medicaid recipient or nonMedicaid;
employed or not; disabled or not). Beginning in the year 2000, HCFA is required
by the BBA to supplement these demographic adjustments with a health status risk
adjustor.
HCFA plans to assign a risk score to each Medicare beneficiary
based on diagnosis information for that individual, taken from previous hospital
inpatient stays. The risk scores were developed using a list of "principal
inpatient diagnostic cost groups" (PIP-DCGs), which were developed for this
purpose. The previous medical costs for inpatient hospital stays incurred by the
individual are used to determine their expected future medical risk and,
therefore, how much the Medicare+Choice health plan in which they are enrolled
should be paid. New enrollees in Medicare will be assigned an estimated risk
score based on HCFA's analysis of existing Medicare fee-for-service (FFS) data.
Conclusions
The new risk adjustment system represents a
significant change for health plans, contracting providers, and health plan
members. While the Academy work group believes the conceptual basis of the
risk adjustment method proposed by HCFA is "actuarially sound,"
as we have defined it for this purpose, we have serious concerns about the
method's implementation, operation, and impact. These issues include:
-
Exclusions of certain risk categories from the risk adjustment
methodology, such as one- day hospital stays, which may penalize health plans
that effectively manage the delivery of health care.- Lack of adequate testing
of the potential impact of the new methodology on health plans and
Medicare+Choice beneficiaries, although the phase-in will significantly soften
the impact of changes in reimbursement levels from what it might otherwise be.
- Administrative feasibility of the implementation of the new system because
of timing and data collection issues.
- The processing of extraordinary
amounts of newly collected data and completing a series of complex calculations
introduces an element of uncertainty that cannot be anticipated until health
plans and HCFA have full opportunity to understand the implications.
- Use
of only fee-for-service data as the basis for the development of risk
adjustment weights.
There is a substantial risk for the Medicare
system if the risk adjustment methodology does not work as
intended. The negative consequences could include withdrawal of Medicare+Choice
health plans from the market, financial problems or insolvency for health plans
and the potential for a reduction in benefits provided to beneficiaries. Because
of these concerns, the work group believes HCFA's decision to implement the new
methodology under a phased-in approach is a sound one and will limit changes
from the current payment system while HCFA and the health plans assess the
impact of the new methodology.
While HCFA has done much work in a short time
period to develop the new methodology and design implementation strategies,
additional work remains to fully define HCFA's risk adjustment
method and test application of the method to make sure it achieves the intended
results. The work group recommends that HCFA further modify the risk
adjustment model with the knowledge gained during the first year of
operation.Definition of Actuarial Soundness
The Academy was asked by HCFA to
evaluate the actuarial soundness of its proposal. For this purpose, there is no
widely recognized definition of "actuarial soundness." The work group therefore
analyzed HCFA's proposal in terms of: (1) established actuarial criteria for
risk adjustment, (2) Actuarial Standards of Practice, and (3)
the general principles and practices of actuarial science. Actuarial Standards
of Practice are guidelines developed by the Actuarial Standards Board to help
actuaries in their work. Specific actuarial goals and criteria for risk
adjustment are described in the Academy's May 1993 monograph titled,
"Health Risk Assessment and Health Risk Adjustment: Crucial
Elements in Effective Health Care Reform." The criteria used to evaluate
risk adjustment systems are:
Accuracy: Because payments to
health plans will be determined based on the risk adjustment
mechanism, accuracy and avoidance of statistical bias is critical. Practicality
and Reasonable Cost: The risk adjustment mechanism should not
be so complex that implementation is extremely cumbersome, thereby adding
significant cost to the system.
Timeliness and Predictability:
Carriers setting premium rates should be able to predict the impact of
risk adjustment on their premiums with a fair degree of
accuracy and in a timely manner, in order to avoid solvency concerns and
disruption to members.
Resistance to Manipulation: The risk
adjustment mechanism should aim to make it impossible for specific
carriers to benefit financially by "gaming" the mechanism.
The Academy's
review took into account all aspects of the proposed methodologies that impact
on its "actuarial soundness," including, but not limited to the proposed
formulas, the availability, quality, and relevance of the data required, and the
ability to be implemented as intended.
In addition, the Academy has
evaluated the appropriateness of the proposed methods in relation to available
alternatives (including non- administrative data models such as surveys,
enhanced age/gender/status, and the status quo) and in light of the
modifications being made to the underlying base rates by county over the same
time period. Limitations of the Work Group's Analysis
It is important to
note that the work group's analysis and conclusions relied on the information
supplied by HCFA. During the review process, HCFA provided the work group with
preliminary results of the potential payment impact of the risk
adjustment methodology on Medicare+Choice plans. However, the work
group was not able to verify the accuracy of the data collected by HCFA or the
calculations used by HCFA to determine the impact on health plans.
In
addition, HCFA did not provide the work group with an assessment of the impact
of the risk adjustment methodology on beneficiaries, and the
scope of our opinion is similarly limited.
HCFA's risk adjusted payment
system is still a "work in progress", and it should be understood that our
opinion on the actuarial soundness of HCFA's proposals are based on the system
as they were described to us at the time we performed our review.
The work
group was not able to undertake a detailed analysis of the mathematical formulas
used to develop the risk adjustment methodology, but rather
focused its review on the conceptual and theoretical basis of the system.
Because HCFA is still working on the proposed methodology and there are a number
of unresolved implementation issues, our report is a qualified review of the
actuarial soundness of the proposal.
Analysis and Recommendations
The
new methodology for making health status risk adjustments to
Medicare payments appears to meet the requirements of the Balanced Budget Act of
1997, provided the system is implemented carefully. On balance, and with a
phase-in, the proposed risk adjustment method appears to be a
reasonable first step in what should be a long-term evolutionary process. HCFA
is to be commended for the progress to date and for recognizing the limitations
of the proposal arising from the available data, timing requirements and areas
for future improvements.
In general, the work group believes the PIP-DCG
risk assessment methodology developed by HCFA meets the goals of risk assessment
I outlined earlier in my testimony. However, there are a number of concerns
about the health risk assessment formula that the work group raised in its
report:
Using Only Inpatient Data: A significant component of the PIP-DCG
model is the restriction of the risk adjustment method to
conditions identified by inpatient hospital claims. This feature has both
advantages and disadvantages. As one positive factor, this requirement matches
well with the information currently available to the Medicare program.
Currently, hospital claim information is more accessible and easier to audit
than ambulatory care data, and requires less additional work by health plans to
report to HCFA.
However, there are several drawbacks to a system that uses
only inpatient data. A major feature of managed care has been the measurable
shifting of inpatient care to outpatient sites and the substitution of less
invasive therapies to treat a given condition. When the risk assessment system
is restricted to inpatient claims, the members subject to effective managed care
can appear healthier than average, because of limits on what is measured.
If
outpatient (ambulatory) data is added to the inpatient claims information, a
better picture of the potential "risk" of each individual Medicare beneficiary
is obtained. We have therefore recommended that outpatient data be included in
HCFA's methodology as soon as it is feasible to do so.
Exclusion of One-Day
Hospital Stays: The risk adjustment methodology does not "give
credit" for one-day hospitalizations, under the assumption that including them
may result in "gaming" of the system by health plans. If included, plans could
"game" the system by ordering unnecessary one-day stays for minor medical
conditions, in order to include beneficiaries in the health status risk
adjustment process, and thereby increase payments the next year. The
underlying concept of excluding one-day admissions does have merit. It can
reduce gaming of the system by requiring each hospitalization to be of a certain
severity (measured by a length of two days or more) and plans would not have an
incentive to hospitalize a patient overnight just to receive "credit."
However, the exclusion of one-day stays may unduly penalize plans which
efficiently manage the delivery of health care. This is because effective care
management tend to reduce stays to one day which might otherwise be two or more
day stays. Since those stays would then be excluded from the risk
adjustment process, this would penalize plans for their efficiency.
According to the report from Health Economics Research (HER), which assisted
HCFA in designing the PIP-DCGs, excluding one-day stays reduces the predictive
power of the health status risk adjustment methodology. Also.
it might be noted that excluding one-day hospitalizations shifts the issue of
"gaming" from whether to hospitalize someone at all to a question of whether to
keep the patient for a second hospital day.
The work group suspects that the
disadvantages of excluding one-day hospitalizations may outweigh any possible
gain. It would be appropriate to analyze the risk adjustment
methodology based on whether it is easier to "game" admissions or to "game"
length of stay and any resulting adverse incentives for health plans.
HCFA
may want to consider either using one-day stays as part of the risk
adjustment formula or giving a partial credit or other adjustments for
those hospitalizations in structuring payments to health plans.
Principal
Diagnosis: The PIP-DCG model measures conditions by capturing the principal
diagnosis recorded on each inpatient claim. The use of the principal diagnosis
for the PIP-DCG model is based on existing coding practices for inpatient claims
used by hospitals. Since only the principal diagnosis is generally used, it is
possible that not all appropriate information is collected or used. A qualifying
condition could be listed as the secondary. (or other) diagnosis, which could be
a contributing factor leading to the need for hospitalization.
Alternately,
there is a common belief that many secondary conditions currently reported are
not as reliable and should not be included in the measurement system. Since the
initial stages of the risk assessment system will be using data that was
recorded without the presence of direct coding incentives, it may be reasonable
to use only principal diagnosis information. However, as the PIP-DCG system is
implemented, the restriction to using only principal diagnostic groups should be
re-evaluated.
Number and Development of the PIP-DCG Groups: Health Economics
Research developed the diagnostic groups using a HCFA survey of Medicare FFS
data which sampled 5% of Medicare beneficiaries. The claims information for this
sample fell in the two-year interval from January 1, 1995 through December 31,
1996. Beneficiaries who were not alive and enrolled in Medicare for the entire
time period were excluded, as were individuals who would not have been eligible
for the Medicare+Choice program for various reasons. Because of these limits,
the actual sample represents roughly a 3.5% sample. We have included some
technical recommendations in our report, which can be included as HCFA revises
the methodology.
Excluding Discretionary Conditions: The base cost
group (those individuals who are not assigned health status risk scores) also
includes Medicare beneficiaries with diagnoses that were determined by HER to be
discretionary, vague, or only occasionally resulted in inpatient admissions. The
exclusion of those "discretionary" conditions has the beneficial effect of
reducing potential bias in the formula against Medicare+Choice health plans with
well managed care delivery systems by not giving credit for discretionary
admissions and by removing the incentives to hospitalize a patient for minor
illness.
However, we suggest that the diagnoses included in the base cost
group should be reviewed in the future as coding practices change under the
PIP-DCG system. If hospitals become more aggressive in their coding in the
future, the percentage of claims falling into a PIPDCG may change and weights
would need to be recalibrated, particularly if the PIP-DCG method is used beyond
the currently planned three-year period.
Chemotherapy: HCFA has indicated
that beneficiaries who are undergoing chemotherapy will be placed in a diagnosis
category based on the patient's secondary diagnosis (most likely cancer). Since
the medical conditions underlying the need for chemotherapy represent high-cost,
ongoing conditions that are predictive of future medical expenses, it is
appropriate that they be included in the risk assessment model. The work group
believes including chemotherapy as part of the diagnosis groups will increase
the ability of the methodology to predict future health care costs.
Exclusion of Indirect Medical Education Costs: The model developed by HER
excludes indirect medical education (IME) costs from the Medicare FFS data used
to calculate the relative weights used in this system. The IME costs are
approximately two-thirds of the total graduate medical education costs currently
paid through Medicare (the FFS data does include direct medical education
expenses). While it is technically incorrect to include any graduate medical
education costs (since medical education costs will be paid outside of the
capitation rate in the future), any distortion is likely to be small. However,
it is possible there will be some internal inconsistencies in the model since
high-cost conditions captured in the PIP-DCGs may more likely be treated in a
tertiary care or teaching hospital.
Factors for Newly Enrolled Medicare
Members: HCFA decided to develop a special set of risk scores for those
individuals who are eligible for Medicare for the first time and do not have any
previous encounter data in the Medicare system. HCFA used FFS data to construct
average expenditures for categories of newly eligible members (beneficiaries who
become eligible for Medicare because of age or disability, or members who were
previously eligible for coverage but deferred entry into the Medicare system).
Newly eligible members will be assigned an estimated risk score based on HCFA's
estimate of their predicted medical expenditures. The validity of these risk
scores is unclear. The work group suggested that HCFA review its risk scores for
the newly eligible once current data is available.
Additional Testing:
Health Economics Research performed a number of tests on the P1PDCG risk
adjuster methodology to determine how accurately it predicts total expected
medical costs. The recommendations made by HER regarding several key components
of the model such as the use of inpatient data only, exclusion of one-day stays
and the number of PIP-DCG groups to be used, appear to be reasonable based on
the FFS data which was reviewed. While the HER report discusses potential bias
against managed care organizations that deliver care more efficiently than fee
for service providers, HER did not have managed care data to determine what, if
any, bias exists.
HCFA has completed some preliminary testing of the
potential impact of the new risk adjustment methodology on
Medicare+Choice plans, including managed care organizations. In order to
understand the impact of the new system on the marketplace, the work group
suggests that HCFA update these tests as additional data is available, and as
health plans gain more experience with the operation of the risk
adjustment mechanism.
Cost-Benefit Analysis: The proposed system is
relatively new and it is likely that there will be difficulties in
implementation. It would be very helpful to establish more accurate estimates of
the cost of implementing the PIP-DCG methodology and any modifications (such as
using ambulatory data) and to determine the benefits to be derived from these
systems before final decisions as to implementation are made. We suggest that
consideration be given to producing a cost- benefit analysis of the PIP-DCG
methodology and any subsequent modifications. The analysis should specifically
include the costs incurred by health plans due to changes to the system.
Actuarial Oversight: HCFA apparently plans to conduct additional analysis of
the impact of the PIP-DCG methodology on managed care plans. It is unclear what
form that impact analysis will take. In addition, there is a need for continuing
monitoring and testing of the system and future modifications. The work group
suggests that additional actuarial review be included as the system and
subsequent changes are implemented.
END
LOAD-DATE: June 10, 1999 
