Medicare Managed Care:

Payment Rates, Local Fee-for-Service Spending, and Other Factors Affect Plans' Benefit Packages

HEHS-99-9R: Published: Oct 9, 1998. Publicly Released: Oct 9, 1998.

Additional Materials:


William J. Scanlon
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Office of Public Affairs
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Pursuant to a congressional request, GAO provided information on Medicare's health maintenance organizations (HMO), focusing on: (1) the key differences between Medicare's traditional fee-for-service (FFS) and managed care programs; (2) how Medicare historically set the monthly capitation rates paid to managed care plans and why these rates varied among counties; (3) how the Balanced Budget Act of 1997 (BBA) affected rates and the rate-setting process; (4) how the Health Care Financing Administration (HCFA) approves managed care plans' benefits and premiums; and (5) what requirements HCFA places on plans to notify beneficiaries about impending benefit and premium changes.

GAO noted that: (1) most Medicare beneficiaries can choose to receive health care services through a traditional FFS arrangement or a managed care organization; (2) there are several key differences between the two health care systems; (3) for beneficiaries, some of these differences involve trade-offs; (4) for example, compared to Medicare FFS, managed care plans typically cover more services and impose lower out-of-pocket cost; (5) however, a beneficiary in FFS can obtain care from any provider who receives Medicare payments, while a beneficiary in a managed care plan is typically limited to providers authorized by that plan; (6) another difference is how medical care is paid for; (7) in FFS, Medicare makes a separate payment for each covered service provided, while managed care plans receive a fixed monthly capitated payment for each beneficiary they enroll; (8) before 1998, payments to managed care plans were tightly linked to per capita Medicare FFS spending in each county to reflect the dramatic variation in health care costs and use; (9) as a result, capitation rates varied with the demographic characteristics of the beneficiary and his or her county of residence; (10) for example, in 1997, a managed care plan would receive $767 per month for serving a beneficiary in Richmond County (Staten Island), New York, compared to $221 for serving a similar beneficiary in Arthur County, Nebraska; (11) moreover, plans in relatively high-payment counties tend to offer a richer benefit package compared to plans in low-payment counties; (12) BBA will likely gradually reduce the geographic variation in managed care payments and benefit packages; (13) at the same time, because the legislation was designed to slow the growth of Medicare spending, benefit packages offered by managed care plans may become less generous; (14) managed care plans must contract with HCFA before they can serve Medicare beneficiaries; (15) contracts normally begin in January and run for 1 year; (16) at a minimum, plans must provide all FFS-covered benefits; (17) if HCFA determines a plan's projected Medicare profits will exceed its normal profit level, the plan is required to enhance its benefit package, set aside funds for future use, or both; (18) although plans can increase benefits or reduce the fees they charge at any time, they do so only with HCFA approval; and (19) in addition, Medicare requires that all plans notify members 30 days before a change takes place.

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