The spillover effects of Medicare managed care: Medicare Advantage and hospital utilization

More than a quarter of Medicare beneficiaries are enrolled in Medicare Advantage, which was created in large part to improve the efficiency of health care delivery by promoting competition among private managed care plans. This paper explores the spillover effects of the Medicare Advantage program on the traditional Medicare program and other patients, taking advantage of changes in Medicare Advantage payment policy to isolate exogenous increases in Medicare Advantage enrollment and trace out the effects of greater managed care penetration on hospital utilization and spending throughout the health care system. We find that when more seniors enroll in Medicare managed care, hospital costs decline for all seniors and for commercially insured younger populations. Greater managed care penetration is not associated with fewer hospitalizations, but is associated with lower costs and shorter stays per hospitalization. These spillovers are substantial – offsetting more than 10% of increased payments to Medicare Advantage plans.     

Disability profile and health care costs of Medicare beneficiaries under age sixty-five

Medicare has more than five million beneficiaries with disabilities who are under age sixty-five, and enrollment is rising rapidly. This paper presents a profile of nonelderly beneficiaries in fee-for-service Medicare by major disability category, excluding those with end-stage renal disease. The profile is based on Medicare Current Beneficiary Survey (MCBS) Cost and Use data for 1994-1996. We estimate Medicare costs by service type and health care costs by payer type, and we discuss implications for Medicare reform and related federal disability policy issues.     

Medicare-the development of publicly financed health insurance: Medicare's impact on the nation's health care system

It is useful for health care managers to understand Medicare's history and the impact on providers of ever-changing Medicare payment methods. Initially, Medicare payments resembled those of commercial insurance plans and Blue Cross Blue Shield plans. When Congress became concerned about the increasing costs of Medicare, new payment methods were created to limit payments to providers. The prospective payment system, imposed on hospitals in 1987 and later on nursing homes, home health agencies, and other services, has been adapted by commercial plans, Blue Cross Blue Shield associations, and state Medicaid programs. Changes in payer reimbursements require health care managers to adjust the department's charge master and exert more control of departmental costs. The story of Medicare's beginnings and development can provide some insight into the possibility of national health insurance, given the historic and current politics that limit publicly financed social programs. This article discusses the development of Medicare and its administration and serves as an introduction to the complex realities of health care reimbursement policy.     

Medicare beneficiaries' costs of care in the last year of life.

This paper profiles Medicare beneficiaries' costs for care in the last year of life. About one-quarter of Medicare outlays are for the last year of life, unchanged from twenty years ago. Costs reflect care for multiple severe illnesses typically present near death. Thirty-eight percent of beneficiaries have some nursing home stay in the year of their death; hospice is now used by half of Medicare cancer decedents and 19 percent of Medicare decedents overall. African Americans have much higher end-of-life costs than others have, an unexpected finding in light of their generally lower health care spending.     

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.     

Medicare revenue in large medical groups

The aged are the heaviest users of physician services. A ageing population and escalation in medical costs have pressured Medicare budgets, which have increased fastest in Part B physician reimbursement. Policy responses include adoption of the Resource Based Relative Value Scale (RBRVS) for physician payment. This paper considers receipt of Medicare revenues by large medical groups and expectations of how groups will fare under RBRVS. In a 73-percent sample of U.S. large group practices, Medicare coverage accounted for one-fourth of clients, Medicare-related revenues for slightly more than one-fourth of revenues, suggesting a slightly higher revenue intensity for Medicare clients, but showing no evidence of truly disproportionate revenues from Medicare users. Medicare shares of revenues are explained by factors related to Medicare clientele and geriatric service provision. Overly-strict Medicare assignment policy may control costs by limiting access to needed care, rather than by limiting overpayments to physicians. Expectations as to how groups will fare under RBRVS are not found to be related to reliance on Medicare, rather to group auspices and ability to contain costs under Medicare payment. The findings are important not only to physician payment under RBRVS but also under health care reform.     

Medicare's operational history and impact on health care

Medicare was originally designed in the 1960s to fit into the existing health care delivery system. However, the program's early years showed an inflationary impact on health care costs. Medicare was the second largest federal domestic program and the fastest growing one, making it a target for those concerned about the size of government in general. By 1980, Medicare constituted 15% of the nation's expenditures for personal health care; and Medicare's administrators recommended substantive changes in provider payments through the introduction of the prospective payment system. Prospective payment system legislation impacted hospitals initially and later skilled nursing facilities and home health agencies. As policymakers made changes in Medicare payments to providers, providers made changes in the way services were delivered. What eventually evolved, in an insidious manner, was implicit management of the nation's health care delivery system by the Medicare program.     

Older Women's Health and Financial Vulnerability

Elderly women and men have different patterns of disease and utilize health services differently. This essay examines the extent to which Medicare covers the specific conditions and services associated with women and men. Elderly women experience higher rates of poverty than elderly men; consequently, elderly women are especially likely to be unable to pay high out-of-pocket costs for health care. Using a new method for simulating out-of pocket costs, the Illness Episode Approach, the essay shows that Medicare provides better coverage for illnesses which predominate among men than for those which predominate among women. In addition, women on Medicare who supplement their basic coverage by purchasing a typical private insurance "Medigap" policy do not receive as much of an advantage from their purchases as do men. The calculations also show that the Medicare Catastrophic Coverage Act would have had little impact on the gender gap in financial vulnerability.     

Potential Medicare savings through prevention and risk reduction

Medicare is challenged to maintain solvency as enrollment climbs because of the aging baby boomers and costs increase as a result of the substantial disease burden present among seniors. In the present study, an actuarial model was developed to determine the present cost (2008) of Medicare-covered benefits for elderly individuals, and to test the impact on cost of health risk reduction that may be possible through population health and wellness interventions. In the model, beneficiaries were categorized by risk according to health status using 3 different indices, and baseline per month and lifetime expenditures were estimated. Changes in morbidity were tested via scenarios of modified transition rates between the risk categories that might result from population health and wellness initiatives, including increases in the proportion of low-risk individuals entering Medicare, and delayed or reduced rates of upward risk transitions. The model showed that the discounted total lifetime cost of Medicare benefits was $174,018 per person, from age 65 until death. Each risk-reduction scenario was associated with both annual and lifetime cost savings, which accounted for increased longevity associated with decreased risk profiles. In conclusion, a model has been developed that can predict the impact on Medicare costs of varying levels of risk reduction in the senior population and, therefore, the potential financial benefit of population health and wellness policy initiatives directed at improving health prior to and during the years of Medicare. The model shows that there are substantial opportunities for savings through modest improvements to the health of the Medicare population.     

Effects of state Medicaid home care Medicare maximization programs on Medicare expenditures

Some state Medicaid programs have attempted to shift home health care costs to Medicare by using retrospective Medicare maximization billing practices. We used a two-part model with random effects to analyze whether retrospective billing practices increase Medicare expenditures for dual eligibles by analyzing primary data collected from 47 state Medicaid offices supplemented with Medicare Current Beneficiary Survey (MCBS) data from 1992-1997. Retrospective billing practices were projected to increase Medicare home health care expenditures by 73.8 million dollars over six years, although this was not statistically significant. We also found significantly higher Medicare spending in states with lower Medicaid spending levels, suggesting that states with high Medicaid utilization have potential to shift some of these expenditures to Medicare.     

Risk adjustment for health plans disproportionately enrolling frail Medicare beneficiaries

There is concern about the adequacy of diagnosis-based risk adjusters for paying health plans that disproportionately enroll frail Medicare beneficiaries. The Medicare Current Beneficiary Survey (MCBS) was used to examine the ability of two risk-adjustment models to predict Medicare costs for groups defined by institutional status and difficulty with activities of daily living (ADLs). Both models underpredicted average costs for non-institutionalized frail beneficiaries; however, the models slightly overpredicted expenses for most frail individuals and severely underpredicted for a minority. Further refinements are needed if diagnosis-based models are used to pay plans that disproportionately enroll frail beneficiaries.     

Issues regarding health plan payments under Medicare and recommendations for reform.

The failures of the market for current Medicare health plans include poor information and price distortions and can be attributed to government policy. Reforms that could improve its structure are annual open enrollment periods, premium rebates from health management organizations (HMOs) to members, and termination of the federal government's subsidy of Medicare supplementary insurance. However, the price for a basic Medicare benefits package would still be distorted because Medicare bases its contribution on the cost of a comparable package in the fee-for-service (FFS) sector rather than on the cost of the most efficient plan available to beneficiaries in each market area. The present Medicare HMO program almost certainly increases total Medicare costs and actually discourages HMO growth by shielding beneficiaries from the true price difference between basic benefits in the HMO and FFS sectors. Lacking payment reforms, the Medicare HMO program should be terminated.     

Health status of Medicare enrollees in HMOs and fee-for-service in 1994

We compared the health status of 863 health maintenance organization (HMO) enrollees with that of 4,576 non-enrollees, controlling for demographics and area of residence, using 1994 data from the Medicare Current Beneficiary Survey (MCBS). HMO respondents were less likely to report fair or poor health, functional impairment, or heart disease. Average predicted costs based on various health-status measures were substantially lower for HMO respondents than for respondents in fee-for-service (FFS) arrangements. The Medicare payment formula for HMOs does not adequately adjust for the better health and consequent lower expected costs of HMO enrollees. The addition of health-status measures would improvement payment accuracy and reduce average HMO payments significantly below current levels.     

PMD6 Chronic Care Costs of New Medicare HMO Enrollees: Implications for Disease Management

Cost-effective care for chronic conditions is a growing concern of health plans enrolling increasing numbers of the elderly and disabled under Medicare risk contracts. This study provides evidence of the prevalence, patterns of care, and costs of chronic illnesses among new Medicare HMO enrollees. The results provide a foundation for estimates of the cost-effectiveness of drug therapy and care management programs that serve this group.
METHODS: We used national Medicare claims data to examine chronic care services and associated costs for a sample of 19,084 beneficiaries who enrolled in an HMO in 1995. We constructed three measures of cost: the total Medicare-covered cost, the cost of medical claims with the chronic condition coded as a diagnosis, and the regression-estimated effect of the chronic condition on cost.
RESULTS: 58% of the new Medicare HMO enrollees in our sample were treated for at least one of the selected chronic conditions in the six months before enrollment. One-third of the new enrollees had multiple conditions represented by diagnoses in more than one of eighteen chronic-condition groups. Persons with chronic conditions accounted for 93% of pre-enrollment Medicare costs among new HMO enrollees. Per 1,000 enrollees, pre-enrollment Medicare costs were greatest for those with hypertensive disease, coronary heart disease, heart failure, and diabetes.
CONCLUSIONS: The concentration of utilization and costs in those with chronic conditions suggests that appropriate drug therapy and care management for those with chronic conditions should be a top priority for HMOs with Medicare risk contracts. These estimates of prevalence suggest a need for HMOs to screen new Medicare HMO enrollees for chronic conditions immediately upon enrollment to ensure continuity of care.     

A decade of Medicare's prospective payment system--success or failure?

The growth in Medicare spending for inpatient hospital services slowed following the implementation of the prospective payment system (PPS) due to a decline in admission rates and limits on payment increases. Hospital costs, however, have increased faster than payments. Rather than reducing costs further, hospitals responded by charging privately insured patients more than the costs of their care and developing new revenue sources. PPS also redistributed Medicare payments across hospitals and was associated with increased spending in other settings. The PPS experience leaves policymakers with some immediate challenges and provides insights for the development of health care reform initiatives.     

Financial performance in the social health maintenance organization, 1985-88

Since early 1985, four social health maintenance organizations have delivered integrated health and long-term care services to Medicare beneficiaries under congressionally mandated waivers that included shared public-program risk for losses. Three of four sites had substantial losses in the first 3 years, primarily because of slow enrollment and resultant high marketing and administrative costs. After assuming full risk, two of the three showed surpluses in 1988. Service and management costs for expanded long-term care were similar across sites and were affordable within the framework of Medicare and Medicaid reimbursement and private premiums.     

Improving the AAPCC (adjusted average per capita cost) with health-status measures from the MCBS (Medicare Current Beneficiary Survey)

Using data from the 1991 Medicare Current Beneficiary Survey (MCBS), multiple regression-based models predicting 1992 Medicare costs are developed and compared. A comprehensive model incorporating demographic, diagnostic, perceived health, and disability variables is shown to be stable and to fit the data well over the full range of Medicare-covered annual per capita expenses and for a variety of beneficiary subgroups defined by their health and functional status. This model produces stable unbiased estimates of expenditures on validation samples. A variant of this model is being considered for use in setting Medicare capitation payments for the second phase of the social/health maintenance organization (S/HMO) demonstration.