Order Code RL30702
CRS Report for Congress
Received through the CRS Web
Updated June 6, 2003
Hinda Ripps Chaikind
Specialist in Social Legislation
Domestic Social Policy Division
namere da cted
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Medicare has a long-standing history of offering its beneficiaries an alternative
to the traditional fee-for-service program. Health Maintenance Organizations and
other types of managed care plans have been allowed to participate in the Medicare
program, beginning with private health plans contracts in the 1970s and the Medicare
risk contract program in the 1980s. Then, in 1997, Congress passed the Balanced
Budget Act of 1997 (BBA, P.L. 105-33), replacing the risk contract program with the
Medicare+Choice (M+C) program. The M+C program established new rules for
beneficiary and plan participation, along with a new payment methodology. In
addition to controlling costs, the M+C program was also designed to expand private
health plans to markets where access to managed care plans was limited or
nonexistent and to offer new types of private health plans. The 106th Congress
enacted legislation to address some issues arising from the BBA changes. The
Balanced Budget Refinement Act of 1999 (BBRA, P.L. 106-113) changed the M+C
program in an effort 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 made only minor changes to the M+C
program and was not able to reach consensus on comprehensive modifications. The
108th Congress is considering major changes to the program.
In 2003, Medicare+Choice plans were available to about 59% of the over 40
million Medicare beneficiaries, and in March 2003 about 12% of them chose to
enroll in one of the 146 (including two private-fee-for service plans) available
Medicare+Choice plans. The rapid growth rate of Medicare managed care
enrollment in the 1990s leveled off with the implementation of the M+C program,
and in fact, there has been a continuous decline in enrollment since 1999 when 17%
of beneficiaries were enrolled in M+C plans.
In order to increase enrollment in Medicare managed care and to allow
beneficiaries to better meet their health care needs, the M+C program offers a diverse
assortment of managed care plans. However, achieving the goals of the M+C
program has been difficult, in part because the goal to control Medicare spending
which led to a slowdown in the rate of increase in payments to plans, may have
dampened interest by managed care entities in developing new markets, adding plan
options, and maintaining their current markets.
The Congressional Budget Office (CBO) estimates that in 2003 Medicare will
spend $35.9 billion for all Medicare group plans, (including M+C and other private
Medicare arrangements, such as demonstrations). By 2013 the projected spending
for Medicare group plans will increase to $46.9 billion.
This report focuses on the recent trends in Medicare managed care, along with
an overview of the M+C program. It will be updated as necessary to reflect
significant changes made to the M+C program. For a more detailed analysis of M+C
payments, see CRS Report RL30587, Medicare+Choice Payments.
Overview of the Medicare+Choice Program . . . . . . . . . . . . . . . . . . . . . . . . . 2
Current Status of the Medicare+Choice Program . . . . . . . . . . . . . . . . . . . . . 3
Trends in M+C Availability and Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Availability of Medicare Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Medicare Managed Care Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Enrollment Trends for Medicare Managed Care . . . . . . . . . . . . . . . . . . . . . . 8
Enrollment Patterns in Urban and Rural Locations . . . . . . . . . . . . . . . . . . . 11
Regional and Geographic Variations in Enrollment . . . . . . . . . . . . . . . . . . 15
Contracts by Plan Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Rules for Enrollment in M+C Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Medicare+Choice Payments to Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Blended Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Minimum Payment (Floor) Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Minimum Percentage Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exclusion of Payments for Graduate Medical Education . . . . . . . . . . . . . . 20
Budget Neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
National Growth Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Bonus Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Risk Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Risk Adjustment Method in Place for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . 31
Scenario 1: Demographically-Based Risk Adjustment (old system) . . . . . . . . . 32
Scenario 2: Phased-in Health Status Based Risk Adjustment (using a
combination of 10% of the new system and 90% of the old system) . . . . 33
New Risk Adjustment Methodology Beginning in 2004 . . . . . . . . . . . . . . . 34
Adjusted Community Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Additional or Supplemental Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Coverage for Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
M+C Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Beneficiary Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Beneficiary Financial Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Quality Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Information and Disclosure Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 48
Grievances and Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Access to Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Current Program Standards and Contract Requirements . . . . . . . . . . . . . . . . . . . 49
Minimum Enrollment Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
State Preemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Organizational and Financial Requirements . . . . . . . . . . . . . . . . . . . . . . . . 50
Provider Protections and Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Protections Against Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Sanctions and Termination of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Medicare+Choice Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Private Fee-for-Service Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Preferred Provider Organization Demonstration . . . . . . . . . . . . . . . . . . . . 53
Reasonable Cost Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Program of All-Inclusive Care for the Elderly (PACE) . . . . . . . . . . . . . . . . 55
Social Health Maintenance Organizations Demonstration . . . . . . . . . . . . . 55
Medical Savings Account (MSA) Demonstration . . . . . . . . . . . . . . . . . . . . 55
Medicare Competitive Pricing Demonstration . . . . . . . . . . . . . . . . . . . . . . 56
List of Figures
Figure 1. Number of Managed Care Plans/Contracts Participating in
Medicare, 1987-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 2. Percent of Beneficiaries Enrolled in Medicare Managed Care Plans,
Actual and Projected, 1990-2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 3. Percent of Medicare Beneficiaries and Medicare+Choice Enrollees
in Urban and Rural Locations, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 4. Percent Variation in Number of Medicare+Choice Plans
Available to Medicare Beneficiaries in Urban and Rural Locations,
January 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 5. Percent of Medicare Beneficiaries Enrolled in Medicare+Choice, by
State, March 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 6. Percent of M+C Enrollees Offered Benefits Beyond Traditional
Medicare Covered Services, in the Lowest Premium Package Available,
1999 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
List of Tables
Table 1. Medicare+Choice Contract Terminations and Service Area
Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 2. Counties With and Without Medicare Managed Care Plans,
1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 3. Percent Distribution of Medicare Beneficiaries by Managed Care
Plans Available in Their Area, 1995-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 4. Percent of Medicare+Choice Enrollees and Medicare Population
Residing in Four States, March 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Table 5. Medicare+Choice Contracts by Plan Model, 2003 . . . . . . . . . . . . . . . . 16
Table 6. Major Factors for Determining Medicare Payments to
Medicare+Choice Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 7. Medicare Demographic-Only Risk Adjustment Factors for
Aged Beneficiaries, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Table 8. Diagnoses Included in Each PIP-DCG . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table 9. Medicare Demographic and Health-Status Based Risk Adjustment
Factors, for Aged Beneficiaries with One or More Years Experience,
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 10. Medical Conditions, Medical Condition Interactions, and
Demographic Factors Included in the CMS Hierarchical Condition
Category Risk Adjustment Model for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 35
Table 11. M+C Enrollees with Drug Coverage in a Basic Plan . . . . . . . . . . . . . 42
Table 12. Percent of Enrollees with an Annual Drug Cap in Basic M+C
Plans, Weighted by Enrollment, 1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . 42
Table 13. Percent of M+C Enrollees by Prescription Drug Co-Payments,
Weighted by Enrollment, 1999-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Table 14. Percent of Medicare Beneficiaries with Access to a Zero-Premium
M+C Plan, by Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Table 15. Distribution of M+C Enrollees, by Basic Premium Levels . . . . . . . . 44
Table 16. Beneficiary Cost Sharing and Provider Reimbursement Under
Medicare+ Choice Plans for Basic Benefit Package . . . . . . . . . . . . . . . . . . 47
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 costreimbursement 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 agreed to furnish all Medicare-covered items and
services to each enrollee. By 1997, 15 years after the start of the risk contract
program, Medicare managed care covered more than 5 million people or about 14%
Then, in 1997, Congress passed the Balanced Budget Act of 1997 (BBA, P.L.
105-33), replacing the risk contract program with the Medicare+Choice (M+C)
program. The M+C program established new rules for beneficiary and plan
participation, along with a new payment methodology. The M+C program was
designed to expand the availability of health plans in markets where access to
managed care plans was limited or nonexistent, and to offer new types of health plans
in all areas. The M+C program has not been successful at expanding coverage, and
the initial moderate growth through 1999, which increased M+C enrollment to about
17% of beneficiaries, has since taken a downward turn. In March 2003 about 12%
of the Medicare population (4. 7 million enrollees) remained in the M+C program,
compared to the 14% of the Medicare population who were enrolled in Medicare
managed care prior to the enactment of BBA.
The 106th Congress enacted legislation in order to address some 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 and Improvement
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 passed The Public Health Security and Bioterrorism
Preparedness and Response Act (P.L. 107-188) which included a few temporary
changes to deadlines in the Medicare+Choice program. Additionally, 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. The 108th Congress is considering similar
options to revise the M+C program.
This paper describes the current status of the M+C program, as amended, along
with the rules and standards under which the program operates. Data for 1998 and
preceding years covers the Medicare risk contract program and beginning in 1999,
data covers the M+C program.
Overview of the Medicare+Choice Program
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 their health care needs, the M+C program was created to offer a diverse
assortment of managed care plans. M+C options include not only coordinated care
plans, but also private fee-for-service plans, and, on a demonstration basis, a
combination of a medical savings account (MSA) plan and contributions to an M+C
MSA. Coordinated care plans are plans that provide a full range of services in
exchange for a per capita payment, the most typical of which is the HMO. An HMO
is a type of managed care plan primarily owned and operated by insurers that acts as
both the insurer and the provider of health care services to an enrolled population.
The BBA also allows for contracts with provider-sponsored organizations (PSOs),
which are coordinated care plans owned and operated by providers, as well as
preferred provider organizations (PPOs), which are groups of doctors and hospitals
that contract with an insurer to offer their services on a fee-for-service basis at
negotiated rates that are lower than those charged to non-enrollees. Unlike other
managed care plans, PPOs do not traditionally have primary-care gatekeepers, who
oversee health care services.
Alternatively, a beneficiary may select a private fee-for-service (PFFS) plan, that
covers enrollees through a private indemnity health insurance policy for which the
Centers for Medicare and Medicaid Services (CMS) makes per capita payments to
the insurer for each enrollee. The insurer then reimburses hospitals, doctors, and
other providers at a rate determined by the plan on a fee-for-service basis without
placing the providers at any additional financial risk. It also does not vary rates based
on utilization. Enrollees may see any Medicare-approved provider who agrees to
furnish services under the plan’s terms and conditions of payment.
Finally, the demonstration MSA plans reimburse enrollees for their expenses for
Medicare-covered services after a specified high deductible is met. The difference
between the premium for the high-deductible plan and the applicable M+C per capita
payment would be placed into an account for the beneficiary to use to meet medical
expenses below the deductible.
However, to date no Medicare beneficiary has enrolled in an MSA. Three PPOs
serve 2,241 beneficiaries through the M+C program. PPOs are more widely available
through a demonstration program, with 56,677 enrollees as of March 2003. On July
1, 2000, a private fee-for-service (PFFS) plan, Sterling Life Insurance Company,
became available to Medicare beneficiaries. Beginning January 2003, a second PFFS
plan, Humana, Inc. also become available to Medicare beneficiaries. As of March
2003 there were 20,761 enrollees in the two PFFS plans throughout the country.1
Additionally, there are another 1,748 enrollees in a PFFS demonstration program.
In addition to expanding options for Medicare managed care coverage, the BBA
also substantially restructured the system for setting Medicare payment rates to
private plans. Under the M+C program, the per capita rate for a payment area is set
at the highest of three amounts. The new payment structure is designed to reduce the
variation in payments across the country by increasing payments in areas with
traditionally low payments and slowing the rate of growth in areas with higher
payments. Although variations in payments have been somewhat reduced,
substantial payment differentials remain nationwide.
Initially, M+C payments were also adjusted for demographic risk factors, such
as age, gender, and coverage by Medicaid to account for variations in health care
costs. The BBA required the Secretary of Health and Human Services (HHS) to
develop a method for risk adjusting payments to include health status, in order to
account for a larger share of the variation in costs. The interim method established
by the Secretary adjusted for health status based on diagnoses for prior year inpatient
hospitalizations. Although phase-in of these health-based risk adjusters began in
January 2000, the BBRA slowed down the Secretary’s planned phase-in schedule.
Further refinements included in BIPA extended the current risk-adjustment
methodology through 2003 and then, beginning in 2004, a new methodology based
on disease grouping will be phased-in based on data from inpatient hospitals and
ambulatory settings. This system will be fully phased in beginning in 2007.
The BBRA and BIPA made several other revisions to the M+C program, raising
M+C payments to plans and providing bonus payments for certain plans that enter
areas where no other plan is in operation to encourage participation in rural areas.
The BBRA moved the deadline for plans to submit their adjusted community rate
(ACR) proposals from May 1 to July 1 of each year, and allowed plans to segment
their service areas along county lines, in order to better match revenues to costs.
Additional changes in BIPA permit M+C plans to offer reduced Medicare Part B
premiums beginning in 2003 and revised payments for End Stage Renal Disease
(ESRD) M+C enrollees.
Current Status of the Medicare+Choice Program
Achieving the goals of the M+C program 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. This cautious behavior may partially be a reaction to a slowdown
in the rate of increase for Medicare managed care payment, the initial slowdown in
spending for Medicare traditional fee-for-service payments following the passage of
the BBA, and the uncertainty about the future of the payments or organization of the
For a more detailed analysis of PFFS plans see CRS Report RL31122, Medicare+Choice:
Private Fee-for-Service Plans, by Paulette Morgan and Madeleine Smith.
Further, beneficiaries in rural areas still have limited access to managed care
plans and enrollment growth has slowed or declined across all geographic areas.
Beneficiaries have also been offered less generous benefit packages and fewer
options for zero or low monthly M+C premiums. Obstacles relating to data
collection and quality improvement requirements may make it more difficult for
some plans to meet these requirements, therefore, further discouraging participation
in the Medicare program. M+C plans have increasingly noted that in addition to
concerns about payment amounts, the regulatory requirements are burdensome and
make it difficult for them to participate in the program.
As plans withdraw from the M+C program, some enrolled beneficiaries are
forced to choose new M+C plans, while others are left without any access to
Medicare managed care. They are forced to return to Medicare’s fee-for-service
program. Even among those who still have an option to choose another 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
In 2003, M+C plans are available to about 59% of the more than 40 million
Medicare beneficiaries, and in March 2003 about 12% of all beneficiaries chose to
enroll in one of the 146 (includes two PFFS plan) available M+C plans. The rapid
growth rate of Medicare managed care enrollment in the 1990s leveled off and
although enrollment initially increased moderately with the implementation of the
M+C program, by March 2003 enrollment was two percentage points below pre-BBA
enrollment. The Congressional Budget Office (CBO) projects that M+C enrollment
will decline moderately through 2008, when it will reach about 9% of the Medicare
population and then slowly decline to about 8% by 2013. CBO estimates that in
2003 Medicare will spend $35.9 billion for all Medicare group plans, (including
M+C and other private Medicare arrangements, such as demonstrations). By 2013
the projected spending for Medicare group plans will increase to $46.9 billion.
Enrollment is widely segmented across the country, however, with the majority
of enrollees in just four states: California, New York, Florida, and Pennsylvania.
Not surprisingly, Medicare beneficiaries in urban areas have greater access to plans.
While 92% of beneficiaries in center cities have access to at least one plan, only 6%
have access in the most rural areas.
Trends in M+C Availability and Enrollment
Availability of Medicare Managed Care
The M+C program began operation on January 1, 1999,2 as authorized by the
BBA. By March 2003, there were 146 M+C contracts with CMS under the M+C
program.3 Over time, the number of M+C contracts has fluctuated. From 1987 to
the early 1990s many risk plans terminated existing contracts, decreasing the number
of available plans from 161 in 1987 to 93 in 1991. Then, the trend shifted as the
number of Medicare risk plans began increasing in 1992, more than tripling from 110
in 1993 to 346 in 1998. With the implementation of the M+C program in 1999, the
downward cycle of availability began once again, as several M+C organizations
withdrew from the Medicare program (or reduced the size of their service area). As
shown in Figure 1, these reductions have resulted in fewer providers of Medicare
managed care under the M+C program than previously existed, dropping from a high
of 346 plans in 1998 to 267 contracts in 2000 and then to 146 as of March 2003.
Although most of the components of the M+C program were effective in 1999, the M+C
payment structure was implemented in 1998.
The BBA changed the designation of “plans”, beginning in 1999. The old definition of
“plans” is now referred to as “contracts” and each contract may include several different
“plans”. In Mar. 2003 there were about 442 plans available through 146 M+C contracts.
For example, the M+C organization may offer one plan providing only the basic Medicarecovered benefits and other plans that also include optional supplemental benefits.
Figure 1. Number of Managed Care Plans/Contracts Participating in Medicare, 1987-2003
number of plans
Source: Prepared by the Congressional Research Service (CRS) based on December CMS Medicare Managed Care Contract (MMCC) Monthly Reports, 2003 data from March.
Note: Medicare managed care plans include risk plans through 1998 and Medicare+Choice contracts beginning in 1999.
Medicare Managed Care Terminations
Since the implementation of the M+C program, a substantial number of
managed care organizations have either terminated contracts or reduced their service
area, as shown in Table 1. The contract terminations and service area reductions in
January 1999 affected about 407,000 (6.5%) of the more than 6 million Medicare
beneficiaries enrolled in managed care, leaving 51,000 (less than 1%) of all M+C
enrollees without any access to M+C plans. About half of the beneficiaries who had
access to other M+C plans chose a new plan, while the other half chose Medicare
fee-for-service. In total, 372 counties were affected by the withdrawals or service
area reductions and 72 counties lost access to Medicare managed care. Then in
January 2000, additional contract terminations and service area reductions affected
327,000 (5%) of M+C enrollees in 329 counties, some of whom had also been
affected the previous year. This cycle of contract changes left 79,000 (1.3%) of all
managed care enrollees in 105 counties without access to any other M+C plan.
Prior to the passage of BIPA, CMS released information about contract
terminations, effective January 2001. Those figures were expected to affect about
934,000 M+C enrollees, leaving almost 159,000 of these enrollees with no access to
Medicare managed care. After the passage of BIPA, M+C organizations were given
an opportunity to reconsider their earlier decision and as a result four M+C
organizations decided to return to the program. In total these organizations had
provided serviced to approximately 13,000 beneficiaries in 2000, covering 11
counties. In five counties, there were no other M+C plans offered. Despite the
changes made to contract terminations after BIPA, this series of contract terminations
affected more beneficiaries than the combined total for the previous 2 years.
Nationwide, just two managed-care companies, AETNA and CIGNA, accounted for
about half of the total number of beneficiaries affected by these withdrawals.
For contract renewals effective on January 1, 2002, 36 plans reduced their
service area and 22 did not renew their contract. This round of withdrawals affected
more than 536,000 M+C enrollees, leaving about 38,000 without access to any M+C
plan. For an additional 52,000 individuals, their only M+C option was the Sterling
private-fee-for-service plan and they had no access to any other type of M+C plan,
such as an HMO. For contract renewals effective January 2003, nine plans
terminated their contracts, and 24 reduced their service area, affecting 215,000
enrollees and leaving 29,000 with no M+C options. For 3,000 enrollees, their only
option was a PFFS plan and for another 3,000 their only option was the PPO
demonstration program. Plans withdrawing from the M+C program affect not only
current M+C enrollees, but also affect both current Medicare fee-for-service
beneficiaries and newly eligible Medicare beneficiaries who might choose to enroll
in an available managed care plan.
Table 1. Medicare+Choice Contract Terminations
and Service Area Reductions
no access to any
access limited to
access limited to
Source: Prepared by the Congressional Research Service (CRS) based on data from the CMS.
Note: Enrollee counts rounded to the nearest thousand and enrollee count before January 2002
withdrawals represents data from March 2003.
Enrollment Trends for Medicare Managed Care
While the number of plans/contracts participating in Medicare managed care has
fluctuated over time, the percent of beneficiaries enrolled in Medicare managed care
continued to increase until 1999. As shown in Figure 2, in 1990 only about 3% of
Medicare beneficiaries were enrolled in the managed care program, but by 1998 this
figure had increased significantly to 16% of Medicare beneficiaries, covering just
over 6 million enrollees. Since the implementation of the M+C program, enrollment
growth increased through 1999, but today has declined below the 1998 level;
reaching almost 17% of beneficiaries in December 1999 (6.3 million enrollees),
declining slightly to 16% (6.2 million enrollees) by December 2000, and to about
12% (5.6 million enrollees) by March 2003. CBO projects that enrollment in M+C
plans will reach about 9% of all beneficiaries by 2008 covering about 3.9 million
enrollees. CBO projects that by 2013 M+C will have the same number of enrollees,
3.9 million, however, because of the growth in the overall Medicare population, the
percentage of enrollees in M+C will actually decline to about 8% of all Medicare
Figure 2. Percent of Beneficiaries Enrolled in Medicare Managed Care Plans, Actual and Projected, 1990-2013
percent of beneficiaries
Source: Prepared by CRS based on MedPAC Chart Book, October 1997, chapter 3. CMS, Medicare Medicare Managed Care Reports, December 1998, 1999,
2000, 2001, 2002 and March 2003 and CBO March 2003 Baseline for projections for 2008 and 2013.
Note: Medicare Managed Care Plans include risk plans through 1998 and Medicare+Choice plans beginning in 1999.
Enrollment in any individual plan is open only to those beneficiaries living in
a specific service area. Plans define a service area as a set of counties and county
parts, identified at the zip code level.4 As a result, not all Medicare beneficiaries
have access to an M+C plan. As of 2003, Medicare managed care was available in
only 17% of counties (Table 2). However, while 83% of counties did not offer M+C
plans in 2003, most Medicare beneficiaries had access to an M+C plan. This
occurred because the population and plans are not distributed equally across counties,
but rather they are concentrated in the more urban counties. In January 2003, only
41% of all Medicare beneficiaries lived in an area that had no access to an M+C plan
(Table 3). Among the 59% of beneficiaries with access to the M+C program 40%
had a choice of at least two plans; 30% had a choice of two to four plans and another
10% had five or more plans available to them. By comparison, in December 1999,
not only did more beneficiaries have access to an M+C plan, but they also had more
Table 2. Counties With and Without
Medicare Managed Care Plans, 1997-2003
Existing plans in county
No existing plans in county
Source: MedPAC computations based on CMS public data for 1997 and 1999; CRS analysis of CMS
data for 2000-2003.
Note: Does not include PFFS plans, demonstration plans, cost plans, or plans serving Puerto Rico.
Medicare managed care plans include risk plans through 1998 and M+C plans beginning in 1999.
M+C organizations can vary premiums, benefits, and cost-sharing across individuals
enrolled in a plan, so long as these are uniform within segments of a service area. A
segment is defined as one or more counties within the plan’s service area.
Table 3. Percent Distribution of Medicare Beneficiaries by
Managed Care Plans Available in Their Area, 1995-2003
Two to four
Five or more
December February February
Source: Prepared by CRS based on MedPAC Chart Book, July 1998, Chart 2-10, Mathematica
analysis of CMS data for 1999, and CRS analysis of CMS data for 2001, 2002 and 2003.
Note: Does not include private-fee-for service plans, demonstration or cost plans, or plans serving
Puerto Rico. Medicare managed care plans include risk plans through 1998 and M+C plans beginning
in 1999. Totals may not add, due to rounding.
Enrollment Patterns in Urban and Rural Locations
Patterns of M+C enrollment are not uniform across urban and rural locales, as
shown in Figure 3. The geographic areas are defined as follows:
Central urban – central counties of metropolitan areas of at least 1 million
Other urban – either fringe counties of metropolitan areas of at least 1
million population or counties of metropolitan areas up to 1 million
Urban/rural fringe – urban population of at least 2,500 adjacent to a
Other rural– includes urban population of at least 2,500, not adjacent to a
metropolitan area, and rural areas (defined as, places with a population
of less than 2,500).
Most M+C enrollees reside in central urban areas; about 69% of the M+C
population as of 2003. However, a smaller proportion, only 39% of all Medicare
beneficiaries reside in the central urban areas. In all geographic areas, except central
urban areas, the percentage of M+C enrollees is less than the percentage of Medicare
beneficiaries. Thus, a larger proportion of the Medicare population in the city
chooses to enroll in managed care than in all other geographic areas. This occurs
because of a combination of interrelated factors, such as availability of M+C plans
and plan benefits.
As shown in Figure 4, access to M+C plans is much greater in urban areas than
in rural areas. Only about 8% of beneficiaries in central urban areas lack access to
M+C plans. Among the 92% of Medicare beneficiaries with access to such plans,
40% have a choice of at least five different plans and another 40% have a choice of
two to four plans. By contrast, Medicare beneficiaries living in rural areas rarely
have even a single plan available to them, leaving most of these beneficiaries (about
94%) with no access to plans. Among the beneficiaries in these areas who have
access to Medicare managed care, about 2% have a choice of two to four plans and
4% have access to only one plan.
Figure 3. Percent of Medicare Beneficiaries and Medicare+Choice
Enrollees in Urban and Rural Locations, 2003
percent of beneficiaries
Source: Prepared by CRS based on CMS data.
Figure 4. Percent Variation in Number of Medicare+Choice Plans
Available to Medicare Beneficiaries in Urban and Rural Locations,
percent of beneficiaries
2 to 4 plans
Source: Prepared by CRS based on CMS data fromMedicare compare database.
5 or more plans
Figure 5. Percent of Medicare Beneficiaries Enrolled in Medicare+Choice, by State, March 2003
Regional and Geographic Variations in Enrollment
In addition to rural and urban variations, enrollment patterns also vary on a
regional basis. M+C enrollment is much higher in western and southwestern states,
as shown in Figure 5. Approximately 30% of the beneficiaries in Arizona, 33% of
the beneficiaries in California, and 28% of the beneficiaries in Oregon are in M+C
plans. The highest levels of enrollment in the eastern states are in Rhode Island
(34%), Florida (19%), Pennsylvania (23%) and Massachusetts (18%). In contrast,
22 states have no (or marginal) plan enrollment, and an additional 13 states have
between 2% and 10% of their Medicare beneficiaries enrolled in an M+C plan, which
is lower than the U.S. average enrollment of 12% of beneficiaries.
M+C enrollees are far more concentrated geographically than Medicare
beneficiaries as a whole. In fact, four states account for over half of all M+C
enrollment: California, Florida, Pennsylvania, and New York. These four states,
alone, account for 59% of all M+C enrollees, but they are home to only 30% of all
Medicare beneficiaries. Table 4 compares the percent of M+C enrollment to the
percent of the total Medicare population for each of these four states.
Table 4. Percent of Medicare+Choice Enrollees and Medicare
Population Residing in Four States, March 2003
Percent of total
Percent of total
Source: Prepared by CRS, based on CMS, Managed Care Contract Reports, March 2003.
(Numbers may not add, due to rounding).
Contracts by Plan Model
In addition to regional and geographic variation, M+C plans also vary by
contract model and plan ownership. M+C contract models include independent
practice associations (IPAs), group models, and staff models. Plan ownership can
either be for profit or nonprofit. Table 5 displays the distribution of M+C plans by
plan contract model and type of ownership.
The majority of M+C contracts are for IPAs models. An IPA is a managed care
organization that contracts with physicians in solo practice or with associations of
physicians that, in turn, contract with their member physicians to provide health care
services. Many physicians in IPAs have a significant number of patients who are not
IPA enrollees. Group model managed care organizations contract with one or more
group practices of physicians to provide health care services, and each group
primarily treats the plan’s members. Staff model managed care organizations employ
health providers, such as physicians and nurses, directly. The providers are
employees of the plan and deal exclusively with their enrollees. The great majority
of M+C contracts are with for-profit organizations. As of March 2003, 66% of
contractors were with for-profit entities.
Table 5. Medicare+Choice Contracts by Plan Model, 2003
Source: Prepared by CRS, based on CMS, Medicare Managed Care Contract Report, March 2003.
Rules for Enrollment in M+C Plans
Medicare beneficiaries are eligible to enroll in any M+C plan that serves their
area, with the following restrictions: 1) beneficiaries must be entitled to benefits
under Part A of Medicare and enrolled in Part B of Medicare, and 2) beneficiaries
who qualify for Medicare solely on the basis of end state renal disease (ESRD) may
not enroll in an M+C plan. Two exceptions apply to individuals with ESRD: 1) a
beneficiary enrolled in an M+C plan who later develops ESRD may continue to
remain enrolled in that plan, and 2) if a plan terminates its contract or reduces its
service area (for an enrollee this is referred to as an involuntary termination), ESRD
enrollees may enroll in another M+C plan. The second exception is retroactive for
an involuntary termination occurring on or after December 31, 1998.
In general, M+C organizations are required to enroll eligible individuals during
election periods, and they cannot deny enrollment on the basis of health status-related
factors. These factors include health status, medical condition (including both
physical and mental illnesses), claims experience, receipt of health care, medical
history, genetic information, evidence of insurability (including conditions arising out
of acts of domestic violence) and disability. However, an organization may deny
enrollment if it has reached the limits of its capacity. Organizations may only
terminate an enrollee’s election for failure to pay premiums on a timely basis,
disruptive behavior, or because the plan ends for all M+C enrollees.
The Secretary is authorized to collect a user fee from each M+C organization
for use in carrying out enrollment information dissemination activities for the
program as well as the health insurance and counseling assistance program. The fee
is based on the ratio of the organization’s number of Medicare enrollees to the total
number of Medicare beneficiaries.
Through 2004,5 individuals are able to make and change election to an M+C
plan on an ongoing basis. Beginning in 2005, elections and changes to elections will
be available on a more limited basis.6 Individuals will be able to make or change
elections each November, during the annual coordinated election period. In addition,
current Medicare beneficiaries may also change their election at any time during the
first 6 months of 2005 (or first 3 months of any subsequent year). Although
individuals are limited to only one change during this 6 (or 3) month period, this limit
does not apply to either changes made during the annual coordinated election period
in November or to special enrollment periods. Special enrollment periods are
provided for limited situations such as an enrollee who changes place of residence.
For newly eligible aged beneficiaries, their 6 (or 3) month period for making
elections or changes to election begins once the individual is eligible for an M+C
plan. Special election periods also apply to newly eligible aged (not disabled)
Medicare beneficiaries. BIPA required that beginning in June 2001 requests to enroll
or disenroll in an M+C plan are effective on the first day of the next calendar month.
(Prior to the passage of BIPA, requests to enroll or disenroll in an M+C plan made
after the 10th of the month were not effective until the first day of the second calendar
Furthermore, beneficiaries enrolled in an M+C plan that terminates its contract
with Medicare are guaranteed access to certain Medicare supplemental insurance
policies (i.e., “Medigap” policies) within either 63 days from the date: 1) they
receive notice from their M+C organization that their plan is leaving the program; or
2) coverage is terminated. A plan leaving a portion of its service area may offer
enrollees the option of continuing enrollment in the plan, only if there is no other
M+C plan offered in the affected area at that time. However, the plan may require
the enrollee to obtain all basic (except for emergency or urgently needed care)
services exclusively at the facilities designated by the organization within the plan’s
A further protection made available with the passage of BIPA extended the
period for Medigap enrollment for M+C enrollees affected by termination of
coverage during their “trial period.” (The trial period allows individuals to try out
Medicare managed care for 12 months, while still guaranteeing them access to a
Medigap plan if they chose to return to Medicare fee-for-service). For individuals
enrolled in an M+C plan during their initial 12-month trial period, their trial period
begins again if they re-enrolled in another M+C plan because of an involuntary
termination. During this new trial period, they retain their rights to enroll in a
Medigap policy; however the total time for a trial period cannot exceed 2 years from
the time they first enrolled in an M+C plan.
Prior to the passage of the Public Health Security and Bioterrorism Preparedness and
Response Act (P.L. 107-188), individuals were only able to make and change elections on
an ongoing basis through 2002.
Institutionalized beneficiaries will continue to have access to ongoing open enrollment for
purposes of enrolling in an M+C plan or changing from one M+C plan to another.
Medicare+Choice Payments to Plans
The Balanced Budget Act substantially restructured the system for setting the
rates by which Medicare pays plans, beginning in 1998.7 In general, Medicare makes
monthly payments in advance to participating health plans for each enrolled
beneficiary in a payment area (typically a county). The Secretary of HHS is required
to determine annually, and announce by the second Monday in May for 2003 and
2004 (and then not later than March 1 for subsequent years) 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 Medicare
benefits (approximately 56%:44%, respectively).
The major factors for determining Medicare’s annual M+C per capita rates are
summarized in Table 6. The annual M+C per capita rate for a payment area (for a
contract for 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
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.8 For a more detailed
analysis of M+C payments, see CRS Report RL30587, Medicare+Choice Payments.
Prior to enactment of the BBA, payments for care of Medicare beneficiaries in risk health
maintenance organizations (HMOs) were based on the adjusted average per capita costs
(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. Payments based on the AAPCC
varied widely across the country. Additionally county payments fluctuated, year to year.
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 Jan. 2002, BIPA required that the Secretary increase the M+C
payment rates for enrollees with ESRD to reflect the demonstration rate (including the riskadjustment methodology) of social health maintenance organizations’ (SHMO) ESRD
capitation demonstrations. The revised rates increased the base rate by 3% and also
included adjustments for age and sex factors. Beginning Jan. 2005, CMS has announced
that it plans to incorporate M+C enrollees with ESRD into the new risk adjustment model
(using a ESRD specific version of the model) in an effort to further align payments with the
method used in the ESRD SHMO demonstration.
The blended per capita rate was intended to shift county rates gradually away
from solely local (generally county) rates, which reflect the wide variations in
fee-for-service costs, toward a national average rate. Blending was designed to
reduce payments in counties where the adjusted average per capita costs (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
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)9 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 the weighted
average of all local area-specific rates. This component of the blend is adjusted to
reflect differences in certain input prices, such as 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.
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 and beyond, the blended rate is based on 50% of the area-specific rate
and 50% of the national, input-price adjusted rate. Each year, the blended rates may
be raised or lowered to achieve budget neutrality (explained below).
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
2001,10 BIPA established multiple floor rates, based on population and location. For
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 hospital, such as more severely ill patients and increased testing.
Generally, increases in M+C payments are effective on Jan. 1, of each year. However, the
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.11 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.12 The 2003 payment to M+C
organizations in these counties is based on the floor payment of $548. For 2004, the
floor amounts will be $592 for larger MSAs and $536 for smaller MSAs.
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
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.13
Exclusion of Payments for Graduate Medical Education
Payments for Graduate Medical Education (GME) are excluded or “carved out”
of the payments to M+C plans, phased-in 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
changes resulting from BIPA were effective on Mar. 1, 2001. As a result, M+C plans were
paid at a pre-BIPA rate for Jan. and Feb. of 2001, and then beginning in Mar. the new rates
went into effect. In future years, increases are effective on Jan. 1.
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.
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.
If the Secretary determines that a change in the Medicare covered benefits would result
in a significant increase in cost to M+C plans, the Secretary is required to adjust
appropriately the M+C payments to reflect this greater cost. In 2004, an adjustment of 0.2%
will be added to M+C payments to account for changes in Medicare coverage. The 0.2%
adjustment will result in a 2.2% increase above the 2003 payment for counties receiving the
minimum percentage increase payment in 2004.
payments excluded began at 20% in 1998, rising in equal amounts. Beginning in
2002, GME payments were set to be fully deducted each year. 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)14 are not carved out.
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 estimated cost was about $1 billion in 2001, $900
million in 2002, $2.9 billion in 2003, and $1.1 billion in 2004.
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 was 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.
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%.15 This figure
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.
Because BIPA increased M+C payments beginning in Mar. 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
was based on a 5.6% projected per capita increase in total Medicare expenditures, a
0.3 percentage point reduction, 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. There was no adjustment for prior
years 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.16 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
The projected national growth percentage increase in 2004 is 9.5%. This
increase reflects a 3.7% increase in per capita costs and a positive 5.6% adjustment
for prior years’ errors. The 9.5% factor is used to update the 2003 blend rate. The
2004 update for the floor is 8.2%, reflecting the same 3.7% increase in per capita
costs, but only a 4.3% increase for the prior year error in 2003 estimates.
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 2003, 6 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.17
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 Mar.
1, 2001 payment levels.
Because BIPA reset the floor payments in 2001, adjustments will only be made for prior
year errors occurring in 2002 and beyond.
Sterling qualified for a bonus in some of the counties located in Alaska, Arizona, Iowa,
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
Table 6. Major Factors for Determining Medicare
Payments to Medicare+Choice Plans
Blend of local and
Rule established in BBA 97, BBRA 99, or BIPA
Transition over 6 years to 50-50 blend of local and
national rates. National rates are adjusted for
differences in input prices
2003 and after
90% local, 10% national
82% local, 18% national
74% local, 26% national
66% local, 34% national
58% local, 42% national
50% local, 50% national
Minimum of $367 (or 150% of 1997 payment
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 U.S., $553/$500 for 2002, $548/$495 for
2003 and $592/$536 for 2004)18
1999 to 2000
2002 and after
102% of 1997 AAPCC payment rate
102% of prior year’s rate
103% of prior year’s rate
102% of prior year’s rate
GME and DSH
GME payments excluded (from blended rate only)
in equal increments over 5 years, fully phased in by
2002. DSH payments not excluded
Total M+C payments may not exceed what would
have been spent if payments were entirely based on
local rates (except no rate can be reduced below the
floor or minimum)
2003 and after
Increase in Medicare per capita expenditures
(MPCE) minus 0.8 percentage points
Increase in MPCE minus 0.5 percentage points
Increase in MPCE minus 0.3 percentage points
Increase in MPCE
10% health status, 90% demographic
2007 and after
30% inpatient and ambulatory, 70% demographic
50% inpatient and ambulatory, 50% demographic
75% inpatient and ambulatory, 25% demographic
100% inpatient and ambulatory
Source: Congressional Research Service analysis of provisions in BBA, BBRA, and BIPA.
Beginning in Mar. 2001, there is a higher floor payment for counties in the U.S. with a
population of more than 250,000 and a lower floor payment for all other counties in the U.S.
M+C payments are 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
its increased health expenses. By 2004, three different risk adjustment methods will
have been used to adjust Medicare+Choice payment rates:
Demographic method (through 1999),
Principal Inpatient Diagnostic Cost Group (PIP-DCG), which
uses hospital inpatient and demographic data (2000-2003),
CMS Hierarchical Condition Category Risk Adjustment
Model (CMS-HCC), which uses ambulatory, inpatient and
demographic data (beginning in 2004).
The former Medicare risk contract program adjusted the AAPCCs for
demographic risk factors, and when the M+C program was implemented, it also
solely used these demographic risk adjusters until 2000. Demographic risk adjusters
include adjustments for age, gender, working status, Medicaid coverage, whether the
beneficiary originally qualified for Medicare on the basis of disability, and
institutional (nursing home) status.
Each aged Medicare beneficiary can be categorized according to these
demographic factors, as shown in Table 7. Separate demographic adjustments are
made for Part A and Part B of the Medicare program (Part A adjustments apply to
about 56% of the payment and Part B adjustments apply to the remaining 44%). The
payment to the M+C plan for an individual is adjusted by the relevant factors. For
example, the Part A share of the payment to an M+C plan for a male beneficiary,
aged 75-79 who was not working, not in an institution and not on Medicaid would
be increased by 5% (multiplied by 1.05 as shown in the table). The Part B share of
the payment for that same beneficiary would be multiplied by a factor of 1.10. For
an individual of the same age, who was institutionalized, the payment would be
multiplied by 2.25 for the Part A share and 1.95 for the Part B share.
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 consider variations in
health status. Beginning in January 2000, the Centers for Medicare and Medicaid
Services (CMS) implemented this new risk adjustment mechanism built on 15
principal inpatient diagnostic cost groups (PIP-DCGs) in order to predict incremental
costs above the average.19 Table 8 displays the 15 PIP-DCGs including the various
diagnoses in each category. Per capita payments to plans are adjusted based on
In a Mar. 1999 report to Congress, CMS calculated that the PIP-DCG model offered a
substantial improvement in explaining variations in health spending over the demographic
risk adjustment model. The demographic adjusters was estimated to explain about 1% of
the variation in health spending among individuals, while the PIP-DCG model was estimated
to explain about 6% of individual variation. According to CMS, the new CMS-HCC model
described below is estimated to explain approximately 9.8% of the variation in health care
spending among individuals.
inpatient data using the PIP-DCG adjuster, for those enrollees with an inpatient stay
during the previous year. Additionally, adjustments are made for demographic
factors (see Table 9), so that this new system accounts for both demographic and
The BBRA slowed down the implementation of the Secretary’s proposed phasein schedule of this new system through 2002, and BIPA made further revisions to the
risk adjustment system. (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 will include introduction of
risk adjustment using the PIP-DCG method and 90% will be based solely on the
older demographic method.
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
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.20
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.”
Table 7. Medicare Demographic-Only Risk Adjustment Factors
for Aged Beneficiaries, 2003
Part A — Hospital Insurance
Gender and age
85 and over
85 and over
Gender and age
85 and over
85 and over
Part B — Supplementary Medical Insurance
Source: Centers for Medicare and Medicaid Services.
Note: Values indicate the multiplier used for a beneficiary with a particular set of characteristics;
average beneficiary has a multiplier of 1.00. A separate set of risk adjusters is used for disabled
beneficiaries, under the age of 65.
Table 8. Diagnoses Included in Each PIP-DCG
....Blood, Lymphatic Cancers/Neoplasmsb
....Brain/Nervous System Cancerb
....End Stage Liver Disorders
....Cardio-Respiratory Failure and Shock
....Decubitus and Chronic Skin Ulcers
....Diabetes with Chronic Complications
....Coma and encephalopathy
....Cancer of Placenta/Ovary/Uterine Adnexab
....Paralytic and Other Neurologic Disorders
....Mouth/Pharynx/Larynx/Other Respiratory Cancerb
....Cirrhosis, Other Liver Disorders
....Congestive Heart Failure
....Atherosclerosis of Major Vessel
....Chronic Obstructive Pulmonary Disease
....Septicemia (Blood Poisoning)/Shock
....Adrenal Gland, Metabolic Disorders
....Paranoia and Other Psychoses
....Degenerative Neurologic Disorders
....Spinal Cord Injury
....Stomach, Small Bowel, Other Digestive Cancerb
....Cancer of Bladder, Kidney, Urinary Organs
....Benign Brain/Nervous System Neoplasm
....Diabetes with Acute Complications/Hypoglycemia Coma
....Inflammatory Bowel Disease
....Rheumatoid Arthritis and Connective Tissue Disease
....Major Depression/Manic and Depressive Disorders
....Epilepsy and Other Seizure Disorders
....Peripheral Vascular Disease
....Pulmonary Fibrosis and Bronchiectasis
....Paroxysmal Ventricular Tachycardia
....Cellulitis and Bullous Skin Disorders
....Thromboembolic Vascular Disease
....Vertebral Fracture Without Spinal Cord Injury
....Pancreatitis/Other Pancreatic Disorders
....Acute Myocardial Infarction
....Transient Cerebral Ischemia
....Fractures of Skull/Face
....Internal Injuries/Traumatic Amputations/Third Degree Burns
....Cancer of Uterus/Cervix/Female Genital Organsb
....Valvular and Rheumatic Heart Disease
....Precerebral Arterial Aneurysm
....Aortic and Other Arterial Aneurysm
....Artificial Opening of Gastrointestinal Tract Status
....Central Nervous System Infections
....Abdominal Hernia, Complicated
....Cancer of Prostate/Testis/Male Genital Organsb
....Ongoing Pregnancy with Complications
....Ongoing Pregnancy with No or Minor Complications
....No or Excluded* Inpatient Admissions
....Completed Pregnancy with Major Complications
....Completed Pregnancy with Complications
....Completed Pregnancy without Complications (Normal Delivery)
Source: Health Economics Research, Inc.
*Excluded admissions are for those conditions that would not be likely to (or could not) re-occur the
following year, such as appendicitis or fractures of the lower limb.
Includes principal and secondary inpatient diagnosis of HIV/AIDS.
Includes principal diagnoses and secondary diagnoses when the principal diagnosis is chemotherapy.
Table 9. Medicare Demographic and Health-Status Based
Risk Adjustment Factors, for Aged Beneficiaries
with One or More Years Experience, 2003
Health status adjusters
Risk Adjustment Method in Place for 2003
The following illustration examines calculations of risk factors in 2003, based
on two scenarios: 1) the demographically-based risk adjustment system in place prior
to 2000, and 2) the actual system in place for 2003, which uses a combination of 10%
of the current health-status-based system and 90% of the old demographic-based
system. Comparing these two scenarios provides an evaluation of the impact of the
different risk adjustment methodologies on M+C payments.
Three beneficiaries are considered; each is male, aged 75. The illustration
assumes that none of these beneficiaries is disabled, institutionalized, covered by
Medicaid, or working. Because the system is prospective, hospitalization in the prior
year, 2002, would determine the health-status adjustment factor used in 2003. The
first beneficiary was not hospitalized in 2002. The second was hospitalized in 2002,
with a diagnosis of kidney infection (PIP-DCG code 10), while the third was
hospitalized with a diagnosis of lung cancer (PIP-DCG code 16).
As shown in the scenarios below, monthly payments to plans for beneficiaries
with no prior year hospitalization will be lower using the current risk adjustment
methodology, compared with payments using the old demographically-based
methodology. Through 2003, only 10% of the payments will be based on the new
methodology, with the bulk of the payment, 90%, based on the old demographic-only
adjusters. Payments for beneficiaries with no prior year hospitalization will decline
even more, as a larger percentage of the payment is based on the more comprehensive
risk adjusters. Alternatively, for any enrollee with a prior year hospitalization,
payments under the new system will be higher than payments under the old
demographic-only based system. In 2004, the new risk adjustment methodology will
begin to be phased in, taking into account data from both inpatient and ambulatory
Scenario 1: Demographically-Based Risk
Adjustment (old system)
Under the old risk adjustment system in place prior to 2000, a plan’s payment was
adjusted to reflect the gender and age of the enrollee. The same adjustments were
assigned to all male beneficiaries ages 75 to 79, who were not disabled,
institutionalized, covered by Medicaid, or working, regardless of health status. As
shown in Table 7 separate demographic adjustments are made for Part A and Part
B of the Medicare program, as follows:
Part A coverage increased by 5% (i.e., 1.05% of the payment), and
Part B coverage increased by 10% (i.e., 1.10% of the payment).
The adjustment for Part A applies to about 56% of the payment and the adjustment
for Part B applies to the remaining 44%, resulting in a weighted adjustment of
about 1.072 to each county payment, regardless of health status.
As shown below, using the demographically based method, payments to plans for
these three beneficiaries will only vary across counties and not within counties,
from a low of $547 per month per beneficiary in Arthur, NE to a high of $935 per
month per beneficiary in Richmond, NY (the county with the highest
Medicare+Choice rate nationwide in 2003).
Calculation of Monthly Payment Rate Under Scenario 1
Reason for hospitalization (if any) in 2002
Lung cancer (PIPDCG 16)
Medicare Part A
Medicare Part B
on a weight of 56%
for Part A and 44%
for Part B)
Adjusted monthly payment in selected counties
Scenario 2: Phased-in Health Status Based Risk
Adjustment (using a combination of 10% of the
new system and 90% of the old system)
Scenario 2 represents the expected payment for 2003 when risk adjustment is
based on 10% of the health-status method and 90% of the old demographic
method. The factors used to calculate the adjustment under this methodology are
found in Table 9. For each beneficiary, there is a single adjustment for
demographics (no split between Parts A and B of Medicare). The base adjustment
for a 75 year old male who is not disabled, not a Medicaid beneficiary and was not
hospitalized during the previous year is 0.907. Adjustments for prior year
hospitalizations are added to the base adjustment. However, only 10% of the
payment for each of the three beneficiaries would be based the following
0.907 for no prior year hospitalization,
0.907+1.170=2.077 for kidney infection (PIP-DCG 10), and
0.907+2.438=3.345 for lung cancer (PIP-DCG 16).
The remaining 90% of the payment is risk adjusted using the old methodology
(i.e., 90% of the 1.072 adjustment for demographics, found in Scenario 1).
As shown below, payments to plans for these three beneficiaries range from a low
of $539 for a beneficiary in Arthur, NE with no prior year hospitalization to a high
of $1,134 in Richmond, NY for a beneficiary with a prior year hospitalization for
Calculation of Monthly Payment Rates Under Scenario 2
Reason for hospitalization (if any) in 2002
Lung cancer (PIPDCG 16)
Adjusted monthly payment in selected counties
New Risk Adjustment Methodology Beginning in 2004
As required by BIPA, beginning in 2004, a new risk adjustment method will be
used to account for more of the variation in health care expenditures than are
accounted for using prior methods. The new model, the CMS Hierarchical Condition
Category Risk Adjustment Model (CMS-HCC), incorporates data from both inpatient
hospital and ambulatory settings, as well as demographic factors.21 The CMS-HCC
model categorizes approximately 3,300 International Classification of Disease (ICD9) codes into approximately 800 disease clusters, and further aggregates those into
64 disease categories. The CMS-HCC also includes several condition-interactions22
and demographic factors, such as age, sex, Medicaid eligibility and original disability
status. Table 10 displays a list of disease groups, interactions and demographic
factors included in the CMS-HCC model.
The payment for an aged beneficiary under the CMS-HCC model is calculated
by summing all of the relevant condition adjustment factors for the prior year with
the demographic adjustment factors and multiplying that sum by the average payment
rate for the beneficiary’s county of residence. Any event which occurs during the
year would be incorporated into the risk adjusted payment for the following year.
Unlike the PIP-DCG method, which allows only one inpatient diagnosis to modify
the payment rate, in general, the CMS-HCC model takes into account multiple
diagnoses.23 For example, if in the previous year, a beneficiary has been diagnosed
with congestive heart failure, a hip fracture, and cancer, all of these conditions would
be factored into the risk adjustment for the beneficiary’s 2004 payment. The new
risk adjustment will be phased in at a rate of 30% in 2004, 50% in 2005, 75% in 2006
and 100% beginning in 2007. The portion of the payment not weighted by the CMSHCC will be weighted by the demographic-only method.
On May 25, 2001 CMS announced that M+C organizations would not be required to
submit hospital outpatient or physician encounter data for dates of service prior to July 1,
2002. Data collection requirements and procedures were revised to reduce administrative
burden and data collection began in July 2002. Data collected between July 1, 2002 and
June 30, 2003 will be used to calculate risk adjustment factors for CY2004 M+C payments.
Separate adjustment factors are listed for certain combinations of conditions, such as
diabetes and congestive heart failure, because the cost of treating a beneficiary with the
combination is greater than could be accounted for by the sum of the two separate risk
If a beneficiary’s illness progresses within a disease process, such as diabetes with
increasing severity, only the most costly diagnosis made for the beneficiary will be applied
to the payment rate.
Table 10. Medical Conditions, Medical Condition Interactions,
and Demographic Factors Included in the CMS Hierarchical
Condition Category Risk Adjustment Model for 2004
Metastatic Cancer, Acute Leukemia
Lung, Upper Digestive Tract, and Other
Lymphatic, Head and Neck, Brain, and
Other Major Cancers
Breast, Prostate, Colorectal and Other
Cancers and Tumors
Diabetes with Renal or Peripheral
Diabetes with Neurologic or Other
Diabetes with Acute Complications
Diabetes with Ophthalmologic or
Diabetes without Complications
End-Stage Liver Disease
Cirrhosis of Liver
Inflammatory Bowel Disease
Rheumatoid Arthritis and Inflammatory
Connective Tissue Disease
Severe Hematological Disorders
Disorders of Immunity
Major Depressive, Bipolar and Paranoid
Spinal Cord Disorders/Injuries
Parkinsons and Huntingtons Disease
Seizure Disorders and Convulsions
Coma, Brain Compression/Anoxic
Cardio-Respiratory Failure and Shock
Congestive Heart Failure
Acute Myocardial Infarction
Unstable Angina and Other Acute
Ischemic Heart Disease
Angina Pectoris/Old Myocardial
Specific Heart Arrhythmias
Ischemic or Unspecified Stroke
Cerebral Palsy and Other Paralytic
Vascular Disease with Complications
Chronic Obstructive Pulmonary Disease
Aspiration and Specified Bacterial
Pneumococcal Pneumonia, Empyema,
Proliferative Diabetic Retinopathy and
Decubitus Ulcer of Skin
Chronic Ulcer of Skin, Except
Extensive Third-Degree Burns
Severe Head Injury
Major Head Injury
Vertebral Fractures without Spinal
Major Complications of Medical Care
Major Organ Transplant Status
Artificial Openings for Feedings or
Amputation status, Lower
Diabetes Mellitus*Congestive Heart
Congestive Heart Failure*Chronic
Obstructive Pulmonary Disease
Chronic Obstructive Pulmonary
Disease*Coronary Artery Disease
Renal Failure*Congestive Heart Failure
Renal Failure*Congestive Heart
Medicaid and originally disabled interactions with age and sex
Medicaid female, disabled
Medicaid female, aged
Medicaid male, disabled
Medicaid male, aged
Men, age 0-34
Men, age 35-44
Men, age 45-54
Men, age 55-59
Men, age 60-64
Men, age 65-69
Men, age 70-74
Men, age 75-79
Men, age 80-84
Men, age 85-89
Men, age 90-94
Men, age 95+
Women, age 0-34
Women, age 35-44
Women, age 45-54
Women, age 55-59
Women, age 60-64
Women, age 65-69
Women, age 70-74
Women, age 75-79
Women, age 80-84
Women, age 85-89
Women, age 90-94
Women, age 95+
Interaction terms marked with a superscript 1 are not additive; a beneficiary’s payment will be
based on the most severe, but not multiple diagnoses. All other interaction terms are additive.
Adjusted Community Rates
M+C plans are required to include all Medicare-covered services. In some
circumstances, plans may also be required to offer additional benefits or reduced cost
sharing to their beneficiaries. The basic benefit package includes all of the Medicarecovered benefits (except hospice services) as well as the additional benefits, as
determined by a formula which is set in law. The adjusted community rate (ACR)
mechanism is the process through which health plans determine the minimum
amount of additional benefits they are required to provide to Medicare enrollees and
the cost sharing they are permitted to charge for those benefits. This system was in
place for the risk contract program and continued with only a few changes under the
In general, no later than July 1 of each year, each M+C organization is required
to submit to the Secretary of HHS, for each of its M+C plans, specific information
about premiums, cost sharing, and additional benefits (if any). However, as specified
below, this deadline has been and will continue to be shifted through 2004. Because
BIPA was enacted after the July deadline, there was a special timeline devised for
2001. Plans that previously provided notice of their intention to terminate contracts
or reduce their service area for 2001 had until January 18, 2001, to rescind their
notice and submit ACR information. Further, any M+C organization that would
receive higher capitation payments as a result of BIPA was required to submit revised
ACR information by January 18, 2001. Plans could only reduce premiums, reduce
cost sharing, enhance benefits, utilize stabilization funds, or stabilize or enhance
beneficiary access to providers (as long as this did not result in increased beneficiary
premiums, increased cost-sharing, or reduced benefits). Any regulations that limited
stabilization fund amounts were waived, with respect to ACR submissions
For 2002, an M+C organization’s deadline for notifying CMS of its intention
to renew its contract as well as a final ACR submission was extended to September
17, 2001. M+C organizations only had to submit a one-page summary on July 2,
2001 and this was not binding on the organization. CMS announced this extension
in order to give organizations more time to gather data for forecasting costs. As part
of the Public Health Security and Bioterrorism Preparedness and Response Act (P.L.
107-188) Congress legislated the deadline change for 2002, and further, set the
deadline for 2003 and 2004 at no later than the second Monday in September. Under
current law, the deadline will return to July 1st of each year, beginning in 2005.
Under Medicare’s rules, a plan may not earn a higher return from its Medicare
business than it does in the commercial market. The Secretary reviews this
information and approves or disapproves the premiums, cost-sharing amounts, and
benefits. The Secretary does not have the authority to review the premiums for either
MSA plans or private fee-for-service plans. Beginning May 1, 2001 ACR
submissions are reviewed by the CMS Chief Actuary.
Beneficiaries share in any projected cost savings between Medicare’s per capita
payment to a plan and what it would cost the plan to provide Medicare benefits to its
commercial enrollees. To accomplish this, plans must provide either reduced cost
sharing or additional benefits to their Medicare enrollees that are valued at the
difference between the projected cost of providing Medicare-covered services and the
expected revenue for Medicare enrollees.24 Additionally, beginning in 2003, plans
may also reduce the Medicare Part B premium.25 Plans can choose which additional
benefits to offer, however, the total cost of these benefits must at least equal the
Alternatively, under the ACR process, plans may also charge a premium if they
demonstrate higher “costs”, rather than “savings” for providing the basic benefit package.
plan. For the basic benefit package and any required additional services in an M+C plan,
the beneficiary premium and actuarial value of the deductibles, coinsurance and copayments
on average to enrolled individuals may not exceed the actuarial value of the deductibles,
coinsurance, and copayments that would be applicable on average to individuals entitled to
Part A and enrolled under Part B if they were not in an M+C plan.
All M+C enrollees (as well as FFS Medicare beneficiaries enrolled in Part B) are required
to pay the Medicare Part B monthly premium. The monthly premium was set at $45.50 for
2000, $50 for 2001, $54 for 2002 and $58.70 for 2003. Beginning in 2003, an M+C
organization may elect to reduce its M+C payment up to 125% of the annual Part B
premium. However, only 80% of this amount can be used to reduce an enrollee’s actual Part
B premium. This has the effect of returning up to 100% of the beneficiary’s Part B
premium. The reduction applies uniformly to each enrollee in the plan. Plans must include
information about Part B premium reductions as part of the required information that is
provided to enrollees for comparing plan options.
“savings” from Medicare-covered services.26 Plans may also place the additional
funds in a stabilization fund or return funds to the Treasury.
Additional or Supplemental Benefits
Nearly all plans offer some benefits to enrollees beyond those in traditional
Medicare (Figure 6). For example, in 2002, about 87% of M+C enrollees were
offered vision care as part of their lowest premium package, 100% were offered
routine physicals, and about 72% were offered some coverage of prescription
(outpatient) drugs. Hearing care was offered to slightly more than half of all
enrollees. Other services offered included preventive dental care, podiatry, and
chiropractic services. While plans may offer even more services, those shown in
Figure 6 are the most frequently offered benefits. Figure 6 shows that the percent
of enrollees offered these benefits has declined for all services, except routine
physicals between 1999 and 2002. However, this figure does not show how the
generosity of benefits or the level of cost sharing may have declined over the time
Plans may also offer extra benefits beyond the “additional” benefits required to spend the
“savings” calculated in the ACR process. These extra benefits are referred to as
“supplemental” benefits. Plans are permitted to charge Medicare enrollees the expected cost
of these supplemental benefits, plus the national average amount of beneficiary cost sharing
for Medicare-covered services. Plans can collect these payments through a combination of
cost sharing and premiums, but the sum of the premiums and the actuarial value of the
deductibles, coinsurance and copayments for such benefits may not exceed the adjusted
community rate for these benefits. Plans may choose to waive part or all of this allowable
premium for all enrollees.
Figure 6. Percent of M+C Enrollees Offered Benefits Beyond Traditional
Medicare Covered Services, in the Lowest Premium Package Available,
1999 and 2002
Percent of Medicare+Choice Enrollees
Source: Figure prepared by CRS based on Mathematica Analysis of CMS data. Lori Achman, and
Marsha Gold, “Trends in Medicare+Choice Benefits and Premiums, 1999-2002,” The Commonwealth
Coverage for Prescription Drugs
One of the advantages of Medicare managed care, over traditional fee-forservice Medicare, is that most plans include some outpatient prescription drug
coverage. However, according to CMS data, currently fewer enrollees have M+C
prescription drug coverage and among those with coverage, the drug benefit has
become less generous over time. As shown in Table 11, about 84% of enrollees had
prescription drug coverage through a basic plan in 1999, declining to about 69% by
2003. Plans are simultaneously decreasing the amount of covered drug spending
while also increasing out-of-pocket costs. As shown in Table 12, very few plans had
no limits (1.4%) on drug benefits in 2003 and an increasing number of plans set
annual benefit limits at $500 or less (10.6% of plans in 1999 compared to 53.4% of
plans in 2003).
As shown in Table 13, almost all plans required some level of copayment for
prescription drug coverage in 2003 and the copayment amount has increased over
time. About 92% of beneficiaries were offered plans with copayments of $10 or less
(including no copayments) for generic drugs in 1999, compared to 77% in 2000. For
brand name drugs, the percentage of enrollees with increased required copayment
amounts over time have been even greater. In 1999, 14% of enrollees paid more than
a $20 copay for brand name drugs, compared to over 73% in 2003.
Table 11. M+C Enrollees with Drug Coverage in a Basic Plan
Source: Centers for Medicare and Medicaid Services (CMS) data.
Table 12. Percent of Enrollees with an Annual Drug Cap in
Basic M+C Plans, Weighted by Enrollment, 1999-2003
Annual drug cap
$500 or less
$2001 or more
Source: Mathematica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold,
“Medicare+Choice Plans Continue to Shift More Costs to Enrollees,” Apr. 2003.
Note: Plans with generic-only benefits are classified a having a benefit limit less than $500 per year.
Table 13. Percent of M+C Enrollees by Prescription Drug CoPayments, Weighted by Enrollment, 1999-2003
$10.00 or less
$10.01 or more
$10.00 or less
$10.01 to $20.00
$20.01 or more
Source: Mathematica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold,
“Medicare+Choice Plans Continue to Shift More Costs to Enrollees,” Apr. 2003.
In addition to the Part B premium, plans are permitted to charge enrollees
additional out-of-pocket fees, such as premiums and coinsurance, depending on
which plan the individual elects. However, organizations may decide to offer zeropremium plans. If Medicare’s per capita payment to a plan exceeds its costs (a
“savings” in the terms of the ACR), the plan may choose to add only enough benefits
to match the savings, requiring no additional premium under the ACR rules. Another
rationale for waiving premiums is to stay competitive in local markets. In this latter
case, the plan may not be at risk of taking a loss on its Medicare business because
profits and overhead based on commercial rates are included in its allowed costs
under the ACR calculation.
Between 1999 and 2003, the percentage of beneficiaries, nationally, with access
to a zero premium plan has declined. As shown in Table 14, the availability of these
plans, nationally, dropped in half, from over 60% to just under 30%. Although, the
data for urban and rural areas was only available through 2001, the trend seems to
indicate that the impact on rural areas was even greater, especially since these
individuals had fewer opportunities for enrolling in the M+C program and fewer
choices among plans.
Table 14. Percent of Medicare Beneficiaries with Access
to a Zero-Premium M+C Plan, by Area
Source: MedPAC analysis of Medicare Compare data from CMS website, Aug. 1999, Jan. 2000, and
Feb. 2001; CMS analysis 2002 and 2003. Na=not available.
Table 15, shows the distribution of M+C enrollees by the monthly premium
amount. Between 2000 and 2003, the percent of enrollees in zero premium plans
declined significantly, so that the majority of Medicare enrollees were no longer
enrolled in zero premium plans. At the same time, the percent of enrollees paying
over $50 in monthly premiums increased from 7% to 35%. In 2003, 0.2% of all
M+C beneficiaries (or 9,129 individuals) were enrolled in plans that reduced their
monthly Part B premium, while 4.2% of all beneficiaries had access to such a plan.
Table 15. Distribution of M+C Enrollees,
by Basic Premium Levels
premium plan premium plan
3,735,524 61% 783,611 13% 1,168,828 19%
2,465,295 45% 636,100 12% 1,517,169 28%
2,020,351 41% 238,272
0.2% 1,738,980 38%
5% 1,131,794 23%
1% 1,150,192 25% 1,606,617 35%
Source: Mathematica Policy Research Analysis of CMS data: Lori Achman, and Marsha Gold,
“Medicare+Choice Plans Continue to Shift More Costs to Enrollees” Apr. 2003.
Post-BIPA premium levels
The M+C program includes requirements designed to limit beneficiaries’
financial liability and to assure beneficiaries of certain rights and remedies.
Beneficiary protections or rights include established beneficiary liability standards,
quality standards, information and disclosure requirements, a grievance and appeals
process, and access to services.
Beneficiary Financial Liability
Enrollees in M+C coordinated care plans are likely to experience the least
amount of out-of-pocket costs (compared to other M+C options). Cost sharing per
enrollee (including premiums) for covered services cannot be more than the actuarial
value of the deductibles, coinsurance, and copayments under traditional Medicare
(Table 16). However, while the total of cost sharing is limited, the plan may set
different amounts for specific services, such as a lower (or higher) deductible for
hospital inpatient services or skilled nursing care services. Enrollees in an M+C
coordinated care plan cannot be charged additional balanced billing amounts by any
The rules for private fee-for-service (PFFS) plans and PPO demonstration plans
are different (Table 16). Generally, contract providers will be allowed to bill
enrollees in private fee-for-service plans up to 15% above the fee schedule the plan
uses.28 In contrast to traditional Medicare, this privilege extends to all categories of
providers, including hospitals. For the PPO demonstration project, the terms of each
individual demonstration proposal specify if, and to what extent, providers may
M+C plans must have a quality assurance program focused on outcomes for
services it provides to enrollees. M+C regulations established guidelines for
organizations to examine the continuity and coordination of care. These quality
standards focus on items such as high volume, high risk, acute care and chronic care
services. The program must provide the Secretary with information to monitor and
evaluate the plan’s quality. Only certain M+C plans (not PFFS, PPOs, and PPO
demonstration plans if so specified in their proposal) have to comply with other
quality assurance requirements, such as providing for internal peer review,
Coordinated care plans must pay a noncontracting provider at least the same amount they
would have received if the enrollee was in traditional Medicare, including allowed balance
billing amounts. A “contract provider” is a provider who enters into an explicit agreement
with a plan establishing payment amounts for services rendered to the plan’s enrollees. A
non-contracting provider may also provide services, but does not have an explicit agreement
with the plan.
The two PFFS plans currently offered in the M+C program do not allow providers to
establishing written protocols for utilization review, and establishing mechanisms to
detect under and over utilization.
Additionally, most Medicare+Choice organizations are subject to external
review for both the quality of their service and their response to written complaints
about poor quality of care. M+C plans may use Peer Review Organizations (PROs),
which are also used for these functions in traditional fee-for-service Medicare.
Private fee-for-service plans and PPO Demonstration Plans (if specified in their
proposal) that do not have utilization review programs are exempt from this
The Secretary is required to ensure that the external review activities do not
duplicate the review activities conducted as part of the accreditation process. The
Secretary may waive the external review requirements (except in the case of
complaints about quality) for organizations with an excellent record of quality and
compliance with other Medicare+Choice requirements. Plans may be deemed to
have met all these requirements if they are accredited by an organization approved
by the Secretary, according to statutory requirements.
Table 16. Beneficiary Cost Sharing and Provider Reimbursement Under
Medicare+ Choice Plans for Basic Benefit Package
Coordinated care plan
Beneficiary out-of-pocket costs (premium plus
any deductibles, coinsurance, and copayments).
Premium and actuarial value of other cost
sharing (for example, coinsurance) on average
cannot exceed the actuarial value of the cost
sharing applicable on average under traditional
The actuarial value of the cost sharing (not
including the premium) on average cannot
exceed the actuarial value of cost sharing on
average under traditional Medicare.
Plans may propose to waive any M+C statutes,
regulations or policies related to premiums,
cost-sharing, payments to plans, such as
actuarial equivalence. Beneficiaries may face
cost sharing that can be higher than FFS.
Beneficiary liability for balance billing.
Beneficiaries are not liable for any balance
Contract providers can bill 15% above the
private fee schedule (or other provider
Noncontract providers cannot balance bill
Balanced billing requirements may vary by plan
and are specified in each individual
demonstration application, plans should
describe the procedure for enrollee complaints
relating to balance billing requests from
Medicare+Choice plan payment obligation to
physicians, hospitals, and other providers.
Contract providers are paid fees or rates that are
privately negotiated by the plan with them.
Contract providers are paid private fees (or
rates) minus beneficiary cost sharing amounts.
Fee schedule or rates must be as generous as
Medicare unless plan has a sufficient number
and range of provider contracts.
Contract providers are paid fees or rates that are
privately negotiated by the plan with them.
Noncontract providers must accept as payment
in full Medicare’s fee schedule (or other
Medicare reimbursement rate) including the
allowed balance billing amounts (if any)
allowed under Medicare.
Plans pay FFS out of network.
Noncontract providers same as for non-contract
providers in coordinated care plans.
Risk sharing between plans and CMS
Plans accept full risk of all costs beyond the
monthly capitated payment made by CMS on
behalf of the beneficiary.
Same as for Coordinated Care Plans.
Plans have the option of sharing financial risk
with CMS, according to the particular risk
sharing agreement made between the plan and
Enrollee choice of providers generally restricted
to a closed network.
Enrollees may seek care from any provider
willing to accept the plan’s terms and
conditions of participation, The plan does not
provide enrollees with a financial incentive for
choosing particular providers.
Enrollees may seek care from any willing
provider, but they have a financial incentive to
seek care from providers in the plan’s network.
Source: Congressional Research Service and Medicare Payment Advisory Commission analysis of provisions in the Balance Budget Act of 1997; Medicare Program: Solicitation
for Proposals. CMS-4042-N.
Information and Disclosure Requirements
The M+C program requires the Secretary to provide for activities to disseminate
certain information to Medicare beneficiaries so that they may make informed
choices about their Medicare coverage. This information includes notice of an open
season, a list of plans and plan options, a general description of the benefits covered
under traditional Medicare, a description of grievance and appeals procedures, and
comparative plan information (such as benefits, premiums, service area, and quality
and performance indicators).
When an M+C organization terminates its contract with CMS, it must provide
and pay for advance written notice to each of its enrollees, along with a description
of alternatives for obtaining benefits.
Further, M+C organizations must disclose to each enrollee (at time or
enrollment and at least annually) information on their service area, benefits, the
number, mix, and distribution of providers, out-of-area coverage, emergency
coverage, supplemental benefits, prior authorization rules, plan grievance and appeals
procedures, and the quality assurance program. Other information is available upon
request, such as information on procedures used by the organization to control
utilization of services and expenditures.
Grievances and Appeals
An M+C organization must have procedures for hearing and resolving
grievances between the organization and enrollees. It also must maintain a process
for determining whether an individual enrolled within the plan is entitled to receive
a health service and the amount (if any) that the individual must pay for the service.
These determinations must be made on a timely basis, appropriate to the urgency of
the situation. A denial of coverage explanation must state the reasons for the denial,
in understandable language, and also must provide information about the
reconsideration and appeal processes.
An enrollee may request a reconsideration of a determination. The
reconsideration must occur within a time period specified by the Secretary, but
(except where an expedited process is appropriate) no longer than 60 days after
receipt of the request. A reconsideration of a denial of coverage based on lack of
medical necessity must be made by a physician with appropriate expertise who was
not involved in the initial determination.
An enrollee in an M+C plan or a physician may request an expedited
determination or reconsideration. M+C organizations must expedite a physician’s
request for a determination or reconsideration, if the physician indicates that the
normal time frame could seriously jeopardize the life or health of the enrollee or the
enrollee’s ability to regain maximum function.
Access to Services
Each plan must make benefits available and accessible to its enrollees within the
service area with reasonable promptness, and must ensure continuity in providing
benefits. This care must be available, when necessary, 24-hours 7 days per week.
Coverage of emergency services for emergency medical conditions is subject
to the prudent layperson standard. This definition states that an emergency medical
condition is one manifesting itself by acute symptoms of sufficient severity
(including severe pain) that a prudent layperson, who possesses an average
knowledge of health and medicine, could reasonably expect the absence of immediate
medical attention to result in: 1) placing the health of the individual in serious
jeopardy (and in case of a pregnant woman, her health or that of her unborn child);
2) serious impairment to bodily functions; or 3) serious dysfunction of any bodily
organ or part.
M+C organizations are financially responsible for emergency and urgently
needed services. There is no prior authorization requirement for these services and
no requirement that services must be obtained within the M+C organization. Further,
the physician treating the enrollee must decide when the enrollee may be considered
stabilized for transfer or discharge. That decision is binding on the M+C
Current Program Standards
and Contract Requirements
Minimum Enrollment Standards
Contracts between M+C organizations and CMS are made for at least 1 year and
are automatically renewable, unless either party gives notice to terminate the contract.
Organizations must have at least 5,000 individuals (or 1,500 in the case of a PSO)
who are receiving health benefits through the organization or at least 1,500
individuals (or 500 in the case of a PSO) who are receiving health benefits if the
organization primarily serves individuals residing outside of urbanized areas. These
minimum requirements may be waived during the first 3 years of the contract, if the
organization can demonstrate to CMS that it can administer and manage an M+C
contract and also manage the level or risk required under the contact.
Federal standards for M+C plans preempt any inconsistent state law or
regulation with respect to: 1) benefit requirements – including cost-sharing
requirements or summaries and schedules of benefits, 2) requirements relating to
inclusion or treatment by providers, 3) coverage determinations – including related
appeals and grievance processes, and 4) marketing materials. No premium, tax, fee,
or other similar assessment may be imposed on a plan by any state.
Organizational and Financial Requirements
In general, an M+C organization must be organized and licensed under state law
as a risk-bearing entity eligible to offer health insurance or health benefits coverage
in each state in which it offers an M+C plan. A Medicare+Choice organization must
assume full risk for Medicare benefits on a prospective basis. However, this doesn’t
preclude an organization from obtaining insurance or making other arrangements to
cover certain costs, such as medically necessary services provided by non-network
providers and part of the costs exceeding its income. The organization also may
make arrangements with providers to assume some or all of the financial risk for
covered benefits they provide, however, PFFS organizations cannot put providers
Provider Protections and Requirements
Each M+C organization (other than a PFFS) must establish physician
participation procedures that provide: 1) notice of the participation rules; 2) written
notice of adverse participation decisions; and 3) a process for appealing adverse
decisions. The organization must consult with contracting physicians regarding the
organization’s medical policy, quality, and medical management procedures.
Although plans may include providers only to the extent necessary to meet the
needs of their enrollees, they can not discriminate with respect to providers who are
acting within the scope of their license or certification under applicable state law,
solely on the basis of such licence or certification. Restricting communications
between providers and their patients (a gag clause) is prohibited. The use of
physician financial incentive plans, (compensations arrangements between
organizations and individual or groups of physicians that may reduce or limit
services) is also limited.
Protections Against Fraud
M+C organizations must also comply with disclosure and notification
requirements. They must report financial information to the Secretary, covering
ownership, transactions between the organization and parties in interest, and evidence
that they are fiscally sound.
The Secretary must conduct annual audits of the financial records of at least
one-third of the M+C organizations (including data relating to utilization, costs, and
computation of the adjusted community rate). In addition, the Secretary has the right
to examine the quality, appropriateness, timeliness of services, ability to bear risk of
a plan, as well as the organization’s facilities, if there is reasonable evidence of need
for such inspection. M+C organizations must notify the Secretary of loans and other
special financial arrangements made with subcontractors, affiliates, and related
Sanctions and Termination of Contracts
In certain circumstances, such as a plan that fails to carry out its contract, the
Secretary may impose civil monetary penalties, temporary suspension of enrollment
or even termination of a contract. The Secretary is authorized to carry out specific
remedies in the event that an M+C organization: 1) fails substantially to provide
medically necessary items and services required to be provided, if the failure
adversely affects the individual; 2) imposes premiums in excess of those allowed; 3)
acts to expel or refuses to reenroll an individual in violation of stated requirements;
4) engages in any practice that would have the effect of denying or discouraging
enrollment (except as permitted by law) of eligible individuals whose medical
condition or history indicates a need for substantial future medical services; 5)
misrepresents or falsifies information to the Secretary or others; 6) fails to comply
with rules regarding physician participation; 7) employs or contracts with any
individual or entity that has been excluded from participation in Medicare; or 8)
terminates its contract other than at an appropriate time after providing appropriate
In addition to the coordinated care plans typically associated with managed care,
the M+C program offers a variety of optional arrangements, either through a standard
program arrangement or on a demonstration basis.
Private Fee-for-Service Plans
Private fee-for-service (PFFS) plans are one of the new types of private plans
available to Medicare beneficiaries as a result of the Balanced Budget Act of 1997.29
A PFFS plan has three defining characteristics that distinguish it from other
Medicare+Choice options: 1) it allows any provider to participate who is both
lawfully authorized to serve Medicare beneficiaries and who accepts the plan’s terms
of payment; 2) it pays providers at a rate determined on a fee-for-service basis
without placing providers at financial risk; and 3) it does not vary payment rates
based on how often a particular service is provided.
PFFS plans, like traditional Medicare, allow providers to deliver medical care
without joining a network. Providers are paid on a fee-for-service basis so they do
not accept financial risk or reduced payments and, further, they do no face incentives
to either limit services or limit referrals to specialists. Providers under PFFS plans
may bill enrollees up to 15% more than the plan’s allowable rate, while providers in
other types of M+C plans may not “balance bill.”30 Moreover, PFFS plans have
fewer restrictions on balance billing than traditional fee-for-service Medicare. Unlike
For a more detailed analysis of PFFS plans see CRS Report RL31122, Medicare+Choice:
Private Fee-for-Service Plans, by Paulette Morgan and Madeleine Smith.
Both of the PFFS plans currently available to beneficiaries (Sterling and Humana) do not
allow providers to balance bill enrollees.
traditional Medicare providers, however, PFFS providers can lose reimbursements
if the PFFS plan becomes insolvent.
Beneficiaries choosing a PFFS plan can choose any provider who is willing to
provide services and who accepts the PFFS plans’ terms of payment. The beneficiary
must inform the provider of his or her enrollment in the PFFS plan. The PFFS plan
may offer additional benefits beyond those covered under traditional Medicare, but
may also charge an additional premium for these services. If providers choose not
to accept a PFFS plan, beneficiary choice would be limited, much as it would be
under a network.
Currently, Sterling Life Insurance Company and Humana Inc. offer the only
Medicare PFFS plans.31 They operate in 27 states,32 over half of all United States
counties, and are available to about 37% of all Medicare beneficiaries. Sterling and
Humana primarily serve rural counties that previously did not have a M+C option.
Possible reasons for serving those areas are: 1) on average, Medicare+Choice rates
are higher than the average cost of traditional Medicare in those counties; 2) an
organization receives a bonus (5% the first year and 3% the second year33) for serving
counties not served by any other Medicare+Choice plan; 3) PFFS does not require
a network of providers, which is difficult to assemble in rural areas; and 4) for
Sterling, its parent company has specialized in serving rural areas. Both
organizations pay providers the same rate they would receive from traditional
Medicare, and prohibit balance billing.
Sterling provides very few additional benefits beyond the required Medicare
benefit package. It provides worldwide emergency hospital care, but does not
provide coverage for outpatient prescription drugs, eye exams, hearing aid, or glasses.
For 2003, Sterling enrollees must pay between $88 and $108 in monthly premiums,
depending on where they live, in addition to the standard Medicare Part B premium
of $58.70. Humana provides a limited drug benefit under one of its plans, but few
additional benefits. Humana enrollees pay $19 in monthly premiums, except for
those in DuPage, Illinois who pay $89 per month, in addition to the Part B premium.
Humana enrollees have an out-of-pocket limit of $5,000. PFFS enrollees might
experience lower (or higher) cost sharing under either Sterling and Humana than
under fee-for-service Medicare, depending on the exact quantity and mix of services
that they use.
Beneficiaries in Sterling’s service area were able to enroll as of July 2000. Beneficiaries
in Humana’s service area were able to enroll as of Jan. 2003. In addition to the two standard
PFFS plans, there is also a PFFS demonstration plan available in 2003, with 1,748 enrollees
as of Mar. 2003.
A PFFS plan is available to beneficiaries in all, or part of the following states: Alaska,
Arizona, Arkansas (part), Delaware, Idaho, Illinois, Iowa, Kentucky, Louisiana (part),
Minnesota, Montana (part), Nebraska, Nevada, New Mexico, North Dakota (part), Ohio
(part), Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota (part), Tennessee
(part), Texas (part), Utah, Washington, West Virginia (part), and Wisconsin.
While bonus payments may have been an incentive for PFFS plans in previous year, these
bonus payments will no longer by available to plans beginning in 2004.
As of March 2003, approximately 21,000 of the over 14 million Medicare
beneficiaries who had access to a PFFS plan, chose to enroll in one. Though most
of the 27 states served by a PFFS plan have received some enrollment, the highest
proportion of enrollees live in Louisiana (16%), Texas (15%), Washington (13%),
Illinois (9%) and Pennsylvania (8%). About two-thirds of PFFS enrollees did not
have a choice of another Medicare+Choice plan.
As PFFS plans have only been available since July 2000, it will take some more
time to determine: 1) their ability and desire to remain in the M+C program, 2) the
impact of these kinds of plans on beneficiary and provider satisfaction; and 3) the
relative cost of PFFS plans compared to other M+C options as well as fee-forservice.
Preferred Provider Organization Demonstration
On April 15, 2002, CMS announced a 3-year Preferred Provider Organization
(PPO) demonstration project within the M+C program. A PPO is a type of managed
care plan arrangement under which insurers contract with doctors and hospitals who
agree to provide their services on a fee-for-service basis at negotiated rates which are
lower than those charged to non-enrollees.
PPOs are not a new option for the M+C program as they have been able to serve
beneficiaries since the passage of BBA. However, in 2003, only three PPOs
participate in the M+C program. The PPO demonstration differs from standard PPOs
in that it is designed to test whether or not changes in payment rates, risk sharing and
administrative requirements will encourage greater plan participation.34 First, while
PPO plans outside of the demonstration are paid under the regular M+C payment
system, plans in the PPO demonstration are paid the largest of either the M+C
payment rate, or 99% of per-capita fee-for-service in the county (excluding all
graduate medical education expenditures). Second, non-demonstration PPO plans
are at full financial risk for higher-than-expected medical costs accrued by their
enrollees. Plans in the PPO demonstration have the option of sharing financial risk
with CMS, according to a risk-sharing agreements which may vary from plan to plan.
A risk-sharing agreement defines a target medical loss ratio, or the percent of revenue
devoted to providing medical services. Plans are at financial risk if their actual
medical loss ratio is 2 percentage points above or below the target. Beyond 2
percentage points, CMS and the plan share the risk according to their agreement,
though CMS is never at risk for more than 80 percent of the amount beyond 2
percentage points from the target. The risk-sharing agreements are symmetrical, so
if the actual medical loss ratio is less than 2 percentage points from the target, CMS
shares in the excess profit, and if it is more than 2 percentage points from the target,
CMS shares in the additional costs. The third difference between a PPO within and
outside of the demonstration pertains to quality assurance requirements. PPOs
outside of the demonstration must comply with the same quality assurance
requirements as health maintenance organizations (HMOs). PPOs in the
demonstration, however, may comply with the “less prescriptive quality
42 U.S.C. 1395b-1(a)(1)(A) grants the Secretary of Health and Human Services the
authority to conduct demonstration projects to determine if changes in methods of payment
would increase the efficiency and economy of health services.
requirements” required of private fee-for-service plans.35 The higher payment rate,
the risk sharing agreements, and the decreased quality assurance requirements may
encourage greater plan participation, though to what extent it will encourage
participation is uncertain.
PPOs participating in the demonstration must offer beneficiaries the standard
Medicare fee-for-service benefits, and they may offer additional benefits such as
prescription drugs. CMS expects the monthly premium and cost sharing of the
demonstration plans to be higher than those of M+C HMOs, but less than the
premiums of Medicare supplemental insurance policies. Beneficiaries enrolled in a
PPO may seek care from any provider, though they have a financial incentive to use
doctors and hospitals in the PPO’s network. For some beneficiaries, the additional
benefits (if offered) and greater provider choice may be worth the higher cost sharing
required under the demonstration plans.
In 2003, PPO demonstration plans are offered by 17 organizations in 23 states,
with an enrollment of 56,667 as of March 2003 – the first 3 months of the program.
Approximately 11 million beneficiaries in 243 counties have access to one of the
demonstrations, of which about 2.2 million are already enrolled in a
Medicare+Choice plan. The organizations offering the PPO demonstrations have
chosen to offer them primarily in areas that are already being served by M+C
organizations, possibly to capitalize on their existing provider networks, or because
of favorable market conditions. Only 4% of beneficiaries in the PPO demonstration
service area do not have another M+C option.
For 80% of counties served by a PPO demonstration in 2003, the M+C payment
rate is higher than 99% of fee-for-service expenditures in the county, thus plan
payment rates will be based on the M+C rate.36 PPO demonstration plans serving the
remaining 20% of counties will be paid the 99% of FFS rate, which is higher than the
Reasonable Cost Contracts
The BBA included provisions to phase out the reasonable cost contracts. Costbased contracts are paid on the basis of the reasonable cost actually incurred to
provide Medicare covered services to enrollees. Reasonable cost contract plans are
paid a monthly interim per capita rate for each Medicare enrollee. Total monthly
payments are determined by multiplying the interim per capita rate by the number of
the enrollees, plus or minus adjustments made by CMS. Further adjustments may be
made at the end of the contract period to reconcile interim payments with
reimbursement amounts payable for services furnished to Medicare enrollees during
that period. Since the passage of BBA, the contracts have been extended and
currently, the Secretary can not extend or renew a reasonable cost reimbursement
contract for any period beyond December 31, 2004. As of March 2003, there were
over 334,000 Medicare enrollees in cost contract plans.
Solicitation for Proposals for Medicare Preferred Provider Organization (PPO)
Demonstrations in the Medicare+Choice program [CMS-4042-N].
Information on FFS expenditures per county can be found at
[http://www.cms.hhs.gov/healthplans/research/ppodemo.asp], last accessed Mar. 31, 2003.
A Health Care Prepayment Plan (HCPP) is another type of managed care
arrangement created prior to the BBA. HCPPs cover only Part B services of
Medicare. HCPPs are a specific type of cost-based plan which is either 1) sponsored
by a union or an employer, or 2) does not provide, or arrange for the provision of any
inpatient hospital services. HCPPs are responsible for the organization, financing
and delivery of covered Part B services on a prepayment basis.37 In March 2003, 15
HCPPs provided Part B services to 101,728 enrollees.
Program of All-Inclusive Care for the Elderly (PACE)
The Program of All-Inclusive Care for the Elderly (PACE) was created as a
demonstration project in Omnibus Budget Reconciliation Act (OBRA) 86. The
Secretary was required to grant waivers of certain Medicare and Medicaid
requirements to community-based organizations to provide health and long-term care
services on a capitated basis to frail elderly persons at risk of being institutionalized.
BBA made PACE a permanent part of Medicare and a state option for the Medicaid
The PACE model was developed to address the needs of long-term care clients,
providers, and payers. PACE providers receive monthly Medicare and Medicaid
capitation payments for each eligible enrollee. The Medicare portion of the provider
payment is based on the M+C capitation rate with a frailty adjuster. PACE providers
assume full financial risk for participants care, without limits on amount, duration,
or scope of services. As of March 2003, there were about 2,000 Medicare enrollees
in PACE plans.
Social Health Maintenance Organizations Demonstration
The Deficit Reduction Act of 1984 established a 3-year Social Health
Maintenance Organizations (SHMO) demonstration to provide prepaid, capitated
payments for integrated health and long-term care services. Payments are based on
adjustments to the M+C capitation rate. The demonstration has been extended
Medical Savings Account (MSA) Demonstration
The Balanced Budget Act authorized a demonstration to test the feasibility of
medical savings accounts for the Medicare program. The M+C option combined a
health insurance plan with a large deductible and an M+C MSA. Contributions to
an M+C MSA would be made annually from the enrollee’s capitation rate after the
plan’s insurance premium had been paid. These contributions, as well as account
earnings would be exempt from taxes. Withdrawals used to pay unreimbursed
enrollee medical expenses (that are deductible under the Internal Revenue Code)
would not be taxed. New enrollments would be allowed after 2002 or after the
number of enrollees reached 390,000. However, no private plans established an
M+C MSA for Medicare beneficiaries before the deadline.
42 C.F.R. 417.800
Medicare Competitive Pricing Demonstration
Under its demonstration authority, CMS attempted to initiate a project to
determine if negotiated rates could increase the efficiency and economy of providing
Medicare services through coordinated care plans. CMS’s initial plan called for the
application of competitive bidding as a method for establishing payments for risk
contract HMOs in either the Baltimore or the Denver area. Through a combination
of court and legislative decisions, these demonstrations have been terminated.
The Balanced Budget Act of 1997 required the Secretary of HHS to establish
a demonstration project under which payments to M+C organizations in certain areas
are determined in accordance with a competitive pricing methodology.
The Secretary was required to designate, in accordance with recommendations
of the newly created Competitive Pricing Advisory Committee (CPAC), up to seven
Medicare payment areas in which the project would be conducted. The Secretary
was to (in accordance with recommendations of the CPAC), establish the benefit
design among plans, structure the method for selecting plans, establish methods for
setting the price to be paid to plans, and provide for the collection and dissemination
of plan information. The first two sites chosen were Phoenix, Arizona, and Kansas
City, Kansas/Kansas City, Missouri.
However, both the BBRA and the Consolidated Appropriations Act of 2000
altered the terms of this demonstration. The Appropriation Act disallowed any
funding of the demonstration for 2000 in Arizona and parts of Kansas and Missouri.
The BBRA delayed implementation of the project until January 1, 2002 or, if later,
6 months after CPAC submits reports on: 1) incorporating original fee-for-service
Medicare into the demonstration; 2) quality activities required by participating plans;
3) the viability of expanding the demonstration project to a rural site, and 4) the
nature of the benefit structure required from plans that participate in the
demonstration. The Secretary is also required (subject to CPAC recommendations)
to allow plans that make bids below the established government contribution rate to
offer beneficiaries Part B premiums rebates.
CPAC submitted its report to Congress on January 2001. In its report, CPAC
highlighted several lessons learned from the competitive bidding demonstrations.
Though the demonstrations were never implemented, CPAC noted that the
preliminary stages were completed expeditiously and without administrative
difficulties. The latest round of demonstrations showed how benefits could be
standardized under competitive bidding, particularly a prescription drug benefit.
Area Advisory Committees (AAC) for each area helped to develop a standardized
benefit which reflected local market characteristics and the views of the various
stakeholders. However, according to CPAC, the proposed demonstration project
underestimated the importance of educating and communicating with health plans,
health care providers and other stakeholders. Further, because the demonstrations
were never implemented, they did not provide information about whether competitive
bidding would result in more efficient Medicare+Choice payments.38
For more information about Competitive Bidding, please see CRS Report RL31434
Medicare+Choice: Using Competitive Bidding to Determine Payments, by Christopher J.
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