Medicare Managed Care:

Growing Enrollment Adds Urgency to Fixing HMO Payment Problem

HEHS-96-21: Published: Nov 8, 1995. Publicly Released: Nov 8, 1995.

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Pursuant to a congressional request, GAO reviewed Medicare payments to health maintenance organizations (HMO), focusing on: (1) current trends in Medicare beneficiary enrollment in HMO; (2) flaws in Medicare's rate-setting method that prevent it from realizing potential savings from HMO; and (3) the Health Care Financing Administration's (HCFA) efforts to test HMO payment reforms.

GAO found that: (1) since 1993, the annual increase in Medicare beneficiary HMO enrollment has exceeded 20 percent; (2) HMO enrollment increases have been concentrated in 15 states; (3) Medicare links HMO payment rates to the average cost of fee-for-service care and fails to adjust HMO payment rates to reflect beneficiaries' health status or local differences in utilization rates; (4) strategies to improve Medicare HMO payments include giving HCFA new authority to use competitive bidding or to negotiate with HMO, modifying the HMO rate-setting formula to include a health status risk adjuster, and requiring larger discounts from HMO in areas where HMO payment rates are too high; (5) HCFA could generate the most savings if it combines all three cost-reduction strategies and tailors the strategy to local conditions; and (6) although HCFA is planning demonstration projects using competitive bidding and improved risk adjustments, HCFA needs to gather and use available data to adjust HMO payments.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: In passing the Balanced Budget Act of 1997, Congress completely changed the HMO rate-setting methodology. Beginning in 1998, HMO rates will be determined by the formula specified in the act. The Secretary of HHS was given no discretion to selectively reduce rates in specific counties.

    Matter: In light of the increasingly urgent need to realize savings from the Medicare HMO program and to develop viable new methods of paying HMO, Congress may wish to consider giving the Secretary of Health and Human Services authority to selectively reduce Medicare HMO payment rates (the adjusted average per capita cost rate) in areas where market data indicate that the Medicare rates are too high.

  2. Status: Closed - Implemented

    Comments: In passing the Balanced Budget Act of 1997, Congress gave HCFA a mandate and clear authority to conduct alternative HMO payment demonstrations. The location and design of these demonstrations will be determined by a Competitive Pricing Advisory Committee, whose members will be appointed by the Secretary of HHS.

    Matter: In light of the increasingly urgent need to realize savings from the Medicare HMO program and to develop viable new methods of paying HMO, Congress may wish to expand HCFA authority to mandate HMO participation in demonstration projects in order to conduct more meaningful studies of alternative payment methods.

 

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