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 The links are no longer being updated.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 the Medicare+Choice Program by Mike Hash
Deputy Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the Senate Finance Committee
June 9, 1999

Chairman Roth, Senator Moynihan, distinguished Committee members, thank you for inviting us to discuss our progress in implementing the Medicare+Choice program. Medicare+Choice allows private plans to offer a wide range of options available in the private sector. It requires a massive new beneficiary education campaign and includes important new statutory requirements for quality assessment and improvement.

It also initiates a five-year transition to a fairer and more accurate payment system that includes risk adjustment to take individual beneficiaries' health care needs into account. Risk adjustment helps assure that payments are appropriate and curtail disincentives for plans to enroll sicker beneficiaries.

Successful implementation of Medicare+Choice is a high priority for us. We strongly believe that managed care and other private plans are important voluntary options next to original Medicare. Medicare managed care enrollment has nearly tripled under the Clinton Administration, from 2.3 million when the President took office to now 6.8 million.

We meet regularly with beneficiary advocates, industry representatives, and others to discuss ways to improve Medicare+Choice. Based on these discussions, we published initial refinements to the Medicare+Choice regulations in February which improve beneficiary protections while reducing plans' administrative workload. We have given plans an extra two months to file the "adjusted community rate"information we use to approve benefit and premium packages. And, we are phasing in the risk adjustment system over five years to prevent disruptions to beneficiaries and health plans. We are eager to continue working with Congress and our other partners to ensure that beneficiaries enjoy the most that Medicare+Choice can offer.

Beneficiary Education

Helping beneficiaries understand Medicare+Choice is perhaps our most important challenge. We launched the National Medicare Education Program to make sure beneficiaries receive accurate, unbiased information about their benefits, rights, and options. The campaign includes:

  • mailing a Medicare & You handbook to explain new benefits and health plan options;
  • a toll-free "1-800-MEDICARE"> [1-800-633-4227] call center with live operators to answer questions, and provide detailed plan-level information;
  • a consumer-friendly Internet site, www.medicare.gov, which includes comparisons of benefits, costs, quality, and satisfaction ratings for plans available in each zip code;
  • working with more than 120 national aging, consumer, provider, employer, union, and other organizations who help disseminate Medicare+Choice information to their constituencies;
  • enhanced beneficiary counseling from State Health Insurance Assistance Programs;
  • a national publicity campaign;
  • more than a thousand individual state and local outreach events around the country; and,
  • a comprehensive assessment of these efforts.

We tested the system in five States in 1998 and learned how to improve efforts for this November's open enrollment period, such as ways to make the Medicare & You handbook easier to use, and additional links on our website to help users find information faster. We are also standardizing plan marketing materials that summarize benefits so beneficiaries can more easily make apples-to-apples comparisons among plans in this November's open enrollment period.

To help us continually improve our education efforts, we are establishing the Citizens Advisory Panel on Medicare Education, under the Federal Advisory Committee Act. The panel will help:

  • enhance effectiveness in informing beneficiaries through use of public-private partnerships;
  • expand outreach to vulnerable and underserved communities; and
  • assemble an information base of "best practices" for helping beneficiaries evaluate plan options and strengthening community assistance infrastructure.

Panel members will include representatives from the general public, older Americans, specific disease and disability groups, minority communities, health communicators, researchers, plans, providers, and other groups. We expect to announce members and meeting schedules soon.

Reaching Out to Plans

We have taken several steps to encourage health plan participation in Medicare+Choice. As a result, we have converted the vast majority of Medicare HMOs -- more than 300 -- to the new Medicare+Choice program, and added 15 new plans and expanded service areas for another 17 plans since last November. We are currently reviewing another 20 new plan applications and 10 service area expansion applications. And total Medicare+Choice enrollment is now greater than it was before some plans decided to leave the program last year.

Last summer, we held outreach sessions attended by more than 1,500 plan representatives, and we continue to strengthen lines of communication with plans. In February, we published initial refinements to the Medicare+Choice regulation that improve beneficiary protections and access to information, while making it easier for health plans to offer more options to beneficiaries. The new rule:

  • clarifies that beneficiaries in a plan that leaves the program are entitled to enroll in remaining locally available plans;
  • specifies that changes in plan rules must be made by October 15 so beneficiaries have information they need to make an informed choice during the November open enrollment;
  • allows plans to choose how they conduct the initial health assessment;
  • waives the mandatory health assessment within 90 days of enrollment for commercial enrollees who choose the same insurer's Medicare+Choice plan when they turn 65, and for enrollees who keep the same primary care provider when switching plans;
  • stipulates that the coordination of care function can be performed by a range of qualified health care professionals, and is not limited to primary care providers;
  • limits the applicability of provider participation requirements to physicians; and,
  • allows plans to terminate specialists with the same process for terminating other providers.

We intend to publish a comprehensive final rule with further refinements this fall.

To further facilitate plans' ability to offer choices to Medicare beneficiaries, the President's budget includes a proposal to give plans 2 more months to file the information used to approve benefit and premium structures. This "Adjusted Community Rate" data would be due July 1, rather than May 1. July 1 is the latest we can accept, process, and approve premium and benefit package data, have the data validated, and still mail beneficiaries information about available plans in time for the November open enrollment. This move should help plans base cost and premium packages on more current marketplace trends and costs. Given legislative schedules and the need to act immediately, we have informed plans that the required filing date this year will be July 1. We look forward to working with you to enact the legislation necessary to support this change that is so important to the success of the Medicare+Choice program.

Fair Payment

The Balanced Budget Act put in place a new payment system which addresses many of the problems with the previous adjusted average per capita cost payment system. The new system will "risk adjust"payments to account for the health status of each enrollee. And it breaks the link between local fee-for-service costs and plan payment rates, which had caused wide disparities across the country in payment rates to plans and availability of plans to beneficiaries.

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 price 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 cost growth.

There is considerable evidence that we have both overpaid plans and continue to overpay plans, because payments are linked to local fee-for-service spending and not adjusted for risk.

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

Risk Adjustment

Payment to plans will become more accurate starting in January, 2000, when the law requires Medicare to "risk adjust"Medicare+Choice payments. That means we must base payment to plans on the health status of individual plan enrollees. Data on individual beneficiary use of health care services in a given year will be used to adjust payment for each Medicare+Choice beneficiary the following year. Adjustments are based on the average total cost of care for individuals who had the same diagnoses in the previous year. Risk adjustment represents a vast improvement over the current payment methodology. It helps assure that payments are more appropriate, and curtails the disincentive to enroll sicker beneficiaries.

The law requires us to proceed with risk adjustment starting January 1, 2000, and does not call for a transition. However, we believe we must implement these changes in an incremental and prudent fashion, as was done with other new major payment systems. We are, therefore, using flexibility afforded to us in the law to phase in risk adjustment over 5 years to prevent disruptions to beneficiaries or the Medicare+Choice program.

In the first year, only 10 percent of payment to plans for each beneficiary will be calculated based on the new risk adjustment method based on inpatient hospital diagnoses. The remaining 90 percent will be based on the existing method for calculating plan payments, which are flat amounts per enrollee per month based on the average cost to care for Medicare fee-for-service beneficiaries in each county and adjusted for basic demographic factors like age and sex. In 2001, 30 percent of payment amounts will be risk adjusted. In 2002, 55 percent of payment amounts will be based on risk adjustment. In 2003, 80 percent of payment amounts will be based on risk adjustment. By 2004, we and health plans will be ready to use data from all sites of care, not just inpatient hospital information, for risk adjustment. Then, and only then, will payment to plans be 100 percent based on risk adjustment.

During the first year of data collection for risk adjustment, both the statute and practical issues require that we use hospital inpatient data alone. About one in every five Medicare beneficiaries is hospitalized in a given year. Data on these hospitalizations are relatively easy to gather, easy to audit, and highly predictive of future health care costs. We will use the data to pay plans more for beneficiaries hospitalized the previous year for conditions that are strongly correlated with higher subsequent health care costs. While we will eventually be using a broader data base for risk adjustment, that is simply not feasible at this time.

The Balanced Budget Act clearly stipulated that more comprehensive data on outpatient, physician, and other services could be collected only for services provided on or after July 1, 1998. That was prudent, because it has been no small task for plans to learn how to gather the inpatient data we are using for the initial phase-in of risk adjustment. Requiring plans to provide additional data on outpatient, physician and other services would have been unduly burdensome.

This year, we will issue a schedule and guidance to plans for reporting other encounter data, such as outpatient information. The schedule will provide sufficient time for plans to gather accurate data and for HCFA to analyze and incorporate the data into accurate risk adjusted payments. We are now confident that by 2004 we will be using data on all health care encounters to assess beneficiary health status for risk adjustment. If we could base risk adjustment on more comprehensive data now, we would. But we cannot. The law requires us to move forward now with the data that is available, as stipulated in the statute. And, even with its limitations, this initial risk adjustment system based on inpatient data alone will increase payment accuracy 5-fold.

The initial risk adjustment system uses only the approximately 60 percent of inpatient hospital diagnoses that are reliably associated with future increased costs. For example, beneficiaries hospitalized for conditions such as heart attacks in aggregate are at higher risk of subsequent cardiovascular problems, and they consistently have higher health care costs in the subsequent year. Hospitalizations for such diagnoses will lead to higher payments to plans in the following year under risk adjustment. Hospitalizations for acute conditions such as appendicitis, however, rarely lead to increased subsequent care costs. They will not lead to higher payments under risk adjustment.

The 60 percent of hospital admission diagnoses that are clearly associated with increased subsequent care costs account for about 30 percent of all Medicare spending the following year. It is important to note that, while risk adjustment is initially based only on inpatient data, the risk adjustment payments account for all costs of care associated with each diagnosis. It is also important to note that risk adjustment is not cost-based reimbursement; it is reimbursement adjusted for projected need based on health status in the previous year.

The relevant diagnoses will be used to classify beneficiaries into 15 different cost categories. One category is for beneficiaries who were not hospitalized the previous year with relevant diagnoses. For beneficiaries included in any of the other categories, plans will receive an additional payment to cover the increased risk associated with diagnoses in that category.

Payment will continue to be adjusted for demographic factors, such as age, gender, county of residence, and whether a Medicare beneficiary is also a Medicaid beneficiary. We have revised these demographic factors for use with risk adjustment, for example, by no longer including institutional status because the risk adjustment methodology itself does a good job of predicting expenses for nursing home residents.

Medicare will calculate a score for each beneficiary to determine the payment that will be made if they choose to enroll in a Medicare+Choice plan. For example, Medicare's average payment per year to health plans is $5,800. Under risk adjustment, payment for an 85-year-old man will on average be $6,414. It will be an additional $2,060 if he is on Medicaid, another $1,207 if he is disabled, and $8,474 more if he was admitted to the hospital for a stroke the previous year, for a total of $18,155. The score for each beneficiary will be calculated annually, and will follow them if they move from one health plan to another.

Most health plans operate with integrity and play by the rules, and we doubt that plans will compromise successful medical management programs that keep patients out of the hospital in order to game the risk adjustment system. However, plans themselves have raised concerns that risk adjustment based on inpatient data alone could create perverse incentives for unnecessary hospitalizations. We, therefore, have taken solid steps to prevent gaming of the system with inappropriate hospital admissions or attempts to inflate the data submitted for use in risk adjustment.

The risk adjustment system does not include hospital stays of just one day, in order to help guard against inappropriate admissions. And it excludes diagnoses that are vague, ambiguous, or rarely the principal reason for hospital admission. In addition, we will use independent experts to assess the validity and completeness of data plans submit to us by conducting targeted medical record reviews and site visits. This will help ensure that plans do not "upcode,"or claim that hospital admissions were for more serious conditions that would result in higher payment.

It is essential to stress that risk adjustment will not and cannot be budget neutral if we intend to protect the Medicare Trust Fund and be fair to the taxpayers who support our programs. The whole reason for proceeding with risk adjustment "and specifically with risk adjustment that is not budget neutral" is that Medicare has not been paying plans accurately. Congress also recognized that plans have been paid too little for enrollees with costly conditions, and too much for those with minimal care needs. The simple demographic adjustments made now for age, gender, county of residence, Medicaid and institutional status, do not begin to accurately account for the wide variation in patient care costs. Risk adjustment will.

The vast majority of beneficiaries enrolled in Medicare+Choice cost far less than what Medicare pays plans for each enrollee. Medicare fee-for-service statistics make clear why risk adjustment must not be budget neutral. More than half of all Medicare fee-for-service beneficiaries cost less than $500 per year, while less than 5 percent of fee-for-service beneficiaries cost more than $25,000 per year, according to the latest available statistics for calendar year 1996. The most costly 5 percent account for more than half of all Medicare fee-for-service spending.

Since Medicare+Choice enrollees tend to be healthier than fee-for-service Medicare beneficiaries, the ratio of high to low cost beneficiaries in health plans is even more stark. Clearly, care for the overwhelming majority of Medicare enrollees costs plans much less than what Medicare pays because our payments are predicated on the average beneficiary cost of care, calculated by county. This average includes the most expensive beneficiaries in fee-for-service, who generally do not enroll in managed care.

If risk adjustment was budget neutral, Medicare and the taxpayers who fund it would continue to lose billions of dollars each year on Medicare+Choice. Accurate risk adjustment inevitably and appropriately must change aggregate payment to plans. Budget neutral risk adjustment would cost taxpayers an estimated $200 million in the first year of the phase-in, and $11.2 billion over 5 years if health plans maintained their current, mostly healthy mix of beneficiaries. It is important to stress that actual savings to taxpayers from risk adjustment will vary to the extent that less healthy beneficiaries enroll in Medicare+Choice plans, resulting in higher payments than health plans receive today.

The amount of payment change will vary among plans and depend on each plan's individual enrollees. Total payment may be higher for some plans as they enroll a mix of beneficiaries that is more representative of the entire Medicare population. As part of our Medicare+Choice March 1 rate announcement, we sent a letter to each health plan with an estimate of how payment will differ from what they are paid now, based on their current mix of enrollees.

Overall, we project that payment to Medicare+Choice plans on average will change by less than one percent in the first year. How it will change over time depends on the mix of beneficiaries in each plan. Risk adjustment significantly changes incentives for plans and could well lead to enrollment of beneficiaries with greater care needs. That could result in plans receiving higher payments than they do now. Phasing in risk adjustment also substantially buffers the financial impact on plans. Taxpayers are forgoing $1.4 billion in savings in the first year and as much as $4.5 billion over the full 5 years because of the phase in. Payment changes will be further buffered by an annual payment update for 2000 of 5.04 percent. This is substantially larger than projections that were made last year.

Competitive Pricing Demonstration

Bringing market forces to bear may further help set more accurate plan payment rates. We will soon begin a test of competitive pricing for Medicare+Choice plans, as called for in the BBA. This is an important step in our efforts to learn how to improve and protect Medicare. It will provide objective data needed to evaluate Medicare reform proposals that assume savings from rate-based competition among plans. In this demonstration, plans will compete to offer benefits at the most reasonable cost. A bidding process, similar to what most employers and unions use to decide how much to pay plans, will be used to set Medicare+Choice rates starting in 2000.

A National Medicare Competitive Pricing Advisory Commission of independent experts, chaired by General Motors Health Care Initiative Executive Director James Cubbin, has made recommendations regarding key design features. It selected the markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as demonstration sites. We established local advisory Committees in these communities to set the local minimum benefit package on which plans will bid and ensure that local beneficiaries and stakeholders have a voice in how the test operates. The local advisory Committee in Phoenix has raised concerns about the tight schedule for implementing the project. In response, the national advisory commission urged the local advisory Committees to work with us to develop an alternative schedule that can implement this essential project no later than April 1, 2000. We have committed to following the Committee's recommendation.

Ensuring Quality

The BBA requires most plans to both monitor and improve quality. Eventually, plans will have to meet minimum performance standards. Beneficiaries will be able to compare plans based on quality, and we will be able to use Medicare's market leverage to promote competition based on quality. We are working to incorporate quality assessment and improvement into original fee-for-service Medicare, as well, so beneficiaries will be able to make truly informed choices about all their options. And we have committed to making measurable quality improvements throughout Medicare as part of our Government Performance and Results Act objectives for fiscal 2000.

All plans must report objective, standardized measurements of how well they provide care and services. They have been using HEDIS, the Health Plan Employer Data and Information Set, for reporting purposes since 1997. We also are using CAHPS, the Consumer Assessment of Health Plans Study, to objectively measure beneficiary satisfaction. This fall, we will survey beneficiaries who disenroll from plans, and next year we will apply HEDIS and CAHPS to fee-for-service Medicare so we can provide comparable data on all options. The results of both HEDIS and CAHPS are being formatted so beneficiaries can make direct, apples-to-apples comparisons among all their options, including the original Medicare program.

We recognize that it takes time for plans to adapt to the quality improvement requirements. Therefore, we made several changes from our draft proposal to help plans comply.

  • We are requiring plans to conduct two performance improvement projects per year. This workload is comparable to standards imposed by private sector accrediting organizations.
  • 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.
  • We are giving plans three years before they must achieve minimum performance level requirements and demonstrable improvement.
  • We are giving plans discretion as to where and how they conduct site visits for provider credentialing, rather than mandating site visits to each provider location.

We are extremely impressed with the quality improvement project outlines submitted by plans. They make abundantly clear that plans are very capable of achieving what Congress envisioned. As a result, they should provide better care and value for taxpayers' dollars.

Market Volatility

As you know, some Medicare HMOs did not convert to Medicare+Choice, and others reduced their service areas last year. We are concerned about the business decision that some plans made to reduce participation in the program, and especially the impact on beneficiaries who were left with no other managed care options, or who experience disruptions in their provider relationships. It is, however, is important to put those business decisions in context.

The vast majority of Medicare HMOs converted to the Medicare+Choice program. We have approved 32 new plan and service area expansions since November, and are reviewing applications from another 30 plans that want to get into or expand their role in Medicare+Choice. And there are now more beneficiaries in managed care plans than before last year's plan pullouts. Plans that withdrew often had weak market positions, commercial pressures such as rising drug expenditures, or internal management issues. Many of the disrupted beneficiaries had several other plans to choose from, and all but about 50,000 had at least one other plan option.

A comprehensive review by the General Accounting Office confirms that many factors contributed to the plan withdrawals. Reasons for withdrawals and service area reductions cited by the GAO include plan decisions that they were unable to compete because of low enrollment or large competitors, and problems in establishing provider networks. Withdrawals affected far more high payment rate counties (91 percent) than low payment rate counties (34 percent), according to the GAO. It is our understanding that the Federal Employees Health Benefits Program had a similar experience with plan pullouts. In several instances plans that withdrew Medicare service from specific counties also withdrew from FEHBP in those same counties.

This all suggests that plan withdrawal decisions have more to do with internal plan and larger marketplace issues than with Medicare rates or regulations. In fact, a certain amount of market volatility must be expected when relying on the private sector to serve beneficiaries. That is one reason why it is essential to preserve a strong, public-sector fee-for-service option in any Medicare reform proposal. It is why the President's budget includes proposals to protect beneficiaries from disruption by plan withdrawals. And it is why we have provided for earlier notification of plan withdrawals in our refinement to Medicare+Choice regulations. We look forward to working with you on legislation the President has proposed to broaden access to supplemental Medigap polices if beneficiaries lose their plan option, and to allow enrollees with end stage renal disease to move to another plan.


We are making substantial progress in implementing the Medicare+Choice program. We are incorporating lessons learned from our initial beneficiary education campaign to refine future efforts, and establishing an advisory Committee to further help improve these essential efforts. We are working with plans to encourage participation, and refining regulations so plans will be able to offer beneficiaries more choices. We are proceeding with quality improvement requirements in a prudent manner that will meet the statutory mandate while giving plans reasonable time and flexibility to comply. And, while we are proceeding with essential payment reforms in a prudent manner, it is abundantly clear that payment to plans continues to be more than adequate, and that any comparison of plan payments to local fee-for-service rates is specious at best. I thank you again for holding this hearing, and I am happy to answer your questions.

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)