Reforms Have Reduced, but Likely Not Eliminated, Excess Plan Payments

HEHS-99-144: Published: Jun 18, 1999. Publicly Released: Jun 22, 1999.

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Pursuant to a congressional request, GAO reviewed concerns surrounding the Balanced Budget Act's (BBA) health plan payment changes, focusing on: (1) the extent to which health plans provide additional benefits and whether they could continue to provide additional benefits if payments were reduced; (2) the evidence regarding managed care's effect on Medicare spending; and (3) whether BBA provisions will eliminate excess plan payments.

GAO noted that: (1) although all health plans are required to provide at least the package of benefits available in traditional fee-for-service (FFS), most plans provide many more benefits; (2) the extra benefits result because projected Medicare payments tend to exceed plans' estimated costs of providing the FFS package of benefits, and the program requires that the difference between payments and plan costs be used to fund additional benefits; (3) in 1997, the average enrollee in a health plan received more than $90 per month in required and voluntary additional benefits; (4) thus, even if plan payments were reduced, the typical plan could provide the FFS package of benefits as well as some additional benefits and still earn a profit; (5) health plans have not produced the expected savings for the Medicare program; (6) until 1997, Medicare plans were paid 95 percent of the expected FFS cost of beneficiaries; (7) the 5-percent discount was established to allow the program to benefit from the efficiencies commonly associated with managed care; (8) however, numerous studies conducted by GAO, the Physician Payment Review Commission, the Health Care Financing Administration (HCFA), and others demonstrated that the Medicare program spent more on beneficiaries enrolled in health plans than it would have if the same individuals had been in FFS; (9) this unexpected result occurred because Medicare payments were based on the estimated cost of FFS beneficiaries in average health and were not adequately adjusted to reflect the fact that plans tended to enroll beneficiaries with better-than-average health who had lower health care costs; (10) BBA's new formula for paying health plans takes steps to lower excess plan payments; (11) the new formula slows the growth of plan payment rates relative to FFS spending growth for 5 years; (12) BBA mandates the implementation of a health-based risk adjustment system intended to better match payments to beneficiaries' expected health care costs and reduce the excess payments caused by favorable selection; (13) the effect of these changes is reduced because BBA locked in place the excessive payment rates that existed in 1997; (14) the HCFA actuaries now know that those rates were too high because the forecast overestimated FFS spending by 4.2 percent; (15) BBA specified that the 1997 rates be used as the basis for the 1998 rates; (16) this implicit inclusion of the forecast error resulted in excess payments of $1.3 billion in 1998; and (17) the annual excess payments associated with the forecast error will increase each year as more beneficiaries join health plans.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Representatives of some Medicare+Choice plans have stated that current payment rates are inadequate. A number of plans have withdrawn from the Medicare+Choice program or reduced their participation. In light of these facts, legislators are considering whether Medicare's payment methodology should be revised.

    Matter: To avoid unnecessary Medicare spending, Congress may wish to consider revising each county's base rate to more accurately reflect the estimated FFS cost of serving the average Medicare beneficiary. Such a revision would eliminate Medicare Choice and FFS spending disparities caused by: (1) flaws in the methodology HCFA used to set base rates in each county before BBA; (2) the incorporation of the 1997 forecast error in 1998 and future rates; and (3) the annual payment rate update reductions mandated by BBA. If Congress wishes to share in the efficiencies of Medicare Choice plans, base rates should be set below estimated average FFS costs as they were under the Medicare risk-contract program. Congress may also want to consider maintaining a minimum base rate to encourage greater participation by Medicare Choice plans in rural areas.


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