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Testimony on Long Term Care Options: PACE and S/HMO by Bruce C. Vladeck Administrator
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Ways and Means, Subcommittee on Health
April 18, 1996


Mr. Chairman and Members of the Subcommittee, it is a
pleasure to appear before you today to discuss an issue close to
my heart: the development of new models of comprehensive care for
the frail elderly. Specifically, I have been asked to talk about
two important demonstration projects in which HCFA has invested
years of thought and effort: the Program of All-inclusive Care
for the Elderly (PACE) and the Social Health Maintenance
Organization (S/HMO) projects. These two projects provide, we
believe, important initial building blocks in our effort to
develop high quality, locally sensitive, customer- oriented,
community-based services for those in need of long-term care.

It is important to begin by talking for just a moment about
community-based long-term care. Both PACE and S/HMO emphasize
home and community-based services. Most beneficiaries and their
families greatly prefer home and community-based care to
institutional care, and we want to continue to explore how to
best serve their needs. We have come a long way since the early
1970s, when home and community- based care was a fairly new idea
and was considered largely as a way to reduce the length of
hospital stays or as an alternative to institutionalization in a
nursing home.

Today, Medicare and Medicaid each provide substantial amounts
of home and community-based care. More than 250,000 people
receive long- term care services in a home or community setting
under Medicaid's home and community services waiver program
alone. More than 2.5 million beneficiaries annually receive
services through Medicare's home health benefit. Because of the
breadth of services and the capitated payment approaches of the
PACE and S/HMO programs, these programs differ from standard home
health benefits of Medicare and Medicaid. Both PACE and S/HMO
emphasize reducing the burden on informal care-givers, improving
social and psychological well-being, improving health status and
functional independence, and increasing longevity. Our
experiences with the PACE and S/HMO programs are providing us
with important information about how best to provide integrated
acute and long-term care.


Integration of services is very important for the estimated
five to six million individuals who are eligible for both
Medicare and Medicaid. Many of these "dual eligibles" have
multidimensional, interdependent and chronic health care needs.
However, as currently structured, the Medicare and Medicaid
programs are not sufficiently coordinated to serve many of these
complex health needs.

Because the financing, administration, and delivery systems
are fragmented, services are often duplicated and access to care
can be limited. Further, since care is financed from different
funding sources, there are insufficient incentives to integrate
services. For example, increased emphasis on rehabilitation in
the acute setting might reduce long-term care spending, but
Medicare providers do not have appropriate incentives to invest
resources that could save Medicaid money.

Integrating acute and long-term care involves coordinating
and integrating the Medicare and Medicaid benefits. Integration
and coordination should address both financing and service
delivery. Integration of financing involves the pooling of
funding from Medicare and Medicaid into a single funding stream.
Current managed care models attempt to integrate services using
capitated payments to providers, which gives managed care
organizations flexibility to tailor benefits to the distinct
needs of each beneficiary. However, integration of funding
sources alone does not ensure integration of services. Today,
various managed care plans coordinate the delivery of acute and
long-term care services to differing degrees. Some plans simply
facilitate patient transitions between the acute and long-term
care settings. Others, such as the PACE demonstration, employ a
multi-disciplinary team of professionals who work together to
manage both medical and social services across the acute and
long-term care settings.

The goal of the PACE and the S/HMO projects is to reduce
fragmentation of services, contain costs, and effectively
integrate acute and long-term care into a single, seamless
system. Funds are combined into a common pool from which
providers pay health care expenses. In S/HMOs, providers receive
funds mostly from Medicare, although they also receive some
Medicaid and private insurance funds. In PACE, providers receive
funding from Medicare, Medicaid, and private insurance.


In 1979, HCFA funded a three-year grant to On Lok, a program
based in San Francisco, California, which provides health,
nutritional, and recreational services to frail older adults in a
day- care setting. On Lok also integrates the provision and
financing of medical and long-term care services. Since the
initial grant award, HCFA has supported On Lok through waivers
for the past 16 years. On Lok is unique because it accepts only
those ill enough to be eligible for nursing home care. Medicare
and Medicaid pay all of the costs of care, and participants are
assigned to an interdisciplinary team that meets regularly to
assess their needs and assure that they receive the full range of
needed services. This might include anything from housing to
medical supplies to a microwave oven for someone who can no
longer use a gas oven safety.

PACE is an outgrowth of On Lok. It was authorized by
Congress in the Omnibus Budget Reconciliation Act of 1986. PACE
was established partly as a result of the success of the On Lok
program, but the PACE program is separate from On Lok. Each of
the current ten nationwide PACE sites is reviewed at least
annually. PACE sites continue to operate under the Secretary's
discretionary authority.

PACE specifically targets frail elderly persons eligible for
nursing home care, but who are living in the community. PACE
seeks to help individuals continue to five at home and not in a
nursing home facility. PACE integrates social and medical
services through adult day health care. It uses a
multidisciplinary team approach, with care provided by
physicians, nurses, social workers, nutritionists, occupational
and speech therapists, and health and transportation workers.
Through preventative and rehabilitative services, participants'
chronic conditions can be stabilized and medical complications
prevented. Community living is usually the overwhelming choice
of participants. However, should nursing home placement become
necessary, PACE also provides that service. PACE enrollees
receive all health services through PACE, including physician
services, hospitalization, therapies, pharmaceuticals, and

Currently, there are approximately 2,700 enrollees who
participate in the ten PACE sites and On Lok. As many as 48
additional organizations are in various stages of developing PACE
sites. The ten operating PACE sites are in the following

- East Boston, Massachusetts;

- Portland, Oregon;

- Columbia, South Carolina;

- Milwaukee, Wisconsin;

- Denver, Colorado;

- El Paso, Texas;

- Bronx, New York;

- Rochester, New York;

- Oakland, California; and

- Sacramento, California.

An additional noteworthy characteristic of PACE is the way in
which it has responded to the diversity of populations in need of
services. The ethnic and racial distribution of beneficiaries
served reflects the communities from which PACE draws its
participants. From January 1993 through December 1993, of the
beneficiaries served in the PACE program:

38 percent were Caucasian,

28 percent were African-American,

20 percent were Hispanic-American, and 13 percent were Asian-


PACE providers receive a fixed monthly fee for each
participant. This fee is set to account for the frailty of PACE
enrollees, but it does not vary based on the degree of frailty or
the services used by the individual participant. PACE providers
receive most of their financial support from Medicaid and are
paid on a capitation basis. The Medicaid capitation rate is
determined by the rate-setting methodology of the state in which
PACE operates.

Medicare, Medicaid and private insurance funds are pooled to
achieve maximum efficiency and flexibility in the use of
resources. The Adjusted Average Per Capita Cost (AAPCC)
methodology used by Medicare to pay for at-risk health
maintenance organizations is modified for Medicare capitation
payments in PACE. The basic AAPCC rate is multiplied by a
"frailty adjustment" of 2.39 to reflect the costs Medicare would
bear in caring for the frail elderly in the fee- for-service

In order to protect against unanticipated costs,
unanticipated dis-enrollment rates, and the unavailability of
stop-loss insurance coverage, PACE demonstration sites share risk
with Medicare and Medicaid. During the first three years of
operation, sites assume progressively increasing risk, and at the
start of the fourth year assume full risk. Currently, special
demonstration waivers permit the integration of Medicare and
Medicaid funds.


A preliminary evaluation of PACE should be available later
this year. State participation in PACE is voluntary, and
continued states have shown a great deal of interest in
continuing their participation. Based on enrollees' low
dis-enrollment rates, enrollees appear satisfied with PACE: the
combined rate of voluntary and involuntary dis-enrollment from
PACE is considerably lower than the voluntary rate of
dis-enrollment from other Medicare risk-based health plans.
Other states are interested in developing their own demonstration

Based on our current knowledge of the success of PACE, we
recommend that PACE be shifted from a demonstration project to a
permanent program. We support legislation, such as the PACE
provision included in the President's Balanced Budget Initiative
for Fiscal 1997, to accomplish this goal. Under the President's
plan, providers would be monitored closely, while progressively
assuming full risk. The President's plan permits the Secretary
to continue to set Medicare payments to ensure budget neutrality.
We recommend that the budget neutrality language be retained.
The President's proposal is supported by both On Lok and the
National PACE Association.


HCFA's Social Health Maintenance Organization demonstrations
were established by Congress in 1984 to test whether investing in
some long-term care benefits for Medicare HMO enrollees could
save money through coordinating care and providing services that
might prevent more costly medical complications. The S/HMO
demonstrations have provided standard HMO benefits, such as
hospital, physician, skilled nursing home, and home health
services, together with limited long- term care benefits to
Medicare beneficiaries who voluntarily enroll. In addition,
expanded benefits, such as eye glasses and prescription drugs,
are available. S/HMOs enroll a cross-section of the elderly
living in the community. S/HMOs' services range from
community-based care to institutional nursing home care.
Services provided include personal care aides, homemakers,
medical transportation, adult day health care, respite care, and
case management in a community setting.

The S/HMOs program provides more limited long-term care
benefits than PACE. S/HMO have a yearly dollar cap for the
long-term care benefit, whereas PACE does not have such a cap.
Financing is through prepaid capitation, by pooling funds from
Medicare, Medicaid, and member premiums and copayments. The
level of the beneficiary premium payments vary by site. Benefits
and capitation payments vary by state; S/HMOs negotiate
independently with respective states to determine financing and

In 1985, S/HMO projects became operational at the following
four sites:

- Kaiser Permanente Northwest established Medicare Plus II in
Portland, Oregon;

- Group Health and Ebenezer Society established Seniors Plus
in Minneapolis-St. Paul, Minnesota;

- Metropolitan Jewish Geriatric Center established Elderplan
in Brooklyn, New York; and

- Senior Health Action Network established SCAN Health Plan
in Long Beach, California.

However, in January 1995, the Minneapolis site withdrew its
participation because it believed the S/HMO was too costly to
administer. Currently, nearly 20,000 Medicare beneficiaries are
enrolled in the three remaining demonstration sites. Overall,
the Medicare beneficiaries enrolled in S/HMOs were healthier than
the average beneficiary.


In 1996, HCFA prepared a status report, now pending final
approval, on the implementation and evaluation of the S/HMO
demonstrations. This report found that the S/HMO projects had
lower levels of dis-enrollment than Medicare's risk contract
HMOs. Healthy S/HMO enrollees also expressed overall
satisfaction with their participation in the program.

Frail S/HMO enrollees were compared to frail fee-for-service
enrollees, based on access to care, interpersonal relationships
with their physician, cost and benefits of care, quality or
competence of care, and an overall measure of satisfaction.
Evidence that the S/HMOs were less costly than fee-for-service
were mixed; only some sites demonstrated savings. Also, relative
to fee-for-service, no improvements in mortality or active life
expectancy were demonstrated. Moreover, frail S/HMO enrollees
were more satisfied than their fee- for-service counterparts in
only one category, cost and benefits of care.


In 1990, Congress authorized an extension of the
demonstrations and established the second generation of the S/HMO
demonstrations, known as S/HMO II. One purpose of S/HMO II is to
test the effects of linking chronic care case management services
and acute care providers. The primary components of the S/HMO II
projects include:

1. An expanded case management system, with acute and
long-term care linkages;

2. A long-term care benefit package; and

3. A risk-adjusted payment methodology.

S/HMO II will continue to provide many of the expanded
benefits offered in S/HMO I. We also expect S/HMO II projects to
address some additional goals. S/HMO II is designed to refine the
financing methodologies and the benefit design of S/HMOs. The
criteria used to target long-term care benefits will also be
refined. S/HMO II will target enrollment to special populations
such as minorities, beneficiaries eligible for both Medicare and
Medicaid, and residents living in rural areas. In 1993, Congress
mandated that one of the S/HMO II projects examine the
feasibility of serving beneficiaries with end-stage renal disease


In January 1995, HCFA awarded developmental grants to the
following six S/HMO H project sites:

1. CAC-United HealthCare Plans of Florida in Coral

2. Contra Costa Health Plan, in Martinez California;

3. Fallon Community Health Plan in Worcester, Massachusetts;

4. Health Plan of Nevada, Inc. in Las Vegas, Nevada;

5. Richland Memorial Hospital in Columbia, South Carolina;

6. Rocky Mountain HMO in Grand Junction, Colorado.

We expect the Nevada and Florida sites to begin implementing
the S/HMO II programs in the summer of 1996. The remaining four
sites should begin operation by January 1997.


The second generation of S/HMOs are building upon what we
learned from the first generation. However, we need to learn
more about the capitation payment structure and providing
integrated services to the acute and long-term population. To
assure that the S/HMO program is cost effective, we recommend
that both generations of the S/HMO projects be extended until
December 31, 2000, but not expanded. Authorization for both the
first and second generation S/HMOs is now set to expire on
December 31, 1997. An extension of the S/HMOs program would
provide additional time necessary to establish a comparative
study and to assess its performance potential.


HCFA is also testing other approaches to achieve integration.
The projects differ in how funding is integrated, the way in
which care is coordinated, and in the use of case management or
other program elements. Among these projects are the following
examples that vary approaches to care delivery.

EverCare is a demonstration designed to study the
effectiveness of managing acute care needs of nursing home
residents by pairing physicians and geriatric nurse
practitioners, who function as primary medical caregivers and
case managers. EverCare seeks to reduce hospital care when
patients can be managed safely in nursing homes if they receive
appropriate services. Three sites are operational in Georgia,
Maryland, and Massachusetts.

The Wisconsin Special Care Initiative is designed to provide
Medicaid-covered medical services and additional social services
such as respite care, family training, long-term planning,
referral and medication services to up to 3,000 Medicaid eligible
SSI recipients in Milwaukee County. About 75 percent of
projected enrollees are between 21 and 64 years of age, most are
unemployed, and many receive some form of adult day care
services. This model includes a physician panel of experienced
providers, case management services provided by a
multidisciplinary teams and specialized clinics. Enrollment in
the three-year demonstration began in July 1994.

Other projects target particular populations:

The Project for Non-Elderly Disabled is a demonstration to
develop integrated care models primarily for non-elderly persons
with disabilities. HCFA is supporting this initiative in
conjunction with the Pew Charitable Trusts, Robert Wood Johnson
Foundation, and the Medicaid Working Group. All participants are
eligible for Medicaid, 40 percent of whom are dually entitled.
Initiatives in Wisconsin, Missouri, New York, and Ohio are in
various stages of development.

MAINE-NET emphasizes care to rural populations by promoting
the development of regional service delivery networks or health
plans. These networks will be responsible for the management,
coordination and integration of services, including
multidisciplinary approaches to care planning and service
delivery. Maine-Net includes a comprehensive package of primary,
acute and long-term care services as part of a prepaid capitated
health plan. Maine plans to implement the program in January


Our primary goal in PACE, S/HMO, and the other integrated
service projects being tested by HCFA is to find the best
approaches to coordinating acute and long-term care services. We
need to Facilitate and advance a beneficiary-centered continuum
of care for people who need long-term care, recognizing that
people in long-term care have significant acute care needs, as
well as chronic care needs. Since Medicaid and Medicare
represent over half of all long-term care spending, we recognize
the central role our programs must play in developing a more
beneficiary-centered system. What we have already seen of PACE
warrants shifting PACE from a demonstration to a permanent
program. We look forward to working with Congress on legislation
which makes this a reality.

We also think there is much to be learned from the S/HMO
projects. Because of the importance of implementing an effective
managed care program for the chronically-ill and elderly in need
of long-term care, we recommend an extension of the S/HMO
demonstrations authority.

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