Medicare Managed Care:

Program Growth Highlights Need to Fix HMO Payment Problems

T-HEHS-95-174: Published: May 24, 1995. Publicly Released: May 24, 1995.

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Pursuant to a congressional request, GAO discussed Medicare's method of paying health maintenance organizations (HMO) for Medicare beneficiaries. GAO noted that: (1) currently, only 7 percent of Medicare beneficiaries are enrolled in HMO under the risk contract program, but HMO are rapidly increasing their enrollment of Medicare beneficiaries; (2) under the risk contract program, HMO are paid a flat fee for each Medicare beneficiary enrolled; (3) current Medicare HMO rates do not reflect the health status of HMO enrollees or market conditions, take advantage of competitive managed care market forces, and may discourage participation by setting payments too low in some areas; (4) Medicare's risk adjustment methodology does not prevent overcompensation to HMO; (5) rate-setting strategies include increasing price competition among HMO, using better risk adjusters, and revising Medicare's capitation rate to reflect local medical prices and market conditions; and (6) although the Health Care Financing Administration conducts rate-setting demonstration projects, it should, in the short term, introduce a better health status risk adjuster and test competitive bidding and other rate-setting approaches.

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