Medicare Managed Care:

Better Risk Adjustment Expected to Reduce Excess Payments Overall While Making Them Fairer to Individual Plans

T-HEHS-99-72: Published: Feb 25, 1999. Publicly Released: Feb 25, 1999.

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William J. Scanlon
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Pursuant to a congressional request, GAO discussed the adjustment of Medicare's payments to managed care plans in the Medicare Choice program, focusing on the: (1) importance of improving the current risk adjustment method; (2) implications of rate-setting changes implemented in 1998; and (3) the advantages and drawbacks of the Health Care Financing Administration's (HCFA) proposed new interim risk adjuster.

GAO noted that: (1) Medicare's current risk adjuster has failed to protect taxpayers, certain plans, and beneficiaries, underscoring the urgency of replacing it with a health-based risk adjuster; (2) studies show that methodological flaws have led to billions of dollars in excess payments and inappropriate payment disparities; (3) the Balanced Budget Act of 1997 provisions now in place may reduce, but not eliminate, excess payments; and payment disparities persist that could jeopardize plan participation and access to managed care for costlier seniors; (4) the new risk adjuster to be in place by 2000 is intended to improve estimates of health plan enrollees' medical costs; (5) better cost estimates producing fairer rates could reduce the unnecessary spending of taxpayer dollars while minimizing the financial disincentive for plans to serve a costly mix of beneficiaries; (6) the use of the new adjuster, while not perfect, is an interim step and improves on the one now in place; and (7) in addition, HCFA plans to phase in the use of the new adjuster, thereby recognizing the need to avoid sharp payment changes that could affect plans' offerings and diminish the attractiveness of the Medicare Choice program to beneficiaries.

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