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Testimony of
before the
May 31, 2001

Chairman Greenwood, Congressman Deutsch, other distinguished members of the Subcommittee, thank you for inviting me to discuss the history and current status of the Medicare managed care program, Medicare+Choice. Medicare+Choice offers Medicare beneficiaries a range of health plan options, including the traditional fee-for-service Medicare program, and allows them to choose the types of health plans that best suit their individual needs, according to the options offered by the plans. It provides valuable alternatives to traditional fee-for-service Medicare, and we are committed to strengthening this program.

Our new Administration, both Secretary of Health and Human Services Tommy Thompson and Health Care Financing Administration (HCFA) Administrator Tom Scully, will be placing a high priority on protecting and improving Medicare+Choice. For instance, this week, Secretary Thompson gave Medicare+Choice plans the extra time they have been asking for to prepare and submit benefit proposals and to make participation decisions for next year. Health care costs in recent years have been less predictable, as have decisions by providers to contract with Medicare+Choice plans. This action will allow plans more time to collect information on their costs and determine the viability of their provider networks before having to make decisions about their benefit offerings and service areas for next year. We are committed to working with you and health plans toward our goal of making more health plan options available to our beneficiaries in all parts of the country, while helping beneficiaries to better understand these options.

Medicare has a long history of offering alternatives to the traditional Medicare fee-for-service program to our beneficiaries. In the 1970's Congress authorized Medicare risk contracting with managed care plans, and in the 1980's Congress modified the program to make it more attractive to managed care companies. Under that program, HMOs contracted with Medicare to provide the full range of Medicare benefits in return for monthly "per person" or "capitated" payment rates. In the Balanced Budget Act of 1997 (BBA), Congress created the Medicare+Choice program to correct perceived flaws in the risk contracting program, including payment differences. Since then, Congress has refined the Medicare+Choice program through the Balanced Budget Refinement Act of 1999 (BBRA) and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA).

Today, 64 percent of all Medicare beneficiaries have access to a Medicare+Choice option; and about 5.5 million, or about 15 percent of all Medicare beneficiaries, have chosen to enroll in a Medicare+Choice plan. As was the case with the risk contracting program prior to the BBA, payments under the Medicare+Choice program vary by county, and plans have the option of varying their additional benefits or premiums from county to county. The differences in benefits across the country and between adjacent counties was an issue with the risk contracting program, and remains an issue with the Medicare+Choice program today.


Medicare pays for the health care of almost 40 million beneficiaries, involving nearly one billion claims from more than one million physicians, hospitals, and other health care providers. As the administrator of this program, the Health Care Financing Administration (HCFA) oversees Medicare's various health care plan options, including the Medicare+Choice program. For beneficiaries in Medicare+Choice, we ensure access to providers, approve promotional materials, and calculate capitated payment rates. Before the BBA became law in 1997, Medicare calculated capitation rates under a methodology known as the Adjusted Average Per Capita Cost, or AAPCC.

Under the AAPCC methodology, we determined, for each county, the average per person cost for fee-for-service Medicare beneficiaries living in that county. Health expenditures were not attributed to the county where services were provided, but to the county in which the beneficiary lived. For example, if a beneficiary living in Bucks County received a service in Philadelphia, that expenditure was included in the AAPCC for Bucks County. The per capita amounts were then "standardized" to account for differences between the demographic characteristics of Medicare beneficiaries in the county and the demographic characteristics of Medicare beneficiaries across the nation. Additionally, capitation rates were set at 95 percent of the AAPCC, with the 5 percent reduction reflecting the assumption that managed care plans could achieve savings through discounts and more efficient management of health services. The following example illustrates how payment was made:

in Bucks County,
PA, 19975
Demographic Factor,
Part A
Demographic Factor,
Part B
Monthly county capitation rate * factor Monthly payment per person
Male, non-institutionalized
Age 65 to 69
Medicaid eligible
1.15 1.10 Part A:
$ 422.05
Part B:
$ 229.50
Female, non-institutionalized Age 80 to 84
Medicaid eligible
1.70 1.25 Part A:
$ 623.90
Part B:
$ 260.80

Under the AAPCC method, Medicare capitation rates varied widely. Since county fee-for-service costs were used to calculate county capitation rates, the rates reflected differences among counties in fee-for-service health service usage and payment levels. In addition to the substantial variation in rates across the country, there were a number of other concerns with the AAPCC payment method, including:

-- Payment rates changed unpredictably from year to year in each county, based on fee-for-service costs in each particular county;
-- Payment rates could vary widely across adjoining counties;
-- Generally, rates were lower in rural areas; and
-- Hospitals were concerned that HMOs did not compensate them for medical education like fee-for-service Medicare.

In the BBA, Congress replaced the risk contract program with Medicare+Choice. The BBA modified Medicare+Choice payment rate calculations to address a number of concerns with the AAPCC methodology. It broke the direct link to fee-for-service spending in a county, and moved to reduce wide disparities in county capitation rates by bringing both high and low payment rates closer to the national average payment rate. In addition to adjusting the payment rates based on demographic factors, the BBA required payment rates to be adjusted for beneficiary health status, sometimes referred to as a "risk adjusted method" of payment. It also provided direct payments to teaching hospitals for Medicare+Choice patients to ensure these hospitals were receiving appropriate medical education payments for their Medicare managed care patients. The BBA also mandated that the 1997 AAPCC rates would serve as the basis for the Medicare+Choice rates, and the rates for particular counties would be equal to the largest one of three amounts:

1. Minimum 2 percent increase over the prior year's rates, which protected high payment areas as the medical education reductions and reductions in geographic disparities took effect.

2. Minimum amount or "floor" amount that increases rates in historically lower-rate counties where Medicare managed care plans generally have not been offered. Beginning in 1998, the BBA set the floor rate at $367; this floor has been adjusted annually by the rate of growth of the overall Medicare program.

3. Blended amount, which is calculated by blending county and national rates, thus increasing rates in historically lower-rate counties while reducing rates in historically higher-rate counties. Each year, from 1998 - 2003, a greater percentage of the payment amount is based on the national rate, until a 50/50 blend is reached. The blend percentage for 2001 was 66 percent county and 34 percent national rates. The "national rate" for each county is calculated by adjusting the national rate by each county's Medicare hospital wage index and geographic physician practice cost index.


As was the case under prior law, the BBA requires plans to compute whether their projected Medicare revenues, based on Medicare capitation payments, will exceed their projected costs for providing Medicare services (excluding Medicare deductibles and coinsurance). If revenues exceed costs, the plan must use those funds to provide additional (non-Medicare) benefits to enrollees at no additional cost to the enrollee. In 2001, on the national level, Medicare+Choice plans are using an average of about 19 percent of their Medicare revenues to provide these additional benefits, such as routine vision care, dental care, and prescription drugs, which are not available through fee-for-service Medicare.

As was also the case under prior law, the BBA mandated that plan premiums or other charges, such as copayments, for services covered by Medicare may not exceed the actuarial value of fee-for-service beneficiary cost sharing. For 2001, that amount is $100.66. Medicare+Choice plans may also offer supplemental benefits that Medicare does not cover, such as prescription drugs, and may charge premiums for those benefits. Depending on the supplemental benefits that a plan offers, this plan premium may exceed $100 per month.

Congress revised the BBA changes in 1999, through the BBRA, and again in 2000, through BIPA. The BBRA included changes to the Medicare+Choice program to make it easier for beneficiaries and plans to participate, including giving plans more flexibility in their benefits and cost-sharing, and increasing payments. The BBRA also included incentives for plans to offer plans in areas without a Medicare+Choice plan already in place. Similarly, BIPA increased Medicare+Choice payments and expanded the incentive program for managed care plans to offer Medicare+Choice in areas without such options. Congress increased both the minimum percentage payment rate increase for 2001 only (from 2 percent to 3 percent), as well as the payment rate floor amount, to $525 in Metropolitan Statistical Areas with a population of 250,000 or more, and to $475 in al other areas.


The BBA and subsequent amendments have reduced the variation in payment rates at the national level. In 1997, the county with the highest payment rate was Richmond County in New York and the county with the lowest payment rate was Arthur County in Nebraska; their rates were $767 and $221, respectively (Chart 1). The ratio of the Richmond County rate to the Arthur County rate was 3.47, that is, the rate in Richmond County was about 250 percent higher than the rate in Arthur County. In 2002, the rates in Richmond and Arthur counties will be $856 and $500, respectively. The ratio of the rates will be 1.71, a dramatic reduction from 1997.

This chart also highlights how variation within states was reduced. In 1997, in Nebraska, the ratio of the highest to the lowest county was 1.96, that is, the rate in Douglas County was about 100 percent higher than the rate in Arthur County. In 2002, that ratio will be reduced to only 1.11. There will be a similar reduction in New York, from 2.53 to 1.71 in 2002. Thus, the BBA changes effectively reduced both national and state level variation in payment rates.


The second chart (Chart 2) looks specifically at Medicare payment rates and utilization rates in Bucks and Philadelphia Counties. The Medicare law requires payments to Medicare+Choice organizations in 2001 to be based 90% on the demographic method and 10% on the risk adjusted method. The first row in the chart indicates that under the rates used in 2001 for the demographic portion of payments, the rate for the average beneficiary in Philadelphia County is 22 percent higher than the Bucks County rate. The next row on the table shows the percentage difference for rates under the risk adjustment method. For the risk adjusted portion of payments, the rate in Philadelphia County is 14 percent higher than the Bucks County rate. The difference between the risk method rates in the two counties would indicate that, on average, beneficiaries in Bucks County are healthier than beneficiaries in Philadelphia.

Turning to the comparison of the utilization of services in the two counties, the table shows that beneficiaries in Philadelphia County utilize more services than those in Bucks County. In particular, they use more hospital, home health, skilled nursing facilities, and durable medical equipment services than beneficiaries in Bucks County. The greater use of these relatively costly services would be associated with a population that is sicker and therefore has a greater need for medical services. This higher use of services corresponds with the higher 1997 base rate for Philadelphia County.

Differences in payment rates as well as in benefits and premiums between adjacent counties were an issue prior to the BBA and remain an issue today. These premium and benefit differences are influenced not only by Medicare payment rates, but also by the ability of the Medicare+Choice organization to negotiate favorable payment rates with providers and the presence of other Medicare+Choice options in the market area.


We are working hard to ensure that Medicare beneficiaries receive high quality health care, and have a variety of options to choose from so their health plans most closely meet their individual needs. The Medicare+Choice program is one important way we accomplish this goal. As the name suggests, Medicare+Choice offers many beneficiaries a guarantee of traditional Medicare fee-for-service benefits, as well as a choice of other options, which vary from plan to plan. Congress has made several important improvements to Medicare+Choice over the last few years, and our new Administrator is strongly committed to working with you and health plans to expand and revitalize the Medicare+Choice program. Thank you for the opportunity to discuss this with you today, and I am happy to answer your questions.

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Last revised: February 12, 2002