DHHS Eagle graphic
ASL Header
Mission Nav Button Division Nav Button Grants Nav Button Testimony Nav Button Other Links Nav Button ASL Home Nav Button
US Capitol Building
HHS Home
Contact Us
dot graphic Testimony bar

This is an archive page. The links are no longer being updated.

Testimony on Medicare+Choice Implementation by Michael Hash
Deputy Administrator
Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Commerce, Subcommittee on Health
October 2, 1998

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members, thank you for inviting me here today to discuss the Medicare+Choice program.

Currently some six million Medicare beneficiaries receive their benefits through managed care organizations. The Medicare+Choice program builds on this experience by:

  • offering beneficiaries the possibility of new options such as provider sponsored organizations (PSOs) and preferred provider organization (PPOs);

  • initiating a five-year transition to a new payment methodology designed to address flaws in the previous adjusted average per capita cost (AAPCC) system;

  • creating a coordinated open enrollment process and an educational program to help beneficiaries make informed choices among their options; and

  • raising the bar on quality and protections for both beneficiaries and providers.

The regulation implementing the Medicare+Choice program was published in June, and the comment period closed on September 24, 1998. We are carefully evaluating this valuable input. We also are meeting regularly with industry representatives, including the American Association of Health Plans, the Blue Cross and Blue Shield Association, and others to discuss ways to improve the program. We already are making refinements based on these comments and discussions.

Yesterday we announced changes that will help plans meet quality improvement requirements called for in the Balanced Budget Act. We also announced that plans will have an additional year to implement compliance plans and complete contracts that incorporate new requirements with their current providers.

We have given careful consideration to industry suggestions that we reopen the process for determining plan premium and benefit structures, and have concluded that it would not be in the best interests of beneficiaries. We are not convinced that it would be in the best interest of beneficiaries to allow almost all HMOs to increase costs and decrease benefits to their Medicare enrollees. While we are taking this position, we remain committed to continue working with Congress and the industry to discuss potential improvements in the process for future years.


Successful implementation of Medicare+Choice is a high priority for us. We have accomplished a great deal, including release of all Balanced Budget Act-mandated Medicare+Choice regulations.

  • In September 1997, we issued 1998 plan payment rates based on the new BBA methodology. In March, we issued the 1999 plan payment rates.

  • In April, we published a regulation establishing the definition of a PSO. In May, we published PSO solvency standard regulations that were developed through a negotiated rule-making process with a wide range of interested parties. We also published regulations on the process to apply for a federal waiver from state licensure.

  • In May, we held the first meeting of the Medicare Competitive Pricing Advisory Commission. The Commission, which is chaired by General Motors Health Care Initiative Executive Director James Cubbin, met last week to decide on recommendations regarding key design features of the competitive pricing demonstration. The Commission will meet again later this month to select possible sites for the project.

  • In June, we published the remaining Medicare+Choice regulations which detail requirements for plans and incorporate protections for beneficiaries and providers.

  • In July, we began a "train-the-trainers" program for 700 individuals across the country in our education partner organizations. The goal is for them to teach others in their organizations and communities how to help beneficiaries understand their new options.

  • As part of our eight-point National Medicare Education Program, we launched a consumer-friendly Internet site, Medicare.gov, where beneficiaries can find direct comparisons of the benefits and costs of plans available in their community.

We have several additional steps scheduled, as well.

  • This November, we will mail Medicare+Choice information to beneficiaries, open a toll-free call center, and provide other services to help beneficiaries understand the program.

  • Also in November, we will provide training for plans on the new adjusted community rate (ACR) process which is used to review and approve plan benefit, premium and copayment structures. This new process addresses criticisms raised by the General Accounting Office and the HHS Inspector General and should reduce payment errors.

  • By March 1999, we expect to formally report to Congress our method for "risk adjusting" payments to account for beneficiaries' health status, which we expect to implement on schedule in 2000. Risk adjustment will begin to address flaws in the payment system that have been documented by us, several Congressional agencies, and many other researchers. It also will ensure that plans have adequate resources to coordinate care for enrollees with serious health problems.

  • We are working with beneficiary advocates and health plans to standardize plan summaries of benefits before the first annual coordinated open enrollment period in November 1999.

Among the most important facets in implementing the Medicare+Choice program is helping beneficiaries understand their options so they can make informed decisions. Based on advice from the Institute of Medicine and our own work with over 30 beneficiary focus group sessions, we are phasing in our national educational campaign in order to refine efforts before the first full-scale education campaign and mailing mandated by the Balanced Budget Act in November 1999. We have an eight-point plan which we began this summer that includes:

  1. beneficiary mailings;
  2. toll-free telephone services;
  3. Internet activities;
  4. a national train-the-trainer program;
  5. a national publicity campaign;
  6. state and community-based special information campaigns;
  7. enhanced beneficiary counseling from State Health Insurance Assistance Programs; and
  8. targeted and comprehensive assessment of our education efforts.

We are first testing the whole system in five states -- Arizona, Florida, Ohio, Oregon and Washington. The handbooks in these states include detailed information on Medicare+Choice options in general, as well as information specifically tailored to each market with side-by-side comparisons of costs and benefits for local plans. The call center will have personnel to answer specific questions. We plan to phase in call center access, with full nationwide service by August 1999. This phased approach allows us to gain experience with this new service, learn what kind of help beneficiaries want most, and determine how many customer service representatives will be needed. Outside these five states we will send beneficiaries a bulletin outlining Medicare+Choice options and other useful information about assistance for low-income beneficiaries, new preventive benefits, and how to obtain comparison data on plans in local markets. A national version of the full handbook will be sent to newly eligible beneficiaries and to any beneficiaries who request it; it is also already available on the Internet. The costs of beneficiary education are ongoing. Due to uncertainty about the demands for Medicare+Choice information, we may need to review funding levels to ensure that beneficiaries are able to make informed decisions.


We also making a concerted effort to help plans learn about the new program. We have had many informal meetings with industry representatives, which are ongoing. We also have had several formal meetings to help plans understand how to participate in the program.

  • An outreach session held July 13-14 in Baltimore had approximately 350 attendees.

  • An outreach session held July 21-22 in Chicago had more than 400 attendees.

  • An outreach session held July 28-29 in Los Angeles had more than 400 attendees.

  • A special outreach session held July 15 for those interested in offering Medical Savings Account plans was attended by representatives from 11 organizations.

  • An outreach session on Medicare+Choice quality improvement requirements was held August 3-4 in Baltimore with 400 attendees.

  • An outreach session on Medicare+Choice encounter data collection and risk adjustment methodologies was held September 17 in Baltimore with 200 attendees.

As of September 28th, we have 48 applications pending for new Medicare+Choice contracts and 25 pending applications for service area expansions from existing risk contractors. We have had only one entity withdraw its application following publication of the Medicare+Choice regulation. The applications we have received are for the most part from HMOs for coordinated care contracts, rather than the newer options authorized under the BBA. This is not surprising, given that the regulation was just published in June, and the time new plans need to develop networks, contracts, and business plans.

We have four applications pending from PSOs. Three have state licences, and one obtained a federal waiver from state solvency standards. Two additional PSO waiver requests are pending. The extent to which provider groups will take advantage of this new option remains to be seen, but we are encouraged by the interest shown to date.

We have so far received only one PPO application. However, our revised quality improvement policy clarifies how standards apply to PPOs and should encourage more such plans to apply.

To date, we have no applications for MSA plans, which is not surprising given the cautious response to MSAs in the private sector. Insurers may show more interest in Medicare MSAs once they have more experience with MSAs in the private sector. Discussions with the industry lead us to believe that we will receive applications next year.

We also have no applications for private fee-for-service plans. This also is not surprising given that such plans would offer virtually unfettered access to services without medical review activities that insurers widely use to control costs. Such plans are now very rare in the private sector.


The BBA includes important quality provisions for Medicare+Choice. It raises the bar by requiring most plans to not only monitor quality but also to improve quality. The new requirements will be phased in over the next several years.

This way beneficiaries can compare plans based on quality, and we can utilize Medicare's substantial market leverage to be a prudent purchaser and promote competition based on quality. We are actively working to incorporate quality assessment and improvement into traditional fee-for-service Medicare, as well, so beneficiaries will be able to make truly informed choices about all their options.

All Medicare+Choice plans must report objective, standardized measurements of how well they provide care and services. They will use HEDIS, the Health Plan Employer Data and Information Set. HEDIS is the industry standard for measuring health plan performance, and it has been tailored specifically for the Medicare program. We have required Medicare HMOs to report HEDIS data since 1997. As a result of our experience with the initial round of HEDIS reporting, Medicare+Choice plans must now have HEDIS data audited before submission to ensure accuracy. We are disappointed that some plans have been unable to report reliable data on HEDIS measures despite substantial advance notice, and will work with plans to improve the quality of their reporting. We also will use CAHPS, the Consumer Assessment of Health Plans Survey, to objectively measure beneficiary satisfaction with plan care and service. We began requiring Medicare HMOs to conduct CAHPS surveys this year. The results of both HEDIS and CAHPS will be formatted so beneficiaries can make direct, apples-to-apples comparisons among their plan options.

Plans with provider networks must conduct performance improvement projects and over time achieve demonstrable and sustained improvement. Eventually these plans, except for network-based Medical Savings Account plans, will have to meet minimum performance standards. Establishing minimum performance standards is important because data now starting to come in from the objective HEDIS performance measures show wide variation in how well plans provide care. For example, according to HEDIS data from existing Medicare managed care plans, 90 percent of women in some plans get yearly mammograms, while less than 50 percent get this essential screening service in other plans. Also, the latest National Committee on Quality Assurance State of Managed Care Quality report shows that, despite the promise and capacity of managed care to improve quality, the managed care industry's overall performance on HEDIS measures was "essentially unchanged" from 1996 to 1997.

That same National Committee on Quality Assurance report documents the potential of managed care to improve quality and save lives. The percentage of plan physicians that gave advice to quit smoking rose industry wide from 61 percent to 64 percent. The Centers for Disease Control calculates that this one improvement in health care quality alone will save 1,520 lives. We must proceed with Medicare+Choice quality improvement requirements in order for the promise of managed care to be met across the board.


We recognize that it takes time for plans to adapt to the quality improvement requirements, and that a learning curve is involved. Therefore, we are making several changes from our draft proposal to help plans comply.

  • We are reducing the number of performance improvement projects that plans must conduct to just two per year. This workload is comparable to standards imposed by private sector accrediting organizations. Plans can choose projects that they believe will target their enrollees' specific concerns.

  • We are permitting waivers of mandatory participation in a national project each year, and allowing plans to substitute any related ongoing projects of their own. In 1999, the national HCFA-sponsored project will focus on diabetes, but plans with existing diabetes projects can instead continue these projects without obtaining pre-approval from HCFA.

  • We are phasing in quality improvement requirements by giving plans three years before they must achieve demonstrable improvement. In the first contract year, plans need only select a topic, establish performance indicators, and collect baseline data.

  • We are clarifying the schedule for compliance with minimum performance level requirements. We intend to establish these levels in 1999, first measure compliance in 2000, and require plans to have achieved demonstrable improvement in 2001.

  • We are giving plans discretion as to where they conduct site visits for provider credentialing, rather than mandating site visits to each provider location. Plans also have discretion in developing criteria for site visits, and they may delegate these functions.

  • We are increasing flexibility in coordinating care by allowing primary care providers, a team of providers, or an employee who is a health care professional to conduct this function.

Phasing in enforcement is a normal and prudent course of business when implementing new programs or rules. The Medicare+Choice quality improvement requirements remain similar to those in the private sector. We are simply making sure plans have sufficient time to come into compliance.

Plans that do not have defined provider networks, such as non-network MSA plans and private fee-for-service plans, must report the same standardized performance measures as all other plans. These non-network plans also must evaluate the continuity and coordination of care that enrollees receive. However, the BBA excludes them from the quality improvement requirements.

Appropriate flexibility will be provided so plans with networks that are less structured than traditional HMOs, such as PPOs, can meet these requirements. The regulation preamble makes clear that we are not adopting a "one size fits all" approach. Our quality improvement systems will be sensitive to different plan structures and their different abilities to affect provider behavior.

Beneficiary and Provider Protections

Other provisions in Medicare+Choice address common complaints about health plans, both by consumers and providers.

Time frames for appeals are significantly tightened for decisions to deny care. Plans must issue initial decisions within 14 days, down from a previous maximum of 60 days. If a beneficiary appeals the initial decision, the plan must issue a ruling within 30 days, also down from 60 days. Plans must rule within 72 hours on denial-of-care decisions, including terminations of care, that could jeopardize the life, health or ability of the enrollee to regain maximum function. For all service-related decisions, extensions of up to 14 days may be permitted if the organization justifies a need and explains how the delay is in the enrollee's interest. The rules also set the same 72 hour and 30 day limits on Medicare's independent appeal body, where appeals are automatically forwarded when a plan denies a beneficiary request.

Emergency room visit copayments can be no higher than $50. Plans must cover emergency room visits for situations that a "prudent layperson" would consider an emergency. And they must pay for any services needed to stabilize a patient until discharge, a plan physician arrives, or an emergency room physician agrees with a plan physician on transfer of the patient to another facility. They must return emergency room calls seeking care authorizations for post-stabilization care within one hour.

Plans also are prohibited from having "gag rules" that limit what providers can tell patients about treatment options. They may not discourage enrollment or deny, limit or condition the coverage because of medical history, genetic information, mental or physical illness, disability, or prior use of services. They must provide direct access to specialists without a new primary care referral for each consultation in a given treatment plan for patients with complex or serious medical problems. And they must provide women access without primary care referrals to women's health specialists in plan networks for women's routine and preventive care, such as Pap smears and breast exams.

There are also important protections for providers. Plans must explain decisions to cancel or refuse to sign contracts with physicians and other health professionals, and let providers request plan review of decisions to remove them from networks. Plans also are prohibited from discriminating against any class of providers.


The BBA put in place a new payment system which addresses many of the problems with the previous adjusted average per capita cost payment system. Once fully implemented it will:

  • break the link between local fee-for-service costs and county payment, thus dramatically reducing disparities in rates across the country;

  • replace unpredictable fluctuations in the individual county rates with a more predictable national update factor; and

  • eliminate overpayments that were estimated to cost Medicare up to $2 billion a year.

Under the BBA system, a rate for a particular county is the greater of three possible rates: a new minimum or "floor" payment; a minimum 2 percent increase over the previous year's rate, or a blend of the county rate and an input priced adjusted national rate. The new system is phased in over five years, and therefore has several different moving parts. Medical education costs, which had been included in HMO payments under the old system, are carved out of county rates over the five-year transition and paid instead directly to teaching hospitals. The blend of county and national rates phases up to a 50/50 balance over the same five years. The national rate, local rates and the minimum payment amount are annually updated based on per capita Medicare growth. On top of these moving parts, the BBA mandates budget neutrality so total payments under the new system equal what total payments would have been if payment were based on county rates. In order to protect the floor payment and a minimum 2 percent increase, the law stipulates that the budget neutrality adjustment is applied only to the blended rates.

For 1998, the HCFA Actuary's initial projection of payments under this new system before the budget neutrality provision was applied was $250 million above what payments would have been if payment were based on county rates. For 1999 it was $300 million above what payments would have been if payment were based on county rates. Because the budget neutrality provision is applied only to the blended rates, payment for counties that would have received the blended rate by law had to be decreased to make up that difference. For 1998 and 1999, this process decreased blended rates to the point that they were below either the floor payment or the minimum 2 percent increase in all cases. Since payments are the greater of either the floor, the minimum increase, or the blend, no county rate is based on the blend. Furthermore, because the statute stipulates that the budget neutrality provision can be applied only to blend payments, total payments to plans based on the floor payment or the minimum 2 percent increase exceed budget neutrality by $95 million in 1998 and $80 million in 1999. We have no authority to address this.

We are disappointed that the blended rates cannot be applied in 1998 and 1999, as the blend rate is expected to encourage Medicare+Choice offerings in rural and other low cost areas. However, it is important to keep in mind that the budget neutrality adjustment affects blended rates only in the year in which it is applied. So, with the blend rising to a 50/50 mix of national and local rates by 2002, counties that have been receiving rates that are low but higher than the new floor will eventually receive a significant increase from the blend. At this point, we project that payments based on the blend will survive the budget neutrality provision and be implemented in 2000.


In the Year 2000, we also will begin to incorporate risk adjustment for enrollee health status into our plan payments. Plans will no longer be paid the same for a healthy beneficiary with minimal health care needs as for one with chronic conditions and substantial health care needs. Payment is now adjusted only for age, sex, and whether the beneficiary is in an institution or also enrolled in Medicaid. For example, in Kings County, NY, we now pay the same $747 for any 76-year-old male beneficiary, regardless of whether they have a serious heart condition or no medical problems at all. Based on the recently proposed methodology for risk adjustment, payment in Kings County for a 76-year-old, male beneficiary with no health problems would be $621, while payment for a 76-year-old male with coronary artery disease hospitalized for a heart attack would increase substantially to $1208, and payment for a 76-year-old male hospitalized for lung cancer would increase to $2317. Thus, plans will have an incentive to enroll beneficiaries with serious health problems who may be most able to benefit from the care coordination services plans promise to provide.

The risk adjustment system we will implement will use inpatient data that plans can readily produce. As plans improve their capacity to provide more detailed data, we will move to a more sensitive risk adjustment methodology that includes outpatient data and non-hospitalized beneficiaries with serious chronic conditions such as diabetes or rheumatoid arthritis. We will provide each plan with an estimate of risk adjustment's impact on their payments early next year. In implementing risk adjustment, we will consider impacts on plan benefits and premium packages. We will fully inform the Subcommittee of our plans when final impact analyses are completed later this year.

Risk adjustment will do two important things. First, it will reduce the incentive for "cherry picking," or enrolling healthy seniors while avoiding enrollment of higher cost beneficiaries. Secondly, it will help end overpayments due to plan cherry picking and thus reduce total overpayment to plans.


There is considerable evidence that we have overpaid plans and continue to overpay plans, in part because payments are not adjusted for risk, and for other reasons as well.

  • The Physician Payment Review Commission, in its 1997 Annual Report to Congress, estimated that Medicare has been making up to $2 billion a year in excess payments to managed care plans. This Congressional advisory body notes that, unlike the private sector where managed care has slowed health care cost growth, managed care has increased Medicare program outlays. The Commission's 1996 Report found that those who enroll in managed care tend to be healthy and those who disenroll tend to be unhealthy, exacerbating Medicare losses.

  • Mathematica Policy Research, which has conducted several studies on Medicare HMOs, says care of Medicare beneficiaries in HMOs costs only 85 percent as much as care for those who remain in traditional fee-for-service Medicare. That is 10 percent less than the 95 percent of the average fee-for-service costs plans were being paid.

  • The Congressional Budget Office has said managed care plans could offer Medicare benefits for 87 percent of Medicare fee-for-service costs, even though they were paid 95 percent.

  • The HHS Inspector General, in a recent report, indicated that Medicare HMOs overstated their anticipated administrative costs in 1994, 1995 and 1996 by as much as $2 billion.

  • The HHS Inspector General also recently reported that payments to plans are inflated because they include traditional Medicare's fraud and abuse costs, which managed care plans should be able to avoid. The IG says inclusion of fraud and abuse costs in plan payments will result in another $5 billion in excess payment to plans in 2002, and another $10 billion in 2007.

  • As described above, the payment methodology stipulated in the BBA, in spite of its own budget neutrality provision, results in total payments that exceed budget neutrality by $95 million in 1998 and $80 million in 1999.

  • The BBA also did not allow us to adjust 1998 rates for errors in projections upon which 1997 plan rates were based. Since the 1997 rates were overstated by nearly 3 percent, the base for all future M+C rates will be permanently overstated by 3 percent. The Congressional Budget Office says that, because of this, Medicare will overpay plans about $8.7 billion over the next five years, and $31 billion over the next 10 years.

Given such extensive evidence of overpayment, there can be no doubt that what we are paying plans is adequate.


We are concerned about the recent trend among plans to withdraw from counties that have somewhat lower payment rates than adjacent counties. As of September 30, 33 of the 347 risk plans currently in Medicare had announced that they are not renewing their Medicare contracts, affecting a total of 195,087 beneficiaries. Another 31 plans are reducing service areas, affecting 43,729 beneficiaries. These terminations and service area reductions affect 318 counties, and we are working to help affected beneficiaries move into other plans available to them. However, in 63 of these counties there are no other Medicare HMOs, leaving 27,850 beneficiaries with no options other than to go back to traditional Medicare. These plan business decisions may cause significant disruptions to beneficiaries. While we are working through our regional offices to help beneficiaries transition to other plans or back to traditional Medicare, we are particularly concerned about the impact on disabled beneficiaries and those who have relied on prescription drug benefits that they may no longer be able to receive.

These widely publicized withdrawals can be misleading, though. The overall trend is for expansion, as more beneficiaries and more counties will have managed care options in 1999 than in 1998. We now have 48 new plan applications and 25 service area expansion applications pending.

Average payment to plans nationwide is $471. Payment in counties where plans are withdrawing averages $467.10 and ranges from the floor payment of $379.84 to $795.35. Payment in counties where withdrawing plans leave beneficiaries with no managed care options averages $435.03 and ranges from the floor payment of $379.84 to $720.81.

As stated above, we have given careful consideration to industry suggestions that we reopen the process for determining plan premium and benefit structures, and concluded that it would not be in the best interests of beneficiaries. We have no assurances from plans that reopening the process would result in reversals of any decisions to reduce service areas or not renew contracts. We do know that such revisions are likely to adversely affect the millions of enrollees outside of the counties in question by reducing benefits and increasing premiums and cost-sharing. We see little benefit in allowing almost all HMOs to increase costs and decrease benefits to their Medicare enrollees. Reopening the process for all the plans and plan options in Medicare, which total more than 900, would require a rushed process in which we would essentially be forced to rubber-stamp plan proposals to increase costs or reduce benefits. This would be unfair to beneficiaries and undermine the integrity of the process for establishing premium and benefit packages. It also could pose problems for our beneficiary education efforts this fall, since changes could make materials describing plan benefits and costs that have already been produced incorrect.

Furthermore, suggestions that payment rates may be inadequate contradict abundant evidence that plans continue to be substantially overpaid. Risk adjustment provisions have not yet been implemented to address overpayments based on enrollee health. There is substantial evidence that we have overpaid and continue to overpay plans, including the Congressional Budget Office estimate that plans will be overpaid $31 billion over the next 10 years because the BBA does not allow adjustments for errors in the projections upon which 1997 plan rates were based. Again, there can be no doubt that what we are paying plans is adequate.

It is unfortunate that this question was raised at such a late date. We are puzzled by the fact that cost trends that were included by plans in their submissions to the Federal Employee Health Benefits Program in late May were not included by the same plans in their submission to us that same month. We would like to continue working with Congress and the industry to discuss potential improvements in the process for future years that would be allow us to produce accurate and timely educational materials for the November open enrollment period.


We are making substantial progress in implementing the Medicare+Choice regulation. We are responding to comments on our regulations with changes that will help the industry participate without compromising Congressional intent that Medicare promote quality and be a prudent purchaser. We are disturbed by the spate of withdrawals by plans from certain counties and are considering options to ameliorate the disruption these business decisions by plans cause beneficiaries. We are also concerned about the message sent to beneficiaries about the reliability of managed care plans. However, more plans continue to come into the program, more beneficiaries continue to sign up, and growth overall should continue at a substantial rate. I would be happy to answer any questions you might have.

Privacy Notice (www.hhs.gov/Privacy.html) | FOIA (www.hhs.gov/foia/) | What's New (www.hhs.gov/about/index.html#topiclist) | FAQs (answers.hhs.gov) | Reading Room (www.hhs.gov/read/) | Site Info (www.hhs.gov/SiteMap.html)