Implementation of risk adjustment for Medicare

The Health Care Financing Administration (HCFA) implemented risk adjustment for Medicare capitated organizations January 2000. The risk adjustment system used, the Principal Inpatient Diagnostic Cost Group (PIPDCG) method, had to be incorporated into the payment structure mandated by the Balanced Budget Act of 1997 (BBA). This article describes how risk adjustment was integrated into the payment system within the rules of the BBA, and how fee-for-service (FFS) and health maintenance organization (HMO) data are collected and used in the determination of payment.     

Modeling Medicare costs of PACE (Program of All-Inclusive Care for the Elderly) populations

Historically, Medicare has paid PACE providers a monthly capitated rate equal to 95 percent of the site's county AAPCC multiplied by a PACE-specific frailty adjuster of 2.39. The Balanced Budget Act of 1997 makes PACE a permanent provider category and mandates that future Medicare payments be based upon the rate structure of the Medicare+Choice payment system, adjusted for the comparative frailty of PACE enrollees and other factors deemed to be appropriate by the Secretary of Health and Human Services. This study revisits the calculation of the PACE frailty adjuster and explores the effect of risk adjustment on that frailty adjuster.     

Biased enrollment of Medicare beneficiaries in HMO plans--implications for Medicare costs

Policymakers assumed that the enrollment of Medicare beneficiaries in health maintenance organization (HMO) plans would generate significant cost savings for Medicare. The Health Care Financing Administration (HCFA) calculates the reimbursement to HMOs per Medicare beneficiary on the basis of individual and community-specific characteristics. Estimates of the individual-specific profitability rate for enrolling an individual in a Medicare HMO risk plan suggest that the probability of enrollment in HMOs increases with a higher profitability score. The probability of not enrolling high-loss cases is found to be high, indicating that the biased selection in HMO plans actually increases the overall cost of running the Medicare program.     

The Balanced Budget Act of 1997 and Rural Training Supported by Medicare Graduate Medical Education Funds

The Balanced Budget Act of 1997 promised a number of changes in medical education to benefit rural communities. The changes suggested that physician training would be more available in rural communities, programs training physicians for work in rural communities would be better supported, and residency programs would be allowed to be separate from hospitals. The regulations developed by the Health Care Financing Administration to implement the act are reviewed in the context of these expectations. Limitations in the regulations indicate that rural communities will see little benefit from this legislation. This article is a commentary on the expectations and reality of the effects of the Balanced Budget Act of 1997 on rural training supported by Medicare.     

Pre-enrollment reimbursement patterns of Medicare beneficiaries enrolled in "at-risk" HMOs.

The Health Care Financing Administration (HCFA) has initiated several demonstration projects to encourage HMOs to participate in the Medicare program under a risk mechanism. These demonstrations are designed to test innovative marketing techniques, benefit packages, and reimbursement levels. HCFA's current method for prospective payments to HMOs is based on the Adjusted Average Per Capita Cost (AAPCC). An important issue in prospective reimbursement is the extent to which the AAPCC adequately reflects the risk factors which arise out of the selection process of Medicare beneficiaries into HMOs. This study examines the pre-enrollment reimbursement experience of Medicare beneficiaries who enrolled in the demonstration HMOs to determine whether or not a non-random selection process took place. The results of this study suggest that the AAPCC may not be an adequate mechanism for setting prospective reimbursement rates. The Marshfield results further suggest that the type of HMO may have an influence on the selection process among Medicare beneficiaries. If Medicare beneficiaries do not have to change providers to join an HMO, as in an IPA model or a staff model which includes most of the providers in an area, the selection process may be more likely to result in an unbiased risk group.     

Understanding biased selection in Medicare HMOs

OBJECTIVE: To investigate the extent of favorable health maintenance organization (HMO) selection for a longitudinal cohort of Medicare beneficiaries, examine whether the extent of favorable selection varies with the degree of Medicare HMO market penetration in a county, and explain conflicting findings in the literature on favorable HMO selection. DATA SOURCES: A panel of 1992-1996 data from the Medicare Current Beneficiary Survey (MCBS), supplemented with linked data from the Area Resource File and Medicare administrative datasets. STUDY DESIGN: Using random effects probit estimation, we model a beneficiary's HMO enrollment status as a function of self-reported health status and Medicare HMO market penetration. DATA EXTRACTION METHODS: The MCBS data for beneficiaries residing in states served by Medicare HMOs in 1992-1996 were linked by county to the supplementary datasets. PRINCIPAL FINDINGS: We find that favorable selection persists in the cohort over time on some, but not all, measures. We find no substantial association between favorable HMO selection and HMO market penetration. We find that conflicting findings in the literature on favorable HMO selection may be explained by several methodological choices, including the choice of health status measure and the structure of the sample. CONCLUSIONS: Our results support further risk adjustment of the adjusted average per capita cost (AAPCC) payment formula.     

Medigap premiums and Medicare HMO enrollment

OBJECTIVE: Markets for Medicare HMOs (health maintenance organizations) and supplemental Medicare coverage are often treated separately in existing literature. Yet because managed care plans and Medigap plans both cover services not covered by basic Medicare, these markets are clearly interrelated. We examine the extent to which Medigap premiums affect the likelihood of the elderly joining managed care plans. DATA SOURCES: The analysis is based on a sample of Medicare beneficiaries drawn from the 1996-1997 Community Tracking Study (CTS) Household Survey by the Center for Studying Health System Change. Respondents span 56 different CTS sites from 30 different states. Measures of premiums for privately-purchased Medigap policies were collected from a survey of large insurers serving this market. Data for individual, market, and HMO characteristics were collected from the CTS, InterStudy, and HCFA (Health Care Financing Administration). STUDY DESIGN: Our analysis uses a reduced-form logit model to estimate the probability of Medicare HMO participation as a function of Medigap premiums controlling for other market- and individual-level characteristics. The logit coefficients were then used to simulate changes in Medicare participation in response to changes in Medigap premiums. PRINCIPAL FINDINGS: We found that Medigap premiums vary considerably among the geographic markets included in our sample. Measures of premiums from different insurers and for different types of Medigap policies were generally highly correlated across markets. Our models consistently indicate a strong positive relationship between Medigap premiums and HMO participation. This result is robust across several specifications. Simulations suggest that a one standard deviation increase in Medigap premiums would increase HMO participation by more than 8 percentage points. CONCLUSIONS: This research provides strong evidence that Medigap premiums have a significant effect on seniors' participation in Medicare HMOs. Policy initiatives aimed at lowering Medigap premiums will likely discourage enrollment in Medicare HMOs, holding other factors constant. Although the Medigap premiums are just one factor affecting the future penetration rate of Medicare HMOs, they are an important driver of HMO enrollment and should be considered carefully when creating policy related to seniors' supplemental coverage. Similarly, our results imply that reforms to the Medicare HMO market would influence the demand for Medigap policies.     

Functional health measure for adjusting health maintenance organization capitation rates.

Because of increasing interest in at-risk enrollment of Medicare beneficiaries by health maintenance organizations, a number of modifications to the adjusted average per capita cost (AAPCC) formula employed by the Health Care Financing Administration have been proposed recently. Researchers have found that new models, which include measures of prior years' utilization and costs, predict Medicare payments significantly better than does the purely demographic formula currently used. In this article, we show that inclusion of instrumental activities of daily living (IADL), a measure of beneficiaries' functional health status, can further improve AAPCC models that already incorporate measures of previous-period utilization and costs. Various models for predicting Medicare payments were examined and compared using survey data and Medicare claims for a random sample of 1,934 beneficiaries. For these models, explained variation in subsequent Medicare payments (as indicated by R2 values) increased considerably when the IADL variable was included. Although actuarial concerns are associated with inclusion of the IADL score in the AAPCC, use of this measure is likely to offset other, possibly more serious, actuarial problems associated with including measures of previous utilization and costs.     

A profile of U.S. hospital mergers

According to Modern Healthcare's Annual Report on Mergers and Acquisitions the number of hospital mergers has declined significantly since the Balanced Budget Act of 1997. This study evaluated market characteristics, organizational factors and the operational performance of these hospitals prior to merger. We found that merged hospitals were more likely to be located in markets with higher per capital income and higher HMO penetration. Merged hospitals were larger in size and had greater clinical complexity as measured by increased services. Finally, we found that merged hospitals had higher occupancy rates, lower return on assets (ROA), and older facilities. From a managerial perspective, merged hospitals display many of the characteristics of an organization in financial distress. From a policy standpoint, the decline in hospital mergers subsequent to the Balanced Budget Act of 1997 may affect the long-term survivability of many U.S. hospitals.     

Tracking the Response to the Balanced Budget Act of 1997: Impact on Medicare Managed Care Enrollment in Rural Counties

The impact of the Balanced Budget Act of 1997 on recent changes in enrollment of Medicare beneficiaries into managed care plans is examined. The Balanced Budget Act of 1997 created a new payment structure for Medicare risk contracts, which, in 1998, resulted in all counties receiving either a minimum payment or a payment with the increase restricted at 2 percent growth over the 1997 rate. Using a baseline of December 1997 and enrollment data through June 1998, differences in early enrollment trends between urban and rural counties and between counties at various rates of payment are examined. As expected, continued enrollment increases in all counties is observed but with some concerns about slow enrollment growth--and announcements of plan terminations--in counties with payment rates in the mid-range, above the floor payment but subject to the 2 percent growth. In addition, evidence of considerable changes in the benefits offered by plans and the premiums charged to beneficiaries also was observed during the first nine months of 1998. The implications for growth of managed care options in rural areas are still unclear. The floor on payments may be helpful, but constraints in payment increases and delays in implementing a blended rate can be expected to create a negative impact on decisions to market managed care plans.     

Health-risk-assessment tools used to predict costs in defined populations

With the Balanced Budget Act of 1997 mandating that the Health Care Financing Administration (HCFA) implement risk-adjusted payment mechanisms for Medicare managed care plans (Medicare + Choice) by January 2000, risk-adjustment tools will play an important role in future capitated reimbursement. This is because there is growing evidence that healthier-than-average beneficiaries select Medicare + Choice. The risk adjustment that HCFA has adopted is initially based on primary inpatient diagnosis from hospitalizations in the previous year. Other payers are likely to adopt similar payment mechanisms. This article reviews nineteen risk-adjustment research papers, including the tool adopted for Medicare + Choice, some of which are likely to form the basis for subsequent HCFA risk-adjustment methods. In general, claims-based models are more powerful in predicting total costs than survey-based or demographics-based models. Survey-based models, although expensive and not as powerful claims-based models, can be used when claims data are unavailable. One of the most popular survey-based tools, SF-36, is likely to become increasingly important because HCFA will be using it to measure quality outcomes from Medicare + Choice plans and will make the results public. All of the models reviewed have limitations, but can be expected to be building blocks for future risk-based capitated reimbursement.     

Medicare+Choice

Created five years ago out of the Balanced Budget Act, Medicare+Choice was thought to be the next generation of Medicare, giving benefits to seniors and saving the government money. But enrollment has dropped and health plans, complaining of low reimbursement rates, have fled. What went wrong? Can it be fixed?     

The impact of the Balanced Budget Act of 1997 on Medicare in the USA: the fallout continues

Although the United States Congress has attempted to ameliorate some of the adverse impacts of the Balanced Budget Act through the 1999 Balanced Budget Refinement Act, the final results of the reforms to Medicare remain to be seen. This article provides an update and examines the impacts of the Balanced Budget Act on health providers and medical education. The authors also discuss the implications of these impacts for further policy adjustment.     

Structure and performance of health maintenance organizations: a review

During the past decade, the number of and enrollment in health maintenance organizations (HMOs) have grown dramatically. In 1980, 236 HMOs served 9 million members. By 1989, there were 591 HMOs with over 34 million enrollees. New HMOs are very different in organizational structure and arrangements than the HMOs that were operating in the 1970s, and the health care markets they serve also have changed substantially with the increasing supply of physicians and declining hospital admissions. Consequently, the accepted research findings on HMO performance in the 1970s may have only limited usefulness in understanding the role of HMOs and their effect on today's market for health services. This is of particular concern as the Health Care Financing Administration considers the further expansion of managed care options available to Medicare and Medicaid beneficiaries. In this article, the author reviews evidence on the relationship between HMO organizational arrangements and performance, and the trends within the HMO industry toward new organizational structures. The implications for Medicare and Medicaid risk contracting are also examined.     

Regence HMO Oregon

Regence HMO Oregon is a large IPA-model HMO based in Portland, Ore. It serves commercial, Medicaid, and Medicare cost enrollees throughout Oregon and southern Washington. An affiliate of Blue Cross and Blue Shield of Oregon, Regence HMO Oregon built its rural enrollment by acquiring Capitol Health Care, an HMO with rural enrollment; by encouraging rural employers with traditional Blue Cross and Blue Shield of Oregon indemnity and PPO coverage to switch to HMO coverage; and by aggressively contracting with providers statewide to serve Oregon Health Plan (Medicaid) enrollees.     

Risk differential between Medicare beneficiaries enrolled and not enrolled in an HMO.

Medicare provides incentive reimbursements to health maintenance organizations (HMOs) which enroll Medicare beneficiaries on a risk option and provide care at a lower cost than expected. The incentive reimbursements are tied to an actuarial calculation of Medicare Adjusted Average Per Capita Cost (AAPCC). The AAPCC adjusts for a number of variables which affect Medicare reimbursements and for which data are available: place of residence, age, sex, welfare status, and institutional status of beneficiaries. These factors account for much of the expected difference in health care reimbursements. They do not, however, account for differences in health status. Because of this, AAPCC calculations of expected costs may be too high if a selected group of beneficiaries is healthier than average, or too low if the selected group has a poorer health status than average. This case study examines the utilization behavior and reimbursement experience of a group of Medicare beneficiaries prior to their joining an HMO (during an open enrollment period) under a risk-sharing option. Their use was compared with a comparable Medicare population (the comparison group) to determine if their usage rates were greater, equal, or less than average. Results show that beneficiaries who joined during open enrollment had a rate of hospital inpatient use over 50 percent below the comparison group and a reimbursement rate for inpatient services 47 percent below the comparison group. These beneficiaries' use of Part B services also appears to be lower than the comparison group. These results must be interpreted with care. The information came from a single case study. Specific aspects of the open enrollment process, described in the paper, further limit the general liability of the findings. Also, while some studies of the same subject support the results, many others do not.     

Effects of Medicare BBA spending reductions on the profitability of general acute care hospitals

The Balanced Budget Act of 1997 was intended to reduce spending by about $115 billion from the Medicare Hospital Insurance trust fund over a five-year period. Several studies were funded by the hospital industry that indicated that the actual reductions would be far greater than $115 billion and that these reductions would have a devastating effect on U.S. hospital finances. In 1999, Congress passed the Balanced Budget Refinement Act, which added back about $11 billion in spending for fiscal years 2000 through 2002. In 2000, Congress passed the Benefits Improvement and Protection Act, which restored another $37 billion in spending over a five-year period. These cutbacks were going into effect at the same time as a cyclical decline in hospital operating margins occurred. This study was designed to determine if any separate effect of the Balanced Budget Act could be detected in the operating margins of general acute care hospitals in Tampa Bay, Florida. Operating margins were analyzed for 25 hospitals for a 12-year period (1990 through 2001), and a regression model was tested in which the dependent variable was the difference in mean operating margins for each hospital between the 1990 through 1997 period and the 1998 through 2001 period. The mean percentage of hospital revenue derived from Medicare, five other revenue source variables, and three hospital structural variables were used as the predictor variables. A statistically significant decline in operating margins was seen between these two periods, but Medicare revenue did not account for a significant amount of the variance. Thus, it was concluded that the Balanced Budget Act of 1997 did not significantly affect the operating margins of the study hospitals. Implications for Medicare policy are addressed.     

Assessing Beneficiary Health Outcomes and Disease Management Initiatives in Medicare

Introduction: Provisions in the Balanced Budget Act of 1997 directed the US Centers for Medicare and Medicaid Services (CMS, formerly the Health Care Financing Administration) to begin focusing attention on the standardized measurement of health outcomes of Medicare beneficiaries as well as testing the effectiveness of various disease management interventions at improving these outcomes.The CMS, in collaboration with the US National Committee for Quality Assurance, developed the Medicare Health Outcomes Survey (HOS) as the first health outcomes measure from the patient’s perspective in Medicare managed care. This new source of data, using the Medical Outcomes Study Short Form 36-Item Health survey (SF-36®) as its core measure, provides valuable standardized health outcomes information about Medicare managed care enrollees in general and the chronically ill in particular. Study design: From May through July 1998, a longitudinal, self-administered survey which utilized the SF-36® (a health status measure which assesses both physical and mental functioning) was administered to 1000 randomly sampled Medicare beneficiaries who were continuously enrolled for a 6-month period in a Medicare managed care health plan. This cohort was re-surveyed from April though June of 2000. We analyzed data from the cohort I baseline and re-measurement analytic sample of 51 700 individuals. Results: Using the change in SF-36® physical component summary scores and mental component summary scores over a 2-year period, we demonstrated that the presence of chronic disease has a negative impact on both the physical and mental health functioning of Medicare managed care enrollees over time. With few exceptions, the negative effect of chronic disease on physical and mental health is found to be independent of gender, race, and socioeconomic status as measured by level of educational attainment. Differences in mean health status scores across levels of chronic conditions suggest that preventing the onset of disease is best for maintaining optimal health. Conclusions: Disease management interventions which are properly designed and implemented have been shown to measurably improve patient outcomes by providing high quality, cost-effective care. Recognizing the need for standardized outcome measures and scientifically validated disease management interventions, the CMS has taken a leadership role by developing and implementing the Medicare HOS and disease management demonstration projects.     

Physician payment reform under Medicare: monitoring utilization and access

The Omnibus Budget Reconciliation Act (OBRA) of 1989 brought about significant changes in physician payment policy under Medicare. A major component of physician payment reform was the implementation on January 1, 1992, of the Medicare fee schedule (MFS). The Secretary of Health and Human Services is required to monitor and report annually on the impact of the changes in physician payment on access to and utilization of health care services. This article provides an overview of the 1993 Report to Congress. First, the article discusses the changes made in physician payment policy as well as the complexities involved in assessing the effects of the MFS. Next, the article discusses the approaches that were implemented in the Health Care Financing Administration (HCFA) to generate timely data to monitor and evaluate the impact of physician payment reform on Medicare beneficiaries. Last, the article describes six analyses that were designed to provide differing perspectives for understanding the impact of the OBRA 1989 physician payment changes on access and utilization. Some of the most salient results of these analyses are presented, including preliminary data from the first year during which the MFS was in effect.     

The expanded racial and ethnic codes in the Medicare data files: their completeness of coverage and accuracy.

OBJECTIVES: This paper evaluates the new race/ethnicity codes for Asian Americans, Hispanics, and Native Americans that have recently been added to the Medicare enrollment database. METHODS: The race/ethnicity code revisions made by the Health Care Financing Administration are described and evaluated by (1) comparing the numbers of persons identified as Asian Americans, Hispanics, and Native Americans with corresponding population census projections and (2) determining whether Medicare enrollees born in Asian and Hispanic countries are assigned Asian and Hispanic codes. RESULTS: Among persons 65 years of age and older, approximately 24% of Hispanics, 17% of Native Americans, and 56% of Asian Americans are identifiable by the new codes. From 18% to 29% of enrollees 65 years old or older born in Mexico, Puerto Rico, and Cuba are coded as Hispanic, and from 14% to 73% of enrollees born in nine Asian countries are classified as Asian American. Classification is not random but is related to timing of migration and to country of origin. CONCLUSIONS: Researchers should resist the temptation to base analyses on the revised Health Care Financing Administration race/ethnicity codes, since coverage is incomplete and biased.