Case Overview, Revising the Risk Adjustment Methodology for Medicare+Choice

This document provides background information and summarizes the debate over revising the risk adjustment methodology for Medicare+Choice. The links to the left will lead you to public documents that we have found.



          In the Balanced Budget Act of 1997 (BBA 97), Congress updated numerous features of the generation old Medicare program, the health insurance plan for the nation’s elderly. One of the many sweeping changes made to the program by that landmark legislation was the creation of the Medicare+Choice program, which gave seniors the option of buying into a Medicare managed care plan (commonly referred to as “Medicare HMOs”). Although select seniors have had access to managed care plans as part of Medicare since 1982, this was the first time all seniors would be able to buy into these plans.

          One of the biggest problems that arose with Medicare outside of the traditional fee-for-service Medicare was payment rates. HMOs were being paid according to a capitation rates, meaning that they receive a set amount of money for each participant served, adjusted only for demographic factors and geographic location (HCFA Press Release, 2000). This payment approach led to problems in that plans with large numbers of sick patients lost tremendous sums of money (since sick patients are more expensive to care for on average), and those with primarily healthy patients made huge profits.

          So as part of the BBA 97, Congress instructed the Secretary of Health and Human Services and the director of the Health Care Financing Administration (HCFA)—the agency that oversees the Medicare program—to develop a “risk adjustment” methodology for the Medicare+Choice program. A risk adjustment methodology adjusts the amount the HMO receives for each patient based on that individual’s health. Under a risk adjustment scheme, an HMO receives more money for caring for sick patients, and less for caring for healthier patients. Ideally, an appropriate risk adjustment methodology would ensure that Medicare HMOs did not take only the healthiest patients and leave the sickest seniors in the traditional fee-for-service Medicare. No one in Congress, nor any of the experts called to testify before the Congress, knew exactly how to develop a risk adjustment methodology so details of a risk adjuster were not specified in the BBA 97. Rather, Congress directed the Secretary of HHS and the HCFA director to implement a risk adjustment methodology by 2000. HCFA decided to design a risk adjustment methodology in two stages: beginning in 2000, HCFA would phase in a preliminary risk adjuster based only on inpatient hospital stays and traditional demographic data (age, sex, etc.). In 2004, HCFA would introduce a new “comprehensive” risk adjuster, that was intended to include not only the data from the interim risk adjuster, but also data from all major health care settings, not just hospital visits.

          As the year 2000 approached, plans participating in the Medicare+Choice program were anticipating not only the changes in payments that would result from the risk adjustment but also additional changes to payment rates that were also part of the BBA 97. These changes technically were distinct from the plan to implement a payment risk adjuster but for participating plans, Medicare enrollees, interested organizations, and administrators and legislators, the changes in payment rates brought about by the BBA – through the risk adjuster and other provisions of the BBA -- could not be separated. A participant in the dialogue about the risk adjuster expanded on this point:

"This problem is complicated because of some of the changes the BBA brought about. [Medicare +Choice] Plans have realized reduced payments and the effort to introduce risk adjustment in 2000 has taken a hit. Everybody supports risk adjustment in theory but because of the effects of various changes in the BBA they see the effect of risk adjustment, which would ultimately save HCFA in the range of 7 or 8 percent."

The penultimate result of these global Medicare+Choice payment issues, including the risk adjuster, was that many Medicare HMOs dropped hundreds of thousands of seniors between 1998 and 2001.

          In the second session of the 106th Congress, several measures were introduced to stretch the timeline for risk adjuster implementation to 10 years, but none of these proposals were successful in passing.



          Many different interests participated in the debate over the revision of the risk adjustment methodology. For insurance companies, especially those with Medicare HMOs, the revision of the risk adjuster was seen as crucial, as they would not serve this market without the proper financial reimbursement. The Healthcare Leadership Council, a group of health care business executives (e.g., the Presidents of CIGNA Healthcare and Merck and Company, Inc.) was involved from the provider side, as were the hospital organizations. The AMA was involved, working with the insurance groups to ensure physicians could contract with HMOs. Drug companies also played a role, since some Medicare+Choice HMOs provided a prescription drug benefit as part of their services, and drug companies wanted to provide seniors with drugs without being price controlled.

          On the opposite side, the Kaiser Family Foundation, the AARP, and many large employee retirement plans were involved. These groups did not oppose the risk adjustment plan per se, but they were concerned that the +Choice program continues to provide elderly consumers with access to high quality health care.

          Several government agencies and commissions were also at the center of this debate. HCFA played a key role for obvious reasons: they developed the risk adjustment methodology. The Medicare Payment Advisory Committee (MedPAC) provided comments and advice to HCFA and others about the risk adjustment methodology and its implementation. The Congressional Budget Office (CBO) also participated in this debate. CBO scores congressional bills as spending increases, spending decreases, or neutral based on the projected cost of the legislation. As controlling costs and appropriately reimbursing health care plans were key topics for this issue, how CBO scored the legislation was important. Ultimately, anyone wanting to stop the risk adjuster or delay its implementation would have to deal with CBO scoring their legislation as a cost increase, which proved unpalatable for members of Congress.

          The members of Congress who were engaged most in the discussion of the risk adjuster were members who served on the committees with jurisdiction over Medicare: the Senate Finance Committee, the health subcommittee of the House Ways and Means Committee, and the health subcommittee of the House Commerce Committee. However, even though some members of Congress sponsored legislation, offered statements from the floor in support of the legislation, etc., no members actively took a leadership role in promoting this issue. On this particular issue, agents at HCFA and private actors provided the more critical push.



          Since the risk adjuster was mandated by the BBA 97, the debate was not so much over whether or not there should be a risk adjuster, but rather what shape that risk adjuster should take. One of the most daunting hurdles to overcome was the collection of the data itself. There is no unique identification number for each patient to keep central records, each hospital and health care organization collects records differently, etc. As one participant stated: “It’s a huge, huge issue…For example, a lot of HMOs don’t even collect the [data/records needed]. There’s the whole information component that the capacity of the system to do risk adjustment isn’t even there—there’s no unique identifier, for example and standardization and privacy issues come into play.” HCFA will have to work to upgrade their data collection systems and processes in order to gather the necessary data.

          One of the most troubling issues for many health plans is the methodology itself. These provider organizations are critical of HCFA’s plans, especially the interim risk adjuster. The interim risk adjuster only looks at inpatient hospital stays of 2 days or longer. However, a main goal of many HMOs is prevention, focusing on outpatient services, vaccinations, screening programs, disease management, etc. As one advocate stated:

"The concerns [about the risk adjustment methodology] are related to the fact that the adjuster is based solely on the hospital inpatient and admissions data from the previous year and that these data count hospital stays of two or more days…if what HMOs are supposed to do is to try to limit hospital stays or keep people out of hospitals to the extent possible, or treat people in alternative settings if it works for them, then eliminating one day hospital stays is going to completely skew the results of risk adjustment."

Clearly, not only how to gather the data, but also what data to gather, is an obstacle to developing the final risk adjustment methodology.

          Further, it is not clear exactly what the impact of the risk adjuster will be once it is phased in completely in 2004. HCFA is basing much of their approach on their area of expertise: the traditional fee-for-service Medicare plans. This is quite a different realm, however, from the for-profit HMO world. One observer commented: “Nobody really knows what the implications [of the risk adjustment methodology] are going to be. It’s based on a fee-for-service model of the health care universe which doesn’t really apply…because it’s based on hospitalizations. It’s a really distorted way to approach something, especially from a health plan perspective.” Much apprehension still remains over the final form of the risk adjuster.

          At the same time, consumer-focused groups tend to take a broader view of risk adjuster issue. Indeed, a representative from a consumer organization explained her group’s approach to the issue as follows:

"Our argument is much more related to the future of the Medicare program, and its dependability as a source of coverage and financial protection against health costs for the older population.If you don’t begin to move down this road then what are your options sort of forces you into less desirable, much more complex, not as well thought out kinds of ideas. Our major arguments here are really in the vein of not so much…you want to pay providers fairly…The issue is for consumers you want a program that is sustainable over the long run in terms of what it costs to the government, what it costs to the consumer, and whether or not it provides quality care. Those three things are really [our] sort of strong tripod of the argument if you will. The other pieces fill in around it…Our general view…is in situations like this you’ve got to start with what you’ve got. The marketplace is changing so quickly that if we just put on hold the whole situation for the next five years hoping that better data is going to begin to exist on a non-hospital basis, experience would tell us that it might well not and then you’re still in limbo, the Medicare program itself is in greater crises. You’re looking at higher and higher costs and no real ability to sort of get a handle on can we in fact develop a program, a delivery system with more manageable cost than fee for service that also can be relied upon and paid fairly to deliver quality care. If you can’t begin to solve that problem then an insolvency date of the medical trust fund, which is 2015, begins to creep closer and closer and closer."

          For many of the interested players, the issue of finding the appropriate vehicle to delay or otherwise alter the implementation of the risk adjuster posed a significant impediment to realizing their objectives. Except on large key proposals, getting an independent bill to move on the floor of the House or Senate is a Herculean task. Many more issues are dealt with in omnibus or reconciliation legislation that bundle together many diverse proposals into a single package for a vote. Commenting on the contemporary legislative process, a lobbyist noted:

"Having a bill introduced and a number of cosponsors, and even having it reported out of one committee, it doesn’t mean you have a viable vehicle. The most viable vehicle is always a reconciliation bill…reconciliation is usually the most viable vehicle because there are certain rules about amending reconciliation on the floor and so you have better protection in a reconciliation bill than you have if you are a freestanding Medicare bill."

This process is compounded by overall politics: no one really wanted to resolve Medicare issues before the 2000 election, for such a resolution would mean that both sides would lack a key campaign issue for the Presidential election. All of these factors complicated the battle over risk adjustment.



          The primary battlegrounds were the Senate Finance Committee, the health subcommittees of the House Ways and Means and Commerce Committees, and HCFA. Lobbyists pressured Congress to exercise their oversight capabilities to review HCFA’s actions and pass legislation that would shape the nature of the risk adjustment plan. Additionally, many groups lobbied HCFA directly, since HCFA was ultimately the body responsible for the creation of the risk adjuster itself. Both of these venues will continue to be active as the 2004 final adjuster is developed and implemented.