Copyright 1999 Federal Document Clearing House, Inc.
Federal Document Clearing House Congressional Testimony
June 09, 1999
SECTION: CAPITOL HILL HEARING TESTIMONY
LENGTH: 3530 words
HEADLINE:
TESTIMONY June 09, 1999 WILLIAM J. SCANLON DIRECTOR SENATE
FINANCE HEALTH CARE OVERSIGHT OF RISK ADJUSTMENT METHODOLOGY AND OTHER
IMPLEMENTATION ISSUES
BODY:
TESTIMONY BY WILLIAM J.
SCANLON 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. 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. 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. 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. 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. 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. 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. 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. Nearly
all plans offer coverage for routine physical, eye, and hearing exams. Most
provide coverage for outpatient prescription drugs. 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 drug 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. 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. 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.
LOAD-DATE: June 9, 1999