[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
MEDICARE+CHOICE: AN EXAMINATION OF THE RISK ADJUSTER
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
HEALTH AND ENVIRONMENT
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
FEBRUARY 25, 1999
__________
Serial No. 106-10
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
55-155CC WASHINGTON : 1999
------------------------------------------------------------------------------
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Health and Environment
MICHAEL BILIRAKIS, Florida, Chairman
FRED UPTON, Michigan SHERROD BROWN, Ohio
CLIFF STEARNS, Florida HENRY A. WAXMAN, California
JAMES C. GREENWOOD, Pennsylvania FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia PETER DEUTSCH, Florida
RICHARD BURR, North Carolina BART STUPAK, Michigan
BRIAN P. BILBRAY, California GENE GREEN, Texas
ED WHITFIELD, Kentucky TED STRICKLAND, Ohio
GREG GANSKE, Iowa DIANA DeGETTE, Colorado
CHARLIE NORWOOD, Georgia THOMAS M. BARRETT, Wisconsin
TOM A. COBURN, Oklahoma LOIS CAPPS, California
Vice Chairman RALPH M. HALL, Texas
RICK LAZIO, New York EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN B. SHADEGG, Arizona JOHN D. DINGELL, Michigan,
CHARLES W. ``CHIP'' PICKERING, (Ex Officio)
Mississippi
ED BRYANT, Tennessee
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Archer, Diane, Executive Director, Medicare Rights Center.... 67
Bertko, John, Principal, Reden & Anders, Ltd................. 98
Discenza, Judith A., Vice President, Blue Cross and Blue
Shield of Florida.......................................... 79
Hash, Michael, Deputy Administrator, Health Care Financing
Administration............................................. 7
Johnson, Kirk, Senior Vice President, CNA Health Partners.... 102
Margulis, Heidi, Vice President, Government Affairs, Humana,
Inc........................................................ 89
Miller, Ann, Member, AARP Board of Directors................. 61
Scanlon, William J., Director, Health Financing and Public
Health Issues, Health, Education, and Human Services
Division, General Accounting Office........................ 42
Schub, Craig, President, Secure Horizons USA................. 84
Wegner, Nona Bear, Senior Vice President, The Seniors
Coalition.................................................. 70
Wilensky, Gail R., Chair, Medicare Payment Advisory
Commission................................................. 35
(iii)
MEDICARE+CHOICE: AN EXAMINATION OF THE RISK ADJUSTER
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THURSDAY, FEBRUARY 25, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Health and Environment,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2322, Rayburn House Office Building, Hon. Michael
Bilirakis (chairman) presiding.
Members present: Representatives Bilirakis, Stearns, Deal,
Bilbray, Whitfield, Coburn, Lazio, Shadegg, Pickering, Bryant,
Brown, Waxman, Green, Strickland, Barrett, and Eshoo.
Staff present: Tom Giles, majority counsel; Dan Boston,
majority professional staff; Jason Lee, majority professional
staff; Penn Crawford, legislative clerk; Bridgette Taylor,
minority counsel; and Amy Droskoski, minority professional
staff.
Mr. Bilirakis. The hearing will come to order. Good
morning.
In the Balanced Budget Act of 1997, the Congress created
the Medicare+Choice Program to provide Medicare beneficiaries
with new choices of private health care plans. I supported
those efforts because I believe that all seniors should be
given the right to choose their own health coverage.
Medicare+Choice offers new private health plan options to
Medicare beneficiaries.
Seniors, as we know, may still select existing Medicare
fee-for-service or they may now choose a Medicare+Choice health
plan. In addition, a new payment method for health plans
participating in the Medicare+Choice Plan was created by HCFA.
This new payment methodology will be the focus of today's
hearing. Prior to BBA 97, payments to Medicare managed care
plans were based on the adjusted average per capita cost which
we fondly always refer to as the AAPCC.
This was a monthly payment to Medicare risk HMO's that
considered the cost of providing services to Medicare
beneficiaries through the traditional Medicare program.
However, HCFA and others were concerned that the AAPCC was an
inaccurate representation of the true cost for HMO enrollees.
Most studies indicate that healthier Medicare beneficiaries
enroll in risk plans leading many to conclude that HMO's
participating in the Medicare Program were receiving excessive
AAPCC payments. Due to these valid concerns, BBA 97 mandated
that HCFA implement a model which considered beneficiary health
status when determining payment.
On January 15, 1995, HCFA announced the details of this new
payment model, better known as a risk adjuster. The HHS
Secretary is required to implement this risk adjustment
methodology by January 1, 2000. In general terms, the risk
adjustment considers a person's diagnosis in 1 year and
predicts additional costs that the person will incur the
following year. For example, an individual who has appendicitis
1 year, is not expected to have higher than average health
costs the following year.
Therefore, such an encounter is not taken into
consideration by the risk adjustment model. However, if someone
has a stroke, above-average costs are predicted an a plan would
receive a larger payment to cover the additional health care
costs of this stroke patient. Currently Medicare pays health
plans a fixed monthly payment for each beneficiary based
largely on the fee-for-service, Medicare reimbursement for each
county in the United States.
Risk adjustment adds diagnostic information to the payment
calculation and significantly improves, we think, the accuracy
of predicting expected costs. So overall this new system allows
the market place to create new private health care options and
provides beneficiaries with the information they need to make
informed choices. For many, Medicare HMO's cover their
deductibles, co-payments and other cost sharing, thus
eliminating the need to purchase expensive Medigap insurance.
Most HMO's also provide beneficiaries, as we know, with
extra benefits such as pharmaceutical drugs, eyeglasses,
etcetera. The number of Medicare beneficiaries who enroll in
HMO's has grown substantially with approximately 6.5 million
enrollees in 1997. With the establishment of the
Medicare+Choice Program this number is expected to grow even
higher. I am pleased that the Administration has chosen to
phase in the risk adjuster methodology in order to minimize any
negative consequences to the plans.
Or even more important, to our Nation's seniors. Similarly,
I am also pleased that HCFA has been flexible with health plans
on many of the new BBA 97 compliance standards. For instance,
HCFA's willingness to move the ACR date for this year from May
1, to July 1, was beneficial to both the plans and the
beneficiaries. However, there are still many questions that
must be addressed on HCFA's development of this new payment
methodology. And of course we all are particularly interested
in the real world impact on seniors and their health plans.
Over the past few months, a significant number of health
plans have terminated our contracts with Medicare, upsetting
the lives of more than 300,000 beneficiaries. In my home State
of Florida, nearly 60,000 seniors have been impacted in more
than 25 separate counties. I am deeply concerned about this
matter, I think we all are. And want to work with HCFA, fellow
Members of Congress and the health plans on a viable solution.
And of course holding this hearing is the first step toward
resolving this serious problem, we trust.
Over the next several months it will be critical for
Congress, HCFA, beneficiaries and private plans to work
together in a cooperative manner to make the Medicare+Choice
Program work. Now having said this, I am sure the whole country
knows by now that there is a bi-partisan Medicare Commission
which may or may not come up with a proposed solution to the
long term care financing problems of Medicare. I am not sure
whether I can say I am optimistic or pessimistic at this point.
A few days ago I was more optimistic than I am today. But I
suppose that no matter what we might ultimately come up with if
do, and certainly this Congress has to. If the Commission does
not. In all probability the risk adjustment process will
probably, will still be the one that will be in effect and I am
sure that Mr. Hash will expand upon that. So I do want to
conclude by welcoming our first witness, Mike Hash, the Deputy
HCFA Administrator. Mike has testified before us before, but
more importantly, I think he has provided distinguish service
to this subcommittee for a number years on the issues of
Medicare and health care reform.
And Michael, we look forward to your testimony. I know that
your knowledge of the Medicare program will clarify the issues
behind this complex risk adjustment model. Let us hear now, the
ranking member and my very good friend, Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. Thank you for arranging
today's hearing on risk adjustment. I would also like to thank
Mike Hash, Bill Scanlon and the many other distinguished
witnesses who have joined us today. Risk adjustment in Medicare
is not an option, it is a necessity. Effective risk adjustment
means more equitable payment across Choice+ Plans and the right
distribution of payments between Choice+ and traditional
Medicare.
The ultimate beneficiary is the Medicare enrollee. Proper
risk adjustment promotes the right level of care for enrollees
with different health needs. Just as proper risk adjustment
strengthens the link between payments and costs, a risk
adjustment mechanism that poorly predicts actual costs, weakens
that link. Our discussion today will, I hope, shed light on the
effectiveness of the proposed risk adjustment methodology, so
that we can move forward toward a better calibrated payment
system.
Risk adjustment is a quality issue, an equity issue and a
fiscal issue. I am glad we will look more closely at that topic
today. Thank you.
Mr. Bilirakis. And I thank the gentleman. Mr. Whitfield.
Mr. Whitfield. First, Mr. Chairman, thank you very much.
All of us are quite anxious about this hearing today. It is
obviously a very important subject. I have always been amazed
at HCFA because it has been my experience as a layman that
everything that HCFA does, and I don't mean to be critical,
seems to be pretty archaic and byzantine to me. So when they
come up with these new formulas, it is always quite
enlightening.
And we recognize the importance of the risk adjusters
because we want to provide incentives for plans to enroll the
sickest patients and not disenroll them. So I think all of us
are looking forward to the testimony that will be provided
today and I yield back the balance of my time.
Mr. Bilirakis. And I thank the gentleman. Mr. Bryant,
opening statement.
Mr. Bryant. Thank you Mr. Chairman. My fellow members of
the committee, good morning. I do want to welcome our guests
and thank the witnesses who are appearing before us today. I
appreciate you taking your time to be with us and certainly
look forward to hearing your testimony this morning. I am not
alone in thinking that Medicare is one of the most important
issues Congress will face this year.
We do owe to the millions of American seniors who depend on
Medicare for health care expense, to make sure the program is
solvent in the future and that it serves them well. We can all
agree that protecting the financial stability is crucial.
However, in addition to stabilizing the cost of Medicare, I
believe it is also important to examine the effects, the
changes Congress made in the Balanced Budget Act are having.
We must also examine the effects of HCFA's implementation
of those changes and effects that it will have on private
health plans participating in the Medicare+Choice. I want to be
sure that the seniors in Tennessee and across America have
choices when it comes to health care coverage. Now having said
that, I have come to the hearing today with an open mind. I
look forward to hearing the different parties represented here
today and what you have to say with regard to Medicare+Choice
risk adjuster. Thank you again, Mr. Chairman, and I yield back.
Mr. Bilirakis. I thank the gentleman. The gentleman from
Ohio, I know you are just barely catching your breath, but you
are more than welcome to make an opening statement.
Mr. Strickland. Thank you. Thank you, Mr. Chairman.
Recently Mr. Hash, there was a headline in the Dayton, Ohio
paper that read, Seniors Ill Over Anthem Exit. Company losses
are forcing it out of the HMO market in some counties. The
article goes on to describe the story of a senior, Dodie
Armstrong, who received her cancellation notice before her
health care coverage membership even took effect.
Ms. Armstrong had gone to a meeting in April of last year
to learn about Senior Advantage, the health maintenance
organization that Anthem Blue Cross and Blue Shield was
marketing aggressively to Medicare beneficiaries. The speaker
at this meeting did not mention that Anthem had asked for
Federal approval to withdraw Senior Advantage from Ms.
Armstrong's community, yet they were still promotion their
health care plan.
Even more troubling this incident was not an isolated one
that was happening to seniors across the country. In my rural
Ohio district, the median annual income for individuals over
age 65 is $19,096. Given the high out-of-pocket health care
costs born by senior citizens with chronic health problems,
even with Medicare coverage, the HMO option is attractive to
many southern Ohioans because it is affordable. These people
simply cannot afford to incur additional costs of $1,000 to
$2,000 a year in health care cost because their primary health
care plan decides they are no longer a profitable market
sector.
As we all know, the Balanced Budget Act of 1997, implements
the risk adjustment formula to address the adverse selection
issue. While many people have shown concerns over the quality
of daily use to determine the formula and the actual short and
long term implications of this approach, I believe risk
adjusters begin to address a serious matter that needs to be
resolved quickly. If I can just share one observation. A
physician in Ohio has recently expressed concern that his older
patients are extremely upset about the availability or lack of
it, of affordable health care.
He believes that as a result of this uncertainty, he will
begin to see more seniors with anxiety, depression, chest pains
and other problems triggered by stress. Even for those seniors
who can still manage to cover their health care costs without
the HMO, the money spent on health care takes away from money
otherwise budgeted for groceries, electricity and rent. For a
vulnerable population stress, which has a very significant
influence on overall health, could become a life-threatening
matter. The time is right for us to pursue options that make it
more likely that managed care entities will not only make but
will honor commitments to the most vulnerable among us.
I am eager to work toward redirecting the focus of HMO's
away from profit motives and toward the focus of providing
quality, affordable health care to everyone. And I believe that
risk adjusters just may be the first step that will enable them
to do so. Having said that, I look forward to hearing from you.
Thank you.
Mr. Bilirakis. The gentleman from Texas, Mr. Green, for an
opening statement.
Mr. Green. Thank you, Mr. Chairman. And I want to thank you
for calling the hearing this morning because this is the first
hearing this session on what I consider one of the more
important issues. Not in Medicare, the global issue, but also
in Medicare+Choice it was created to give more options and more
beneficiaries more health care options. Particularly many
seniors chose Medicare HMO's because of the additional
benefits, especially the prescription drug benefit.
In a recent survey of drug costs in my own district showed
that seniors without any prescription drug benefit were paying
almost double what HMO's and other preferred customers pay.
Unfortunately the Medicare+Choice Program seems to be, at best,
falling well short of our goals. Hundreds of thousands of
seniors live in areas that are not served by HMO's and many
more were dropped from their HMO when they decided, when it was
decided Medicare simply wasn't profitable enough to continue
covering those seniors.
Of course that statement lies in direct contrast to what a
recent GAO Report says that the Medicare HMO on the average are
still being paid, being overpaid because they typically recruit
and serve healthier seniors. And that is why a full
implementation of the risk care adjuster is important. It is
the only way to make sure that HMO's are paid for what they do
and who they serve. If a specific HMO wants to only cover
healthy patients, then they should only be paid as much as that
HMO, as an HMO that is willing to provide to care to sicker
patients.
However, the recent withdrawal of so many HMO's from the
Medicare Program raises legitimate questions on whether these
HMO's are being overpaid by Medicare or if in their minds they
are not just being overpaid enough. I look forward to hearing
from our distinguished witnesses today and I thank you for
being here. Mr. Chairman, I yield back my time.
Mr. Bilirakis. Mr. Waxman, no opening statement?
Mr. Waxman. I will pass.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. John Shadegg, a Representative in Congress
from the State of Arizona
Mr. Chairman, I commend you for holding this hearing.
Medicare+Choice is a program which is significant to many of the people
who are over-65 and reside in and around my district, Phoenix. Changes
which are made to this program, be they to beneficiaries directly or to
plans and their operations, are important to my constituents. Given the
expectation that the number of people in Arizona aged 65 and over will
grow by 34% between 1998 and 2010, effects of changes to the
Medicare+Choice program are particularly significant.
Let me restate the importance of the Medicare+Choice program in
Arizona: Arizona has 10 Medicare HMOs, and Medicare enrollment in these
``risk HMOs'' as a percentage of total beneficiaries is 39%. This is
almost three times the national average of 15%. Changes to this program
affects nearly a quarter-million people in Arizona.
For the past few years, a great deal of attention has been given to
the need to reform Medicare, improving its solvency and making it
operate in a more efficient manner. While the President has proposed
setting aside 15% of surplus to ``save'' Medicare, I am skeptical of
his ideas. Also, we need to think and act in a way to make Medicare run
in a more efficient manner. And, we have done that, in the Balanced
Budget Act of 1997 with the proposal to more properly risk adjust
payments to Medicare HMOs.
It is for this reason that I support the concept which passed in
the Balanced Budget Act of 1997--to find a better methodology for the
payment of Medicare HMOs and prevent overpayment of these companies
relative to the risk and expenses incurred by enrollees using their
services. We need to find ways to improve incentives for plans to
provide high quality health care services, but also to seek out ever
greater cost savings to be passed on to Medicare, and ultimately,
taxpayers.
Let me also say that I support other proposals to improve the
efficiency of Medicare. Phoenix has recently been chosen as a test site
for the Competitive Pricing Demonstration Project, to improve the
setting of Medicare+Choice reimbursement rates.
I commend HCFA for phasing in these changes over a 5 year period
and recognize that Congress may have tied HCFA's hands with respect to
only collecting hospital encounter data for use in this program.
However, I have significant concerns about the implementation of the
methodology which HCFA has recently proposed. In its proposal, HCFA has
chosen a route which only uses outpatient encounter data in the fifth
and final year of the transition period, rather than phasing it in
sooner, not later.
I want to highlight how this program may impact non-hospital
programs such as long term care facilities and other providers that
focus on keeping the elderly out of hospitals. EverCare is a skilled
nursing facility which presently operates a successful demonstration
program nationally, which includes sites in Phoenix. As a result of
using only hospital encounter data and not phasing in the use of
outpatient data, EverCare may face the prospect of closing down its
facilities after 2000. Under Medicare+Choice rules, also, if EverCare
closes its facilities, it will not be able to re-enter a market for 5
years. Certainly, having companies like EverCare leave the
Medicare+Choice program and forcing its residents to look elsewhere
will be an outcome that benefits no one.
During this hearing I look forward to hearing from HCFA and its
plans to improve the transition to the risk adjustment methodology,
especially from 2000 to 2001 How will it begin to use outpatient data?
I also look forward to hearing from the health plans and beneficiaries
who will be affected by this program.
Thank you and I yield back the balance of my time.
______
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Thank you, Mr. Chairman.
I am pleased that the Health and Environment Subcommittee is
holding this hearing today. The Medicare+Choice program stands as one
of Congress' most significant achievements.
Prior to the Balanced Budget Act of 1997, America's seniors were
faced with an ailing Medicare program. Just as troubling, Medicare was
a program that offered its beneficiaries little freedom to obtain truly
responsive and effective coverage.
The Medicare+Choice program changed all that. The explicit intent
of this program is to give seniors access to more choices than ever
before, so that they can get better coverage than ever before.
That is why it is so vitally important that Congress ensure that
the risk adjustment model developed by HCFA for the Medicare+Choice
program meets not only the letter of the law, but also the spirit in
which Congress intended these changes in plan payments. I am pleased
that the Administration has chosen to phase-in this new payment
methodology to minimize any potential negative consequences to the
plans.
Similarly, I am also pleased that HCFA is showing greater
flexibility in helping plans meet many of the new BBA '97 compliance
standards. For instance, their willingness to move the ACR date for
this year from May 1 to July 1, is good for both the plans and the
beneficiaries.
As we will hear today, early efforts by HCFA to write
Medicare+Choice regulations have been widely viewed as too onerous and
prescriptive. Last Fall, a number of insurance providers dropped out of
the market. We cannot let this pattern repeat itself.
I am pleased that the Agency is taking steps to rewrite portions of
these regulations. And I would encourage them to continue doing so.
This Committee takes a dim view of regulations that exceed their
statutory basis. That is why I hope we will continue this series of
formal inquiries by this Committee into this important program and its
implementation.
Again, Mr. Chairman, thank you for convening this hearing today.
Mr. Bilirakis. Thank you, I would appreciate that. The
opening statements, of course, of all members of the
subcommittee are, without objection, made a part of the record.
Mr. Hash, I am going to set the clock for 10 minutes. Obviously
your written statements are part of the record, please share
your knowledge with us.
STATEMENT OF MICHAEL HASH, DEPUTY ADMINISTRATOR, HEALTH CARE
FINANCING ADMINISTRATION
Mr. Hash. Thank you, Mr. Chairman. Congressman Brown,
distinguished members of the subcommittee, I want to thank you
for this opportunity to come and discuss our efforts to pay
Medicare+Choice Plans accurately and fairly. The Balanced
Budget Act, as has been pointed out here this morning, requires
Medicare risk adjust payments starting January 1, 2000. That
means we must base our payments to plans on the health status
of their enrollees.
We believe this is a vast improvement over the current
payment method. Risk adjustment will increase payment to plans
for their sickest enrollees, and thus curtail what many have
perceived as the disincentives to enroll these beneficiaries.
It will also lower payments for healthier enrollees of managed
care plans. Risk adjustment is an essential component of the
Medicare+Choice Program.
We want to thank, at the outset here, the health plans who
are contracting with Medicare, for their cooperation in
providing the data that is essential and needed for this
important advancement in payment policy. And we want to
continue working with plans to resolve any remaining data
issues. The law requires us to begin risk adjustment, as I
said, on January 1, 2000. However, we believe we must proceed
in an incremental and prudent fashion.
So we have decided to phase in the risk adjustment over a
5-year period to prevent disruptions to beneficiaries or to the
Medicare+Choice Program and health care plans. In the first
year, only 10 percent of the payment to health plans will be
based on this new risk adjustment. First we must base the risk
adjustment on in-patient data alone, that is where we are
starting. But by 2004, we will be using data on all health care
encounters including out-patient services, physician office
visits and so forth to implement a comprehensive risk
adjustment.
Later this year we will be issuing a schedule for health
plans and the methods for reporting this wider base of
encounter data that I referred to. If we could base risk
adjustment on more comprehensive health care data now, we
would. But that cannot be done at this time. But even with that
limitation, we believe that risk adjustment, based on in-
patient data alone, will increases the accuracy of our payments
to Medicare+Choice Plans by five-fold.
Plans themselves have raised concerns about risk adjustment
based on in-patient data alone, suggesting that it could create
perverse incentives for unnecessary hospitalizations. We
therefore have taken a number of steps in designing our payment
and risk adjustment to prevent inappropriate hospital
admissions or attempts to inflate data submitted for use in
risk adjustment payments.
It is essential to stress, I think that risk adjustment
will not and cannot be budget neutral. The whole reason for
proceeding with risk adjustment is that the Medicare Program
has not been paying plans accurately and properly. There is
substantial evidence, which you will be hearing about in the
course of today's testimonies, that we overpay plans because
payments are not now currently adjusted for the health care
status or expected health care costs of enrollees in managed
care plans.
Studies by the Physician Payment Review Commission, PPRC,
now MedPAC, the Congressional Budget Office, Mathematica Policy
Research and many others, have all found that Medicare has been
paying far too much because plans tend to enroll healthier,
low-cost beneficiaries. If risk adjustment were budget-neutral,
Medicare and the Taxpayers who fund it, would continue to lose
billions of dollars of each year on managed care payment.
Accurate risk adjustments inevitably and appropriately must
change aggregate payments to managed care plans. Actual savings
will vary according to the extent that less healthy
beneficiaries enroll in Medicare+Choice Plans. Risk adjustment
significantly changes the incentives and could well lead to the
enrollment of beneficiaries with greater health care needs and
that could lead to higher payments for health plans who enroll
such individuals.
Overall we project that payment to plans on average in the
year 2000, will change by less than 1 percent of total managed
care payments. Phasing in the risk adjust also substantially
buffers the plans from any financial impact that they are
likely to experience. Without a transition, Medicare savings
for a full risk adjustment or without a phase in would have
been $1.4 billion or more in the first year, in the year 2000.
And as much as $4.5 billion over the full 5 years.
We will closely monitor the impact of the risk adjustment
on beneficiaries and plans and continue to work with them to
refine and improve this methodology. But clearly we believe we
must start now. Mr. Chairman, I want to thank you for this
opportunity to come before you and to talk about this important
change in the way we pay Medicare health plans that are serving
our beneficiaries.
I look forward to responding to any questions that you or
other members of the subcommittee may have. Thank you very
much.
[The prepared statement of Michael Hash follows:]
Prepared Statement of Mike Hash, Deputy Administrator, HCFA
Chairman Bilirakis, Congressman Brown, distinguished committee
members, thank you for inviting me here to discuss our efforts to pay
health plans accurately and fairly. The Balanced Budget Act of 1997
requires Medicare to ``risk adjust'' payments to Medicare+Choice
organizations, starting January 1, 2000. That means we must base
payment to Medicare+Choice plans on the health status of their
enrollees.
Risk adjustment is an essential component of the Medicare+Choice
program, and represents a vast improvement over the current payment
method. It helps assure that payments are appropriate and curtail the
disincentive for plans to enroll sicker beneficiaries.
Under risk adjustment, data on individual beneficiaries use of
health care services in a given year will be used to adjust payment for
each beneficiary enrolled in a Medicare+Choice plan the following year.
The payment adjustments are based on the average total cost of care for
individuals who had the same diagnoses in the previous year. In order
to prevent disruptions to beneficiaries and health plans, we will phase
this change in over five years. Initially, we will use data on
inpatient hospital stays and move in an orderly fashion, as envisioned
in the Balanced Budget Act, to use of data from other health care
settings.
We would like to thank plans for their cooperation in providing the
data needed to implement this important advance.
Currently, some 6 million of Medicare's 40 million beneficiaries
have chosen to enroll in Medicare+Choice plans. Risk adjustment will
increase payment to plans for their sickest patients, and thus curtail
the disincentive for plans to enroll these beneficiaries. It also will
lower payment to plans for their healthier patients. Risk adjustment is
an essential step forward for beneficiaries, taxpayers, and health
plans.
Risk adjustment will help beneficiaries feel confident in all
their Medicare+Choice options. It will assure beneficiaries
that Medicare pays plans the right amount to provide all
necessary care because payment to plans will take each
enrollee's health status into account. That will help people
with serious illnesses, such as cancer or cardiovascular
disease, who can benefit most from the coordination of care
health plans can provide.
Risk adjustment will help taxpayers by addressing the main
reason that Medicare has lost rather than saved money on
managed care. Many studies show that health plans enroll
Medicare beneficiaries who, on average, are much healthier and
therefore less costly than those who remain in traditional
Medicare. This ``favorable selection'' of healthy beneficiaries
has cost taxpayers $2 billion a year, according to a 1997
report by Congress' Physician Payment Review Commission (now
part of the Medicare Payment Advisory Commission).
Risk adjustment will help level the playing field among
Medicare+Choice plans. It will temper the risk of significant
financial loss when plans enroll beneficiaries who have
expensive care needs, and focus competition more on managing
care than on avoiding risk. Risk adjustment also will help
plans by alleviating concerns among beneficiaries that plans
have financial incentives to deny care.
Phasing-In Risk Adjustment
The law requires us to proceed with risk adjustment starting
January 1, 2000, and does not call for a transition. However, we
believe we must implement these changes in an incremental and prudent
fashion, as was done with other new major payment systems. We are,
therefore, using flexibility afforded to us in the law to phase in risk
adjustment over 5 years to prevent disruptions to beneficiaries or the
Medicare+Choice program.
In the first year, only 10 percent of payment to plans for each
beneficiary will be calculated based on the new risk adjustment method
based on inpatient hospital diagnoses. The remaining 90 percent will be
based on the existing method for calculating plan payments, which are
flat amounts per enrollee per month based on the average cost to care
for Medicare fee-for-service beneficiaries in each county and adjusted
for basic demographic factors like age and sex. In 2001, 30 percent of
payment amounts will be risk adjusted. In 2002, 55 percent of payment
amounts will be based on risk adjustment. In 2003, 80 percent of
payment amounts will be based on risk adjustment. By 2004, we and
health plans will be ready to use data from all sites of care, not just
inpatient hospital information, for risk adjustment. Then, and only
then, will payment to plans be 100 percent based on risk adjustment.
Using Inpatient Data
During the first year of data collection for risk adjustment, both
the statute and practical issues require that we use hospital inpatient
data alone. About one in every five Medicare beneficiaries is
hospitalized in a given year. Data on these hospitalizations are
relatively easy to gather, easy to audit, and highly predictive of
future health care costs. We will use the data to pay plans more for
beneficiaries hospitalized the previous year for conditions that are
strongly correlated with higher subsequent health care costs. While we
will eventually be using a broader data base for risk adjustment, that
is simply not feasible at this time.
The Balanced Budget Act clearly stipulated that more comprehensive
data on outpatient, physician, and other services could be collected
only for services provided on or after July 1, 1998. That was prudent,
because it has been no small task for plans to learn how to gather the
inpatient data we are using for the initial phase-in of risk
adjustment. Requiring plans to provide additional data on outpatient,
physician and other services would have been unduly burdensome at this
time.
This year, we will issue a schedule and guidance to plans for
reporting other encounter data, such as outpatient information. The
schedule will provide sufficient time for plans to gather accurate data
and for HCFA to analyze and incorporate the data into accurate risk
adjusted payments. We are now confident that by 2004 we will be using
data on all health care encounters to assess beneficiary health status
for risk adjustment. If we could base risk adjustment on more
comprehensive data now, we would. But we cannot. The law requires us to
move forward. And, even with its limitations, this initial risk
adjustment system based on inpatient data alone will increase payment
accuracy 5-fold.
The initial risk adjustment system uses only the approximately 60
percent of inpatient hospital diagnoses that are reliably associated
with future increased costs. For example, beneficiaries hospitalized
for conditions such as heart attacks in aggregate are at higher risk of
subsequent cardiovascular problems, and they consistently have higher
health care costs in the subsequent year. Hospitalizations for such
diagnoses will lead to higher payments to plans in the following year
under risk adjustment. Hospitalizations for acute conditions such as
appendicitis, however, rarely lead to increased subsequent care costs.
They will not lead to higher payments under risk adjustment.
The 60 percent of hospital admission diagnoses that are clearly
associated with increased subsequent care costs account for about 30
percent of all Medicare spending the following year. It is important to
note that, while risk adjustment is initially based only on inpatient
data, the risk adjustment payments account for all costs of care
associated with each diagnosis. It is also important to note that risk
adjustment is not cost-based reimbursement; it is reimbursement
adjusted for projected need based on health status in the previous
year.
Determining Diagnosis Groups
The relevant diagnoses will be used to classify beneficiaries into
15 different cost categories. One category is for beneficiaries who
were not hospitalized the previous year with relevant diagnoses. For
beneficiaries included in any of the other categories, plans will
receive an additional payment to cover the increased risk associated
with diagnoses in that category.
Payment will continue to be adjusted for demographic factors, such
as age, gender, county of residence, and whether a Medicare beneficiary
is also a Medicaid beneficiary. We have revised these demographic
factors for use with risk adjustment, for example, by no longer
including institutional status because the risk adjustment methodology
itself does a good job of predicting expenses for nursing home
residents.
Medicare will calculate a score for each beneficiary to determine
the payment that will be made if they choose to enroll in a
Medicare+Choice plan. For example, Medicare's average payment per year
to health plans is $5,800. Under risk adjustment, payment for an 85-
year-old man will on average be $6,414. It will be an additional $2,060
if he is on Medicaid, another $1,207 if he is disabled, and $8,474 more
if he was admitted to the hospital for a stroke the previous year, for
a total of $18,155. The score for each beneficiary will be calculated
annually, and will follow them if they move from one health plan to
another.
Protecting Program Integrity
Most health plans operate with integrity and play by the rules, and
we doubt that plans will compromise successful medical management
programs that keep patients out of the hospital in order to game the
risk adjustment system. However, plans themselves have raised concerns
that risk adjustment based on inpatient data alone could create
perverse incentives for unnecessary hospitalizations. We, therefore,
have taken solid steps to prevent gaming of the system with
inappropriate hospital admissions or attempts to inflate the data
submitted for use in risk adjustment.
The risk adjustment system does not include hospital stays of just
one day, in order to help guard against inappropriate admissions. And
it excludes diagnoses that are vague, ambiguous, or rarely the
principal reason for hospital admission. In addition, we will use
independent experts to assess the validity and completeness of data
plans submit to us by conducting targeted medical record reviews and
site visits. This will help ensure that plans do not ``upcode,'' or
claim that hospital admissions were for more serious conditions that
would result in higher payment.
Protecting Taxpayers
It is essential to stress that risk adjustment will not and cannot
be budget neutral if we intend to protect the Medicare Trust Fund and
be fair to the taxpayers who support our programs. The whole reason for
proceeding with risk adjustment--and specifically with risk adjustment
that is not budget neutral--is that Medicare has not been paying plans
properly.
There is considerable evidence that we have overpaid plans and
continue to overpay plans, in large part because payments are not
adjusted for risk.
The Physician Payment Review Commission, in its 1997 Annual
Report to Congress, estimated that Medicare has been making up
to $2 billion a year in excess payments to managed care plans.
This Congressional advisory body notes that, unlike the private
sector where managed care has slowed health care cost growth,
managed care has increased Medicare program outlays. The
Commission's 1996 Report found that those who enroll in managed
care tend to be healthy and those who disenroll tend to be
unhealthy, exacerbating Medicare losses.
Mathematica Policy Research, which has conducted several
studies on Medicare HMOs, says care of Medicare beneficiaries
in HMOs costs only 85 percent as much as care for those who
remain in traditional fee-for-service Medicare. That is 10
percent less than the 95 percent of the average fee-for-service
costs plans were being paid.
The Congressional Budget Office has said managed care plans
could offer Medicare benefits for 87 percent of Medicare fee-
for-service costs, even though they were paid 95 percent.
Congress also recognized that plans have been paid too little for
enrollees with costly conditions, and too much for those with minimal
care needs. The simple demographic adjustments made now for age,
gender, county of residence, Medicaid and institutional status, do not
begin to accurately account for the wide variation in patient care
costs. Risk adjustment will.
The vast majority of beneficiaries enrolled in Medicare+Choice cost
far less than what Medicare pays plans for each enrollee. Medicare fee-
for-service statistics make clear why risk adjustment must not be
budget neutral. More than half of all Medicare fee-for-service
beneficiaries cost less than $500 per year, while less than 5 percent
of fee-for-service beneficiaries cost more than $25,000 per year,
according to the latest available statistics for calendar year 1996.
The most costly 5 percent account for more than half of all Medicare
fee-for-service spending.
Since Medicare+Choice enrollees tend to be healthier than fee-for-
service Medicare beneficiaries, the ratio of high to low cost
beneficiaries in health plans is even more stark. Clearly, care for the
overwhelming majority of Medicare enrollees costs plans much less than
what Medicare pays because our payments are predicated on the average
beneficiary cost of care, calculated by county. This average includes
the most expensive beneficiaries in fee-for-service, who generally do
not enroll in managed care.
If risk adjustment was budget neutral, Medicare and the taxpayers
who fund it would continue to lose billions of dollars each year on
Medicare+Choice. Accurate risk adjustment inevitably and appropriately
must change aggregate payment to plans.
Budget neutral risk adjustment would cost taxpayers an estimated
$200 million in the first year of the phase-in, and $11.2 billion over
5 years if health plans maintained their current, mostly healthy mix of
beneficiaries. It is important to stress that actual savings to
taxpayers from risk adjustment will vary to the extent that less
healthy beneficiaries enroll in Medicare+Choice plans, resulting in
higher payments than health plans receive today.
The amount of payment change will vary among plans and depend on
each plan's individual enrollees. Total payment may be higher for some
plans as they enroll a mix of beneficiaries that is more representative
of the entire Medicare population. As part of our Medicare+Choice March
1 rate announcement, we will send a letter to each health plan with an
estimate of how payment will differ from what they are paid now, based
on their current mix of enrollees.
Overall, we project that payment to Medicare+Choice plans on
average will change by less than one percent in the first year. How it
will change over time depends on the mix of beneficiaries in each plan.
Risk adjustment significantly changes incentives for plans and could
well lead to enrollment of beneficiaries with greater care needs. That
could result in plans receiving higher payments than they do now.
Phasing in risk adjustment also substantially buffers the financial
impact on plans. The federal government is forgoing $1.4 billion in
savings in the first year and as much as $4.5 billion over the full 5
years because of the phase in.
Payment changes will be further buffered by an annual payment
update for 2000 that our preliminary estimate suggests will be 5.2
percent. This is substantially larger than projections that were made
last year. The final figure will be released March 1, 1999. This annual
update is based on formulas set in law and projected expenditures for
Medicare that are included in the President's fiscal year 2000 budget.
conclusion
Risk adjustment is an essential step forward for Medicare,
beneficiaries, taxpayers and the Medicare+Choice program. It will help
Medicare pay plans fairly and accurately. It will curtail disincentives
to enroll less healthy beneficiaries. It will help taxpayers and the
Medicare Trust Fund start saving, rather than losing, money on managed
care. It will help level the playing field among plans. And it is
required by law.
We are aware of the magnitude of the impact of risk adjustment and
are, therefore, phasing in implementation to avoid undue disruptions.
We are also taking proactive steps to prevent potential gaming of the
system. We will closely monitor the impact on beneficiaries and plans.
We will continue to consult with beneficiary groups, health plans and
academic experts. Adjustments can be made each year as we proceed.
But, clearly, we must proceed. Risk adjustment is too important to
postpone and too important to implement without a prudent phase-in that
allows time for any necessary refinements. Again, I thank you for
inviting us here today to discuss this, and I am happy to answer your
questions.
Mr. Bilirakis. Thank you, Mr. Hash. Well, let me ask you a
question that is in the general, generic, category. And without
maybe oversimplifying the problem, it seems to me that many of
these managed care companies which are choosing not to continue
in the Medicare beneficiary area, are doing so mainly on the
come, so to speak. Or doing so because the risk adjustment is
coming and they don't like what they see coming and what their
obligations or responsibilities are going to be.
Many of them have already told us they look upon the
regulations as being too onerous in addition to the other
responsibilities that go along with it. What is your response
to that?
Mr. Hash. Mr. Chairman, we think that the risk adjustment
methodology that we are going to phase in is actually a needed
improvement to the management of the program. We think it is
what the Congress intended when it enacted the Balanced Budget
Act. We have spent a lot of time over the last year working
with plans, with other experts, with the Academy of Actuaries,
with a whole host of folks to actually design an appropriate
and implementable risk adjustment methodology and we think we
have done that or are about to do that.
And we don't think that it would be appropriate to delay
the progress on bringing payments more in line with the
expected cost of the beneficiaries who choose to enroll in
managed care plans. The imbalance between what we are paying
and the costs of the enrollees has been documented in study
after study. And I think if for no other reason, our fiduciary
responsibility to the program means that we should move ahead
and make sure these payments are accurate rather than continue
with the significant overpayments that we have experienced.
Mr. Bilirakis. Well are beneficiaries being dropped,
because programs or plans are pulling out of certain areas. I
took a look at a chart here somewhere and there are more
beneficiaries impacted by this in Florida, for instance. That
concerns you, does it not?
Mr. Hash. It does.
Mr. Bilirakis. All right. Now what, if that concerns you,
how is HCFA planning to meet that concern? I mean, we have
heard the opening statements up here and we have heard a lot of
complaints on the AAPCC process. And risk adjustment appears to
be, certainly make a lot more sense. I think roughly everybody
seems to think it is a good idea. But in the meantime, we have
these problems.
We have these beneficiaries who basically have lost their
choice. They certainly could go back to fee-for-service, but
they have lost their choice. How will you respond to that and
how is HCFA planning to respond to that? What are you plans and
your strategy in that regard?
Mr. Hash. Mr. Chairman, since the experience of last fall
that you and other members heard a lot about when plans decided
not to participate or at least to reduce the geographical areas
that they were going to participate in, we have been working
with the plans and with folks in the Congress, your staff as
well, to analyze exactly what the reasons were for that non-
participation. And you may know, that last month, we published
a regulation, an interim final regulation, that addressed a
number of concerns that plans had raised about the regulations
we published last summer, last June, to implement the
Medicare+Choice Program.
We think we have actually gone a significant way toward
addressing the issues that plans identified as the reason for,
at least some of the reasons for, dropping out. I think it is
important to recognize that there are a host of factors that
influence a decision by a health plan to withdraw from
participation in Medicare. One of the things I think that
struck me as most interesting about the experience last fall
was that as we look back on it, we determined that about an
equal percentage of health plans that had been participating in
the Federal employees health benefit program also dropped out
of that program or chose not to participate for Federal
employees this coming year in some of the same markets that the
Medicare+Choice Plans withdrew from.
Presumably in addition to payment concerns, health plans
look at market situations, the penetration of their own plan,
the competitive nature of the markets in which they are
engaged. There are a whole host of factors, only one of which
presumably is Medicare payment and Medicare requirements. And
we tried to address some of the concerns that have been raised
since last fall.
Mr. Bilirakis. So, in other words, you feel that many of,
or at least some of the clients' decisions to withdraw aren't
necessarily directly related to the proposed risk adjustment
plan?
Mr. Hash. I believe that to be the case, Mr. Chairman.
Mr. Bilirakis. All right. Let me ask you, were you or a
member or one of your representatives going to remain
throughout the entire----
Mr. Hash. Yes sir, yes sir.
Mr. Bilirakis. [continuing] and take notes?
Mr. Hash. Yes sir.
Mr. Bilirakis. Because we have a lot of the insurance
representatives testifying later on.
Mr. Hash. Yes sir.
Mr. Bilirakis. Thank you very much. Mr. Brown to inquire.
Mr. Brown. Thank you, Mr. Chairman. Mr. Hash, thank you for
your very informative testimony. Clearly part of the problem is
we don't have enough information from many of these Medicare
HMO's so we can make some of these decisions, but last, as you
know, some 400,000 people nationally have been dropped from
their Medicare HMO. United Health has dropped some 50,000. In
my home county of Lorraine, Ohio they dropped 2,000 people
without appropriate notice. People read it in the newspaper and
began to call offices like mine and others.
But in counties nearby, Cuyahoga, Medina County, other
counties, they didn't drop people. I know because we don't have
all the information, so perhaps you can't answer this. But if
we had had a risk adjustment system like the one discussed
today, would this likely have happened?
Mr. Hash. Well, I think it is hard to say, as I said a
moment ago. There are many factors that go into the calculation
about whether to participate and which markets to participate
in. To say that if we had a full comprehensive risk adjustment
in place, would that have reduced the extent to which plans
pulled out? I think in some cases it probably would have. For
plans who felt like they had above-average health cost
enrollees, more adequate payments for the needs of those
enrollees would have obviously helped to ameliorate their
financial concerns about continuing to participate. But I am
not sure that would be the case in all plans. And the risk
adjustment benefit depends on the nature of the kinds of
individuals, in terms of their expected health care costs, that
are actually enrolled in the plan.
So, you know, for plans who withdrew because they felt like
they had a non-representative group of enrollees in the sense
that their health care costs were higher on average than the
typical Medicare beneficiary, those people would have been
helped by a full risk adjustment.
Mr. Brown. You had said that you don't have, you can't use
comprehensive data to develop the risk adjuster. Is that
because you are not getting that data from HMO's? You can't
gather the data or you haven't had time to process it and put a
comprehensive amount of data together to do it? What is the
problem?
Mr. Hash. It is some of all of that, Mr. Brown. Risk
adjustment for plans and for us represents a new stage of our
relationship. We have not traditionally, in our contracts with
managed care plans, required them to report to us the clinical
data on hospitalizations or encounter data on out-patient
services or clinic services. That has not been a part of what
they have been doing. So what we have been trying to do is to
build the data infrastructure.
We started with, as the Congress said in the BBA,
collecting in-patient hospital data. That is what we did
beginning January 1, 1998. We are going to put in place the
tools and the formats for plans to report this broader array of
data, but we think it takes time. We want to work with the
plans and give them the time to do this. We want to prepare
ourselves to make sure we can receive that data properly. And
that is why we have phased in the risk adjustment in the way we
have.
Mr. Brown. One final question. Congressman Stark has sent
some testimony to this committee, which in a moment I will ask
the chairman to enter into the record. In his testimony, he
noted that a letter from the HCFA Administrator describes a
``little known glitch in the Balanced Budget Act that overpays
HMO's $8 billion over 5 years and $31 billion over 10 years.''
The HCFA Administrator ascribes this overpayment to a lower
rate of medical inflation.
Would a risk adjustment have dealt with this, so that this
overpayment would not have happened? Or if it would not have,
is there a way of doing risk adjustment and somehow roll this
hedge against inflation or really a reverse of that into it?
Mr. Hash. I think what happened, Mr. Brown, was we
estimated the updates that are required for updating the rates
paid to managed care plans. And in the base year that now forms
the basis for rates for managed care plans, 1997, the statute
in the BBA did not included authority for us to correct any
errors in that projection.
And as we look back on the estimates we made from 1997, we
determined that the overstatement was about 4 percent of what
it should have been in terms of the update to the rates. And we
lack the authority to correct what was built in, and that is, I
think, what Mr. Stark is referring to as built in and above
inflation to the rates. This would not actually be affected by
the risk adjustment methodology that we are talking about. It
is a separate but important issue.
Mr. Brown. And can we deal with that.
Mr. Hash. I don't think actually that is----
Mr. Brown. So that it is----
Mr. Hash. [continuing] that is a problem that can be dealt
with by the risk adjustment language. I think we would be happy
to work with you and others to see other avenues for dealing
with it. But I don't think it can be dealt with through risk
adjustment.
Mr. Brown. Mr. Chairman, I would like to ask your honor's
consent to enter into the record Mr. Stark's testimony?
Mr. Bilirakis. Without objection.
Mr. Brown. Thank you, Mr. Chairman.
[The prepared statement of Hon. Pete Stark follows:]
Prepared Statement of Hon. Pete Stark, a Representative in Congress
from the State of California
Mr. Chairman, Members of the Committee: Congratulations on holding
this hearing on this important issue. I would like to make three short
points.
1) On behalf of the HMOs that have done the right thing and
enrolled a fair and representative proportion of the Medicare
population--both the sick and the well--I urge that Congress not
consider legislation delaying the phase-in of the risk adjustor. Any
delay will reward those who have avoided the sick and chronically ill,
and punish those who have sicker than average patients--and that is
exactly the opposite of good health policy.
By phasing in the risk adjustment, we have already hurt the best
HMOs, and given the industry a $4.7 billion gift (see attached table).
2) Second, we should not buy the argument of the for-profit HMOs
that we are not paying them enough. I would like to enter into the
Record a summary of the ways we have been overpaying Medicare HMOs. I
would also like to enter a letter from the HCFA Administrator that
describes a little known `glitch' in the Balanced Budget Act that
overpays HMOs $8 billion over five years, and $31 billion over ten
years. This overpayment occurs because we took away the authority of
HCFA to adjust for overpayments in 1997. We paid plans a higher amount
in 1997 than was justified in light of the lower medical inflation
which actually occurred. By allowing these overpayments, we built into
the budget base billions of dollars in extra payments. As the
Administrator's letter makes clear, the other budget savings in the BBA
do not even correct for this mistake--let alone reduce the earlier,
underlying overpayment to the Plans.
3) Most importantly, the testimony today of the fourth panel of
private sector plans shows--indeed proves--why the Premium Support plan
being pushed by a majority of the Bipartisan Commission on the Future
of Medicare will not work
The President of PacifiCare Health Systems is testifying:
``Unless Congress [delays risk adjustment/gives us more money]
the number of providers who refuse to contract with
Medicare+Choice plans will increase, and health plan
withdrawals will continue at a more rapid pace.''
The Vice President of Blue Cross and Blue Shield of Florida is
testifying:
``that HCFA's current approach [to risk adjust] will ultimately
cause health plans to exit the program or significantly reduce
benefits . . .''
On behalf of the Health Insurance Association of America, the
Senior Vice President of CNA Health Partners is testifying:
``If the current reimbursement structure is not adjusted [i.e.,
pay us more money] more Medicare+Choice organizations are
likely to withdraw from areas served and beneficiaries enrolled
in the remaining plans will likely experience premium increases
or reduced benefits.''
And the Vice President of Humana testifies:
``Some plans have already decided to discontinue participation
in the M+C program in one or more counties . . . it is likely
more plans will go this route in the next two years if the . .
. risk adjustment system is implemented on the current
schedule.''
In short, pay us more or we can't offer extra benefits--in fact, we
may not even be able to stay in the program.
But as described in my second point above, we currently pay
Medicare HMOs more than we should. We pay the plans more for the people
they enroll than we would have paid if those people had stayed in
Medicare Fee-For-Service. The taxpayer would actually save money if we
abolished the Medicare+Choice program.
Unfortunately, the beneficiaries in these plans who have been
getting extra benefits will lose, and that is why we need to improve
the core Medicare program, so that everyone has a drug benefit and
catastrophic protection--and so that people do not need to join an HMO
to get extra benefits.
The Bipartisan Commission on the Future of Medicare's majority is
pushing the idea that we can save Medicare hundreds of billions of
dollars--as much as $475-$850 billion in the year 2030--if we can only
get more people to enroll in private plans. (They have no proof of this
savings; they just assume--assume--that private plans will grow 1% per
year less than Medicare fee-for-service over the next thirty years.
They assume this although the history of the last 11 years shows
Medicare and Premium Support growing at almost exactly the same rate--
the FEHBP Premium Support model grew only 0.1% less than Medicare, not
1.0% less!)
But if plans say they cannot offer extra benefits at a time when we
are overpaying them, they certainly won't be able to when Medicare
actually starts saving money by paying them more accurately for the
people they enroll.
And if the plans can't offer extra benefits, who in the world would
want to join a system that rationed their choices and services?
Premium Support won't work to save Medicare--it is just a way to
raise premiums on seniors and the disabled to force them into bare-
bones, no-frills HMOs that will offer no extra benefits. Indeed, more
than half of all the savings projected for the Breaux-Thomas Premium
Support plan would come from higher payments by beneficiaries.
I hope all the Members will consider the testimony of Panel 4
before they endorse the Premium Support scheme.
The representatives of the managed care plans testifying today are,
in fact, testifying that the Breaux-Thomas Premium Support plan will
not work.
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Mr. Bilirakis. Mr. Whitfield.
Mr. Whitfield. Mr. Hash, I had noticed that a lot of these
payments are going to be based upon a diagnostic cost grouping.
And under the existing payment system, I think, to hospitals
there are, and I am not sure I have this correct, but there are
DRG groupings.
Mr. Hash. That is correct.
Mr. Whitfield. Now are they the same as this diagnostic
group?
Mr. Hash. They are not, Mr. Whitfield. What we have done in
the risk adjustment, is to identify what amounts to
approximately 12 percent of all hospital admissions. We have
indicated that for enrollees that have an admission that falls
into one of those categories, about 15 categories altogether,
that will be an individual for which a larger payment will be
forthcoming to the plan.
The hospital in-patient DRG System is one which involves
something like 480 or so separate DRG's to cover the full array
of conditions that might occasion someone to be hospitalized.
Mr. Whitfield. Okay so the, I noticed in the diagnostic
groups, there are 172 of those and so that is totally separate
then from the other, okay. And could you just briefly explain
the way you are going to use the diagnostic cost groups in
determining the factor that would be applied to patients?
Mr. Hash. Yes it is, the first step is to identify a subset
of hospital admissions that are associated with high cost, both
the probability of future hospitalizations, as well as in many
cases, extensive outpatient care that is required. And, having
identified people who have a hospital admission in one of those
categories that is associated with significant increased health
care costs, then those individuals will be assigned a risk
score, if you will, higher than the average. This will
translate into a payment on their behalf that will be higher
than the average payment the plan would otherwise receive.
Mr. Whitfield. Okay. Okay, Mr. Chairman, I yield back the
balance of my time.
Mr. Bilirakis. I thank the gentleman. Mr. Strickland.
Mr. Strickland. Thank you, Mr. Chairman. Mr. Hash, given
the experience that some of my constituents have had in regard
to losing coverage that they thought they had and could depend
upon, I just want your personal opinion, if you would be
willing to offer it. Do you think that HMO's that market just
seniors should have an obligation, as a part of their marketing
strategies, to provide a disclaimer indicating to the seniors
that this coverage may not be there for them in the future. So
that they can make whatever choices they make with, after being
fully informed as to what they may face?
Mr. Hash. That is a difficult question, Mr. Strickland. I
would have to say, from the marketing point of view, such a
disclaimer in marketing materials, I think, would be viewed as
a significant impediment to the enrollment of Medicare seniors.
On the other hand, I recognize that the fact that plans can
voluntarily come and go in the Medicare Program. Actually, as
you might know, if plans withdraw from the Medicare+Choice
Program from now on, they are banned from coming back in the
program for 5 years.
So there is, how should we say, a much stronger
disincentive for a plan that is currently participating in the
program to withdraw if they expect to come back into the
program any time in the near future. So I think some of the
ability of plans to come and go on an annual basis, will be
reduced by that protection in the BBA. And one of the things we
do require, we have a lot of requirements related to the
marketing materials, that plans reach out to senior citizens.
And one of the requirements associated with marketing is
that they must disclose that they can terminate coverage. In
other words, they tell the beneficiaries that if they give them
proper notice, that the plan may in fact withdraw from
participation in the Medicare Program. So that is actually part
of the notice requirements that we impose in terms of the
marketing materials that they use.
Mr. Strickland. Well apparently for many that, that
information is not either being given or being recognized
because so many of my constituents made decisions in good
faith, they gave up Medigap coverage, they have pre-existing
health care conditions and then at a moment in time, they find
that they do not have the coverage that they, I mean that is
what, I have always thought that is what insurance is.
Something that you can depend on.
If you can't depend upon it, then it is not insurance, it
is something else. And it just, it really troubles me that so
many of our most vulnerable citizens feel as if they have been
manipulated or misled and I was just wondering if there was
something we could do to make that less likely to happen in the
future?
Mr. Hash. Well, I think I should point out why I think it
is less likely in the future. Last year was unique in the sense
that it was something of a transition year. Plans operating
under the old system had the opportunity to give a notice 90
days before the end of the year, October 1, that they would not
be participating in the new calendar year.
That has now changed under the BBA and plans have to
indicate to us earlier in the year about their commitment to be
in, so that when beneficiaries have a chance to make a choice
in November of each year. Plans will then be locked in for the
coming year and there won't be this last minute kind of
withdrawal from the program that we experienced last year. So I
think the potential is much less in the future.
Mr. Strickland. Okay, and if I can ask one more quick
question. As a result of Mr. Waxman's suggestion, I had a study
done in my district regarding prescription drug prices. And
what we found was that seniors who participate in HMO plans,
that the drugs available to them are much cheaper than seniors
who are not a part of such a plan. The differential on five
drugs was 107 percent. And I am wondering, as you do this risk
adjustment, if you factor in the fact that HMO's on average get
much, much less costly drugs than do non-HMO participating
seniors?
Mr. Hash. I think the answer to that is a complicated one,
Mr. Strickland. But the brief answer would be, you know, that
Medicare does not cover much in the way of drugs to begin with,
so that wouldn't be reflected in our payments to managed care
plans. With respect to the drugs that we do cover under
Medicare, which are basically drugs often that are provided as
part of an in-patient hospital stay, the cost of those drugs
are reflected in the rates in the sense that the way we cover
them under the fee-for-service system.
They are built in there, but they are probably built in at
a level that is higher than the acquisition costs on the part
of HMO's, because many HMO's obtain discounts and have group
purchasing arrangements that provide, as you point out, more
favorable drug prices. And that data is not fully reflected in
the rates that we pay.
Mr. Strickland. And it seems as if some cost shifting may
be taking place from the HMO participant to the non-
participating senior.
Mr. Hash. Yes.
Mr. Strickland. Thank you, Mr. Chairman, I am sorry I went
over.
Mr. Bilirakis. No problem. Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman. Mr. Hash, I have three
questions for you and I will one at a time, of course. The
health care plans have expressed concerns that it is difficult
for them to validate or replicate your risk adjustment
calculations because HCFA has not provided them with the
formulas used for the components of the risk adjustment
methodology. This lack of complete information makes it
difficult, if not impossible, for the health organizations to
forecast revenues.
Will this information be provided to health plans and if
so, when?
Mr. Hash. Mr. Bryant, we want to work with the plans to
resolve any questions about data that is not available to them,
because I have heard the same sort of comments. Let me just
say, as I indicated earlier, beginning last September,
September 8 to be exact, we published for comment the model,
the risk adjustment model and methodology that we were going to
use. We got lots of comments from health plans and others.
We submitted it to the American Academy of Actuaries, who
have also reviewed and analyzed it. We met with the health
plans in the fall over this. On January 15, we sent a notice to
all health plans which indicated what the methodology was and
provided information about the average risk scores that were
being determined. On March 1, next week, we will be
communicating with every plan giving them information about
their specific risk adjustment for the enrollees that they
currently have.
They can use that information to prepare their submissions
to us later in the year about the benefits and premiums they
are going to charge. We will be giving them the software that
we used to group the patients into these various risk cells. We
think we have been very forthcoming, very transparent. To the
extent there are issues that plans feel that we have not given
them, we would like to talk to them about that.
We would be happy to try to work with them. But we think we
have been very forthcoming on the data front.
Mr. Bryant. Thank you. And I know we will certainly hear
from some of those folks later on in this hearing. Earlier you
have made arguments that health plans have been overpaid for
providing health care services and that the risk adjustment
method is needed to correct this overpayment. However, the
health care organizations maintain that the data used to make
this judgment is old data from 1992, in fact.
Number one, I guess, is that a correct statement that it is
from 1992? And number two, how can you state with certainty
that plans are currently overpaying using data from 7 years
ago?
Mr. Hash. Mr. Bryant, I would say that there are a variety
of studies out there that have looked at the issue of the
adequacy of payments, proper payments to managed care plans.
Some of those studies go back as far as you are talking about.
One as recently as 1997, by the Physician Payment Review
Commission indicated that they felt in the aggregate we were
overpaying managed care plans by $2 billion a year.
The General Accounting Office, which will be testifying
following me, has also done studies based on more recent
information. So I think actually there is a considerable amount
of evidence of current vintage that suggests that we are
overpaying health plans.
Mr. Bryant. Again, my final question. You alluded to some
of this information in your statement, I wish you would expand
on that. In terms of the transition, the concerns that the
first 4 years of, we haven't finished the first 4 years of the
5 year phase in, concern only in-patient hospital data that
would be used to predict future patient cost. Further, only
hospital stays of 2 days or longer will be included in the
methodology.
I guess what we are looking for is more reasoning for this
and also that, as you said, there might be some perverse
incentive involved here that would have health care providers
admit beneficiaries who keep in the hospital longer to work
this in. Again, could you simply expand on why this was chosen?
Mr. Hash. Well, the first answer is, to your question, is
that we used in-patient data because the BBA laid out a
schedule that said we were to start collecting only in-patient
hospital data, January 1, 1998, and to use that for the first
part of the risk adjustment beginning in the year 2000. That is
the short answer for why we are using in-patient data.
On the issue of whether our methodology creates an
incentive for inappropriate hospitalizations, I think what we
have done in designing our methodology is to carve out from the
admissions that we are going to treat ones that are warranting
a special payment, discretionary admissions, admissions for
conditions that are not associated, you know, with future
health care.
For example, someone who has an appendectomy who may have a
very short hospital stay, that would be an admission which we
would not count as predictive of increased future costs.
Mr. Bryant. When will you do this? Because again, I think
our whole----
Mr. Hash. That is----
Mr. Bryant. [continuing] our whole purpose is to----
Mr. Hash. That is actually a part of the risk methodology
that we will be implementing next January.
Mr. Bryant. But can you get these encounters, these other
medical encounters, for the 4 years?
Mr. Hash. We are going to start collecting that data. We
are going to put out a schedule later this year and we will,
our present plan is, to implement the full risk adjuster based
on the more comprehensive data in 2004.
Mr. Bryant. Thank you.
Mr. Bilirakis. The gentleman's time has expired. Mr. Green.
Mr. Green. Thank you, Mr. Chairman. And Mr. Hash, the plans
that have withdrawn from the Medicare Program over the last 6
months claim to be losing money, however the GAO recently
reported that even after the Balanced Budget Act, Medicare
still overpaid some of the plans. Were the plans that withdrew
actually losing money or were they not earning as much as they
expected?
Mr. Hash. I actually have not been able to review the
financial conditions of the plans that withdrew, so I wouldn't
be in a position to comment on their profitability or lack
thereof. Clearly in some of their statements about their
reasons, they indicated that Medicare was no longer profitable
to them.
Mr. Green. The risk adjustment is critical in preventing
the cherry picking of healthy beneficiaries and, but is it
possible that the basic payment levels are too low to meet the
needs of seniors?
Mr. Hash. There has been a lot of talk about that, Mr.
Green. And I think the answer to that is that it depends on
what part of the country you are talking about, what kind of
area. The BBA, as you know, went a long way to try to narrow
the range of payments that Medicare makes to managed care plans
by bringing up the floor. It is now about $380 per person in
the lowest areas.
And it also put in a blending methodology which in the
first 2 years, 1998 and 1999, we were not able to actually
implement because of budget neutrality limitations. But the
newest data for the year 2000, in terms of the update for
managed care rates, indicates that there will be about a 5.1
percent increase in managed care rates. The effect of that will
be to fund the blended rates in the large number of counties
around the country.
What that means is, for counties that are below the
average, by blending with the average, their rates will be
brought up. So we think that in lower payment areas, beginning
in the year 2000, there will be some additional help in terms
of the adequacy of the payment rates that are available for
Medicare beneficiaries in private plans.
Mr. Green. And why wasn't out-patient data included?
Mr. Hash. Well, because under the way the BBA laid out the
requirement to move to risk adjustment, it required us to start
collecting in-patient hospital data on or after January 1,
1998. That is what we have done. We will be allowed to collect
a broader array of data, including the out-patient data and
that is what we will use for the comprehensive risk adjustment
that will be put into effect in 2004.
Mr. Bilirakis. Thank you, Mr. Green. Thank you, gentleman.
The vice chairman of the subcommittee, Dr. Coburn.
Mr. Coburn. Mr. Hash, good to see you again. Thank you, and
let me just remind you I am still waiting for some of that
information on nursing homes.
Mr. Hash. Yes, actually Dr. Coburn, I signed the letter
this morning.
Mr. Coburn. Great, thanks. Do you feel comfortable that you
really have----
Mr. Hash. And one to you, Mr. Chairman, as well.
Mr. Coburn. Do you feel comfortable that you really have
the data right now, enough data based on what the experience is
out there, to put forward a risk adjuster?
Mr. Hash. Dr. Coburn, we do. We have collected data on over
1.2 million admissions between the period July 1, 1997, through
June 30, 1998, for 5.5 million beneficiaries and we actually
think we have a very rich data base.
Mr. Coburn. And geographically distributed properly as
well?
Mr. Hash. Yes, sir.
Mr. Coburn. Okay. I am interested in what Mr. Brown gave us
in terms of adjusting and I would be anxious to talk with you
in terms of trying to do the authority to get the adjustments
made in terms of that growth. Would it be possible for HCFA to
develop comparisons, say like from 1990 to the present to give
the members on the committee sort of a historical perspective
on the number of renewals and non-renewals on Medicare managed
care?
In other words, we are seeing this big abrupt withdrawal
now, but how does that compare to historical changes and
renewals and non-renewals?
Mr. Hash. Last year was definitely much higher than any
previous experience. I think I am correct and my colleagues
will probably correct me here. For the years 1994, 1995 and
1996, we had a total of 5 health plans that completely withdrew
or reduced service areas. And obviously we had a much larger
number last year, 99 either withdrew completely or reduced
their geographical service area. So last year was, by any
means, much higher than any previous experience.
And in fact plans have been generally increasing in 1999, I
am told, to correct it here a little bit. In the mid-'80's we
had a very large drop of plans who dropped out of the program.
I will get you the specific data on that.
[The following was received for the record:]
Medicare Plan Renewals/Non-renewals 1985-1998
----------------------------------------------------------------------------------------------------------------
Percentage
Year Total Risk Non- Renewals Non-
Contracts renewals renewing
----------------------------------------------------------------------------------------------------------------
1985........................................................... 87 3 84 ...........
1986........................................................... 149 7 142 5
1987........................................................... 161 29 132 18
1988........................................................... 154 34 120 22
1989........................................................... 131 38 93 29
1990........................................................... 96 14 82 15
1991........................................................... 93 12 81 13
1992........................................................... 96 8 88 8
1993........................................................... 110 4 106 4
1994........................................................... 148 1 147 1
1995........................................................... 181 0 181 0
1996........................................................... 241 2 239 1
1997........................................................... 307 8 299 3
1998........................................................... 346 45 301 13
----------------------------------------------------------------------------------------------------------------
Source: Medicare Managed Care Contract Plans Monthly Summary Reports.
Non-renewal rates peaked in 1988 and 1989.
The percentage of nonrenewals in 1998 was 14 versus 22 in 1988.
Prepared by the Office of Legislation, HCFA, March 1999.
Mr. Coburn. I think it would be real helpful for the
members to see it in terms of perspective. You know as you look
at all this, firms are going to either participate or not
participate on this on whether they can make any money in it. I
mean that is what they are in the business for. As you sit and
look at that, how much money should they make?
Mr. Hash. Well, I think again it is difficult to answer
that precisely. I think the purpose of this risk adjustment
methodology is to try to say, with the payment policy we have
now, we are clearly not paying appropriately and that we need
to change that and to bring the payments more in line with the
expected costs that enrollees are going to experience. And if
that means that people have lower than average costs, who are
enrolled in managed care plans, that is going to be a lower
payment for them.
But for those who have sicker patients, it is going to be a
higher payment for them and we think that is an appropriate
change.
Mr. Coburn. So could these firms expect in the future that
now the risk adjustment is out there and things are going along
and can they expect a crunch again? In other words, all of a
sudden we move more people into managed care and the costs rise
a little faster than what they were and things start going up
and they creep a little bit. Are we going to come back through
HCFA and say, well you know, our risk adjuster is a little too
high, we are growing a little faster than what we thought too.
And we are going to tighten that up.
Because ultimately that is what it counts on. And I am
interested in your perspective, because I know you all
understand that if they don't make any money, they won't be, I
mean they may on the short term. And I am not saying they are
not making any money. There was a wonderful report on
PacifiCare that happened to time with this hearing that is
enlightening. But the point is at some point we have to decide,
with your help, how much is a good rate of return for people
who are offering this service?
Mr. Hash. I agree with that, Dr. Coburn. I mean we do have
to monitor very carefully participation by plans and the
reasons they are giving for the inadequacy of our payments,
where that exists. And pay attention to that. Because if we
want choices for Medicare beneficiaries we are going to have to
pay adequately for it. I just don't have a ready answer to tell
you what sort of changes might be needed.
But one of the reasons we are phasing in this risk
adjustment is to not further destabilize the market for these
plans and to minimize the changes of payments that will happen
to plans. So that at least in the short run, we shore up the
market place for our beneficiaries.
Mr. Coburn. Well is it your feeling, I know you may not be
able to have the knowledge on this. Is it your feeling that we
had the tremendous withdrawals in this because of the lack of a
certain expectation coming? And that because there was a lack
of an expectation of a fixed amount or an unknown out there in
terms of being able to predict what they were going to be able
to do, we saw more withdrawal than what we would have
otherwise?
Mr. Hash. I think the anticipatory effects played a large
role. I think people were uncertain at the point they made
their decision about what the risk adjustment would be over
time. I think they were uncertain about the rate of increase in
plan payments over time in the aggregate. And that uncertainty
certainly played a role in the decision of many plans, I am
sure, to withdraw.
Mr. Coburn. Thank you.
Mr. Bilirakis. Mr. Waxman to inquire.
Mr. Waxman. Thank you, Mr. Chairman. Mr. Hash, if we don't
have an adequate risk adjuster, it seems to me we are
encouraging plans to try to skim and get the healthiest
population in order to make more money. Then we overpay them
because we pay them based on the amount that Medicare paid for
the average population. If we can't get a risk adjuster, we are
overpaying them. Isn't that what we are faced with and why this
committee and the Congress asked you to develop a risk
adjustment?
Mr. Hash. That is correct, Mr. Waxman.
Mr. Waxman. We don't want to overpay. We don't want to give
an incentive for plans to try to refuse the sicker patients and
only go after the healthier patients. But it is not easy doing
a risk adjuster, is it?
Mr. Hash. No, sir, it is not. It is very complicated.
Mr. Waxman. It is very complicated, but it is very
necessary. But let me just go beyond where we are today. There
is a Medicare Commission that is now looking at changing the
Medicare Program. And if we don't have a good, accurate risk
adjuster under the premium support system, which is what they
are talking about over there, what we are going to have, it
seems to me, is a system where people who go into a fee-for-
service system are going to find it unaffordable because they
are going to have to pay more money. Isn't that the case? And
why would that be the case, if it is?
Mr. Hash. It is the case. Well, I think there are several
issues there. But a premium support program, as I understand
it, could not function without a risk adjustment methodology.
It just would not work. And I think members of the Commission,
Mr. Bilirakis, who is a member of the Commission, have been
through lots of discussions about that. So I think that is one
of the reasons for what we are doing here. If it turned out
there were some kind of premium support approach introduced
into Medicare, experience with this risk adjustment is
absolutely essential to making that----
Mr. Waxman. When you say it wouldn't work. It would work--
--
Mr. Hash. Well----
Mr. Waxman. [continuing] it would produce some results that
we wouldn't find very satisfying.
Mr. Hash. Correct.
Mr. Waxman. I mean after all if you pay a percent of the
average of the premiums for all plans, including fee-for-
service, and you don't have any risk adjustment, if a plan is
able to make a lot of money and pay a lower amount because they
have skimmed off a healthier population, then they are going to
drag down that average of all the plans.
And then, as a senior, when you want to go into a plan that
has a higher premium and costs more money, the government says,
oh, this is all we are going to give you for that. You are
going to have to come up with the difference because you are
going into a plan that is going to have a disproportionate
amount of sicker patients, it's premium is higher, you get paid
proportionately less for it. Isn't that the fear we would have?
Mr. Hash. That is correct. If you don't have a risk
adjustment you are going to have significant adverse selection
in the model that you just described. And the affect of adverse
selection is obviously that the plans who get the sicker
individuals will have increasingly higher costs, higher
premiums. And the individuals who choose those kinds of plans,
will have to pay more for them.
Mr. Waxman. Well it seems to me the stakes get higher and
higher. We better make sure we have some risk adjuster that
works, especially if we are even looking at a drastic, radical
change of the Medicare Program as is being discussed by this
Commission. We are having a tough enough time now, under the
Medicare+Choice Plan to make sure that we get a risk adjustment
that works.
Let me ask you about the prescription drug issue. The
President has said we ought to cover prescription drugs under
Medicare. Some people are saying we ought to cover prescription
drugs under Medicare only if people go into a managed care
plan. What would be your view of a system like that?
Mr. Hash. Well, I think the President has been very direct
on that point, Mr. Waxman. And his view and the view of the
Administration is clearly that prescription drugs are a needed
addition to the Medicare Benefit Package and that they should
be provided across-the-board in the traditional fee-for-service
program, as well as any private managed care plans.
Mr. Waxman. Well wouldn't some want to push people into
managed care? Isn't that mainly what people think we want to
do? I mean if we stack the deck without a risk adjuster and we
cover drugs only under managed care, aren't we telling people,
you don't really have a Medicare choice, you have a choice
between a bunch of managed care plans?
Mr. Hash. That certainly is one way to look at it, Mr.
Waxman. I think what we are trying to ensure is that we don't
have a situation where there are markers for plans that create
adverse selection. Which gets to the same point you are making,
which is if only some plans offered prescription drugs to a
senior and disabled population, they are going to inordinately
attract, I think, a large number of those beneficiaries into
those plans.
Mr. Bilirakis. The gentleman's time has expired.
Mr. Coburn. Yes sir, would you yield for one question for
Mr. Hash.
Mr. Bilirakis. Without objection, you can have an
additional 30 seconds.
Mr. Waxman. Thirty seconds, okay.
Mr. Coburn. I just want to complement your political savvy.
I mean we are already debating something that isn't out there
yet and it is really important. I really respect that because
you are already setting the markers of where you don't want the
Commission to go, which I praise you for. I think that is good.
It is also very smart politically. My question was----
Mr. Waxman. How about on policy grounds?
Mr. Coburn. No, I think it is better on political grounds
than it is policy. My question is----
Mr. Waxman. Are you ready to make the leap?
Mr. Coburn. Not with Mr. Waxman, it is not. Mr. Hash, the
average paid on HMO yearly, versus the average consumed by non-
HMO Medicare, could you give us those two numbers?
Mr. Hash. I think the average payment for a Medicare+Choice
Organization is about $475. And the annual amount on the fee-
for-service side I think is more like $5,000 or so a year, but
I am quickly dividing that to make it comparable to the $475,
would be----
Mr. Coburn. It is about $5,500?
Mr. Hash. Yes, roughly.
Mr. Coburn. So in essence, right now today, managed care is
$500 more?
Mr. Hash. No, that is the annual amount per capita for
Medicare, about $5,500.
Mr. Coburn. And what is it on managed care?
Mr. Hash. It would be 475 times 12.
Mr. Coburn. Well, that is about $5,700.
Mr. Hash. Yeah.
Mr. Coburn. So it is comparable. Okay, thank you. And I
thank the gentleman for yielding.
Mr. Bilirakis. Mr. Deal to inquire.
Mr. Deal. Thank you, Mr. Hash. With the risk adjustment
factor going in, are we still operating under the 95 percent
cap?
Mr. Hash. You mean, I think you mean that we pay 95 percent
of the average fee-for-service costs.
Mr. Deal. Is that still a limiting factor on the top side?
Mr. Hash. Yes, sir, it is.
Mr. Deal. How do you deal with that if in fact the risk
adjustment has the exact opposite effect of what we say managed
care has now. That is, is there going to be an incentive to
select those who are sicker because the risk adjustment in
effect pays more. If that occurs, how does the 95 percent
figure into the mix? Are they going to be penalized if they
have a higher number of sicker patients as opposed to what the
situation is now? How does that fit?
Mr. Hash. Well, the 95 percent in effect, gets you to what
we would say would be the base rate for managed care plans. And
what the risk adjustment does is to say, for that small subset
of enrollees who have these hospital episodes that fall into
one of these 15 categories, that the base rate will be
increased by an amount that roughly approximates what the data
show are the expected health care expenditures in the following
year for an individual who has such a hospital episode.
So I think, you know, the way those two things work
together is that 95 percent just gets you to the base rate that
we actually pay. The risk adjustment methodology identifies a
subset of all the people who get the base rate and gives them
an additional premium associated with their expected health
care costs for the coming year.
Mr. Deal. Okay. Will the assessment be made on an annual
basis, a per patient annual basis?
Mr. Hash. It will be.
Mr. Deal. And it is prospective, in other words.
Mr. Hash. It is.
Mr. Deal. You assess their situation in 1999, which would
affect their rate reimbursement for the year 2000?
Mr. Hash. That is correct.
Mr. Deal. Are there any interim adjustments based on
catastrophic illness, etcetera?
Mr. Hash. Well, the way the methodology works is that we
are actually basing the next year's adjustment on the
experience in the year that is from the prior June/July period.
Let me say that again. For the year 2000, the data for the risk
adjustment will be the hospital data that covers the period
July 1, 1998, through June 30, 1999. So it is a period that is
6 months in advance of the beginning of the calendar year. The
other option that we considered was to actually base it on the
full calendar year prior to, which would have required us to
have a retroactive adjustment to the rates once we got all the
data in, calculated the risk scores and then made an
adjustment.
We put out both of those options last September in our
proposal to the public, and I think the vast majority of health
plans suggested they wanted to have the 6 month approach that
we have adopted, that is where the full risk adjustment comes
into effect, but is not subsequently adjusted during the course
of the year.
Mr. Deal. Thank you, Mr. Chairman.
Mr. Coburn [presiding]. Mr. Barrett.
Mr. Barrett. Thank you very much, Mr. Chairman. You have
touched, I think, in your written testimony and I apologize for
not being here, on your concerns about gaming the system. Could
you run through again what you are going to do to make sure
that there is going to be little gaming of the system?
Mr. Hash. Well, we don't actually think there will be much
of that because, first of all, we have eliminated from
consideration discretionary hospital admissions, the 1-day
stays. We think that to the degree people are worried about
inappropriate hospitalizations to qualify an individual for a
high-risk score the likelihood of that is not very large for a
couple of reasons. One is the effect of the risk adjustment is
not immediate after the hospitalization. It is in the year
following the year in which the episode occurred.
And therefore there is some substantial uncertainty about
whether that individual will even be in that plan a year from
now. And second, to have admissions that were inappropriate,
you would have to also encourage physicians and individual
beneficiaries to undergo hospitalization which they
traditionally are resistant to do. So we actually think we have
built in enough adjustments to our system to mitigate against a
possibility of any manipulation of the data Mr. Barrett. Thank
you. I want to touch a little bit on the, and you made
reference to this in your comments about the disparity, the
payment disparity. And I come from a State where there is a
concern that the payments are lower than they should be. Can
you talk about how in the first 2 years because of the Balanced
Budget limitations, we were not able really to bring up the
floor. You would concur with that?
Mr. Hash. Well, the things that were supposed to happen as
a result of the BBA were three things. One, the floor was to be
raised. There was a minimum update of 2 percent each year. And
there were a series of blended rates that were being phased in
over the course of the 5 years of the BBA. What the statute
says was, you must do the floor and the 2 percent update and if
there is any money left over, you can actually fund the
additional cost of a blended approach.
It turned out that in the first 2 years, 1998 and 1999, the
floor came up, 2 percent was offered, but in no county that
would otherwise have gotten a blended rate was that actually
able to be----
Mr. Barrett. For the 2 percent, did that go to everyone? So
did you actually have a situation----
Mr. Hash. Well, that was the minimum now----
Mr. Barrett. Okay.
Mr. Hash. For people who were affected by the floor, we had
payments as low as about $220 a month. The floor was
originally, I think, $370. So people who went from $220 to
$370, had a very substantial, greater than 2 percent, gain. It
is fair to say, however, that in many of those counties there
are not any managed care plans.
So that from a plan perspective, the raising of the floor
probably didn't affect a lot of plans because they weren't
serving areas where the floor was raised
Mr. Barrett. And I assume that you have studies that would
show where the plans are most prolific.
Mr. Hash. Oh, yes.
Mr. Barrett. In other words, I am assuming that, I would be
interested in getting some of that information.
Mr. Hash. Be happy to supply that.
Mr. Barrett. Because intuitively I would think that a lot
of these areas that have the low reimbursement rates are going
to, not going to have this. So this becomes sort of an academic
exercise if we don't have people who are providing these plans.
Mr. Hash. Well, I think it is fair to say that most of the
penetration of managed care in the Medicare Program is in
geographical areas where the payments made by the Program are
relatively high. We do have that data and would be happy to
share it with you.
[The following was received for the record:]
Managed Care Penetration and Weighted Payment Rates for Counties, Sorted by Payment Decile, 1998
----------------------------------------------------------------------------------------------------------------
Payment Rate*
------------------------------------------------------------- Average Payment** Penetration Rate
High Low
----------------------------------------------------------------------------------------------------------------
$783.............................. $506 $587 26.31%
$506.............................. $461 $487 19.18%
$461.............................. $435 $446 13.97%
$435.............................. $413 $422 11.53%
$413.............................. $394 $403 11.95%
$393.............................. $376 $386 8.80%
$376.............................. $367 $371 6.73%
$367.............................. $367 $367 4.67%
----------------------------------------------------------------------------------------------------------------
Note: In the above table, counties were sorted by the aged M+C payment rate (highest to lowest) and then divided
into 10 equal groups. For example, the 1st decile represents the 10% of counties with the highest payment
rates. The average payment for these counties is $587 and the penetration rate is approximately 26%. There are
many factor's that weigh on a plan's decision to enter or leave a market. Payment rate may be one factor.
* The bottom three deciles, representing plans receiving the floor payment, were combined into one group for
analysis.
** Weighted by number of risk enrollees.
Source: HCFA, Office of Legislation, March 1999
Mr. Barrett. And just to follow up on that. As I follow the
Medicare Commission Reports that talk about prescription drug
coverage and talk about maybe having more incentives for people
who are in HMO's. Again, my concern is that we are leaving a
lot of people behind if the emphasis is going to be in that
area. And there are huge parts of this country where managed
care just is simply not interested in going because of that.
So all of a sudden we are looking at a multi-tiered system
based more on geography than anything else.
Mr. Hash. Well, I guess to respond to that I would say,
that is one of the reasons, at least as the President has
looked at and talked about the deliberations in the bi-partisan
Commission, I think he has been very outspoken about the need
to maintain a defined, benefit package across-the-board for all
Medicare beneficiaries regardless of whether they are in a
private plan or in the traditional fee-for-service program.
So in order to make sure that everywhere the beneficiaries
have a guarantee of a defined benefit package, including
prescription drugs. I mean that is a core, or should be a core
feature of any strengthening or improvement of the Medicare
Program----
Mr. Barrett. Okay, thank you.
Mr. Coburn. Mr. Barrett, did you want to request that he
send us that information?
Mr. Barrett. Yes, please.
Mr. Coburn. If you would, Mr. Hash? Would you, Mr. Hash?
Mr. Hash. Be happy to.
Mr. Coburn. In terms of the comparison of rates and
participation rates based on payments. The gentleman from
Florida.
Mr. Stearns. I thank you, Mr. Chairman. Mr. Hash, I have
here a document that is dated December 11, 1998, and I
understand the committee just recently got this. It is a list
of risk plans not renewing or reducing services to areas for
1999. And going through this I notice Florida is almost two
pages here. And a lot of these counties are in my Congressional
District, Clay, Baker, Lake, Marion, but you even have Orange
County here, which is Orlando.
You have Volusia County which is Daytona Beach. So you have
counties here like Clay, in my district, which is basically a
lot of working people. And yet all these HMO's are leaving. So
I guess, for the record, tell me why they are leaving again?
Mr. Hash. Well, I think there are a variety of reasons, as
I, you might not have been here but I talked about this a
little bit earlier. And the variety of reasons includes plans'
decisions about their relative market position, their
penetration in the market, and the competitiveness of the
market. Obviously, some of it has to do with their anticipation
of what Medicare rates are going to be like.
There was further uncertainty about what the risk
adjustment methodology, how that would affect them. There are a
variety of factors and they are not easily generalizable
because each market, I think, is very different. And I think
the decisions that were made in Florida are ones that are
unique to the market place.
Mr. Stearns. That is my main question. Is there something
about Florida that is different than other States?
Mr. Hash. No, no, when I said unique, I mean that the
particular decision by a given plan to withdrawal completely or
reduce their service area is affected by the particular
circumstances in which they find themselves. That could be that
they have a relatively small penetration into the Medicare
market place and do not feel, in terms of the numbers that they
have been able to enroll, that it provides an adequate base in
terms of taking the risk on for this population.
Mr. Stearns. Mr. Hash, in three of these which are in my
Congressional District, there were no HMO's. In other words,
this HMO that left was the only one.
Mr. Hash. Right.
Mr. Stearns. There was no competition.
Mr. Hash. Right.
Mr. Stearns. And they, when I talked to them, they always
complain they are not getting enough money from you to make it
worthwhile and they want to see a reimbursement similar to what
Miami is getting. Is that a legitimate argument?
Mr. Hash. Well, I----
Mr. Stearns. They say because there is less population, and
the cost of living is less. And Miami costs more, so Miami is
getting more. And so they go to Miami and they don't go to----
Mr. Hash. The reasons the payments vary so dramatically in
the Medicare+Choice program have to do with the range and
variation in the Medicare costs. That is what really is at the
base of what the rate is in any given area. It is what has been
the historical cost experienced in terms of the price paid for
services and the utilization patterns for services in that
area.
In a place like Dade County, both price and utilization
historically has been at the top of the list of Medicare
utilization and price across the country. That translates into
among the very highest payment rates. In other areas of the
country and other counties even I am sure in the State of
Florida, price and utilization rates in the Medicare Program
over time have been very much different than what is going on
in Dade County.
Mr. Stearns. This is my last question, Mr. Chairman. I know
we have to vote. Maybe in one or two sentences, if you had the
power and you could make the decision today and you had the
genie right on your shoulder, what would you do in two
sentences to make universal availability of HMO's across this
country in an affordable, accessible way.
Mr. Hash. I think that is a question I can't answer in one
or two sentences.
Mr. Stearns. You have got a genie on your shoulder now.
Mr. Hash. But I would like to work with you to try to find
the answer to that.
Mr. Stearns. You sound like a politician. Thank you, Mr.
Chairman.
Mr. Coburn. I just want to confirm with you, Mr. Hash, that
we will get the comparison from 1990 to now on renewals/non-
renewals, if you would. And your staff is going to remain here
for the rest? Okay, thank you very much.
Mr. Hash. Thank you, Mr. Chairman.
Mr. Coburn. And we will adjourn until I guess, until the
chairman gets back. How is that?
[Brief recess.]
Mr. Bilirakis. The hearing will come to order. The second
panel will consist of Dr. Gail Wilensky, Chair of the Medicare
Payment Advisory Commission and Bill Scanlon. Mr. Scanlon is
Director of Health Financing and Public Health of the United
States General Accounting Office. Welcome, Dr. Wilensky and Mr.
Scanlon. You have been here before, both of you have and how.
Your written testimony is obviously a part of the record.
We will set the clock at 5 minutes. If you feel you have got to
exceed that, I don't think we will shut you off. We will start
off with Dr. Wilensky.
STATEMENTS OF GAIL R. WILENSKY, CHAIR, MEDICARE PAYMENT
ADVISORY COMMISSION; AND WILLIAM J. SCANLON, DIRECTOR, HEALTH
FINANCING AND PUBLIC HEALTH ISSUES, HEALTH, EDUCATION, AND
HUMAN SERVICES DIVISION, GENERAL ACCOUNTING OFFICE
Ms. Wilensky. Thank you. Thank you very much, Chairman
Bilirakis and members of the subcommittee for inviting me to be
here. I am here in my role as Chair of the Medicare Payment
Advisory Commission. I want to summarize a few thoughts that I
would like to leave you with following the discussion that went
on in the very interesting first panel.
The first point is just to remind you what the problem is
that you are trying to fix with regard to risk adjustment. And
that is that payments to plans have not reflected predictable
differences--and the emphasis on the predictable--in seniors'
health care spending. And so what we have seen from HCFA is an
attempt to make an interim adjustment to the payment that
relies on data from in-patient stays on the patients' diagnosis
as a better way to adjust payments to reflect the seniors'
health status.
We have already been using age and sex and their
employment, whether or not they are institutionalized and
whether they are on Medicaid. But as you well know, that has
not been a very good way to pick up other predictable
differences based on their health care status. Now the plans
have taken a number of hits on their base payment as a result
of the Balanced Budget Act. And you are probably going to hear
more about that later.
But I think it is important to distinguish between whether
or not the base payment to a plan is adequate or right--
particularly as a result of the various changes that have
occurred from the Balanced Budget Act--and whether the relative
payments between plans and between the plans and traditional
Medicare are right. What this is supposed to accomplish, the
risk adjustment, is to make the relative payments right. You
could agree on that and still have an argument about whether
the base has been hit too hard or will be hit too hard in the
future.
There has clearly been stronger reductions because of the
stronger than anticipated reductions in fee-for-service
spending from the Balanced Budget Act and there have been a
number of administrative requirements that have increased
spending needs for the plans, including some of the data
reporting requirements that have been put on them. And this
risk adjustment, it appears, will also reduce overall the
payments to the plans. But it doesn't address the issue about
the relative payments.
Third point is that the focus ought not to be thought of as
punishing plans, but rather trying to provide incentives so
that plans who are willing to, or who want to take on
chronically ill patients, get paid appropriately so they can do
that and have that payment reflected in their premiums. Now
there are some appropriate concerns that have been raised if
they only use in-patient data.
They are basing the expenditures on what we know from fee-
for-service data, and as I have talked about, it is one more
hit, it looks like overall. But the fact is I think HCFA has
done the very best that it could, given the requirements of
beginning to implement risk adjustment January 2000. As you
know, they only have data from the in-patient stay. They are
phasing in the change. They will phase it in over a several
year period.
They are backloading the change, that is it is a little
change in the beginning. Most of the change occurs in the last
few years. And by the time they finish the phase in, full
encounter data, that is data from the out-patient setting,
should be available. And that will make it a much better risk
adjustment. So in conclusion I would like to say that while I
think there can be some question about some of the changes that
have occurred this year, about when the appropriate date is to
ask health care plans to put in the information on their
premium and benefit combinations to maybe move it a little
later than it is now in statute in May.
There can be some questions raised about whether the
requirements for reporting of data are too onerous or too
costly or whether the base payment is right. But the risk
adjustment that has been proposed by HCFA, I think is a very
reasonable rule. I think by having it phased in, by backloading
the impact, by using full encounter data as soon as they can,
they have really produced a very reasonable rule. And I would
urge you to proceed with it. Thank you.
[The prepared statement of Gail R. Wilensky follows.]
Prepared Statement of Gail R. Wilensky, Chair, Medicare Payment
Advisory Commission
Good morning Chairman Bilirakis and members of the Subcommittee. I
am Gail Wilensky, Chair of the Medicare Payment Advisory Commission
(MedPAC). I am pleased to be here this morning to discuss the issue of
risk adjustment and the Medicare+Choice program.
summary
The system used to adjust payments to Medicare's risk-contracting
plans and now Medicare+Choice plans has been widely acknowledged to be
inadequate because it does not accurately reflect predictable
differences in enrollees' health spending. As a result, Medicare has
overpaid plans to care for relatively healthy enrollees and underpaid
plans to care for those in poorer health. Overall, payments have
exceeded plans' costs of providing the basic Medicare benefit package.
A better risk adjustment system would improve payment equity across
plans and reduce Medicare's overpayments to plans. The interim risk
adjustment system proposed by the Health Care Financing Administration
(HCFA)--which relies on principal diagnoses from inpatient hospital
stays--is imperfect, but it represents a step in the right direction by
making payments correspond more closely to enrollees' health needs.
Moreover, many of the limitations of the proposed interim system could
be mitigated by moving to a system based on diagnosis data from all
sites of care. MedPAC supports HCFA's efforts to do this effective for
payments in 2004.
Adopting any new system of risk adjustment would introduce swings
in payments to plans. Accordingly, MedPAC supports the phase-in
proposed by HCFA that back-loads the impact.
risk adjustment and why it is needed
Risk adjustment is a term used to describe incorporating
predictable differences in health status and service needs into the
capitation payments made to health plans. When payments are risk
adjusted, plans receive larger payments for their relatively sick
enrollees and smaller payments for their healthier ones.
In Medicare, risk adjustment is intended both to make payments
equitable across Medicare+Choice plans and to account for differences
in the mix of enrollees between the traditional fee-for-service program
and the Medicare+Choice program. Put another way, risk adjustment may
be viewed as a means of encouraging health plans to serve beneficiaries
with severe or chronic illnesses by paying plans more to care for them.
Medicare beneficiaries' needs for health services--inpatient care,
physician visits, and so on--vary, and this variation has both a random
component and a systematic component. The random component reflects
service needs that are, by definition, unpredictable, so that if there
were no other differences among beneficiaries, risk adjustment would
not be necessary. In such a situation, unexpectedly high costs for some
enrollees in a plan would be offset by unexpectedly low costs for other
enrollees. Given sufficient numbers of enrollees, payments to plans
would be correct on average.
In fact, there are differences among beneficiaries that lead to
systematic and predictable differences in their needs for health
services. For example, older people use more services than younger
people, and people with severe or chronic illnesses use more services
than others. These predictable differences in the use of services--
whether they are predictable either by health plans or by enrollees
themselves--introduce the potential for risk selection. If no
adjustments are made to account for these differences, plans will be
overpaid for healthy enrollees and underpaid for sick enrollees.
Accordingly, they will have an incentive to enroll beneficiaries whose
expected costs are below average, because they will still receive the
average payment. If plans act on this incentive and successfully
attract relatively healthy beneficiaries, aggregate payments will be
too high.
medicare's current system of risk adjustment
Currently, Medicare adjusts payments to private health plans to
reflect only differences among enrollees in their demographic
characteristics (age and sex), employment status, institutional status,
and eligibility for Medicaid. This risk adjustment system accounts for
the relatively greater use of health services of older beneficiaries
and those who are institutionalized, and the relatively lower expected
costs associated with working enrollees who have primary coverage
through their employers. However, it does not account for variation due
to differences in health status. Until 1998, the original payment
method paid 95 percent of expected fee-for-service spending for
beneficiaries with similar characteristics, which was intended to
account for health plans' ability to deliver care more efficiently.
Now, payments are based on updated 1997 rates.
Payment inequity and overpayment under the current system
A common complaint about the current system is that plans have
experienced significant favorable risk selection--enrollment of
relatively healthy beneficiaries--that is not reflected in their
payments. Because it does not take health status into account, the
current system rewards organizations that attract healthier enrollees
because it does a very poor job of accounting for predictable
differences in health spending. Plans are thus paid the same amount for
two beneficiaries with identical demographic characteristics, even
though differences in their health status would suggest that one will
be much more costly than the other.
Empirical research supports the assertion that plans have
experienced favorable selection while their payments have been based on
average risks within demographic groups. For example, Riley and
colleagues (1996) found that in 1994 the predicted costs of Medicare
risk plan enrollees were 12 percent lower, on average, than the
predicted costs of fee-for-service enrollees with the same demographic
characteristics. Because payments currently are adjusted only for
demographic differences, even setting rates at 95 percent of the amount
Medicare expected to spend for a beneficiary in the fee-for-service
program resulted in overpayments of as much as 7 percent (Riley et al.
1996, Hill et al. 1992). Those overpayments are in part why Medicare
risk plans have been able to offer expanded coverage to enrollees.
Some favorable risk selection may be inevitable because the methods
organizations use to recruit enrollees might not reach people with poor
health status, such as the institutionalized, or because healthy people
may be less particular about being able to see a specific physician.
Moreover, even if selection to plans has been favorable in the
aggregate, that does not mean that all individual plans have
experienced favorable selection. For example, one study shows that
mortality and hospitalization rates rise as length of managed care
enrollment increases (PPRC 1996). This ``regression towards the mean''
means that in terms of their use of health services, managed care
enrollees become more like fee-for-service beneficiaries over time.
Thus, plans that have participated in Medicare longest and have long-
tenured enrollees may see less favorable selection.
Risk adjustment requirements in the Balanced Budget Act
In response to concerns about the current system, the Balanced
Budget Act of 1997 (BBA) directed HCFA to develop a new risk adjustment
system. The rationale of the Congress for mandating the new system was
to make Medicare's payments to Medicare+Choice organizations more
accurately reflect predictable differences in health spending by
enrollees. This new system should improve Medicare+Choice by making
payments more equitable across plans and making them reflect the
generally better health of Medicare+Choice enrollees as compared with
fee-for-service beneficiaries.
The BBA required the new risk adjustment system to use enrollees'
health status and demographic characteristics to account for variations
in their expected spending. It laid out a very tight time schedule,
requiring HCFA to implement the system by January 1, 2000.To meet that
schedule, the agency must:
publish a preliminary notice by January 15, 1999, describing
the changes in methods and assumptions it will use to determine
payment rates for 2000, compared with those for 1999 (HCFA
1999);
publish a final notice by March 1, 1999, on the payment rates
for 2000 and the risk and other factors it will use to adjust
those payment rates; and
submit a report to the Congress that describes the risk
adjustment method it will implement with the new payment rates,
also by March 1, 1999.
While HCFA has supported research to develop improved risk
adjustment methods for more than a decade, implementing the new system
has required HCFA to collect and analyze a substantial amount of new
data in a short period of time. The agency must measure not only the
health status of beneficiaries enrolled in Medicare+Choice plans, but
health status and subsequent spending for beneficiaries in the
traditional fee-for-service program.
HCFA must collect data from Medicare+Choice organizations both to
determine monthly payments for each enrollee starting in 2000 and to
inform Medicare+Choice organizations about the anticipated effects of
the new risk adjustment system.
HCFA must measure health status and spending for fee-for-service
beneficiaries for two reasons. First, the agency must estimate risk
scores that measure relative levels of expected spending for
beneficiaries with different combinations of health conditions and
demographic characteristics. These scores require beneficiary-specific
data on health conditions, demographic characteristics, and annual
Medicare spending for covered services that are currently available
only for beneficiaries in the traditional fee-for-service program.
Second, once the new risk scores are developed, HCFA must adjust the
per capita monthly payment rate for each county--the county rate book--
to reflect the county's expected level of per capita spending for a
beneficiary with national average health and demographic
characteristics.
To facilitate these tasks, the BBA permitted HCFA to collect
encounter data--which provide information similar to claims data--on
hospital inpatient stays from Medicare+Choice organizations, but not
before January 1, 1998. Starting July 1, 1998, HCFA could collect
encounter data from other providers of care such as physician offices,
hospital outpatient departments, skilled nursing facilities, and home
health agencies. HCFA will be able to use the diagnoses reported in the
encounter data to develop indicators of beneficiary health status.
HCFA has indicated it has been meeting the time requirements of the
BBA and has collected almost complete hospital inpatient encounter data
records from nearly all organizations. A small number of organizations
have supplied incomplete data, and HCFA is working with them to get
complete data. Some organizations are less confident and believe the
data generally are not complete due to systems problems. However, the
actual risk scores will be based on the next round of data collection,
which should afford an opportunity to work out existing problems.
hcfa's proposed interim system
The schedule outlined in the BBA restricted HCFA to adopt, at least
initially, an interim system in which health status will be measured
using only hospital inpatient diagnoses. Before the Congress passed the
BBA, HCFA argued that it needed data as soon as possible to implement
an improved risk adjustment system. However, HCFA and the Congress
recognized that Medicare+Choice organizations could not establish
systems for reporting data from sites of care other than hospital
inpatient departments in time for implementation by January 1, 2000.
Therefore, HCFA indicated to the Congress it needed inpatient data by a
particular date and left the Congress to determine the remaining time
frame.
Description of the proposed interim system
In the interim system, HCFA will determine payments to
Medicare+Choice organizations according to the following process.
First, HCFA will characterize beneficiaries by:
age and sex;
principal diagnoses associated with any inpatient hospital
stays they had during the previous year;1
---------------------------------------------------------------------------
\1\ Inpatient diagnoses are based on encounter data submitted by
organizations for current enrollees and on Medicare fee-for-service
claims for new enrollees who were previously in the traditional
program. Risk scores for beneficiaries who are newly eligible for
Medicare and who enroll in a Medicare+Choice plan will be based solely
on their demographic characteristics. This is necessary because HCFA
lacks a claims history for these beneficiaries.
---------------------------------------------------------------------------
eligibility for Medicaid benefits during the previous year;
and
for aged beneficiaries, previous eligibility for Medicare on
the basis of a disability.
Based on this classification, HCFA will determine prospective risk
scores for Medicare+Choice enrollees (see the Appendix for more
detail). Risk scores are intended to measure enrollees' expected
spending in the forthcoming payment year relative to that of the
average beneficiary in the traditional fee-for-service program. As in
the current risk adjustment system, spending patterns in the
traditional fee-for-service program will be treated as a baseline, so
the risk score associated with each combination of demographic and
health status factors will be estimated using fee-for-service
data.2
---------------------------------------------------------------------------
\2\ In principle, risk scores could (perhaps should) be estimated
using Medicare+Choice spending patterns, but data on annual spending
for covered services, which are needed to estimate expected spending
given enrollees' diagnoses and demographic characteristics, are not now
available for Medicare+Choice enrollees.
---------------------------------------------------------------------------
In the last step, HCFA will calculate payments for enrollees as the
product of three factors:
the year 2000 payment amount for enrollees' county of
residence from the county rate book;
a factor that will adjust the county payment rate to reflect
the change in risk measurement methods; and
the enrollees' risk scores based on the interim system.
The county adjustment factors are needed to change the county
payment amounts so they are consistent with the new system. Under the
current system, each county payment rate is based on the updated 1997
payment rate, which reflects the current expected fee-for-service
spending per capita in the county for a beneficiary with the national
average demographic profile. Because the new risk adjustment system
captures risk differences among beneficiaries more precisely than does
the current system, HCFA needs to recalibrate the county amounts using
the new adjusters. This method will ensure that the county payment
rates reflect the 1997 expected fee-for-service spending per capita in
the county for a national average beneficiary, as measured by the new
system.
The interim system intended to improve payment equity
The interim risk adjustment system should be an improvement over
the current system because payments to organizations will more
accurately reflect the predictable differences in health spending by
their enrollees. If it works as intended, the system will encourage
organizations to compete on the basis of how effectively they manage
care and not reward plans for attracting favorable risks.
The interim system is consistent with the BBA's objectives for risk
adjustment. First, it will encourage organizations to compete on
factors other than risk selection because the profits from favorable
selection will be lower. Second, organizations may have more resources
for developing specialized care management programs for enrollees with
serious conditions, which may lead to improvements in efficiency and in
the quality of care enrollees receive. Finally, aggregate overpayments
to Medicare+Choice organizations that result from enrolling healthier
Medicare beneficiaries may be reduced.
Potential concerns with the interim system
Despite these improvements over the current system, the interim
system's dependence on hospital inpatient diagnoses raises several
potential concerns that policymakers should monitor closely.
Incentives to hospitalize inappropriately. Because organizations
will receive higher payments only for enrollees who have been
hospitalized, the proposed system may create incentives for
Medicare+Choice organizations to hospitalize enrollees inappropriately.
However, the impact of such incentives is likely to be mitigated by a
number of factors.
First, payments for enrollees' hospital stays are based on
their expected spending in the year following the stay, so the
incremental payment may be lower in many cases than the
hospitalization cost the organization incurred.
Second, organizations will not receive an increased payment
until the calendar year after a hospitalization, and then only
if the hospitalized beneficiary remains enrolled in the same
organization.3
---------------------------------------------------------------------------
\3\ In fact, there will be a lag of six months between collecting
diagnosis data and calculating risk scores. Thus, payments for calendar
2000 will be based on data collected between July 1, 1998 and June 30,
1999.
---------------------------------------------------------------------------
Finally, organizations would have to influence physicians to
hospitalize more patients and to overcome resistance on the
part of enrollees to being hospitalized.
To further counteract any incentive to hospitalize, HCFA will treat
enrollees with one-day inpatient stays and those with diagnoses for
which hospitalization is discretionary the same as enrollees who were
not hospitalized. HCFA considers a hospitalization to be discretionary
if the principal diagnosis represents only a minor or transitory
disease or disorder, is rarely the main cause of an inpatient stay, or
is vague or ambiguous.
Adjustments based on fee-for-service patterns. A second potential
problem is that risk scores based on fee-for-service hospitalization
patterns may understate the riskiness of certain Medicare+Choice
enrollees. This understatement will occur if Medicare+Choice
organizations substitute other sites of care in place of
hospitalizations more frequently than do providers in traditional fee-
for-service Medicare. If this were true, Medicare+Choice enrollees with
serious conditions would be hospitalized less often and would receive
lower risk scores, on average, than fee-for-service beneficiaries with
comparable conditions and demographic characteristics.
How serious this problem could be is unclear. Hill and colleagues
(1992) found that Medicare managed care organizations did not reduce
the hospitalization rate relative to fee-for-service Medicare. But
Medicare+Choice organizations have also argued that they hospitalize
comparable patients for shorter stays than do fee-for-service providers
in traditional Medicare, and results from Hill and others support this
argument. To the extent organizations shorten hospital stays to one
day, HCFA's proposal to treat enrollees with one-day stays the same as
enrollees without inpatient stays will compound any understatement
caused by calibrating risk scores based on fee-for-service data.
Potential for large changes in payments. A third issue is that
implementing any improvements in risk adjustment will often lead to
changes in payments to some individual plans that are much larger than
the change in aggregate Medicare+Choice payments. Under the interim
system, these changes could affect some Medicare+Choice organizations'
decisions to participate in some or all of the market areas they serve
for Medicare and disrupt Medicare+Choice coverage for some
beneficiaries.
Medicare+Choice organizations are understandably concerned about
the effects of HCFA's new risk adjustment system on their future
payments. Other things being equal, adoption of this new system on
January 1, 2000, will change payments for individual organizations and
reduce overall Medicare+Choice payments. However, the full effects of
the new system are somewhat uncertain because the data that HCFA will
use to determine payments to organizations in 2000 will not be
available until late in 1999 when enrollment data are available.
MedPAC has not yet made a comprehensive assessment of the impact of
the new system on specific plans. But the amounts involved will be
significant. Based on preliminary data, HCFA estimates that if the new
system were implemented immediately and if there were no changes in the
composition of enrollment:
variation in payments for individuals would range by a factor
of about 25, compared with the current variation of about 6;
additional payments would be made for about 12 percent of
enrollees, and about 20 percent of total payments would be
redistributed;
aggregate plan payments would fall by 7.6 percent; and
payments to some plans could fall by 15 percent, whereas
payments to others could increase by 5 percent.
Inpatient data inadequate. Finally, some analysts have expressed
concerns that payments to Medicare+Choice organizations under the
interim system will not fully account for measurable and predictable
differences in spending among their enrollees because there is
diagnosis and health status information that is not reflected in the
demographic and hospital diagnosis data used. As a result,
organizations that attract seriously ill enrollees still will be
underpaid, while those that attract healthy ones will continue to be
overpaid. This concern is valid, but the new system nonetheless
represents a substantial improvement over the existing system.
medpac's recommendations
In MedPAC's Report to the Congress: Medicare Payment Policy that
will be released next week, the Commission makes two recommendations
that could mitigate many of the concerns associated with a new risk
adjustment system for Medicare+Choice.4
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\4\ Risk adjustment may reduce incentives for risk selection, but
will not by itself create neutral financial incentives to provide
specific services. In its March 1998 Report to the Congress, MedPAC
recommended a large-scale demonstration of partial capitation or other
methods that would pay plans partly on the basis of a capitated rate
and partly on the basis of payment for services used. The Commission
continues to support such a demonstration to test the merits of
supplementing risk adjustment with risk sharing.
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Recommendation to use diagnosis data from all sites of care
Many of the problems cited for the proposed interim system could be
mitigated by replacing it with a permanent one in which health status
is based on diagnoses assigned during both inpatient hospital and other
types of health care encounters. Thus, MedPAC recommends that:
As quickly as feasible, the Secretary should develop the
capability to use diagnosis data from all sites of care for
risk adjustment.
In its January 15, 1999, 45-day risk adjustment notice, HCFA
indicated it intends to replace the interim system on January 1, 2004,
with a comprehensive system based on diagnoses from beneficiaries'
encounters with all major types of providers. To make that possible,
HCFA will require organizations to augment their hospital inpatient
data with information from enrollees' encounters in physicians'
offices, hospital outpatient departments, skilled nursing facilities,
and home health agencies. However, this requirement will not be
implemented before October 1, 1999.
Recommendation to phase in the interim system to cushion its effects on
payments
MedPAC agrees with the Secretary's plan to phase in the interim
risk adjustment system:
The Secretary's plan to phase in the interim risk adjustment
system--with a method that uses a weighted blend of the payment
amounts that would apply under the interim system and those
that would apply under the current system--is sound. The weight
on the interim payment amounts should be back-end loaded. That
is, the weights should be relatively low in the first years so
that most organizations will not experience extreme changes in
their total payments.
The phase-in should reduce the number of organizations that
withdraw from the Medicare+Choice program, but it also will slow the
benefits of adopting the interim risk adjustment system. In addition,
the phase-in will raise Medicare spending because the reduction in
payments that otherwise might occur under the interim system will not
be fully realized.
Blended payments will be made during 2000 through 2003. In 2000,
payments will be calculated using 90 percent of the existing system and
10 percent on the interim system.5 Progressively lower
weights will be assigned to the existing system in 2001 through 2003.
In 2004, payments will be based on full implementation of a
comprehensive risk adjustment system that uses data from all sites of
care.
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\5\ As an example of how the blend will work in 2000, consider an
organization that would receive a monthly payment for an enrollee of
$470 under the interim system and $500 under the current system. In
2000, the blended monthly payment would be: (.10)x($470) + (.90)x($500)
= $497.
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conclusion
Changes in Medicare's rules for private health plans participating
in the program have had both intended and unintended consequences.
These changes, introduced in conjunction with the new Medicare+Choice
program, were designed to improve Medicare's risk contracting program
by increasing the fairness of the distribution of payments to health
plans, by creating incentives to improve quality of care, and by
helping beneficiaries to make more informed choices. But taken together
with lower base payment updates attributable to the BBA and to
unexpected slowing in the growth of fee-for-service Medicare spending,
the new rules may have made participation in Medicare less attractive
from the plans' perspective. Plans have expressed particular concerns
about the combined impact of lower base payment updates under the BBA
and possible decreases from that base as risk adjustment is
implemented.
Improving Medicare's current risk adjustment system is essential.
Risk adjustment is about getting relative payment rates right, so that
payments for enrollees in the Medicare+Choice program more closely
match their expected costs. It is appropriate that the new system of
risk adjustment be phased in, both to avoid any instability that sudden
swings in payments to health plans could have for their enrollees and
to allow time for policymakers to assess how it is working, but the
benefits of better risk adjustment should not be delayed more than
necessary. While the Commission recognizes that the transition to the
new Medicare+Choice program has been less smooth than many had hoped,
we believe the issues raised during the transition should be considered
separately from the issue of improving Medicare's system of risk
adjustment.
Mr. Bilirakis. Thank you, Doctor. Mr. Scanlon.
STATEMENT OF WILLIAM J. SCANLON
Mr. Scanlon. Thank you very much, Mr. Chairman and members
of the subcommittee. I am pleased to be here today as you
consider HCFA's proposed risk adjuster for rates paid to
Medicare+Choice Plans. As you have heard from several sources,
Medicare's current risk adjuster falls far short of its
intended goal of assuring appropriate payment for such plans.
In 1997, we issued a report on Medicare's payments to HMO's in
California.
I think that the California study produced two findings
which are very relevant for today's discussions. First of all,
as other research has demonstrated for earlier time periods and
using smaller numbers of beneficiaries, we found that the
combination of the Medicare's pre-Balanced Budget Act rate
setting method and the existence of favorable selection for
HMO's, led to excessive capitation rates.
These rates, based on the experience of a sicker population
of non-enrollees, were paying for the services needed by the
healthier population of enrollees. We estimated that $1 billion
in overpayments, representing about 16 percent of the total
payments, were made to plans in 12 California counties. A
quarter of these overpayments were attributable to computing
each county's average rate using only the service experience of
fee-for-service beneficiaries and not that of all
beneficiaries.
Three-quarters of the overpayments was due to the failure
of Medicare's risk adjuster to adequately lower those average
rates to be consistent with managed care enrollees, better
health and lower use of services. The second finding was that
under Medicare's pre-Balanced Budget Act rate setting method,
excess payments were continuing to grow with increased
enrollment, rather than diminish, which many had speculated
they would.
The reason was that as a county's managed care population
grew, the concentrations of higher cost beneficiaries remaining
in fee-for-service also grew. Rates based on the sicker fee-
for-service populations resulted in increasingly excessive
payments relative to the average better health of the managed
care population. Our work specifically showed that HMO's in
counties with the highest managed care penetration received a
higher share of excess payments.
The Balanced Budget Act modified the method for setting
county rates, halting the spiral of increasing overpayments
being built into these average rates. However, in establishing
1997 levels as the base, it is also clear that historical
overpayments remain in today's capitation rates. The rates
continue to be quite generous relative to the expected use of
medical services by Medicare's managed care population.
However, excess payments in the aggregate do not mean that
every plan is overpaid. A fundamental problem with Medicare's
current risk adjustment method is that it puts plans enrolling
high cost beneficiaries at a competitive disadvantage.
Demographic information alone is inadequate to predict an
enrollee's health care cost. As a result, a current risk
adjustment does not adequately raise a plan's capitation rate
enough to pay appropriately for sicker beneficiaries' use of
services.
As a practical matter, Medicare managed care plans
receiving a fixed payment per enrollee are not likely to go out
of their way to encourage Medicare's frailest seniors to join
their plans. We and others have repeatedly called for a health-
based adjuster, HCFA's proposed method using hospital and
patient data, while not perfect, is headed in the right
direction.
HCFA has taken steps to ensure that the shortcomings
associated with having to use these data are reduced. It was an
appropriate step to seek expert clinical input to identify and
exclude from the risk adjustment calculations hospitalizations
that were more likely discretionary or not predictive of future
costs. We also find that HCFA's phase in approach is prudent.
It avoids rapid payment changes that plans may find
difficult and that could adversely affect beneficiaries if
plans respond by suddenly altering their benefit packages or
reconsidering their commitment to the Medicare+Choice Program.
Nevertheless, because having encountered data on Medicare
managed care enrollees' use of services in all settings is
critical to improving risk adjustment, we urge that plans
participating in Medicare+Choice collect and report these data
to HCFA as soon as possible.
All plans may not be able to submit such data quickly, so
it may not be feasible to accelerate the transition to the
comprehensive risk adjusters currently planned for the year
2004. However, having full encounter data from some plans, may
allow HCFA to assess the appropriateness of the interim risk
adjusters and make modifications during the transition period,
if appropriate.
Overall, we believe that the new health-based risk adjuster
system will help reduce overpayments to managed care plans and
will also make payments fairer to plans enrolling Medicare's
costliest beneficiaries. Thank you, Mr. Chairman. I would be
happy to answer any questions you or the members may have.
[The prepared statement of William J.. Scanlon follows.]
Prepared Statement of William J. Scanlon, Director, Health Financing
and Public Health Issues, Health Education and Human Services Division,
GAO
Mr. Chairman and Members of the Subcommittee: We are pleased to be
here today as you address the question of adjusting Medicare's payments
to managed care plans in the Medicare+Choice program. Although the
subject matter is technical, its implications are significant for
Medicare's greater use of managed care. The Balanced Budget Act of 1997
(BBA) includes provisions designed to slow the growth of Medicare
payments overall. BBA also encourages the expansion of managed care in
its creation of Medicare+Choice, designed to offer beneficiaries more
health plan options beyond those available through Medicare's health
maintenance organizations (HMO). BBA provisions modify the method used
to pay health plans, and it is the details for implementing these
provisions--representing billions of dollars in savings--that are under
discussion here today.
Managed care plans receive from Medicare a fixed monthly payment,
called a capitation payment, for each beneficiary they enroll. Because
the payment is fixed per enrollee, regardless of what the plan spends
for each enrollee's care, health plans lack the incentive to provide
unnecessary services. However, the enrollment of beneficiaries in
managed care plans has not saved the government money as expected,
mainly for two reasons. First, as we and others previously determined,
Medicare's capitation rates are excessive because payments are based on
health care spending for the average non-enrolled beneficiary, while
the plans' enrollees tend to be healthier than average.1
Second, instead of diminishing as more beneficiaries enrolled in
managed care, excess payments per enrollee continued to grow. To
correct these problems, BBA changed the rate-setting formula used by
the Health Care Financing Administration (HCFA), the agency responsible
for administering Medicare. It required that most of the rate-setting
provisions be in place in 1998 and required that HCFA replace
Medicare's current risk adjuster--the mechanism that modifies a plan's
average capitation rate to better reflect an enrollee's expected
medical costs--with a new one to be implemented in 2000. The risk
adjuster in place has been widely criticized as a major factor in the
HMO overpayment problem.
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\1\ Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions
in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
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In considering Medicare's new rate-setting method, my comments
today will focus on (1) the importance of improving the current risk
adjustment method, (2) the implications of rate-setting changes
implemented in 1998, and (3) the advantages and drawbacks of HCFA's
proposed new interim risk adjuster. My comments are based on
information drawn from our issued work on this subject, supplemented by
relevant published studies and interviews with HCFA officials.
In summary, Medicare's current risk adjuster has failed to protect
taxpayers, certain plans, and beneficiaries, underscoring the urgency
of replacing it with a health-based risk adjuster.
Studies by us and others show that methodological flaws have
led to billions of dollars in excess payments and inappropriate
payment disparities.
BBA provisions now in place may reduce, but not eliminate,
excess payments; and payment disparities persist that could
jeopardize plan participation and access to managed care for
costlier seniors.
The new risk adjuster required to be in place by 2000 is
intended to improve estimates of health plan enrollees' medical
costs. Better cost estimates producing fairer rates could
reduce the unnecessary spending of taxpayer dollars while
minimizing the financial disincentive for plans to serve a
costly mix of beneficiaries.
The use of the new risk adjuster, while not perfect, is an interim
step and improves on the one now in place. In addition, HCFA plans to
phase in the use of the new adjuster, thereby recognizing the need to
avoid sharp payment changes that could affect plans' offerings and
diminish the attractiveness of the Medicare+Choice program to
beneficiaries.
background
The long-term financial condition of Medicare is now one of the
nation's most pressing problems. As the nation's largest health
insurance program, Medicare's size and impact on all Americans is
significant. The program covers about 39 million elderly and disabled
beneficiaries at a cost of more than $193 billion in fiscal year 1998.
About 83 percent of the program's beneficiaries receive health care on
a fee-for-service (FFS) basis, in which providers are reimbursed for
each covered service they deliver to beneficiaries. The rest, about 6.8
million people, are provided care through more than 450 managed care
plans, as of December 1, 1998.2
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\2\ About 90 percent of the 6.8 million Medicare beneficiaries are
enrolled in managed care plans that receive fixed monthly capitation
payments. The remainder are enrolled in plans that are reimbursed for
the costs they incur, less the estimated value of beneficiary cost-
sharing.
---------------------------------------------------------------------------
To extend the solvency of Medicare's Hospital Insurance Trust fund
beyond 2008, BBA provided for substantial reforms in both the FFS and
managed care components of Medicare. BBA provisions are expected to
achieve estimated Medicare savings that reduce the program's average
annual growth rate by more than 3 percent, representing over $100
billion over 5 years.
One way in which BBA seeks to restructure Medicare is to encourage
greater participation in Medicare+Choice. Under this program, BBA
permits the creation of new types of Medicare health plans, such as
preferred provider organizations and provider-sponsored organizations.
BBA's emphasis on Medicare+Choice reflects the perspective that
increased managed care enrollment will help slow Medicare spending
while expanding beneficiaries' options in choosing health plans.
BBA also sought to improve the method for setting managed care
plans' payment rates. In general terms, the pre-BBA rate-setting
methodology worked as follows. Every year, HCFA estimated how much it
would spend in each U.S. county to serve the ``average'' FFS
beneficiary. It would then discount that amount by 5 percent under the
assumption that the managed care plans provided care more efficiently
than the unmanaged FFS system. The resulting amount constituted a base
county rate to be paid to the plans operating in that county. Because
some beneficiaries were expected to require more health services than
others, HCFA ``risk adjusted'' the base rate up or down for each
beneficiary, depending on certain beneficiary characteristics--
specifically, age; sex; eligibility for Medicaid; employment status;
and residence in an institution, such as a skilled nursing
facility.3
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\3\ Separate rates, using the same demographic traits, are
calculated for beneficiaries who qualify for Medicare because of a
disability (under age 65). Separate rates are also set for
beneficiaries with end-stage renal disease (kidney failure).
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BBA's new payment rate method seeks to address the two main factors
contributing to excess payments: (1) the disparity in expected health
costs between Medicare's FFS and managed care populations built into
each county's base capitation rates and (2) the failure of the risk
adjuster to correct for that disparity on an individual enrollee level.
BBA required that a county's capitation rate equal the highest of
a blended capitation rate, which reflects a combination of
local and national average FFS spending from 1997, updated for
increases in national spending;
the previous year's county rate increased by 2 percent; or
a minimum payment amount, called a floor, set equal to $367 in
1998 and updated each year.
Loosening the link between the current cost of Medicare's FFS
population and counties' base rates helps prevent the excess payments
from continuing to increase as more beneficiaries join managed care
plans. BBA also acknowledges the need for individual enrollee
adjustments by requiring the development of a risk adjustment method
based on health status. The law requires that HCFA develop and report
on the new risk adjuster by March 1 of this year and the method be in
place by January 2000.4
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\4\ Technically, the law requires the Secretary of the Health and
Human Services to develop, report, and implement the health-based risk
adjustment method.
---------------------------------------------------------------------------
medicare's current risk adjustment method fails to prevent overpayments
and appropriately target payments to plans
Risk adjustment is a tool to set capitation rates so that they
reflect enrollees' expected health costs as accurately as possible.
This tool is particularly important given Medicare's growing use of
managed care and the phenomenon of favorable selection--the tendency of
managed care plans to attract a population of Medicare seniors whose
health costs are generally lower than those of the average program
beneficiary. Our 1997 study on payments to California HMOs, which
enrolled more than a third of Medicare's managed care population, found
that Medicare overpaid plans by about 16 percent because HMO enrollees
had costs that were lower than the average beneficiary's.5
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\5\ GAO-HEHS-97-16, Apr. 25, 1997. This is consistent with a 1996
study by HCFA researchers finding that health plan enrollees had costs
estimated at 12 to 14 percent below the average beneficiary's. (Riley
and others, HCFA Review, 1996.)
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Medicare's current risk adjuster cannot sufficiently lower rates to
be consistent with the expected costs of managed care's healthier
population. The reason is that Medicare's risk adjuster relies on
demographic factors such as age and sex, which alone are poor
predictors of an individual's health care costs. For example, two
beneficiaries can be demographically identical (same age and sex), but
one may experience occasional minor ailments while the other may suffer
from a serious chronic condition. Without the use of health status
factors to make that distinction, Medicare's risk adjuster produces
excessive payments in compensating plans for their relatively lower
cost enrollees.
The financial consequences of a poor risk adjuster are huge. In our
1997 study of California's payment rates, we estimated that Medicare
paid about $1 billion in excess to health plans operating in the
California in 1995. Shortly before we issued our report, the Physician
Payment Review Commission (PPRC), now a part of the Medicare Payment
Advisory Commission, estimated that annual excess payments to Medicare
HMOs nationwide could total $2 billion.
Some analysts have speculated that, with growing enrollment, health
plans would necessarily enroll a substantially larger share of less
healthy beneficiaries, which would raise plans' costs and reduce
Medicare's excess payments. Our 1997 analysis, however, showed that--
rather than shrinking excess payments--the rapid growth in Medicare
managed care enrollment actually exacerbated the situation. The
counties with higher managed care enrollment had higher, not lower,
excess payments. Data indicated that the sickest beneficiaries tended
to remain in FFS while the healthier beneficiaries joined managed care
plans. Excess payments grew with managed care enrollment partly because
HCFA based the payment rates on average FFS spending, which increased
as the pool of FFS beneficiaries shrank and, as a group, became less
healthy.
Better risk adjustment is also important for plans that may not be
adequately compensated for serving higher cost beneficiaries who
enroll. Having enrollees who are sicker than the average mix of
Medicare beneficiaries can alter a plan's costs significantly. About 10
percent of Medicare beneficiaries account for 60 percent of Medicare's
annual expenditures. Without adequate risk adjustment, plans with more
than their share of the costly beneficiaries are at a competitive
disadvantage.
bba provisions may reduce overpayments, but substantial excess likely
remains
BBA contains several provisions, implemented in 1998, that are
designed to improve Medicare's rate-setting method. Certain provisions
seek to reduce excess payments and inappropriate geographic
disparities. These changes represent steps in the right direction but
do not eliminate the need for a health-based risk adjuster. Substantial
excess payments likely persist, in part, because other BBA provisions
tended to incorporate the excess that existed in 1997 into the current
rates.
Certain BBA Provisions May Reduce Excess Payments but Are Not
Substitutes for Improved Risk Adjustment
BBA aims to reduce the excess in Medicare's managed care payments
in two ways. First, BBA holds down managed care per capita spending
increases for 5 years. Specifically, BBA sets the factor used to update
managed care payment rates equal to 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.
BBA also provides for a methodological approach known as
``blending,'' which may help reduce excess payments. The blended rate
set for each county combines that county's 1997 rate, updated for
increases in national Medicare spending, and a national average. The
blending formula is currently weighted heavily toward local rates but
will gradually change so that local and national rates will be weighted
equally in 2003. Over time, blending will reduce the substantial
variation in county payment rates that now exist. For, example, county
rates ranged from a low of $380 to a high of $798 in 1999. Because of
BBA-mandated budget neutrality and minimum payment constraints, no
county received a blended rate in 1998 or 1999. Blending is expected to
occur for the first time in 2000.
Blending may help reduce excess payments because high-rate counties
(where excess payments are estimated to be concentrated) will receive
smaller annual increases relative to low-rate counties. Evidence on the
relationship between county payment rates and excess payments is
provided in a 1997 PPRC study. PPRC reported that county payment rates
tend to overestimate beneficiaries' health care costs in high-payment-
rate areas and underestimate their costs in low-payment-rate
areas.6 PPRC found that a comprehensive health-based risk
adjustment methodology would have lowered, for example, the average
Miami-area payment rate from $616 to $460 in 1995. The same methodology
would have raised the average payment rate in rural Minnesota from $263
to $310.
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\6\ Physician Payment Review Commission, 1997 Annual Report to the
Congress.
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Blending is a rather blunt tool for addressing the excess payment
problem, however, and does not obviate the need for improved risk
adjustment. As the PPRC results indicate, not all high-rate counties
have rates that are too high and not all low-rate counties have rates
that are too low. For example, PPRC's risk-adjustment methodology would
have reduced the average payments in rural Michigan (a relatively low-
payment-rate area) from $346 to $334. Furthermore, not all plans in
high-rate counties may receive excess payments. Because payment rates
are based on the expected costs of beneficiaries in average health,
plans that attract costly beneficiaries may be underpaid by the current
risk adjustment method.
Some BBA Provisions Have Tended to Incorporate Excess Payments From
1997 Into Current Rate Structure
BBA specified that 1997 county rates be used as the basis for all
future county rates beginning in 1998. Although the law changed many
aspects of the rate-setting formula, this BBA provision had the effect
of incorporating the excess payments that existed in 1997 into all
future rates.
As we testified before this Subcommittee in February 1997, HCFA's
then current rate-setting methodology resulted in county rates that
were generally too high. Simply put, instead of setting rates based on
the expected cost of the average beneficiary in each county, the agency
set rates based on the expected costs of serving FFS beneficiaries. If
the agency had included the expected costs of serving managed care
beneficiaries--who as a group tend to be healthier than FFS
beneficiaries--the overall county average would have been lower. About
one-quarter of the $1 billion in overpayments we estimated in our
California study resulted from flaws in developing the county rate.
Excess payments are also built into current rates because BBA did
not allow HCFA to adjust 1997 county rates for previous forecast
errors--a critical component of the rate-setting process. Although the
process for setting rates was extremely complex and involved separate
adjustments for each county, annual payment rate updating was
straightforward. Each fall, HCFA would forecast total Medicare spending
for the following year; the estimated percentage spending increase,
from the current year to the following year, was used to update the
county rates. Before applying the increase, however, HCFA corrected any
forecast errors from previous years. If HCFA discovered that previous
forecasts had overestimated or underestimated the current spending, the
update was appropriately adjusted.
HCFA actuaries now estimate, based on FFS claims data, that the
1997 managed care rates were too high by 4.2 percent. BBA, in
establishing a new methodology for setting rates in 1998 and future
years, specified that HCFA use the 1997 rates as the basis for the new
rates. While the law 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 beginning in 1998.
hcfa's proposed risk adjustment approach improves on current method and
minimizes disruption for plans and beneficiaries
HCFA's proposed interim health-based risk adjustment method--to be
implemented in 2000--represents a major improvement over the current
method. For the first time, Medicare managed care plans can expect to
be paid more for serving beneficiaries with serious health problems and
less for serving relatively healthy ones. The interim method relies
exclusively on hospital inpatient data to measure health status.
Although it would be better to measure health status with complete and
reliable data from other settings, such as physicians' offices, these
data are not yet available. In addition, HCFA's decision to phase in
the new method will likely minimize disruptive plan pull-outs and
altered benefit packages, which could occur if payment rate changes
were implemented too suddenly.
Proposed Risk Adjustment Method Based on Available Hospital Inpatient
Data
The proposed method, known as the Principal Inpatient Diagnostic
Cost Group (PIP-DCG) method, would use hospital inpatient data to more
accurately match managed care payments to beneficiaries' expected total
Medicare costs. PIP-DCG would assign each individual to 1 of 15
categories if during the prior year they had been hospitalized for
certain diagnoses. For example, a beneficiary who had been hospitalized
for congestive heart failure would be placed in one category, while a
beneficiary who had been hospitalized for a kidney infection would be
placed in another. Those beneficiaries who were not hospitalized and
those who were hospitalized for diagnoses not included in PIP-DCG--
about 88 percent of all beneficiaries--would be placed in the base
category. The next year's payment rate for each enrollee would be
determined by the category the individual was placed in and by certain
demographic data, such as age and sex. Rates for enrollees placed in
one of the 15 prior hospitalization groups would be higher than rates
for those in the base category with the same demographic
characteristics.
HCFA anticipated potential concerns about a risk adjustment
methodology based on hospital inpatient data. Such an approach could
reward plans that hospitalize patients unnecessarily or, conversely,
penalize efficient plans that provide care in other, less costly
settings. HCFA has attempted to address these concerns in several ways.
First, PIP-DCG would assign individuals to prior hospitalization
categories only when the diagnosis is for a condition that normally
requires hospitalization and is linked to further medical costs in the
following year. To determine which specific diagnoses to include, HCFA
relied on the advice of a clinical panel. The panel recommended that
diagnoses associated with about one-third of hospital admissions be
excluded because they (1) could be ambiguous, (2) were for conditions
that were rarely the main cause for an inpatient stay, or (3) were not
good predictors of future health care costs. For example, a beneficiary
hospitalized for appendicitis would not be assigned to a higher cost
category because that condition generally is not linked to further
medical costs in the next year. Also, HCFA's proposal does not permit
enhanced payments for hospital diagnoses associated with 1-day stays.
These admissions may be more discretionary than admissions for longer
stays.
Second, delaying an adjustment in payment until the following year
discourages unnecessary hospitalizations that would trigger an enhanced
payment. Further, the payment delay dampens any incentive to encourage
higher cost enrollees who have been hospitalized to switch plans, since
the plan in which the beneficiary is a member the following year
receives the payment.
The PIP-DCG method assumes that admission rates for beneficiaries
of similar health status are the same for FFS and managed care
providers. Although the evidence on managed care admission rates is
limited, findings presented by the American Association of Health Plans
last month support this hypothesis. A study conducted for the
Association found that hospital admission rates for managed care plans
and FFS plans were comparable. These findings are consistent with those
of a 1993 Mathematica Policy Research study on hospital admissions
rates.
Gradual Implementation of Interim Method Will Minimize Impact on Health
Plans and Beneficiaries
HCFA proposes to phase in the new interim risk adjustment method
slowly. In 2000, only 10 percent of health plans' payments will be
based on the new system. This percentage will be increased each year
until 2003, when 80 percent of plans' payments will be based on the
PIP-DCG risk-adjusted rate. In 2004, HCFA intends to implement a more
accurate risk adjuster that uses medical data from physicians' offices,
skilled nursing facilities, home health agencies, and other health care
settings and providers--in addition to inpatient hospital data.
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. Rapid payment rate
changes could strain the financial soundness of some plans. Rapid rate
changes could also adversely affect beneficiaries if plans respond by
suddenly altering their benefit packages or reconsidering their
commitment to the Medicare+Choice program.
If HCFA had comprehensive patient-level data from Medicare managed
care plans, it could adjust the PIP-DCG methodology to reflect any
differences in practice patterns between managed care and FFS
providers. Although plans currently are required to submit only
hospital inpatient data, the agency intends to begin collecting more
comprehensive data shortly. Therefore, it may be possible to refine the
PIP-DCG methodology before the implementation of the full risk
adjustment in 2004.
conclusions
The implementation of a new health-based risk adjustment system
will lead to major changes in Medicare managed care payments and will
create more desirable incentives. Plans attracting healthier
beneficiaries will be paid less, whereas those attracting costlier
beneficiaries will be paid more. In more fairly compensating individual
plans for the beneficiaries they enroll, the new method will reduce
excess payments and produce savings for taxpayers. The new method
represents an interim step in the use of health-based risk adjustment.
We believe that to facilitate the introduction of an improved risk
adjuster in 2004, plans should aggressively pursue the collection and
reporting of more comprehensive data on beneficiaries' medical
conditions.
Mr. Chairman, this concludes my statement. I will be happy to
answer any questions you or other Members of the Subcommittee may have.
Related GAO Products
Medicare Managed Care: Payment Rates, Local Fee-for-Service
Spending, and Other Factors Affect Plans' Benefit Packages (GAO/HEHS-
99-9R, Oct. 9, 1998).
Medicare HMO Institutional Payments: Improved HCFA Oversight, More
Recent Cost Data Could Reduce Overpayments (GAO/HEHS-98-153, Sept. 9,
1998).
Medicare HMOs: Setting Payment Rates Through Competitive Bidding
(GAO/HEHS-97-154R, June 12, 1997).
Medicare Managed Care: HMO Rates, Other Factors Create Uneven
Availability of Benefits (GAO/T-HEHS-97-133, May 19, 1997).
Medicare HMO Enrollment: Area Differences Affected by Factors Other
Than Payment Rates (GAO/HEHS-97-37, May 2, 1997).
Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in
Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).
Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
Improving Accuracy of the County Rates (GAO/T-HEHS-97-82, Feb. 27,
1997).
Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing
HMO Payment Problem (GAO/HEHS-96-21, Nov. 8, 1995).
Medicare: Changes to HMO Rate-Setting Method Are Needed to Reduce
Program Costs (GAO/HEHS-94-119, Sept. 2, 1994).
Medicare: Health Maintenance Organization Rate-Setting Issues (GAO/
HRD-89-46, Jan. 31, 1989).
Mr. Bilirakis. Thank you Mr. Scanlon and Dr. Wilensky. Are
you both concerned that in some areas of the country risk
adjustment may result in more plan withdrawals, on the
assumption now that a lot of the withdrawals are due to the
forthcoming risk adjustment plan?
Ms. Wilensky. I am concerned in that this will exacerbate
the problem we saw this year. But I think it may be possible to
make some changes that will reduce some of the likely that will
occur. As I mention in my testimony, part of the concern that
we have heard raised is that the Balance Budget Act required
the premium benefit combination to be reported in May, which is
very early in the year.
And that some of the plans found themselves in a position
by mid-summer where their expectations after one quarter were
not well met. And that when they attempted to make some
adjustments in the early fall, they were unable to do so. One
of the recommendations that MedPAC is making is to move that
date a little later. We understand it is a tradeoff with making
sure that seniors can get their information in a timely way,
but 6 months seems a little unduly long as a window.
And that that might help the plans be in a better position
to know the premium benefit tradeoffs. Second, we ought to make
sure that----
Mr. Bilirakis. The July 1, date, I guess, is now the firm
date.
Ms. Wilensky. Yes.
Mr. Bilirakis. Are you satisfied that it is----
Ms. Wilensky. I think the July date was what we were
thinking about. I thought that required a statutory change. So
it maybe what has been agreed to informally, but I don't know
that. But if that would go through, I think that would be a
good improvement. The second thing is whether the quality
requirements are appropriate to the needs. In having been in
that place, I have sympathy with the interest and need for
information. Making sure that the requirements are not too
burdensome and too costly is something that ought to have some
oversight.
And ultimately whether or not the payment is right.
Particularly the 95 percent after the full phase in of risk
adjustment I think would also be an appropriate
reconsideration. None of those, in my view, alters the
appropriateness of risk adjustment. It is a problem. You heard,
Mr. Waxman, Mr. Brown, all of you on the committees, discussing
why having appropriate adjustments for the health status should
be considered as a part of the plan.
I urge you not to try to fix one problem by altering the
solution of another.
Mr. Scanlon. We share the concern about the withdrawals of
plans and the reductions in service areas in different portions
of the country. And certainly the change in the rates may be a
factor. However, in looking at participation of plans in the
past, we discovered that rates alone are not the sole
determinate of how much managed care penetration there is in an
area.
We have low rate areas of this country in which there was
very extensive managed care participation on the part of
Medicare beneficiaries in part because there was strong
participation among non-Medicare, younger individuals in
managed care. As Dr. Wilensky indicated, there has been a
series of changes that have occurred recently with respect to
managed care participation. The fact that the volume and the
speed with which the changes have occurred is a major factor in
plans perhaps assessing their participation. This may be a
short term phenomenon.
We are doing work for this committee as well as for the
Committee on Ways and Means and the Senate Finance Committee
looking at the change in plans' participation and we will try
to identify, to the extent possible, how different factors have
played a role in affecting participation now. But I would also
emphasize that we are potentially in a period of transition.
In some respects the terms under which Medicare is
purchasing managed care have changed and managed care plans
have to assess whether or not they can provide care, under
those terms. But frankly, they have been changed in ways that
we have talked about over the years that are positive from the
program's perspective.
These changes involve trying to align payment appropriately
and making sure that we have accountability for the care that
we purchase.
Mr. Bilirakis. How close are you, Mr. Scanlon, to
definitizing the reasons why----
Mr. Scanlon. We are hoping to report to you by the end of
next month.
Mr. Bilirakis. By the end of March.
Mr. Scanlon. Right.
Mr. Bilirakis. Okay, now I guess you are doing that for
Ways and Means now?
Mr. Scanlon. We are doing it for you, Ways and Means and
Finance.
Mr. Bilirakis. Okay.
Mr. Scanlon. All three committees, all three authorizing
committees.
Mr. Bilirakis. Well that is, I think significant.
Ms. Wilensky. Mr. Bilirakis, MedPAC is also attempting to
monitor the counties in which change is occurring, withdrawal
occurring. And as part of our June Report we will have whatever
information is available to us. What has happened and any
information we have as to why there has been withdrawals and
the effect that it has had on the beneficiaries' access to
health care plans.
Mr. Bilirakis. We have had counties where there have been
withdrawals, but in many of those counties there are other
options.
Ms. Wilensky. Most of the counties.
Mr. Bilirakis. Under the fee-for-service. Most of those
counties, yes.
Ms. Wilensky. Right.
Mr. Bilirakis. But there are some counties where there
aren't any other options and that is significant information.
Was that information requested of Mr. Hash? We have a break
down by county and we have the total. For instance, in Florida,
58,571 enrollees are affected. But only 8,271, as I read this
chart, are affected so adversely that there aren't any other
choices.
So, there is no breakdown of that 8,271 by county so that
we can have some idea. I don't know----
Ms. Wilensky. HCFA would have that information. It is
available by county.
Mr. Bilirakis. Is HCFA still here? All right, can we
request that information from you as soon as you can get it?
And since you have already broken out the 8,271, you must have
that by county, I would think? Good. If you could submit that
to us, I would appreciate it. All right, thank you. Mr. Brown.
[The following was received for the record:]
Plans that Left Medicare or Reduced Their Service Area: Counties with No Other Managed Care Option
(as of the contract year beginning January 1, 1999)
----------------------------------------------------------------------------------------------------------------
Non-Renew or
State County Name Contract Name Service Area AAPCC Eligibles #Benes
Reduction Enrolled
----------------------------------------------------------------------------------------------------------------
California................... Colusa......... Health Net CA.. SAR............ $514.42 2,557 209
California................... Glenn.......... Health Net CA.. SAR............ $452.95 4,155 483
California................... Inyo........... Cigna S. CA.... SAR............ $419.87 3,916 162
California................... Lassen......... National Med, Non-Renew...... $435.79 3,929 2
Inc.
California................... Modoc.......... National Med, Non-Renew...... $401.19 1,760 23
Inc.
California................... Mono........... Cigna S. CA.... SAR............ $422.10 812 7
California................... Monterey....... Pacificare N. SAR............ $493.50 43,324 4,325
CA.
California................... Plumas......... Health Net CA.. SAR............ $517.82 3,996 63
California................... Shasta......... National Med, Non-Renew...... $490.85 30,917 1,088
Inc.
California................... Sierra......... Health Net CA.. SAR............ $454.96 710 18
California................... Siskiyou....... National Med, Non-Renew...... $412.28 9,761 275
Inc.
California Total............. ............... ............... ............... ......... 105,837 6,655
Delaware..................... Kent........... Aetna--Del..... Non-Renew...... $411.14 15,892 760
Delaware..................... Kent........... AmeriHealth HMO Non-Renew...... $411.14 15,892 263
Delaware..................... Kent........... Optimum Choice. Non-Renew...... $411.14 15,892 29
Delaware..................... Sussex......... Aetna--Del..... Non-Renew...... $463.82 29,931 1,072
Delaware..................... Sussex......... AmeriHealth HMO Non-Renew...... $463.82 29,931 869
Delaware..................... Sussex......... Optimum Choice. Non-Renew...... $463.82 29,931 379
Delaware Total............... ............... ............... ............... ......... 59,862 3,372
Florida...................... Citrus......... AvMed.......... SAR............ $463.64 35,278 1,391
Florida...................... Gilchrist...... AvMed.......... SAR............ $476.67 2,031 409
Florida...................... Glades......... Humana Medical SAR............ $580.75 923 138
Plan, S. FL.
Florida...................... Hendry......... Humana Medical SAR............ $509.16 3,587 747
Plan, S. FL.
Florida...................... Highlands...... Humana/PCA..... SAR............ $460.03 25,776 1,218
Florida...................... Highlands...... United Health SAR............ $460.03 25,776 172
Care FL.
Florida...................... Marion......... AvMed.......... SAR............ $426.12 66,282 3,866
Florida...................... Monroe......... Humana Medical SAR............ $605.18 11,437 1,234
Plan, S. FL.
Florida...................... Okeechobee..... Humana Medical SAR............ $720.81 6,845 1,970
Plan, S. FL.
Florida...................... Polk........... Aetna--FL...... SAR............ $397.97 90,138 1,638
Florida...................... Polk........... Florida First Non-Renew...... $397.97 90,138 0
Health Plans,
Inc.
Florida...................... Polk........... Humana/PCA..... SAR............ $397.97 90,138 169
Florida...................... Polk........... United Health SAR............ $397.97 90,138 565
Care FL.
Florida...................... Polk........... CIGNA.......... SAR............ $397.97 90,138 10
Florida Total................ ............... ............... ............... ......... 242,297 13,527
Kentucky..................... Carroll........ Southeastern SAR............ $419.61 1,649 0
United
Medigroup.
Kentucky..................... Gallatin....... Southeastern SAR............ $427.91 919 0
United
Medigroup.
Kentucky..................... Grant.......... Southeastern SAR............ $442.00 2,962 0
United
Medigroup.
Kentucky..................... Hardin......... Southeastern SAR............ $506.02 10,965 0
United
Medigroup.
Kentucky..................... Henry.......... Southeastern SAR............ $466.06 2,481 0
United
Medigroup.
Kentucky..................... Meade.......... Southeastern SAR............ $508.52 2,198 0
United
Medigroup.
Kentucky..................... Owen........... Southeastern SAR............ $379.84 1,332 0
United
Medigroup.
Kentucky..................... Shelby......... Southeastern SAR............ $393.88 3,837 0
United
Medigroup.
Kentucky..................... Spencer........ Southeastern SAR............ $449.11 1,212 0
United
Medigroup.
Kentucky..................... Trimble........ Southeastern SAR............ $494.58 1,064 0
United
Medigroup.
Kentucky Total............... ............... ............... ............... ......... 28,619 0
Missouri..................... Gasconade...... Group Health SAR............ $379.84 3,270 90
Plan.
Missouri..................... Montgomery..... Group Health SAR............ $400.08 2,412 34
Plan.
Missouri Total............... ............... ............... ............... ......... 5,682 124
Minnesota.................... Goodhue........ Medica Minn.... SAR............ $379.84 7,170 72
Minnesota Total.............. ............... ............... ............... ......... 7,170 72
New Hampshire................ Strafford...... Aetna--NH...... Non-Renew...... $406.83 14,391 187
New Hampshire Total.......... ............... ............... ............... ......... 14,391 187
New York..................... Broome......... Welicare....... SAR............ $379.84 39,143 2,021
New York..................... Broome......... Community Non-Renew...... $379.84 39,143 2,761
Health Plan.
New York..................... Tioga.......... Community Non-Renew...... $379.84 7,431 364
Health Plan.
New York Total............... ............... ............... ............... ......... 46,574 5,146
North Dakota................. McLean......... Blue Cross & Non-Renew...... $379.84 2,217 3
Blue Shield of
North Dakota.
North Dakota................. Mountrail...... Blue Cross & Non-Renew...... $379.84 1,351 0
Blue Shield of
North Dakota.
North Dakota................. Renville....... Blue Cross & Non-Renew...... $379.84 573 0
Blue Shield of
North Dakota.
North Dakota................. Ward........... Blue Cross & Non-Renew...... $387.06 8,337 9
Blue Shield of
North Dakota.
North Dakota Total........... ............... ............... ............... ......... 12,478 12
Ohio......................... Coshocton...... Community SAR............ $413.89 6,155 692
Insurance OH.
Ohio......................... Coshocton..... Community SAR............ $413.89 6,155 0
Health OH.
Ohio......................... Muskingum..... Community SAR............ $394.85 14,840 2
Health OH.
Ohio Total................... ............... ............... ............... ......... 20,995 694
Oregon....................... Hood River..... Qualmed Oregon. Non-Renew...... $379.84 2,743 258
Oregon....................... Lincoln........ Qualmed Oregon. Non-Renew...... $379.84 9,925 121
Oregon....................... Wasco.......... Qualmed Oregon. Non-Renew...... $379.84 4,408 149
Oregon Total................. ............... ............... ............... ......... 17,076 528
Texas........................ Freestone...... Pacificare TX.. SAR............ $379.84 2,922 77
Texas........................ Karnes......... PCA TX......... Non-Renew...... $379.84 2,566 2
Texas........................ Limestone...... Humana TX...... SAR............ $379.84 4,371 5
Texas........................ Mc Lennan...... Humana TX...... SAR............ $379.84 30,779 11
Texas........................ Navarro........ Pacificare TX.. SAR............ $417.42 7,613 392
Texas........................ Wilson......... Humana TX...... SAR............ $401.27 3,511 159
Texas Total.................. ............... ............... ............... ......... 51,762 646
Utah......................... Davis.......... IHC Utah....... Non-Renew...... $379.84 17,475 587
Utah......................... Davis.......... Pacificare Utah Non-Renew...... $379.84 17,475 645
Utah......................... Morgan......... IHC Utah....... Non-Renew...... $419.37 615 31
Utah......................... Morgan......... Pacificare Utah Non-Renew...... $419.37 615 9
Utah......................... Salt Lake...... IHC Utah....... Non-Renew...... $381.21 80,489 5,229
Utah......................... Salt Lake...... Pacificare Utah Non-Renew...... $381.21 80,489 7,447
Utah......................... Summit......... Pacificare Utah Non-Renew...... $379.84 1,449 97
Utah......................... Tooele......... Pacificare Utah Non-Renew...... $418.57 3,013 139
Utah......................... Utah........... Pacificare Utah Non-Renew...... $382.96 25,599 2,383
Utah......................... Wasatch........ Pacificare Utah Non-Renew...... $379.84 1,324 61
Utah......................... Weber.......... IHC Utah....... Non-Renew...... $379.84 22,299 1,009
Utah......................... Weber.......... Pacificare Utah Non-Renew...... $379.84 22,299 925
Utah Total................... ............... ............... ............... ......... 152,263 18,562
Virginia..................... Albemarle...... QualChoice VA.. Non-Renew...... $413.51 8,177 208
Virginia..................... Buckingham..... QualChoice VA.. Non-Renew...... $418.45 2,045 3
Virginia..................... Caroline....... NYLCare--MDNA/ Non-Renew...... $433.45 3,032 106
DC.
Virginia..................... Charlottesville QualChoice VA.. Non-Renew...... $410.17 7,253 187
City.
Virginia..................... Fauquier....... NYLCare--MDNA/ Non-Renew...... $424.54 5,885 347
DC.
Virginia..................... Fluvanna....... QualChoice VA.. Non-Renew...... $437.79 2,866 71
Virginia..................... Fredericksburg NYLCare--MDNA/ Non-Renew...... $453.99 8,080 239
City. DC.
Virginia..................... Greene......... QualChoice VA.. Non-Renew...... $440.94 1,567 37
Virginia..................... King George.... NYLCare--MDNA/ Non-Renew...... $432.61 1,688 25
DC.
Virginia..................... Louisa......... NYLCare--MDNA/ Non-Renew...... $456.03 3,626 47
DC.
Virginia..................... Louisa......... QualChoice VA.. Non-Renew...... $456.03 3,626 50
Virginia..................... Madison........ QualChoice VA.. Non-Renew...... $387.38 1,861 25
Virginia..................... Nelson......... QualChoice VA.. Non-Renew...... $409.42 2,990 34
Virginia..................... Orange......... QualChoice VA.. Non-Renew...... $414.43 5,301 50
Virginia..................... Richmond....... NYLCare--MDNA/ Non-Renew...... $425.76 790 0
DC.
Virginia..................... Spotsylvania... NYLCare--MDNA/ Non-Renew...... $452.25 3,917 102
DC.
Virginia..................... Stafford....... NYLCare--MDNA/ Non-Renew...... $457.11 4,069 157
DC.
Virginia..................... Westmoreland... NYLCare--MDNA/ Non-Renew...... $484.77 3,344 63
DC.
Virginia Total............... ............... ............... ............... ......... 66,491 1,751
West Virginia................ Monongalia..... HealthAmerica.. SAR............ $502.11 9,711 0
West Virginia Total.......... ............... ............... ............... ......... 9,711 0
Total for All States......... ............... ............... ............... ......... 841,208 51,276
----------------------------------------------------------------------------------------------------------------
Source: HCFA 12/98
Mr. Brown. Thank you, Mr. Chairman. Dr. Wilensky, thank you
for joining us. Without risk adjustment a plan with sicker than
average enrollees that offers high quality benefits can lose
money. A competing plan with healthier than average enrollees
offering the same high quality benefits could prosper and make
money. Can such a system work without risk adjustment?
Ms. Wilensky. Not for very long. You run the risk of
inappropriately rewarding plans because of their selection and
inappropriately hurting plans because of either their
intentional or unlucky attraction of sick people. If you are
going to appropriately reward and incent plans for taking on
sick people and giving sick people an option of having
coordinated care as a replacement for Medicare, you need to
make this adjustment.
If you don't get into trouble without making an adjustment,
it is just because you are lucky. The incentives are there to
get yourself in trouble. A very important step, it has been
discussed for many years, and HCFA is starting what I think is
a reasonable process.
Mr. Brown. So Medicare managed care really can't work
without risk adjustment.
Ms. Wilensky. What you may end up doing is having a health
care plan that contracts with an academic health center or a
very well-known health foundation or health care provider that
itself attracts very sick people finding itself disadvantaged
relative to a health care plan that didn't have such
arrangements. That is not a very good idea in terms of
rewarding one and penalizing the other.
It is not just Medicare/managed care. It is actually any
kind of replacement Medicare plan. If you allowed for private
fee-for-service, which you actually did as part of the Balanced
Budget Act, you need to have risk adjustment any time there is
a choice of a health care plan. It is very similar to why you
have a classification system for paying hospitals.
If you paid hospitals the same amount, given somebody's
age, and didn't make any kind of adjustment for the diagnosis,
you would obviously overpay hospitals that admitted people with
relatively minor health conditions. And you would underpay them
if they had by-pass surgery or valve replacement, et cetera.
This is really the same kind of adjustment. You acknowledge
that health status will predictably influence a patient's use
of expenditures and it is the predictable difference that you
try to compensate for.
Mr. Brown. Mr. Scanlon, we have been hearing that HCFA
should wait to implement risk adjustment until we have a
better, a more complete set of data to incorporate into it. Now
given HCFA's historic overpayment to managed care plans, I
assume waiting to implement risk adjustment will cost the
Medicare Program a lot of money.
Do you have an idea how much HCFA will lose if risk
adjustments, say, were delayed for 2 years?
Mr. Scanlon. The estimate of overpayment made by Physician
Patient Review Commission was $2 billion. A risk adjuster,
however, is not going to eliminate all of that overpayment. It
is only going to eliminate a fraction. My understanding of
HCFA's estimate of the cost through the transition is that it
is roughly $1.4 billion, I think, that is going to be lost due
to phasing this in as opposed to immediately implementing it.
So it is somewhere in that ball park, I think, per year
that we are talking about. We defer to HCFA on more precise
numbers for that.
Mr. Brown. Okay, thank you. Thank you, Mr. Chairman.
Mr. Bilirakis. Mr. Whitfield.
Mr. Whitfield. Thank you, Mr. Chairman. Dr. Wilensky and
Mr. Scanlon, do we have any reason to anticipate that as a
result of this risk adjustment approach that some health
maintenance organizations may become more specialized or make
an effort to focus more on the treatment of seriously ill
Medicare patients? And then from that, because of the
efficiency and quality just make that sort of a specialty that
they would have of treating those kinds of patients?
Ms. Wilensky. Well, we would like to assume we could get
there. I think in the beginning the adjustment probably isn't
all that good that you would want to make that your
overwhelming specialty. But as we get better in making risk
adjustments, it certainly should allow plans that want to
attract physicians and other health care providers that treat
seriously ill patients to do so and not feel that they will be
penalized. And that would not be the case now.
If you had a health care plan that specialized in the
treatment of AIDS patients or diabetics with multiple
complications, they would be hurt by our payment system.
Mr. Scanlon. I would agree. I think that we have seen in
the experience of the Medicaid Program which has somewhat more
experience with risk adjustment that it does alleviate some of
the concerns of plans that might include within their networks
a specialty center, like an academic medical center or a cancer
center or a group of physicians who provide care for people
with AIDS.
Because without risk adjustment, many plans are fearful of
having those types of providers in their network, feeling that
they will attract a disproportionate number of people with very
high cost illnesses. With risk adjustment, more of these
providers end up potentially in networks. That is a very
positive. But I agree also that it will take awhile before we
may see a plan that specializes in providing such care.
Mr. Whitfield. And would there be any regulations or
current laws on the books that would prohibit an entity from
pursuing that. I mean, in other words could they say, well, we
are not going to take this Medicare patient because we want
this one?
Ms. Wilensky. No. It is not legal to make that kind of
selection. But you can indirectly influence who you are
attractive to by which groups of physicians or what hospitals
you contract with. If you contract with a cancer hospital or
you contract with an academic health center, particularly one
that specializes in certain complicated treatments, you are
going to be very attractive to sick people.
If you contract only with community hospitals that do
little of tertiary, quertesary medicine, you will be less
attractive. So there are ways to make it more or less
attractive.
Mr. Whitfield. It seems to me that over the long term that
would be a positive benefit if you do have organizations that
really are specializing in particular areas. Would you all
agree with that?
Ms. Wilensky. I agree. Whether or not that happens will
depend on whether or not we will have a risk adjustment system
that does that. An idea that the Vice Chair of MedPAC, Joe
Newhouse, has raised is to try to make sure very sick patients
continue to be attracted to plans through something called
partial capitation, where a portion of the payment that would
go to the plan would reflect actual use.
So that you would have maybe 20 percent of the payment for
the person reflect the actual use and 80 percent being a health
adjusted risk payment, just to make sure that the very sickest,
who use a lot of resources, aren't shunned by health care
plans. I think it would be much better if we had opportunities
for very sick people to have their care better coordinated than
exists under current Medicare.
Mr. Whitfield. I yield back the balance of my time.
Mr. Bilirakis. Mr Waxman, inquiries.
Mr. Waxman. Thank you, Mr. Chairman, I appreciate the
testimony from both our witnesses. Both of you believe we ought
to try to develop a risk adjustment in order to make the
Medicare+Choice System work. HCFA is starting off looking at
in-patient information. They are hoping to get more data on
out-patient. They are going to have 1 year and try to learn
from that year to extrapolate to the next. This is not easy
work, is it, to develop a risk adjuster?
Ms. Wilensky. No. They have been sponsoring research for at
least 10 years.
Mr. Waxman. Does that give you some caution about moving
forward with changes that put more weight on a risk adjustment
working pretty well?
Ms. Wilensky. Well, I think what HCFA has done by the phase
in and by the backwaiting of change, is a reasonable way to
minimize disruptions and to have the biggest impact occur when
you should expect to have better data. One of the things that
happens when you introduce change is that you typically get
better just by doing it, which is one of the reasons I am eager
to have them start.
Mr. Waxman. Mr. Scanlon, I would like your response to that
question, and let me put it differently. Government is not the
best in accomplishing management of very complicated systems.
And now we are going to have government involved in a very
major way to make adjustments between plans as to the severity
of the illnesses of the population and a lot of other factors.
This is complicated business.
Do you feel some sense that we ought to recognize that
while we would like to have risk adjustment, we may not achieve
one that works real well for some time, and therefore we ought
to be a little bit careful in moving in a direction where we
expect it to work very well?
Mr. Scanlon. Well, I think we should be extremely careful
to make sure that it works as well as we possibly can. But the
reality is we already have risk adjustment. We have a risk
adjustment system that is based on demographic characteristics
and whether someone is Medicaid eligible and whether someone is
in an institution and whether someone is eligible because they
are either aged or disabled.
It is not working. Those factors explain about 1 percent of
the variation in medical costs. The hospital-based system is
going to explain about 5 percent of the variation in medical
cost. It is an improvement; it is not a solution. An all
encounter system is going to continue to improve this share of
medical cost variation that we can explain.
So I think that we really do need to push for moving toward
that better system. The phasing period here is critical. We
have seen HCFA as backloading the system. In this first year,
we are only going to adjust the cost by blending a 10-percent
base on the new risk adjuster and 90 percent based on the old.
Mr. Waxman. Let me interrupt you because I have limited
time. I don't disagree with your testimony, that we need a risk
adjuster. What I am trying to figure out is how Mr. Bilirakis
and Mr. Dingell and others sitting on this Medicare Reform
Panel make a judgment when they are looking at the notion of
premium support, and the idea of a premium support is
predicated on plans coming in and bidding, and then basing the
premium contribution on some percentage of the average of all
the bids.
Unless we have a real good risk adjuster that works, we
still have a good chance that some plans are going to be able
to bid very low because they are still, in lots of clever ways,
able to select out a patient population that is a lower risk.
And insofar as we have some plans able to bid low, that is
going to pull the average down. So if we have a percent of an
average premium that we are going to say to people we'll
contribute for their Medicare selection, then those who are
sicker and older and maybe less prosperous, are going to have
to come up with a lot more money if they go into a plan that
takes care of them.
I don't know if Mr. Whitfield was suggesting that some
plans might find it advantageous to take more sick people. I
don't think it is ever going to be advantageous to have to
spend more money on a capitated population. So my concern is if
people have to go into a plan that is going to spend more
money, they are going to have to come up with a lot of money
out of pocket in order to be in that plan or be forced into
whatever may be available to them.
So I am just worried that unless we know a risk adjustment
works, then we ought to be cautious about leaping into a whole
new system.
Mr. Scanlon. I don't think we have made a leap in this
situation.
Mr. Waxman. I am not talking about what we are doing now, I
am talking about what the Commission is talking about.
Mr. Scanlon. Right. And there is no question about what we
want----
Mr. Waxman. To move to enhance premium or premium support
or whatever they call it.
Mr. Scanlon. The more we rely on the risk adjuster the
better risk adjusters we need. I think that during this
transition period, we need to learn from this experience. We
have been learning about risk adjusters from the experience of
the Medicaid Program, from some experience in the private
sector. This is really Medicare's first attempt to try and do
something that is health-based.
Mr. Waxman. My time is up. We have been researching this
for 10 years. You say the more experience we have with a risk
adjuster, the better we will be. I am just saying, we are not
there yet where we can say we know what really works. I want to
be sure that if we move into a whole new system of premium
support that we don't act as if we had a risk adjustment that
was working so well that we are not going to leave a lot of
people and plans in the lurch.
Mr. Scanlon. I am not going to say that your concern is not
valid. But I would say we have been researching it for 10
years, now we need to be using it and see if we can learn from
the use of it.
Mr. Waxman. While we are using it a lot of plans are
closing their doors.
Mr. Scanlon. Well, we are hoping that is not the full story
there.
Mr. Bilirakis. Mr. Shadegg.
Mr. Shadegg. Thank you, Mr. Chairman. I will be brief. I
think I heard you just say that we have, in reality, a risk
adjuster no matter what, it already exists. This one wasn't
studied or calculated very well. We are now working on trying
to study and calculate a new one. And in that regard let me
ask, particularly you, Mrs. Wilensky, but Mr. Scanlon if you
want to comment I would be interested in that as well.
The risk adjuster currently being used focuses on in-
patient hospital data. It is clear the law requires that in the
first year, but then is not so clear as to the remaining years,
yet it appears HCFA is going to look at in-patient data for
all, for four of the 5 years. I guess I am interested in what
information we will not capture by looking at in-patient data.
And what the affect of that might be and what you think we
should be looking at?
Ms. Wilensky. Well, there is no question that there is an
irony about using in-patient only data to adjust payments to
risk-based plans. They have spent their whole being trying to
alter the in-patient/out-patient mix of services to use more
out-patient, not to rely on in-patient. And so there clearly is
an irony about having that happen.
However, HCFA has attempted to mitigate the problems by not
looking at discretionary in-patient stays. By not looking at 1-
day stays. Although that could go either way. And by moving as
quickly as they feel possible to full encounter data. If it is
possible to get to full encounter data by year 3, that would be
much better. The sooner the better. And the fact that you are
backloading it, helps some.
It is not, by any means, a perfect way to go, but I think
starting the process will help. And moving as fast as humanly
possible, even if you don't have full encounter data, to
encounter data for most plans would be a worthwhile tradeoff. I
would also like to just comment on the discussion we were
having about the complexity. It is true this will make it more
complex, but remember relative to what?
We have a Medicare Plan where government is involved in
deciding 9,000 CPT Codes and 500 Admission Codes and a number
of post-acute payment rates. So it is a very complicated system
that we have. If we can make adjustments so that we give sick
people a chance to have a different kind of health care plan, I
think it is really worth pushing on. So I think you can
mitigate some of the concerns about in-patient only. But it is
a fair issue.
Mr. Shadegg. Mr. Scanlon.
Mr. Scanlon. We share the same views as Dr. Wilensky in
terms of this not being a perfect system. There is a lot of the
variation in medical costs that will not be recognized. Pushing
forward is the key here as is trying, during this transition
period, to accelerate what we know and whether or not
adjustments are needed.
Mr. Shadegg. I guess I would only conclude by saying, with
regard to the question of going forward with the risk adjuster
about which we do not have perfect knowledge is probably true
that on a few occasions government has passed legislation
without knowing all of their unintended consequences. Mr.
Chairman, I yield back.
Ms. Wilensky. Even in Medicare.
Mr. Shadegg. I yield back the balance of my time.
Mr. Bilirakis. Mr. Barrett to inquire, sir.
Mr. Barrett. Thank you, Mr. Chairman. Mr. Scanlon, have you
been surprised, you talked about plans dropping out. Have you
been surprised by the number of providers that have dropped
out?
Mr. Scanlon. We have been somewhat surprised but not
totally. We have made a significant number of changes to what
is to be a managed care plan within the Medicare Program. We
saw in the mid 1980's, a similar sort of high level of
withdrawals as plans were learning to be able to serve elderly
beneficiaries, and some were finding that this was more
difficult than they originally thought. And then after
enrolling they decided to sort of leave Medicare.
My sense is that what we will see is that some of those
same plans that chose to leave will come back into some areas,
but not necessarily into others. The market for managed care,
frankly, is in some turmoil today that didn't exist a few years
ago. We had a period of very low inflation. We are not seeing
premiums going up. We have managed care plans reassessing their
ability to serve, not just Medicare, but as Mr. Hash indicated,
FEHBP beneficiaries and changing the terms that they are
willing to provide private employers.
So I think that all of these things are going on. It is
very hard to sort out what the lessons are from something that
is in this much turmoil, but we are trying to do it to the
extent we can now. I do think we need to be cautious about
changing our direction which is sound in the sense that we feel
that Medicare is moving toward paying more appropriately and
asking for accountability on what is being purchased.
Mr. Barrett. Same question, Dr. Wilensky?
Ms. Wilensky. I was surprised, although I think part of the
change, the drop out, didn't have to occur if HCFA had behaved
more like an Insurance Commissioner. Allow plans to come in,
beat them up, give them 15 or 20 percent of what they asked for
in terms of their second round of change, and we might have
forestalled some of the withdrawal.
Part of it was some bad decisions on the part of some plans
to go into areas where they had too little infrastructure. It
may also have been a problem that plans used to think about a
zero premium or a very small premium, but I think now they are
looking at a competitive Medigap alternative which is
frequently $1,800 a year.
And so it may well be possible to offer an attractive
package with a premium that is $30 or $50 a month more than
they had been offering. More than they would have been charging
before. But far less for a full package of Medigap benefits
than is available as the alternative. So I think there may have
been some learning going on. There may have been some bad
expectations by the plans and by seniors. And the plans may
have made some strategic errors in terms of how rapidly they
went out into some of the areas.
But I am concerned. I think we have to watch what is going
on. It may be that some of the requirements have raised too
much uncertainty, but I don't think risk adjustment is the
place to stop. That is a very important change.
Mr. Barrett. Were the decisions to pull out exclusively
economic decisions?
Ms. Wilensky. Well my sense is--and I know you have panels
later from the health care plans who can tell you more--that
plans were quite reluctant to pull out. It is bad publicity, it
doesn't sit well. Most of these plans didn't leave entirely.
They left some markets. At least most of the big companies
stayed in Medicare in some markets and left in other markets.
My sense is that they were concerned that not only were
they losing money, or not making money in some markets, but
they had high degrees of uncertainty about whether things were
going to get better in the near term. In fact, some sensed that
they were much more likely to be hurt even more. And on those
grounds, they left the areas. I think it is economic, but not
as little as saying, we weren't making enough money.
I think there was a sense that this is not something you
want to do. But if they didn't do it this year, there is a 5-
year stay out period. So it was less costly to do it now than
it will be in the future. That will be a much bigger decision.
Mr. Barrett. Thank you, Mr. Chairman.
Mr. Bilirakis. Thank you, Mr. Barrett. Well, the fact is
that, the many, some plans are withdrawing. The fact is that
they are withdrawing in some areas where there are no other
choices other than going back to fee-for-service, which is very
difficult for some people because of their reasons for going to
managed care in the first place. Prescription drugs
principally, I guess.
Now you have mentioned, Dr. Wilensky, that possibly taking
a look at the reimbursement rates in some areas and what not,
and the staff and I have talked and they have mentioned that
too. I guess the first thought that comes to my mind is would
this be maybe rewarding some, you mentioned bad public
relations and the fact that they didn't very rashly withdraw,
but they really were reluctant to withdraw. And I will accept
that. But could this be rewarding some people maybe who should
not have withdrawn?
Ms. Wilensky. I think you need to know more about what
happened and why it happened and what is likely to happen in
the future. MedPAC is very concerned about this. We are going
to monitor it. We think you need to monitor it. I don't think
any of us understand enough about what is going on to say throw
more money at the problem. We ought to look at the additional
costs that we are imposing on plans and we ought to be careful
about what happens in the future.
But I don't think there is evidence to date to suggest go
in and put more money to fix the problem.
Mr. Bilirakis. Is there something else that could be done,
maybe, whether it be in addition to that or lieu thereof in
some cases the data that is, how onerous is this data
gathering?
Ms. Wilensky. Well, I think that is an issue that, and it
may be one that GAO either has or could look at, which is the
data that are being required to be reported under the HCFA
rules. Whether it is as lean and as cost-effective a
requirement as possible, whether there are some ways to lighten
that burden. And perhaps along with changing the date of the
ACR reporting, that might be able to keep some plans in. And
encouraging a little more dialog between HCFA and some of the
health care plans, although I know that they engage in that.
It is important to have these options out there. It is not
obvious why you should have seen so much change early on. I am
surprised. Ultimately there is a problem that in the high
spending areas where there have been a lot of health care
plans, the slow growth in the capitation payment is going to
mean a big divergence between what traditional Medicare spends
in some of the south Florida counties and some of the
California counties and what the capitation plans get as their
capitation rate.
And that is a mistake. That differential payment will
continue because traditional Medicare is going to be growing at
5 or 6 percent per year, per capita payments in these areas are
probably going to grow at the minimum of 2 percent per year.
And you are going to have to go back and try and get those in
alignment. That is probably the one thing you can plan on
having to take up in the next year or 2. Right now I don't
think we know much more than that. But perhaps Bill would
comment.
Mr. Scanlon. I think we do need to be very concerned about
what it is that we have asked the plans to do in terms of the
reasonableness of the burden for participation. But at the same
time, we maybe also need to focus on whether or not the basic
premise that we are using, not just for the managed care
portion of Medicare but with respect to many services as well.
We have built our payment methods on national averages.
What we have seen are withdrawals in certain areas and not
within others. We need maybe to ask ourselves, do we need a
different but still rational basis upon which to base payment.
It may be that we do. Participation levels over the longer haul
may be an indicator that more regionalization is important. A
similar kind of concern may arise in the future with respect to
physicians, who have also experienced very significant changes
in the payments that they are receiving.
Ultimately, we need to think about our philosophy about
setting rates more generally rather than just for the Medicare
managed care program.
Mr. Bilirakis. Thank you. Mr. Brown? Mr. Barrett? Thanks so
very much. We appreciate your patience and your willingness to
help out. The next panel. Ann Miller, Member of the Board of
Directors of AARP and Diane Archer, Director of the Medicare
Rights Center. Oh, I am sorry, I didn't mean to leave out Ms.
Wegner. Nona Wegner, Senior Vice President of the Seniors
Coalition. We had the pleasure of her company just recently
before this committee.
Your written testimony is a part of the record. We would
prefer that you would complement it orally. We will set the
clock at 5 minutes and hopefully you will stay as close to it
as you possibly can.
Ms. Miller.
STATEMENTS OF ANN MILLER, MEMBER, AARP BOARD OF DIRECTORS;
DIANE ARCHER, EXECUTIVE DIRECTOR, MEDICARE RIGHTS CENTER; AND
NONA BEAR WEGNER, SENIOR VICE PRESIDENT, THE SENIORS COALITION
Ms. Miller. I am Ann Miller from Morro Bay, California. I
am a Member of the AARP's Board of Directors. In 1997, AARP
supported the BBA and its creation of Medicare+Choice. I am
pleased to be here today to present AARP's views on
Medicare+Choice, the risk adjuster and other reform issues.
Medicare+Choice was enacted to expand the health care options
available to Medicare beneficiaries while at the same time
maintaining affordable, quality care in Medicare.
Last fall's unexpected disruption in Medicare HMO
availability, illustrates the magnitude of these changes and
holds several lessons. First, while private sector options have
been able to address some glaring faults in original Medicare,
such as the lack of prescription drug coverage and high out-of-
pocket costs, these options are not without their own
shortcomings.
A private business can be more innovative and efficient.
But if it is not profitable, it will leave the market.
Therefore, private market participation in Medicare must be
structured to assure beneficiaries have stability in their
health insurance coverage. Second, the impact of the BBA has
been and will continue to be significant. It must be evaluated
and understood before launching even a greater Medicare Reform.
The Medicare HMO withdrawals last year displaced about
400,000 Medicare beneficiaries from their HMO's. This
unexpected event created a lot of confusion and frustration as
beneficiaries struggled to find alternative HMO's or returned
to original Medicare. The HMO industry contends that the BBA
payment methodology was the chief reason that plans pulled out
of certain markets. AARP does not have enough data to evaluate
whether or not payments are adequate or fairly calculated, but
such claims should be carefully reviewed to ensure that we
don't return to the error of overpayments to some plans.
We believe it is important for Congress, the Medicare
Commission, HCFA, health plans and beneficiaries to understand
what caused last year's withdrawals. In order to determine how
to preserve enrollment stability for beneficiaries without
undermining the physical integrity of the program. Health plans
have also reported that uncertainty about risk adjustment
contributed to their decisions to pull out of certain markets
in 1998, and that could lead to future withdrawals.
While we understand that the methods of risk adjustment are
imperfect, it is important that HCFA move forward by phasing in
the proposed risk adjuster to allow a smooth transition to more
accurate payments for plans. The proposed phase in will soften
the economic impact on plans while implementing at least a
partial solution. Another important issue is the Medicare
Beneficiaries Education Campaign.
Medicare+Choice can realize its potential only if
beneficiaries have the knowledge that will enable them to be
wise consumers in the market place. We support HCFA's efforts
to educate beneficiaries and as a part of our effort to make
Medicare+Choice work, AARP has a campaign to educate our
members about Medicare+Choice. Congress must also do its part
by providing sufficient resources so HCFA can carry out this
challenging task.
And we strongly support increasing Medicare+Choice user
fees to $150 million. This increase is needed to assure that
all aspects of the education campaign can be carried out as
Congress envisioned. I want to emphasize the importance of
fully understanding the changes that have already been made
under Medicare+Choice before we layer on new changes.
Let me assure you, however, that AARP does not believe that
the status quo in Medicare is acceptable. More must be done to
assure the program's long term solvency and prepare Medicare
for the retirement of the baby boomers. There are some
fundamental principles that have guided Medicare, which AARP
believes should be the basis of any efforts to reform the
program. I want just to highlight a few.
Medicare should continue to be available to all older and
disabled Americans despite health status or income. It should
guarantee a defined set of benefits with payments that keep
pace with the cost of the benefit package. Medicare should keep
up the advances in medicine. This means, among other things,
including prescription drug coverage in the Medicare benefit
package. And changes in Medicare financing and benefits should
protect all beneficiaries, including those with low incomes,
from burdensome out-of-pocket costs.
AARP looks forward to continue to work with this committee
and your colleagues in the House and Senate on a bi-partisan
basis to improve on the Medicare+Choice Program. We also want
to work with you to advance a Medicare Reform Package. The
status quo in Medicare is not acceptable. But together we must
ensure that any reform package continues Medicare's promise of
quality, affordable health care. Thank you.
[The prepared statement of Ann Miller follows.]
Prepared Statement of Ann Miller, Member, AARP Board of Directors
Good morning Mr. Chairman and members of the Committee. I am Ann
Miller from Morro Bay, California. I am a member of the AARP Board of
Directors and come before you as a representative of a group whose
large and diverse membership includes millions of current and future
Medicare beneficiaries. The Association supported the creation of the
Medicare+Choice program as part of the Balanced Budget Agreement in
1997 and we appreciate this opportunity to share the beneficiary
perspective on the Medicare+Choice program today.
In 1997, Congress passed the Balanced Budget Act (BBA) that
included sweeping changes in the Medicare program. The BBA provided
significant program savings to extend Medicare's solvency until 2008
and made several major changes affecting the program's beneficiaries.
These changes included the creation of the Medicare+Choice program
through which four new health plan options are to become available to
beneficiaries. The legislation also addressed when and how
beneficiaries can enroll in health plans or Medigap plans, as well as
what information beneficiaries receive about those choices. In
addition, as the changes mandated by the BBA take effect, virtually
every beneficiary will face higher out-of-pocket expenses for health
care.
AARP supported the BBA and its creation of Medicare+Choice in order
to accomplish the objective of expanding choice in the program while
also protecting access, affordability, and quality. We understood that
extending the short term solvency of the Medicare program required
shared sacrifice from all who participate in the program--providers and
beneficiaries alike. We also recognized that Medicare+Choice would lay
the foundation for essential longer term reform in the Medicare
program.
Impact of BBA
Last fall's unexpected disruption in Medicare HMO availability,
however, serves as a wake-up call to all who seek to bring private
sector solutions to bear on Medicare's problems. While private sector
options have been able to remedy some glaring faults in original
Medicare, such as the lack of prescription drug coverage and high out-
of-pocket costs, these options are not without their own failings. When
private businesses are given the right to manage a beneficiary's care
in exchange for the opportunity to earn a profit, several things can
happen. On the plus side, the innovations in administrative efficiency
and improved health care delivery could benefit the patient with lower
costs, better benefits, and better coordinated care. On the minus side,
patients may have less control over health care treatments, and no
control over whether their chosen health care plan continues to be
available from year to year. It is a challenge to separate the positive
from the negative, because the same factors create both results. A
private business can be more innovative and efficient, but if it is not
profitable, the private business will leave (or not enter) the market.
The beneficiary who gained the extra benefits for a time, can lose in
the long run.
One of the lessons from the initial implementation of
Medicare+Choice is that every change to Medicare will have
consequences, some predictable, some unanticipated. In fact, the
disruption last year, which seemed enormous to those affected, occurred
before any new Medicare+Choice plans were available. Once new types of
private plans are offered, other issues are certain to arise. At this
point, two things are clear: first, private market participation in
Medicare must be structured to assure beneficiaries have stability in
their health insurance coverage; and second, the impact of the BBA is
significant and it must be evaluated and understood in order to plan
the even greater changes needed to strengthen Medicare for the future.
Issues Arising from Medicare+Choice Implementation
Beginning late last fall, Medicare beneficiaries began to feel the
effects of the program's transformation. Medicare, like other health
insurance programs, has always been complex. But, with the advent of
new choices, greater private sector involvement, and the accompanying
need for information, it has become even more confusing. In order to
protect beneficiaries' choices, significant issues, such as payment
methodology, risk adjustment and public information and education, will
need to be addressed and understood as Medicare+Choice is implemented.
We need to address these needs and stabilize the Medicare+Choice
program before greater changes take place.
Payment Methodology/Medicare HMO Withdrawals--Last fall, about
400,000 beneficiaries found themselves displaced from their current
HMOs when multiple plans terminated their Medicare contracts. The
majority of beneficiaries who lost coverage had the option of joining
another HMO in their area, but often that meant changing doctors or
losing extra benefits that had attracted them to the particular HMO in
the first place. Beneficiaries were also entitled to return to original
fee-for-service Medicare, but for many that was not a preferred option.
Often, these beneficiaries chose managed care because it both relieved
them of the financial burden of Medigap insurance payments and offered
needed benefits, such as prescription drugs, that are not covered by
Medicare. Under the BBA, beneficiaries who lost their HMO coverage and
returned to original Medicare were given certain rights to purchase--or
repurchase--a Medigap policy, but they would have to bear the
significant expense, generally in excess of $100 a month. Even if they
can afford Medigap, not all beneficiaries are protected by the rules.
Disabled beneficiaries may not have the right to purchase Medigap and
no beneficiary is guaranteed the right to purchase a policy with drug
coverage.
The Medicare HMO withdrawals at the end of 1998 affected 7 percent
of all Medicare beneficiaries in managed care. While only 1 percent
lost their managed care option, all of these beneficiaries were deeply
troubled, and the general disruption in the HMO market could make other
beneficiaries reluctant to join a Medicare HMO in the future.
Several reasons have been put forward to explain the HMO
withdrawals from Medicare. The HMO industry contends that the BBA
Medicare payment rates and methodology was the chief reason that plans
pulled out of certain markets. Whether or not the payments are adequate
or fairly calculated is an issue on which AARP does not have enough
data to permit us to evaluate the situation. We believe, however, that
it is important for all stakeholders--Congress, the Medicare
Commission, HCFA, health plans and beneficiaries--to understand what
caused last year's rash of HMO withdrawals in order to determine how to
preserve enrollment stability for beneficiaries without undermining the
fiscal integrity of the program.
Most stakeholders agree that it is necessary to change deadlines of
the Medicare+Choice program to allow the program to function more
smoothly and to attempt to avoid a repeat of last year's HMO withdrawal
problem. We understand that one proposal is to move the date for plans
to file the Adjusted Community Rate (ACR) from May 1 to July 1. This
would allow Medicare+Choice plans to base their next years' benefits
and premiums on two quarters of experience. We believe moving the date
of the ACR submission to no later than July is a reasonable
accommodation to the needs of managed care plans to set their rates
based on recent data. AARP continues to believe that plans have the
responsibility to identify problems that may affect rates as early as
possible. If plans are going to operate responsibly as part of Medicare
and deal fairly with beneficiaries, they need to be aggressive in their
efforts to set rates appropriately. Changing the timeline for plan
submission of ACR data will not be without its impact on beneficiaries,
however. It will necessitate adjustments in the information that can be
included in the Medicare Handbook, which will have to be carefully
worked out in 1999.
Ultimately, the HMO withdrawal situation underscores the importance
of original Medicare. Regardless of the market decisions of private
health plans, beneficiaries need the security of knowing original
Medicare and access to Medigap are there for them.
Risk Adjustment--Health plans have also reported that uncertainty
surrounding new risk adjustment methodology contributed to their
decisions to pull out of certain markets in 1998, and beneficiaries
fear a similar response by health plans this year.
In its 1996 Annual Report to Congress, the Physician Payment Review
Commission estimated that HMOs received overpayments of about 5 to 6
percent per beneficiary because the populations they enrolled were
healthier than the general Medicare population. In recognition of that,
the BBA requires HCFA to implement a risk adjustment method to set
payment rates based on the ``expected relative health status of each
enrollee.'' Risk adjustment is intended to ensure that health plans are
neither penalized for enrolling beneficiaries with chronic illnesses
nor overcompensated for enrolling healthier beneficiaries. In theory,
risk adjustment will make all beneficiaries equally attractive to
health plans regardless of their health status. The BBA requires the
system to be in place no later than January 1, 2000.
Last September, HCFA released a notice describing the risk
adjustment method it intends to implement. The new system will adjust
payments to Medicare+Choice plans for each Medicare beneficiary based
on whether the individual's ``risk factor'' is higher or lower than
that of an average beneficiary. Specifically, payments to
Medicare+Choice plans will be risk adjusted by incorporating diagnosis
information into the payment methodology. The information used would be
based on inpatient hospital encounter data to determine payments to
Medicare+Choice organizations and, eventually, additional encounter
data (outpatient hospital, physician services, etc.) will be
incorporated into the methodology as well.
We understand that the diagnosis-based or hospital data risk
adjuster has several advantages, including that it is more readily
available, strongly correlated with future expenses, and verifiable
through audit. On the other hand, this approach has met with some
criticism. Health plans argue that using hospital-only data to
determine diagnosis penalizes plans that avoid hospitalizations,
potentially creating inappropriate incentives to needlessly hospitalize
Medicare beneficiaries. Also, it does not recognize the cost of
treating expensive illnesses that do not result in hospitalizations.
While we understand that available methods of risk adjustment are
imperfect, adding risk adjustment is still essential to derive a more
accurate payment for Medicare+Choice plans. If plans are to compete
fairly in the Medicare market, it will be necessary to minimize risk
selection through improved risk adjustment. Prior risk adjusters based
on demographic factors are widely recognized to be inadequate to
protect the Medicare system. AARP understands that HCFA intends to
address plans' concerns about financial impact by phasing-in the
implementation of the diagnosis-based risk adjuster. AARP believes that
it is important that HCFA move forward with the proposed risk adjuster
in order to allow a smooth transition to more accurate payment for
plans. Refinement of risk adjustment methodology should continue, as
Medicare cannot afford to wait for a perfect risk adjuster before
implementing at least a partial solution.
Medicare+Choice Information and Education--In supporting expansion
of Medicare choices, AARP emphasized the importance of solid, consumer-
friendly information so that beneficiaries can make informed decisions
and select the best health plan choices for them. But, we also
recognize that educating beneficiaries so that they understand the
complex range of choices facing them is an enormous task. Recent
research in five cities conducted for AARP by Dr. Judith Hibbard of the
University of Oregon found that many beneficiaries were not able to
make knowledgeable choices even between the original Medicare fee-for-
service program and Medicare HMOs. As more Medicare options become
available, this task will grow still more difficult. In addition, for
those beneficiaries who do select any of the new Medicare+Choice
options, they will need help in navigating within those options. These
challenges must be taken very seriously by HCFA, the Congress, health
plans, and groups like AARP.
AARP supported Medicare+Choice in order to give beneficiaries the
full benefit of innovations in health care delivery. However,
Medicare+Choice can realize its potential only if beneficiaries acquire
the knowledge that will enable them to exercise their leverage as
informed consumers in the marketplace. We support HCFA's efforts to
educate beneficiaries and have joined with the Agency as a partner in
its education campaign. AARP has also undertaken a campaign to educate
our members about the Medicare+Choice program and the new options they
may have available to them.
We believe Congress, too, must do its part by providing sufficient
resources to enable HCFA to carry out its challenging tasks. This year,
for example, we anticipate that HCFA will need to make changes in its
beneficiary education campaign to reflect modifications in program
timelines, like the ACR filing date, and to respond to problems
encountered last year. Medicare has found its $95 million
appropriation--less than $3 per beneficiary--barely sufficient to carry
out the education campaign. Presently the #800 line is operational only
in the five pilot test states and the full Medicare Handbook has been
mailed only to those states. By the end of this year, these services
must be available nationwide. Therefore, we strongly support the
Administration's proposed increase in Medicare+Choice user fees to $150
million. AARP believes this increase is needed to assure that all
aspects of the education campaign can be carried out as Congress
envisioned, including the #800 telephone assistance line with live
operators as opposed to an automated response system.
Greater Medicare Reforms
As we've noted, Medicare+Choice is still in its infancy and many of
the changes enacted by the Balanced Budget Act are still phasing in.
The overall affect of these changes on beneficiaries, providers and the
Medicare program itself is not yet clear and there is much to be
learned. The challenges and the successes of Medicare+Choice will have
important implications for broader reform of the Medicare program. The
amount of ``fine-tuning'' now under discussion for Medicare+Choice
offers ample reason why larger-scale reforms in Medicare must be made
slowly and cautiously.
While we have stated the importance of understanding the impact of
the changes that have already been made before new changes are layered
on top, this does not mean that the status quo in Medicare is
acceptable.
Medicare continues to face financial challenges which have to be
addressed if the program is to continue to remain strong for current
and future beneficiaries. Equally important, Medicare's benefits and
delivery system need to be modified to live up to the demands of 21st
century medicine. That means that greater reforms are still necessary.
The Balanced Budget Act extended Medicare's solvency only until 2008.
More must be done to ensure the program's long-term solvency. The
program must also be prepared to handle the enormous number of baby
boomers who are moving towards retirement.
To this end, AARP believes that there are some fundamental tenets
that have guided Medicare and should be the basis of any efforts to
reform the program:
First and foremost, Medicare should continue to be available
to all older and disabled Americans despite health status or
income. Our nation's commitment to a system in which Americans
contribute to the program through payroll taxes during their
working years and then are entitled to receive the benefits
they have earned is the linchpin of public support for
Medicare. Toward that end, AARP views it as unacceptable to
create a situation where more Americans would be uninsured by
requiring people to wait until they are 67 to receive Medicare.
Medicare should guarantee a defined set of benefits with
payments that keep pace with the cost of the benefit package.
Clearly defined benefits, across all plans, provide an anchor
on which health plan benefits and the government's
contributions are based. On the other hand, a defined
contribution, with payments tied to artificial budget targets
rather than the cost of a benefit package, creates the
potential for both benefits and government payments to diminish
over time. The latter would leave beneficiaries more vulnerable
to rising health care costs--something over which individual
Americans have little control.
Medicare should keep up with advances in medicine and medical
technology in much the same way as do private and employer-
provided insurance. This means, among other things, modernizing
Medicare's defined benefit package to include prescription drug
coverage. Prescription drugs keep people healthy, independent,
and out of hospitals. Therefore, there should be a guarantee of
drug coverage across all Medicare plans. Without such coverage
in every Medicare plan, there would be a greater tendency
towards adverse selection of beneficiaries.
Changes in Medicare financing and benefits should protect all
beneficiaries--including those with low-incomes--from
burdensome out-of-pocket costs. Medicare beneficiaries should
continue to pay their fair share of the cost of coverage, but
out-of-pocket costs must be kept affordable. The average
beneficiary already spends nearly 20 percent of his/her income
out-of-pocket on health care. If cost-sharing is too high,
Medicare's protection would not be affordable and many
beneficiaries could be left with relatively few coverage
options.
Medicare must have a stable source of financing that keeps
pace with enrollment and the costs of the program. Ultimately,
any financing source will need to be both broadly based and
progressive. Additionally, AARP supports using an appropriate
portion of the on-budget surplus to insure Medicare's financial
health beyond 2008.
As private insurance participation in Medicare expands,
effective administration of the program will be essential. The
agency or organization that oversees Medicare must be
accountable to Congress and beneficiaries for assuring access,
affordability, adequacy of coverage, quality of care, and
choice. This will require things like: ensuring that a level
playing field exists across all options; modernizing original
Medicare fee-for-service so that it remains a viable option for
beneficiaries; improving the quality of care delivered to
beneficiaries and ensuring that all health plans meet rigorous
standards; and continuing to rigorously attack waste, fraud,
and abuse in the program.
AARP is awaiting the Medicare Commission's report. We have reviewed
the ``premium support'' proposal put forth by Senator Breaux. This
proposal relies heavily on the private insurance market to provide
health insurance coverage to Medicare beneficiaries. As discussed
earlier, a step towards greater involvement of private sector health
plans in Medicare requires careful assessment and ample time to test
the potential impact on beneficiaries. Since many details of this
particular proposal are still sketchy it is premature for us to comment
on it fully. As more information becomes available, AARP will weigh the
proposal--as we will any Medicare reform plan--against the fundamental
principles of the Medicare program described above.
In the meantime, AARP will continue to work with the Commerce
Committee, and your colleagues in the House and Senate to improve upon
the Medicare+Choice program. We also want to work with you to advance a
Medicare reform package. The status quo in Medicare is not acceptable.
But together we must ensure that any reform package continues
Medicare's promise of quality, affordable health care.
Mr. Bilirakis. Thank you very much, Ms. Miller. Before I
recognize Ms. Archer, the Chair recognizes Mr. Brown.
Mr. Brown. Ms. Miller, thank you. Congresswoman Lois Capps,
who is your Member of Congress, I believe, asked me to welcome
you. She could not be here today because of an illness in her
family, but wanted to extend her greetings and thank you for
traveling all the way across the country.
Ms. Miller. Well, thank you. Yes, Morro Bay is part of San
Luis Obispo County and I am in her district.
Mr. Brown. And you definitely have a friend in the work she
does in this committee.
Ms. Miller. Thank you.
Mr. Brown. Thank you.
Mr. Bilirakis. Ms. Archer.
STATEMENT OF DIANE ARCHER
Ms. Archer. Thank you. My name is Diane Archer. I am the
Executive Director of Medicare Rights Center, a national not-
for-profit organization based in New York. We help seniors and
people with disabilities on Medicare through telephone
counseling, public education and policy work. I thank the
Commerce Committee for this opportunity to testify today.
MRC devotes considerable resources to counseling our
clients on how to choose a Medicare health plan. We tell people
to choose carefully because quality matters and quality varies.
But we can't give callers information to help them choose among
the many Medicare plans based on the health care they offer.
Good information on health plan quality is not available.
For now we know that many of our clients are forced to
choose a health plan based solely on out-of-pocket costs and
additional benefits. But a choice that doesn't factor in
quality, isn't an informed choice and doesn't make for a
competitive market place. To help ensure that seniors and
people with disabilities get good care from their plans, they
must be encouraged to compete on their health performance.
As a Nation, we should measure the success of the market
place and Medicare on how well health plans treat seniors and
people with disabilities who need care the most. Currently 75
percent of Medicare costs cover the health care needs of the
sickest 10 percent of the Medicare population. The Medicare
Program was founded to provide a safety net for these
vulnerable seniors and people with disabilities who would
otherwise be uninsurable.
If we overlooked the health care needs of these people,
Medicare will no longer be the safety net it is intended to be.
Risk adjusting payments to health plans are essential if they
are to compete for members with costly health care needs.
Because of the current payment system, some of the most
vulnerable people on Medicare tell us they fear they may not be
able to get the care they need from Medicare HMO's.
And we have no evidence about particular health plans to
allay their fears. Unfortunately today, Medicare's capitated
payment system penalizes plans that develop and promote
programs for people with costly health care needs. If they
attract too many people with complex conditions, they can't
stay in business. As a result, health plans don't compete on
the quality of health care they provide to people with costly
conditions.
And without good risk adjustment, the Federal Government
winds up wasting taxpayer dollars by overpaying HMO's to enroll
healthy people. A better risk adjustment system will help the
Medicare market place and provide an incentive for plans to
enroll people with costly conditions. By the year 2000, plans
will be paid slightly more for enrollees who were hospitalized
in the previous year to account for higher average projected
total cost in the current year.
The new system will begin to compensate those private
Medicare plans with higher numbers of members with costly
needs. Today choosing a private Medicare plan is not a matter
of informed choice, and it can be as risky as a trip to a Vegas
slot machine. We will know that the Medicare market place is
meeting the health care needs of those who need it the most
when private Medicare plans aggressively develop and advertise
programs for people with cancer, heart disease and other
serious illnesses.
Risk adjustment will push the Medicare market in the right
direction, encouraging health plans to compete against each
other on the quality of their product, health care, and
improved risk adjustments should encourage full disclosure by
health plans of their treatment policies and enable people on
Medicare to make informed choices about which plan to join now
for when they become sick later. With risk adjustment the most
vulnerable seniors and people with disabilities on Medicare
would not need to fear falling by the Medicare wayside.
Instead, the Medicare Program could become a public/private
partnership that we can all be proud of and a legacy for future
generations. Thank you.
[The prepared statement of Diane Archer follows.]
Prepared Statement of Diane Archer, Executive Director, Medicare Rights
Center
My name is Diane Archer. I am the Executive Director of the
Medicare Rights Center, a national not-for-profit organization based in
New York City. MRC helps seniors and people with disabilities on
Medicare through telephone counseling, public education, and public
policy work. Under a contract with the New York State Office for the
Aging, with funding from the Health Care Financing Administration, we
operate New York State's Health Insurance Assistance Program hotline.
Each year, we field approximately 50,000 hotline calls from people with
Medicare questions and problems and provide direct assistance on a
variety of Medicare issues to more than 7,000 individual callers. I
thank the Commerce Committee for this opportunity to testify on the
need to risk adjust payments to private Medicare plans. Only through
risk adjustment will these plans have the incentive to develop and
promote programs for enrollees with costly conditions and to provide
treatment information that consumers need to make informed health care
choices.
MRC devotes considerable resources to counseling our clients on how
to choose a Medicare health plan. Our counselors tell people to choose
carefully because quality matters and quality varies between plans.
But, we cannot give callers information to help them choose a private
Medicare plan based on the health care they offer. Good information
about how private Medicare plans care for enrollees with costly health
care conditions is unavailable. For now, we know that many of our
clients are forced to choose a health plan based on out-of-pocket costs
and additional benefits without factoring in quality. But a choice
based solely on costs and benefits is not an informed choice and does
not make for a competitive marketplace. To help ensure that seniors and
people with disabilities get good care from their health plans, health
plans must be encouraged to compete on their health performance.
We as a nation should measure the success of the Medicare
marketplace on how well health plans treat those seniors and people
with disabilities who need care the most. Currently, 75% of Medicare
costs cover the health care needs of the sickest 10% of the Medicare
population. The Medicare program was founded to provide a safety net
for these vulnerable seniors and people with disabilities who would
otherwise be uninsurable. If we overlook the health care needs of the
most vulnerable people on Medicare, Medicare will no longer be the
safety net it is intended to be.
Risk adjusting payments to health plans is essential if they are to
compete for members with costly health care needs. As a result of the
current payment system, some of the most vulnerable people on Medicare
tell us they fear they may not get the care they need from Medicare
HMOs. And we have no evidence about particular plans to allay their
fears. Unfortunately, today, Medicare's capitated payment system
penalizes plans that develop and promote programs for people with
costly health care needs. If they attract too many people with complex
conditions, they will go out of business. As a result, health plans do
not compete on the quality of health care they provide to enrollees
with costly conditions. And without good risk adjustment, the federal
government winds up wasting taxpayer dollars by overpaying HMOs to
enroll healthy people.
We believe that even the most basic risk adjustment will help the
Medicare marketplace and provide an incentive for plans to enroll
people with costly conditions. By the year 2000, plans will be paid
slightly more for enrollees who were hospitalized in the previous year
to account for higher average projected total cost in the current year.
This new risk adjustment methodology is an improvement over the
existing system because we know that people with costly health
conditions like cancer, congestive heart failure, and diabetes are more
likely to need extended hospital stays than other enrollees. The new
system will no longer reward health plans with a disproportionate
number of healthy members. Rather, it will begin to compensate those
private Medicare plans with higher numbers of members with costly
needs.
Today, choosing a private Medicare plan is not a matter of informed
choice, and it can be as risky as a trip to a Vegas slot machine. We
will know that the Medicare marketplace is meeting the health care
needs of those who need it the most when Medicare HMOs and other
private Medicare health plans aggressively develop and advertise
programs for people with cancer, heart disease, and other serious
illnesses. Because health plans want to attract as healthy a membership
as possible, they vie for clients with glossy pictures of seniors
riding bikes and swinging on swings with their grandchildren. Risk
adjustment would push the Medicare market in the right direction,
encouraging health plans to compete against each other on the quality
of their product--health care. And, improved risk adjustment should
encourage full disclosure by health plans of their treatment policies
and enable people on Medicare to make informed choices about which plan
to join now for when they become sick later. With risk adjustment, the
most vulnerable seniors and people with disabilities on Medicare would
not need to fear falling by the Medicare wayside. Instead, the Medicare
program could become a public-private partnership that we can all be
proud of, and a legacy for future generations. Thank you.
Mr. Bilirakis. Thank you, Ms. Archer. Ms. Wegner.
STATEMENT OF NONA BEAR WEGNER
Ms. Wegner. I thank the committee for this opportunity for
my organization to be represented. The Seniors Coalition in a
non-profit, non-partisan advocacy organization representing
about 3 million older Americans and their families. This
hearing addresses a very important health care issue of deep
concern, not only to my members but to every senior citizen.
Over the last decade we have vigorously supported providing
Medicare beneficiaries with age-appropriate options so as to
place them on an equal footing with the products and services
presently available to younger consumers. We were very hopeful,
and we still are hopeful, that the Medicare+Choice provisions
of the Balanced Budget Amendment will do this.
But as of today, that has not happened. Clearly that was
the intent of the passage of the legislation, but the choices
which we expected to see available have not come to pass. We
believe that there are a number of important factors which have
created this problem and I would just like to mention two.
First, we are told and on behalf of our members, who inquired
about and were told, that the late issuing of HCFA's first
interim regulations significantly delayed the entry of products
into the market place.
But second, concern over the risk adjuster is a factor
which is acknowledged universally as being one of the issues.
We acknowledge and truly believe that a risk adjustment factor
is critical in balancing affordability and profitability in the
development of new health care products. There are both
anecdotal evidence as well as the evidence presented today that
justifies that. So we will not quarrel with that idea.
But we do want to say that it is important to look at how
that risk adjustment is developed and whether or not it
reflects accurately the market place balance that must occur
for products to be brought on line and consumers to have access
to it. It certainly is true that the Medicare+Choice options as
envisioned in the BBA would benefit seniors both economically
and physically through better health care outcomes.
But for seniors who are economically vulnerable and
physically frail, as my co-panelist just said, perhaps more
important than choice is quality and availability of access to
service. The harsh reality is that there are few products in
the market place and seniors have neither choice not cost-
savings nor quality right now. I want to digress just a moment,
as I was invited to do, to say that we are concerned that in a
defined benefit program, that choice does become a problem.
I just want to relate something that happened to me this
week. I had a member of my organization who lives in south West
Virginia call me and his wife has Parkinson's Disease. Whether
it was through the Michael J. Fox discussion of his surgery or
not, he and his wife investigated deep brain surgery. Her
doctor recommended that treatment for her, but it was not
covered by Medicare.
I don't have an answer for him. I know that that is a
naughty problem that leads away from this issue, but in looking
at what we construct, we have to keep in mind that Medicare was
created in an environment in the 1960's in which deep brain
surgery was never even envisioned, let along performed. What we
see here in all of this are growing pains in which we are
trying to restructure the system.
So we really encourage the restructuring of the system. We
know that the risk adjuster is a bridge to it. It may not be
perfect and I have one more thing I want to say. In which I
say, I don't think it is. But we need to do that in order to
move it forward. It is like having a child with growing pains.
We can't stop raising the child. We can't stop and wait because
Medicare must evolve to create a health protection for seniors
in the 21st century.
The medical advantages we have today and the way in which
the practice of medicine have evolved are far beyond anything
that was ever conceived in the original construction of the
Medicare Plans. Now let me return back to my other point that I
want to make. Is that we are very concerned that basing only,
that basing the risk adjuster only on in-patient hospital data
has a negative consequence. I will stop there. Thank you.
[The prepared statement of Nona Bear Wegner follows.]
Prepared Statement of Nona Bear Wegner, Senior Vice President, The
Seniors Coalition
Good morning. I am Nona Wegner, Senior Vice President of The
Seniors Coalition, a non-profit, non-partisan senior-citizen advocacy
group here today on behalf of our 3 million members and supporters.
Thank you for allowing me to speak to you on this critical issue.
The Seniors Coalition has long promoted the concept of providing
Medicare beneficiaries with options and alternatives similar to those
available to younger health care consumers. We were extremely hopeful
that the Medicare+Choice provision of the 1997 Balanced Budget Act
would, at last, effect this change.
At this juncture, however, it would appear that neither the hopes
of the Congress who passed the measure, nor those of seniors who wanted
new choices, have come to pass. Certainly we realize that the late
release date of HCFA's interim regulations were one factor that has
delayed the entry of products to the market place, but we also believe
that industry concern over the risk adjuster is another factor of
considerable importance.
We do understand and acknowledge that risk adjustment is necessary
to the operation of a competitive marketplace. Alice Rosenblatt, then
Chairperson of the Risk Adjustment Work Group of the American Academy
of Actuaries, in testimony to the House Ways and Means Committee in
1997 noted: ``Risk assessment and risk adjustment are methods intended
by policymakers to promote competition the basis of medical and
administrative efficiency, rather than risk selection. She goes on to
say that the goals of risk adjustment include maintaining consumer
choice, protecting the financial soundness of the system and
compensating plans fairly for the risks they assume.
Let me stop here and say I am not an actuary, nor am I here to
present myself in such a way. I am, however, a consumer, as are Seniors
Coalition members, and we are here to voice our concern that the
current marketplace is not serving our needs. Of course we want quality
and affordability in healthcare services and delivery; these are as
important as choice, if not more so. But when there are no products, we
have neither choice, nor cost savings, nor quality.
In short, when the regulatory environment is such that companies
hesitate to bring products to the marketplace--products that are
desperately needed--we must ask why.
The question leads us to the heart of many of our concerns about
Medicare and the role of government in our healthcare decision making.
Many other experts you have here today will crunch the numbers. I, on
the other hand, wish to briefly discuss the impact of this problem in
human terms.
The Seniors Coalition has grave concerns about using inpatient
hospitalization data as the basis for the risk adjuster for three
reasons:
1. It creates an incentive to game the system by hospitalizing seniors
who might otherwise be better served with outpatient treatment.
2. Increased hospitalization inevitably adds more cost to an already
overburdened Medicare system, worsening an already desperate
financial crisis.
3. Reliance on such a model flies in the face of the way in which
modern health care delivery has evolved. Inpatient hospital
care is no longer the treatment of choice in for the treatment
of many types of conditions resulting from acute and/or chronic
illnesses. Lack of recognition of this fact can lead to
actually diminishing the quality of care given to older
Americans.
In conclusion, we believe that four years is too long to wait for
HCFA to develop a formula for risk adjustment that takes into account
the complexities and standards of practice in medicine today. We are
concerned that such a model will not only slow down the entry of new
Medicare products to the marketplace but impact negatively upon the
financial solvency of Medicare and far more importantly reduce the
quality and availability of services to Medicare beneficiaries.
Mr. Bilirakis. Well thank you, Ms. Wegner. And of course
you heard Dr. Wilensky agree with you and hopefully that, as
time goes on, will work itself out. Ms. Miller, when you say
that seniors should continue to pay their fair share, is that
in relation to the cost of the program or how much a senior can
afford? I guess the question goes to, are you advocating means
testing the program?
Ms. Miller. I think that we should have health care for all
Medicare beneficiaries regardless of their income, and whether
they can pay for it or not.
Mr. Bilirakis. Yes.
Ms. Miller. Our actual goal is Medicare beneficiaries
should be able to choose the kind of medical health care option
that best meets their needs. And Medicare+Choice is a step
toward providing that choice.
Mr. Bilirakis. Yes, okay. But you have heard the problems
with the cost of the programs. And do you know what I mean by
means testing?
Ms. Miller. Yes.
Mr. Bilirakis. All right. I mean right now under the
current program you are talking about, let us say, with the
Part B premiums, the multi-millionaire pays no more than the
poorest person. How do you feel about that?
Ms. Miller. AARP is not, at this point, I cannot speak for
the position on it. We have to look at all issues and respond
for the best area of our membership. So I would have to not
respond.
Mr. Bilirakis. You are being a lawyer on me now, aren't
you?
Ms. Miller. No, I am being honest.
Mr. Bilirakis. Do you have a personal opinion? I don't mean
on behalf of the AARP. I don't mean to put you on the spot, but
you may have a personal opinion.
Ms. Miller. Absolutely. No, I don't want to give you a
personal opinion, if I may take that option. Because there is
too much involved here on both sides and it would have to be
looked at.
Mr. Bilirakis. Ms. Archer, do you have any opinion.
Ms. Archer. I do.
Mr. Bilirakis. You know, if you can do it quickly.
Ms. Archer. Yeah, I am opposed to mean testing. The
millionaires do pay a lot more in taxes than the low-income
seniors. We want a program that treats everybody equally, that
makes everybody, satisfies everybody's needs. Once you start
means testing you begin to create dissention in the program and
I believe a lower quality program.
Mr. Bilirakis. Ms. Wegner.
Ms. Wegner. Traditionally my organization has opposed means
testing. We would look at an individual proposal, but, and I
would not speak about what my organization would do in the
future, but traditionally it was opposed.
Mr. Bilirakis. Interesting. You have all said that risk
adjustment is essential. And yet you have sat through very
patiently the rest of the hearing and you have realized the
problems that we have with seniors basically being dropped from
the program and some of the blame, at least, is being
attributed to the new risk adjustment. Do you feel that risk
adjustment is so important that it sort of overbalances? Do you
know what I mean, Ms. Archer?
In other words, along with risk adjustment we have this
problem. And it is a problem that we all consider very serious.
How would you respond to that?
Ms. Archer. I think I should raise one point that hasn't
been raised today. My understanding is there are 9 million
people on Medicare today who can't join an HMO even if they
wanted to. So that is the beginning of the issue. Risk
adjustment, I don't believe, is going to do two things that we
need it to do. That you need it to do and consumers need it to
do.
From your perspective it is going to save you literally
billions of dollars in overpayments to health plans. That is
critical to preserving the Medicare Program. I think we all
agree with that. And from a consumer point of view, it is the
only thing that I see that we can do that will begin to
encourage plans to want to try people who are sick. To promote
and develop programs for people who are sick.
Mr. Bilirakis. So even if we can't solve the immediate
problem, you feel that strongly about the risk adjustment
process.
Ms. Archer. I do.
Mr. Bilirakis. Good. Ms. Wegner.
Ms. Wegner. I would concur. We are concerned that despite
the safeguards, which I understand HCFA has tried to implement,
that there will be found a way to gain the system. And history
has chosen, has told us that that has been the case. We are
concerned about the impact on patients about that. But we have
to, the fact that we don't have a perfect system, doesn't mean
that we shouldn't move toward bettering it.
Mr. Bilirakis. And you all agree that choice is
significant. So you like the idea of additional choice.
Ms. Archer. I would say here that good choice is
significant. That in fact what is most significant to seniors
is security, stability and affordability. And if you have
choice and a market place that is in constant turmoil, that is
not good. Choice and health plans that aren't doing right by
their members, that is no good. Moreover, I would say seniors
don't need a lot of choice and don't want a lot of choice. They
want some limited choice to guarantee affordability, security,
comprehensive benefits.
Mr. Bilirakis. Ms. Archer, on Page 3 of your written
statement you say, ``today choosing a private Medicare Plan is
not a matter of informed choice, but can be as risky as a trip
to a Vegas slot machine.'' And yet, I am sure you are aware
that HCFA has invested a lot of money in this document which is
intended to inform seniors and ensuring that they get the
information needed in order to make informed choices. Do you
have any response to that?
Ms. Archer. I would say a few things. No. 1, if anybody has
any sort of notion of how they would pick a health plan today,
let me know, because I think HCFA would agree that it is just
impossible today. Because there are so many factors that we
don't understand about each health plan. providers can come and
go from one moment to the next. You join, your doctor is in the
network, the next thing that doctor is out.
The drugs that they cover can change from one day to the
next. You join because your drug is covered, it is no longer
covered. The plan terminates and it raises premiums enormously.
Mr. Bilirakis. So you don't feel that HCFA, in spite of
their effort is adequately----
Ms. Archer. Informing people?
Mr. Bilirakis. Yes.
Ms. Archer. It is not adequately informing people, but it
doesn't have the tools to because the data is yet to be
available. So I can't fault HCFA for only providing people with
information that they have available. The information that we
need is just not yet available. We are making some progress
with HEDIS data, Health Employer Data Information Set,
information and CAHP's data, Consumer Assessment of Health
Plans data, which is beginning to measure plan quality.
But again, like risk adjustment, we are only in the
beginning stages of that. So it is very hard for people to make
an informed choice about their health plan based on quality. On
cost it is a little bit easier.
Mr. Bilirakis. All right, thank you. I am sure my time has
long expired. Mr. Brown.
Mr. Brown. Mr. Chairman, thank you. Ms. Miller, on
prescription drugs there are lots of proposals out there now.
Some in the Medicare Commission want to extend coverage of
prescription drugs only to Medicare beneficiaries in HMO's.
Others want to see universal coverage of all Medicare
beneficiaries' prescription drug costs. Others want to see a
catastrophic prescription drug plan.
Others want to start from the first dollar and put a limit
on annual benefits. AARP, I know, supports some kind of
prescription drug coverage. What is your position precisely?
Ms. Miller. Prescription drugs is good medicine, and I will
give you an example with me. Prescription drugs is exactly what
is keeping me well. I had a heart attack about 6 years ago, a
mild one. But the prescription drugs for high blood pressure
has kept me well and I depend on that. Prescription drugs is
absolutely good medicine.
Now we don't have enough data yet from the Commission, it
is kind of sketchy, so that we can make any decisions along
that line. But we need to have prescription drugs as part of
the traditional Medicare package.
Mr. Brown. So you do not support prescription drug coverage
only for Managed Care enrollees?
Ms. Miller. No, it should be across the board.
Mr. Brown. It should be across the board.
Ms. Miller. Yes. But I am adding the fact that when things
fall out as far as the other plans are concerned and people are
without health care, then can then turn to their traditional
Medicare and hopefully have prescription drugs along with it.
That fills a void.
Mr. Brown. Okay, thank you. Ms. Archer, one quick question
and then a bit longer one. You mentioned that 9 million
Medicare beneficiaries cannot join an HMO. That is for
geographic reasons, generally?
Ms. Archer. Yes.
Mr. Brown. Okay.
Ms. Archer. Yes.
Mr. Brown. If I understood you correctly, you said there
are disincentives in the current system, obvious disincentives,
I think, for plans to enroll higher cost people. Could you
elaborate on how that works?
Ms. Archer. Sure, I mean if a bunch of us got together and
said, we want to create the best HMO out there. We want to have
the best hospital affiliations, academic affiliations, best
providers, we are going to offer the best care for people with
cancer. We would go out and actively promote it. People with
cancer or heart disease would all join and we wouldn't be paid
adequately to service them. We would be out of business very,
very quickly. From a market place perspective, the health plans
are paid in a way where their incentive is to steer clear from
people with costly health care needs in order to do well on the
stock exchange.
Mr. Brown. Okay. My concern is the converse: HMO's
marketing only to the healthy. You are saying you are
advertising to only get the sickest people. Some HMO's maybe
just get a cross-section of people but so often HMO's seem to
try to cream skim. Explain that side of the coin to me?
Ms. Archer. I don't know if you saw the Kaiser Family
Foundation Report, but they did a whole analysis of this issue.
But the ads are usually of healthy people exercising, scuba
diving and having a lovely time of it and that is all well and
good. But again, we think that Medicare's major important role
is not to help the healthy people get health care but to help
the most vulnerable.
Mr. Brown. Tell me more. Okay, I understand that
philosophically. Tell me more about how they actually market.
They run ads with healthy people. Healthy people watch it on
tv, they want to join. Less healthy people may not want to
join. But give me other examples of how they promote favorable
selection?
Ms. Archer. No, here is another way. If you call them and
you ask what they will do for you if you have cancer or heart
disease or some other costly illness. Or if you write them. We
have written them and asked them for treatment information. It
is all proprietary. So if you are at all concerned about how
you are going to be treated, what treatment options are
available to you, before you join you are going to find that
you can't get a good answer from the plan.
I think there was an article in the Washington Post
recently about a man in a Medicare HMO who had AIDS. He had
been getting Protease Inhibitor from his Medicare HMO which was
closing down. He was trying to find information about other
HMO's that would provide that drug. Which again, was going to
keep him going, and he couldn't get it from those HMO's. And
for good reason, again. If they were to disclose it, they would
be attracting too many people with AIDS and they couldn't
afford to do that. So that is a serious problem.
Mr. Brown. There is certainly an incentive not to disclose
it. And there is also an incentive not to offer it.
Ms. Archer. That is exactly right. The better ones might
offer it, but if it is at all promoted, then they have to, they
were going to stop offering it. The ones who just are out there
to make money are not going to be promoting or setting up those
kinds of programs.
Mr. Brown. Thank you.
Mr. Bilirakis. Mr. Bryant.
Mr. Bryant. Thank you, Mr. Chairman. Ms. Wegner, let me ask
you about some concerns that have been raised here today about
the phase in of the risk adjuster and the use of in-patient
data and the impact of these on the health plans. How would
you, would you elaborate actually on the effects of this
adjuster would be on beneficiaries and the care provided to
him.
Ms. Wegner. As I pointed out in my testimony, I am not an
Actuary, so I can't give you a mathematical model. But as a
representative as consumers and judging from history of other
kinds of regulatory implementation, there is a distinct, we
think, predisposition for this system to be gained. So that
hospitalization for perhaps, and I know that the focus has been
on a 1-day hospitalization, may not be that, but there will be
a focus on hospitalization which is what we are concerned
about.
And we have several concerns related to that. One is in-
patient hospitalization is the most costly means of treatment.
It already impacts negatively Medicare and its financial
situation. Two, it is not in the best interest of seniors. And
three, it sort of flies in the face of a medical model in which
out-patient treatment procedures have become the norm. One of
my children had her entire knee replaced and it was done as
out-patient surgery.
I was really reluctant. When the second child had it, it
was exactly the best way to go. They were happier being at home
and it was much better. Now I am not saying my child is the
same as a senior, but there are great advantages to not
promoting hospitalization. So all of those things make us very
concerned when there are other data available to look at
treatment. I am sorry that was such a long answer.
Mr. Bryant. I wanted to ask all three of you three quick
questions and I am sort of alone up here, so maybe we can go a
little bit over our time. But I will start with Ms. Miller and
then Ms. Archer and then Ms. Wegner. In terms of your
organizations, No. 1, how many of your members, estimated
obviously, would likely join Medicare+Choice as a result of
this new risk adjustment?
And second, are you concerned that there may be more of
your members in plans now that could conceivably see those
plans that they are in now cut services and withdraw as a
result of this new methodology? And third and finally, is there
any resistance from the more healthy members in these
Medicare+Choice Plans now who do not want to see the risk
adjuster?
Three sort of detached questions, but if you can recall
those, if you can answer those for me quickly. And if you need
for me to remind you, I will happily do that.
Ms. Miller. I don't know the exact percentage, I am taking
a guess because we would have to get this from our staff.
Mr. Bryant. Just your estimate.
Ms. Miller. Okay, a ball park figure I would imagine it is
probably in the 30 percent range that are in HMO's. I don't
know how many have, I can't break that down for you. But I will
go back to the fact that our beneficiaries have to choose the
medical plan that works for them and their best options that
satisfies their particular needs. I will give you, again, an
example.
I have Medicare and I have a Medigap policy. I don't have
prescription drugs. I find that the plan that has the
prescription drugs will cost more than if I buy my prescription
drugs on my own. So I stay with the plan that I have. However,
what about the people that cannot get the Medigap policy and
need the prescription drugs. We have to fill that gap. So that
is why I say that prescription drugs added on to the
traditional Medicare Plan is very, very important so that all
people can be benefited by it.
Mr. Bryant. Mr. Chairman, can I have maybe 2 additional
minutes to allow Ms. Archer to answer those questions?
Mr. Bilirakis. Sure.
Ms. Archer. I don't know how many more are likely to join
because of this beginning phase in risk adjustment. Although I
think many will join for affordability reasons. I think to the
extent that they are concerned about cuts in services and plan
terminations, they are already concerned. And I am not sure to
what extent. Certainly I haven't read much about risk
adjustment in the papers. That is going to be the issue for
them.
It is going to be thinking about what they have read about
over the last few months about plan terminations. That is going
to be what slows down potentially enrollment in HMO's. My
understanding is that there has been a tremendous slow down in
HMO enrollment over the course of the last 4 months, in part
because of these plan terminations. Then I guess your final
question was resistance of healthy people to join plans?
I can't see that at all. I think that for healthy people
plans can work very well and they are very affordable.
Mr. Bryant. Thank you. Ms. Wegner, do you have any comments
above and beyond that?
Ms. Wegner. Only that just that my membership has a smaller
percentage currently in HMO's, and that may reflect geography
and availability or it may reflect a resistance to change. That
I don't know, but it is an interesting question that we would
like to pursue.
Mr. Bryant. Thank you all for our testimony.
Mr. Bilirakis. Ms. Miller, I just wanted to get clear. You
have the fee-for-service Medicare and you have Medigap policy.
Your Medigap policy does or does not cover prescription drugs?
Ms. Miller. Does not.
Mr. Bilirakis. It does not.
Ms. Miller. But there is an option.
Mr. Bilirakis. There are some Medigap policies that do?
Ms. Miller. Right. But in my particular case, when I
figured it out with all the deductions and what have you, it
was a little less expensive for me to keep the policy I have.
Mr. Bilirakis. And still pay for your prescription drugs?
Ms. Miller. Right.
Mr. Bilirakis. Mr. Green.
Mr. Green. Thank you, Mr. Chairman. One of the, in fact,
all of the questions I think are good for this panel. One of
the questions I wanted to ask is that I am concerned about a
lot of the low-income seniors that are beneficiaries, who there
is assistance available for Medigap or Medicare supplements but
they don't always know about them. In fact the story was that
there was a pamphlet sent out that displayed a notice to low-
income seniors to be eligible for assistance with premiums and
cost-sharings.
And apparently the pamphlet was received and the State
program was flooded with calls who need it. Are we doing as
good a job as we should on making sure seniors, poor seniors
know that this is available?
Ms. Archer. The answer is that it is actually been the
State's responsibilities and that has been the problem. I think
the Federal Government would do a much better job of ensuring
that low-income seniors knew about the qualified Medicare
Beneficiary Program and other programs to help them with their
costs. If Social Security were responsible for handling these
applications, my understanding in New York, for example, is
that the State local offices, the local Medicaid offices which
are required to process the claims, were mistakenly turning
down many of our clients because they didn't have Medicaid.
Well, the whole point of these programs is that you don't
need to have Medicaid in order to qualify. Other States have
incredibly complicated application processes. With the QI2
Program which only gives people $1.07 a month, I have heard
from many, many people in the States that it is just too costly
to implement it. It costs them more to implement than it does
to give people the benefit.
So there are a lot of obstacles for people enrolling in
these programs that I think could be alleviated if the Federal
Government took the application process on itself and had
Social Security do it.
Mr. Green. Thank you. Any other comments?
Ms. Wegner. Mr. Green, I just wanted to add that one of
the, I think, one of the barriers to the dissemination of
information is that the government always thinks of using
dissemination only in government channels. There are many other
methods of communication using utility companies, using
voluntary organizations, and using other things in the not-for-
profit sector and even in the private sector for the
dissemination of information.
It has a high probability of reaching low-income seniors,
but those channels are not utilized. I would argue that that
approach might be cheaper and perhaps as effective as well, and
they are often overlooked.
Mr. Green. Okay. So we have to do a better job and maybe
instead of having 50 State programs doing this, having some
kind of standardization for the whole country so seniors will
know that these are available.
Ms. Miller. AARP tries very hard to educate our membership
on all issues. We have an 800 number, we have a website and
hopefully we can get to all people, not just our own
membership, through the website.
Mr. Green. Yeah. Although I have to admit I am a member of
AARP and I wish I could read the magazine, much less everything
else I get in the mail. And I know there is an effort to
publicize to the local chapters and I visit. But again, the
membership is not, compared to the numbers that we have.
Ms. Miller. We have forums all across the country. We have
our volunteers from AARP to help get that message across.
Mr. Green. Thank you, Mr. Chairman.
Mr. Bilirakis. Thank you, Mr. Green. Anything further, Mr.
Brown. You are excused. Thank you so very much for your
patience and for your consciousness in wanting to contribute.
The last panel consists of Mr. John Bertko, Principal with
Reden and Anders, Limited. Heidi Margulis, Vice President of
Government Affairs for Humana. Judy Discenza, Chief Actuary of
the Blue Cross/Blue Shield of Florida.
Craig Schub, I hope I haven't mispronounced too badly,
President of Secure Horizons USA, Santa Anna, California. And
Kirk Johnson, Senior Vice President of CNA Health Planners,
Chicago, Illinois. Welcome, ladies and gentlemen and again
thank you so very much for your patience in sitting out there
throughout this very lengthy hearing knowing that you are going
to be at the tail end. And ordinarily at the tail end,
unfortunately, we never have as many members as we do right at
the beginning. But it is certainly not any indication of lack
of interest, particularly on a day like this where we have had
the last vote unusually early, at 12:30.
So you know many are already on the airplane flying home.
But your testimony is very important to us and it is a part of
the record and certainly will be a factor in what we might do
regarding this problem. I guess we will start off, your
testimony, your written testimony, as you know, is a part of
the record and hopefully you could just complement it with some
oral testimony. Judy Discenza, please kick it off, Ms.
Discenza.
STATEMENTS OF JUDITH A. DISCENZA, VICE PRESIDENT, BLUE CROSS
AND BLUE SHIELD OF FLORIDA; CRAIG SCHUB, PRESIDENT, SECURE
HORIZONS USA; HEIDI MARGULIS, VICE PRESIDENT, GOVERNMENT
AFFAIRS, HUMANA, INC.; JOHN BERTKO, PRINCIPAL, REDEN & ANDERS,
LTD.; AND KIRK JOHNSON, SENIOR VICE PRESIDENT, CNA HEALTH
PARTNERS
Ms. Discenza. Mr. Chairman and members of the subcommittee,
my name is Judy Discenza, I am Vice President and Actuary of
Blue Cross and Blue Shield of Florida. Risk adjustment is a
process that varies HMO reimbursements prospectively, as you
know, depending on the expected health care needs of its
members. This concept is familiar to the insurance industry of
course. Actuaries always attempt to match revenues with risk as
closely as possible. The method scheduled to be used next year,
though, could produce outcomes quite different from what is
desired and could ultimately cause additional plans to exit the
market or reduce member benefits.
There are three reasons for this. First and foremost, as
you have heard earlier, the current approach to risk adjustment
in biased against managed care plans because it is based on in-
patient data only. Second, there are unresolved data and
systems questions that will accentuate the problems of
implementing the method. And third, it could lead to
disproportionate reductions in payments to plans.
For this reason, my company urges delaying the current risk
adjustment approach so that HCFA and the industry can study,
refine and test an improved model. We believe that a refined
risk adjuster without the problems of an in-patient only
approach, will ultimately help to expand beneficiaries'
choices. But implementing a flawed interim solution, will only
add to the volatility already affecting Medicare+Choice.
First, why is the approach flawed? The risk adjustment
method to be used for the first 4 years is a proxy for true
risk assessment. The substitute method uses, as we heard
earlier, about 12 percent of admission types to determine the
health status of the entire enrolled population. That means
that only those seniors who have specific types of hospital
stays factor into risk determination.
Those for whom hospital stays are shortened or avoided, are
assumed to be in better than average health. Serious, chronic,
costly conditions can be totally ignored. Unfortunately also
this approach creates incentives for increased and unnecessary
hospitalization, exactly the opposite of what managed care
tries to do. Perverse incentives happen largely because there
is no risk adjustment score for any member treated of a
significant health care condition without a hospital admission
of at least 2 days.
A risk adjustment method should aid our health care system
by encouraging efficient use of health care services. It should
not provide incentives for increased hospitalization, tempting
plans to shift their limited dollars into much less productive
types of treatments. That is the main reason we urge revising
the current plan to allow for full study, refinement and
testing in a Medicare managed care environment using both in-
patient and ambulatory care.
The method, not the concept, is faulty because it is
incomplete and because it will be counterproductive. In
addition to those flaws though, we face unresolved data and
systems issues. Perhaps the most serious of them is the Y2K
problem. As you know, Medicare sees Y2K compliance as important
enough to suspend a number of initiatives, including some of
those mandated by Congress, to free resources to deal with Y2K
systems issues.
A similar problem exists for plans in attempting to collect
the data needed to implement a risk adjustment system. It takes
major systems changes to gather, format and report all of the
encounter data that will be needed for risk adjustment. We
still have not received the guidance from HCFA regarding the
planned October submission of ambulatory encounter data. Plans
cannot afford to divert Y2K resources this year.
Finally, at the same time that risk adjustment method
creates incentives to hospitalized patients and after 2 years
of 2 percent caps on payment increases, HCFA estimates that
this proposal will produce 5 year payment reductions for
Medicare+Choice plans of over $11 billion. Even with the
proposed phase in, some of the plans that would otherwise be
capped at 2 percent, could see their year 2000 payment increase
entirely offset.
In Florida, for example, the 2 percent cap on revenues has
applied in every county where our program exists. That means
that the original 95 percent of AAPCC, I have got maybe one
more point if I could continue?
Mr. Bilirakis. Please, please proceed.
Ms. Discenza. Thank you. Have already been reduced to an
average of 89 percent. To continue this process and then
overlay risk adjustment, will continue to widen the gap between
fee-for-service and Medicare+Choice reimbursement. That will
bring the reimbursement down to about 85 percent of AAPCC, not
the 95 percent that we have been most familiar with.
And in fact if, when the full risk adjustment, even on the
in-patient is implemented, it could drive some areas of our
State down to in between 70 and 75 percent. Thank you very
much.
[The prepared statement of Judith A. Discenza follows.]
Prepared Statement of Judith A. Discenza, Vice President, Blue Cross
and Blue Shield of Florida
Mr. Chairman and members of the subcommittee, I am Judith A.
Discenza, Vice President and Actuary for Blue Cross and Blue Shield of
Florida. Our Health Options plan is a large Medicare risk contractor
with an enrollment of approximately 123,000 Medicare beneficiaries.
I appreciate the opportunity to testify before the Subcommittee
today on how HCFA's current approach to implementing risk adjustment
will heighten already existing threats to the Medicare+Choice (M+C)
program. As a result of constrained payments and the business risks of
implementing the regulations, more than 500,000 Medicare beneficiaries
were affected when health plans in 1998 scaled back their service or
decided not to participate. The result is that Medicare beneficiaries
were left with fewer, not more, health plan choices. Because of
uncertainty related to regulation and reimbursement around
Medicare+Choice and in large part, uncertainty around the risk
adjustment methodology, continued volatility in Medicare+Choice is
likely.
In light of the existing serious issues surrounding
Medicare+Choice, we urge delaying the current risk adjustment approach
and encourage HCFA to work with the industry to study, refine, and test
a risk adjustment model. While we support efforts to devise and apply
more effective methods of risk adjustment, we are concerned that HCFA's
current approach will ultimately cause health plans to exit the program
or significantly reduce benefits for three reasons:
First, HCFA's current approach is flawed because it only uses
inpatient data;
Second, HCFA's current approach is fraught with unresolved
data and systems questions, all of which will accentuate the
problems of implementing an inherently biased risk adjustment
methodology; and
Third, even in the first year of the phase-in, HCFA's current
approach could lead to significant proportionate reductions in
payments to plans, particularly in areas that have been capped
at 2 percent for several years running.
I shall now address these points in more detail.
i. the current risk adjustment method is flawed because it relies on
inpatient data
Currently, HCFA is proposing that a proxy be used for true risk
assessment. The substitute methodology is based only on inpatient
hospital data.
Using only inpatient stays of two days or more will also create an
incomplete picture of a plan's health risks. For example, any attempt
to identify diabetics by using hospitalization data will almost
certainly miss most of them. One would need data on physician visits,
or better yet, pharmacy data, to identify beneficiaries with diabetes.
Relying on hospital stays of two or more days means that only those
seniors who have specific types of hospital stays provide the sole
means of determining health status for the entire enrolled population.
Those for whom hospital stays are shortened or avoided are assumed to
be in better than average health.
The proxy being implemented also creates a situation in which
inpatient stays could increase, driving up medical costs. The method
presents problems because a key objective of managed care is to focus
on prevention and thereby minimize the frequency of hospitalization. A
hospital-based risk adjuster provides incentives for increased and
unnecessary hospitalization and provides disincentives for plans that
successfully minimize the need for hospitalization.
A primary goal of the health care system is to provide appropriate
care at the appropriate time to individuals. Much of the health
services and clinical research of the past 10 years has focused on
excess capacity in the health care system and the resulting overuse of
health care services. Blue Cross and Blue Shield of Florida is
concerned with overuse of services. An appropriate risk adjustment
methodology, by providing appropriate reimbursement and incentives,
will aid our health care system by encouraging efficient use of health
care services. However, risk adjustment, which provides incentives for
increased hospitalization, will have the opposite effect.
The penalty results from the absence of a risk adjustment ``score''
for any member treated for a serious condition without a hospital
admission of two or more days. For example, a member who undergoes an
angioplasty in an outpatient clinic will not receive a ``score'' for
having a serious condition, even though his or her care was as
effective as a fee-for-service (FFS) beneficiary treated as an
inpatient. The only way that a health plan gets ``credit'' for
enrolling a high-risk beneficiary is if the beneficiary is admitted to
a hospital.
Further heightening the incentive against appropriate care is the
exclusion of short-stay admissions from risk adjustment scoring.
Excluding one-day stays from the payment model is questionable. As an
example, an individual with a particular diagnosis who is enrolled in
Medicare FFS may be hospitalized for three days. An individual with the
same diagnosis enrolled in a M+C plan may be hospitalized for only one
day, then moved to a sub-acute facility (for which no ``score'' is
credited). When short stay admissions are eliminated from the risk
adjustment process, M+C plans may be penalized in that they receive no
additional payment for treating these patients because the patients did
not have a qualifying inpatient admission.
An additional problem is the exclusion of low frequency, but
potentially high-cost, admissions due to sample size limitations. The
interim risk adjustment method does not include diagnoses that occur
among fewer than 1,000 Medicare beneficiaries--even if these conditions
are associated with extraordinary medical costs. Thus, a plan that
enrolls a beneficiary with one of these rare, high-risk conditions
would not receive credit for needed care.
Over the years managed care has capitalized on new technologies and
advancements in medical treatments to keep people out of the hospital.
Hospital stays have decreased substantially over this period. Rather
than move the trend in the opposite direction, we urge revising the
current risk adjustment plan to allow for full study, refinement, and
testing in a Medicare managed care environment.
There are two lessons which we can learn from the current examples
of systems which use risk adjustment: 1) because they do not cover
individuals over 65, they do not provide complete models for the
Medicare+Choice population; and 2) they all either use or recognize the
need to move to a full encounter model. In Washington State, the
covered population includes public employees and non-Medicare retirees,
and uses a risk adjustment model that is based on both inpatient
hospital and ambulatory data. In Minneapolis, the covered population
includes those who are less than 65 and also uses a risk adjustment
model that is based on both inpatient hospital and ambulatory data. In
California, the covered population includes those less than 65 and
utilizes an inpatient only risk adjustment model, but recognizes the
need to move to a full encounter model as data becomes available.
ii. the current risk adjustment approach contains unresolved
implementation problems
Compounding the conceptual problems of HCFA's current risk
adjustment method are unresolved implementation problems that stem
largely from two issues:
(1) The limited ability that health plans have to validate the risk
adjustment calculations or replicate the model; and
(2) Data and systems complications, particularly surrounding year 2000
compliance.
Limited Validation/Replication ability
A major factor in an organization's decision to offer a
Medicare+Choice plan is the ability of the organization to forecast
revenues. Health plans face significant uncertainties because it is
difficult to validate or replicate HCFA's risk adjustment calculations.
Additionally, because HCFA has not yet disclosed the formulas used for
components of the risk adjustment process it is impossible to replicate
the analyses.
Data and Systems Complications--The most important systems issues
revolve around the Year 2000 (Y2K) problem. Plans are currently making
a major effort to ensure that ``Y2K'' does not disrupt services for
their Medicare and non-Medicare enrollees. Medicare sees Year 2000
compliance as so important that it has suspended a number of
initiatives--including initiatives mandated by Congress--to free
resources to deal with Y2K systems issues. At least 15 HCFA initiatives
have been delayed or modified due to Y2K concerns:
The implementation of SNF consolidated billing.
The implementation of new payment systems for ambulatory
surgical centers and hospital outpatient services.
The implementation of new payment methods for home health
agencies.
The purpose of these actions is to minimize the number of system
changes that might interfere with the ability of contractors to make
sure that information systems are ready for the Year 2000 and are able
to process claims without interruption. A similar problem exists for
the data needed to implement a risk adjustment system. We have not
received guidance from HCFA regarding the planned October submission of
ambulatory encounter data. It is vital to have information such as the
required fields, implementation instructions, and data format
requirements with sufficient time for system changes well before the
data is required to be submitted. The burden of system changes around
these new requirements comes at a particularly bad time in relation to
system changes for Y2K
A related issue is what will happen in the event of a computer
systems failure. There is a possibility of computer systems failure
anywhere in the process--i.e., in the transfer of data, in the
processing of data, etc. Computer failures related to the Year 2000,
particularly for hospitals that must transfer data to plans or directly
to fiscal intermediaries are special concerns. As the HCFA
Administrator noted in recent testimony before the House Ways and Means
Subcommittee on Health:
``Health care providers must be Year 2000 compliant in order to
bill us properly and continue to provide high quality care and
service to Medicare beneficiaries . . . Our monitoring
indicates that some . . . providers could well fail. We are
providing assistance to the extent that we are able, but that
likely will not be enough. This matter is of urgent concern,
and literally grows in importance with each passing day.''
The current risk adjustment method contains unresolved data and
information systems issues. For example, it is unclear how plans will
be able to check for completeness of data arriving at HCFA for risk
adjustment. Plans will face challenges in checking for data
completeness--they may have trouble with fiscal intermediaries or with
the editing process. In addition, plans may have difficulty getting
data on all services, particularly from capitated providers. The detail
of the data or the process at this time is insufficient to provide
confidence that all data are being transmitted, received and used
appropriately.
iii. significant reductions in payments to plans
HCFA estimates that this risk adjustment proposal will produce
five-year payment reductions for Medicare+Choice plans of $11.2
billion. Such reductions are likely to reduce the health plan choices
available to beneficiaries and the benefits that these plans can offer.
Even with HCFA's proposed phase-in--in which only 10 percent of the
risk adjustment effect kicks in--some of the plans that are again
capped at 2 percent could see their year 2000 payment increase entirely
offset. In 1998 and 1999, virtually all Medicare beneficiaries lived in
areas that receive 2 percent payment increases; we expect that millions
of Medicare beneficiaries will again see plans in their areas receive 2
percent in 2000. HCFA estimates that this risk adjustment method could
trim as much as 2 percent from some plans'' payments. In addition, all
Medicare+Choice plans are required to pay a user fee to defray the
costs of HCFA's informational campaign, which will probably be about
0.4 percent. Thus, despite acceleration in private sector health care
costs in 2000, some M+C plans might actually see a decrease if HCFA
implements this risk adjustment method in 2000.
iv. conclusion
Congress created the Medicare+Choice program in the Balanced Budget
Act of 1997 (BBA) to expand the types and number of private health
plans offered to Medicare beneficiaries. However, as a result of
constrained payments and the business risks of the implementing
regulations, health plan options and choices have not expanded
significantly; in fact, they have contracted in many areas. The
premature adoption of a risk adjustment method will only intensify the
volatility of the Medicare+Choice program.
Blue Cross and Blue Shield of Florida believes that a refined risk
adjuster--without the inherent bias of the inpatient-only approach--can
further the objective of expanding the choices available to Medicare
beneficiaries. However, prematurely implementing interim solutions
could well work against this objective.
As stated in the beginning of this testimony, we urge delaying the
current risk adjustment approach to give more time to study, refine,
and test a valid risk adjustment model in a Medicare managed care
environment. We look forward to a continued dialogue with HCFA to
ensure a proper approach to risk adjustment and, hence, the viability
of the Medicare+Choice program.
Thank you for the opportunity to speak with you on this important
issue.
Mr. Bilirakis. Mr. Schub, is that correct? Naturally, I am
going to get it wrong.
Please proceed.
STATEMENT OF CRAIG SCHUB
Mr. Schub. Thank you, Mr. Chairman and members of the
subcommittee. Thank you for this opportunity to comment on the
issues related to the implementation of the Medicare+Choice
risk adjuster provisions of the Balanced Budget Act. I am Craig
Schub, President of Secure Horizons USA. That is PacifiCare's
health plan for seniors. PacifiCare provides health coverage
for 3.5 million individuals in 10 States.
Through Secure Horizons we serve nearly 1 million Medicare
beneficiaries, the largest Medicare enrollment nationwide. The
preceding Panelists and those to come will detail the technical
and methodological problems that plague the risk adjusters and
threaten the goals of the Medicare Risk Program, but I would
like to focus my remarks on the cumulative impact of these
problems on providers and beneficiaries.
Given our experience in 1998 and 1999, where we saw an
exodus from the Medicare+Choice Program, PacifiCare is very
concerned that providers leaving networks and health plans,
exiting from Medicare+Choice, could continue and become
particularly acute in mid 2000 without corrective action. This
will leave beneficiaries with fewer choices for coverage and
greater out-of-pocket cost. Our Medicare Provider Networks have
become fragile in some areas as payment is stretched thinner
and thinner.
We have also experienced difficulty attracting new
providers to our Medicare Networks. The reason, the lower
payment differential between Medicare+Choice and our prime
competitor, which is the fee-for-service system. It is
increasing. The proposed risk adjuster further widens the
differential by adjusting payments, often already discounted
payment schedule that is currently less than 95 percent.
And I understand that is different as has been previously
stated today. HCFA asserts that the proposed risk adjuster
merely affects health plans, not the providers and
beneficiaries. It ignores the latest and predominant provider
models and contracting methods. Namely, the health plans
contract with local provider groups on a percentage of premium
capitation basis. Over the preceding years, this model had
expanded the provider choices for beneficiaries.
It has given physicians autonomy in treating their patients
within a competitive and accountable delivery system.
PacifiCare contracts with over 350 medical groups that
represent over 66,000 physicians and hospitals. And we pay them
a contractually defined percentage of the per member premium.
PacifiCare estimates that in the first year of implementation,
risk adjusters will reduce the cost to the company of up to $64
million. But that money otherwise would have gone directly to
providers, paid for health prevention programs, such as those
that identify, that provide mammography screening for early
identification of breast cancer, diabetes management and other
quality management programs.
Even more problematic is the fact that reduced provider
payment will be the direct result of not having hospitalized
more of their patients in lieu of more cost-effective
alternatives. The end result is that providers as well the plan
are paid less than is warranted by the benefits and the actual
severity of the illness that the plan carries.
This clearly affects the willingness of providers to
participate in Medicare+Choice Plans. But most importantly, it
is the beneficiary who is going to experience reductions. Where
no providers will contract at the premium rate paid by
Medicare+Choice, no choice exists. And for seniors who are
enrolled in a plan that is no longer available, benefits they
once received at no cost must now be paid for through expensive
Medigap Plans or out of their own pockets.
Seniors that can and do remain in a Medicare+Choice may see
their benefits reduced or co-payments increased. The
beneficiary impact is especially troublesome when one considers
that a larger percentage of lower and middle income
beneficiaries enroll in Medicare+Choice Plans. Additionally,
the nature of patients' specific risk adjustment raises the
questions of privacy that I do not believe have been seriously
explored.
Today seniors are satisfied getting more benefits and
better care from HMO's as demonstrated in even recent HCFA
studies. That is why, in an effort to not further jeopardize
the choices envisioned by the BBA, PacifiCare proposes a delay
in the implementation of the risk adjusters until we can
achieve the following three objectives. One, a fair and sound
methodology is developed. Two, adequate HCFA information
systems are in place. And three, a stable and predictable and
timely process is established for determining risk adjuster
payment rates. Thank you.
[The prepared statement of Craig Schub follows.]
Prepared Statement of Craig Schub, President, Secure Horizons USA, on
Behalf of PacifiCare Health Systems
i. introduction
Mr. Chairman and members of the Subcommittee, thank you for this
opportunity to comment on issues related to the implementation of the
Medicare+Choice risk adjuster provisions of the Balanced Budget Act of
1997 (BBA). I am Craig Schub, President of Secure Horizons USA,
PacifiCare Health Systems' Medicare plan. PacifiCare is based in Santa
Ana, California and provides health coverage for more than 3.5 million
individuals in ten states--Arizona, California, Colorado, Kentucky,
Nevada, Ohio, Oklahoma, Oregon, Texas, and Washington--and the
territory of Guam. Through Secure Horizons, we enroll nearly one
million Medicare beneficiaries--the largest Medicare enrollment
nationwide.
With the passage of the BBA, Congress created the new
Medicare+Choice program to spur competition, expand health care choices
for seniors, and extend the solvency of the Medicare Trust Fund.
PacifiCare was, and continues to be, pleased to have a significant role
in supporting these goals. However, Congress' intent simply will not be
realized if the Medicare+Choice program is permitted to stay on its
current course. Unless Congress takes corrective action, the number of
providers who refuse to contract with Medicare+Choice plans will
increase, and health plan withdrawals will continue at a more rapid
pace. Beneficiaries will be left with fewer choices for health
coverage, disruptions due to changes in the availability of providers,
greater out-of-pocket costs, and higher Medigap premiums for those who
are forced to return to the traditional Medicare fee-for-service
program.
The risk adjuster, as proposed by HCFA, is one of the most
troubling factors that threaten the stability of the Medicare+Choice
program. It poses two fundamental problems: 1) it exacerbates the
cumulative impact of payment reductions to Medicare+Choice plans; and
2) it creates unworkable and burdensome administrative processes that
increase plan costs and raise the likelihood of inaccurate payment.
Taken together, these problems will widen the growing disparity between
payment to Medicare+Choice plans and reimbursement under fee-for-
service. This will make it difficult for Medicare+Choice plans to
operate in certain markets and to maintain the level of benefits and
services to which beneficiaries have become accustomed. It is
unrealistic for HCFA or Congress to assume that a disparity of this
magnitude will have no adverse impact on providers, delivery of
services, or health care options for seniors.
ii. the payment backdrop
The BBA established a new payment formula for Medicare+Choice
plans. Plans receive the highest of a minimum payment floor, a phased-
in blend of national and local rates, or an annual minimum two percent
payment update. The BBA also limited the annual rate of growth in
Medicare+Choice to Medicare fee-for-service growth minus 0.8 percent in
1998 and fee-for-service growth minus 0.5 percent from 1999 to 2002.
These provisions were estimated to achieve $22.5 billion in budgetary
savings over five years.
In fiscal years 1998 and 1999, HCFA assessed a $95 million user fee
on Medicare+Choice plans to fund the education campaign for 100 percent
of the Medicare beneficiaries, even though only approximately 15
percent of the Medicare population are in Medicare+Choice plans.
Depending upon the year, this user fee reduced the minimum update by
18%-25% for many plans. This is essentially an additional tax imposed
on the plans. HCFA is asking for authority to assess a fee of $150
million in FY2000, despite the fact that the BBA only authorizes a $100
million user fee for 2000.
It is against this backdrop of significant payment reductions that
the risk adjuster is imposed. According to HCFA's own calculations, the
risk adjuster, which will be phased in beginning in January 2000, will
reduce payments to Medicare+Choice plans by an additional $11.2 billion
(or 7.6%).
iii. key methodological flaws of the risk adjuster
A. Ignores Budget Neutrality
By providing for implementation of a risk adjuster in BBA, Congress
intended to improve payment accuracy by paying plans less to take care
of healthier individuals and more to care for sicker individuals. The
BBA included a budget neutrality requirement that applies to
Medicare+Choice payment provisions, including the risk adjuster. HCFA,
however, refuses to implement the risk adjuster in a budget-neutral
manner. Its methodology is designed to extract additional savings
($11.2 billion) from Medicare+Choice plans in contravention of the
budget agreement.
B. Improperly Relies on Inpatient Data Only
HCFA's initial risk adjuster model attempts to correlate health
status with individual patient diagnoses based only on inpatient
admissions. This ignores the fact that advances in medicine provide for
treatment of many serious diseases in outpatient settings. For example,
the care for a cancer patient has changed dramatically from inpatient-
based to outpatient-based with better results. Many cancer patients
require few, if any, hospitalizations, but they do require costly
medications and services. Yet, under the proposed risk adjuster, they
would be counted as ``healthy'' patients, and their plans and providers
would not receive an appropriate adjustment to cover their expensive
treatments.
Moreover, the HCFA model establishes a financial incentive to
hospitalize beneficiaries. Although this is unlikely to affect the
manner in which the vast majority of health plans deliver care, it does
create a perverse incentive that is not in the best interests of the
beneficiary or the ultimate payor--the federal government.
We do not believe it was Congress' intent to penalize health plans
for providing patients with the services most appropriate for their
conditions. Nor is it good public policy to incentivize costly and
inappropriate hospitalizations. In order for a risk adjuster model to
differentiate between good medical management and health status, it
must include diagnoses of beneficiaries in the outpatient and
ambulatory settings, as well as the inpatient setting.
C. Excludes One-Day Hospital Stays
The HCFA model improperly excludes encounter data from one-day
hospital stays. As with the reliance on inpatient data, exclusion of
one-day hospitalizations creates perverse incentives. It encourages
providers to lengthen hospitalizations to two days which would not be
desirable from a quality or efficiency perspective.
D. Ignores Investments in Initiatives to Improve Member Health
Health plans typically engage in numerous efforts designed to
improve the health of its members, such as preventive services, disease
management, wellness programs, chronic care initiatives, and quality
measurement and reporting. To the extent that these programs are
successful in improving health outcomes (e.g., preventing a heart
attack), the health plan will receive lower payments from HCFA. Again,
the methodology results in a bias against health plans. The costs
associated with these quality-of-care programs are real, but because
they are invisible, plan revenue ultimately will decrease.
Consequently, plans will be less able to continue to build upon these
innovations in health care management and delivery.
E. Excludes an Institutional Adjustment
By excluding an institutional adjustment from the risk adjuster
methodology, HCFA will be overpaying for institutionalized
beneficiaries and underpaying for all others. Since health plans tend
to enroll fewer institutionalized members, the result is a negative
bias in Medicare+Choice payments.
F. Misstates Cost in the Year of Death
Providers who incur significant costs in caring for a beneficiary
in the last year of life will not get paid for these costs under HCFA's
proposed methodology. This is because the payment will not be
determined until eighteen months after the death in many cases. Unless
a beneficiary is still in the program at the time of payment, the
payment will not be directed to the plan in which he or she was
enrolled.
iv. key systems issues
A. HCFA's Information Systems are Insufficient and in Some Cases,
Inoperable
HCFA's information systems are unable to accept, process, or
manipulate correctly much of the data that health plans already have
submitted. For example, a system change implemented in October 1998 has
prevented HCFA from tracking beneficiaries who have moved from plan to
plan, thus understating inpatient costs for those members. The problem
is so acute that despite its statutory duty to provide plans with
payment estimates for January 1, 2000, by March 1st of this year, HCFA
has informed plans that they should rely on their own estimates for
purposes of developing their benefit packages. It is our understanding
from HCFA that hospitalizations of up to one-third of PacifiCare's
members in California (added as a result of a recent merger) may not be
included in its risk adjustment payment calculation due to problems
with HCFA's information systems and processing of plan encounter data.
HCFA is struggling to meet the challenges of Year 2000 compliance,
and this is adversely affecting its ability to properly implement the
risk adjuster. The situation is not likely to improve in the near
future. This raises serious questions about the integrity of the data
upon which HCFA relies and the accuracy of the resulting payment
adjustments. Prior to using a data set for the development of payment
rates, HCFA has an obligation to assure itself and those who will be
paid under the system that the data is of the highest integrity. Tests
should be performed to challenge the validity of the data in each of
the key variables used in the payment process. The data also should be
reconciled to other sources within HCFA to assure that it is complete
and accurate. Moreover, HCFA has a fiduciary as well as administrative
responsibility to advise Congress on systems that do or do not work
when advancing from theory to operations, particularly when something
as fundamental as payment for Medicare services is at stake. It is
unclear whether HCFA has undertaken these critical verification and
disclosure functions.
B. HCFA's Data Requirements Impose Excessive Burdens and Costs on Plans
The HCFA risk adjuster data requirements are extraordinary, forcing
plans to divert resources away from health care services for members in
order to pay for expensive information systems and operations. To date,
plans have not been provided sufficiently detailed information to
reconcile data records or ensure accuracy. As a result, plans cannot
determine whether or not HCFA will pay appropriately.
v. impact on providers and beneficiaries
HCFA's assumption that the proposed risk adjuster merely affects
health plans ignores the reality of the latest provider models and
contracting methods--namely, contracting with local provider groups on
a ``percent of premium capitation'' basis. Formative work on
appropriate plan payment levels and diagnostic cost groups were based
on less sophisticated delivery models as opposed to those that are
commonly in place today in mature managed care markets. While more
traditional provider models survive, the most rapid and stable growth
in managed care has been built on contracting with local providers.
If inpatient diagnoses under-represent the true illness burden of
many managed care seniors, then the providers who care for them
necessarily feel the impact of the proposed risk adjuster. PacifiCare
contracts with over 350 medical groups and hospitals and pays them a
contractually defined percentage of the per-beneficiary premium.
PacifiCare estimates that in the first year of implementation, risk
adjuster reductions will cost the company up to $64 million.
Approximately $54 million of this amount will be borne by its
providers. The end result is that the providers, as well as the plan,
are paid less than is warranted by the actual severity of the illness
burden of the plan's members. This clearly affects the willingness of
providers to participate in Medicare+Choice plans.
Reduced Medicare+Choice payments already have adversely affected
PacifiCare's ability to renegotiate provider contracts; implementation
of the proposed risk adjuster will exacerbate the situation. For
example, in late 1998, many providers concluded that Medicare+Choice
payments for 1999 were inadequate to support the continued delivery of
quality health care services. They opted to return to traditional
Medicare because fee-for-service payment was more lucrative. In total,
PacifiCare exited 25 counties in five states, affecting 17,632
beneficiaries. And we were not alone. For 1999, nearly 100 plans
withdrew from some of their Medicare+Choice markets, affecting 500,000
beneficiaries.
By encouraging the migration of expensive patients back to fee-for-
service Medicare, the risk adjuster defeats Congress' stated purpose of
ensuring more choice, competition, and savings through the efficiencies
and quality management of Medicare+Choice plans. Seniors also
experience a financial burden. Benefits they once received at no cost
must now be paid for through expensive Medigap plans or out of their
own pockets. Seniors that do remain in a Medicare+Choice plan may see
their benefits reduced and/or their co-payments increased. The
beneficiary impact is especially troublesome when one considers that
larger percentages of lower and middle income beneficiaries enroll in
Medicare+Choice plans. Predictable and accurate payments are essential
to patient protection, provider financial stability, and the ability of
health plans to serve more markets.
vi. conclusion
There are numerous other BBA implementation problems that impact
reimbursement and Medicare+Choice plan operations. We have attached as
an exhibit to this testimony a brief description of some of these
issues. The risk adjuster must be considered in the context of all of
the implementation problems because their cumulative effect seriously
threatens the viability of the Medicare+Choice program.
In addition to the specific recommendations mentioned above,
PacifiCare proposes a further delay in implementation of the risk
adjuster until the following conditions are met:
1) A fair methodology is developed;
2) Adequate HCFA information systems are in place to ensure complete
and accurate data; and
3) A stable, predictable, and timely process is established for
determining risk-adjusted payment rates in a budget-neutral
manner.
PacifiCare appreciates this opportunity to present this testimony
to the Subcommittee. We look forward to continuing to work with
Congress and HCFA to ensure the successful implementation of the
Medicare+Choice program.
Mr. Bilirakis. Thank you, sir.
Ms. Margulis.
STATEMENT OF HEIDI MARGULIS
Ms. Margulis. Thank you, Mr. Chairman. In 1997,
Congressional leaders had a vision. To deliver more health care
benefits to Medicare beneficiaries at lower cost by providing
them with the same kinds of private health care choices you and
I have. Mr. Chairman, members of the committee, I am Heidi
Margulis, I represent Humana, a company who covers 500,000
Medicare+Choice beneficiaries.
Beneficiaries for whom we are privileged and proud to be
providing more benefits, including prescription drug coverage,
preventive services and disease management programs that are
demonstrably improving the health and well-being of those
seniors.
We support your vision and the goals of the BBA and are
here to discuss how the proposed risk adjustment payment
methodology affects Medicare beneficiaries blurs the vision you
had in 1997.
Let me state for the record, Humana supports risk
adjustment done correctly. I have three key messages today
about the risk adjustment methodology. First, HCFA should adopt
a risk adjustment methodology that reflects the perspective
health care needs of patients. Second, HCFA's current risk
adjustment proposal is based on insufficient data that will
cause seniors harm and should be re-evaluated prior to
implementation.
And last, Congress and HCFA should delay this risk
adjustment proposal and set a course to implementing one with
adequate and supportable data. The new risk adjustment proposal
which reduces payments to plans by billions more than you
intended will have significant consequences on the availability
of M+C Plans for seniors. This proposed payment reduction comes
on the heels of three other significant payment reductions,
both intended and unintended; an 8-percent reduction relative
to fee-for-service, payment reductions due to the removal of
graduate medical education, and the payment of user fees for
beneficiary information materials.
Risk adjustment methods can be implemented either to save
money or in a budget neutral manner. The method HCFA plans to
use does indeed save money for Medicare, but it does so by
taking the money out of the pockets of beneficiaries by
unnecessarily reducing payments and undermining seniors access
to choice.
The combination of risk adjustment and these payment
reductions together may lead to more health plans withdrawing
from the program leaving some seniors with fewer or in some
cases, no Medicare HMO choices. I don't believe that was your
intent and I urge you to evaluate the current proposal for risk
adjustment. There are reliable and accurate ways to develop
risk adjusters that correctly reflect the future health care
costs of beneficiaries. Humana previously worked with the State
of California in developing risk adjusters for the health
insurance plan of California, the HIPC.
Experience taught us that cooperation, communication and a
simulation for any major payment change, worked for both
government and beneficiaries. We have been involved in risk
adjustment work group discussions with HCFA for some time and
have shared perspectives on the effect of various risk
adjustment models and how the private sector risk adjusts. We
believe that together we can develop a workable risk adjustment
methodology to ensure that payments to plans are accurate and
truly reflect the future health care costs of our members.
We need time and HCFA's continued cooperation and
understanding of what will and will not practically work in the
market place and ask for your assistance in that. In my written
testimony and others, you have heard about the complications
caused by HCFA's proposed methodology. Let me highlight just
one. Current model relies exclusively on in-patient hospital
data. No data on services provided outside the hospital or in
other institutional settings are used.
Therefore it rewards hospitalizing patients, a trend that
has dramatically changed over the past several years. Private
health plans work to keep people out of the hospital by
stressing prevention and the best practices of disease
management. As a Humana example, we are recognized nationally
as a leader in disease management programs from diabetes to
complex chronic conditions to chronic heart failure.
As part of these programs members collaborate with their
caregiver to coordinate care, hopefully avoiding
hospitalizations. Patients like these programs and health
outcomes are measurably improved. These trends should be the
mainstay for the Medicare+Choice Program as well. The
methodology proposed by HCFA penalizes plans that have these
disease management programs because there will be fewer
hospitalizations.
Disease management programs aren't free, we bear the cost
of these innovative treatment programs. Based on our
experienced in our congestive heart failure program, we expect
to reduce an estimated 2,300 hospital admissions for our 4,000
beneficiaries enrolled in this program. Under the new
methodology, we will lose $12,000 per admission, a $28 million
loss which could translate into--may I, I am close to the end.
Mr. Bilirakis. Please continue.
Ms. Margulis. [continuing] In prescription drug coverage
for all seniors in a market. Congress and HCFA should take
additional time to determine a risk adjustment method. I urge
you to delay the implementation of this proposed risk
adjustment methodology for at least 1 year and stop the phase
in of a flawed system. Become an active participant in helping
us get this done correctly for the 6 million seniors who have
made this choice and for those who wish to make this choice.
Thank you.
[The prepared statement of Heidi Margulis follows.]
Prepared Statement of Heidi Margulis, Vice President of Government
Affairs, Humana, Inc.
Introduction
Good morning, Mr. Chairman. I am Heidi Margulis, Vice President of
Government Affairs at Humana, Inc. I am pleased to be here this morning
to talk with you about the effects of risk adjustment on
Medicare+Choice organizations. Humana has been an active participant in
the Medicare program since the mid 1980's--we currently provide
coverage for over 500,000 Medicare+Choice enrollees and are committed
to continued participation in this program. We have also been active in
the discussions that have occurred between managed care plans and HCFA
on the topic of risk adjustment.
One of HCFA's goals in implementing a risk adjustment system
\1\,\2\ for Medicare+Choice is to ensure that Medicare
payments to health plans are accurate and that they reflect the health
care needs of enrolled members. We believe that this is a laudable goal
and are committed to working with HCFA and other interested parties in
this endeavor. Payments that are risk adjusted based on health care
diagnostic data appear to be, on the surface, an improvement over the
current methodology, but only if designed fairly and implemented
correctly. My testimony addresses the issues that Humana has identified
and the potential effects of risk adjustment on Humana's 500,000
enrollees, and the Medicare+Choice program.
---------------------------------------------------------------------------
\1\ Iezzoni, LI, et al. ``Paying more fairly for capitated care,''
New England Journal of Medicine, 339(26), December 24, 1998, pp. 1933-
38.
\2\ Medicare+Choice Rates--45 Day Notice, http://www.hcfa.gov/
stats/hmorates/45d1999/45d.htm.
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Risk Assessment and Risk Adjustment
It may be helpful to first describe the difference between risk
assessment and risk adjustment. Risk assessment is a means of
determining objectively how much an individual or a subgroup differs in
cost from the average of the entire group. Individuals who are
projected to incur more costs for medical services are considered
relatively high risks (and, thus, have higher risk scores) than those
who are expected to incur lower costs.\3\ Risk assessment can be
accomplished using only demographic data, with diagnostic information,
or through use of health status surveys.
---------------------------------------------------------------------------
\3\ See ``Health Risk Assessment and Health Risk Adjustment,
Crucial Elements in Effective Health Care Reform,'' Monograph Number
One, American Academy of Actuaries, May 1993 for a more detailed
explanation.
---------------------------------------------------------------------------
Risk adjustment may be called ``health-based payment.'' It is a
process that can be used to determine the amount of funds that should
be allocated to account for the differences in risk characteristics.
While all covered individuals should be allocated a ``base'' or minimum
payment, only for those enrollees with high risk characteristics should
a health plan receive additional risk adjustment transfers.
Brief Actuarial History of Risk Adjustment
Health plan actuaries have been using various forms of risk
adjustment for years for pricing premiums for health insurance
coverage. Age/sex rating, experience rating, and tier rating have been
components of the methods used to determine premiums to be charged for
a specific category of individuals. The insurance industry's practice
of health underwriting has been based on the ability to appropriately
project next year's costs based on current claims experience (for large
employer groups), or on past medical conditions along with age and sex
(for individuals), or on a combination (for small employer groups).
This type of cost and illness information has been used in a way that
is generally similar to how the new health risk adjustment methods
operate.
Humana has had actual experience with some of the early adopters of
risk adjustment methods. One of the best-designed early ``natural
experiments'' was the Health Insurance Plan for California (the
``HIPC''), a small group purchasing pool.\4\ The HIPC implemented an
inpatient-data risk adjuster for the 1996/97 contract year, after two
years of development and simulation. Humana's small employer division,
Employers Health Insurance, participated in the HIPC as one of two
original PPOs and was actively involved in the design and
implementation of the HIPC's risk adjustment method. Humana and the
HIPC learned several lessons as we progressed from the ``good idea''
stage to full implementation, including:
---------------------------------------------------------------------------
\4\ Bertko, J. and Hunt, S. ``Case Study: The Health Insurance Plan
of California,'' Inquiry, 1998, 35:148-153.
A full and open process between vendors (health plans) and the
payment agency (the HIPC's parent, California's Managed Risk
Medical Insurance Board) was very helpful in designing a
practical method;
Any new data collection process will have flaws which only
``trial and error'' can uncover and which can then be
corrected; and
A simulation period for a brand new payment method is
invaluable for learning the details of the approach and for
evaluating the ``real world'' impact (on premiums and
behavior).
What HCFA Did--Right and Wrong
I will turn now to a few specific comments about the proposed risk
adjustment system. In its efforts to implement a risk adjustment
system, HCFA has considered and responded to several critical issues.
First, HCFA realized that given a January 1, 2000 implementation date,
the use of inpatient data (while imperfect) is the only practical
option. Second, HCFA has adopted a prospective payment method, using a
6-month data lag. This means that payments to a health plan will be
made based on information that at most is between 6 and 18 months old.
Third, HCFA plans to implement the system using a ``back-loaded''
transition approach, somewhat limiting the degree to which health plan
payments are affected in the early years of the transition period.
The system that HCFA plans to implement uses the Principal
Inpatient Diagnostic Cost Group (``PIP-DCG'') model, which groups
diagnostic data according to expected cost.\5\ This model has been
extensively tested on Medicare fee-for-service data alone. However, it
relies exclusively on inpatient hospital data; no data on services
provided outside the hospital are used. There are several shortcomings
to a system that uses only inpatient data, including a payment bias
against Medicare+Choice plans.
---------------------------------------------------------------------------
\5\ Ellis, RP, Pope, GC, Iezzoni, LI, et al. ``Diagnosis-based risk
adjustment for Medicare capitation payments,'' Health Care Financing
Review,'' 17(3), 1996, pp. 101-28.
---------------------------------------------------------------------------
Many managed care organizations have implemented programs to treat
patients on an outpatient basis when appropriate. For example, Humana
has developed several disease management programs for our enrollees--
ranging from asthma to diabetes to complex chronic conditions to
congestive heart failure. As part of these programs, our health plan
enrollees collaborate with their caregivers to manage their care, often
eliminating or shortening inpatient stays and improving health status.
High levels of patient satisfaction are associated with these programs
as well as reduced costs. When health plans implement programs that
manage care and keep enrollees out of the hospital, they bear the full
cost of those programs. Without such programs, enrollees would be more
likely to be hospitalized, an outcome that is costly and unnecessary as
the hospital may no longer be the most effective setting for such care.
The PIP-DCG risk adjustment method penalizes plans that have such
disease management systems because such plans will have fewer inpatient
admissions.
The proposed risk adjustment system also excludes ``short''
hospital stays, those that are shorter than two days. In so doing, HCFA
again penalizes those health plans that are able to provide treatment
during a short inpatient stay. As an example, an individual with a
particular diagnosis who is enrolled in Medicare FFS must be
hospitalized for three days prior to discharge to a sub-acute care
facility. An individual with the same diagnosis enrolled in a
Medicare+Choice plan may be hospitalized for only one day, then moved
to a sub-acute facility (which is not part of the inpatient hospital).
The Medicare+Choice plan would not receive any additional payment for
the treatment of this individual, since the patient did not have a
qualifying inpatient admission.
There is a similar problem for conditions that can be treated
equally well on an inpatient or outpatient basis--so called
``discretionary diagnoses.'' In these cases, health plans are only paid
if the condition is treated on an inpatient basis. While the PIP-DCG
system does make some effort to exclude such cases,\6\ some
discretionary diagnoses are still included on the final list of
diagnostic groups that lead to additional payment above the base
payment amount such as many types of congestive heart failure. It is
unlikely that there will be a large scale effort on the part of health
plans to move care back into the hospital to increase payment. However,
a very real potential effect is that health plans will be less likely
to be innovative--either to invest in new disease management programs
or in new technologies that would allow patients to be treated on an
outpatient basis.
---------------------------------------------------------------------------
\6\ Iezzoni, LI, et al. ``Paying more fairly for capitated care.''
---------------------------------------------------------------------------
There are also technical shortcomings to the proposed risk
adjustment system. First, there is a difference in the time period used
to calibrate the PIP-DCG model and what will actually be used to pay
health plans. The current model was developed using data from one
calendar year to predict expenses for the immediate next calendar year
(i.e., calendar 1995 data were used to predict calendar year 1996
expenses). In HCFA's 45-day notice,\7\ a 6-month time lag for the
actual implementation of the PIP-DCG model is described--this model
will use data from a 12-month period (July 1-June 30) to predict
expenses for the year beginning six months later (i.e., data from July
1, 1998-June 30, 1999 will be used to predict year 2000 expenses) using
the original, ``no lag'' risk weights. A more appropriate technical
solution would be for a different set of risk weights to be used; these
weights would be calibrated to incorporate the 6-month time lag.
---------------------------------------------------------------------------
\7\ Medicare+Choice Rates--45 Day Notice, http://www.hcfa.gov/
stats/hmorates/45d1999/45d.htm.
---------------------------------------------------------------------------
Another technical issue relates to the criteria that were used to
determine whether a particular diagnosis would be included in the group
of diagnoses that lead to increased payments for health plans. To be
included, at least 1,000 beneficiaries in the original sample had to
have the diagnosis. Such a decision rule helps to stabilize payments in
the model; however, by setting a minimum threshold, admissions with
very high costs may be excluded and plans will not receive any
additional payment for these very high cost cases.
Risk Adjustment Implementation Issues
There are several important issues related to the implementation of
the proposed risk adjustment system. One of the reasons we are
reluctant to have risk adjusted payments implemented this year is that
we have received insufficient information from HCFA on the details of
the risk adjustment process. For plans to have confidence in the risk
adjustment system that HCFA implements, we must be able to understand
the system and be able to replicate HCFA's results. To this end, we
believe that HCFA must disclose all of the formulas used in the risk
adjustment process--we cannot replicate results given with the
information we have received thus far.
To date, HCFA has not disclosed all of the formulas used for the
various components of the risk adjustment process even though plans
have asked for this information for several months. As one example, a
re-scaling factor is used to transform the current AAPCC county
ratebook into the new risk county ratebook that forms the basis for
calculating an individual's risk-adjusted payment. Thus far, HCFA has
only provided a brief description of this formula--not all the
components of the formula. Months ago, the American Association of
Health Plans (AAHP), the industry's trade association, and others
submitted to HCFA a list of desired information that would allow plans
to make the same kinds of calculations that HCFA is making. A summary
of the types of information needed is included in one of the
attachments to this testimony.
HCFA has indicated that when it does release data to the health
plans on March 1st, it will do so on a summary basis. Again, this will
not allow plans to compare their own results with those of HCFA--the
plans need individual data to determine whether they are using the same
data and whether they are applying the risk adjustment technology
appropriately. We understand that HCFA has faced a daunting time
schedule in attempting to implement a risk adjustment system for
January 1, 2000 and believe that they could do more to disclose
relevant information to health plans if they had more time.
Many of the key implementation issues relate to the gathering,
transmission, and analysis of data. Each health plan submits its data
to a fiscal intermediary, which in turn submits the data to HCFA. To
date, plans have not been able to confirm that the data submitted to
HCFA are being transmitted, received and used correctly or whether
there are other systems' issues HCFA has identified. If there are HCFA
or fiscal intermediary systems problems that need to be fixed, plans
are concerned those fixes may be delayed due to Year 2000 compliance
issues. There may be as yet undetected problems in the data transfer
process, potentially leading to incorrect payments to plans.
While Humana is generally pleased with the performance of its
Fiscal Intermediary, Palmetto Government Benefit Administrators, we
have had to work out several time-consuming processes to understand the
nature of the Medicare FFS edit ``error messages'' that became part of
the process. This happens, we believe, because HCFA is forcing the
``square peg'' of managed care data into the ``round hole'' of a Fiscal
Intermediary's FFS information system. Here are just a few of our
issues:
Inability to obtain a relevant list of error codes. If we had
obtained a list with the coding logic that creates an error
message, we would correct the problems at the source of the
error and avoid further submissions with these so-called
errors.
The Fiscal Intermediary provides errors grouped in an almost
useless format--by provider. We need to have a more ``user-
friendly'' or managed care-relevant error report--such as
returning our own list with the error reason annotated in the
same format.
There are a lot of claims--Beginning March 1, we will be
submitting encounter data in batches of 11,000 every two
weeks--because of capacity constraints at the Fiscal
Intermediary. Humana is being forced to build a special program
just to organize the error list electronically to allow
reconciliation and correction.
The HCFA contractor that combines all of the Fiscal Intermediaries'
claims has its own turnaround and through-put issues. As reported to me
by our staff, error edits can take between one day and three weeks for
each batch. The process of informing us of errors is incredibly
inefficient, as demonstrated by the following:
The HCFA contractor ``kicks out'' one error at a time on a
claim and then returns it. When corrected for that specific
error, the contractor may then find another error on the same
claim and return it again. This process is repeated until all
codes on a claim have been accepted.
Each separate error requires a new claim line, which then
clogs up our claim system with unnecessary claims history.
We cannot obtain the logic behind the edits to identify and
fix the source of the errors and are forced to continue this
awkward, time-consuming, and costly process. This is just one
example of where resources are used for unnecessary
administrative costs rather than for patient care.
There are related problems with HCFA's own system (Common Working
File). We received a 22,000-page report to be reconciled. Although most
of these claims were accepted, we understand that some of the remainder
may have ``disappeared.''
These are just a few examples of our frustrations and concerns
about the start-up phase of this new data collection process. While
HCFA has made a valiant attempt to prepare for start-up, there are
still too many unresolved issues. Among them, our Chief Financial
Officer must ``attest'' to the accuracy of our data submissions. He
takes this responsibility seriously and is greatly concerned about the
remaining problems. Second, any loss of data unfairly penalizes health
plans since most hospital admissions create additional payments for
sick members. Missing data means reduced payments in 2000. Each
qualifying missed claim represents approximately $1,900 to $26,500.
Phase-In of Risk Adjustment
HCFA included a phase-in schedule for the risk adjustment system. A
transition approach has a long history in the Medicare program--such
rules were used for the implementation of Medicare's Prospective
Payment System (PPS) and Resource-Based Relative Value System (RBRVS).
During the transition for PPS, for example, hospitals received a blend
of a hospital-specific payment rate and a Federal payment rate. In the
first year of the transition, hospital payments were more heavily
weighted toward the hospital's own costs, while toward the end of the
transition, hospital payments were more heavily weighted toward the
Federal payment rate.\8\
---------------------------------------------------------------------------
\8\ 1986 Annual Report to Congress: Impact of the Medicare Hospital
Prospective Payment System, Health Care Financing Administration, May
1989.
---------------------------------------------------------------------------
Effects of Risk Adjustment
As many Subcommittee Members and staff may know from a HCFA
briefing on January 14, 1999, preliminary estimates by HCFA analysts
indicate that HCFA's fully phased-in PIP-DCG risk adjuster would reduce
payments to health plans for the 195 plans that were measured.\9\ It
must be noted that a risk adjustment method can be designed to be
budget-neutral; HCFA, however, has released a method that apparently is
intended to reduce payments to health plans even further than intended
by Congress.
---------------------------------------------------------------------------
\9\ Presentation to Congressional staff by the Health Care
Financing Administration on January 14, 1999.
---------------------------------------------------------------------------
There are two main issues related to the impact on health plans:
(1) Should the new risk adjuster be budget neutral? and (2) Are the
results of PIP-DCG risk adjustment method biased because of the
reliance on only inpatient data?
Although HCFA analysts and other researchers \10\ have previously
submitted studies using Medicare Fee For Service data indicating
concerns about overpayment of health plans in excess of 10%, HCFA's own
impact assessment using actual preliminary health plan data showed a
payment reduction of 7.6% for a typical month. Because this analysis
used the initial submission of somewhat incomplete admission data, the
actual payment reduction impact is likely to be less than 7% with
better data. Reducing the PIP-DCG method's biases would likely
eliminate more of the preliminary estimate of overpayment.
---------------------------------------------------------------------------
\10\ Brown, R.S., Bergeron, J.W., Clement, D.G., Hill, J.W., and
Retchin, S.M., ``Does Managed Care Work for Medicare? An Evaluation of
the Medicare Risk Program for HMOs,'' Princeton, NJ: Mathematica Policy
Research, Inc., December 1993.
---------------------------------------------------------------------------
Some or all of this overpayment issue has already been addressed.
Implementation of a risk adjuster that is not budget-neutral would be
the sixth reduction in payment to health plans relative to FFS
Medicare. The first reduction is the long-established 5% reduction in
the payment to health plans relative to the average FFS payment--a
reduction that is continued through use of the 1997 county ratebooks
under the BBA. This reduction was originally made to assure savings in
the Medicare Risk program. The second reduction is the five year phase-
in of a ``growth reduction'' of 2.8% under BBA, which is an arbitrary
payment reduction. The third reduction, while not intended as a
reduction, is related to decreasing the geographic payment disparity
between high and low cost counties which affects counties where the
majority of beneficiaries reside. The fourth reduction is reduced
payments to FFS providers--an indirect reduction--and the fifth
reduction, also not intended to be a reduction, is the unfair
imposition of a ``user fee'' to cover the cost of beneficiary education
materials for all beneficiaries--not just those in managed care.
Finally, HCFA has proposed a risk adjustment implementation that
further reduces payments to Medicare+Choice contractors, rather than
using risk adjustment to allocate proper funding to health plans that
enroll sicker members. We strongly recommend that risk adjustment be
implemented on a budget-neutral basis to avoid ``double jeopardy'' of
multiple payment reductions.
The other major issue is the bias against managed care health plans
through use of HCFA's version of the PIP-DCG method. There are several
areas where this bias will have an effect on payments. The following
are examples:
HCFA's elimination of ``short stay'' admissions from the PIP-
DCG model payments. Humana, like most Medicare+Choice
contractors has successfully reduced the length of stay at
acute facilities. The elimination from payment ``scoring'' of
hospital stays of less than two days penalizes health plans
that have reduced hospital costs. For Humana's senior and
disabled members, 22% of hospital visits were in the ``short
stay'' category, based on a recent study. While many of these
stays will be for less serious conditions, the effect of the
elimination was approximately a 1.5% reduction in payment. In
contrast, there is much less incentive in Medicare FFS to
achieve significant reductions in length of stay given
Medicare's requirement of a 3-day stay prior to discharge to a
sub-acute care facility.
HCFA's inclusion in PIP-DCG payments of certain conditions
that are more commonly treated in FFS medicine by an inpatient
admission. There is a wide variation in treatment practice
across the U.S.\11\ and great efforts by health plans to
appropriately treat members in the lowest cost setting. Since
this setting is more frequently an outpatient clinic or
physician office, conditions that are ``site-of-treatment
discretionary'' should be moved to the ``base'' payment
category, so health plans are not penalized (by failing to
trigger additional payments associated with a PIP-DCG group)
through shifting patients to these less expensive ambulatory
sites. Using definitions of discretionary conditions from an
older study by members of the DCG research team,\12\ our
consultants found that keeping these discretionary conditions
in the PIP-DCG model could reduce payments to health plans by
1% to 3%.
---------------------------------------------------------------------------
\11\ Wennberg, J.E., Freeman, J.L., Shelton, R.M., and Bubolz,
T.A., ``Hospital Use and Mortality among Medicare Beneficiaries in
Boston and New Haven,'' New England Journal of Medicine, 321(17):1168-
73, October 26, 1989.
\12\ Ellis, R., and Ash, A. ``Refining the Diagnostic Cost Group
Model: A Proposed Modification to the AAPCC for HMO Reimbursement,''
February 1988, report prepared for the Health Care Financing
Administration.
---------------------------------------------------------------------------
A perverse incentive created by use of only inpatient
admissions rather than more complete diagnostic data. Humana
recognizes the practical need to begin risk adjustment with
only inpatient data. While pragmatic issues may mandate the use
of an inpatient data method at the start, health plans should
not be penalized at every decision point. If some of the biases
can be corrected, then health plans will be paid more
appropriately for providing care in a cost effect manner.
We would point out that this practical approach penalizes the
``good deeds'' that health plans accomplish, such as preventing heart
conditions. For example, Humana has over 3,900 members in a disease
management program to prevent or reduce Congestive Heart Failure (CHF).
Our specialists estimate that 60% of admissions linked to CHF can be
eliminated--therefore, we hope to eliminate all admissions next year
for 2,300 of the 4,000 seniors in the program. However, if all these
members are Medicare+Choice members, we will then lose about $12,000
per admission by not triggering the additional payment for PIP-DCG 16--
for a total of about $28 million. On a per-person basis in the region
affected, reimbursement would be reduced by about $100 per member per
year. We may need to reduce members' prescription drug benefits by
nearly 33% to offset this revenue loss.
Possible effects of inappropriate implementation of risk adjustment
on our Medicare+Choice enrollees could be significant. While the phase-
in reduces concerns in the first year, the amount of payment reduction
that may be incorrect in the second year is frequently greater than a
health plan's entire profit/surplus margin. One or more consequences
will occur: health plans will reduce supplemental benefits, premiums
will be charged or increased, or health plans will exit counties that
are currently marginal or difficult markets. The recent study in JAMA
about ``spillover'' effects of Managed Care points out the savings that
would be eliminated from FFS Medicare without the beneficial presence
of health plans.\13\
---------------------------------------------------------------------------
\13\ Baker, L. ``Association of Managed Care Market Share and
Health Expenditures for Fee-for-Service Medicare Patients,'' Journal of
the American Medical Association, 1999, 281: 432-437.
---------------------------------------------------------------------------
Administrative Cost Concerns
The cost of adapting to risk adjustment is just one of many
administrative costs resulting from the Balanced Budget Act (BBA).
Although Humana has begun to estimate these costs, we continue to
collect and submit new data, adapt our rating and budget processes,
revise provider contracts, products, enrollment systems and
communication materials, collect data for newly mandated clinical
studies and train providers and staff. To provide some idea of the
magnitude of the administrative costs, we turn to the issue of provider
contracting. Humana has over 128,000 separate providers of all types--
physicians, hospitals, labs, DME vendors, etc. Because of BBA changes,
we are in the process of re-contracting with a significant number of
those providers--providers in whose offices we are concurrently
auditing medical records for the purposes of HEDIS and clinical studies
and securing data to meet regulatory requirements for physician
incentive arrangements. The average cost of just re-contracting runs
about $34 per hour and 3 hours of effort, for an average contract cost
of roughly $100. Including the costs for drafting and regulatory agency
filing of contract forms, we estimate provider re-contracting costs
will exceed $3.2 million.
Beyond risk adjustment, the HCFA's BBA regulations have imposed
extensive new requirements for oversight, additional clinical studies
for quality measurement, and other compliance requirements. As an
example, the two required Medicare clinical studies for each Humana
Medicare+Choice plan requires an expenditure of $75,000 per plan for
data collection alone. Current accreditation costs for Humana requires
an expense of between $300,000 and $1.5 million.
Request for Deferral of Risk Adjustment
We would ask that risk adjustment using inpatient data for the
Medicare+Choice program be deferred for at least one year due to lack
of disclosure of necessary methodological and formula-related
information to plans, data collection issues, known and unknown HCFA
and Fiscal Intermediary systems issues and the potential adverse
effects this payment method could have on beneficiaries and health
plans. To date, health plans have submitted detailed claims data to
HCFA and HCFA is in the process of analyzing those data. As you may
know, due to provisions in the Balanced Budget Act of 1997, Medicare
payments to health plans have increased in many counties by only 2% in
the previous two years, a level below the cost increases that many
health plans have experienced. As a result, increased payment
uncertainty due to a new risk adjustment system will exacerbate what is
already a difficult situation for many health plans. Some plans have
already decided to discontinue participation in the M+C program in one
or more counties. In spite of the phase-in of risk adjusters, it is
likely more plans will go this route in the next two years if the PIP-
DCG risk adjustment system is implemented on the current schedule.
As an alternative to implementation of the proposed system on
January 1, 2000, we suggest that over the next year, HCFA continue to
analyze data submitted by the health plans and conduct a simulated risk
adjustment. This would allow hospitals, health plans, HCFA and its
contractors enough time to improve their data reporting systems so as
to ensure proper payment. A similar timeframe for implementation was
used in California for the Health Insurance Plan of California (HIPC),
a small-group purchasing cooperative.\14\ We strongly believe that a
simulation of risk adjustment over the next year would provide
invaluable information to participating health plans and to HCFA.
---------------------------------------------------------------------------
\14\ Bertko, J. and Hunt, S. ``Case Study: The Health Insurance
Plan of California.''
---------------------------------------------------------------------------
Conclusion
Humana supports the move towards a risk-adjusted payment system but
only after several key risk adjustment method issues are resolved and
data collection processes are improved significantly. We urge you and
HCFA to defer implementation of the new risk adjustment system for at
least one year to allow this improvement. We understand that HCFA faced
a daunting schedule and believe that the Agency could do more to
disclose relevant information to health plans if it had more time. As
an alternative to implementing the proposed system on January 1, 2000,
we suggest that over the next year, HCFA continue to gather and analyze
data submitted by the health plans, conduct a simulated risk
adjustment, and work towards improving the entire data process. This
would allow all parties sufficient time to improve their data reporting
systems so as to ensure proper payment. We strongly believe the
additional time would allow health plans and HCFA to obtain valuable
experience and information, allowing all to have greater faith that the
new risk adjustment system is an improvement and is being implemented
correctly.
This concludes my prepared testimony. I would be happy to answer
any questions you may have.
Request for Data to Understand HCFA's Proposed PIP-DCG Risk Adjustment
Method
Risk adjustment is correctly recognized as a major change in
payment methodology. As such, all components of the method must be
fully understood by health plans as well as HCFA. At this point, the
conceptual components of the method have been published and are
beginning to be understood. However, many of the calculations and much
of the underlying data remain in the ``black box'' used by HCFA. The
HMO industry requires access to all of the calculations and data,
including access to all of the demographic data now used (e.g., data on
the new ``originally disabled'' status), diagnostic data needed to
create the PIP scores and the calculations which create the ``re-
scaling'' factors needed to convert the current AAPCC county ratebook
into the new county ``risk'' ratebooks.
Data, Formulas and Examples Required
The following data, formulas or examples are needed to fully work
through the risk adjustment method and its implementation process:
1. HCFA should provide a detailed illustration of every formula and
calculation used to determine the results of applying the risk
adjustment method. For example, HCFA should provide examples of
calculations for health plans in five counties (e.g., large
urban county, suburban county, rural county, and very small
rural county) showing exactly how the rescaling factors are
calculated and how the risk scores of illustrative health plans
would be calculated.
2. HCFA should provide detailed descriptions of how the various BBA
provisions (e.g., the floors, blend, removal of GME and budget
neutrality) will apply to the two separate rate books (the
``old'' AAPCC and the new risk ratebooks) and provide examples
of when one ratebook would replace another (e.g., if the floor
using the new risk ratebook would be larger than the floor
using the old AAPCC ratebook).
3. HCFA should provide access to all the Fee For Service demographic
information in a county (in a confidential format) so that
health plans can replicate the rescaling factor calculations.
This would include providing appropriate designation of
``originally disableds,'' Working Aged, Medicaid eligibles
(under both the old and new rules) and institutionalized (under
the old AAPCC rules) in a format that would allow health plans
to calculate the old county ratebook portion of the rescaling
factor and the demographic components of the new county risk
ratebook.
4. HCFA should provide access for several counties (e.g., 10 counties
in various geographic regions) to the full diagnostic data that
were used to calculate the PIP-DCG scores for those counties.
While this data may be part of the very large 100% Medicare FFS
data set that is available, providing the 10-county amount in a
useable format and size would be very helpful. In addition, it
would be useful to have HCFA provide the actual calculation
illustrations for each of the 10 counties (i.e., the
distribution of PIP-Groups and diagnoses as an intermediate
step to allow confirmation of the results).
5. HCFA should provide access to all of the demographic data of a
health plan's own members required to compute the PIP-DCG
scores under the new method. At this time, health plans do not
have access to records regarding ``originally disabled'' status
and prior Medicaid status (in some cases, such as recent
enrollees). In addition, Working Aged status is generally not
well-documented. We would like to obtain a better idea of how
the Working Aged files are maintained.
6. HCFA should provide any impact analysis of removing short stays
(i.e., admissions of less than two days length) and a list of
diagnoses that are disproportionately affected.
7. HCFA should provide detailed illustrations and data for the
development of the ``new beneficiary'' category of payment
factors.
8. HCFA should provide more detail about the kinds of data transmission
and analysis problems that have emerged for each health plan's
data submission. Because of anecdotal evidence, many health
plans have concerns that data were submitted, collected,
transmitted or analyzed in an inadequate manner. To date, the
very brief summary letter mailed by HCFA on December 11, 1998
is somewhat helpful in understanding the magnitude but of very
little help in finding and focusing on one-time or systematic
problems.
9. HCFA should provide a briefing on any data backlog problems that
have surfaced at any of the six Fiscal Intermediaries, at
HCFA's risk analysis contractor or at the agency itself.
The following chart provides a summary indication of the kinds of
data and calculation illustrations still likely to be needed after
March 1st.
Data and Information Needed from HCFA for Risk Adjustment Analysis
----------------------------------------------------------------------------------------------------------------
Data/Information Needed Available 1/15? Available 3/1? Available 1/1/2000?
----------------------------------------------------------------------------------------------------------------
Detailed description of every No..................... No..................... No
procedure and step of risk
adjustment calculations used by HCFA.
Detailed description and examples of No..................... No..................... No
how HCFA is interpreting BBA
provisions for floors, blending, 2%
min. etc.
Electronic data file for all FFS No..................... No..................... No
demographic data for each county,
including Medicaid, institutional,
originally disabled, and Working
Aged statuses to allow checking of
the demographic portion of the re-
scaling factor.
Electronic file for all FFS members Partial--only provided N/A.................... N/A
PIP scores to allow checking of the county relative risk
risk portion of the re-scaling scores; may need to
factor. have an audit
procedure.
Electronic data file for demographic No..................... Summaries only--perhaps A member-by-member PIP
data for all health plan members for and demographic score
each county, including Medicaid, for currently enrolled
institutional, originally disabled, members
Working Aged statuses.
Impact analysis of eliminating one- May be able to analyze No..................... No
day stays: types of diagnoses and try to assess.
eliminated and the impact.
Detailed description, data and No..................... No..................... No
examples to allow health plans to
replicate calculation of the re-
scaling factors.
More detailed information about data No, other than the No..................... No
problems and quality of data (e.g., 12/11/98 letter
comparisons of frequencies of
diagnoses) for health plan submitted
data.
Information about backlog and No..................... No..................... No
transmission problems at the Fiscal
Intermediaries or into HCFA systems.
Detailed description of the method Very short description No..................... No
and calculations used to determine provided.
the ``neutral'' demographic factors
for new Medicare entrants.
----------------------------------------------------------------------------------------------------------------
Mr. Bilirakis. Mr. Bertko, please proceed, sir.
STATEMENT OF JOHN BERTKO
Mr. Bertko. Good afternoon, Mr. Chairman and members of the
committee. My name is John Bertko and I appreciate the
opportunity to provide you with information about my experience
with risk adjustment using HCFA's proposed Principal Inpatient
Diagnostic Cost Group or PIP-DGC method.
I am a Principal with Reden and Anders, an actuarial
consulting and data analysis firm which is part of Ingenix, the
information division of United Health Group. Over the past
year, Reden and Anders has analyzed the affects of risk
adjustment for many clients, including 15 large Medicare+Choice
Contractors operating in 40 markets. I will be drawing upon
that experience today to provide an actuary's perspective on
the effects and issues associated with the proposed risk
adjuster.
In my opinion, risk adjustment using diagnostic data
represents a step forward in making appropriate payments to
Medicare+Choice Contractors. Technically, payments using health
risk adjusters are somewhat more accurate than the current
method. With a risk adjusted system, health plans will be paid
more for individuals with health problems and less for healthy
individuals.
Also, use of risk adjustment helps achieve the policy goal
of better matching payment to the needs of the covered
population. Under this PIP-DCG method, most enrollees will be
assigned to the healthy or base category. This means that
health plans will receive a base payment amount of
approximately $5,000. Then HCFA will analyze each enrollees
medical encounters over the previous year to see if that
enrollee had an admission that falls into one of the 15 PIP-DCG
categories that increase payments.
A qualified in-patient admission then creates a PIP score
that is worth from $2,000 to $26,000 more in additional
payments. Now, because the PIP-DCG method relies exclusively on
in-patient data, as mentioned by most speakers today, it should
be considered only a first step. Analysts and Actuaries
recognize the bias inherent in a payment method that uses only
in-patient data since payments to health plans are reduced for
keeping members out of the hospital.
However, in an in-patient data method is really the only
practical first step and should be acceptable, but only if
implemented with care. While I believe that the overall design
of the PIP-DCG model is appropriate, there are several
components of the model that should be re-examined because of
unnecessary payment bias. As one example, HCFA and others have
talked about that the decision to eliminate short stays, that
is admissions of less than 2 days.
Thus if a person with a heart condition is treated during a
1-day hospitalization and then sent to a sub-acute facility, no
payment other than the base payment is made. In fee-for-service
Medicare it is much more likely that this person will be
hospitalized for 2 days or more adding to the payment bias. The
second example involves conditions that can be treated either
on an in-patient basis or an out-patient basis, such as a
physician office or clinic.
Again, for any treatment that occurs in a non-hospital
setting, health plans will not receive any payment over the
base amount. An option would be for HCFA to remove some of
these discretionary conditions from the PIP-DCG model to reduce
the payment bias. Next, one of an Actuaries professional
requirements is that he or she be able to replicate the results
of another Actuary's work. At this point, I am unable to say
that I can perform a thorough replication of HCFA's work.
I agree with all of Mike Hash's statements earlier, but I
strongly recommend that HCFA produce full disclosure and have
open discussions with health plans and other interested parties
about more of the details. This involves disclosing all of the
formulas used for every component in the model and the research
reports used to create the model. Health plans need to be able
to fully test and understand the model's operation. Last,
implementation of the PIP-DCG model requires creation of a new
data transmittal an analysis process.
In this process, encounter data must be handed from
hospitals to health plans to fiscal intermediaries to HCFA like
a runner's baton. If this data baton is dropped anywhere along
the way, health plans then are automatically penalized through
payment reductions. There are many opportunities for errors and
break downs in the system. These include hospitals delaying
correction of in-patient data errors. Plans having difficulty
gathering data from capitated providers who pay their own
claims.
And many of the fiscal intermediaries having awkward or
very slow procedures in place to identify and report errors. My
experience as an Actuary in California, with Colorado, with
Washington State, is that risk adjustment can be done correctly
by taking the time necessary to have all the components working
right.
In summary, risk adjusted payments represent an improvement
over the current payment method, but only if the practical data
issues are first addressed and several components of HCFA's
model are re-examined. HCFA staff are really to be commended
for their hard work and moving toward implementation on such a
demanding timetable. I suggest, however, that implementation
not occur until HCFA and the health plans are satisfied that
all the data issues have been addressed and that several of
these biases are re-examined and removed. Thank you.
[The prepared statement of John Bertko follows.]
Prepared Statement of John Bertko, Principal, Reden & Anders, Ltd; San
Francisco
Good Morning, Mr. Chairman and Members of the Committee. I
appreciate the opportunity to provide you with information about my
experience with risk adjustment for health plans using the Principal
Inpatient Diagnostic Cost Group (or PIP-DCG) method. I am a consulting
actuary and Principal with Reden & Anders, Ltd., an actuarial
consulting and data analysis firm, which is part of Ingenix, the
information division of United Health Group. Reden & Anders' risk
adjustment clients include 15 large Medicare+Choice contractors with
operations in nearly 40 diverse markets. Over the past year, we have
been analyzing data from our clients, in an effort to help them better
understand how their payments for Medicare enrollees will change as a
result of the implementation of a risk adjustment system. I will be
drawing from this experience and providing an actuary's perspective on
the effects of and issues associated with the proposed PIP-DCG risk
adjuster.
Risk Adjusted Payments Are an Improvement over the Current Method
In my opinion, risk adjusted payments using diagnostic data
represent a step forward in making appropriate payments to
Medicare+Choice contractors. Technically, a payment system using health
risk adjusters is somewhat more accurate than the current payment
system. This is especially true for groups of individuals with more
health problems--in most cases, health plans will spend more to treat
these individuals and, as a result, deserve higher payments. Similarly,
for groups of healthy individuals, risk-adjusted payments to health
plans will be appropriately reduced. Use of risk adjustment also helps
to achieve the policy goal of better matching payment to the needs of a
covered population.
In any diagnosis-based risk adjustment method, each individual is
assigned a ``relative risk score'' based on his or her past illness
history. In comparison with the average risk score of 1.00 for an
entire population (both sick and healthy individuals), someone with a
heart condition may have a relative risk score of 3.0, which means we
expect the person to have expenditures that are three times the average
next year. By contrast, a healthy 70 year-old male may have a risk
score of .70, meaning that we would expect his expenditures for the
next year to be only about 70% of the average of the group.
Under the PIP-DCG method, most enrollees (i.e., those who do not
have a qualifying inpatient stay) will be assigned to the ``healthy''
(base) category. This means that health plans will receive a base
payment amount (approximately $5,000 for these individuals). The base
payment varies by age and gender, as well as by disability, welfare,
and working aged status. HCFA will analyze each enrollee's medical
encounters over the previous year to determine whether the enrollee had
an admission that falls into one of the 15 PIP-DCG categories with
increased payments. An inpatient admission creates a PIP-DCG score that
is worth from $2,000 to $26,000 per year in additional payments.
Because the PIP-DCG method relies only on inpatient data, it should
be considered a first step, or a ``Work in Progress,'' but an important
improvement over the current method--which uses only age, gender, and
status (disability, institutionalization, welfare or Working Aged
status) for payments. Other methods that use data from both the
inpatient and outpatient settings (``full'' data methods) are under
development and are being used in some settings (e.g., by the Buyers
Health Care Action Group in Minneapolis). HCFA has indicated that it
plans to use both inpatient and outpatient data for risk adjustment
beginning in 2004.
Analysts and actuaries recognize the bias inherent in a payment
method that uses only inpatient data, since Managed Care plans are
penalized for keeping members out of the hospital. However, an
inpatient data-based method is the only practical first step and should
be acceptable, if implemented with care. The inpatient method should
also be thought of as a natural transition to a method that uses both
inpatient and outpatient data. This is because the relative risk scores
that are calculated using only inpatient data are, generally, closer to
the average for the group (1.00) than risk scores calculated using
``full'' data methods, thus reducing the effects on payment to health
plans. On the other hand, health plans that successfully treat high-
cost conditions in an ambulatory setting will be penalized, since no
additional payment will be provided for high-cost individuals who have
not had an admission.
PIP-DCG Model Still Needs Refinement
While I believe that the PIP-DCG model overall is well-designed and
has been tested extensively on the Medicare population, there are
several components of the model that should be re-examined. As noted
above, any inpatient-data risk adjuster will be biased against Managed
Care plans because of their ability to eliminate some inpatient
admissions. Although this circumstance must be accepted during a
transition phase, other components of the HCFA model add to this bias.
As one example, HCFA has chosen to eliminate ``short stays'' or
admissions with a length of stay of less than two days from
contributing to an enrollee's risk score. Thus, if a person with a
heart condition is treated during one day and then sent to a Skilled
Nursing Facility, the health plan will receive only the base payment
for that enrollee, since the enrollee did not have a qualifying
inpatient admission. In FFS Medicare, it is much more likely that this
person will be hospitalized two days or more, adding to the payment
bias. Similarly, there are other conditions that can be treated either
on an inpatient basis or an outpatient basis (in a physician office or
clinic). Again, for any treatment that occurs in a non-hospital
setting, health plans will not receive any payment over the base
amount. The result would be that the relative risk scores for enrollees
in Managed Care plans would be lower than the relative risk scores of
Medicare FFS enrollees. One way to address this problem would be for
HCFA to remove some of these conditions from the PIP-DCG model.
HCFA Needs to Disclose Data and Methods
One of an actuary's professional requirements is that he or she be
able to replicate the findings of another actuary's work. To date, we
have analyzed data for our clients, using our ``best guess'' regarding
the various formulas and components of the PIP-DCG Model. Therefore, at
this point, I am unable to perform a thorough replication. I strongly
recommend that HCFA provide full disclosure and have open discussions
with health plans, consultants, academics, and other interested
parties. This involves disclosing all of the formulas used for every
component of the model, as well as providing access to data in HCFA's
files about beneficiary status and health conditions so that health
plans can test and fully understand the model's operation.
Implementation Issues
Implementation of the PIP-DCG payment method has required the
creation of a new data transmittal and analysis process. As part of
this process, encounter data must be handed from hospitals to health
plans to Fiscal Intermediaries to HCFA or its contractor. If the ``data
baton'' is dropped anywhere along the way, then health plans are
penalized automatically through lower payments. For example, sometimes
hospitals make mistakes regarding an inpatient admission and attribute
it to the wrong health plan. We have heard reports of hospitals
delaying correction of errors, with the result being that health plans
cannot submit corrected encounter records. Some plans may have
difficulty gathering data from capitated providers who pay their own
claims. Many of the Fiscal Intermediaries have awkward or slow
processes in place to identify and report errors. As a result, health
plans can spend an inordinate amount of time trying to fix errors. If
the Fiscal Intermediaries were more forthcoming with what triggered
errors, the health plans could correct the errors before submitting
data to the Fiscal Intermediaries. HCFA has at least a few small
problems in its systems for making use of encounter data. With the lack
of sufficient feedback on the data errors, health plans are unable to
confirm that data being used by HCFA matches their internal records.
Summary
Risk-adjusted payments represent an improvement over the current
AAPCC payment method, but only if practical data issues are first
addressed and several components of HCFA's PIP-DCG method are re-
examined. HCFA staff are to be commended for their hard work in moving
towards implementation on such a demanding timetable. I suggest that
implementation not occur, however, until HCFA and health plans are
certain that all biases are removed from the model and important data
process issues are corrected.
Mr. Bilirakis. Mr. Johnson.
STATEMENT OF KIRK JOHNSON
Mr. Johnson. Thank you, Mr. Chairman and members of the
committee. I am Kirk Johnson, Senior Vice President of CNA
Health Partners, a subsidiary of a multi-line insurance
carrier, CNA. I am testifying today on behalf of the Health
Insurance Association of America, which CNA is a member. HIA
members include companies currently serving as Medicare+Choice
carriers, companies who are considering doing it and companies
who have withdrawn from the program.
Although CNA has a significant involvement in health care,
it is the largest professional liability insurer in the country
and we administer the second largest of the Federal employee
health benefit plans, the Mailhandlers Plan. CNA does not
itself have a Medicare Risk Plan or Medicare+Choice product.
CNA Health Partners, however, is a management services
organization, a partner for doctors, hospitals and integrated
delivery systems who have become Medicare Risk Plans as HMO or
who take downstream risks from other risk plans and Contractors
like those here today, or who desire to become PSO's, Provider
Service Organizations.
PSO's, as you know, were created by the Balanced Budget Act
of 1997. They were supposed to offer to Medicare beneficiaries
a competitive alternative to traditional HMO's and to fee-for-
service providers. The Medicare+Choice law has not yet done
what it is intended to do. It has not created more competition
or more choices for Medicare beneficiaries. It has not yet
rationalized the payment mechanism so that there is
predictability and fairness.
It has not yet made it possible for doctors, hospitals and
integrated delivery systems to directly contract with HCFA to
offer their own plans. Indeed, the Act has made it less likely
that they will subcontract on a risk basis with existing plans
today. The reason is only partly concerns about the risk
adjustment formula, although we have them. In fact, behind me
are charts which show how the disparity in payments to fee-for-
service versus risk plans will grow by 2003 under the current
formula.
The primary reason providers are not in this business are
the very ones which you have heard from the established
national Medicare risk plans. It is difficult for the
government to be both a purchaser and a regulator. It cannot
pay less than the rate of medical inflation on the one hand,
and at the same time add significant new regulatory
requirements, procedures and restrictions on a plans ability to
make essential market adjustments.
No one would expand into or enter into this market. It is
particularly unlikely that providers will do that. Providers,
doctors and hospitals do not have either the scale, the big
networks or the sophisticated claims and information
infrastructure of the national plans. There were less than a
handful of PSO's under the new BBA provisions last year.
Congress and the regulatory system gave PSO's very little
help. In fact for many providers, and we represent a
substantial number of them who have PSO aspirations, the
program appeared to be going backwards. For example, the
mandated expedited appeal procedures which entitle every
Medicare beneficiary to a formal appeal virtually any time he
or she disagrees with a physician's treatment recommendation.
It turns a common medical matter for which a second opinion
would be an obvious remedy, into an expensive, administrative,
legal adversary one. The requirement that every detail of a
plan be approved and then frozen well in advance of the
effective date. What will amount to, on the average, of 2
percent reimbursement increases for most plans at a time when
medical inflation is three times that. Finally, the important
and necessary risk adjustment for providers is particularly
necessary.
Providers are going to attract patients who know them best,
the sick ones. But it should not be done in a way that reduces
overall reimbursement, and it should not add substantially to
the already serious regulatory burdens on them. Health care
costs are going to go up, perhaps dramatically. There is no way
and it would be immoral if not illegal to do so, to manage out
of the system the ever-growing technology gains that save life
and enhance its quality, even though they will inexorably add
to the cost.
Creating new competitive alternatives as the BBA did, was
the right approach. Particularly the opportunity for providers
to accept financial accountability, directly or in partnership
with the plans. I think most would agree that doctors, now the
ones who are licensed to practice medicine, will have to find
the next round of savings and efficiencies in medicine. They
can do it now because of the innovations in medical technology
and the incentive to take financial accountability, but they
have precisely the same concerns about the execution of the BBA
as the existing Medicare Plans have. Thank you.
[The prepared statement of Kirk Johnson follows.]
Prepared Statement of Kirk Johnson, Senior Vice President, CNA Health
Partners, on Behalf of the Health Insurance Association of America
Mr. Chairman and members of the Committee, I am Kirk Johnson,
Senior Vice President of CNA Health Partners. I am testifying today on
behalf of the Health Insurance Association of America (``HIAA''). As
the preeminent health insurance trade association, HIAA is the
principal voice of the broadest spectrum of the health insurance
industry. HIAA represents over 265 members that include commercial
insurers, health maintenance, preferred provider and managed care
organizations and businesses that provide products and services to the
health insurance industry. Together, HIAA members provide health, long-
term care, supplemental, and disability income insurance coverage to
more than 110 million Americans. Association members include companies
currently serving as Medicare+Choice managed care contractors,
companies who are considering offering new Medicare+Choice options, and
companies that have recently withdrawn from the Medicare+Choice
program, giving us a unique perspective on the issues under review by
this Committee. CNA Health Partners is a company assisting new or
developing Medicare+Choice organizations.
I am pleased to have this opportunity to discuss the implementation
of the Medicare+Choice program with you and to share a few of our
principle concerns. HIAA and CNA Health Partners believe that the
Medicare+Choice program represents an essential component in the
government's effort to ensure the financial survival of the Medicare
program and to meet the health care needs of the baby boom generation
as we move into the 21st Century. HIAA applauds the Commerce Committee
for its role in shaping these bold Medicare reforms through the
Balanced Budget Act of 1997. Recent developments, however, suggest that
the Committee's work is not yet done. To ensure the promise of the
reform, and to facilitate beneficiary choice under the Medicare
program, additional legislative and policy modifications must be made.
concerns about low anticipated medicare+choice organization payment
rate increases
1. Limits on Annual Increases in Capitation Rates and Concerns
Regarding the New Proposed Risk Adjustment Methodology Threaten
the Continued Attractiveness of the Medicare+Choice Program to
Beneficiaries and Providers.
a. Most Plans Will Experience Cost Increases From Medical Inflation
That Exceed Payment Increases During the Coming Year.--Perhaps the
greatest threat to the success of the Medicare+Choice program is the
collective impact of changes in Medicare's payment methodology enacted
by the BBA. In order to achieve a successful partnership between the
federal government and Medicare+Choice organizations, program rules
must: (1) allow payment rates that recognize and adjust for the actual
costs of providing health care and permit necessary investment in
clinical and operational improvements, and (2) incorporate financial
incentives to reward those Medicare+Choice organizations that achieve
the government's economic, clinical and operational objectives.
As set forth in Section 1853(c) of the BBA, Medicare+Choice
organizations will be paid the greater of:
(a) a blended capitation rate, which is the sum of a percentage of
the area-specific capitation rate and a percentage of the national
Medicare+Choice capitation rate (the percentage balance will change
over time until it reaches a 50/50 blend in 2002); or
(b) a minimum amount, which is $379.84 per enrollee per month in
1999; or
(c) a minimum percentage increase for 1998 equal to an increase of
2 percent of the 1997 Adjusted Average Per Capita Cost (``AAPCC'') rate
for the particular county, with increases of 2 percent in each
subsequent year.
Due to a budget neutrality requirement, the blended capitation rate
was not available in 1998 or 1999. The Health Care Financing
Administration (HCFA) anticipates, however, that the blend will apply
for the first time in the year 2000. While the majority of counties
will receive blended payments, it is HIAA's understanding that
approximately 30 percent of counties will continue to receive the floor
amount and 11 percent of counties will receive the minimum two percent
increase.
The practical result, based on actual Medicare+Choice enrollment,
is that Medicare+Choice organizations serving a majority of Medicare
beneficiaries enrolled in such organizations will receive rate
increases of the minimum 2 percent or only slightly more. For many--if
not all--of these organizations, this increase would not be sufficient
to cover the increased cost of providing mandated services, given
projected medical inflation 1. This, combined with the fact
that many Medicare+Choice organizations experienced significant losses
in 1998 (and anticipate additional losses in 1999), forecasts trouble
for the program.
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\1\ The budget for fiscal year 2000 includes funding original fee-
for-service Medicare that reflects anticipated increases in medical
costs over a five year period of 27% and an increase in the Federal
Employee Health Benefit Program of about 50%. Estimates of the likely
growth for Medicare+Choice plans in high paying counties for the same
period is less than 10%.
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Indeed, inadequate reimbursement rates largely were responsible for
the retrenchment of Medicare+Choice plans last Fall. At that time, some
of the most respected Medicare+Choice organizations in the country
withdrew from states and counties with low capitation rates. Other
withdrawals occurred in low enrollment areas even though capitation
rates were above average. As reported, 42 health plans decided to
withdraw from the Medicare+Choice program and 53 plans decided to cut
back their services. In all, about 400,000 Medicare beneficiaries were
effected. To put this in perspective, HCFA averaged two Medicare risk
contract cancellations per year from 1993 through 1997.
The use of the blended rate for some Medicare+Choice plans for the
first time in 2000 is clearly a step in the right direction in terms of
ensuring fair and adequate reimbursement. However, HIAA strongly
believes that additional adjustments are necessary to attract and
maintain the number and diversity of Medicare+Choice organizations
necessary to establish a sound and attractive market-based alternative
to the traditional fee-for-service program.
Accordingly, HIAA urges Congress to reconsider the artificial and
arbitrary limits on capitation rate increases set forth in the BBA.
Specifically, HIAA suggests that annual increases in Medicare+Choice
payment rates be sufficient to fully cover medical inflation
experienced in the local markets. Because local employer health plans
and other commercial customers have a tremendous incentive to keep
costs down, they will positively affect the inflation rate in each
market. If the current reimbursement structure is not adjusted, more
Medicare+Choice organizations are likely to withdraw from areas served
and beneficiaries enrolled in the remaining plans will likely
experience premium increases or reduced benefits. Finally, as
Medicare+Choice plans leave the market, the original Medicare program
(with its higher per capita costs) will have more beneficiaries and put
additional strain on both the Part A Trust Fund and the budget.
b. The New Risk Adjustment Methodology Will Substantially Reduce
Payments to Medicare+Choice Organizations.--Change in the
Medicare+Choice payment calculations is all the more necessary because
the risk adjustment process which HCFA is implementing is expected to
substantially reduce aggregate payments to Medicare+Choice plans while
adding additional administrative requirements and expenses. According
to preliminary HCFA estimates, total Medicare+Choice plan revenues for
the year 2000 are projected to be $200 million less than they would
have been under the Adjusted Average Per Capita Cost (``AAPCC'')
payment method and $6.3 billion less in 2004. As a result, some plans
will see even their minimum two--percent increase eroded in 2000 as the
risk adjustment methodology is phased in. Thus, what began as a
straightforward effort to more accurately compensate plans for the
health care costs of their particular members will, unexpectedly,
result in an overall reduction in funds to Medicare+Choice
organizations.
This development runs counter to HIAA's understanding of
Congressional intent, i.e., that the savings resulting from the
percentage reduction 2 in plan payments for years 1998
through 2002 was intended to be in lieu of any net program savings from
risk adjustment. (Indeed, the Congressional Budget Office did not score
any projected savings in connection with the risk adjustment program
under BBA 97). The new methodology, and huge projected revenue
reductions, underscores HIAA's concerns regarding the inadequacy of
plan payments under Medicare+Choice. To the extent that the proposed
HCFA risk adjustment methodology translates into a significant overall
decrease in payments for the Medicare+Choice program, it will
undoubtedly be an additional deterrent to program participation.
Accordingly, HIAA urges Congress to require HCFA to modify the risk
adjustment methodology so that aggregate payments to Medicare+Choice
plans for 2000 and beyond are based on aggregate BBA adjustments,
making the risk adjustment process budget neutral.
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\2\ In addition to the 5 percent reduction in payment from fee-for-
service costs which existed prior to the BBA, the increase in payment
to Medicare+Choice organizations under both the blended rate and the
floor will not fully reflect anticipated medical inflation. A reduction
of 0.8 percent was made in 1998 and reductions of 0.5 percent are to be
included in 1999 through 2002. The cumulative effect of these
reductions will be that even the blended rate adjustment will be
inadequate. This, coupled with the insufficient increases in the
minimum rate, will undermine Congressional intent to encourage growth
of Medicare+Choice options for seniors in low cost areas.
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c. The User-Fee ``Tax'' on Medicare+Choice Organizations for
Beneficiary Education is Inequitable and Reduces Even Further Payments
to Medicare+Choice Organizations.--HIAA strongly supports educating and
informing Medicare beneficiaries about all coverage options, including
the Medicare+Choice program, and supplying beneficiaries with
straightforward, unbiased information to help them choose appropriate
coverage. That said, we are concerned that the BBA, to support
beneficiary education activities for all 37 million beneficiaries,
places a ``user fee tax'' on Medicare+Choice organizations
only.3 The educational campaign is a benefit to all Medicare
beneficiaries. Indeed, initial information suggests that the toll-free
number HCFA established last year with funds from the $95 million
dollar ``tax'' assessed upon Medicare+Choice organizations primarily
fielded calls from beneficiaries seeking information about the fee-for-
service program. Considerations of equity dictate that the educational
program--which informs beneficiaries about basic program benefits and
requirements--be funded from the Medicare trust fund, or another broad-
based source of revenue, as are other such essential program functions.
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\3\ Medicare+Choice organizations essentially pay a ``head tax''
(i.e., an amount based on the number of Medicare+Choice enrollees in
their plan) to support the public information program.
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We note that this tax, which is .355% of the total monthly payments
to each Medicare+Choice plan in 1999, further exacerbates the problems
outlined above concerning inadequate reimbursement. Indeed, when the
user fee tax is combined with potential large revenue reductions from
risk adjustment, some existing Medicare+Choice plans will see little or
no increase in their payment rates from 1999 to 2000 even though HCFA
is using a phase-in of an interim risk-adjustment methodology.
The cumulative effect of these three payment reductions will vary
depending upon the relationship of the current payment, current
benefits, and the number of beneficiaries enrolled.
In your district, Chairman Bilirakis, there were 139,000
beneficiaries enrolled in Medicare risk plans (or 32 percent of
Medicare beneficiaries). We project 4 that Medicare+Choice
plans will receive only 51.4 percent or half of the increase per capita
relative to Medicare fee for-service increases. We also project an
increase in the 65+ population from 482,000 in 1998 to 533,000 in 2003.
If Medicare+Choice options are withdrawn or have less perceived value
by then, a reduction of Medicare+Choice enrollment to 75 percent of
existing numbers would reduce the savings from BBA for 2003 by $77.7
million 5 from your district alone.
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\4\ Our projections utilize September 1998 enrollment figures, a
1998 Price Waterhouse report on Medicare Capitated Payments, and
reflect HCFA's assumption for the average cost to Medicare+Choice plans
of risk adjustment.
\5\ Lost savings, based on the difference in projected per capita
payments to HCFA vs. Medicare+Choice, multiplied by the potential
Medicare+Choice enrollment less 75 percent of current enrollment.
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HIAA has calculated the impact of BBA's payment policies, including
risk adjustment, for the counties of each member of this subcommittee.
A composite of your district's projected payments has been delivered to
your office. As examples of these projections, attached to our
testimony are the projections for Chairman Bilirakis' district and
Representative Brown's district.
2. The May 1 Deadline for Filing ACRs Has Created Serious Problems in
the Administration of the Medicare+Choice Program and Should Be
Changed to November 1.
The BBA moved the deadline by which Medicare+Choice plans must
submit their adjusted community rate (ACR) proposals from November 1 to
May 1. This was done in order to allow HCFA sufficient time to approve
rates and include this rate information in the materials to be
distributed to beneficiaries as part of the educational campaign. The
problem with this time frame is two-fold. First, by submitting
proposals seven months in advance of the actual effective date (i.e.,
January 1), plans place themselves at substantial risk that health care
costs will rise in unexpected ways in the latter half of the year and
thus not be captured in the proposals. This is what occurred last year,
contributing to the decision by many Medicare+Choice organizations to
not renew their Medicare+Choice contracts for 1999, or to reduce their
service areas. Also, proposals submitted by May 1st are based on
relatively limited claims experience with the Medicare beneficiary
population enrolled in the more rapidly growing plans and are thus less
likely to be accurate predictors of costs than proposals based on a
longer period of time.
Accordingly, HIAA proposes moving the ACR deadline to November 1 or
as close to that date as operationally possible.6
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\6\ We recognize that HCFA may prefer a date earlier than November
1 in order to collect information for the annual public information
campaign. We believe that HCFA's public information objectives can be
met while permitting Medicare+Choice organizations to submit ACRs on
the old schedule. Working with third party publishers, including daily
newspapers, HCFA could more than adequately distribute plan specific
information to beneficiaries in a timely fashion.
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In regulations published earlier this month, HCFA ``recognize[d]
the difficulties inherent to estimating the cost of a benefit package
for 2000 based on at most 4 months of experience under the 1999 benefit
package,'' but indicated that it had no discretion in this matter due
to the statutory mandate. The President's fiscal year 2000 budget
includes a proposal that would extend the deadline for ACR submissions
until July 1. HCFA strongly supports this proposal. Given the
importance of this issue to Medicare+Choice organizations, and the
concerns involved, HIAA urges the Committee to take steps to put in
place a permanent workable deadline for ACR submissions and suggests
that an ACR date of November 1.
3. Congress Should Return to the Previous Policy Allowing Flexible
Benefits and Premiums Within a Service Area.
Historically, Medicare risk contractors were able to offer
different benefit or charge structures within a given contracted
service area. For example, modified benefit packages were often
developed and offered in a subset of the contracted service area. While
Medicare beneficiaries residing in the segmented service area were
offered a uniform array of benefits at a uniform price, uniformity was
not required across the entire service area. This flexibility was
important because it allowed contractors to adjust their benefit
package and premium structure to take into account differences in
capitated payment rates received, which varied by county.
In the BBA, Congress mandated a new policy requiring that
organizations offer uniform benefits and premiums throughout a service
area, despite varying payment levels. Under the Medicare+Choice
regulations, an organization may offer multiple plans and propose
different services areas for each plan. (Were this not the case,
organizations would be discouraged from expanding to outlying rural
counties that typically offer lower reimbursement rates.) This
regulatory policy allows Medicare+Choice organizations to achieve
results similar to the original flexible benefit policy, but only at
significant additional expense. Instead of one ACR being filed for a
broad service area with benefits modified to reflect anticipated
revenues, as used to be the case, multiple ACRs must be generated for
separate Medicare+Choice plans by each organization, and reviewed and
approved by HCFA. The Congressional mandate thus imposes significant
administrative costs on the organizations and the agency, with
absolutely no benefit to beneficiaries. Therefore, HIAA urges Congress
to repeal the uniform benefits and premium provisions of the BBA.
in many places the regulations are overly rigid and demanding so they
become an impediment to small and/or rural medicare+choice
organizations
1. The Quality Assurance Approach is Misguided.
HIAA believes that some form of quality standards are important to
any market-based approach to Medicare. Without quality standards, or
some other performance measurement, the added costs of maintaining
quality will be difficult to present fairly although over time, it will
be obvious. That being said, HIAA has serious concerns about the
breadth and depth of the onerous quality assessment, performance
improvement and performance measurement standards developed by HCFA.
a. Performance Measures Should Vary More by Type of Plan--As an
initial matter, we believe that performance measures should be designed
to fit the services offered by various types of plans. HCFA, however,
has essentially embraced a ``one size fits all'' approach. As a result,
it is unlikely that Medicare+Choice PPO plans that offer a broad choice
of providers to beneficiaries (but are loosely ``managed'') will be
able to meet the quality requirements. Similarly, the extensive
quality-related requirements applied to MSA plans and private fee-for-
service plans are likely to deter the necessary investment required
before these types of plans can be offered. The bottom line is that the
HCFA regulations are so inflexible that few options other than existing
managed care arrangements with large numbers of beneficiaries can be
developed. As a result, beneficiary choice will suffer, and a key goal
of the Congress' work on BBA will have been defeated. In rural areas
with no existing private health plan options, these regulations
effectively preclude any chance that new choices will develop under
most reasonable financial scenarios.
b. The Extensive Data Collection Proposed Is Not Necessary--Second,
the extensive data collection and reporting efforts required under the
regulations will add significant administrative costs to
Medicare+Choice organization operations. We question whether these
costs are justified or desirable, and whether the quality assurance
goals might not be met just as well through alternative approaches.
HIAA strongly believes that consumers, not government officials, should
dictate through their plan choices the extent and nature of quality
improvement, balanced against costs. Under this approach, organizations
that are responsive to consumer preferences would be rewarded with
greater market share. Fewer government resources would be required for
oversight.
HCFA could, however, play a central role in ensuring that minimum
standards are met and encouraging quality initiatives through flexible,
incentive-based standards established by contracts. HCFA is to be
congratulated for posting beneficiary satisfaction survey results and
other such information on the Medicare internet site
(www.medicare.gov). In HIAA's view, this would be far superior to the
current practice of setting detailed regulatory mandates which run the
risk of leading to micromanaging and encouraging uniformity at the
price of creative experimentation.
In trying to determine the cost of the extensive data collection
effort proposed, HIAA notes that many health care organizations,
particularly those with loosely managed network-style delivery systems
(such as PPOs) do not currently have the capability to capture or
report performance data at the level being proposed. The BBA's
limitations on increases in capitation rates means that outside sources
will be required to fund system upgrades. Even if financially possible,
the time required for procurement, installation, training, and
validation are not consistent with HCFA's scheduled implementation and
reporting requirements for Medicare+Choice plans. As a result, these
quality assessment requirements will be a significant deterrent to
expanding senior's choices as potential new plans decide not to
participate in the Medicare+Choice program. At the very least, HIAA
believes that organizations making a good faith effort to meet the
regulatory requirements should be provided a transition period where
penalties would not be imposed. This is particularly important given
plan efforts to address Year 2000 computer issues.
c. The ``Deemed Status'' Program Should Be Implemented
Immediately.--Most Medicare+Choice organizations already adhere to
rigorous quality assurance review by nationally accredited health care
organizations. HCFA has provided by regulation that Medicare+Choice
organizations may be ``deemed'' to meet quality assessment and
performance improvement requirements if judged to do so by a national
accreditation organization approved by HCFA and applying HCFA's
standards for assessing compliance. This approach has much merit. It
would allow plans to work with reviewers who already are familiar with
their operations, creating obvious efficiencies and potential cost-
savings. HCFA has failed, however, to establish procedures to implement
the ``deemed status'' process. To date, HCFA has not designated any
national accreditation organization for this purpose, nor has it issued
policy guidance on how this process will work. HIAA urges Congress to
direct HCFA to promptly institute a procedure for awarding deemed
status since this process has the potential to reduce some of the
substantial costs associated with HCFA's extensive quality assurance
measures.
2. The Proposed Risk Adjustment Policy is Ill-Conceived.
On January 15, 1999, HCFA announced its methodology for
implementing the risk adjustment mandate set forth in the BBA. While
HIAA believes that improved risk adjustment is an appropriate and
essential long-term goal for the program, we have serious concerns
regarding the current HCFA proposal, which calls for the initial use of
only inpatient hospital data. During the Administration's proposed 5-
year phase-in period, plans would receive capitated payments based on a
blend of payment amounts under the current demographic system and the
interim (PIP-DCG) risk adjustment methodology. For the year 2000, for
instance, the HCFA plan calls for a separate capitated payment rate for
each enrollee based 90 percent on the demographic method and 10 percent
on the risk adjustment methodology. By 2004, payment rates would be
based on comprehensive risk adjustment using full (i.e., inpatient and
other) encounter data and the demographic method would not be used.
HIAA's concerns with this proposal are both practical and programmatic.
First, the practical. The time frame for implementation outlined by
HCFA is simply far too short. Given the significant technological
considerations involved, it is unreasonable for the agency to require
that all Medicare+Choice organizations be able to provide physician,
outpatient hospital, skilled nursing facility and home health data
beginning as early as October 1, 1999. (HCFA has not yet identified a
specific date by which this information must be provided, creating
additional uncertainty.) The collection, verification, transmission and
analysis of ``representative'' encounter data is a complicated
endeavor. Capturing this data in a valid, accurate and transferable
manner will be a major challenge for most plans. Indeed, some HIAA
member companies that currently contract with HCFA do not have the
technical capability to capture and transmit encounter data other than
inpatient encounters. Nor do our members with PPO and similar network-
style delivery systems have the capability to do so. They are simply
not organized in a manner that will allow them to collect this level of
data.
Even if the capital for such purposes can be arranged, HCFA's
proposed time frame is insufficient to allow Medicare+Choice
organizations to procure and install the required systems. Procuring
systems that can accomplish these tasks requires very careful planning
and assessment, review of the capabilities of competing technologies
and vendors. Time is needed to install the systems, modify provider
contracts if necessary to ensure adequate reporting to the
Medicare+Choice plan, train the staff (both at the Medicare+Choice
organization and provider locations) and verify and validate the data.
All of these steps must be carefully executed or the system will fail.
These obstacles to compliance cannot simply be wished away. Moreover,
the imposition of these costs on all Medicare+Choice plans will make
the development of rural plans even more difficult because they will
continue to have fewer beneficiaries enrolled compared to plans in
other areas.
The process by which information is communicated to, and received
by, HCFA is likely to present significant technological problems as
well, if past experience is any guide. HIAA members have experienced,
and continue to experience, problems in ensuring that accurate
inpatient hospital data is transmitted via Medicare fiscal
intermediaries to HCFA.
Difficulties can also be expected as HCFA attempts to manipulate
significant amounts of data for the first time using the proposed PIP-
DCG risk adjustment model. The methodology developed by HCFA is
complicated and requires numerous steps. The process is yet untested.
HCFA faces a monumental task in getting the PIP-DCG system to work. We
are awaiting the opportunity to review the plan-specific effects of the
data collected to date. Moreover, as HCFA acknowledges, ``the PIP-DCG
model is [simply] an interim step towards implementation of a
comprehensive risk adjustment model (i.e., one which uses diagnoses
from all sites of service.)'' HIAA strongly believes that the ambitious
time frame proposed by the agency rests on a flawed premise: namely,
that all of the anticipated technological and methodological problems
can be resolved in the five-year window.
HIAA's doubts in this regard are heightened by the fact that
planned implementation coincides, at least initially, with agency
efforts to ensure Year 2000 readiness, both internally and in
connection with Medicare+Choice organizations and other contractors. If
HCFA transitions to risk adjustment before the necessary fixes are made
and before reliable data are gathered and properly analyzed, the
consequences could be catastrophic for individuals enrolled in
Medicare+Choice plans, as well as the Medicare managed care program
generally.
As if all this were not reason enough to delay implementation, HIAA
has significant programmatic concerns regarding the proposed risk
adjustment model. First, HIAA is concerned that variations resulting
from excessive payments under the original Medicare fee-for-service
program have been incorporated into the risk adjustment calculation.
Additional, unnecessary hospitalizations that have occurred within the
original Medicare Part A fee-for-service program, despite HCFA's
attempt to fight this, are still significant. As a result,
Medicare+Choice organizations will receive lower payments through the
proposed risk adjustment methodology. HCFA should not penalize the
managed care portion of Medicare for the program's failure to limit
false or fraudulent claims and medically unnecessary hospitalizations.
One approach to avoid this, would be to limit the use of risk
adjustment so that the total amount paid to all Medicare+Choice plans
is not reduced but instead redistributed among Medicare+Choice plans
only.
Second, recognizing the fact that most federal agencies rely on
sampling, HCFA's expectation of reported data on all individuals seems
excessive. Given that even the more comprehensive risk adjuster will
not be able to fully reflect all differences, HIAA believes that
Congress should require HCFA to reexamine the use of plan-based
sampling to reduce the administrative burden on the plans, reduce the
potential for errors in the start-up phases, and increase the privacy
of each individual's sensitive medical information.
Third, HIAA strongly believes that it is poor public policy to base
risk adjustment--even temporarily--on inpatient hospital data only.
Such an approach, even with the adjustments that HCFA has made to its
initial risk adjustment proposal, would reward Medicare+Choice plans
with excessive hospital use, and penalize plans that have effectively
reduced inpatient hospitalizations and focused on providing more care
on an outpatient basis. The incentives created by a risk adjustment
methodology based exclusively on inpatient hospital data could result
in increased inappropriate hospital use, increased avoidable costs, and
a set back in the effort to realize greater efficiency in the health
care system. Beneficiaries enrolled in plans with a relatively high
proportion of members who receive care for expensive chronic illnesses
outside the hospital setting would be particularly harmed.
For all these reasons, HIAA urges HCFA to delay the implementation
date of risk adjustment beyond January 1, 2000. Since HCFA believes it
does not have the authority to do this, Congress should revise the
implementation date. While the effort to collect encounter data should
proceed in a careful and deliberate manner, changes in payment
methodology based on risk adjustment should not be implemented until
complete and reliable encounter data are available. To ensure the
validity of the data and a viable risk adjustment process, Congress
should direct HCFA to (1) conduct a demonstration project aimed at
validating the proposed methodology and (2) identify less costly and
less data intensive ways of performing risk adjustment.
summary and conclusion
If the Medicare program is to be sustained for the next generation
of beneficiaries and beyond, it is crucial that the federal government
employ every strategy appropriate to enhance quality health care
options for beneficiaries and encourage the development of lower cost
options rather than relying on punitive regulations which will reduce
choice and funnel more people into the highest cost option--fee-for-
service Medicare. The Medicare+Choice program already is at an early
crossroad where improvements can allow it to flourish but neglect of
necessary change will doom it to failure. It would be more wise, in the
long run, for the government to employ market-oriented strategies to
ensure that there are Medicare+Choice options available to
beneficiaries and to create incentives for private health insurers and
providers to deliver value in the context of the Medicare program.
Because it is a critical building block in this market-based strategy,
Medicare+Choice must be successful.
In summary, HIAA believes that the prospects for success will be
greatly improved if the following steps are taken with respect to the
Medicare+Choice program:
Adjust the payment structure so that increases cover medical
inflation;
Issue revised regulations to reduce costly administrative
burdens on small, rural and non-HMO plans;
Change the due date of ACRs to November 1 to eliminate
unnecessary risk;
Delay and revise the proposed risk adjustment model to reduce
the cost of reporting and system development; and
Modify the role of risk adjustment so that overall revenues to
the Medicare+Choice program are not reduced, but simply
reallocated among based on the health status of enrollees.
A final word of caution: Congress must act quickly to direct HCFA
to change course in the manner outlined and to find ways to reduce the
regulatory burden of participating in the Medicare+Choice program if it
wants the program to succeed. The time frames for critical decisions
relating, for instance, to system investments are very short,
particularly given HCFA's anticipated risk adjustment schedule. Thus,
if Congress is to make adjustments to the program, it should act now.
Thank you, Mr. Chairman. I would be happy to answer any questions
you may have at this time.
Mr. Bilirakis. Thank you, Mr. Johnson. Thanks to all of
you. Ms. Discenza, has Blue Cross/Blue Shield of Florida
withdrawn from any county?
Ms. Discenza. No, sir, none at all.
Mr. Bilirakis. Why have you all chosen not to do it when so
many others have?
Ms. Discenza. Our whole business is confined to Florida.
And to ignore the seniors market in Florida would be a big
mistake for us. We actually even have more customers under our
Medigap products right now than we do under our
Medicare+Choice. So we think that that market is one that we
must value over the long term, but I will confess that we
thought very seriously last fall.
Mr. Bilirakis. I was about to commend you. Go ahead, no.
Ms. Discenza. We did think very seriously about certain
locations. Because honestly, not just the risk adjusters but
the 2 percent cap with costs going up at 5 or 6 percent.
Mr. Bilirakis. Is that a bigger problem for you all, the 2
percent cap for that period of time versus the risk adjusters?
You know risk adjustment is something, you heard the testimony
earlier, is something that HCFA has been considering and
working on for 10 years. And some of you say that you would
like to see a year's delay. You know, it would be interesting
to find out what an extra year would do when you have already
been, it has already been worked on for a 10-year period of
time?
I suppose there may be a little more out-patient
information available and ambulatory-type information over a
year's time. But let me ask you again, Ms. Discenza, I didn't
mean to cut you off. Did you have something else?
Ms. Discenza. No, that is okay.
Mr. Bilirakis. Could you explain in a little more detail
how payments to Medicare+Choice Plans have ended up being so
far below the traditional fee-for-service program?
Ms. Discenza. In the initial part of the program, the 95
percent was chosen to recognize the fact that HMO's should have
better overall experience, and when the Balanced Budget
Amendment passed, that difference was widen. Widen because the
reimbursement has been going up for all of our counties by 2
percent a year, when our costs are going up five or six.
Well that means that the 95 percent went to, say, 92 least
year and to about 89 this year. Let us say to 86 or even 85
next year, and maybe combining that with the question that you
asked a minute ago, risk adjusters or the reductions in overall
payments, it is the combination of the two that really hurts
us. That if we are already at 85 percent and the studies that I
have read say that Medicare+Choice people have health
improvements that average even 10 percent from the average
population.
We are already pushed below that 10, and then to have the
prospect of full risk adjuster implementation drive that down
even further is, our concern is.
Mr. Bilirakis. Now Blue Cross/Blue Shield is a non-profit?
Ms. Discenza. We are a not-for-profit mutual that pays
Federal income tax.
Mr. Bilirakis. I won't try to figure that one out.
Ms. Discenza. I won't either.
Mr. Bilirakis. Let me ask a question, I think you mentioned
you wanted the opportunity to be able to work with HCFA in
trying to devise a better, in your eyes, risk adjustment
program. Well, let me ask the question. Have you been
approached, have any of you been approached by HCFA? Do you
have to work with HCFA?
Ms. Margulis. Yes.
Mr. Bilirakis. Okay. What has happened? Your advice has
been ignored? Tell me a little bit.
Ms. Margulis. Mr. Chairman, we have been working with HCFA
over a period of time on this payment methodology, and there
are basically two issues, I will give two examples. The first
is that while the loss specifies the use of in-patient hospital
data and such other data as the Secretary requires.
Mr. Bilirakis. And we recognize that that is really not the
best way to approach it.
Ms. Margulis. Correct. But HCFA had the opportunity along
the way, as we shared our information with them, to make some
different choices that would not have created as large a bias
against the managed care plans. And I would list a couple of
those for you. The first is, I believe, Mr. Bertko referred to
short stays. As you may be aware, managed care plans have
significantly more 1-day stays. That is probably due to the
fact that we treat our beneficiaries in an out-patient setting
and into these management programs.
Second, by using in-patient hospital data, it does not
recognize those other in-patient settings, such as skilled-
nursing facilities, where we may take someone with a diagnosis
who has been in the hospital for 1 day and transfer them to a
skilled-nursing facility. We have that data, we could have
provided that data to HCFA. Third, with regard to those
conditions that could be treated on an in-patient or out-
patient basis, while HCFA did make some in-roads in agreeing
that those could be considered discretionary conditions, there
is some others, for example, in the chronic heart failure area
that are still left in that bias against us.
So we have worked with them. The second area, if I might
talk about that is, for months we have asked HCFA to supply us
with the data necessary to replicate the formulas to be able,
as Mr. Bertko said, to go back and recalculate the formulas and
the information that HCFA has. They have not supplied us with
that information. Sorry for the long answer. I probably could
go on.
Mr. Bilirakis. Well, I think, again, I think it was you who
talked about disease management programs. You make a good point
in that regard. Certainly the Y2K is something that maybe we
haven't considered adequately. I have, after Mr. Brown finishes
up, I am sure Humana is anticipating a question from a
Floridian.
Ms. Margulis. Absolutely.
Mr. Bilirakis. Mr. Brown.
Mr. Brown. There seems to be a lot of Floridians on this
panel. Is that my imagination?
Mr. Bilirakis. Ms. Margulis is from Louisville, Kentucky,
by the way.
Mr. Brown. Yeah, but there is still one. Thank you. Mr.
Chairman, I am a little perplexed by all this. You know I
represent a district in northeast Ohio. Two counties in my
district United Health Care disenrolled 2,000 people in each
county. Gave sort of cavalier notice to them by publishing
something in the newspaper.
Then I read in the paper that the CEO of United Health Care
made $68 million last year. I read in the Los Angeles Times,
Orange County edition, the county where Mr. Schub's company is,
I think. PacifiCare Health Systems, No. 1 operator of Medicare
HMO said fourth quarter operating profits more than tripled as
it left some markets and cut costs. You see executive salaries
skyrocketing in this business.
You see huge marketing costs with full page ads in
expensive big city newspapers. Then I read that more and more
of you are dropping senior citizens in some counties, because
you are just not getting enough money to cover them. But in
counties next door you are staying because beneficiaries there
are profitable. And then Mr. Schub's testimony says, unless
Congress takes corrective action, the number of providers who
refuse to contract with Medicare+Choice plans will increase and
health plan withdrawals will continue at a more rapid pace. All
within the context of bigger executive salaries, good profits
for PacifiCare, expensive marketing campaigns. And you want the
Medicare Commission to give you more money. That's what I don't
understand, Mr. Schub.
Mr. Schub. I think maybe I would start, Mr. Brown, with
just a comment that the industry has been going through a lot
of change through the preceding years. In that period of
change, health plans have been profitable and unprofitable, and
our company as well. Last year we had some significant write
downs from markets that were, were literally out of control.
So the news release you saw was a company that has gotten
itself to a little more than 2 percent after tax profit margin,
with a lot of hard work and see ourselves as a stable company
right now. We are committed to the Medicare business. We take
our seniors to be our No. 1 priority. The health improvement
our seniors and the success of our provider partners is what
our company is about.
We have to earn more than, we have to have some retained
earnings to be able to apply capital and expand the program. We
believe that a slightly more than 2 percent after tax margin,
is an acceptable margin when you consider the fact that any
not-for-profit hospital has to maintain at least twice that to
simply maintain their bond rating and borrow money. So all
organizations in health care have to have some sort of a margin
after tax.
As it relates to executive compensation, we bench mark
ourselves against other industries. I can't speak for United,
but I know that within PacifiCare we bench mark ourselves
against other industries and are not excessive in terms of
executive compensation. To the point, last year there were no
bonuses paid, simply because of the fact that the company did
not perform.
Mr. Brown. Mr. Bertko, you mentioned in your testimony that
HCFA's proposed risk adjustment model is an improvement over
the status quo. You said payments to health plans would be more
accurate. Tell us some of the deficiencies in the current AAPCC
rate, if you would?
Mr. Bertko. Yes, I will. First off, I think many of the
previous speakers have said that in general the age, gender and
status ones basically overpay for folks that are very healthy
and do underpay by some considerable amount for folks who are
in the sickest quartile or quintile. So that is the main
feeling of it. It doesn't recognize the real needs of the
population. And in this case, by using this part of diagnostic
data, you are able to better match, not perfectly, but better
match up what the payment would be versus what the needs of the
population are.
Mr. Brown. So risk adjustment clearly is preferable to
AAPCC, I mean there is no doubt about that?
Mr. Bertko. Yes. And again, I think the only thing I would
add there is that the data streams and the mechanics that go
with it have to be in the right shape when you start it up.
Mr. Brown. I have one other question. Ms. Discenza, HCFA
says that managed care plans are experiencing favorable
selection. Most managed cares plans disagree with that notion.
If HCFA says that many of you are experiencing favorable
selection and many of you disagree with that statement, does
that mean that you have better data or tools than HCFA does to
assess beneficiaries' health status?
Ms. Discenza. Actually the studies that I have seen I don't
think the majority of us would question that in fact people who
choose to join HMO's usually have had better past health care
results than people who choose not to join HMO's. That is true
not in just the seniors' market but in the under 65 market as
well. That is something though that tends to happen more often
when a program is new than when it is very mature.
If we look at, for example, the under 65 population today
with as broad an HMO enrollment as there is today, there is
not, the gap between those who will choose an HMO and those who
don't is narrowing. I personally do not question at all the
studies that show that those who join, the seniors who join an
HMO were easily in 10 percent, 5 to 10 percent better health in
the year before the joined.
Mr. Brown. So that would, that would certainly argue for a
risk adjustment?
Ms. Discenza. There is no question that risk adjusters,
done correctly, are appropriate.
Mr. Bilirakis. So what you are saying is that risk
adjustment can be beneficial as well as the opposite for your
company, right?
Ms. Discenza. Risk adjusters, done appropriately.
Mr. Bilirakis. Done correctly.
Ms. Discenza. The problem is that if we started off, as I
mentioned earlier, with 95 percent with a 5-percent reduction
in the beginning of the Medicare, what was called Medicare Risk
Program, that has now moved down to below 90. And if we move
with risk adjusters down from there, it seems to me we could
well be double counting this purported healthiness of the
Medicare+Choice enrollment.
Mr. Bilirakis. Mr. Bryant, would you like to inquire?
Mr. Bryant. Thank you, Mr. Chairman. I will ask maybe one
or two of you if you want to answer this. Many health plans
have developed specialized programs and provide high quality
care in settings other than hospitals to members who otherwise
would have been treated as an in-patient setting. Can you
provide an example of such a program that you have and how it
is penalized by HCFA's new risk adjustment method? And I have
got a CNA question.
Ms. Margulis. Mr. Bryant, we have a congestive heart
failure program that covers approximately 4,000 beneficiaries
in our market. We anticipate this next year that we will be
able to reduce hospital admissions by 2,300 of those
beneficiaries. Each one of those avoided hospitalizations is
$12,000, which will result in a potential $28 million loss. And
if I put that on a per beneficiary basis, that could mean that
we would have to reduce prescription drug coverage in those
markets for beneficiaries.
Mr. Bryant. Did you get any comfort this morning from Mr.
Hash. I think, I thought I heard him say that they were going
to try to use other provider, medical encounters fairly soon.
Although I understood it was going to be 3 or 4 years, 5 years
perhaps. But I thought I heard him say that that was going to
be more immediate.
Ms. Margulis. No sir, unless we have some sort of delay
where we can go back and perhaps make some adjustments, test
the data. A page from the California HPIC would be to step
back, make sure that we can accurately correct and process the
data and simulate the payment method so that we can make
corrections.
What I would say too, and I have heard a lot people here
today say this. We are talking about implementing a risk
adjustment system done correctly. But I would say to the
members of the committee, this is now being done on top of a
pile of other reductions that has already, in essence, taken
away any favorable selection that there would have been.
So we are very cognizant of that and concerned that we
won't be able to offer the kinds of additional benefits that
attract people to our programs. If we don't go back and correct
some of the errors and flaws that we think this current process
has. And to implement, as many of the Panelists spoke about, we
are only implementing 10 percent of this new payment
methodology. We think it is wrong to implement a flawed system.
It means the second year is only, the problems are only
exacerbated.
Mr. Bryant. You know, what I hear you saying is that while
the rhetoric is there that they want competition in private
sector market place to work, the regulations and the
implementation is making it, these items are making it very
difficult for you to compete and operate. Would that be a yes
or no?
Mr. Johnson. It would be a yes. A large part of it is the
uncertainty, a And the anxiety, particularly for providers, who
are going at risk. In a fee-for-service world, the risk is
minimal and you can control some of that by working harder,
doing more procedures, whatever. In a capitated world where you
are really trying to be organized, coordinating care and take
all comers. Most of the provider plans we represent are not-
for-profits who are doing this in the community because there
is an access issue.
For those continued uncertainty about how the regulations
are going to hit them next year or in 6 months, without the
flexibility to adapt, is just causing them to say, no, let us
not do it. And on balance, these systems offer improvements. At
least they offer a different kind of care and a choice. Which
really ought to be in the system, but for providers it is not,
they are not going to do it.
It is just the regulatory system, the uncertainly about how
these adjustments are going to affect them, a And risk
adjustments should help providers. We will attract a
disproportionate number of sick patients if we have a good
reputation in our community. But we don't know whether being
efficient about it, reducing in-patient stays, is going to
actually hurt us or help us in the formula. And we don't know
whether we can get all the data together to actually produce
what is needed by HCFA in the timeframe required.
Mr. Bryant. Mr. Schub.
Mr. Schub. If I could just add to that, thank you Mr.
Bryant. The point that was raised before by the chairman, that
predictability is a big issue, a And the simplicity of
understanding, you can't serve two masters. And that is what
the comments that were just made refer to. That physicians,
they generally practice one style of medicine and they need to
know what the game is and what you want them to do. And they
can demonstrate significant changes in health care cost
reductions while maintaining quality and satisfaction. But at
this point, they are getting very confused.
Mr. Bilirakis. Well thanks, Mr. Bryant. Just one comment
here. For instance, Humana, I don't mean to pick on you but I
have already told you----
Ms. Margulis. It has been done before.
Mr. Bilirakis. Humana has pulled out or reduced services in
14 Florida counties. That plan pulled out or reduced services
more than any other plan in our State. None of that took place
in my Congressional District, I suppose that was more of a
coincidence than anything else. But you know, your timing, not
only Humana's but I think managed care's timing stinks, quite
frankly. I mean you are under attack these days. I don't think
a 2-percent profit margin in wrong.
This is America. If the stockholders of United, is it,
don't care about their CEO receiving a $65 million salary last
year, then I am not going to care about it. But if in fact I
see that that company has pulled out and really putting in
jeopardy a lot of Medicare beneficiaries, then that is going to
concern me. You have said you will work with HCFA. You have
said that HCFA has been respondent in some degrees and not
respondent in others.
I don't know. Are you going to basically force us to do
what most of us don't want to do? And that is to mandate that
you continue to cover some of these Medicare beneficiaries in
some of our, well, in America? You could be leading toward
that. And I don't think you want that. And I guarantee you I
don't want that. But you know, we have got people out there who
have complained to us. Now maybe some of them would, some of
these plans would have withdrawn anyhow in the normal course of
events.
But as I said, your timing is rotten and it seems to me
that, you know, I get the feeling that you are using this risk
adjustment as rationale. And you are using it, basically I made
the comment in my opening statement about on the come. Risk
adjustment is coming and you are not happy with the way it
seems to be devised by HCFA. You are pulling out and you feel
that maybe that is going to be beneficial to work with HCFA to
improve it.
But it may work the other way around. And I would really
hate to see that, but it could happen. Do you have any comment,
Ms. Margulis? I guess I should at least give you that
opportunity.
Ms. Margulis. Yes sir. Yes, we also, I might say, thought
the timing was very poor as well. Let me say first that we have
been in the Medicare Risk and now Medicare+Choice Program for
13 years.
Mr. Bilirakis. Any you are heavy in the Tampa Bay area in
Florida.
Ms. Margulis. Clearly, clearly. And we bought a troubled,
you may remember, plan back in 1987.
Mr. Bilirakis. I remember.
Ms. Margulis. And had troubles for many years.
Mr. Bilirakis. And that is why I say, I don't know that. I
should question a 2-percent return or whatever the case may be.
I don't do that.
Ms. Margulis. I think what I would want to say to you is
that we have been a long, long-term participant in this
program. We believe in it. We would like to be in every Florida
county. The situation last year was unusual for us. You may
recall last year we acquired a large company in Florida,
Physician Corporation of America. There were issues in some of
those counties that were related to an acquisition and
integration. One of the requirements for us to remain in this
program is to have adequate provider health care delivery
systems and adequate networks, a And in many cases we were
unable to have that kind of network that we could offer an
affordable, quality product.
Mr. Bilirakis. Why, because of the current, because of the
current AAPCC or what? What was the reason?
Ms. Margulis. Related to a variety of considerations, a And
I believe Mr. Hash and several people said that withdrawals are
due to many conditions in a market. Let me say this, that the
promulgation of the Medicare+Choice rules, the timing of that
plus the notification deadline for non-renewals and the thought
that if we could change the environmental situation in many of
those counties in 1999 or 2000, we could go back to those
counties.
I think a number of our decisions were based on that.
Mr. Bilirakis. I am sorry, what do you mean by
environmental?
Ms. Margulis. If, when pulling out in October, there is no
5 year penalty for going back, s So we would have an
opportunity, if we could build an adequate network and realize
that we would be able to cover our costs for providing services
that would attract beneficiaries to our plans, we could go
back. I think what I want to say long term is that it is our
intent to be a long-time participant in this program.
We want to work on, not only a payment methodology that
doesn't every year put Congress in the position of having a
formula fight, b But also one that can deliver additional
benefits to seniors and to all beneficiaries to join this
program. The risk adjustment methodology we feel, if
implemented correctly and based on adequate and sufficient
data, will help. As I mentioned before, not on top of a whole
lot of other payment reductions so that we can no longer be
attractive to people in the fee-for-service sector to select
us.
Mr. Bilirakis. Well, all right. I want to publicly commend
HCFA, gentleman, there may be more than just you here, sir, I
don't know. But the point is I have asked that they have a
representative here to listen to all this, they have, and I
think that is good. But you have also heard that there might be
openness for more work with these people. As much as we may
try, the risk adjustment seems to be something that everybody
thinks is a good idea, but you say it has to be done right.
I don't know what doing it right is or isn't. But you know
we have beneficiaries out there who have lost a choice, a very
important choice. And we have to respond to them.
And I think you all have got to realize that. Hopefully you
do. I have nothing further. Do you have anything further, Mr.
Brown? Well, thank you so very much. Again, I appreciate your
patience.
[Whereupon, at 2:16 p.m., the subcommittee was adjourned.]