Medicare HMOs:

HCFA Could Promptly Reduce Excess Payments by Improving Accuracy of County Payment Rates

T-HEHS-97-78: Published: Feb 25, 1997. Publicly Released: Feb 25, 1997.

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William J. Scanlon
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GAO discussed the rates Medicare pays health maintenance organizations (HMO) in its risk contract program, focusing on: (1) the Health Care Financing Administration's (HCFA) method for setting HMO rates; and (2) GAO's proposed modification of HCFA's HMO rate-setting method.

GAO noted that: (1) HCFA's current method of determining the county rate produces excess payments; (2) because HCFA's method excludes HMO enrollees' costs from estimates of the per-beneficiary average cost, it bases county payment rates on the average per-beneficiary cost of only those beneficiaries that remain in the fee-for-service sector and ignores the costs HMO enrollees would have incurred if they had remained in fee-for-service; (3) research has shown the costs of those remaining in fee-for-service to be higher on average than the likely costs of HMO enrollees; (4) a difficulty in correcting the problem is that HCFA cannot directly observe the costs HMO enrollees would have incurred if they had remained in the fee-for-service sector; (5) GAO's proposed modification is designed to fix that problem; (6) GAO developed a way to estimate HMO enrollees' expected fee-for-service costs using information available to HCFA; and (7) GAO's approach produces a county rate that represents the costs of all Medicare beneficiaries and could result in hundreds of millions of dollars in savings to Medicare.

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