Payments Exceed Cost of Fee-for-Service Benefits, Adding Billions to Spending

HEHS-00-161: Published: Aug 23, 2000. Publicly Released: Aug 23, 2000.

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William J. Scanlon
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Pursuant to a congressional request, GAO reviewed Medicare Choice program payment issues, focusing on: (1) whether program spending for Medicare Choice plan enrollees has exceeded what Medicare-covered care for these beneficiaries would have cost in the fee-for-service (FFS) Medicare program; and (2) the extent to which payments to individual plans differ from expected FFS costs.

GAO noted that: (1) Medicare Choice has not been successful in achieving Medicare savings; (2) Medicare Choice plans attracted a disproportionate selection of healthier and less-expensive beneficiaries relative to traditional FFS Medicare (a phenomenon known as favorable selection), while payment rates largely continued to reflect the expected FFS costs of beneficiaries in average health; (3) consequently, in 1998 GAO estimated that the program spent about $3.2 billion, or 13.2 percent, more on health plan enrollees than if they had received services through traditional FFS Medicare; (4) this year the Health Care Financing Administration implemented a new methodology to adjust payments for beneficiary health status; (5) however, GAO's results suggest that this new methodology, which will be phased in over several years, may ultimately remove less than half of the excess payments caused by favorable selection; (6) in addition, the combination of spending forecast errors built into plan payment rates and Balanced Budget Act payment provisions caused an additional $2.0 billion, or 8 percent, in excess payments to plans; (7) instead of paying less for health plan enrollees, GAO estimates that aggregate payments to Medicare Choice plans in 1998 were about $5.2 billion (21 percent), or approximately $1,000 per enrollee, more than if the plans' enrollees had received care in the traditional FFS program; (8) it is largely these excess payments, and not managed care efficiencies, that enable plans to attract beneficiaries by offering a benefit package that is more comprehensive than the one available to FFS beneficiaries, while charging modest or no premiums; (9) nearly all of the 210 plans in GAO's study received payments in 1998 that exceeded expected FFS costs because their enrollees were healthier than average beneficiaries; (10) however, the percentage of estimated excess payments varied substantially among plans; (11) about two-thirds of the plans received payments that were at least 10 percent more than enrollees would have cost Medicare in the traditional program, even without considering excess payments due to forecast errors; (12) the largest estimated excess payment to an individual plan totalled $334 million, or 40 percent more than Medicare would have spent if the plan's enrollees had been covered under FFS; (13) GAO also estimated that nine plans received payments below its enrollees' expected FFS costs; and (14) however, when excess payments due to forecast error are included, only 2 of the 210 plans were paid less ($1.7 million and $175,000) than its enrollees' expected FFS costs.

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