Medicare+Choice Payments

Medicare+Choice Payments

Order Code RL30587
Report for Congress
Received through the CRS Web
Medicare+Choice Payments
Updated January 22, 2003
Hinda Ripps Chaikind
Specialist in Social Legislation
Paulette C. Morgan
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Medicare+Choice Payments
Summary
In 1997, Congress passed the Balanced Budget Act of 1997 (BBA, P.L. 105-33),
which included provisions to create the Medicare+Choice (M+C) program. This
legislation redesigned the system for setting Medicare payment rates for health
maintenance organizations and other private plans that contract with Medicare. The
new payment structure is designed to reduce variation in payments across the country
by increasing payments in areas where they are traditionally low and slowing the rate
of growth in areas with higher payments.
The M+C program also established new rules for beneficiary and plan
participation. These new rules were devised to expand health plans to markets where
access to managed care plans was limited or non-existent, and to offer new types of
health plans in all areas. The M+C program has had limited success at expanding
coverage, and the initial moderate growth which increased M+C enrollment has been
on a downward turn since 2001.
In 1999, Congress enacted the Balanced Budget Refinement Act of 1999
(BBRA, P.L. 106-113) to address some of the issues arising from the passage of the
BBA. The BBRA included changes to the M+C program in an effort to make it
easier for Medicare beneficiaries and plans to participate in the program. Further
refinements to the M+C program were included in the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000, (BIPA, P.L. 106-554).
The 107th Congress considered, but was not able to reach agreement on major
legislative changes to the Medicare+Choice program. The House passed H.R. 4954
on June 28, 2002, a bill that would have increased M+C payments in 2003 and 2004
and then in 2005 would have created a new Medicare+Choice competition program
and a demonstration program. Two bills were introduced in the Senate that would
have also made major changes to the M+C program. S. 3018 (introduced by the
Senators Baucus and Grassley et al.,) contained similar provisions to H.R. 4954 to
increase M+C payments 2003 and 2004. S. 2729 (introduced by Senator Grassley
et al. - the tripartisan bill) would have based payments in M+C on competitive bids
by plans. Neither bill was passed by the Senate.
This report focuses on M+C payments. For a discussion on the recent trends in
Medicare managed care, along with an overview of the M+C program, see CRS
Report RL30702, Medicare+Choice.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Calculation of the Medicare+Choice Payment Rate . . . . . . . . . . . . . . . . . . . . . . . 2
Blended Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Minimum Payment (Floor) Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Minimum Percentage Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Exclusion of Payments for Graduate Medical Education (GME) . . . . . . . . . 5
Budget Neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
National Growth Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Bonus Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Variations in Medicare+Choice Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 9
County Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Geographic Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Average Payment Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Current Issues of the Medicare+Choice Program . . . . . . . . . . . . . . . . . . . . . . . . 16
Legislative Activity in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Figures
Figure 1. Rule Used to Determine Country Payment Rates, by Year,
1998-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 2. Range of County Medicare Managed Care Payments for the
Aged by Location, 1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 3. Comparison of Average Monthly Aged Medicare+Choice Payment
Rates for All Beneficiaries and Currently Enrolled
Medicare+Choice Beneficiaries: 2000 - 2003 . . . . . . . . . . . . . . . . . . . . . . 15
List of Tables
Table 1. Major Factors for Determining Medicare Payments to
Medicare+Choice Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 2. Calculation of Monthly Payment Rates for Selected Counties, 2003 . . 11
Table 3. Monthly Payment Rates for Aged Enrollees in Selected Areas, 2003 . 14

Medicare+Choice Payments
Introduction
Medicare has a long-standing history of offering its beneficiaries an alternative
to the traditional fee-for-service program, in which a payment is made for each
individual Medicare-covered service provided to a beneficiary. Beginning in the
1970s, private health plans were allowed to contract with Medicare on a cost-
reimbursement basis. In 1982, Medicare’s risk contract program was created,
allowing private entities, mostly health maintenance organizations (HMOs), to
contract with Medicare. In exchange for a preset monthly per capita payment from
Medicare, private health plans agree to furnish all Medicare-covered items and
services to each enrollee.
Then, in 1997, Congress passed the Balanced Budget Act of 1997 (BBA, P.L.
105-33), replacing the risk contract program with a new Medicare+Choice (M+C)
program. The M+C program established a new payment structure, designed to
reduce the variation across the country by increasing payments in areas with
traditionally low payments, and slowing the rate of growth in areas with higher
payments. However, although payment variation has been somewhat reduced,
substantial payment differentials remain nationwide.
The M+C payment structure was implemented beginning in 1998.1 In general,
the program makes monthly payments in advance to participating health plans for
each enrolled beneficiary in a payment area (typically a county). The Secretary of
Health and Human Services (HHS) is required to determine annually, and announce
by the second Monday in May2 in the year before the calendar year affected, the
annual M+C per capita rate for each payment area, and the risk and other factors to
be used in adjusting such rates. Payments to M+C organizations are made from the
Medicare Trust Funds in proportion to the relative weights that benefits under Parts
A and B represent of the actuarial value of total Medicare benefits.
The M+C program also established new rules for beneficiary and plan
participation, along with the new payment methodology. The program was designed
to expand the availability of health plans in markets where access to managed care
plans was limited or non-existent, and to offer new types of health plans in all areas.
1 Although the M+C payment structure was implemented in 1998, most of the other
components of the M+C program were effective in 1999.
2 The Public Health Security and Bioterrorism Preparedness and Response Act (P.L.
107-188) temporarily moved this deadline from March 1 to no later than the second Monday
in May, effective only in 2003 and 2004. It also made other temporary changes in deadlines
for the program.

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In order to increase enrollment in Medicare managed care, and to allow beneficiaries
access to similar options available in the non-Medicare market for meeting health
care needs, the M+C program offers a diverse assortment of managed care plans.
However, achieving these goals has been difficult, in part because the goal to control
Medicare spending may have dampened interest by managed care entities in
developing new markets, adding plan options, and maintaining their current markets.
The 106th Congress enacted legislation in order to address some of the issues
arising from the BBA changes. The Balanced Budget Refinement Act of 1999
(BBRA, P.L. 106-113) as well as the Medicare, Medicaid, and SCHIP Benefits
Improvements and Protection Act of 2000 (BIPA, P.L. 106-554) amended the M+C
program in an effort to increase reimbursement and to make it easier for Medicare
beneficiaries and plans to participate in the program.
The 107th Congress considered, but was not able to reach agreement on further
major legislative changes to the Medicare+Choice program. The House passed H.R.
4954 on June 28, 2002, a bill that would have increased M+C payments in 2003 and
2004 and then in 2005 would have created a new Medicare+Choice competition
program and a demonstration program. Two bills were introduced in the Senate that
would have also made major changes to the M+C program. S. 3018 (introduced by
the Senators Baucus and Grassley et al.,) contained similar provisions to H.R. 4954
to increase M+C payments in 2003 and 2004. S. 2729 (introduced by Senator
Grassley et al., - the tripartisan bill) would have based payments in M+C on
competitive bids by plans. Neither bill was passed by the Senate.
Calculation of the Medicare+Choice Payment Rate
The major factors for determining Medicare’s annual M+C per capita rates are
summarized in Table 1. The annual M+C per capita rate for a payment area (for a
contract in a calendar year) is set at the highest of one of three amounts calculated for
each county:
! a rate calculated as a blend of an area-specific (local) rate and a
national rate,
! a minimum payment (or floor) rate, or
! a rate reflecting a minimum increase from the previous year’s rate.
Each part of the system is described in more detail below.3
3 A state may request a geographic adjustment to a payment area to establish a single
statewide M+C area, a metropolitan based system, or the consolidation into a single area of
noncontiguous counties. For disabled and ESRD beneficiaries, payment rates are set using
a similar method as that for aged beneficiaries, except that ESRD rates are calculated on a
statewide basis. Beginning in January 2002, BIPA required the Secretary to increase M+C
payment rates for enrollees with ESRD. The revised rates reflect the demonstration rate
(including the risk-adjustment methodology) of social health maintenance organizations’
ESRD capitation demonstrations and include adjustments for factors such as renal treatment
(continued...)

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Blended Rates
The blended per capita rate shifts county rates gradually away from solely local
(generally county) rates, which reflect wide variations in fee-for-service costs, toward
a national average rate. Blending is designed to reduce payments in counties where
the adjusted average per capita costs4 (AAPCCs) historically were higher than the
national average rate, and to increase payments in counties where AAPCCs were
lower. The blended rate is defined as the weighted sum of:
! a percentage of the annual area-specific M+C per capita rate for the
year for the payment area, and
! a percentage of the input-price adjusted annual national M+C per
capita rate for the year.
The component of the blend determined by the area-specific (local) rate is based
on the 1997 AAPCC for the payment area with two adjustments. First, the
area-specific rate is reduced to remove an amount corresponding to graduate medical
education (GME)5 payments. Second, rates are updated each year by a national
growth percentage (described below). The component of the blend determined by
the national rate is a weighted average of all local area-specific rates. This
component of the blend is adjusted to reflect differences in certain input prices, such
as hospital labor costs, by a formula stated in the law. The BBA allows the Secretary
to change the method for making input-price adjustments in the future. Each year,
the blended rates must be raised or lowered to achieve budget neutrality (described
below).
Under current law, the percentage in the blend assigned to the area-specific rate
was reduced in increments over 6 years from 90% in 1998 to 50% in 2003, while the
corresponding percentage for the national component was increased from 10% to
50%. In 2003, the blended rate is based on 50% of the area-specific rate and 50% of
the national, input-price adjusted rate. However, in 2003 no county will be paid at
the blend payment rate.6
3 (...continued)
modality, age, and underlying cause of the disease.
4 Prior to enactment of the BBA, payments for care of Medicare beneficiaries in risk health
maintenance organizations (HMOs) were based on the AAPCC. The AAPCC represented
a monthly payment to cover the cost of treatment in a Medicare risk HMO. It was calculated
according to a complex formula based on the cost of providing Medicare benefits to
beneficiaries in the fee-for-service portion of the Medicare program. The per capita
payment was set at 95% of the AAPCC, and was adjusted for certain demographic
characteristics of HMO enrollees.
5 Medicare pays for the both the direct and indirect costs of GME. Direct payments include
payment for expenses such as salaries of residents, interns and faculty. The indirect
adjustment accounts for factors not directly related to education which may increase the
costs in teaching hospitals, such as more severely ill patients and increased testing.
6 The blend payment is the highest payment in 2003 for 10 counties located in Alaska,
California, New York and the Virgin Islands. The local payment for these counties is much
(continued...)

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Minimum Payment (Floor) Rate
Each county is also subject to a floor rate, designed to raise payments in certain
counties more quickly than would occur through the blend alone. Initially, the BBA
provided for a floor rate that would apply to all counties within the United States and
for 2000 this minimum rate was $402 per month. A separate minimum was also
established for areas outside (i.e. territories) the United States. Beginning March
20017, BIPA established multiple floor rates, based on population and location. For
2001, the floor was $525 for aged enrollees within the 50 states and the District of
Columbia residing in a Metropolitan Statistical Area (MSA) with a population of
more than 250,000. For all other areas within the 50 states and the District of
Columbia, the floor was $475. For any area outside the 50 states and the District of
Columbia, the $525 and $475 floor amounts were also applied, except that the 2001
floor could not exceed 120% of the 2000 floor amount. As required by law, these
payment amounts are increased annually by a measure of growth in program
spending (see discussion of national growth percentage, below). In 2002, the floor
was $553 for the larger MSAs and $500 for the smaller MSAs. The 2003 floors are
lower than the 2002 floors; $548 for the larger MSAs and $495 for the smaller
MSAs.8 In 2003, M+C payments in only 6 counties are based on the floor payments,
because these counties were able to change their designation from a low floor county
payment area to a high floor county payment area.9 The 2003 payments to M+C
organizations in these counties is based on the floor payment of $548.
Minimum Percentage Increase
The minimum increase rule protects counties that would otherwise receive only
a small (if any) increase. In 1998, the minimum rate for any payment area was 102%
of its 1997 AAPCC. For 1999 and 2000, the increase was 102% of the annual M+C
per capita rate for the previous year. BIPA applied a 3% minimum update for 2001,
beginning in March. For subsequent years, the minimum increase returned to an
6 (...continued)
lower than the national payment, so that the shift from a 58% local/42% national rate to
50/50 split boosts their payments. Even though the factor used to increase the blend (see
discussion of national percentage growth) is negative for 2003, the positive impact of the
increased weight of the national component is greater, resulting in the highest payment for
these few counties. However, because the blended rates must be raised or lowered to
achieve budget neutrality each year, no plan payment is based on the blended rate in 2003.
7 Generally, increases in M+C payments are effective on January 1, of each year. However,
the changes resulting from BIPA were effective on March 1, 2001. As a result, M+C plans
were paid at a pre-BIPA rate for January and February of 2001, and then beginning in March
the new rates went into effect. In future years, increases are effective on January 1.
8 See discussion of national growth percentage for an explanation of how the adjustment
for prior year’s errors actually lowers the floor payments in 2003.
9 M+C payments for five of these counties was set at the lower floor rate in 2002, while
payments for the sixth county was set at the minimum update rate in 2002. Regardless of
their actual 2002 payment amount, the high floor amount yields the highest M+C payment
for each of these six counties in 2003.

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annual January update of an additional 2% over the previous year’s amount. The
minimum percentage increase is the only positive update for 2003 M+C payments.
Exclusion of Payments for Graduate Medical Education
(GME)
Payments for GME are excluded or “carved out’” of the payments to M+C plans
over 5 years. Specifically, in determining the local rate prior to determining the
blended rate, amounts attributable to payments for GME costs were deducted from
the 1997 payment amount. The percent of GME payments excluded began at 20%
in 1998, rising in equal amounts until it is fully deducted, beginning in 2002.
However, the GME “carve out” will not occur in a year in which no payment is based
on the blended rate, because this carve out only applies to the blended rate and not
to either the minimum percentage increase of the floor rate. Payments for
disproportionate share hospitals (DSH)10 are not carved out.
Budget Neutrality
Once the preliminary rate is determined for each county, a budget neutrality
adjustment is required by law to determine final payment rates. This adjustment is
made so that estimated total M+C payments in a given year will be equal to the total
payments that would be made if payments were based solely on area-specific rates.
A budget neutrality adjustment may only be applied to the blended rates because rates
cannot be reduced below the floor or minimum increase amounts. As a result of this
limitation, it is not always possible to achieve budget neutrality. The law makes no
provision for achieving budget neutrality after all county rates are assigned either the
floor or minimum increase. When this situation occurred for the 1998, 1999, 2001,
2002, and 2003 rates, the Centers for Medicare and Medicaid Services (CMS) chose
to waive the budget-neutrality rule rather than the floor or minimum rate rules.
While the cost of waiving budget neutrality was not significant in 1998 and 1999
(less than $100,000 each year), the cost was about $1 billion in 2002, and $900
million in 2002.
National Growth Percentage
The national per capita M+C growth percentage is defined as the projected per
capita increase in total Medicare expenditures minus a specific reduction set in law.
Because this increase is tied to total Medicare expenditures, it maintains a link
between Medicare fee-for-service and managed care spending. In 1998, the reduction
was 0.8 percentage points, from 1999 through 2001 it is 0.5 percentage points, and
in 2002 the BBRA set the reduction at 0.3 percentage points. There is no reduction
after 2002. Starting with the 1999 M+C payments, adjustments were also made for
errors in the previous years’ spending projection.
10 DSH payments are a payment adjustment for the higher costs that hospitals incur as a
result of serving a large number of low income patients.

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The national growth percentage for 2001, after the reduction and adjustments, was
-1.3%. However because BIPA set the floor rates in 2001, the national growth
percentage was not used to calculate the floor rate in 2001. It was only used to
calculate the blend rate for 2001.
For 2002, the estimated national growth percentage increase over the pre-BIPA
payment amount (used for January and February of 2001) was 8.3%11. This figure
was based on a 5.6% projected per capita increase in total Medicare expenditures, a
0.3 percentage point reduction set by the BBRA, a minus 0.3% adjustment for errors
in the previous years’ projection of spending (1998 – 2001), and an increase of 3.2%
to account for the impact of BIPA. The increase used to calculate the floor payment
for 2002 was 5.3%, reflecting only the projected per capita increase in total Medicare
expenditures of 5.6% and the 0.3 percentage point reduction set by the BBA. There
was no adjustment for prior year errors, as the floor amounts were reset by the
amounts established in BIPA.
For 2003, the projected national growth percentage increase is actually a
decrease of 2.9%. This decrease reflects a 0.9% increase in per capita costs and a
negative 3.8% adjustment for prior years’ errors. The -2.9% factor is used to update
the 2002 blend rate. The 2003 update for the floor is -1%, reflecting the same 0.9%
increase in per capita costs, but only a 1.9% decrease for the prior year error in 2002
estimates.12 Because both of these updates are negative, the minimum percentage
increase is the only positive update for 2003, yielding the highest M+C payment for
most counties.
Bonus Payments
BBRA established a bonus payment to encourage new M+C plans to enter
counties that would otherwise not have a participating plan. The first plan to enter
a previously unserved county (or an area where all organizations announced their
withdrawal from the area as of October 13, 1999) would receive a 5% added payment
during their first year and a 3% added payment during their second year. BIPA
further extended these bonus payments for M+C plans to include areas for which
notification had been provided, as of October 3, 2000, that no plans would be
available January 1, 2001. For 2002, 5 M+C contracts qualified for these bonus
payments for some of the counties located the following states; Maryland, Missouri,
New York, Virginia, and Puerto Rico, as well as for some counties in states served
by the Sterling Private Fee-for-Service Plan.13
11 Because BIPA increased M+C payments beginning in March 2001, CMS calculated a
revised national growth percentage of 4.9% for 2002 to be applied to these new BIPA
payment levels. The difference between the revised national growth percentage increase and
the original increase is the 3.2% increase for BIPA adjustments. It was not necessary to
include this 3.2% adjustment in the revised increase, as it was already reflected in the
March 1, 2001 payment levels.
12 Because BIPA reset the floor payments in 2001, adjustments will only be made for prior
year errors occurring in 2002 and beyond.
13 Sterling qualified for a bonus in some of the counties located in Alaska, Arkansas, Iowa,
(continued...)

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Table 1. Major Factors for Determining Medicare
Payments to Medicare+Choice Plans
Factor
Rule established in BBA 97, BBRA 99, or BIPA
Blend of local
General
Transition over 6 years to 50-50 blend of local
and national
and national rates. National rates are adjusted for
rates
differences in input prices.
1998
90% local, 10% national
1999
82% local, 18% national
2000
74% local, 26% national
2001
66% local, 34% national
2002
58% local, 42% national
2003 and after
50% local, 50% national
Minimum
1998
Minimum of $367 (or 150% of 1997 payment
payment (floor)
outside United States)
rate
1999 and after
Previous year’s payment times annual percentage
increase, except for 2001 when the amount was
set in law ($380 for 1999, $402 for 2000, and
$525/$475 for 2001-or 120% of 2000 payment
outside US, $553/$500 for 2002, and $548/$495
for 2003)14
Minimum
1998
102% of 1997 AAPCC payment rate
percent increase
1999 to 2000
102% of prior year’s rate
2001
103% of prior year’s rate
2002 and after
102% of prior year’s rate
GME and DSH
General
GME payments excluded (from blended rate
only) in equal increments over 5 years. DSH
payments not excluded.
Budget
General
Total M+C payments must equal what would
neutrality
have been spent if payments were entirely based
on local rates (except no rate can be reduced
below the floor or minimum)
National growth
1998
Increase in Medicare per capita expenditures
percentage
(MPCE) minus 0.8 percentage points
1999-2001
Increase in MPCE minus 0.5 percentage points
2002
Increase in MPCE minus 0.3 percentage points
2003 and after
Increase in MPCE
Risk adjustment
2000-2003
10% health status, 90% demographic
2004
30% inpatient and ambulatory, 70% demographic
2005
50% inpatient and ambulatory, 50% demographic
2006
75% inpatient and ambulatory, 25% demographic
2007 and after
100 % inpatient and ambulatory
Source: Congressional Research Service analysis of provisions in BBA, BBRA, and BIPA.
13 (...continued)
Illinois, Montana, Oklahoma, Pennsylvania, South Carolina and Washington state. (For a
more detailed discussion of Medicare Private-Fee-for-Service plans, see CRS report
RL31122, Medicare+Choice: Private Fee-for-Service Plans, by Paulette Morgan and
Madeleine Smith.)
14 Beginning in 2001, there is a higher floor payment for counties in the US with a
population of more than 250,000 and a lower floor payment for all other counties in the US.

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Risk Adjustment
M+C payments are also risk adjusted to control for variations in the cost of
providing health care among Medicare beneficiaries. For example, if sicker and older
patients all sign up for one M+C plan, risk adjustment is designed to compensate the
plan for their above average health expenses. The former Medicare risk contract
program adjusted the AAPCCs for demographic risk factors, and when the M+C
program was implemented, it also used these demographic risk adjusters.
Demographic risk adjusters include those for age, gender, working status, Medicaid
coverage, whether the beneficiary originally qualified for Medicare on the basis of
disability, and institutional (nursing home) status.
However, these demographic risk adjusters account for only a very limited
portion of the variation in health care costs, and as a result, the BBA required the
Secretary of HHS to develop a new risk adjustment mechanism that would also
account for variations in health status. Beginning in January 2000, CMS
implemented this new risk adjustment mechanism built on 15 principal inpatient
diagnostic cost groups (PIP-DCGs). Payments are adjusted based on inpatient data
using the PIP-DCG adjuster and demographic factors, so that this new system
accounts for both demographic and health-status variations. Under this mechanism,
the per capita payment made to a plan for an enrollee is adjusted if that enrollee had
an inpatient stay during the previous year. Separate demographically-based payments
are used for newly eligible aged persons, newly eligible disabled Medicare enrollees,
and others without a medical history.
The BBRA and BIPA made changes to the Secretary’s proposed phase-in
schedule of this new system, through 2002. Plans were concerned because this new
risk adjustment methodology reduces aggregate M+C payments; slowing down its
implementation lessens the reduction. Through 2003, 10% of payments include risk
adjustment using the PIP-DCG method and 90% are based solely on the older
demographic method.
BIPA made additional changes to risk adjustment so that beginning in 2004, a
new risk adjustment methodology will be phased-in based on data from not only
inpatient hospitals but also from ambulatory settings as well, in order to account for
more of the variation in health status. This new risk adjustment will be phased in at
the rate of 30% in 2004, 50% in 2005, and 75% in 2006 and 100% beginning in
2007. In March 2002, CMS announced that the new risk adjustment methodology
would be based on a “selected significant condition” model comprised of
approximately 61 disease groups chosen because of their statistical and clinical
significance for the Medicare population. Beginning July 1, 2002, M+C
organizations must collect information on the selected diagnoses (and must submit
that data to CMS beginning October 2002).
One further change required by BIPA, although temporary, fully implemented
risk adjustment based on inpatient hospital diagnoses for an individual who had a
qualifying congestive heart failure inpatient diagnosis between July 1, 1999 and June
30, 2000, if that individual was enrolled in a coordinated care plan offered on January

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1, 2001. This applied for only 1 year, beginning on January 1, 2001. This payment
amount was excluded from the determination of the budget neutrality factor.15
Variations in Medicare+Choice Payment Rates
A M+C payment area is defined as a county or equivalent area specified by the
Secretary. (In the case of individuals with end stage renal disease (ESRD), the M+C
payment area is each state, or other payment areas as the Secretary specifies.) Upon
request of a state for a contract year, the Secretary will redefine M+C payment areas
in all or a portion of the state to: 1) a single statewide payment area; 2) a metropolitan
system; or 3) a single payment area consolidating noncontiguous counties (or
equivalent areas) within a state.
County Payment Rates
As noted above, each county rate is set at the highest amount calculated under
three rules (blend, minimum increase, and floor), and then adjusted for budget
neutrality. Because of the low national growth percentage in 1998 and 1999, no
county rate was set by the blended-rate rule after applying the budget neutrality
adjustments (Figure 1). In 2000, the national growth percentage was sufficiently
large (5%), so that payments in 60% of counties were based on the blended-rate rule.
However, the national growth percentage for 2001 was -1.3%, as previously
discussed. Therefore, in 2001, no county was paid using the blended-rate rule and
about 72% of all county payments were set at the floor, with the remainder of
counties receiving the minimum 3% increase. Similarly in 2002, no county was paid
using the blended-rate rule, and about 79% of all counties had their payment set at
the floor with the remainder of payments set at the minimum update of 2%. For
2003, all but six counties had their payments set at the minimum update of 2%, with
the remaining six set at the higher floor payment.
15 This payment adjustment is different from CMS’s initiative for the “Extra Payment in
Recognition of the Costs of Successful Outpatient Congestive Heart Failure Care”.

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Figure 1. Rule Used to Determine Country Payment Rates, by Year,
1998-2003

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Calculations for selected 2003 county payment rates are shown in Table 2. The
table shows the calculation under the three rules, as well as the rates before and after
any budget neutrality adjustments. For the seven counties selected, before
application of budget neutrality, one has its rate set using the floor amount (Marion,
Florida)16, four set at the minimum update (Los Angeles, California; Dade, Florida;
Hennepin, Minnesota; and Fairfax, Virginia), and two set at the blended rate (Bristol
Bay, Alaska and San Benito, California). After the budget neutrality adjustment, the
two counties originally set at the blend had their payments set at the minimum
update.
Table 2. Calculation of Monthly Payment Rates
for Selected Counties, 2003
Selected
Calculation using each of the
Determination of Rates
Counties
three separate rules
Minimum
Floor
Blend
Before
Actual
update
50%
budget
rate (after
local and
neutrality
budget
50%
adjustment
neut ral i t y
national
adjustment)
Los Angeles, CA
$ 708
$ 548
$ 633
$708
$708
Dade, FL
851
548
684
851
851
Hennepin, MN
564
548
485
564
564
Fairfax, VA
564
548
495
564
564
Bristol Bay, AK
510
495
514
514
514
San Benito, CL
532
495
547
547
532
Marion, FL
510
548
481
548
548
Source: Congressional Research Service analysis of CMS data.
Geographic Payment Rates
Large variation in county payment rates was one of the motivating forces behind
changes enacted in the Balanced Budget Act. The M+C payment method is designed
to reduce this variation. Raising the floor and constraining the minimum update for
2001 supported the goal to reduce both the overall variation and to increase the
average payment. However, the effect of “negative” updates for both the blend and
floor payments in 2003 slightly increased variation in payments across counties. In
order to reduce variation across counties the national growth rate must be sufficiently
large, so that a greater number of M+C payments to plans are based on the blend rate
rather than the floor or minimum rate. Further, if more M+C payments were based
on the blend, the budget neutrality adjustment will diminish.
16 Marion, Florida is one of the 6 counties in 2003 that changed its status from a lower floor
payment county to a higher floor payment county.

CRS-12
Examining variations across all counties, Figure 2 shows that the substantial
range above and below the average payment rate continues to exist in 2003.
Although the differences between highest and lowest payment had diminished each
year since the start of the M+C program through 2002, in 2003, the variation
increased a small amount. For example, in 1997, the average monthly payment rate
weighted by the number of Medicare beneficiaries in each county was $467. The
lowest rates in the country were $221 in two rural Nebraska counties (Arthur and
Banner). The highest rates in 1997 were $767 and $748, respectively, in Richmond
County, New York (Staten Island), and Dade County, Florida (Miami). Examining
the variation, from highest to lowest payments, the range was $546 in 1997. By
2002, the range had diminished to $356, as the floor rate was $500 (for areas with
fewer than 250,000 in population) and the highest rate (Richmond County) was $856.
The average payment in 2002 was $571. In 2003, the range from lowest to highest
payment increased to $363 (an increase of $7 per month per beneficiary, i.e., 2%
higher than $356). The average payment increased to $582, an increase of $11 per
month per beneficiary over the 2002 amount. While the low floor payment decreased
from $500 to $495, no M+C plan will be paid that amount. The lowest rate in the
country is $510, representing a 2% increase over the low floor rate of $500 for 2002.
The highest rate in 2003 is again in Richmond County at $873, with Dade County
(Miami) at $851 and Bronx, New York at $828.
Payment rates vary geographically, as well, with higher payments generally
occurring in more urban areas (Figure 2). Because the blend rate was only paid in
2000, the large variations in payment rates that existed prior to the M+C program,
have only partially reduced. The 2001 floor rate (increased by BIPA) mostly affected
rural counties, but it raised rates for some urban counties as well. Payments continue
to be higher in urban areas and lower in the most rural areas. The 2003 average
payment is $636 in central urban counties, $70 above that for other urban counties,
$114 above that for rural-urban fringe counties, and $120 above that for other rural
counties.17 The range within each of the urban – rural categories remains substantial
as well.
17 Central urban counties are the central counties in metropolitan areas of 1 million
population or more. Other urban refers to other counties in those metropolitan areas and any
county in smaller metropolitan areas. Rural-urban fringe counties are defined as those non-
metropolitan counties that are adjacent to a metropolitan area, and other rural refers to non-
metropolitan counties not adjacent to a metropolitan area.

CRS-13
Figure 2. Range of County Medicare Managed Care Payments for the Aged by Location, 1997-2003
Medicare+Choice Payment (in dollars per month)
$900
$873
$873
$856
$856
$828
$814
$800
$811
$814
$788
$783
$783
$772
$772
$767
$767
$736
$742
$707
$735
$728
$721
$700
$693
$687
$660
$636
$647
$624
$600
$582
$583
$571
$553
$564
$566
$555
$554
$544
$522
$516
$510
$510
$500
$511
$510
$506
$500
$513
$510
$500
$485
$500
$500
$480
$467
$449
$450
$434
$438
$412
$402
$402
$402
$402
$398
$400
$402
$394
$371
$367
$367
$367
$367
$367
$349
$300
$256
$231
$221
$221
$200
$100
Minimum
Mean
Maximum
$-
1997 1998 2000 2002 2003
1997 1998 2000 2002 2003
1997 1998 2000 2002 2003
1997 1998 2000 2002 2003
1997 1998 2000 2002 2003
National
Central urban
Other urban
Rural-urban fringe
Other rural
Source: Figure prepared by CRS based on analysis of CMS data.
Note: Means weighted by the number of aged beneficiaries per county; Does not include Puerto Rico.

CRS-14
Payment rates range widely regionally, as well as geographically, as shown in
Table 3. For example, plans serving Miami are paid an average of $851per month
in 2003, compared with $564 in Fairfax County, Virginia. But even within a region,
there can be wide variation in payment rates. The 2003 payment rate for Dade county
in Southern Florida is $207 more than the rate for Palm Beach county. Furthermore,
plans competing in the same market may receive substantially different payments for
beneficiaries who live on opposite sides of a county boundary. As illustrated in the
Washington, D.C. metro area, these differing payment levels may affect plan
participation and enrollment. However, variation in M+C payments can only be
marginally reduced if no county receives the blended rate; further, if all counties
receive the minimum update payment, variation increases, as demonstrated in 2003.
Table 3. Monthly Payment Rates for Aged Enrollees
in Selected Areas, 2003
County
Payment rate
Washington, DC-Maryland-Virginia
Prince George’s County, MD
$685
Washington, DC
664
Montgomery County, MD
574
Alexandria City, VA
564
Arlington County, VA
564
Falls Church City, VA
564
Fairfax City, VA
564
Loudoun, VA
564
Fairfax County, VA
564
Southern Florida
Dade (Miami)
$851
Broward (Ft. Lauderdale)
740
Palm Beach
644
Southern California
Los Angeles
$708
Orange
653
San Bernardino
606
Riverside
593
Source: Centers for Medicare and Medicaid Services.
Average Payment Rates
Figure 3 compares average payment rates for two groups: 1) the hypothetical
rate if all Medicare beneficiaries were enrolled in M+C plans; and 2) the rate for
beneficiaries currently enrolled in M+C plans. The average payment rate across all
beneficiaries is lower than the average for actual M+C enrollees because M+C
enrollment tends to concentrate in areas with higher payment rates. For example, in
2003 the monthly average across all beneficiaries is about $582, while the monthly
enrollee average is about $625. If enrollment were higher across all areas of the
country, especially in lower-payment rural areas, the actual average M+C payment
would be lower and thus closer to the beneficiary average.

CRS-15
Figure 3. Comparison of Average Monthly Aged Medicare+Choice
Payment Rates for All Beneficiaries and Currently Enrolled
Medicare+Choice Beneficiaries: 2000 - 2003

CRS-16
Current Issues of the Medicare+Choice Program
Achieving the goal of expanding Medicare managed care has been difficult, in
part because of a competing goal to control Medicare spending. As discussed above,
payment increases to plans have generally been limited to the floor and minimum
updates, and as a result, managed care entities are less interested in developing new
markets, adding plan options, and maintaining their current markets. These limited
M+C payment rate increases become even more significant when contrasted with
recent higher growth rates for Medicare fee-for-service expenditures. In addition,
some plans have scaled back their extra services, such as prescription drug coverage
and also increased premiums.
As plans withdraw from the Medicare+Choice program, enrolled beneficiaries
are forced to choose new M+C plans, or may be left without any access to Medicare
managed care. Even among those who still have an option to choose a health plan,
some beneficiaries have selected Medicare’s fee-for-service program because they
are concerned that additional plan withdrawals could be disruptive to their health care
coverage. As plans withdraw from areas, they not only affect current plan enrollees,
but they also affect both current Medicare fee-for-service beneficiaries and newly
eligible Medicare beneficiaries who are entitled to enroll in an available managed
care plan, if they choose to do so.
The M+C program continues to evolve, and as a result, faces new challenges.
Modifying the payments to M+C organizations and further reducing variations in
payments across the country are possible mechanisms for meeting some of these
challenges.
Legislative Activity in the 107th Congress
During the 107th Congress, both the House and Senate considered legislation
that would have changed the payments, as well as many other aspects of the
Medicare+Choice program. On June 28, 2002 the House passed H.R. 4954, the
Medicare Modernization and Prescription Drug Act of 2002, while the Senate
considered two bills, S. 2729 (introduced by Senator Grassley et al., – the tripartisan
bill) and S. 3018 (introduced by the Senators Baucus and Grassley et al.,). Neither
bill was passed by the Senate.
H.R. 4954 would have increased payments to plans in 2003 and 2004. In 2005,
the legislation would have established a new Medicare+Choice competition program,
as well as a new demonstration program in no more than 4 sites chosen from those
areas with high concentrations of M+C enrollees. Under the competition program,
M+C plans would submit a bid for the premium amount they planned to charge and
once accepted, the premiums would be measured against a government set
benchmark amount. Medicare enrollees would chose an M+C plan and if the
government set benchmark amount was less than the plan premium, enrollees would
have to pay the additional amount for these more expensive plans. Conversely,
Medicare beneficiaries would qualify for a rebate for enrolling in less expensive
plans.

CRS-17
While the competition program under H.R. 4954 would only affect M+C
enrollees, the demonstration program could affect all Medicare beneficiaries residing
in the demonstration site. In the demonstration program, the government would set
its benchmark to incorporate both FFS and M+C components. In addition to
potential premium “adjustments” for M+C enrollees, those FFS enrollees residing in
the demonstration area would also be eligible for rebates or be subject to increased
Part B premiums depending on the FFS bid in the demonstration area. If FFS
beneficiaries were required to pay higher premiums, then some healthier beneficiaries
who did not want to pay an increased amount might switch from FFS to a lower cost
M+C plan.
S. 3018 would have increased payments for M+C plans in 2003 and 2004. The
Tripartisan bill, S. 2729 would have entitled Medicare beneficiaries to elect to
receive enhanced Medicare benefits under a new Part E. There would be a unified
deductible along with a serous illness threshold so that beneficiaries would not be
responsible for any cost-sharing (deductible, coinsurance and copayments) once this
threshold had been reached. For individuals choosing managed care, there would be
a new M+C payment system. Each year the Medicare Commissioner for the
Medicare Competitive Agency (a newly created agency in this legislation) would
calculate a benchmark amount for each M+C payment area, to cover Medicare
benefits under Part E. The Commissioner would determine the difference between
each adjusted plan bid and benchmark in order to determine the payment amount, the
Part E premium, and the M+C monthly basic beneficiary premium reduction (if
applicable). Similar to the competition program in the House bill, Medicare M+C
enrollees would pay additional premiums for more expensive plans or conversely,
they would qualify for a rebate for enrolling in less expensive plans.
The 108th Congress
As the108th Congress debates various options for modernizing the Medicare
program, many issues will be considered. For example, changes to the program
could be broad and encompass the entire Medicare program, including FFS and
M+C, or could be more limited, changing just one segment, such as M+C. With
regard to M+C, Congress will likely consider further changes to payments in an effort
to strengthen the program and increase enrollment. Furthermore, consideration of a
prescription drug option for Medicare beneficiaries has implications for the M+C
program. A new drug benefit might strengthen the M+C program, if plans were able
to build upon prescription drug coverage that they have traditionally offered as a
means of attracting Medicare beneficiaries.