SPEAKERS CONTENTS INSERTS Tables
Page 1 TOP OF DOC
42–117 CC
1997
MEDICARE HMO PAYMENT POLICIES
HEARING
before the
SUBCOMMITTEE ON HEALTH
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
FEBRUARY 25, 1997
Serial 105–4
Printed for the use of the Committee on Ways and Means
Page 2 PREV PAGE TOP OF DOC
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, Jr., Florida
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
DAVE CAMP, Michigan
JIM RAMSTAD, Minnesota
JIM NUSSLE, Iowa
SAM JOHNSON, Texas
JENNIFER DUNN, Washington
MAC COLLINS, Georgia
ROB PORTMAN, Ohio
PHILIP S. ENGLISH, Pennsylvania
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
Page 3 PREV PAGE TOP OF DOC
KENNY HULSHOF, Missouri
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
RICHARD E. NEAL, Massachusetts
MICHAEL R. McNULTY, New York
WILLIAM J. JEFFERSON, Louisiana
JOHN S. TANNER, Tennessee
XAVIER BECERRA, California
KAREN L. THURMAN, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Subcommittee on Health
BILL THOMAS, California, Chairman
Page 4 PREV PAGE TOP OF DOC
NANCY L. JOHNSON, Connecticut
JIM McCRERY, Louisiana
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
PHILIP M. CRANE, Illinois
AMO HOUGHTON, New York
SAM JOHNSON, Texas
FORTNEY PETE STARK, California
BENJAMIN L. CARDIN, Maryland
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
XAVIER BECERRA, California
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined. The electronic version of the hearing record does not include materials which were not submitted in an electronic format. These materials are kept on file in the official Committee records.
C O N T E N T S
Advisory of February 12, 1997, announcing the hearing
Page 5 PREV PAGE TOP OF DOC
Congressional Budget Office, Paul N. Van de Water, Ph.D., Assistant Director for Budget Analysis
Prospective Payment Assessment Commission, Joseph P. Newhouse, Ph.D., Chairman; accompanied by Donald A. Young, M.D
American Academy of Actuaries, Alice Rosenblatt
Oxford Health Plans, Inc., Stephen F. Wiggins
SUBMISSION FOR THE RECORD
American Hospital Association, statement
TUESDAY, FEBRUARY 25, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:10 a.m., in room 1100, Longworth House Office Building, Hon. Bill Thomas (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
Page 6 PREV PAGE TOP OF DOC
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON HEALTH
CONTACT: (202) 225–3943
FOR IMMEDIATE RELEASE
February 12, 1997
No. HL–2
Thomas Announces Hearing on
Medicare HMO Payment Policies
Congressman Bill Thomas (R–CA), Chairman, Subcommittee on Health of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing to examine Medicare Health Maintenance Organization (HMO) enrollment growth and payment policies. The hearing will take place on Tuesday, February 25, 1997, in the main committee hearing room, 1100 Longworth House Office Building, beginning at 9:00 a.m.
Page 7 PREV PAGE TOP OF DOC
In view of the limited time available to hear witnesses, oral testimony at this hearing will be heard from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
In recent years, there has been a rapid increase in the number of Medicare beneficiaries choosing to enroll in Medicare risk HMOs. While only 4 percent of eligible beneficiaries were enrolled in 1991, by 1996 this number had climbed to 11 percent. The Congressional Budget Office estimates that over the next decade, this trend will continue. By the year 2007, more than one third of the Medicare beneficiaries are expected to be enrolled in HMOs.
Under its risk contracting program, Medicare pays risk plans based on a county-level per capita monthly rate equal to 95 percent of the adjusted average per capita costs in the Medicare fee-for-service sector. Calculating the rates at the county level based on historical fee-for-service program spending results in wide variation in rates across counties. For example, the 1997 monthly per capita rates range from $221 in one county to $767 in another—an annual difference of $6,552.
Medicare's county-level payment rates are based on the costs of treating the average beneficiary. The Health Care Financing Administration currently uses a limited set of demographic characteristics to adjust the rates, including gender, age, Medicaid eligibility, institutional status, and employment status (working or non-working aged). Unfortunately, these adjustments do not accurately account for much of the variation in costs. Better risk adjustment methods could reduce Medicare costs and increase the choices available to Medicare beneficiaries.
Page 8 PREV PAGE TOP OF DOC
The President's fiscal year (FY) 1998 budget proposal fundamentally restructures the manner in which HMOs are paid by Medicare and reduces projected payments to HMOs by $34 billion from FY 1998 to FY 2002. The most significant policy change would be to sever the direct link between HMO payment rates and individual county-level fee-for-service spending. The proposal also would blend national and regional rates and institute a payment floor of $350 per month for payments in low-cost counties. Under the President's plan, the calculation of the HMO payment rates would exclude Medicare's special payments for direct and indirect medical education and to disproportionate share hospitals. Beginning in the year 2000, the President's plan would further reduce HMO payment rates by approximately 5 percent across-the-board to account for an ''overpayment'' which is alleged to occur due to risk selection.
In announcing the hearing, Chairman Thomas stated: ''We are encouraged by the growing number of beneficiaries choosing to enroll in private health plans. Clearly, giving Medicare beneficiaries the choice of enrolling in HMOs and other health plans will be a fundamental element of any plan to save Medicare. I am happy to see that the administration has come to the table with a plan that recognizes that fundamental changes must be made in Medicare's payment system. I look forward to reviewing the details of the administration's plan.''
FOCUS OF THE HEARING:
This hearing will focus on the implications of the President's budget proposals on Medicare HMO enrollment and spending. These proposals will be assessed in light of the Medicare recommendations developed for the Congress by the Prospective Payment Assessment Commission and the Physician Payment Review Commission, as well as the policies contained in the Medicare Preservation Act of 1995 and the Balanced Budget Act of 1995.
Page 9 PREV PAGE TOP OF DOC
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement for the printed record of the hearing should submit at least six (6) copies of their statement and a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of hearing noted, by the close of business, Tuesday, March 11, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Health office, room 1136 Longworth House Office Building, at least one hour before the hearing begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages including attachments. At the same time written statements are submitted to the Committee, witnesses are now requested to submit their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
Page 10 PREV PAGE TOP OF DOC
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and the public during the course of a public hearing may be submitted in other forms.
Note: All Committee advisories and news releases are available on the World Wide Web at 'HTTP://WWW.HOUSE.GOV/WAYS_MEANS/'.
Page 11 PREV PAGE TOP OF DOC
The Committee seeks to make its facilities accessible to persons with disabilities. If you are in need of special accommodations, please call 202–225–1721 or 202–225–1904 TTD/TTY in advance of the event (four business days notice is requested). Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.
—————
Chairman THOMAS. The Subcommittee will come to order. Today we are conducting the second hearing on the President's fiscal year 1998 budget proposal with a focus on the Medicare health maintenance organization payment policy. The Congressional Budget Office estimates that 12 percent of beneficiaries are enrolled in private HMO plans today and that that number will reach 23 percent by 2002 all other things being equal, and one of the things we are going to question is whether or not those numbers will be achieved since there are a number of folk who do not want to make sure that all other things are equal.
CBO further projects that more than one-third of the beneficiaries will voluntarily choose private health plans over the fee-for-service traditional Medicare by 2007. The reasons for the rapid rise of enrollment are assumedly apparent: beneficiaries are finding that well-run private health plans can generally provide more benefits with less out-of-pocket costs than fee-for-service Medicare. By enrolling in risk contract HMOs, beneficiaries can reduce their Medigap premiums or forgo them all together and forgo paperwork hassles.
We need to make sure that any changes we make in the Medicare HMO payment policy do not jeopardize the availability of private health plan options or inhibit the further expansion of beneficiary choice. This hearing will examine the concepts of the President's HMO payment proposal. I say examine the concepts because we have not yet gotten all of the legislative language to be comfortable with what the President is proposing in its entirety.
Page 12 PREV PAGE TOP OF DOC
According to the Office of Management and Budget scoring, projected HMO payments would be reduced by $34 billion between fiscal year 1998 and 2002. The biggest decrease in health plan payments, $18 billion, would come from the indirect effect of lower fee-for-service spending. In addition, there would be a $10 billion reduction from removing teaching and disproportionate share payments from the HMO payment rates. Finally, the President's plan includes an across-the-board reduction to the rates in years 2000 and beyond to, they argue, account for risk selection. These are significant changes, and they need to be evaluated carefully.
We have with us today three distinguished panel members to help us evaluate the President's proposal. I will introduce our witnesses in a moment. First, I will yield to my colleague and friend from California, the Ranking Member, Mr. Stark.
Mr. STARK. Thank you, Mr. Chairman, for holding this hearing. Clearly, we need to make savings in this sector of Medicare, and like you I am not convinced the administration's proposals are the best way to achieve the savings. I hope today's witnesses can help us find a way to achieve savings in these HMOs, who have been in a very real sense cheating the program. They have been the ones signing up healthier patients and avoiding the care of sicker patients. By concentrating cuts on those types of HMOs, we can avoid hurting the good HMOs that have been efficiently doing the right thing.
It was said by a former colleague of ours, something like pork roast and fatback come from the same animal, but there is a world of difference in the taste. Some HMOs are very good and some are just plain bad. For example, in today's panel, Puget Sound spends 96 cents of every premium dollar on health care while Oxford only spent 77 1/2 cents per dollar on medical care in 1995. Now, with nearly 20 cents a dollar difference, it is hard to imagine that the two HMOs provide the same level of quality and good outcomes. Similarly, a recent search of news articles indicates a litany of complaints about PacifiCare but great praise for Puget Sound. Now, clearly, there are major differences between HMOs and I hope we can explore how Medicare can reward the good plans and help consumers pick the plans that deliver health care rather than those that use up Medicare money in overhead and profits. I would like to enter into the hearing record recent data by the Sherlock Co. of Pennsylvania on HMO profitability and overhead costs along with a compilation of newsclips regarding the three HMO witnesses for today.
Page 13 PREV PAGE TOP OF DOC
Chairman THOMAS. Thank the gentleman. Without objection, the papers will be entered in the record.
Mr. STARK. Thank you, Mr. Chairman.
[The following was subsequently received:]
INSERT OFFSET FOLIOS 53 TO 65 HERE
[The official Committee record contains additional material here.]
—————
Chairman THOMAS. Let us begin then. Our first panelist, Paul Van de Water, who is the Assistant Director for Budget Analysis, Congressional Budget Office, will give us as much of an update as he is able given the materials that we have; Gail Wilensky, Chair of the Physician Payment Review Commission, who is accompanied by Dr. LeRoy; and Dr. Newhouse is with us, who is the Chairman of the Prospective Payment Assessment Commission, ProPAC, accompanied as always by Dr. Donald Young.
Let us begin with you, Paul, and then move across the panel.
STATEMENT OF PAUL N. VAN DE WATER, PH.D., ASSISTANT DIRECTOR FOR BUDGET ANALYSIS, CONGRESSIONAL BUDGET OFFICE
Mr. VAN DE WATER. Thank you, Mr. Chairman. Mr. Stark, Members of the Subcommittee, thank you for inviting me here this morning to discuss the role of health maintenance organizations in Medicare. Although the Congressional Budget Office has recently reduced its projection of spending for Medicare, the program's costs are still growing at rates that contribute substantially to the Federal deficit in the short term and are unsustainable in the long run. At the same time, CBO projects that enrollment in Medicare HMOs will continue to increase substantially.
Page 14 PREV PAGE TOP OF DOC
These two trends then raise the question, How can Medicare's HMO Program be changed so as to achieve budgetary savings in the short term and to help secure Medicare's survival in the long run? The shift in enrollment toward risk-based HMOs will not slow Medicare spending unless the program can retain some of the savings possible from managed care plans. In the short run, that result could be achieved in a couple of ways. The simplest alternative would be to reduce Medicare's payment rate from 95 percent of fee-for-service costs to some lower rate. Another way is to break the link between payments to HMOs and costs in the fee-for-service sector.
As fee-for-service enrollment shrinks, it makes less sense to base updates to HMO payments on fee-for-service spending in an area. Lower payment rates would achieve savings for Medicare, but at the same time they would slow the growth in HMO enrollment. In the longer run, a market-based strategy offers the most promising approach to slowing the growth of Medicare spending. Such a strategy would be based on a more competitive market and a defined contribution from the Federal Government. Although a complete restructuring of Medicare could require years to achieve, practical steps to begin that process could be undertaken now.
In particular, taking steps to make risk-based plans more widely available to beneficiaries would be conducive to long-term reform even though those steps would not reduce Medicare spending in the short run. One easy step would be to introduce a coordinated open enrollment period, similar to that in the Federal Employees Health Benefits Program, in which beneficiaries could select from all health plans available in their area. Another possibility would be to reduce the wide disparities in Medicare payments among counties. A third idea would be to expand the array of risk-based plans to include a larger range of managed care and private fee-for-service options.
The administration's proposal for Medicare managed care incorporates several of the foregoing ideas. The administration would continue to update HMO rates based on changes in Medicare spending, but it would change how those rates are calculated. Specifically, it would make five changes. One, it would reduce the percentage of Medicare's adjusted AAPCC, the adjusted average per capita cost, paid to plans from 95 to 90 percent starting in 2000. Two, it would remove payments for disproportionate share hospitals and graduate medical education from the AAPCC and return those funds directly to teaching and DSH hospitals based on the number of HMO enrollees they served. Three, it would narrow the gap between counties with high and low payment rates by phasing in a blend of local and price-adjusted national rates by 2002 and by setting a minimum payment rate of $350 per month. Four, it would ensure that no county's payment rate in 1998 and 1999 is reduced from the level in the previous year. That proposal includes a computation for budget neutrality intended to ensure that this provision and the $350 floor on payment rates would not increase HMO payments overall. And five, it would update the new payment rates by the growth in national Medicare spending per capita—with a minimum update of 2 percent a year—beginning in 2000.
Page 15 PREV PAGE TOP OF DOC
The administration's proposal also contains several features intended to make HMO enrollment more attractive to beneficiaries. I will list three of them: One, allow contracting with additional types of plans, including preferred provider organizations and provider-sponsored networks; two, establish an open enrollment period and provide beneficiaries with standardized comparative information about plans; and three, guarantee that Medigap coverage would be available at community rates for beneficiaries choosing to disenroll from a Medicare HMO.
The administration is still working out the details of some of its proposals, and CBO's analysis of the budget is not yet complete. However, we have reached some tentative conclusions about the effects of the administration's plan on HMOs. CBO estimates that the administration's proposal would not significantly increase or decrease enrollment in managed care plans. Reducing disparities between high- and low-cost areas, using a coordinated enrollment period, and contracting with additional types of plans, would tend to expand the managed care program. But enhancing the benefits package in fee-for-service Medicare and reducing HMO payments relative to those in the fee-for-service sector would tend to lower enrollment in managed care.
Guarantee of Medigap coverage on disenrollment raises more complex issues. Such a guarantee could encourage HMO enrollment by easing beneficiaries' worries that they might be locked into a plan they did not like, but it would simultaneously encourage the disenrollment of sicker beneficiaries from HMOs, compounding selection problems and causing Medigap premiums to increase.
CBO is currently estimating the effects of the administration's proposal on Medicare spending. The estimate of managed care savings depends upon both the managed care and the fee-for-service policies. We anticipate, however, that our estimate of savings in payments to managed care will fall somewhat short of the $34 billion that the administration projects. That ends my brief summary, Mr. Chairman.
[The prepared statement and attachment follow:]
Page 16 PREV PAGE TOP OF DOC
Statement of Paul N. Van de Water, Ph.D., Assistant Director for Budget Analysis, Congressional Budget Office
Mr. Chairman and Members of the Committee, thank you for inviting me to discuss the role of health maintenance organizations (HMOs) in Medicare. Although the Congressional Budget Office (CBO) has recently reduced its projections of spending for Medicare, the program's costs are still growing at rates that contribute substantially to the deficit in the short term and are unsustainable in the long run. At the same time, CBO projects that enrollment in Medicare HMOs will continue to increase substantially. Those two projections naturally prompt the question: can risk-based health plans become the foundation for a sustainable Medicare program?
Projections of Medicare Spending
CBO projects that spending for Medicare primarily for medical benefits will increase from $194 billion in 1996 to $317 billion in 2002 and $469 billion by 2007, an average annual increase of more than 8 percent. Although growth in Medicare has slowed since the late 1980s and early 1990s, it will continue to outpace the growth in resources that finance the program (see Table 1). CBO projects that federal revenues will grow by only 5 percent a year about the same rate as the economy.
Outlays for Hospital Insurance (HI) benefits will increase more rapidly than payroll tax revenues, depleting the HI trust fund by the end of 2001 (see Table 2). Moreover, because premiums for the Supplementary Medical Insurance (SMI) program may increase by no more than the Social Security cost-of-living adjustment after 1998, the share of costs covered by premiums will continue to shrink.
Page 17 PREV PAGE TOP OF DOC
CBO's projections assume that the number of Medicare beneficiaries enrolled in HMOs will grow rapidly. Although most beneficiaries remain in the traditional fee-for-service plan, enrollment in risk-based HMOs jumped from 7 percent of the total in 1995 to 11 percent in early 1997. CBO projects that the fraction of beneficiaries in such plans will approach 25 percent by 2002 and 35 percent by 2007. With growth in overall enrollment in Medicare rising very slowly over that period, the number of beneficiaries in Medicare's fee-for-service sector will decline in absolute terms (see Figure 1).
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 1 HERE
Several factors drive the strong growth in enrollment in risk-based plans that CBO projects over the next decade. First, because of the rapid shift in enrollment from fee-for-service to managed care plans in the private sector, an increasing proportion of people becoming eligible for Medicare at age 65 will already be HMO members. Second, rising premiums for Medigap coverage in the fee-for-service sector will make HMO enrollment relatively more attractive. Third, many employers are dropping or reducing the generosity of health insurance coverage for retirees.
Medicare's Payments to Health Maintenance Organizations
As a result of the rapid increase in HMO enrollment, payments to managed care plans are the fastest growing element of Medicare spending. CBO projects that such payments will increase from $18 billion in 1996 to $73 billion in 2002 a 26 percent average annual rate of growth. In contrast to the private sector, however, where the increasing importance of HMOs and other health care plans has helped to slow the growth in health insurance premiums dramatically, under current Medicare payment policies the program incurs no financial benefit from higher HMO enrollment. In fact, the available evidence suggests that the growth in HMO enrollment actually works to Medicare's disadvantage.
Page 18 PREV PAGE TOP OF DOC
Current Medicare Payment Polices
Medicare's current payment system for risk-based managed care plans is, by design, unrelated to their cost of doing business. Medicare pays risk-based HMOs 95 percent of the adjusted average per capita cost (AAPCC) for each beneficiary. The AAPCC is an estimate of what a similar beneficiary in the fee-for-service sector in the same county would cost the program. That payment mechanism was intended to allow Medicare to claim some of the savings expected from the more efficient practices of HMOs, while permitting any additional savings to be shared between the HMO and its Medicare enrollees.
Risk Selection
The calculation of the AAPCC takes into account a number of characteristics of beneficiaries that influence Medicare's costs: their age, sex, institutional status, Medicaid eligibility, disability status, and whether they have primary health insurance coverage through an employer. Those adjustments for health risk are crude, however, and result in overpayments.
Numerous studies suggest that Medicare's payment formula does not adequately adjust for differences in health status between HMO enrollees and fee-for-service beneficiaries. The Physician Payment Review Commission, for example, has estimated that new HMO enrollees incur below-average Medicare costs in the six months prior to their enrollment and that beneficiaries disenrolling from HMOs have above-average costs in their first six months back in the fee-for-service sector.
The consensus of the literature is that Medicare pays about 5 percent more on behalf of HMO enrollees than it would have paid if they had remained in the fee-for-service sector. One should note, however, that the available analyses are all based on a period when very few Medicare beneficiaries were enrolled in HMOs. The extent of Medicare's overpayment would decline in the future if HMO enrollment becomes more representative of the entire Medicare population.
Page 19 PREV PAGE TOP OF DOC
Regional Variations
Medicare's current payment system also results in large differences in payment rates among the nation's counties. The ratio of the highest AAPCC to the lowest is currently more than 3 to 1. Even adjusting for regional differences in input costs, that ratio is 1 1/2 to 1.
The variation in price-adjusted payment rates stems from regional differences in patterns of medical practice in Medicare's fee-for-service sector, as well as from differences in the health status of fee-for-service beneficiaries. Regional variation in payment rates contributes to differences in the benefits that HMOs offer to Medicare beneficiaries. HMOs in counties with a high payment rate are able to offer more generous benefits to enrollees than HMOs in counties with a low payment rate. Regional differences in benefits in turn contribute to regional differences in rates of enrollment in HMOs.
Achieving Savings From Risk-Based Plans
How can Medicare's HMO program be changed to achieve budgetary savings in the short term and help assure Medicare's survival in the longer run? The shift in enrollment toward risk-based HMOs will not slow Medicare spending unless the program can retain some of the savings possible from managed care plans. In the short run, that result could be achieved in a couple of ways.
The simplest alternative would reduce Medicare's payment rate from 95 percent of fee-for-service costs to some lower percentage. That approach would save money for Medicare. However, it would also diminish the attractiveness of HMOs to beneficiaries, because HMOs would be less able to offer their current array of additional benefits. Yet in markets in which both the payment rate and enrollment in HMOs are high, those effects are likely to be small.
Page 20 PREV PAGE TOP OF DOC
Another way of achieving savings is to break the link between payments to HMOs and costs in the fee-for-service sector. As fee-for-service enrollment shrinks, it makes less sense to base updates to HMO payments on fee-for-service spending in an area. One option is to set the rate of growth of risk-based payments so that it equals an external factor, such as the rate of growth of the economy. Lower updates would achieve savings for Medicare, but they would also slow the growth in HMO enrollment.
In the longer run, a market-based strategy offers the most promising approach to slowing the growth of Medicare spending. Such a strategy would be based on a more competitive Medicare market and a defined contribution from the federal government. Although a complete restructuring of Medicare could require years to achieve, practical steps to begin that process could be adopted now. In particular, taking steps to make risk-based plans more widely available to beneficiaries would be conducive to long-term reform, even though those steps would not reduce Medicare spending in the short run.
One easy step would be to overhaul Medicare's enrollment procedures. Although beneficiaries are currently given a list of risk-based plans in their area, no single, reliable source of information compares the features of those plans. Moreover, most beneficiaries are automatically enrolled in fee-for-service Medicare on first gaining eligibility. Instead, Medicare could institute a coordinated open-enrollment process similar to that of the Federal Employees Health Benefits Program in which beneficiaries could select from all health plans operating in their area. Beneficiaries would receive uniform information on all plans regarding benefits, costs, and access to providers.
Another possibility would be to reduce the wide disparities in Medicare payments among counties. That move would provide an incentive for risk-based plans to serve areas that now have low payment rates. At the same time, reducing payment rates in some high-cost areas could bring payments more into line with the costs that plans in those areas incur in covering Medicare services.
Page 21 PREV PAGE TOP OF DOC
A third idea would be to expand the array of risk-based plans to include a larger range of managed care and private fee-for-service options. Beneficiaries would be better able to find plans that suited their needs if the range of options was expanded, although doing so would also increase the possibilities for favorable selection. Offering a wider variety of plans could also raise a number of regulatory issues, such as solvency requirements, standards for quality of care, and antitrust considerations.
The Administration's Proposal
The Administration's proposal for Medicare managed care plans incorporates several of the foregoing ideas. The Administration would continue to update HMO rates based on changes in fee-for-service spending. However, it would change how those rates are calculated, and it would encourage additional HMO enrollment by expanding the type of plans eligible to participate and changing the regulations governing Medigap insurance.
Payments to Health Maintenance Organizations
The Administration's proposal would modify payments to HMOs in a number of ways. Specifically, it would:
• Reduce the percentage of the AAPCCs paid to plans from 95 percent to 90 percent starting in 2000.
• Phase in a reduction in the AAPCCs to reflect payments for dis-proportionate share (DSH) hospitals and graduate medical education. Removing those so-called special payments from the AAPCCs would reduce payment rates by about 5 percent. Those funds would be returned directly to teaching and DSH hospitals based on the number of HMO enrollees they served.
Page 22 PREV PAGE TOP OF DOC
• Narrow the gap between high- and low-AAPCC counties by phasing in a blend of 70 percent local and 30 percent national rates by 2002, and by setting a minimum AAPCC of $350 per month.
• Ensure that no county's AAPCC in 1998 and 1999 is reduced from its 1997 level. The proposal includes a computation for budget neutrality intended to ensure that this provision and the $350 floor on the AAPCCs would not increase HMO payments overall.
• Guarantee that the AAPCCs would be updated by a minimum 2 percent a year beginning in 2000.
Measures to Encourage Enrollment in Health Maintenance Organizations
The Administration's proposal also contains several features intended to make HMO enrollment more attractive to beneficiaries. It would:
• Allow contracting with additional types of plans, including preferred provider organizations and provider-sponsored networks.
• Coordinate changes in HMO enrollment status through third-party brokers, provide beneficiaries with standardized comparative materials about eligible plans and Medigap policies, and establish an annual open-enrollment period.
• Guarantee that Medigap coverage would be available at community rates for beneficiaries choosing to disenroll from a Medicare HMO.
Impact of the Administration's Proposal
The Administration is still working out the details of some of its proposals, and CBO's analysis of the budget is not yet complete. However, we have reached some tentative conclusions about the effects of the Administration's plan.
Page 23 PREV PAGE TOP OF DOC
CBO estimates that the Administration's proposal would not significantly increase or decrease enrollment in managed care plans. Reducing disparities between high- and low-cost areas, using a coordinated enrollment period, and contracting with additional types of plans would tend to expand the managed care program. But enhancing the benefits package in fee-for-service Medicare and reducing HMO payments relative to those in the fee-for-service sector would lead to lower enrollment in managed care plans.
The guarantee of Medigap coverage on disenrollment raises more complex issues. Such a guarantee could encourage HMO enrollment by easing beneficiaries' worries that they might be locked into a plan they did not like. But it would encourage the disenrollment of sicker beneficiaries from HMOs, compounding selection problems and causing Medigap premiums to increase.
CBO is currently estimating the effects of the Administration's proposals on Medicare spending. The estimate of managed care savings depends on both managed care and fee-for-service policies. We anticipate, however, that our estimate of savings in payments to managed care plans will fall short of the $34 billion that the Administration projects.
—————
—————
Chairman THOMAS. Somewhat short? Somewhat short? I was just commenting on the ''somewhat short.''
Mr. VAN DE WATER. Oh, I am sorry.
Chairman THOMAS. I do not know what ''somewhat short'' means, but we will pursue that.
Page 24 PREV PAGE TOP OF DOC
Ms. Wilensky.
STATEMENT OF GAIL R. WILENSKY, PH.D., CHAIR, PHYSICIAN PAYMENT REVIEW COMMISSION; ACCOMPANIED BY LAUREN B. LEROY, PH.D., EXECUTIVE DIRECTOR
Ms. WILENSKY. Thank you, Mr. Chairman. Thank you for inviting me here to present the views of the Physician Payment Review Commission on payment changes for HMO payment under Medicare. I would like to go through a few of the technical and policy issues that the PPRC has recently commented on and will be included in our 1997. Then I would like to talk about some of the policies that flow from those conclusions.
There has been rapid growth in HMOs under Medicare with about 13 percent of the Medicare beneficiaries now enrolled in HMOs. Appropriately, there is a lot of concern about the method used to set payments to HMOs that is based on fee-for-service spending in the local area adjusted for the characteristics of enrollees. These concerns include wide geographic variation in payments, and also that the payments are volatile. There have been concerns raised that the current methods for risk adjustment are not adequate to the job. I am going to talk more about that in 1 minute. Another concern is the use of the earmarked funds, particularly for disproportionate share and graduate medical education. And finally there has been some concern in using the county as the basis for payment rates and whether a unit that is that small geographically is causing some of the volatility problems.
In looking at ideas for changing payments to HMOs, there are several ways to go about it. One is to try to improve the basic payment now. That is the AAPCC. Another is to try to unlink the payment from fee-for-service. Now that could mean such things as has been proposed in the past as blending. That is, taking the national rate and the local rate and trying to not have wide disparities. It could mean something called trimming where you knock off the very low values now, some of the 250-dollar-per-member-per-month counties that now exist, and also some of the very highest rate values such as in Dade County where you have over 750-dollar-per-member-per-month payments. Or you could then find new ways to try to set those payments.
Page 25 PREV PAGE TOP OF DOC
One of the issues I would like to raise—this will come up for a number of policies that you may be considering—is that if you break the link from the local area fee-for-service, you need to be concerned about driving a wedge in the payment level available for HMOs versus what is going on in the fee-for-service market. As much as we may worry about inequities of why someone under Medicare should be able to have $750 if they live in Florida per month and why they should have payments of $250 if they live in certain counties in Nebraska, if you start making the payment differential too great within a geographic area, you are inviting unintended adverse consequences. So while you may want to think about reforming the payment—I think you should and I think there are ways to do that—you need to worry about driving a wedge within geographic markets.
In addition to unlinking from the fee-for-service fee, you could use market-driven competitive rates if you wish to do so. Probably, the most important single issue that you need to deal with is risk adjustment, and one of the recommendations of the Physician Payment Review Commission is that we need to start now. As you know, the President and administration has recommended going from 95 to 90 percent on the grounds that healthier people go to HMOs. This very crude blanket reduction will invite the kind of selection against the fee-for-service program that is now of concern. In fact, what we need to do is start doing better adjustment and to begin to do some now.
Let me give some ideas about how you could do that. One is by using administrative data. Use some of the fee-for-service claims data for new enrollees. Use some of the hospital no-pay bills to look at mortality rates which would provide us with information in terms of how much movement we might make toward average payment exists. We can begin to make some modest payment changes now based on administrative data such as making lower payments for new enrollees. This would recognize the diversity among plans in the distribution of new enrollees. Some plans have more than 70 percent of their members who have been in the plan for more than 6 years. Rather than reduce the amount paid to all HMOs no matter what their own enrollees look like, you could begin to take account for some of the different risks without inviting the problem that you are trying to correct.
Page 26 PREV PAGE TOP OF DOC
Finally, let me close on a point that has been raised both by you in the Subcommittee and by a number of commentators, and that is this notion as to whether the government ought to be looking to HMOs as a way to save Medicare money. I hope you will at least consider the notion that perhaps the government should try to be neutral with respect to where seniors seek to receive their care and to come up with payment policies that neither reward nor punish people for choosing various types of delivery systems. That means you must take account of risk selection as it occurs, but it would push the notion of looking at the proper payment irrespective of whether a senior chooses to receive traditional Medicare, to go to a network plan, or to go to an HMO. Your endpoint is somewhat different in terms of the role the government is attempting to carry out.
Thank you very much, Mr. Chairman.
[The prepared statement follows:]
Statement of Gail R. Wilensky, Ph.D., Chair, Physician Payment Review Commission
Mr. Chairman and members of the Committee, I am pleased to present the Physician Payment Review Commission's views and recommendations on several issues related to payment under Medicare managed care. Expansion of managed care and introduction of new private health plan options for Medicare beneficiaries present both opportunities and challenges. The Commission has been working closely with congressional committees and staff to provide analysis and recommendations that can help inform your deliberations. Any policy changes should further the goals of ensuring Medicare's financial solvency and beneficiary access to timely, appropriate health care services. Accomplishing these goals, however, creates a tension between setting payments that are high enough to provide access but are also affordable.
Over the past decade, there has been tremendous change in how Americans pay for and receive health care. Pressures to reduce growth in health care spending have created a new awareness among consumers, purchasers, and providers of the tradeoffs that arise when resources are finite. Managed care has grown in part because of purchasers and consumers' willingness to trade limits on access for lower health costs.
Page 27 PREV PAGE TOP OF DOC
Medicare can learn from the experience of the private sector. In fact, as commercial managed-care penetration grows and managed-care enrollees age into Medicare, it is inevitable that more and more beneficiaries will select this option within Medicare. But it is important to keep in mind that Medicare differs in important ways. First, Medicare managed-care enrollment, while growing, still lags substantially behind commercial enrollment (Figure 1). Second, although managed-care growth in the private sector has been associated with reduced cost growth, under current policy, this is not the case for Medicare. In fact, some studies suggest that managed care growth increases program outlays. Third, while the private market encompasses a broader range of plan options than Medicare currently permits, most individuals with employer-based insurance have only a limited number of plans to choose from.
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 2 HERE
The debate on Medicare managed care always eventually turns to payment. Changes in payment policy could serve several goals: reducing program spending, encouraging managed-care enrollment by making the program more attractive to plans in certain markets, and improving equity by reducing the variation in benefits offered by Medicare managed-care plans in different areas of the country. My testimony this morning focuses on these issues and the range of policy options that could be adopted. The challenge facing policymakers is to develop an approach to paying plans that is fair, reduces cost growth, and ensures that beneficiaries have access to appropriate care at a cost they can afford.
My statement begins with some brief background information about Medicare managed care and the issues that will arise as managed care choices expand. I will then sketch out how Medicare now pays managed-care plans and the problems associated with current policy which the Commission and others have identified. Finally, I will talk about the different options that the Congress could take to address these problems (including those included in the Balanced Budget Act passed in the last Congress and the President's recent budget proposal) as well the Commission's recommendations concerning implementation of these options.
Page 28 PREV PAGE TOP OF DOC
Medicare Managed Care: Plan Participation and Beneficiary Enrollment
As you know, Medicare managed care is growing. By the end of 1996, about 13 percent of Medicare beneficiaries were enrolled in some form of managed care, compared to 5 percent in 1990. Participation by beneficiaries varies widely, with over 20 percent of urban beneficiaries enrolled in managed care, compared to about 1 percent of rural beneficiaries. Although predominantly an urban phenomenon, enrollment rates differ across urban areas. Over half of beneficiaries in Riverside, CA, are in risk plans, for example, while virtually none are in Atlanta and Detroit (Figure 2).
Most plans participate in Medicare through the risk-contracting program. Under a risk contract, plans commit to providing Medicare-covered services to beneficiaries for a fixed monthly payment from the program. There were 241 risk contracts in effect at the end of 1996; 17 more have been added in the last two months (Figure 3).
The availability of risk plans varies widely across the nation. In most urban areas, beneficiaries can choose among several plans, while 80 percent of rural beneficiaries have no plan available. Overall, about two-thirds of beneficiaries are served by at least one risk plan; 25 percent have access to more than four plans (Figure 4).
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 3 HERE
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 4 HERE
Page 29 PREV PAGE TOP OF DOC
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 5 HERE
Current Policy Affecting Risk-Plan Payment, Benefits, and Premiums
Now let's consider the current policies that determine how much risk plans are paid and the benefits and premiums that enrollees receive. Going over a few of the basics will be helpful in understanding the problems created by these policies.
As a result of current policies and local competitive pressures, there is wide geographic variation in payments to plans, in the benefits available to beneficiaries, and in the premiums that they pay. For example, there is a three-fold difference between the lowest and highest county payment rates (Figure 5). Over 50 percent of 1997 county rates, however, are between $340 and $440. Currently, more than three-quarters of risk plans offer additional eye and ear care, and over half provide prescription drug coverage (Figure 6). By the end of 1996, two-thirds of plans provided benefits beyond those covered by Medicare at no additional charge to enrollees (Figure 7).
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 6 HERE
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 7 HERE
"The Official Committee record contains additional material here."
Page 30 PREV PAGE TOP OF DOC
INSERT OFFSET FOLIO 8 HERE
Setting Payments and Benefits
Payments, benefits, and premiums are the result of two separate administrative processes, as well as of local competitive pressures.
Process for Setting Plan Payments. Payments are set to reflect local fee-for-service costs. This measure is referred to as the AAPCC. Actual per capita spending is adjusted for differences in the characteristics of local populations. The resulting AAPCC is the expected local cost of caring for a typical beneficiary. Each county's payment is set at 95 percent of the AAPCC. Plans are paid this rate with an adjustment for the characteristics of their enrollees.
This two-step process of setting a local rate for a typical beneficiary in each county and then adjusting payments to plans based on actual enrollment was designed with two purposes. First, expected spending on managed care should equal that in fee for service less the 5 percent savings. Second, plans should be fairly compensated for the relative risks of their enrollees.
In setting both the local rate and the payment to a plan, adjustments are made to reflect the characteristics that affect beneficiaries' use of health care. The same five risk adjusters are used in both steps: age, sex, welfare status, institutional status, and working status. Separate adjustments are made and AAPCCs calculated for the aged, disabled, and end-stage renal patient populations.
Process for Establishing Required and Optional Benefits. The benefits and premiums that risk plans offer to beneficiaries are set in a second process. Plans submit adjusted community rate (ACR) proposals in which they estimate the cost of providing Medicare-covered services to enrollees based on the costs of serving their commercial population. If Medicare pays a plan more than these estimated costs, then the plan must return the difference to Medicare or to beneficiaries in the form of additional benefits. In practice, all plans opt to provide additional benefits to beneficiaries. The Commission estimates that in 1995, enrollees received additional benefits worth about $42 per month for which they paid no additional premium.
Page 31 PREV PAGE TOP OF DOC
In response to local competition, plans may also choose to offer even more benefits. The ACR proposal establishes the maximum premium that plans can charge for these optional benefits, but plans can choose to waive all or part of this premium. In 1995, enrollees received optional benefits worth about $45 per month for which they paid an average of $18 per month.
Concerns About Current Policy
The wide geographic variation and volatility in spending for traditional Medicare results in large differences in the AAPCC across counties. These differences in turn affect patterns of managed-care enrollment, premiums, and benefits across the country. They may contribute to the uneven pattern of Medicare managed-care enrollment that I described earlier. And they account, at least in part, for the wide and seemingly arbitrary variation in additional benefits that Medicare beneficiaries receive from risk plans in different markets.
Several factors that could be addressed in legislation contribute to this geographic variation. The most important of these are:
• Inadequacies of current demographic risk adjusters. Inadequate risk adjustment results in increased Medicare spending in two distinct ways. First, local rates may overstate the likely cost of a typical beneficiary because the AAPCC reflects only beneficiaries who remain in fee-for-service and who have higher costs than managed-care enrollees (Figure 8). If these beneficiaries are less healthy than those in managed care and their poorer health is not captured by the current demographic adjusters, then expected fee-for-service payments are overstated. This is referred to as base-rate bias. Better adjusters would make the AAPCC a more accurate reflection of expected outlays for a typical beneficiary and would reduce some of the variation in payments.
Page 32 PREV PAGE TOP OF DOC
Second, in addition to the local rate being too high, inadequate risk adjustment results in overpayments to plans for their particular enrollees. Current risk adjusters explain only a small portion of the variation in health care costs among Medicare beneficiaries. A more accurate set of risk adjusters would result in lower payments to plans reflecting their relatively healthier enrollment.
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 9 HERE
As I will explain in a moment, the Commission plans to make a series of recommendations concerning risk adjustment in its 1997 annual report to the Congress due on March 31.
• Inclusion of earmarked funds. Medicare makes payments to hospitals for graduate medical education and for serving a disproportionate share of low-income patients. Including these special funds in AAPCC-based rates contributes to geographic variation in managed-care payments. It also raises the question of whether these payments should be passed along to all managed-care plans, since they are targeted to compensate specific hospitals for special circumstances beyond the costs of caring for Medicare patients.
The Commission has recommended that these funds could be removed from the AAPCC. A related but separate issue is whether teaching and disproportionate share hospitals should receive additional compensation for seeing managed-care enrollees or whether managed-care plans should be compensated an additional amount for teaching or serving low-income patients. The Commission recommends that mechanisms be developed to ensure that hospitals and managed-care plans involved in training are paid fairly for these costs.
• Geographic basis of rates. Use of counties, which are relatively small geographic units, in setting payments leads to more geographic variation and volatility than may be appropriate. Variation and volatility reflect several factors, such as differences in practice patterns, difference in the health status of local populations, and, at least in some cases, small numbers of beneficiaries. Areas larger than counties would help address problems with the AAPCC and may be more consistent with the notion that managed-care plans serve markets, not counties. Using larger areas, however, loses information about the variation in health status at the county level that contributes to the accuracy of payment. For these reasons, any changes to geographic areas should be accompanied by implementation of better risk adjusters.
Page 33 PREV PAGE TOP OF DOC
It is important to recognize that even if all of these technical issues were resolved, under current policy, savings from managed-care enrollment can not exceed 5 percent. Because managed-care payments increase in lock-step with Medicare fee-for-service expenditures, cost increases in fee for service drive cost increases throughout the program. Expanding managed-care without increasing outlays will require breaking the link between managed-care payments and fee-for-service expenditures.
Proposals for Change
Over the past two years, the Congress and the Administration have been considering how to set Medicare capitated rates that are fair to plans and allow the program to benefit from managed-care efficiencies. Proposals to improve risk-plan payment policies were included in the Balanced Budget Act passed during the 104th Congress. Similar proposals were introduced by Senator Daschle and supported by the Administration last year and were more recently put forward in the President's fiscal year 1998 budget proposal. All of these proposals included provisions previously recommended by the Commission.
There are basically three different ways to reduce the variation in risk-plan payment rates. These approaches could be implemented to achieve budget savings, or could be budget-neutral, focused solely on reallocating payments across areas.
The first approach is to improve the AAPCC. Improving risk adjustment, removing earmarked hospital payments, and changing the geographic basis of the local rate would all result in better estimates of patient care costs, which would differ less across areas.
A second approach is to unlink risk payments from local spending, using current rates as a starting point for setting new rates. A variety of strategies could be used to set rates which have less geographic variation than those now based on the AAPCC. These include blending current local rates with national rates, trimming rates through floors and ceilings, and setting new ways to update local rates. Since these approaches begin with the AAPCC, the Commission recommends that if they are adopted, that they be adopted in tandem with the improvements in the AAPCC that I just mentioned.
Page 34 PREV PAGE TOP OF DOC
Finally, current policy could be discarded altogether in favor of market-driven competitive solutions. Under this approach, local market characteristics would be used to set rates, either through some form of competitive bidding or a defined federal contribution for both fee-for-service and risk beneficiaries. This approach would work only in markets with sufficient local competition. It could be adapted to markets with little managed-care penetration if payments are based on the experience of both managed-care and fee-for-service beneficiaries. The Commission has recommended that the Health Care Financing Administration (HCFA) test such alternative methods for setting payments, including competitive bidding and partial capitation.
The Importance of Risk Adjustment
Regardless of how payment rates are set, as long as Medicare beneficiaries can choose among options, improved risk adjustment will be essential. Otherwise, plans will not be fairly paid for enrollees with better or worse-than-average health status (for example those with chronic conditions or functional disability). Without improvements in risk adjustment, plans will continue to have an incentive to avoid enrolling patients who will be expensive to care for.
The Commission recommends that improved risk adjustment be implemented immediately. Although available approaches are not perfect, they would do a better job than the demographic factors currently used. As a first step, the Commission recommends that Medicare begin to phase-in risk-adjusted payment changes using administrative data. For example, our analyses and those of others would support an approach of paying less for new managed-care enrollees who have lower-than-average per capita costs. (New enrollees now account for 55 percent of Medicare managed-care enrollees, up from 43 percent in 1993.) Because there are substantial differences among plans in the proportion of new enrollees, this approach would be preferable to an across-the-board cut which would particularly hurt those plans with a large proportion of long-time enrollees (Figure 9). Since risk adjustment methods typically underpredict the true variation in costs and selection, improvements such as paying less for new enrollees do not risk over adjusting (that is paying too little) for individuals with certain characteristics.
Page 35 PREV PAGE TOP OF DOC
Steps could also be taken immediately to improve the availability of data useful for risk adjustment. For example, hospitals are now required to submit ''no-pay'' bills to HCFA for hospitalized managed-care enrollees but many do not do so. The potential use of these data for risk adjustment increases the importance of enforcing this requirement.
Use of administrative data for risk adjustment is only the first step. Over the longer term, the data and infrastructure required to support risk adjustment should be developed and implemented. This includes obtaining data that more accurately captures risk (such as those obtained from surveys of beneficiaries or encounter data collected by plans and their contracting providers), further development of risk adjustment models, and implementation of adjusted payment rates.
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 10 HERE
The President's budget proposal includes a provision aimed at recovering some of the overpayments due to inadequate risk adjustment. It calls for setting local rates at 90 percent of the AAPCC, instead of the 95 percent under current policy. Although this would mitigate the budget impact of risk selection against the fee for service program, it would not adjust for risk selection among managed-care plans and so would not reduce plans' incentives to avoid enrolling costly beneficiaries.
Effects of Change
The effect of any payment changes on total Medicare payments, plans, and beneficiaries will ultimately depend upon how they are implemented, how much payment levels change, and how plans and beneficiaries respond. The effect of payment floors, blended rates, and other approaches to reducing inappropriate variation in risk plan payments will differ, depending upon the exact combination of policies and the sequence in which they are calculated.
Page 36 PREV PAGE TOP OF DOC
The effects of changes on plan participation and beneficiary enrollment are also uncertain. If plans and beneficiaries are sensitive to payment rates, then rate changes could lead to participation increases in areas with increased rates and declines in those where rates drop. But if plans and beneficiaries are relatively insensitive to risk-plan payment rates, then we might not see such effects.
Unfortunately, there is little information that could guide us in predicting how plans and beneficiaries will react to payment changes. Researchers have been examining this question but their conclusions have been mixed. A staff analysis for the Prospective Payment Assessment Commission (ProPAC) indicates that plan entry into the risk program is highly sensitive to the local payment rate. Another recently published study found that beneficiary enrollment rates are much more sensitive to factors such as local managed-care penetration in the commercial market than to local Medicare rates.
If risk payments differ from per capita fee-for-service outlays, then more detailed information about beneficiaries' enrollment behavior will be required in order to make accurate budget projections. In particular, it will be important to understand how beneficiaries of different risk categories select between managed care and fee for service.
Conclusions
It is important to recognize that payment policy is only one of the factors that will determine the future of managed care within Medicare and its impact on the federal budget, beneficiaries, and providers. Realizing the potential of Medicare managed care will also require policy changes to minimize risk selection. Policies concerning information available about choices, the enrollment and disenrollment process, and enrollee grievance procedures must work together to allow plans to compete effectively and to protect beneficiaries. The Commission has made a variety of recommendations about these topics that I hope will provide the Congress some guidance.
Page 37 PREV PAGE TOP OF DOC
I would also like to take the opportunity to mention that since the vast majority of Medicare beneficiaries remain in fee-for-service (and are likely to do so for the next decade), the Commission has also devoted some time to issues related to improving traditional Medicare's performance. I would be glad to provide information about these issues to the Committee.
—————
Chairman THOMAS. Thank you, Dr. Wilensky.
Dr. Newhouse.
STATEMENT OF JOSEPH P. NEWHOUSE, PH.D., CHAIRMAN, PROSPECTIVE PAYMENT ASSESSMENT COMMISSION; ACCOMPANIED BY DONALD A. YOUNG, M.D.
Mr. NEWHOUSE. Thank you, Mr. Chairman, for inviting me here to testify. I am representing Prospective Payment Assessment Commission and have Donald Young with me. As you noted in your opening statement and as our chart 1 demonstrates, the risk program at one level has been quite a success because enrollment has grown strikingly. Since 1993, it has grown 32 percent a year. At another level, it has not been successful in achieving savings for the Medicare Program. There are many reasons for that that the previous witnesses have alluded to and, in fact, in our report that will be forthcoming to you next week, we recommend a number of modifications that are largely consistent with what you have heard from the prior two witnesses.
Our recommendations focus on risk adjustment, on payment amounts, and on risk plan information. I will talk about risk adjustment and payment amounts this morning. The research that has been done on risk adjustment suggests that the Medicare payments for the at-risk plan enrollees are an estimated 5 to 7 percent too high. That is the basis for the administration recommendation. It means that Medicare is losing rather than saving money on the risk program. Those overpayments would be reduced if the payments for enrollees were adjusted to account for their likely use of services.
Page 38 PREV PAGE TOP OF DOC
The overpayments are, of course, controversial, but I do not think it is so controversial that an adequate risk adjustment method should not be implemented that would reduce payments for any plans that had healthier enrollees and pay more to plans that had sicker beneficiaries—all plans are not alike. Research has gone along two different lines in developing better risk adjustors. One uses information on diagnosis. If a plan enrolled a woman with breast cancer, for example, it would pay that plan more. The other uses self-reported health and functional status. A risk adjustment method could use both kinds of information, but diagnosis information alone does about as well as both methods and that is what we would recommend.
Even the best available risk adjustment method, however, does not fully offset any efforts by plans that are going to seek out healthier beneficiaries, which means that research on risk adjustment ought to continue. And in the meantime, a partial capitation method should be investigated to reduce risk selection. That would partially pay plans on the basis of actual utilization, which would presumably be less for plans that had healthier members.
Our chart 3 documents the geographic variation that the previous witnesses have alluded to in the AAPCC. We would also like to reduce that. After you adjust for differences in input prices, you see that there is about a 200-dollar-a-month spread for urban and rural areas. In chart 4, you see the spread within the Washington, DC, metropolitan area going from about $600 a month in Prince George's County to around $400 a month in Fairfax. We recommend several changes that would reduce the geographic spread. We also recommend taking out the teaching and disproportionate share payments, accounting for use in military and veterans facilities, and making other changes in payments.
We also agree with the previous witnesses that it would be good to break the link with the fee-for-service payment system, and that judgment could be used in updating the rates as it is on the fee-for-service side. In the longer run, we would like Medicare to investigate more competitive methods such as bidding or negotiations. Let me conclude by referring to chart 6 which shows that limiting payments and cutting the geographic spread will have the effect probably of reducing benefits to beneficiaries. What this chart shows is that areas in the high payment rate areas provide more extra benefits than plans in areas where the AAPCC is less, which is not terribly surprising. Since I see my time is up, let me stop, and I would be happy to answer your questions as best I can.
Page 39 PREV PAGE TOP OF DOC
[The prepared statement follows:]
Statement of Joseph P. Newhouse, Ph.D., Chairman, Prospective Payment Assessment Commission
Good morning, Mr. Chairman. I am Joseph Newhouse, Ph.D., Chairman of the Prospective Payment Assessment Commission (ProPAC). I am accompanied by Donald Young, M.D., the Commission's Executive Director. We are pleased to be here today to discuss improvements to Medicare's risk contracting program. During my testimony, I will refer to several charts. These charts are appended to the end of my written testimony.
In 1985, Medicare implemented the risk contracting program. Under this program, participating health maintenance organizations (HMOs) receive a monthly capitation payment to provide the Medicare benefit package to each beneficiary they enroll. The risk program was created to allow Medicare to enjoy some of the advantages of capitation arrangements, such as predictable spending and savings. Beneficiaries who join risk plans also benefit because many plans provide additional services and have low cost sharing requirements.
On one level, the risk program has been a success because more and more beneficiaries are choosing to receive services under these arrangements. Since 1993, enrollment has increased, on average, 32 percent each year. Today, 4.2 million beneficiaries, or 11 percent of the total Medicare population, have chosen this option for their health care coverage (see Chart 1).
The risk program has yet to be successful, however, in its goal of achieving savings for the Medicare program. Capitated managed care arrangements have the potential to restrain Medicare expenditures because they create incentives to control the number of services furnished, as well as the cost of each unit of service. These arrangements have helped to curb spending in the private sector. To date, however, the risk program has not achieved the savings that the private sector experience suggests is possible. There are several reasons for this, most notably that Medicare payments to plans do not reflect their enrollees' lower-than-average probability of using health care services. Another reason is that the capitation rates are based on the spending experience of beneficiaries in the fee-for-service program, rather than the costs that would be expected under a managed care arrangement.
Page 40 PREV PAGE TOP OF DOC
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 11 HERE
In H.R. 2491, the Balanced Budget Act of 1995, the Congress passed a number of reforms to improve the payment methodology for managed care plans. The President also has proposed a number of modifications in his recent budget proposal. ProPAC agrees with the Congress and the President on the need to better adjust risk payments and to move away from fee-for-service spending as a basis for setting rates.
In our forthcoming Report and Recommendations to the Congress, the Commission will recommend a number of modifications that it believes are necessary to improve the risk program. We believe that, if adopted, these actions will benefit both the program and its beneficiaries. These recommendations focus on improvements in three areas: risk adjustment, payment amounts, and risk plan information. This morning, I would like to share with you the Commission's views. But first I will briefly summarize the current method for paying risk plans.
The Risk Payment Methodology
As you know, Medicare pays risk plans a monthly payment for each Medicare enrollee to cover the program's share of costs for Medicare-covered services. This rate is based on 95 percent of projected fee-for-service Medicare program payments (the adjusted average per capita cost or AAPCC) in the county in which the enrollee resides. Separate rates are calculated for aged and disabled beneficiaries and for those who are eligible for Medicare because they have end-stage renal disease. The rates are adjusted by five factors to account for variations in enrollees' health care needs. They are the enrollee's age, sex, Medicaid status, institutionalized status, and whether the person has employer-based coverage. As I will discuss in a moment, these adjustments are not adequate to reflect enrollee spending patterns.
Page 41 PREV PAGE TOP OF DOC
The Medicare program recognizes that risk plans are likely to keep their costs below their payments. While plans are permitted to return to the program any payments that exceed their projected costs, they also may use them to provide extra benefits to risk enrollees. Not surprisingly, most plans choose to offer extra benefits in the form of additional services, lower cost-sharing, or coverage of services from out-of-network providers. To further attract Medicare beneficiaries, plans may include even more benefits than they are required to provide.
Almost every risk plan provides some type of extra benefits. In 1996, the vast majority of plans covered routine physicals and eye exams. Half of plans offered some type of pharmaceutical benefit and two-thirds charged no premium for their basic package. A ProPAC analysis estimated that in 1995, the average risk plan provided each enrollee with $43 in extra benefits each month. The amount of extra benefits varied tremendously across the country, however, even after adjusting them to reflect differences in local price levels (see Chart 2). In 1995, a tenth of plans offered extra benefits valued at over $100 per enrollee per month while another 10 percent offered less than $1. As I will describe later in my testimony, the level of extra benefits that risk plans provide is associated with the payment rates in the areas the plans serve. The variation in the value of extra benefits suggests that fee-for-service spending patterns are not good predictors of the costs plans might be expected to incur.
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 12 HERE
Improving Risk Payments
Mr. Chairman, as both the Congress and Administration recognize, if managed care is to be a viable option under Medicare, the risk program must be modified. First, the program needs better risk adjustment methods. Second, Medicare must revise the risk payment methodology. Immediate changes would begin to break the link to fee-for-service spending and reduce the variation in payment rates across areas. Over the longer term, Medicare should consider new ways of setting risk payment rates. I would like to briefly address each of these issues.
Page 42 PREV PAGE TOP OF DOC
The Risk Adjustment Method
In concept, the risk program should generate savings for Medicare because the payment rate is 5 percent less than the fee-for-service spending that would be expected for each beneficiary in an area. Instead, however, research has shown that Medicare payments for current risk enrollees are, on average, an estimated 5 to 7 percent greater than if these beneficiaries had remained in the fee-for-service option. Thus, Medicare is losing, rather than saving, money on the risk program.
These overpayments would be reduced, and spending more appropriately distributed, if payments for enrollees were adjusted to account for their likely use of services. An adequate risk adjustment method would do this. It would reduce risk plan payments relative to fee-for-service spending to reflect the healthier population of risk plans. Further, it would increase payments to plans that serve sicker beneficiaries and reduce them to plans that have healthier enrollees.
Researchers have been evaluating methods that could be used to better target risk payments. Two have been studied. One uses diagnosis information that accounts for prior health service use. The other is based on enrollee reports of their health and functional status, and past and present health conditions. While a risk adjustment method could be designed that would draw on both types of information, diagnosis information alone measures risk about as well as using both methods together. An outlier policy to address unusually costly enrollees would further improve payments to risk plans.
An improved risk adjustment system would reduce overall risk plan payments as well as redistribute funds across plans and areas. Therefore, it may be appropriate to phase in a new system over time. Mr. Chairman, we know, however, that even the best available risk adjustment method will not fully offset efforts by plans that seek out healthier beneficiaries. Therefore, research needs to continue to seek further improvements in risk adjustment methods. This would help to ensure that Medicare payments to risk plans reflect the health care needs of their enrollees. In the meantime, a partial capitation method should be investigated as a means to reduce the effects of risk selection. This approach would pay plans partially on the basis of their enrollees' utilization, which would be lower for plans that had healthier members.
Page 43 PREV PAGE TOP OF DOC
Risk Plan Base Payments
Another fundamental problem with the risk program is its reliance on fee-for-service spending to set risk payment rates. This approach has resulted in wide variations in risk payment rates. This year, for example, risk plan payments are based on rates that vary by as much as $500 per member per month depending upon the county they serve. Even after adjusting for differences in local input prices, per person payment rates can vary by as much as $200 per month across both urban and rural areas (see Chart 3).
In addition, a plan offering services in neighboring counties may receive very different risk payments for enrollees living in those counties. For example, in the Washington, DC area, the 1997 monthly per person rates range from $401 in Fairfax county to $602 in Prince George's county—a 50 percent difference (see Chart 4).
The current degree of payment variation across areas, particularly among plans within the same area, does not seem to be justified. There are areas where payments are such that risk plans can provide extra benefits. At the same time, payment rates may be too low in other areas, discouraging plans from participating in the program.
In our upcoming report, the Commission recommends several changes to the current system that would result in more appropriate payment levels. These include removing special payments associated with teaching and disproportionate share hospitals, accounting for services provided in military and veterans' facilities, and making other changes that would increase minimum payment levels and further reduce payment variation. I would like to discuss each of these issues in turn.
Removing Special Payments—Part of the variation in risk payment rates relates to Medicare fee-for-service payment policies that may not reflect the way managed care organizations operate. Because of the way they are determined, the capitation rates include special payments to hospitals that have graduate medical education programs or serve a disproportionate share of low-income patients. Risk plans, however, are not required to use these providers, or pass along these extra payments to them. Consequently, the capitation rates in these areas may be higher than risk plans' costs.
Page 44 PREV PAGE TOP OF DOC
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 13 HERE
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 14 HERE
The Commission believes teaching and disproportionate share payments should be removed from the calculation of risk payments. In 1995, these special payments represented about 5.3 percent of total Medicare program spending, with wide variation at the county level. Among the 30 counties with the greatest risk enrollment in 1995, teaching and disproportionate share payments ranged from 1 percent of total fee-for-service spending to almost 20 percent.
This change would reduce the rates the most in counties where fee-for-service spending is higher because of these special payments. In most counties, however, the amount of these payments is low so that risk payment rates would change only slightly. The Commission also believes a separate mechanism should be developed to make additional payments to teaching and disproportionate share hospitals for the Medicare risk plan enrollees they treat. This is necessary to preserve Medicare beneficiaries' access to care in these facilities and to continue Medicare's support for the special roles these institutions play in teaching, research, and serving the poor.
Accounting for VA and DoD Services—Another source of variation is due to services received by Medicare beneficiaries in facilities operated by the Departments of Veterans Affairs and Defense that are not accounted for in Medicare's calculation of fee-for-service rates. In those areas where risk enrollees do not use these facilities to the same extent as beneficiaries in the fee-for-service system, risk payments may be too low. In areas with little risk enrollment, these lower rates might discourage risk plan participation. If payment rates were increased in these areas, adjustments might be needed for those risk enrollees that continue to use DoD or VA facilities.
Page 45 PREV PAGE TOP OF DOC
Other Changes—Even with the modifications I have just mentioned, the Commission believes that other changes are necessary to improve capitation payments. In some areas, payment rates may need to be increased to a minimum level to provide adequate payment for the costs of providing Medicare services. This may be especially important in rural areas where sparse populations and less developed health care infrastructures add additional cost requirements for plans. Any increase in payments, however, should be offset either by reducing all payment rates above the minimum level or by lowering the highest rates.
Overall variation in capitation rates could be constrained in several ways. One way would be to blend local amounts with the national average rate, bringing all payments closer to the average.
Updating Risk Payments
In addition to recommending changes to risk plan base payment rates, the Commission believes that the method for updating payments must be replaced. Currently, risk payments change each year based on the spending experience in the fee-for-service sector. Because spending in many areas is quite variable, there can be profound changes in risk payments from year to year—especially in counties with few beneficiaries. For example, between 1996 and 1997, the payment rates for several counties jumped by 25 percent or more, while other counties experienced payment decreases of 10 percent or more (see Chart 5). Even for relatively large counties, the rates can vary substantially from year to year. Moreover, the problem can be compounded in areas where relatively healthy beneficiaries are choosing to enroll in risk plans. In those areas, risk plan payment increases are based on the higher spending patterns of sicker beneficiaries remaining in the fee-for-service system. Thus, the payment rates may become increasingly out of line with the costs of serving the risk enrollee population.
Page 46 PREV PAGE TOP OF DOC
Mr. Chairman, this method of updating risk payments is flawed on several fronts. First, and perhaps most importantly, the method provides no way for Medicare to share in savings that occur when risk plan costs increase more slowly than the payment rate. Any difference between payments and costs goes towards extra benefits to enrollees. While extra benefits may be useful to attract beneficiaries, Medicare has no means for retaining any of the excess payment.
Second, updating risk plan payments based on changes in fee-for-service spending may not reflect the performance of managed care plans in providing services to risk enrollees. The fee-for-service system is fundamentally different than managed care. Spending growth under fee-for-service is driven in large part by increases in the volume and intensity of services provided, which reflect fee-for-service payment incentives. A capitated system, by contrast, seeks to control the volume of services provided. In addition, unlike the fee-for-service system, risk plans can negotiate lower prices with providers and can sometimes shift patients from more expensive settings to less costly ones.
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 15 HERE
The current system for updating risk payment rates should be discarded and replaced by a method that is analytically-based. A formula approach similar to one the Commission uses to recommend hospital payment increases should be implemented. Such a framework would consider factors that are likely to affect plan costs, such as inflation and industry productivity improvements. In this way, Medicare could break the link to fee-for-service spending and permit Medicare to share in the savings associated with any increase in efficiency.
Longer Term Changes to Risk Payments
Page 47 PREV PAGE TOP OF DOC
The Commission believes that risk payments should be based on the costs that an efficiently run plan would be expected to incur in providing Medicare-covered services. As you know, however, this level is difficult to determine. While the Commission believes its recommended changes to the current system will improve the risk payment methodology, it also believes Medicare should begin looking at alternative ways for determining capitation rates. Market-based methods such as competitive bidding and third-party negotiations should be explored. These approaches also would break the link to fee-for-service spending and permit Medicare to take advantage of many of the same forces private sector purchasers have successfully relied on to reduce their health care costs.
Risk Plan Participation and Beneficiary Enrollment
Changes to the risk payment methodology are necessary to ensure the success of the risk program. These changes have the potential to affect HMO participation in the program as well as beneficiary enrollment. Participation and enrollment could rise in areas where payment levels are increased but could fall in areas where rates are reduced. The likely impact of any changes, however, is difficult to quantify because participation and enrollment depend upon a number of factors. The changes we recommend, however, likely would differ little from changes that any prudent purchaser would impose given similar circumstances.
A recent ProPAC analysis found that HMOs are more likely to participate in the risk program in urban areas with higher payment rates. At the same time, however, there are areas with relatively low payment rates where HMOs participate in the risk program and areas where there is minimal participation despite relatively high payment rates. This suggests that characteristics of the market as well as of the HMO itself also play a role in participation decisions. ProPAC analyses indicate that larger and older HMOs are more likely to participate. This may indicate that success in the commercial market is an important factor in an HMO's decision to enter the risk market. The extent of risk plan competition in an area also influences participation decisions; HMOs are less likely to enter a market where they would face a number of competitors.
Page 48 PREV PAGE TOP OF DOC
Consequently, decisions to participate in the risk program involve a complex decisionmaking process, of which payment rates are only one factor. If faced with lower payment rates, participating plans can choose to not renew their contracts, but there are less drastic alternatives that plans might pursue. Plans could lower their costs through tightening administrative spending, accepting lower profits, or negotiating more stringent rates with providers. They also could reduce the level of extra benefits they offer beneficiaries.
Raising payment rates in certain areas would encourage participation, but other factors may limit HMOs' responses. For example, provider shortages and sparse populations may have a greater influence on plan decisions in rural areas. I should point out that participation may increase in all areas if the Congress decides to expand the program to include additional entities, such as provider service organizations. This may be especially relevant in rural areas where providers who already serve Medicare beneficiaries may choose to develop these entities. Again, however, many factors are likely to come into play.
The impact of rate changes on beneficiary participation also is unclear. A primary reason why Medicare beneficiaries join risk plans is because they can receive extra non-Medicare covered services at no additional costs. ProPAC analyses indicate that plans serving areas with higher payment rates tend to provide richer benefit packages (see Chart 5). But like plan participation decisions, the level of extra benefits offered by plans is influenced by other factors as well. For example, plans in more competitive areas tend to provide a higher level of extra benefits than plans that have little or no risk plan competition.
Limiting payment rates may reduce the level of extra benefits that risk enrollees would receive. Given the relatively generous extra benefits in high payment areas, it is likely that beneficiaries in these areas would still receive some amount of extra benefits, regardless of any payment reductions. In addition, plans may have other incentives, such as competitive pressures, to forego a share of their profits to maintain a competitive benefit package. It also is possible that as more commercial managed care enrollees age into Medicare, they may choose to continue their coverage under a managed care arrangement, regardless of the level of extra benefits.
Page 49 PREV PAGE TOP OF DOC
"The Official Committee record contains additional material here."
INSERT OFFSET FOLIO 16 HERE
Improving Risk Plan Information
Mr. Chairman, as the risk program continues to expand, it is increasingly important that the program have sufficient information to ensure that risk payments are appropriate and that plans are delivering quality care. In addition, beneficiaries need to have comparative information to make informed choices between competing risk plans, or choosing between the risk option and remaining in fee-for-service.
Currently, discussions about risk plan payments and costs are hindered because there are no data available on the actual costs risk plans incur to provide Medicare services. The only cost data available are from the adjusted community rate (ACR) proposals that plans annually submit to HCFA. These proposals, used to determine the level of extra benefits that risk plans are required to offer, set forth plans' projected costs in providing the Medicare-covered benefit package, including administrative outlays and profit.
The process used to arrive at these projections is indirect. Plans estimate the monthly per enrollee costs needed to provide the Medicare benefit package to their commercial population and then adjust these estimates upward to reflect the higher usage rates of an older, sicker Medicare population. There is no mechanism to learn whether, and to what extent, risk plans' actual Medicare costs are above or below their projections.
These cost projections may be particularly distorted because of the method plans use to calculate their Medicare administrative costs and profit estimate. Risk plans apply the share of their commercial costs that is devoted to administration and profit to their estimated Medicare patient care costs to obtain this estimate. Because Medicare's service-related costs are, on average, about triple those in the private sector, the amount of costs attributable to Medicare administration and profit is also about three times higher. According to ProPAC analyses of 1995 data, plans estimated they would receive, on average, about $20 per month to cover administrative costs and profit associated with each commercial enrollee. Because of the allocation formula, however, these items accounted for about $66 of risk plans' projected Medicare costs per member per month. I should note that these costs do not affect the payment that plans receive, but rather can alter the level of additional benefits that plans may be required to offer beneficiaries.
Page 50 PREV PAGE TOP OF DOC
The Commission recommends that the Secretary require plans to provide information to assess the costs of furnishing services to Medicare enrollees. This information is needed to evaluate the appropriateness of plan payments as well as the relationship between payments and costs of care. This information could also be used to assess whether plans are returning appropriate amounts of excess payments to beneficiaries through extra benefits. This data collection would not need to be overly burdensome. It could be obtained through a process similar to that of preparing the current ACR proposal.
Information to monitor and assess the quality of care provided by risk plans also is needed. In a managed care environment where there are incentives to provide less rather than more care, concerns about the quality of care are heightened. The Commission supports the Secretary's efforts to evaluate Medicare risk plans through the use of the Health Plan Employer Data and Information Set (HEDIS) and enrollee satisfaction surveys. While this is a good first step, the Commission believes that quality measurement tools should be evaluated continually and modified to improve the evaluation of plan performance.
Finally, as the risk program expands, more and more beneficiaries will have the choice of enrolling in a risk plan, and choosing among risk plans. To date, beneficiaries have not had adequate information for making these choices. Information about the risk option furnished by Medicare has been general and provided only to new beneficiaries or those who request it. This year, HCFA will introduce a number of initiatives to improve the information beneficiaries can use to decide whether to join a risk plan. ProPAC believes that all beneficiaries should receive quality and satisfaction data about risk plans as well as the fee-for-service system. In this way, beneficiaries can make informed decisions about which option is better for them.
Conclusion
Page 51 PREV PAGE TOP OF DOC
As Medicare managed care continues to expand, the growth in overall Medicare spending will depend increasingly on the performance of the risk program. This program has the potential to restrain Medicare spending, but only if problems with the payment methodology are addressed. Relying on the current risk adjustment methods and fee-for-service spending distorts risk plan payments. Changes that move towards breaking this link would permit Medicare to fulfill its role as a prudent purchaser of quality health care services for its beneficiaries.
This concludes my formal statement, Mr. Chairman. I would be pleased to
answer any questions from you or other members of the Subcommittee.
—————
Chairman THOMAS. Thank you. I appreciate that. We have three panels and we will try to adhere to the lights a bit more than we did in the last Subcommittee hearing.
Paul, you ended your statement by saying that the President's plan may fall somewhat short in the 5-year period of saving the $34 billion. My assumption is you have not yet honed your instruments enough to tell us how far short?
Mr. VAN DE WATER. That is correct, Mr. Chairman.
Chairman THOMAS. We await that information. The second thing the President does is under his argument say that he reduces it by $34 billion, but that enrollment will continue to increase in HMOs. Are you beginning to see that same pattern, which is the old model of losing on every model but making it up in volume? Is that actually going to happen, or can you tell us that yet?
Mr. VAN DE WATER. As I think you indicated, Mr. Chairman, in our baseline, we assume there will be continued substantial growth in enrollment in Medicare risk plans. The current rate of enrollment in risk plans is about 11 percent, and we project that under current law—that is, without any of the changes contemplated by the President or any other proposals—enrollment in risk plans would reach about 25 percent of the total by 2002 and about 35 percent by 2007.
Page 52 PREV PAGE TOP OF DOC
As I indicated in my statement, our tentative conclusion is that the President's proposal will not have much effect on the rate of growth of HMO enrollment that would otherwise occur. There are things in the President's proposal that would encourage HMO enrollment; there are also items that would tend to make HMO enrollment less attractive. We think, as a working assumption, that the pluses and minuses will roughly cancel out.
Chairman THOMAS. Thank you. Dr. Wilensky, you talked about part of the President's proposal especially in trying to deal with the AAPCC and the enormous discrepancies that you indicated. It is a little bit like Yogi Berra's ''deja vu all over again'' because we wrestled with the same problem, and interestingly enough, when we finished our conference report, our floor was eventually to be $350. There was an attempt to try to reduce the more than 3-to-1 ratio. Unfortunately for us, today we lost that double digit increase that could have been used to deal with the disparity, but as I look at some of the President's proposals, they do not look a lot unlike what we were talking about.
If he is approaching it somewhat similar, which I believe to be the case—would you agree—were there advantages to what we did or advantages to what the President is doing because although our goal is the same, reduce the spread, it is done differently, and what, if you have had a chance to analyze it, are the consequences of doing it the way the President is doing it versus the way we talked about doing it in the Balanced Budget Act?
Ms. WILENSKY. As you indicated, blending rates between the local and the national, and trimming which gets rid of the very low and high values were in the Medicare Preservation Act that was passed. They are also in the President's proposal. So that in those areas, they are similar. There are two areas that are different. A third, removing disproportionate share and graduate medical education, was an issue that has been raised before.
The area that I am particularly concerned about has to do with the reduction from 95 to 90 percent across the board, which was not dealt with last year. I do think it is possible to introduce some better risk adjustors now, but not one that is nearly so crude. But it exacerbates the other issue, which was handled last year but is not handled this year, and that is not bringing spending rates in an area in fee-for-service back in line with what goes on in capitation. As I indicated, I think there is a real problem that is brewing. Let us use the low spending county as an example. If in the fee-for-service area, in some counties of Nebraska, the spending is $250 per person per month approximately in fee-for-service, but in an HMO that amount will now be $350 because that is where the floor is, you are going to make it very difficult for fee-for-service medicine to continue in those counties. Similarly, in the very high areas, if your choice is being in fee-for-service medicine and having $750 spent on your behalf or being in an HMO and having $650 spent on your behalf, especially if you had slightly better risk adjustors, you are going to push people out of HMOs. So when you start making these adjustments to get rid of the very low and high values, it becomes very important that you bring spending in the fee-for-service area to that same level.
Page 53 PREV PAGE TOP OF DOC
That happened more or less with the so-called fail-safe mechanisms which are now not being contemplated. Having the reduction from 95 to 90 percent is going to exacerbate some of the problems of risk selection, and I worry about that enormously. I think there is a real issue there, but this is not the way to handle it. We can do better. We can start now, and as we get better data, better methodologies, we can improve it. This is going to make the problem worse.
Chairman THOMAS. My concern is if we wait around for the perfect risk adjustor, we will be waiting around a long, long time, and if we find better tools than we have now, plug them in and as we get better ones——
Ms. WILENSKY. It is the very strong belief of the Physician Payment Review Commission that we can and should start now improving risk adjustment.
Chairman THOMAS. Yes. Dr. Newhouse, in your testimony, you say that changes—at the top of the page—changes to the risk payment methodology are necessary to ''ensure the success of the risk program.'' What does ''ensure the success'' mean, and are we supposed to ensure the success? I do not know exactly what you mean by that.
Mr. NEWHOUSE. I mean——
Chairman THOMAS. If you are going to ensure the success of the risk program, leave it like it is. In fact, if we are overpaying, it is going to be very healthy. If our goal is to pay as little as possible while providing maximum quality, we may need to look at it. So I just do not understand what you mean when you say ''ensure the success of the risk program.''
Mr. NEWHOUSE I think the intent was very similar to Dr. Wilensky's notion of neutrality. That if the risk program is unbalanced in either direction, it would not succeed for either the beneficiaries, on the one hand, possibly, or the government as a prudent purchaser, on the other hand.
Chairman THOMAS. Or we have a teeter-totter.
Page 54 PREV PAGE TOP OF DOC
Mr. NEWHOUSE. So in this sense, as a viable option.
Chairman THOMAS. Do you believe that currently the teeter-totter tilts in the direction of paying more than we ought to, in a very general sense?
Mr. NEWHOUSE. Yes.
Chairman THOMAS. Do you believe the President's plan will tend to tilt us in the direction of not paying enough?
Mr. NEWHOUSE. Well, my concern is similar to Dr. Wilensky's with the proposal to come down to 90 percent. That is to say that it would move the line, as it were, with respect to who was and who was not a profitable enrollee for the at-risk plan. So a person who was now unprofitable at 95 percent would become even more unprofitable. A person who was marginally profitable would become marginally unprofitable. And everybody who was more profitable, they would become somewhat less profitable. But I would expect, in other words, some short-run savings from this, but I would expect in the long run selection to reemerge.
Chairman THOMAS. And, of course, the key would be to make the cuts where the cuts are appropriate rather than across the board, and that gets us back to the risk adjustors.
Mr. NEWHOUSE. Well, the key, I think would be, as Dr. Wilensky said, to get better risk adjustment in place rather than just lop off a fixed percentage for every person.
Chairman THOMAS. So on the whole, the President's plan may not be bad but the way in which it is applied probably is not the best possible way to apply it. Is that what you are saying?
Mr. NEWHOUSE. Well, I would have preferred more of an effort to get risk adjustment in place on the capitated payment rather than just reduce the ratio. But, I do believe that in the short run, at least, there will be some short-run savings from it.
Page 55 PREV PAGE TOP OF DOC
Chairman THOMAS. Thank you.
Mr. NEWHOUSE. Although we will see what CBO thinks.
Chairman THOMAS. Mr. Stark.
Mr. NEWHOUSE. The official arbiter.
Mr. STARK. I would like to ask Dr. Newhouse, Dr. Wilensky, and Dr. Van de Water, I hear everybody suggesting that we need some type of risk adjustment, and that makes sense, but we do not have it right here to do. Could you comment on the GAO's suggestion that we just improve the accuracy of the county payment rates? The suggestion involves recalculating the AAPCC by including HMO costs in the base and not just dealing with the fee-for-service costs. Can you comment on that, Joe? Have you see it before?
Mr. NEWHOUSE. I have not thought about that. I have not seen the GAO's suggestion.
Mr. STARK. OK.
Mr. NEWHOUSE. I think the issue goes to how one would compute HMO costs.
Mr. STARK. They have a system for doing that.
Mr. NEWHOUSE. OK. I would have to look at that. In principle, that sounds like it would help. But it still leaves the incentives in place for the HMO to go after profitable people.
Mr. STARK. Oh, yeah, but that we have to deal with.
Mr. NEWHOUSE. Right. And that can only be remedied by, as has been said, getting into better risk adjustment. Now I do think there is better risk adjustment technology that is available and could be tried on a larger scale than it is now being tried. The risk adjustment, as I indicated, based on diagnosis, seems to me to be a substantial improvement on what we have. It is not perfect, but it is better and it should help.
Page 56 PREV PAGE TOP OF DOC
Mr. STARK. Gail, did you see the——
Ms. WILENSKY. I am looking right now at some of what they have suggested, and there are parts of it we agree with very much. That is make——
Mr. STARK. It is mostly on page——
Ms. WILENSKY. I am looking on page—at the notion of making an adjustment for new HMO enrollees. That is something we think can and should be done basically as soon as it can be put into legislation. And I think if you use beneficiary survey information along with encounter data and put more pressure to get the no-pay hospital bills from HMOs, that is also something that can be put into effect within 1 year's time.
Mr. STARK. While these other things——
Ms. WILENSKY. Exactly. So I think we need to keep working on this, but we could improve from where we are now right away.
Mr. STARK. I hate to denigrate your testimony, but it is Dr. Van de Water who will tell us whether we can save any money doing that. Paul, how does this strike you at first blush?
Mr. VAN DE WATER. I do not think I can give you a cost estimate off the top of my head. That would be——
Mr. STARK. OK.
Chairman THOMAS. Well, you could, but——
Mr. VAN DE WATER But that would be very risky.
Mr. STARK. All right. Thank you. Paul, in your testimony, you suggest that the real solution to the world is going to a defined contribution plan. Let me ask you, because it is a concern I have, if the defined contribution is structured, either because we have balanced budget amendments or whatever, so that it does not keep pace with medical inflation, say in the private sector, what happens? What is the effect then on the beneficiaries?
Page 57 PREV PAGE TOP OF DOC
Mr. VAN DE WATER. I think you are honing in on the central issue here. The crucial question is, How is the growth of that defined contribution established?
Mr. STARK. But if it does not keep pace, what happens to the beneficiary? What are the alternatives?
Mr. VAN DE WATER. If it does not keep pace, then beneficiaries will bear an increasing share of the responsibility for paying for their own health care in their old age.
Mr. STARK. I think that is a way to say increased costs; is it not?
Mr. VAN DE WATER. Yes. It is a way of saying it increases costs for beneficiaries.
Mr. STARK. Or they get less care?
Mr. VAN DE WATER. Yes.
Mr. STARK. Which would obviously be the less desirable result. OK. Thank you very much.
Chairman THOMAS. Does the gentleman from New York wish to inquire?
Mr. HOUGHTON. Dr. Wilensky, everybody, great to see you, thank you very much for being on the panel. I have got to follow up. You described the 95- to 90-percent reduction as a crude and a blunt tool. And let me just run you through a couple of figures. I come from a small county in upstate New York. The difference between that county and let us say the Bronx or Kings County or New York County is huge, far more than the difference in the cost of living. Believe me I have lived in both areas. Now we get 1997 part A and B AAPCC rating of about $358—OK—so now that will go down to 90 percent of that.
Ms. WILENSKY. Correct.
Page 58 PREV PAGE TOP OF DOC
Mr. HOUGHTON. OK. So that will be about $322, but now the President says you must have at least $350. So that will go back up to $350. So we end up at $8 less in effect than we are getting now, and furthermore we have one of the lowest rates of Medicare risk penetration in the whole State. So if the whole thrust is to move from fee-to-service to managed care, and we already have something like 0.2 percent comparing to an average of about 15 percent in the New York City counties, what incentive is there? What makes sense in terms of bringing us to the promised land?
Ms. WILENSKY. You clearly have indicated a problem for those counties that are already receiving low payment. They will also lose an additional 5 percent, which may or may not be mitigated because of the floor that would be put in place. I would urge you to think about the thrust of allowing the seniors in your county to be able to choose an HMO plan if they want which is very difficult given the low payment rates that you now have rather than trying to push them in. I think it ought not to be the policy of the government to push seniors either to go into managed care or to stay in fee-for-service.
But the disparities in payment across the country are astounding. There is a 3 to 1 difference between the payment in the lowest counties and the payment in the highest counties, and they can be brought closer together. Again, when you do that, you need to make sure you do not let the fee-for-service spending in those same areas continue as it did before, or you will either make it impossible for fee-for-service to continue or make it very unreasonable for someone to choose to leave fee-for-service and take such a large reduction in spending if they were to go into an HMO.
So you need to think of all of these payments of interacting with each other. We have not talked about that issue yet, but the fact is there are many changes that either directly or indirectly will affect either HMOs or particular county areas, including what you do with graduate medical payments and disproportionate share spending, what you do for risk adjustment and what you do with these variations. They all interact with each other, and you have to think about them that way. But your area will not end up any better off even though there is now a floor because you will lose it by going down to 90 percent. And if you had a lot of sick people in an HMO, there is no way the HMO would receive any allowance for that. So you invite risk selection to worsen rather than trying to fix what we know is now a problem.
Page 59 PREV PAGE TOP OF DOC
Mr. HOUGHTON. Can I ask you just one more question? I think we have a different light here. Should I be happy if I am an advocate of a provider service organization that this thing is happening now, that it makes it virtually impossible for an HMO to come into a rural community, and so ultimately the provider service organization is going to be able to be established competing with HMOs and do what we really want to and that is to keep money in the community? Should I be happy about that?
Ms. WILENSKY. Not in the long run. In the long run, you ought to be happy to have choices available to the seniors, and if as a provider-sponsored organization you can offer a good package of services, all you should need is an even chance to be available to seniors. You do not want to rule out HMOs. It will come back to bite you if you try to shut them out.
Mr. HOUGHTON. I sure do not want to be bitten. Thank you, Mr. Chairman.
Chairman THOMAS. That shows you the difference between New York and California. I have some followup questions on the bite question.
The gentleman from Maryland.
Mr. CARDIN. Thank you, Mr. Chairman. I notice that none of you really spent too much time talking about the removal of the GME or disproportionate share from the AAPCC rate. Can I assume that your view is that it makes sense to take that payment out and pay it directly to the hospitals that are providing the services to the managed care companies rather than doing it generally through the rate?
Ms. WILENSKY. Let me share with you PPRC's recommendation on that. Take it out, yes, but be