Securing
Future:
W h a t a r e t h e i s s u e s ?
RESTRUCTURING MEDICARE FOR THE LONG TERM PROJECT
I n t e r i m
R e p o r t
Medicare’s
M a r c h 1 9 9 7
The National Academy of Social Insurance is a nonprofit, nonpartisan organization madeup of the nation’s leading experts on social insurance. Its mission is to conduct researchand enhance public understanding of social insurance, develop new leaders, and provide
a nonpartisan forum for exchange of ideas on important issues in the field of social insurance.Social insurance, both in the United States and abroad, encompasses broad-based systems forinsuring workers and their families against economic insecurity caused by loss of income fromwork and protecting individuals against the cost of personal health care services. The Academy’sresearch covers social insurance systems, such as Social Security, unemployment insurance, work-ers’ compensation, Medicare, and related social assistance and private employee benefits.
The Academy convenes steering committees and study panels that are charged with conductingresearch, issuing findings and, in some cases, reaching recommendations based on their analyses.Members of these groups are selected for their recognized expertise and with due considerationfor the balance of disciplines and perspectives appropriate to the project.
The views expressed in this report do not represent an official position of the National Academyof Social Insurance, which does not take positions on policy issues, or its funders. The report isthe responsibility of the Steering Committee and, in accordance with procedures of theAcademy, its has been reviewed by a committee of the Board for completeness, accuracy, clarity,and objectivity.
The project received financial support from The Robert Wood Johnson Foundation, the PewCharitable Trusts, the Henry J. Kaiser Family Foundation, Kaiser Permanente, and TheCommonwealth Fund.
© National Academy of Social Insurance1776 Massachusetts Avenue, NW, Suite 615Washington, DC 1997
Securing
Future:
W h a t a r e t h e i s s u e s ?
Medicare’s
M a r c h 1 9 9 7
FOREWORDThe pending insolvency of the Hospital Insurance Trust Fund, pressure to control federalspending (particularly health care spending), and the aging of the Baby Boom generation willrequire that policymakers consider seriously and in a systematic fashion alternative approaches torestructuring the Medicare program.
The National Academy of Social Insurance has mounted a project, Restructuring Medicare forthe Long Term, which is designed to produce objective and timely analyses of some of the mostimportant questions facing those who will be charged with restructuring Medicare. For this pur-pose, the Academy has assembled a diverse Steering Committee and study panels of expertsfrom fields including economics, finance, law and public policy, medicine, gerontology, publichealth, and sociology. The comprehensive study agenda of the project will be carried out over athree-year period. Each of the four study panels is addressing an interrelated set of technical andpolicy questions including issues related to capitation, fee-for-service Medicare, the program’slarger social role, and Medicare’s financing. Each panel will produce its own report, drawingpolicy-relevant conclusions based on analysis of available evidence. In addition to coordinatingthe work of the study panels, the Steering Committee will synthesize the results across the pro-ject in its own reports and help disseminate findings.
As described in this Interim Report of the Steering Committee, Medicare’s most significantlong-term challenges include assuring the program’s long-term fiscal health, its ability to protectbeneficiaries adequately against the costs of needed health care, and the provision of such socialgoods as the training of medical professionals and the maintenance of health facilities for unin-sured and underserved populations.
This report also outlines the project’s framework for addressing the key research and policyquestions these challenges pose for policymakers and describes work already underway as part ofthe project. An appendix provides a brief overview of salient Medicare program characteristicsthat provide context for our study panels. The intent is to raise questions and to introduce issuesthat can, even before the project’s work is done, inform discussions among policymakers,including members of Congress, their staff, and executive branch officials, as well as researchers,policy analysts, and anyone else interested in the future of Medicare.
The National Academy of Social Insurance would like to acknowledge the Robert WoodJohnson Foundation, the Pew Charitable Trusts, the Henry J. Kaiser Family Foundation, KaiserPermanente, and The Commonwealth Fund who have provided generous financial support forthis project. In addition, the substantial time and effort given by members of the SteeringCommittee and Study Panels have been essential in making the project possible. Ampersand,Incorporated provided graphic design for this report, and Regina Tosca copy edited the final text.
Robert D. ReischauerChair, Medicare Steering Committee
Senior Fellow, The Brookings Institution
David Blumenthal, DirectorHealth Policy Research and Developmental UnitMassachusetts General HospitalBoston, MA
Stuart Butler, Vice PresidentThe Heritage FoundationWashington, DC
Patricia Danzon, Celia Moh ProfessorThe Wharton School of BusinessUniversity of PennsylvaniaPhiladelphia, PA
James Firman, President and CEONational Council on the AgingWashington, DC
Paul Ginsburg, PresidentCenter for Studying Health System ChangeWashington, DC
Willis Gradison, PresidentHealth Insurance Association of AmericaWashington, DC
Merwyn Greenlick, Professor and ChairDepartment of Public Health and
Preventive MedicineOregon Health Sciences UniversityPortland, OR
William Hsiao, Professor of Economics and Health Policy
School of Public HealthHarvard UniversityCambridge, MA
John Iglehart, EditorHealth Affairs QuarterlyPotomac, MD
Charles Kahn, Staff DirectorWays and Means Health SubcommitteeU.S. House of RepresentativesWashington, DC
Judith Lave, Professor of Health EconomicsGraduate School of Public HealthUniversity of PittsburghPittsburgh, PA
Lawrence Lewin*, Chairman and CEOThe Lewin GroupFairfax, VA
James Mongan, PresidentMassachusetts General HospitalBoston, MA
Marilyn Moon, Senior FellowThe Urban InstituteWashington, DC
Joseph Newhouse, John D. MacArthur Professor of Health Policy and Management
Harvard UniversityBoston, MA
Martha Phillips, Executive DirectorThe Concord CoalitionWashington, DC
Janet Shikles, Director of Public Policy and Government Relations
Powers, Pyles, Sutter, and VervilleWashington, DC
Rosemary Stevens, Professor of History and Sociology of Science
University of PennsylvaniaPhiladelphia, PA
Gail Wilensky, Senior FellowProject HopeBethesda, MD
T. Franklin Williams, Professor of Medicine,Emeritus
School of Medicine and DentistryUniversity of RochesterRochester, NY
National Academy of Social Insurance Medicare Steering Committee
Robert Reischauer, Chair Senior Fellow, The Brookings Institution
Washington, DC
* Through February 1997
Michael Gluck, Project Director
Jill Bernstein, Senior Research Associate
Craig Caplan, Health Policy Analyst*
Lisa Layman, Health Policy Analyst **
Dwayne Smith, Project Specialist
Andrew Zebrak, Research Assistant
* Through February 1997** Through October 1996
Project Staff
Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
Medicare’s Larger Social Role: What Are The Issues? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare’s Long-Term Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Challenge of Long-Term Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Is Medicare Adequately Protecting Against Out-of-Pocket Health Care Expenses? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Challenges Posed by Medicare’s Subsidization of Other Social Goods . . . . . . 7
The Academy’s Medicare Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Study Panel I: Building an Infrastructure for Medicare Capitation . . . . . . . . . . . 9
Structuring Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Risk Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Carve Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Consumer Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Study Panel II: Modernizing Fee-for-Service Medicare? . . . . . . . . . . . . . . . . . . . 14
Managing Care in Fee-for-Service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
What is Needed to Modernize Fee-for-Service Medicare? . . . . . . . . . . . . 15
Study Panel III: Medicare’s Larger Social Role . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Study Panel IV: Financing Medicare For the Long Term . . . . . . . . . . . . . . . . . . 17
Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Appendix A—The Academy’s Medicare Study Panels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Appendix B—An Overview of the Medicare Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Appendix C—A Legislative Chronology of Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Appendix D—Abbreviations and Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Medicare, which has successfully providedhealth insurance to people over 64 and topeople with disabilities, remains highly popu-lar after 30 years. In 1997, Congress is con-sidering changes in the program as part of aneffort to balance the federal budget and toavoid insolvency by 2001 in one of the trustfunds that finances Medicare. These changeswill likely leave the basic structure of the pro-gram intact and will not address several sig-nificant long-term challenges to Medicare.What are these long-term challenges?
THE CHALLENGE OF MEDICARE’SLONG-RANGE FINANCING
Without significant restructuring of the pro-gram, Medicare spending is projected to risefrom 2.6 percent of national income (grossdomestic product) in 1996 to 7.8 percent in2035 and 8.8 percent in 2070. This increasewill be the result of two factors:
1. an aging population, and
2. increases in the costs of health careresulting in part from the largelyunconstrained adoption of advancesin medical science (both technology-intensive innovations and care forchronic conditions) and from lack ofconsensus about when and how tocontrol those costs.
As Medicare’s costs increase, revenues intothe program under current policy will notkeep pace. Medicare’s Hospital Insurance(HI) Trust Fund receives the vast majority ofits income from payroll taxes on employersand workers. As the Baby Boom retires, the
number of workers per Medicare beneficiarywill drop sharply. Medicare’s SupplementaryMedical Insurance (SMI) Trust Fund thatpays for physicians and outpatient servicesreceives 75 of its funds from general tax revenues.
The federal government may slow thegrowth in Medicare costs by continuing toreduce how much it pays physicians, hospi-tals, and other providers. But at some point,such cuts may affect beneficiaries’ quality ofcare. Relying on health maintenance organi-zations (HMOs) and similar health plans toslow cost increases is unlikely to produceneeded savings. On average, Medicare cur-rently pays HMOs more than it would underthe traditional fee-for-service program. If thegovernment were to substantially reduce itspayments to HMOs and leave fee-for-serviceMedicare unchanged, plans might be willingto invest less to serve the Medicare market,making these plans potentially less attractiveto beneficiaries.1
PROTECTING AGAINST OUT-OF-POCKET HEALTH CARE EXPENSES
An original goal of Medicare was to financemedical care for people aged 65 and older.Medicare’s architects designed the programto resemble the most common private healthinsurance available to working Americans in1965. Its package of benefits focused onacute care provided in hospitals and physi-cians’ offices with no coverage of prescriptiondrugs or long term care.
1 This is not to deny emerging evidence of exemplary health plans that may provide appropriate, quality services(particularly for chronic care) that beneficiaries find attractive while containing costs. Such examples offerresearchers the opportunity for further study and potential replication.
EXECUTIVE SUMMARY
Health care needs and medical practice havechanged significantly since then:
1. the population has aged and will con-tinue to do so,
2. beneficiaries with chronic and long-term care needs represent a largerportion of the Medicare populationthan they did at the program’s incep-tion, and
3. health care given to Medicare benefi-ciaries reflects the changes and newmedical technology, including com-plex and costly long-term care tomanage disability, new screeningtechnologies, and sophisticated phar-maceutical regimens.
The net effect is that Medicare now pays fora lesser share of its beneficiaries’ total healthcare costs than it did at its inception, and, onaverage, beneficiaries devote a larger share oftheir income to out-of-pocket health careexpenses than they did at the program’sinception. Further, policymakers may wish toconsider whether the program’s benefitsshould be restructured to pay for a moreeffective package of health care services thatmaintain health, rather than just treat illness.
MEDICARE’S SUBSIDIZATION OFOTHER SOCIAL GOODS
Medicare subsidizes other policy objectives,including the training of new medical person-nel and the support of health care facilitiesthat treat large numbers of individuals with-out health insurance. These institutions,which the government has deemed to per-form valuable functions, often face higherthan average costs. Payments to hospitals forthe costs of medical education and the addi-tional payments to hospitals treating dispro-portionate numbers of low income patients
totaled almost $11 billion in 1996, about 16percent of total payments to hospitals.
Traditionally, “disproportionate share” andteaching hospitals have depended on privateinsurance, in addition to Medicare, for sup-port. However, HMOs and other types ofmanaged care’s selective use of these highercost institutions reduces revenues to dispro-portionate share and teaching hospitals.HMOs bear a smaller share of the costs oftreating the uninsured, leaving Medicare tobear a greater share of the responsibility fortheir costs.
The expansion of managed care increases theurgency of long-range questions about if andhow Americans want to subsidize medicaleducation and the availability of facilities totreat low-income patients.
THE ACADEMY’S MEDICARE PROJECT
The Academy’s project, RestructuringMedicare for the Long Term, convened thisSteering Committee to address these long-range challenges through timely, balancedanalysis. The Steering Committee is bringingtogether four expert Study Panels to examineboth philosophical and technical aspects ofMedicare’s future. Once the four StudyPanels have released their final reports, theSteering Committee will synthesize their con-clusions and disseminate the result to policy-makers.
STUDY PANEL I: BUILDING ANINFRASTRUCTURE FOR MEDICARECAPITATION
Private health insurance has moved from alargely fee-for-service system to one charac-terized by competitive purchasing of health
insurance in an effort to slow cost increasesand to improve quality. Recent proposalsincorporate some of these same ideas intoMedicare. The principles underlying theseproposals include (1) capitation in whichpurchasers (often employers) pay a fixedamount each year to a health plan to coverneeded services, (2) choice for enrolleesamong multiple health plans to foster compe-tition and encourage cost-savings, and (3)arrangements in which the governmentshares the financial risk of enrollees’ healthcare with the health plan, and potentiallywith providers and enrollees, to limit thegovernment’s costs.
This Academy Study Panel is examining sev-eral of the most important issues inherent inestablishing the infrastructure for such a sys-tem. These include:
■ the decisions government faces in estab-lishing a system with greater capitationand beneficiary choice of health plans;
■ issues in the implementation of “riskadjustment;”
■ the potential for Medicare of “carve-outs” for specific services or populations;
■ how to protect consumers from the risksassociated with such a system.
The Panel will release its final report andfindings in 1997.
STUDY PANEL II: MODERNIZINGFEE-FOR-SERVICE MEDICARE
Despite the rapid growth of Medicare’s capi-tated health maintenance organization(HMO) program, about 86 percent of bene-ficiaries still receive care through the tradi-tional fee-for-service program. Even if thecapitated program were to continue to grow,there would likely be a role for fee-for-service
well into the future. Some beneficiaries maynot find a capitated health plan in their areathat is able to meet their particular healthneeds adequately. Such beneficiaries mayinclude those with chronic ailments or dis-abilities. With fee-for-service likely to remaina major part of Medicare, assuring quality ofcare and efficient management of utilization,costs and administration will remain priori-ties.
This Study Panel’s work has three foci: (1)the applicability of tools for managing care inprivate fee-for-service insurance for Medicare,(2) how these tools might conflict with otherpublic policies including sunshine laws, dueprocess, procurement and personnel policies,and the need to maintain accountability tothe American people, and (3) potentialchanges in Medicare’s administrative struc-ture and authority to incorporate those toolsthat hold promise. The Panel will release itsfinal report and findings in 1997.
STUDY PANEL III: MEDICARE’SLARGER SOCIAL ROLE
A third Panel, convened in January 1997, isexploring the roles Medicare plays inAmerican society. It is focusing on the under-lying philosophical principles and rationalesfor the program and how it interacts withother publicly supported health care pro-grams. Among the topics on its agenda:
■ do Medicare’s original social insuranceprinciples still make sense after 30 years?;
■ potential conflicts between the goals ofprotecting beneficiaries and the need tokeep Medicare fiscally stable;
■ the appropriateness of the benefit pack-age, including Medicare’s ability to findthe most appropriate models of providing
quality care for chronically and terminallyill persons;
■ Medicare’s role in supporting medicaleducation and health facilities servinguninsured individuals.
The Panel will release its final report andfindings in 1998.
STUDY PANEL IV: ISSUES IN MEDICARE FINANCING
The Academy will convene a fourth MedicareStudy Panel later in 1997 to explore issuessurrounding financing in the next centuryincluding:
■ What options exist for increasing rev-enues to the program (from either bene-ficiaries or workers), and what are theirimplications?
■ What options exist for changing benefi-ciaries’ financial liability, and what aretheir implications?
■ What are the implications of limiting pay-ments to providers over the long run?
■ How might eliminating the distinctionbetween Part A and Part B benefits affectthe program’s financing?
The Panel will examine these questionsagainst the backdrop of issues under consid-eration by the Study Panel on Medicare’sLarger Social Role, including the financingimplications of alternative benefits packagesand innovative models of care delivery. Thetwo Study Panels may engage in joint analy-ses of these issues. The Panel will convene in1997 and release its final report in 1998.
NEXT STEPS
During the first half of 1998, the Academy’sMedicare Steering Committee will reflect onboth the findings of the four Study Panels
and any enacted legislation or other publicpolicy developments to produce one or morefinal reports of its own. In preparing thesedocuments, the Steering Committee will syn-thesize the work of the Panels and draw outcommon themes to foster greater evidence-based, open-minded discussion and policy-making to solve Medicare’s long-termchallenges.
INTRODUCTION
After 30 years, Medicare remains highly pop-ular with the American people. They judgethis social insurance program, which providesprimary health insurance to people 65 andover and certain people with disabilities, tobe a success (36). During 1997, Congresswill likely consider reductions in Medicarespending as part of its plans to balance thefederal budget by 2002. In 1996, Medicareexpenditures constituted 12 percent of thebudget, a figure that has more than doubledsince 1975. The amount by which Medicareexpenditures exceeded premiums from ben-eficiaries and other program revenues in1996 represented about half of the total fed-eral deficit in that year (48). Medicare spend-ing cuts that may be included in deficitreduction actions will likely delay the date ofinsolvency of the Hospital Insurance (Part A)Medicare trust fund. This trust fund reim-burses hospitals, hospices, skilled nursingfacilities, and home health care agencies. Themost recent estimates by the fund’s trusteesshow that, without action, it will exhaust itsreserves and lack sufficient funds to pay forbeneficiaries’ health care by 2001.
The Clinton Administration’s January 1997proposals to address these problems wouldleave the basic structure of Medicare largelyunchanged. The bulk of savings would bedrawn by cutting reimbursements toproviders and health maintenance organiza-tions (HMOs) that serve Medicare beneficia-ries. In the 1996 election campaign,President Clinton suggested that Congresscreate a bipartisan commission in 1997 to
recommend more substantial reforms. Itappears unlikely that the Administration orthe Congress are now ready to adopt changesthat address long-term, fundamental issues inMedicare.
Thus, even if legislation enacted this yearbrings the federal budget into balance andextends the life of the Hospital Insurance(HI) Trust Fund, Medicare will still facelong-term challenges. What are they?
MEDICARE’S LONG TERMCHALLENGES
Over the next several decades, Americans willneed to address long-range challenges facingMedicare including: (1) how to pay equi-tably for health care for an aging population;(2) whether Medicare is adequately andappropriately protecting families against thecost of health care; and (3) what roleMedicare should have in subsidizing thetraining of new medical professionals and insubsidizing certain types of hospitals andother health care institutions.
THE CHALLENGE OF LONG-RANGEFINANCING
Medicare’s costs over the next severaldecades are projected to grow more rapidlythan the economy. In their 1996 reportgauging Medicare’s short- and long-termfinancing, the Trustees of the Social Securityand Medicare Trust Funds projected thatwith no changes, total Medicare spendingwill rise from 2.6 percent of Gross DomesticProduct (GDP) in 1996 to 7.8 percent in
MEDICARE’S LARGER SOCIAL ROLE: WHAT ARE THE ISSUES?
2035 and 8.8 percent in 2070 (6).1 One ofthe major causes of this expected increase isthe growth in the number of beneficiaries.While Medicare beneficiaries represented 14percent of the population in 1995, they areprojected to grow to 22 percent by 2030(56).
The other major factor that will driveMedicare’s costs is the increase in the pro-gram’s cost per beneficiary. This issue is notunique to Medicare, but rather, emblematicof rising health care costs overall. The privatesector and other government programs,including Medicaid, are all attempting torestrain the growth of health care costs.
Experts usually identify advances in medicalscience (both technology-intensive innova-tions and care for chronic conditions) as wellas when and how these services are providedas significant factors in explaining why percapita medical costs have grown faster thanper capita income over the last three decades(56, 46). Cost-increasing innovation is pro-jected to continue over the long term. Usingdata from the 1996 Trustees report and theSocial Security Administration’s (SSA) actuar-ies, the Congressional Budget Office (CBO)projects that per capita Medicare costs willcontinue to grow at an average of 8 percentper year through 2010 but slow to 5.4 per-cent per year thereafter (56).
Under current policy, revenues flowing intothe Medicare’s HI Trust Fund will not keeppace with its increasing disbursements, even-tually making the fund insolvent even if
spending reductions enacted in 1997 delaythe date of insolvency. The HI Trust Fundreceives most of its funds from a tax of 1.45percent of earnings that is paid by workersand matched by their employers for a totaltax of 2.9 percent of payroll.2 As the BabyBoom retires, the number of workers perMedicare beneficiary is projected to dropfrom 3.9 in 1995 to 2.2 in 2030 and to 2.0in 2060, thus reducing revenues per benefi-ciary (6). Figure 1 shows the Trustees’ bestestimate of the growing gap between costsand revenues in the HI Trust Fund,expressed as a percentage of taxable payroll.
While the Supplemental Medical Insurance(SMI) Trust Fund that pays for physician ser-vices and outpatient medical procedures can-not become insolvent, it is projected torepresent a growing share of the federal bud-get. The SMI Trust Fund now receives 75percent of its monies from general tax rev-enues and 25 percent from monthly premi-ums deducted from beneficiaries’ SocialSecurity checks.3 Under current law, increas-es in the SMI premium after 1998 will belimited to increases in the cost of living asmeasured by the Consumer Price Index.Consequently, assuming that Congress doesnot change this provision, the general fundwill pay a larger percentage of total SMI costsafter 1998. Figure 2 shows the Trustees’ bestestimate of how the SMI Trust Fund’sfinancing needs will grow over the next sev-eral decades.
Although Congress might attempt to slowprojected cost increases by continuing to cut
1 See Appendix B for a summary of the structure and role of the Medicare trust funds and projections of theirfinancial status.
2 A small percentage of beneficiaries who do not qualify for HI benefits through their work history opt to pay apremium for coverage; these premiums go into the HI Trust Fund. In addition, some revenue from taxation ofSocial Security benefits is earmarked for the HI Trust Fund.
3 Currently, the premium is set to equal 25 percent of the average Medicare spending for each elderly beneficiary.
reimbursements to hospitals, physicians, andother health care providers in future years,such a strategy may have limits. At somepoint, additional reductions in provider pay-ments would adversely affect beneficiaries’access to and quality of care. As reimburse-ments fall, doctors and hospitals may be lesswilling to treat Medicare patients, or thequality of care that would be provided maynot keep pace with that available to the restof the population.
Another strategy proposed for containingcosts, enrolling greater numbers of Medicarebeneficiaries in HMOs, will not save moneywithout substantial restructuring of the pro-gram. Some studies suggest that under thecurrent method of paying HMOs that serveMedicare beneficiaries through “risk con-tracts,” Medicare may spend, on average,between 5 and 8 percent more than it wouldunder the traditional fee-for-service compo-nent of Medicare for those enrolled inHMOs (49, 69).4
If Congress were to substantially cut pay-ments to HMOs (while continuing to tiesuch payments to fee-for-service reimburse-ments), HMOs might invest less to serve theMedicare market, making them potentiallyless attractive to beneficiaries. Currently,almost all Medicare HMOs provide benefitsnot included in the traditional Medicare ben-efit package such as preventive services andoutpatient prescription drug coverage. In1995, 51 percent of Medicare HMOscharged beneficiaries no premiums for these
extra benefits, and another 25 percentcharged a lower premium than enrolleeswould have paid for private insurance thatsupplements Medicare (64). Cuts in pay-ments to HMOs may reduce health plans’willingness to provide such benefits, leadingfewer Medicare beneficiaries to enroll inHMOs. Furthermore, while the experienceof HMOs for the privately insured in certainareas of the country appears to have beensuccessful in helping to bring down healthcare costs, they can require a significantinvestment in administrative capacity andconcerns about quality of care continue to beraised (74).5
IS MEDICARE ADEQUATELYPROTECTING AGAINST OUT-OF-POCKET HEALTH CARE EXPENSES?
Medicare beneficiaries pay more for theirhealth care than they did 30 years ago. Largecuts in payments to providers could furtherundermine program objectives of protectingbeneficiaries and their families against thecosts of health care and assuring the deliveryof appropriate benefits.
In 1965, the benefit package that Congressadopted for Medicare was adequate for thetimes. The program’s architects modeled itto resemble the most common private healthinsurance provided by employers to workingAmericans (40, 3). This package focused onacute care — diagnostic and therapeutic ser-vices provided in hospitals and physicians’offices. Neither Medicare nor the typical pri-
4 Looking beyond these averages, actual payments to HMOs by the federal government for each Medicareenrollee vary across the country according to the current payment formula. Appendix B summarizes currentopportunities for Medicare beneficiaries to enroll in HMOs and similar plans as well as the formula used todetermine Medicare’s payments to these health plans.
5 This is not to deny emerging evidence of exemplary health plans that may provide appropriate, quality servicesthat beneficiaries find attractive (particularly for chronic care) while containing costs. Such examples offerresearchers the opportunity for further study and potential replication.
FIGURE 1MEDICARE’S HOSPITAL INSURANCE (HI) TRUST FUND: LONG-TERM INCOMEAND COSTS
0
2
4
6
8
1 0
1 2
19
96
20
00
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
20
55
20
60
20
65
20
70
y
Cost ratefiIncome rate◊
Notes:1 The ratio of Medicare expenditures to taxable payroll.2 The ratio of Medicare tax income to taxable payroll.3 Taxable payroll is the earnings in covered employment that are taxable under Medicare. This measure is used to
allow comparisons between different time periods along a common standard since the value of the dollar changesover time.
Source: 1996 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund.
YEAR
RA
TE A
S A
PER
CEN
TAG
E O
F TA
XA
BLE
PA
YR
OLL
3 Cost Rate1
Income Rate2
vate insurance package provided coverageagainst catastrophic medical expense, pre-scription drugs, or other services likely to beused by individuals with chronic conditions.These benefit packages also reflected the pre-dominant way in which physicians practicedmedicine in the mid-1960s, with an emphasison curative care provided in hospitals and byphysicians in solo and small group practices(52, 23).
Health care needs and medical practice havechanged significantly since the mid-1960s:
■ The population has aged. The growthin the proportion of the population overage 65 has resulted from increases in lifeexpectancy and decreases in fertility.Expected years of life remaining at age 65rose from 12.9 years for men and 16.3years for women in 1965 to 15.4 and19.2 years respectively in 1992 (64). Atthe same time, fertility rates (measured asthe number of live births per 1000women age 15-49) fell from 118.0 in1960 to 70.9 in 1990 (58). The primaryfactor lying behind the aging of the pop-ulation in the first half of the next
FIGURE 2MEDICARE’S SUPPLEMENTARY MEDICAL INSURANCE (SMI) TRUST FUND:LONG-TERM EXPENDITURES AS A PERCENTAGE OF GDP1
Notes:1 SMI Expenditures are displayed as a percentage of Gross Domestic Product, a measure of all the goods and ser-
vices produced in the United States, to indicate the increasing burden to the economy of SMI benefits. SMIcosts are not expressed as a percentage of taxable payroll because general revenues and beneficiary premiumsfinance the program, not taxable payroll.The dip in the curve after 2035 reflects projections of smaller increases in per capita health care costs in lateryears; SMI expenditures as a percentage of GDP rise again after 2050 reflecting the impact of demographic pro-jections.
Source: 1996 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund.
00.5
11.5
22.5
33.5
4
19
95
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
SMI Expenditures aGDP
YEAR
% O
F G
DP
SMI Expenditures as a % of GDP
century will be the large number of BabyBoomers, who will begin to turn 65around 2010. The percentage of the pop-ulation over age 65 was 9.5 percent in1960, but is expected to climb to 13 per-cent in 2000 and 21 percent in the year2040. The portion of the population overage 84, which was 1 percent in 1980, isprojected to grow to 4 percent by 2040(30).
■ Medicare beneficiaries have morechronic conditions and long-term careneeds than they did at the program’sinception. Because the oldest of the old(the fastest growing part of the Medicarepopulation) are more likely than others to
have chronic illnesses or disabilities (41),the proportion of beneficiaries withchronic and long-term care needs in theMedicare population has increased. Thedevelopment of medical technologywhich has brought about the increase inlife expectancy also turned conditions likeheart disease that were often quickly fatalinto manageable chronic ailments thatbeneficiaries live with for many years, butthat require ongoing monitoring andtreatment.
■ Health care services received byMedicare beneficiaries reflect thesechanges and the availability of newmedical technology. Medicare beneficia-
6 Appendix B describes Medicare’s benefits in greater detail.7 Among beneficiaries over age 64, 31 percent had employer sponsored policies, 32 percent had individual
Medigap policies, 8 percent had both employer and individual policies, 7 percent were enrolled in an HMO, 13percent had Medicaid coverage, and 9 percent had no coverage to supplement Medicare. Among disabled bene-ficiaries under age 65, 8 percent had employer-sponsored policies, 20 percent had individual Medigap policies, 2percent had both employer and individual policies, 3 percent were enrolled in an HMO, 41 percent hadMedicaid coverage, and 26 percent had no coverage to supplement Medicare (64).
ries are more likely than in the past torequire and receive long-term careincluding assistive services to manage dis-abilities. Advances in medical science haveled to a better understanding of the needfor and benefit of detecting and treatingmany chronic illnesses like hypertensionand high cholesterol. These conditionscan be treated effectively by pharmaceuti-cals in ways they could not in 1965.Hence, Medicare beneficiaries are morelikely to use such prescription drugs thanthey were when the program began.Other innovations in technologies andservices mean that health care can offerMedicare beneficiaries more diagnosticand therapeutic services than it could 30years ago.
While the health care needs of Medicare ben-eficiaries have become more chronic, thebenefit package has remained largely acute inits focus.6 When Congress has added limit-ed preventive chronic care benefits toMedicare, it has done so in a piecemeal andunsystematic manner — coverage of certainscreening tests and immunizations, coverageof certain drugs (e.g., for beneficiaries whohave had organ transplants), coverage for aparticular health condition (i.e., end-stagerenal disease), and some limited long-termcare (e.g., hospice, respite care). This hasresulted in a complicated and potentiallyuneven set of benefits beyond the program’scoverage of acute services.
The typical private health insurance package,on the other hand, has expanded to include
coverage for many of the interventions medi-cine can now provide. For example, most pri-vate health plans now include some form ofprescription drug coverage (66, 67) and cata-strophic coverage limiting the insuree’s totalout-of-pocket expenditures. Medicare nowpays for less of its beneficiaries’ total healthcare costs than it did at its inception, andbeneficiaries’ out-of-pocket health care costs,as a percentage of their income, have risen(42).
In 1994, Medicare paid for 79 percent oftotal spending on hospital services for olderpersons, 59 percent of spending for physicianservices, and none of the $12 billion spenton outpatient prescription drugs for olderpersons (29). In addition, for services cov-ered by Medicare, the average beneficiary’scost-sharing (the amount not paid byMedicare) increased 56 percent in real dollarsbetween 1977 and 1993 (59, 20).
Medicare beneficiaries have increasingly cometo rely on supplemental insurance to payMedicare deductibles and copayments and tocover some of the services not included inthe Medicare benefit package. In 1993, 89percent of Medicare beneficiaries had such apolicy, including those eligible for Medicaid(64).7 Although some retirees can rely ontheir former employers to pay at least part ofthe premiums for this supplemental insur-ance, their out-of-pocket costs for this insur-ance were still, on average, $728 in 1992.Those who purchase their own supplementalinsurance pay premiums that average $1,014
per year (12). Poor, near poor, and thosewith impoverishing medical expenses mayhave Medicaid coverage to supplementMedicare or to pay their cost-sharing obliga-tions. However, out-of-pocket expenses as apercentage of income rise as income fallsamong Medicare beneficiaries 65 and over.Those with incomes less than the poverty linepay 30 percent of their income, while theaverage for all persons over 65 is 21 percent(42).
As pointed out in the previous section, theMedicare Trustees project that per capitaMedicare costs will grow at 8 percent a yearuntil 2010 and 5.4 percent a year thereafter.They project that after 2004, inflation willaverage 4 percent per year. If Social Security,the main source of income for most benefi-ciaries, is held to the rate of inflation whilethe cost of supplemental insurance continuesto grow at a rate approximating that ofMedicare, then out-of-pocket health carecosts for Medicare beneficiaries will consumeever greater portions of their income in thefuture.8 The potential strain on beneficiaries’income underscores that policymakers willhave to take action over the long term toavert these projected trends.
Beyond the question of whether Medicare isadequately protecting families against thecost of health care, some have suggested thatthe program should be reoriented so that itpays for not only treating illness, but also formaintaining health by covering services thatprevent illness (19). These include preventiveservices such as more disease screening,counseling in the home to avoid injuriescommon to older persons, or to improve
nutrition, and other non-medical supportservices to assist those limited in their dailyactivities or to help keep beneficiaries fromneeding acute care (4). Recent analyses havealso noted the lack of sufficient knowledgeabout the health needs of older people andthe outcomes of health care provided tothem. In recommending that researchers sys-tematically address these issues, these recentreports stress the value of outcomes data indesigning a clinically appropriate Medicareprogram and in assuring quality of care (44,32).
The changes that Congress and the Presidentmight adopt this year are not likely toaddress either the appropriateness ofMedicare’s benefit package in a systematicway or whether Medicare is adequately pro-tecting beneficiaries and their families againstthe costs of health care. Furthermore, anyexpansion of Medicare coverage to lowerout-of-pocket expenses for beneficiaries, or toadd benefits, would increase Medicare costsand exacerbate the program’s long-term fiscalimbalance. Consequently, in any restructur-ing process, policymakers will be forced tograpple with conflicting objectives.
CHALLENGES POSED BY MEDICARE’SSUBSIDIZATION OF OTHER SOCIALGOODS
Medicare payments to hospitals subsidizeother activities in the health care system thatare deemed desirable. These activities includethe training of new medical personnel andsupporting health care facilities that treathigh proportions of low-income, uninsuredindividuals. Hospitals that take on these
8 If Congress were to cut benefits, Medigap costs for beneficiaries could grow even faster as they begin to coverbenefits no longer part of Medicare.
9 See Appendix B for a description of PPS. 10 See Appendix B for a description of how Medicare determines these payments to HMOs.
responsibilities have higher costs than otherinstitutions.
Medicare subsidizes hospitals that take onthese activities in three ways: disproportion-ate share (DSH) payments, indirect medicaleducation (IME) payments, and direct grad-uate medical education (GME) payments.
Hospitals receiving DSH payments havehigher costs because of their location (oftenin urban areas), the greater health care needsof their patients, and the fact that theirpatients are more likely than patients in otherhospitals to lack insurance or other resourcesto pay for their care (71). Over time, theDSH program has come to be viewed as amechanism to preserve access to care for low-income populations (70). Many DSH hospi-tals are also teaching hospitals which arefacing significant financial problems relatedto competition, and to reductions in fundingand subsidies at the state and local levels(70). DSH payments totaled about $4.3 bil-lion or about 5.9 percent of all funds provid-ed under Medicare’s Prospective PaymentSystem (PPS) for hospitals in 1996 (57).9
IME payments compensate hospitals for thehigher indirect costs associated with servicesprovided, case mix, and training new physi-cians and other medical personnel. Such hos-pitals tend to have sicker patients with morecomplicated illnesses, and they tend to pro-vide more expensive services than the averagehospital. The IME payment to each hospitalincreases with the number of residents andinterns per hospital bed, which is a measureof the intensity of the institution’s trainingactivities (71). IME payments also totaled
$4.3 billion in 1996 and represented another5.9 percent of PPS payments.
GME payments to hospitals directly supportphysicians and other medical professionals intraining. The payments depend on six factors:(1) the hospital’s reported training costswhen PPS was first introduced in 1984; (2)an annual update of this figure; (3) the num-ber of interns or residents trained; (4) theirmedical specialties; (5) how far along they arein their training; and (6) Medicare’s share ofall care provided in the hospital. In 1996,GME payments totaled $2 billion for train-ing physicians, with another $300 million fortraining nursing and other health profession-als (71).
Medicare is not the only source of revenue tosupport these activities. Hospitals alsodepend on other public and private insurersexplicitly or implicitly to cross subsidize train-ing and the treatment of low-income patients(22). As HMOs and other types of managedcare more selectively use low-cost hospitals,they divert patients from higher cost institu-tions like teaching hospitals and those with adisproportionate share of low-income indi-viduals. Consequently, revenues to teachingand disproportionate share hospitals declineand Medicare bears a greater share of theresponsibility for their costs (17, 22).
In addition, the growth of HMO enrollmentwithin Medicare further erodes funds avail-able for training and disproportionate shareinstitutions. The formula for determininghow much Medicare pays HMO enrolleesimplicitly includes DSH, IME, and GMEpayments.10 But, the Medicare HMOs arenot necessarily using teaching and dispropor-
tionate share hospitals, and even if they are,they are not necessarily passing on the pay-ments to these facilities (70, 33).
Throughout its history, Medicare has been aconvenient and effective mechanism to helpfund graduate medical education and assurethe availability of hospitals for vulnerablepopulations. Rapid changes in the health caresystem are shifting a greater burden to fee-for-service Medicare to accomplish theseobjectives. These changes pose significantquestions for the future:
■ what kind of health care work force andfacilities will we need in the next century?;
■ what should be the roles of the federalgovernment and the private market inhelping to assure their availability?; and
■ is Medicare the federal government’s besttool for doing so, and if not, how elsemight the federal government fulfill therole it deems appropriate in securingthese public goods?
THE ACADEMY’S MEDICARE PROJECT
The Academy’s project, RestructuringMedicare for the Long Term, convened aSteering Committee to address these long-range challenges. The Steering Committee isbringing together four expert Study Panels toaddress specific aspects of Medicare’s long-term future. These include both the broad,philosophical underpinnings of this socialinsurance program and more narrowlyfocused technical questions. The first twoStudy Panels are examining technical ques-tions that need to be sorted out if Medicarewere to:
■ place greater reliance on “capitated”health plans which beneficiaries wouldhave to choose among; and/or
■ modernize the traditional fee-for-servicecomponent of Medicare to incorporatesome of the management tools beingdeployed in private health insurance (69,1, 41, 9).
The third Study Panel is analyzing the socialroles Medicare has played over the last 30years and the policy implications of alterna-tive philosophical bases for Medicare for thenext several decades. The fourth Study Panel,which will begin in 1997, will examine issuessurrounding long-range Medicare financing.
The Study Panels will begin to release theirfindings in 1997. The Steering Committeewill then synthesize conclusions from all fourStudy Panels and disseminate the results topolicymakers. Appendix A lists the membersof the project’s three Study Panels whosework is currently underway.
STUDY PANEL I: BUILDING ANINFRASTRUCTURE FOR MEDICARECAPITATION
Private health insurance has moved from alargely fee-for-service system to one charac-terized by capitated plans in a competitivemarket using a variety of purchasing tech-niques in an attempt to control costs andimprove quality of care (18). Some have pro-posed incorporating these ideas intoMedicare (31, 1, 9, 14). These principal fea-tures of such a Medicare system wouldinclude:
■ capitation, in which a fixed amount ispaid to a health plan for each Medicarebeneficiary enrolled in the plan for allcovered services needed in a specifiedperiod of time (69);
■ a choice among health plans which willoffer enrollees several plans from whichto choose, with the aim of stimulatingcompetition among health plans to pro-mote efficiency in the delivery of care andto slow the growth of health care costs;and
■ risk-sharing arrangements in which thegovernment limits its financial contribu-tion for enrollees’ health care, whichwould make beneficiaries and health careproviders become more financiallyresponsible for their health care decisions(34).
If future Medicare reforms were to incorpo-rate these principles, policymakers wouldneed to develop the infrastructure to makethem work. Study Panel I is examining issuesinherent in establishing that infrastructure:
■ the options for government to equitablyand efficiently structure beneficiaries’greater choice of health plans;
■ implementation and management ofmechanisms to avoid “risk selection” inwhich capitated health plans seek only thehealthiest, least costly patients; and
■ ways to protect beneficiaries against theconsequences of uninformed or unfortu-nate choices of their health plans.
Structuring Choice
There are many ways in which to structure aMedicare program that incorporates greaterchoice among capitated health plans. TheStudy Panel is identifying the decisions poli-cymakers will have to make and the implica-tions of alternative structures.
The questions that policymakers will faceinclude:
■ How might the federal government’sand beneficiaries’ contributions to pre-miums be determined? Would the gov-ernment’s contribution to plans be anadministrative price determined by thefederal government through a formula,or would it be determined through sometype of competitive bidding process?Would beneficiaries in a region all facethe same premium or face different pre-miums depending on their choice ofplan? Should plans be able to chargebeneficiaries above the Medicare-paidpremium?
■ What plans might be allowed to par-ticipate? Would all qualified plans beallowed to participate, or only a smallnumber? Which criteria would determinewho could participate?
■ How often would beneficiaries beallowed to change health plans? Howlong would they be locked in to theirchoices? Would beneficiaries have anannual or a monthly open enrollmentperiod in which to choose a plan? Wouldbeneficiaries be locked-in for a month, ora year? A longer lock-in creates a morestable market, but restricts movementbetween plans by beneficiaries.
■ What new administrative infrastruc-ture might be needed to implementand administer the program? WouldMedicare’s administration differ greatlyfrom the current system? What rolewould the Health Care FinancingAdministration (HCFA), states, and otherpublic and private agencies play? Howwould fee-for-service Medicare be admin-istered?
■ What would be the implementationand administrative costs? Would thesystem be expensive, offsetting savings toMedicare?
■ What transitional issues emerge? Whatare the implications of gradual versusrapid implementation?
■ What would be the role of traditionalfee-for-service Medicare under the newsystem? Would it be treated as anotherequal choice or as a residual program?Would there be a role for Medigap andother private supplemental insurance policies?
■ What might be the implications forbeneficiaries’ private supplementalinsurance? What would be the role ofemployers in a new system? What shouldHCFA do if a health plan subsidizes theHMO premium for enrolled retirees?
The Academy has commissioned two back-ground papers by experts with different per-spectives to help address these issues andserve as a starting point for the Study Panel’sown discussions. In answering the abovequestions, the authors of the papers and thePanel will draw on the experiences of publicand private sector models that attempt tomake use of these same principles (e.g.,Buyers Health Care Action Group inMinnesota, Pacific Business Group onHealth, California Public EmployeesRetirement System).
Risk Selection
“Risk selection” and “biased selection”describe a situation in which health plansattract enrollees with disproportionately highor low needs for health care services. Riskselection becomes a problem in Medicare ifthese differences are not accounted for in theformula that determines the plans’ paymentfrom the federal government for eachMedicare enrollee. Risk selection can occurthrough actions by both beneficiaries and
health plans. Healthier beneficiaries may pre-fer HMOs over traditional Medicare, orHMOs may take actions to attract healthier(less costly) beneficiaries. Alternatively, planor market features may affect beneficiaries’preferences. For example, plans affiliated withacademic medical centers specializing in highcost cases may attract a large number of sick-er beneficiaries (21).11
Because of the wide range of costs associatedwith the Medicare population (61), planshave the potential to earn high profits byactively seeking low-cost, healthier beneficia-ries as long as the payment formula rewardsthem for doing so. A plan may design itsbenefits package to attract more low-costbeneficiaries than high-cost ones. For exam-ple, under the current program that allowsMedicare beneficiaries to be part of theMedicare Risk program, an HMO mayadvertise supplemental benefits such as freeexercise classes and other services that tendto attract healthier beneficiaries (1, 35).
Most studies show that the Medicare riskHMOs as a whole have enrolled a higherproportion of low cost beneficiaries than hasfee-for-service (FFS) Medicare. Sicker benefi-ciaries may prefer FFS Medicare, whichallows greater access to specialists and assuresthat beneficiaries can continue to see familiarprimary care physicians. Under current rules,beneficiaries can leave HMOs with 30 daysnotice if they are dissatisfied. Medicare RiskHMOs are paid 95 percent of the adjustedaverage per capita cost (AAPCC) that is paidfor FFS beneficiaries’ in their county (69).But, if beneficiaries enrolled in these HMOshave average costs that are only 85 to 90 per-cent of those for traditional Medicareenrollees, as some estimates indicate (10),
11 Appendix B describes current opportunities for Medicare beneficiaries to join HMOs.
then Medicare loses money by paying HMOs95 percent of the average FFS beneficiary’scosts. The current AAPCC methodology,which uses geography, age, gender, Medicaidstatus, nursing home status, and employmentstatus to adjust payments to HMOs, has notworked well in predicting health costs acrossbeneficiaries. Hence, available research sug-gests that the AAPCC methodology hasgiven some plans the latitude to risk select(72).
Researchers and policymakers are attemptingto develop tools to remedy this risk selectionproblem. These tools include quantitativemodels that predict individuals’ health careexpenses and then adjust capitated paymentsto health plans accordingly. Some modelspredict health care expenses for the comingyear and use that information to “risk adjust”payments to plans (25, 72, 16). Other mod-els adjust payments based partly on servicesactually incurred (i.e., on an “experience rat-ing” basis) and partly on a capitated basis (amethod known as “partial capitation”). Stillother approaches trigger additional paymentsto plans only if an enrollee has certain high-cost diseases or conditions or if a beneficia-ry’s (or group of beneficiaries’) costs exceeda certain threshold (i.e., through “reinsur-ance” or other fixed payments for high costcases).
Any risk adjustment that might be adoptedfor Medicare would require adequate dataand careful administration. To date, very fewof these quantitative models have been usedin a real-life setting. Also, very little attentionhas been given to the practical issues ofimplementing ways to minimize risk selectionand make them both effective and fair. The
Study Panel is focusing on the followingissues:
■ Data requirements. What data wouldMedicare need to collect, and how wouldMedicare get that data?
■ Privacy and confidentiality concernswith the data. Who would have accessto the data, and what potential problemswould be created through the collection?
■ Start-up and transitional issues toinstitute a new system. What infrastruc-ture would need to be in place for thesystem to work? What are the potentialproblems? Should Medicare implementthe change all at once or phase it in grad-ually?
■ Detection of cheating by health plans.Could audits or other checks catch abuseby health plans so that they would not beable to influence the data collectionprocess for financial gains?
■ Administrative duties of HCFA. Whatwould HCFA have to do to assure thatthe system runs smoothly?
■ Costs to plans and HCFA. What wouldbe the types of costs of starting-up andrunning a new system?
Carve-Outs
The Panel is also looking at the potential ofcarve-outs to mitigate risk selection and toachieve other policy goals. A carve-out is aformal arrangement in which a payer forhealth care contracts with another entity tomanage care for patients with a particularcondition or to provide particular types ofcovered services to its members. In exchange,the payer gives a set amount for each patientthus minimizing its financial risk for thesepatients or services. The contractor then hasan incentive to manage care for the patient
efficiently (5). For example, a person withdiabetes in a plan that had carved-out thatcondition would receive treatment throughthe carve-out entity for care associated withdiabetes; under some structures that patientmay receive care not associated with diabetesthrough the carve-out entity as well.Conditions (particularly high cost ones12),procedures, or diseases, not persons, areoften prime candidates for carve-outs. Inaddition, services such as vision, dental, men-tal health, and pharmacy benefits often areprovided through carve-outs.
The Panel is drawing on available evidence toinvestigate the potential benefits and draw-backs of using carve-outs in managed care forMedicare beneficiaries. The Panel will consid-er whether carve-outs could mitigate theproblem of risk selection. By eliminatinghigh-cost diseases or services from the pack-ages of services provided by the beneficiary’sprimary health plan, the health plan wouldhave less incentive to avoid patients whoincur those expenses.
The Panel is looking at carve-outs as a meansto control health care costs and improvequality of care for those with specializedhealth care needs. The Panel is also address-ing the potential adverse impact of carve-outson continuity and coordination of care,which could become fragmented in carve-outarrangements. The Panel is examining theimpact of carve-outs on vulnerable popula-tions as well.
Consumer Protection
Increasing the number of choices of plansand the availability of capitated payments cancreate potential challenges to consumer pro-tection. The Panel’s analysis builds on therecent work of other policy groups and drawson the experiences of states, the MedicareRisk program, Medigap, and large benefitplans such as the California Public EmployeesPersonal Employee Retirement System(CalPERS).
Specifically, the Panel is examining areas ofpotential risks in a Medicare program withgreater capitation and choice. Some of thepotential problem areas to consumers thatthe Panel is analyzing include the following:
■ Marketing practices by plans: problemsrelated to marketing materials and salesagents;
■ Due process protections for beneficia-ries: types of grievance and appeals pro-cedures;
■ Monitoring and oversight of plans:Consumer protection laws only work ifthey are adequately monitored andenforced. Inadequate monitoring andoversight could hurt consumers;
■ Delivery of services and quality ofcare: Unlike in traditional fee-for-servicemedicine, capitation offers incentives forplans to reduce the number of servicessince any expenditures for providing ser-vices decrease net profits (50). However,plans also compete on perceived qualityof services. The exact relationship ofpatient care outcomes and financial risk inHMOs is mostly unknown (13);
12 This is analogous to high-cost case management that has evolved in some FFS systems.
13 In 1995, 75 percent of all workers with health insurance were in some form of managed care: 33 percent wereHMO enrollees, 26 percent were in preferred provider organizations (PPOs), and 16 percent were in point ofservice (POS) plans (37).
■ Information for beneficiaries (e.g., onaccess, quality, benefits, premiums, etc.):
1. Beneficiaries over 65 who are notknowledgeable about how managedcare works. Unlike the working popu-lation with health insurance (37),13
many older persons have had littleexperience with capitation and man-aged care. Potential problems exist ininterpreting covered benefits andmedical necessity;
2. Beneficiaries with special needs. TheMedicare population includes manypeople with serious or complex med-ical conditions, and those who sufferfrom cognitive or mental impair-ments that require high-technologyor extensive nursing care. Providingappropriate information to this popu-lation and/or caregivers is particular-ly challenging.
The Panel is assessing the likelihoodand consequences of each type of riskinvolved with increased choices, aswell as the strengths, weaknesses, andcosts of alternative mechanisms tomitigate these risks.
Study Panel I will release its final report andfindings later in 1997.
STUDY PANEL II: MODERNIZINGFEE-FOR-SERVICE MEDICARE
Despite the rapid growth of Medicare man-aged care, about 86 percent of beneficiariesstill receive their care on a FFS basis. Even ifMedicare were to adopt a system makinggreater use of capitated arrangements asdescribed in the preceding section, therewould likely remain a substantial role for FFS
well into the future. Not only would itremain through a transition period, theremay likely continue to be populations notadequately served by the choice of capitatedhealth plans available in their areas. If so, FFSmay provide a safe harbor for such beneficia-ries for some period of time. Prime amongthese vulnerable populations may be peoplewith disabilities and those with chronic ill-nesses (35). With FFS likely to remain amajor part of Medicare for the foreseeablefuture, assuring quality, managing utilizationand costs, and fostering efficient, accountableadministration will remain priorities.
The Panel’s work has two main foci: (1) theapplicability to Medicare of tools for manag-ing care in private FFS insurance, and (2)whether changes would be needed inMedicare’s administrative structure andauthority to incorporate those tools that holdpromise for controlling costs or improvingquality.
Managing Care in Fee-for-Service Medicare
One analysis is examining the applicability ofvarious tools developed in private-sectorhealth plans for managing care and assuringquality. To date, most attempts to controlcosts in FFS Medicare have focused on con-trolling the amounts paid to health careproviders, i.e., the “price” of services. Amongprivate FFS plans, however, insurers haveincreasingly incorporated tools used byHMOs and other capitated health plans tofocus on utilization, the volume of servicesdelivered and their appropriateness as well asapproaches that focus on both price and uti-lization simultaneously. These include greateradministrative and clinical scrutiny of certain
procedures before they are performed, retro-spective data analysis of services provided,competitive purchasing of supplies and ser-vices, payment for more inclusive bundles ofservices, greater use of preventive services,centers of excellence, preferred providerarrangements, case management, and relatedtechniques.
In its work, the Panel is:
■ defining each of these techniques;
■ briefly reviewing how they have beenused to-date in the private sector andby Medicare and with what results;and
■ identifying whether and how theiradoption by Medicare may conflictwith other public goals and policies. Asa public program, Medicare is subject torestrictions that serve other public goalsbut may inhibit its ability to make use ofsome of these tools. For example, sun-shine laws, due process, and procurementpolicies may present barriers to usingtools such as purchasing through com-petitive bids to the extent to which theprivate sector uses such tools. The Panelwill explore these and other potential bar-riers in greater depth.
What Is Needed to Modernize Fee-for-Service Medicare?
The second piece of the Panel’s work isexploring what would be required forMedicare to balance the competing objec-tives identified in the first analysis to incorpo-rate appropriate tools of managed indemnityinsurance. In particular, the Panel will focuson the administrative structure and authoritygranted to HCFA. To what extent could
HCFA adopt innovations in FFS manage-ment now? What changes would requiregreater statutory authority or an increasedadministrative budget? Should capitatedMedicare (whatever its eventual extent orform) be run by the same organization thatmanages FFS Medicare? To what extentshould Medicare’s administration be in thepublic sector as opposed to the private sec-tor? What are the costs and risks associatedwith changing HCFA’s statutory authority orits organizational structure and purview?
For each of the innovations that the Panelconsiders, it will identify the types of changesin law or regulation that would be requiredfor adoption and implementation.Furthermore, it will consider the otherresources that would be required. It is alsoexamining the benefits and drawbacks of fouralternative organizational structures for thefuture administration of FFS Medicare. Thesestructures range from marginal changes inthe structure and authority of HCFA all theway to a quasi-public corporation, possiblyanalogous to the U.S. Postal Service.
In early 1997, the Panel will release the twoworking papers it commissioned to help itbegin its thinking on these topics. Thepapers, written by Peter Fox, a health econo-mist and consultant, and by David Smith, aSwarthmore College political scientist whohas studied Medicare’s political evolution,will present the points of view of the authors.Later in 1997, the Study Panel will release itsown findings in a final report.
STUDY PANEL III: MEDICARE’SLARGER SOCIAL ROLE
The Academy’s third Panel, convened inJanuary 1997, is exploring the roles thatMedicare plays in American society. ThePanel is examining the underlying philosoph-ical principles and rationales of Medicare andhow the program fits into the larger socialinsurance and welfare structures. The Panel’swork is focusing on two basic aspects ofMedicare’s role: the underlying “social con-tract” that Medicare represents, and the pub-lic goods that the program has come toprovide.
To begin its work, the Panel is addressing thebroad context in which Medicare wasdesigned by:
■ examining the social, political and eco-nomic values and agreements that shapedthe initial development of Medicare, andhow the social contract between workersand beneficiaries shaped its evolution;
■ documenting how trends in Americansociety, including changes in industrialorganization and labor force participa-tion, demographic changes, develop-ments in medical technology, and therestructuring of health care delivery sys-tems, have affected the context of thatsocial contract;
■ formulating alternative conceptions of asocial contract that can accommodate theneeds of elderly and disabled populationsin the 21st century; and
■ identifying the implications of new con-ceptions of the social contract in terms ofeligibility, benefits design, financing,management, and oversight for a restruc-tured Medicare program.
This Panel is exploring the potentialconflicts between controlling the long-rangecost of Medicare and protecting beneficiariesagainst out-of-pocket costs of health care. Itis also reviewing the benefits Medicare pro-vides, how responsibility for the aged anddisabled should be shared between Medicaidand Medicare, whether the program is moreproperly viewed as a vital government func-tion or as insurance that in some circum-stances could be offered equally well by theprivate sector, the role of supplemental insur-ance (Medigap, employer-sponsored retireepolicies, and Medicaid), and the role ofMedicare in paying for long-term care.
The Panel has begun to assess the extent towhich the chronic and long-term health careneeds of the beneficiary population can bemet through current provisions or throughcreative applications of home and communi-ty-based care programs. Background work onMedicare’s role in the care provided at theend of life has begun. The Panel also plans tofocus on special concerns of women — bothbeneficiaries and their primary caregivers.
Simultaneously, the Panel is preparing back-ground papers on Medicare’s contribution tothe wider health care system, by supportinggraduate medical education, hospitals andclinics serving uninsured populations, andfacilities in rural areas where health servicesare scarce. The Panel will consider the utilityof these broader functions, and whetherMedicare should continue to support thesepublic goods.
The Panel expects to produce several back-ground papers that contribute to the publicdebate about Medicare’s social role. Drawingon its analyses, the Panel’s final report, to be
released in early 1998, will address the ques-tion: “What social values are we trying topursue through Medicare, recognizing thatthe federal government relies on other pro-grams in addition to Medicare to help theaged and disabled?”
STUDY PANEL IV: FINANCINGMEDICARE FOR THE LONG TERM
The fourth Study Panel to be convened aspart of the Academy’s Medicare initiative willfocus on Medicare’s financing in the nextcentury. Panel members will include individ-uals with expertise in public finance,Medicare policy, economics and tax policy.The group will also bring a diversity of insti-tutional experience and philosophical per-spectives.
Among the questions this Panel will likelyconsider are:
■ What options exist for increasing rev-enues to Medicare (from either beneficia-ries or workers), and what are theirimplications? In addition to changes inthe current payroll tax contributions, thePanel will consider the pros and cons ofother types of revenue sources includingestate taxes, taxes on certain federal bene-fits, and broad-based taxes.
■ What options exist for changing benefi-ciaries’ financial liability, and what aretheir implications?
■ What are the implications of limiting pay-ments to providers over the long run?
■ How might the elimination of the dis-tinctions between Part A and Part B ben-efits affect Medicare’s financing?
The Panel will examine these issues againstthe backdrop of the larger philosophical
questions considered by the Study Panel onMedicare’s Larger Social Role, especially theimplications of proposals to move Medicareaway from being a defined benefit socialinsurance program toward a defined contri-bution program with limited financial liabilityfor the government. Consequently, these twoStudy Panels may engage in some joint ana-lytic work. The Panel will convene in earlysummer 1997 and release its final conclusionsin 1998.
NEXT STEPS
The impending insolvency of the HI TrustFund and the desire to balance the federalbudget have focused the nation’s attentionon Medicare’s future. The public and theirelected officials have begun to understandthe challenges facing the largest insuranceprogram in the country. Potential solutionsare being debated. This debate overMedicare’s future involves both complextechnical issues and compelling philosophicalquestions about Americans obligations toeach other. During the first half of 1998, theproject’s Steering Committee, drawn fromdiverse philosophical, institutional, and disci-plinary backgrounds will reflect on the find-ings of the project’s four individual StudyPanels in light of recent policy developments.In one or more final reports of its own, theSteering Committee will synthesize the workof the Study Panels and draw out commonthemes among these experts’ work. Throughall of these groups’ efforts, the Academyseeks to foster relevant evidence-based, open-minded discussion and policymaking as thedebate over Medicare’s future continues.
STUDY PANEL ON MEDICARE CAPITATION AND CHOICE Joseph Newhouse, Harvard University, Chair
Richard Anderson, Kaiser Foundation Health PlanRobert Berenson, National Capital Preferred Provider Organization
Stuart Butler, The Heritage FoundationGeraldine Dallek, Families USA Foundation
Judith Lave, University of PittsburghHarold Luft, University of California at San Francisco
Christine Petersen, Prudential HealthCare GroupCharlie Pryde, Ford Motor Company
Alice Rosenblatt, WellPoint Health NetworksJohn Rother, American Association of Retired Persons
Cary Sennett, National Committee For Quality Assurance
STUDY PANEL ON FEE-FOR-SERVICE MEDICAREPaul Ginsburg, Center for Studying
Health System Change, Chair (from February 1997)*
Janet Shikles, Powers, Pyles, Sutter and Verville, Chair (through January 1997)*Mark Chassin, Mt. Sinai Medical School
Lynn Etheredge, ConsultantJon Glaudemans, Aetna Health Plans
Sheila Leatherman, United HealthCare CorporationSuzanne Mercure, Southern California Edison
Alan Nelson, American Society of Internal MedicineSteven Ringel, University of Colorado Health Sciences Center
Thomas Scully, Federation of American Health SystemsLynn Shapiro Snyder, Epstein Becker & Green, P.C.
Judith Moore, Health Care Financing Administration, ex-officio**
*Paul Ginsburg assumed the duties of Study Panel Chair when Janet Shikles left the U.S. GeneralAccounting Office and took her current position in February 1997.
**Formerly a private consultant and full Panel member, Judith Moore became an ex-officio member whenshe took her current position in August 1996.
Appendix AMembers of the Academy’s Medicare Study Panels
STUDY PANEL ON MEDICARE’S LARGER SOCIAL ROLERosemary Stevens, Chair, University of Pennsylvania
Lawrence Brown, Columbia University
David Blumenthal, Massachusetts General Hospital
Norman Daniels, Tufts University
Merwyn Greenlick, Oregon Health Sciences University
Marsha Lillie-Blanton, U.S. General Accounting Office
David Meltzer, University of Chicago
David Moss, Harvard Business School
Thomas Paine, Consultant
Uwe Reinhardt, Princeton University
Louis Sullivan, Morehouse School of Medicine
Kathleen Utgoff, Center for Naval Analyses
Fredda Vladeck, International Brotherhood of Teamsters
WHAT BENEFITS DOES MEDICAREPROVIDE?
The Medicare program consists of two parts,Hospital Insurance (Part A) andSupplementary Medical Insurance (Part B).Part A coverage is automatic for those whoqualify and it pays for inpatient hospital care,skilled nursing facility care, intermittenthome-health care, and hospice care.Beneficiaries pay deductibles and coinsurancefor Part A services they receive. Table B-1describes the benefits and beneficiaries’ finan-cial obligations under Part A in greater detail.
Participation in Part B is voluntary for eligi-ble individuals and carries a monthly premi-um ($43.80 per month in fiscal year 1997)and a deductible of $100 per year. It coversphysician services (including office visits,surgeries, and consultations); lab and otherdiagnostic tests; outpatient services at hospi-tals; and mental health services. Table B-2describes the benefits and beneficiaries’ finan-cial obligations for Part B in greater detail.
As mentioned in the text of this report, mostbeneficiaries have insurance that supplementstheir Medicare coverage. Supplemental insur-ance includes both privately purchased poli-cies as well as Medicaid for certainlow-income Medicare beneficiaries. In addi-tion, the Federal government has establishedtwo programs that use Medicaid funds tohelp other low-income elderly pay Medicarepremiums, deductibles and coinsurance.Qualified Medicare Beneficiaries (QMBs)have incomes below the federal poverty lineand resources at or below twice the levelallowed for participation in the federalSupplemental Security Income (SSI) pro-
gram. Medicaid pays for QMB’s Medicarepremiums as well as cost-sharing obligationsof both Parts A and B. Specified Low-Income Medicare Beneficiaries (SLMBs)meet the same resource test as QMBs, buthave incomes between 100 percent and 120percent of the poverty line. They receiveMedicaid subsidies to help pay only their PartB premiums.
WHO ARE MEDICAREBENEFICIARIES?
Eligibility
Persons are eligible for Medicare if they (ortheir spouses) have worked for at least 10years in Medicare-covered employment, areat least 65 years old, and are citizens or per-manent residents of the United States.Younger individuals can qualify for Medicareif they have worked a sufficient amount oftime in Medicare-covered jobs and they havedialysis-dependent end-stage renal disease(ESRD) or they have received Social Securitydisability benefits for two years. Disabilitybeneficiaries include disabled workers, dis-abled widows older than age 50, and adultsdisabled since childhood and whose parentsare veterans, disabled, or deceased. Personswho do not have sufficient work history toqualify can still purchase Medicare if they areover 65, disabled, or have ESRD by payingan actuarially fair premium.
Data About Beneficiaries
Medicare provides health care coverage fornearly 97 percent of the elderly (33 million).The remainder of the Medicare populationincludes 4 million disabled individuals, andabout 210,000 persons with end-stage renal
Appendix BOverview of the Medicare Program in 1997
Table B-1. Medicare Part A, 1997Benefit Medicare Pays Beneficiary Pays1,2
First 60 Days All but first $760 First $760 61st to 90th Day All but first $190 a Day $190 a day
91st to 150th Day3 All over $380 a Day $380 a dayBeyond 150 Days Nothing All Costs
First 20 Days 100% of Approved Amount NothingAdditional 80 Days All over $95 a Day Up to $95 a DayBeyond 100 Days Nothing All Costs
Unlimited as long 100% of approved Nothing for as beneficiary meets amount; Services;Medicare conditions
80% of approved 20% of approvedamount for durable amount for durable medical equipment medical equipment
For as long as doctor All but limited Limited costs for certifies need costs for outpatient outpatient drugs
drugs and inpatient and inpatient respite care respite care
Unlimited if All but first 3 pints First 3 pints4
medically necessary per calendar year
Source: National Academy of Social Insurance based on U.S. Department of Health and Human Services,Health Care Financing Administration, The Medicare Handbook, Washington, DC: U.S. GovernmentPrinting Office, 1996, updated for 1997.
1 1997 Part A monthly premium: $311 with fewer than 30 quarters of Medicare-covered employment; $187 withmore than 30 quarters but fewer than 40 quarters of covered employment. Most beneficiaries do not have to paya premium for Part A.
2 Either beneficiary or his or her supplementary insurance company are responsible for paying the amounts listedin the “Beneficiary Pays” column.
3 This 60-reserve-days benefit may be used only once in a lifetime.4 Blood paid for or replaced under Part B of Medicare during the calendar year does not have to be paid for or
replaced under Part A.
Services
HOSPITALIZATIONSemiprivate room and board, general nursing and other hospital services and supplies
SKILLED NURSING FACILITY CARESemiprivate room and board,skilled nursing and rehabilitativeservices and other services and supplies: if it follows within 30days of a hospitalization of 3 or more days and is certified asmedically necessary
HOME HEALTH CAREPart-time or intermittent skilledcare, home health aide services,durable medical equipment andsupplies, and other services
HOSPICE CAREPain relief, symptom managementand support services for the terminally ill
BLOODWhen furnished by a hospital orskilled nursing facility during a covered stay
Table B-2. Medicare Part B, 1997Benefit Medicare Pays Beneficiary Pays1,2
Unlimited if 80% of approved $100 deductible,medically necessary amount (after plus 20% of approved
$100 deductible) amount and limitedReduced to 50% charges above
for most outpatient approved amount formental health services each office visit
or procedure
Unlimited if Generally 100% Nothing for servicesmedically necessary of approved amount
Unlimited as long as 100% of approved Nothing for services; beneficiary meets amount; 80% of 20% of approved
Medicare conditions approved amount amount for durable for durable medical medical equipment
equipment
Unlimited if Medicare payment to 20% of whatevermedically necessary hospital based the hospital charges
on hospital cost (after $100 deductible)
Unlimited if 80% of First three pints medically necessary approved amount plus 20% of
(after $100 deductible approved amount and starting for additional
with fourth pint) pints (after $100 deductible)3
Unlimited if 80% of $100 deductible,medically necessary pre-determined amount plus 20% of pre-
(after $100 deductible) determined amount
Source: National Academy of Social Insurance based on U.S. Department of Health and Human Services,Health Care Financing Administration, The Medicare Handbook, Washington, DC: U.S. GovernmentPrinting Office, 1996.
1 1997 Part B monthly premium: $43.80 (premium may be higher if beneficiary enrolls late.) The beneficiarypays a single $100 deductible for all covered services in a year.
2 Either beneficiary or his or her insurance company are responsible for paying the amounts in the “BeneficiaryPays” column.
3 Blood paid for or replaced under Part A of Medicare during calendar year does not have to be paid or replacedunder Part B.
Services
MEDICAL EXPENSESDoctors’ services, inpatient and out-patient medical and surgical ser-vices and supplies, physical andspeech therapy, diagnostic tests,durable medical equipment, andother services
CLINICAL LABORATORYSERVICESBlood tests, urinalyses, and more
HOME HEALTH CAREPart-time or intermittent skilled
care, home health aide services,
durable medical equipment and
supplies, and other services
OUTPATIENT HOSPITALTREATMENTServices for the diagnosis or treat-
ment of illness or injury
BLOODUnlimited if medically necessary
AMBULATORY SURGICALSERVICESUnlimited if medically necessary
disease (ESRD), a Medicare-eligible categorythat was added in 1972 (61). These numberswill continue to increase. In 1990, Medicarecovered 12.2 percent of the population, andby 2030, the program is projected to cover19.8 percent of the population. As describedin the text of this report, the growth inMedicare beneficiaries to-date reflectsincreased longevity and decreased fertility.
The Medicare population is also becomingmore disabled. The fastest rate of enrollmentgrowth in the program has been among theESRD population and people with disabili-ties. Between 1980 and 1994, the number ofpeople with ESRD grew from 65,678 to254,626, a 74 percent increase from 1980.The number of disabled enrollees under 65years old rose from 3.0 million in 1980 to4.2 million in 1994, a 40 percent increase(61). In 1993 about one fourth of elderlybeneficiaries and more than half of disabledbeneficiaries rated their own health status as“fair” or “poor” (64).
Most Medicare enrollees have limitedincomes. In 1993, 72 percent of elderly ben-eficiaries reported annual incomes of lessthan $25,000, including 30 percent whoreported incomes of less than $10,000. Ofthe disabled beneficiaries, 40 percent report-ed incomes of less than $10,000 (64).Thirteen percent of the older beneficiariesand 41 percent of those with disabilities arealso eligible for Medicaid, another indicatorof many beneficiaries’ low-income status.
PROGRAM ADMINISTRATION
The Department of Health and HumanServices’ Health Care FinancingAdministration (HCFA) is the federal agencywith primary responsibility for the Medicareprogram. Its responsibilities are to:
■ select and oversee carriers and fiscal inter-mediaries; (Carriers are organizations thatprocess claims and make Medicare pay-ments to health care providers for mostMedicare Part B benefits. Intermediariesare organizations that make Medicarepayments for Part A and certain Part Bbenefits to hospitals and other providersof services and perform related func-tions.)
■ formulate general policies and guidelinesfor the coverage and payment of services(although carriers and intermediariesmake initial payment decisions on indi-vidual cases);
■ develop conditions of participation andthe certification of providers; and
■ maintain and review utilization records.
Other federal agencies also have someresponsibility for Medicare’s administration.The Social Security Administration (SSA)makes initial determination of an individual’seligibility for Medicare and maintains themaster beneficiary record. The Departmentof the Treasury manages the HealthInsurance (Part A) and SupplementalInsurance (Part B) Trust Funds (see sectionon Medicare Trust Funds) and transfersfunds to pay Medicare bills. A Board ofTrustees — composed of the Secretaries ofthe Department of Health and HumanServices (USDHHS), the Department ofLabor, the Department of the Treasury, theCommissioner of Social Security, and twopublic-appointed members — oversees thetrust funds and reports annually to Congresson their status and operation.
In order to participate in the Medicare pro-gram, providers and suppliers of health ser-vices must comply with Conditions ofParticipation, the statutory and regulatoryrequirements pertaining to the health andsafety of Medicare beneficiaries. State agen-cies, usually under agreements with HCFA,
inspect provider institutions and supplierfacilities or institutions that wish to partici-pate in the Medicare program (61).
PAYMENT POLICY ANDADMINISTRATION
HCFA uses different reimbursement meth-ods for Part A and Part B services.
Part A
Until the adoption of Medicare’s prospectivepayment system (PPS) in fiscal year 1984, thefederal government based reimbursementsfor inpatient hospital care on a retrospective,cost-based payment system. This methodcontinues to be the basis for reimbursingskilled nursing facilities and home healthagencies, although limitations apply. In addi-tion, four classes of specialty hospitals (chil-dren’s, psychiatric, rehabilitation, andlong-term) as well as distinct psychiatric andrehabilitation units within some general hos-pitals are excluded from PPS. The federalgovernment reimburses these facilitiesaccording to reasonable and allowable costsas defined by the Tax Equity and FiscalResponsibility Act (TEFRA) of 1982 (P.L.98-21).
Under PPS, hospitals receive payments basedon diagnosis-related groups (DRGs) for inpa-tient services provided to Medicare beneficia-ries. The DRG system is a clinically based setof categories that classifies patients upon dis-charge from the hospital. As the name sug-gests, each of the 495 DRGs identifies by aparticular diagnosis and represents a relativelynarrow range of treatment costs.Intermediaries pay hospitals the predeter-mined amount for each Medicare dischargeassigned a given DRG. The federal govern-
ment adjusts DRG payment rates for a geo-graphic area, indirect costs of patient careassociated with hospitals that have teachingprograms, and costs related to treating dis-proportionately large shares of low-incomepatients. Additional payments are made forcases called outliers, that involve extremelylong hospital stays or are otherwise veryexpensive. The PPS payment for a given caseis considered full payment for the carereceived, except for the annual Part Adeductible and coinsurance amounts paid bythe beneficiary. By adopting PPS, the federalgovernment gave hospitals the incentive toprovide efficient care since the payment foreach discharged patient with a given diagno-sis does not vary regardless of how many spe-cific services the patient receives.
Part B
For Part B services, physicians can elect to bepaid directly by the carrier, a process called“assignment.” By accepting assignment, thephysician agrees to accept the allowedMedicare charge as payment in full. In 1995,72 percent of physicians treating Medicarepatients accepted assignment, and 90 percentof all Medicare claims were assigned (69).Medicare reimburses 80 percent of theallowed charge (after the beneficiary has metthe annual deductible amount), and the ben-eficiary is responsible for the 20-percentcoinsurance amount, as required by law. Ifthe physician does not accept assignment, thebeneficiary is responsible for paying the dif-ference between the physician’s submittedcharge (which can be no more than 115 per-cent of the Medicare-allowed charge) and theMedicare-allowed charge, as well as anydeductible or coinsurance amounts.
Since 1992, the federal government has usedthe Medicare Physician Payment ReformProgram (MPPRP) to determine the allowedcharge for each Part B service. MPPRPaffects about 500,000 physicians and110,000 other medical professionals, includ-ing dentists, optometrists, podiatrists, andchiropractors who bill Medicare for services.It consists of:
■ a national Medicare fee schedule(MFS) for more than 7,000 coveredservices based on a resource-basedrelative value scale and geographicadjustments for justifiable differencesin physicians’ costs of practice.Medicare pays 80 percent of thephysicians’ actual charges or the MFSamount, whichever is lower.
■ a volume performance standard(VPS) to restrain the annual rate ofincrease in Medicare physician pay-ments. The VPS system provides amechanism to adjust fee updates forthe MFS based on how annualincreases in actual expenditures com-pare with previously determined per-formance standard rates of increase.
■ a restriction that prevents non-partic-ipating physicians (those who do notaccept assignment) from chargingMedicare beneficiaries more than 115percent of the MFS amount.
■ a standardized claim form for physi-cians and other suppliers of Medicareservices.
During MPPRP’s five-year imple-mentation period, health careproviders received payments based ona transitional formula that attemptedto spread out payments more evenlyacross physician specialties than theyhad been spread in the past. By
1996, all Medicare physicians werepaid the MFS amount.
MEDICARE TRUST FUNDS
Two trust funds established in 1965 by theSocial Security Act finance the Medicare pro-gram. The Hospital Insurance (HI) TrustFund pays for Part A services, and theSupplemental Medical Insurance (SMI) TrustFund pays Medicare Part B benefits.
The trust funds are a mechanism by whichrevenues are credited to the funds in theform of government securities while expendi-tures for benefits are debited against thefunds (54). Under present law there is noauthority for the government to pay programbenefits if the assets of the trust fundsbecome depleted (6). The HI Trust Fundreceives income principally from a tax onearnings of 1.45 percent paid by employeesand matched by their employers for a totalcontribution of 2.9 percent of payroll.Interest on the securities held by the trustfund and taxes on certain Social Securitybenefits form most of the remaining income.The SMI Trust Fund’s assets consist of bene-ficiary monthly premiums ($43.80 in 1997),contributions from the government’s generalrevenue, and interest on the trust fund assets.
The Board of Trustees annual report toCongress projects the funds’ financial out-look over the short term (10 years) and thelong term (75 years.) As described in thetext of this report, the Trustees’ 1996 bestestimate is that the HI Trust Fund will bedepleted early in 2001. The HI deficit overthe 75-year period is equivalent to a payrolltax rate increase in 1996 of 2.26 percent foremployers and employees each (6).
The Trustees’ reports act as an early warningdevice of potential shortfalls in the program’sfinancing. Short-term estimates signal theneed for immediate legislative action whereasthe long-range estimates indicate the needfor attention to more distant structural prob-lems (2). In 1995, expenditures of the HITrust Fund exceeded income for the firsttime (although a surplus from previous yearsremained), and the Trustees projected in1996 that the fund’s surplus would beexhausted in early 2001. Without correctivelegislation, the federal government wouldnot have authority to pay for beneficiaries’covered health care. The SMI Trust Funddoes not produce a deficit because it receivesunlimited federal general revenues to coverprogram expenditures. Nonetheless, SMIexpenditures are projected to grow signifi-cantly as a share of GDP.
HMOS FOR MEDICARE: THE RISKPROGRAM AND RELATEDDEMONSTRATION PROJECTS
Beneficiaries can choose to enroll in aMedicare Risk Health MaintenanceOrganization (HMO) instead of traditionalfee-for-service (FFS). This section providesbackground about HMOs and the currentMedicare Risk Program, Medicare Select,and several related demonstration projectsthat experiment with other forms of man-aged care for Medicare beneficiaries. It alsodescribes the major issues currently facing theMedicare Risk Program.
HMOs
A Health Maintenance Organization (HMO)provides a defined set of health care servicesthrough a specified network or panel ofproviders. The HMO makes decisions aboutwhere and how health services are provided
and negotiates payment levels with itsproviders in return for a set amount ofmoney each year for each enrollee (26).
In Medicare, HMOs are either staff model,group model, or independent practice associ-ation (IPA) model. Staff-model HMOsdirectly employ doctors and other providers,who serve only patients enrolled in theHMO. Group model HMOs, by contrast,contract with a group of providers. Finally, inan IPA model (the most common model inMedicare), the HMO contracts withproviders and/or provider groups, who canserve both HMO enrollees and non-enrollees.
Medicare Risk Program
While Medicare has included managed careoptions since its inception, the Medicare RiskProgram was Medicare’s first capitated pay-ment option. Implemented in 1985, the TaxEquity and Financial Responsibility Act(TEFRA) of 1982 allowed federally qualifiedHMOs and other plans that met specifiedrequirements in Medicare law (competitivemedical plans, or CMPs) to enter Medicarerisk contracts and provide all Medicare cov-ered services (Part A and B) for a fixed, orcapitated, rate per beneficiary per month(69). Health plans entering risk contractsassume full risk for the cost of providingMedicare benefits.
An HMO integrates the financing and deliv-ery of health care, so it is expected to take anactive role in managing a person’s care,rather than merely acting as a third-party bill-payer. In theory, then, health care can beadministered at lower costs in an HMO thanin the fee-for-service (FFS) sector, whereproviders are reimbursed for the cost of ser-vices rendered. For this reason, the govern-
ment pays HMOs less per enrollee than theestimated cost of providing services to theaverage FFS beneficiary. Currently, the feder-al government determines the federal pay-ment in the risk program through theAdjusted Average Per Capita Cost (AAPCC)method. Once a year, HCFA projects thecost of treating the average beneficiary underFFS Medicare in the country, an estimateknown as the United States Per Capita Cost(USPCC). HCFA then derives the AAPCCthrough “localizing” the USPCC estimatefor each county by adjusting for geographicdifferences in input costs (i.e., wages andprices of inputs such as medical supplies andland), and for the overall health risk of bene-ficiaries.1 The government pays HMOs anamount that is 95 percent of the local AAPCC.AAPCCs are computed separately for theover age 65 population, the disabled, and theend-stage renal disease (ESRD) beneficiaries.
Medicare Risk HMOs provide all Medicarecovered benefits for enrollees in exchange forcapitated payments (i.e., 95 percent of thelocal AAPCC). Medicare Risk enrollees paythe part B premium, but may pay an addi-tional premium to the HMO to receive bothcovered and supplemental services (e.g., pre-scription drugs). Because federal law requiresRisk HMOs to return any savings they realizeto beneficiaries, these HMOs often offeradditional benefits beyond those in Part B atno extra premium.
The Medicare Risk Program has grownrapidly in recent years, in terms of both planparticipation and beneficiary enrollment. Asof December 1996, 241 risk plans participat-ed, up from 183 at the end of 1995, a
growth of 31.7 percent in one year. MedicareRisk HMOs had over 4.1 million enrollees,up from 3.1 million enrollees in December1995, approximately a 33 percent increase inone year. Altogether, Medicare HMOenrollees made up almost 11 percent of theoverall Medicare population (64). Since1989, Medicare Risk enrollment’s annualrate of growth has exceeded that of the non-Medicare population (64).
Point-of Service (POS) Option
Recently, HCFA issued guidelines for HMOsto offer a Point-of-Service (POS) option inthe Medicare Risk contract program. Planscan now offer selected medical services thatthe beneficiary may receive outside theHMO’s network of physicians and otherproviders. POS plans in the private sectorallow enrollees to go out of network toreceive care, but the enrollee must pay ahigher copayment when they do so. POSplans have become popular in the private sec-tor due to their greater flexibility in allowingenrollees to see non-network providers.HCFA hopes that introducing a variant ofthe POS model, an option as yet in its infan-cy for Medicare beneficiaries, will increaseparticipation in managed care.
Medicare Select
Congress established Medicare Select as a 15-state experimental program in 1990 toincrease beneficiary participation in managedcare. The program allows beneficiaries in tra-ditional Medicare FFS to use managed careorganizations for their supplemental(Medigap) insurance. Medicare Select plansprovide the supplemental insurance coverage
1 To attempt to correct for differences among beneficiaries’ costs, Medicare currently adjusts payments to HMOsaccording to beneficiaries’ age, gender, Medicaid status, nursing home status, and whether or not they currentlywork.
through Preferred Provider Organizations(PPOs). A PPO is a group of providers andhospitals that contracts with a third party toprovide health services to covered enrolleeson a FFS basis at specified (generally dis-counted) prices. Beneficiaries enrolled in aPPO can visit an out-of-network provider,but must pay a higher copayment than if theywere to visit a provider in the network. Thegovernment hopes Medicare Select familiar-izes more beneficiaries and providers with theuse of defined provider networks (27).
Medicare Demonstration Projects
HCFA has several other demonstration pro-jects currently underway that expand thepresence of managed care in Medicare andprovide beneficiaries with a greater range ofchoices. These variants on the risk programmay provide insights in the eventual long-term restructuring. Two major demonstra-tions are Medicare Choices and Social HMO(S/HMO).
Medicare Choices
HCFA designed the Medicare Choicesdemonstration to offer Medicare patients avariety of managed care delivery options(e.g., PPOs and provider-sponsored net-works) that are currently not available toMedicare beneficiaries as their primarysources of coverage. The demonstration pro-ject, announced in June of 1995, also plansto test different payment methods (e.g., rein-surance, partial capitation). Most of the man-aged care plans chosen to participate in thedemonstration project are located in marketareas that currently have limited enrollmentin risk contracts. HCFA’s Office of Researchand Demonstrations (ORD), responsible forimplementing the project, expects thedemonstration to last three to five years (60,62).
Social HMO (S/HMO)
The S/HMO is a demonstration currentlybeing conducted at three sites. Over 50,000enrollees have participated over the past 12years. The model adds home and communi-ty-based services and short-term nursinghome care to the Medicare HMO’s basicbenefit package. Initially, the first set ofS/HMOs experienced developmental prob-lems, including cost over-runs and risk selec-tion problems. Over time, however, studiesdemonstrated that frail S/HMO memberslive in the community with home and com-munity-based services longer than othermembers under a risk contract, and use lessnursing home care.
A broad cross-section of the Medicare popu-lation is enrolled, and the Social HMOs offera comprehensive package of acute care andancillary benefits, including prescriptiondrugs. Enrollees who need supportive ser-vices are identified by resource coordinatorsthrough population screening and internalreferral systems. The resource coordinatorsact to help ensure enrollees are assessed forappropriate service utilization across the con-tinuum of acute care and limited home andcommunity-based coverage.
The S/HMO combines acute care, as well ashome and community-based care into anintegrated health service delivery system. TheHMO is reimbursed by Medicare, Medicaid,and private premiums on a prepaid, capitatedfunding basis. The three original demonstra-tion sites are all financially viable and expand-ing. The fourth dropped out after 10 years ofoperations after the growth in Medicare pay-ments failed to keep pace with the growth incosts.
Moving into its second generation, theS/HMO will emphasize a geriatric servicemodel with a case management approach.The model will be designed to identify indi-viduals who are at high risk for both illnessand disability. HCFA has asked six new sitesto submit proposals, and one site is opera-tional. Financing methodology has alsochanged for the second generation ofS/HMO sites. The first-generation sites sup-plemented their standard payment formulawith a special rate category for disability,while the second round will use a new formulathat takes into account a variety of health,functional, and demographic factors (24).
MAJOR ISSUES OF MEDICARE RISK
Geographic Variation
In 1994, nearly three quarters of allMedicare beneficiaries had at least oneMedicare managed care option available(45). However, the bulk of enrollees inMedicare Risk plans is highly concentrated inrelatively few regions of the country. As ofDecember 1996, six states made up over 70percent of overall enrollment in Risk plans,with California making up 31.8 percent ofenrollment alone. Many states still have avery small percentage of their Medicare pop-ulation enrolled in a Medicare Risk plan. Asof December 1996, 27 states had 3 percentor fewer of their Medicare beneficiariesenrolled in a Risk HMO. Of those 27, 13had no Medicare Risk enrollees at all (63).
In 1996, about 45 percent of the country’sHMOs participated or anticipated participat-ing in the Medicare Risk program. However,enrollment has also been highly concentratedin a relatively small number of large HMOs,although the level of concentration has start-ed to decline. In 1995, five plans alone (fourof which were located in California) had
approximately 30 percent of the entireMedicare Risk program in their enrollment(73).
States with the highest enrollment inMedicare Risk HMOs often have highAAPCCs (32), which, in turn, reflect highFFS costs. If plan payments exceed the pro-jected costs, federal law requires that the sav-ings must be returned to the federal treasuryor to beneficiaries in the form of additionalbenefits (71). This overpayment may be sogreat that Risk HMOs in some counties canprovide multiple (sometimes costly) supple-mental benefits at no added premium to thebeneficiary. The most common supplementalbenefits include routine physicals, immuniza-tions, eye exams, and ear exams, each of whichare currently offered by at least three quartersof Medicare Risk HMOs as part of their basicoption package. Prescription drug coverage isoffered by three-fifths of all plans. Additionalbenefits include health education, foot care,dental care, lenses, and hearing aids (64).
States with a mature, highly penetrated man-aged care market often have the largerMedicare Risk market (although lowAAPCCs may hinder growth in the Medicaremarket in some regions with high non-Medicare market penetration). California, forexample, has a very mature managed caremarket, which includes high penetration inboth non-Medicare and Medicare popula-tions (73). Non-Medicare HMO penetrationhas exceeded Medicare HMO penetration inall but a few states (64).
Studies have also shown that Medicare RiskHMO enrollment growth has been due inpart to changes in the complexion ofemployment-based health insurance coveragefor retired workers (32). Many firms haverevised their employee/retiree health benefitsby increasing cost-sharing for beneficiaries
(especially among traditional indemnityplans). As a result, enrollment in HMOsamong retirees has increased. Their coveragehas generally been structured so that theHMO options have lower retiree costs andmore comprehensive coverage.
Payment Variation
Because the AAPCC is calculated at thecounty level and used as the basis for pay-ments to Medicare Risk HMOs, HMO pay-ments are directly linked to costs in theMedicare FFS sector (by paying 95 percentof the local AAPCC to the HMO). AAPCCrates reflect differences in health status, prac-tice patterns, input prices, availability of ser-vices, special payments (e.g., graduatemedical education or disproportionate share),and the use of other government facilities(VA and Department of Defense) (38) .
The AAPCC varies greatly across differentcounties throughout the United States. For1997, the payment rates to Risk HMOsrange from $221 monthly for plans inArthur, Nebraska to $767 monthly inRichmond, New York. AAPCCs often differgreatly even for two counties very close toone another geographically. For example,Prince George’s County in Maryland has anAAPCC of $602 monthly for 1997, whilenearby Fairfax County, Virginia has anAAPCC of $401 monthly (38).
AAPCCs often fluctuate greatly from oneyear to the next. Between 1996 and 1997,99 counties had payment increases of at least15 percent, while 214 counties had ratedecreases that large (38). Rural counties,
with sparse populations, often have the mostvolatile AAPCCs. Many rural areas have lowAAPCCs, thus creating a disincentive forthose plans to enter into Medicare RiskContracts (53).
Much of the variation in the AAPCC reflectslarge geographic differences in services pro-vided to beneficiaries. The use of servicesvaries for both discretionary reasons (e.g.,provider practice styles) and non-discre-tionary reasons (e.g., patient characteristicsand health status). Traditional FFS providersare reimbursed irrespective of either discre-tionary or non-discretionary differences.2
However, capitation puts plans at financialrisk for differences in service use. Thus, capi-tation creates incentives for plans to decreasethe level of service use due to discretionaryfactors, and may also lead plans to avoidpatients with high non-discretionary use byactively seeking healthier beneficiaries (i.e.,risk selection) (69).
Under current AAPCC calculations, capita-tion payments reflect historical variations inFFS payments. Severing this capitation pay-ment-FFS costs link would remove the legacyof past inefficiencies that are built into cur-rent payment rates, but new problems willlikely emerge. Setting the capitation rates toreflect the costs of the most efficient HMOswill ultimately reflect service use, since costsare a function of use (both discretionary andnon-discretionary). Determining appropriatevariations in the use of services acrossenrollee populations is a challenge that poli-cymakers must face in restructuringMedicare.
2 The Resource Based Relative Value Scale (RBRVS) fee schedule used in Medicare physician payment wasdesigned in part to change economic incentives in physician practice so that, for example, physicians were givengreater incentives to spend time on visits, rather than performing discretionary diagnostic procedures.Nevertheless, physicians are still paid more for doing more in FFS.
Appendix CMedicare MilestonesThe following is a chronological overview of major legislative and administrative milestones inMedicare’s history:
July 30, 1965 In signing the Social Security Amendments of 1965, President Lyndon Johnsonmade the Medicare program law, establishing a health insurance program foraged persons to complement the retirement, survivors, and disability insurancebenefits under Title II of the Social Security Act.
1972 P.L. 92-603 extended Medicare benefits to disabled persons who received bene-fits under Social Security or Railroad Retirement programs for at least 2 yearsand individuals with end-stage renal (kidney) disease (ESRD).
1982 Medicare implemented hospice care coverage for terminally ill beneficiarieswhose life expectancy is 6 months or less.
P.L. 98-21, or the Tax Equity and Fiscal Responsibility Act, establishedMedicare’s prospective payment system (PPS) to offset the increasing costs ofinpatient hospital services. The law also established the Risk HMO program andthe Prospective Payment Assessment Commission (ProPAC) as an independentpanel to monitor and update the new payment system.
1985 P.L. 99-272, the Consolidated Omnibus Budget Reconciliation Act (COBRA)of 1985, extended mandatory Medicare coverage to nearly all state and localgovernment employees hired after December 1, 1985. Also, Medicare was madesecondary payer for all workers aged 65 or older and their spouses who electedto be covered by health insurance from an employer with 20 or more employees.
1986 Under the Omnibus Budget Reconciliation Act (OBRA) of 1986, Medicare wasmade secondary payer for all disabled Medicare beneficiaries who elected to becovered as current employees (or family members of such employees) by healthinsurance from an employer with at least 100 employees. The Act also providedthat outpatient drugs furnished to transplant patients be covered for one yearafter the transplant.
1987 OBRA 1987 permitted previously disabled individuals, after a period of employ-ment, to resume Medicare coverage without an additional two-year waitingperiod when they reestablished their disability requirement. Medicare wasrequired to be the secondary payer to employer-based insurance for ESRD.Also, the maximum payment for mental health services was increased and cer-tain outpatient mental health services were covered along with the services ofcertified nurse-midwives, clinical social workers, clinical psychologists in ruralhealth clinics, and physician assistants in rural health manpower shortage areas.
1988 P.L. 100-360, or the Medicare Catastrophic Coverage Act (MCCA) providedthe largest expansion of benefits since the program’s inception. Medicare wouldnow protect the elderly and the disabled from the costs of catastrophic medicalbills. The act also provided broad coverage of outpatient prescription drugs.The new benefits were to be financed by two premiums: an increase in the PartB premium and an income-based premium for persons eligible for Part A.
1989 P.L. 101-234, or the Medicare Catastrophic Coverage Repeal Act repealed theMedicare catastrophic benefits outlined in the previous year’s MCCA, restoredMedicare benefit levels to those available before January 1, 1989, and canceledboth catastrophic premiums.
P.L. 101-239, or OBRA 1989, revised the Medicare physician payment system.The new fee schedule would be phased in over a 5-year period beginningJanuary 1, 1992. The fee schedule was based on a resource-based relative valuescale that measured the time, training, and skill required to perform a given ser-vice and was adjusted for overhead costs and geographical differences. The Actalso: (1) limited what physicians could charge beneficiaries over and above theMedicare allowed fee; (2) increased coverage of mental health services; (3) elim-inated the limit on mental health benefits; and (4) extended coverage to servicesof clinical psychologists and social workers.
1989 OBRA 1989 provided an opportunity to continue Medicare coverage to individ-uals under age 65 who are no longer entitled to Social Security benefits becausetheir earnings exceeded the substantial gainful activity level, but who continuedto be disabled. These individuals would now have the option to purchaseMedicare coverage during specified enrollment periods. The amount of themonthly Part A premium would be the same as the premium charged forMedicare’s Part A benefits for uninsured individuals. The Part B premium is thesame for all individuals (51).
1989 In response to a court decision (Duggan v. Bowen, 691 F. Supp. 1487 (D.D.C.1988)), HCFA revised its requirements for determining Medicare home healtheligibility. The revision made it possible for more beneficiaries to qualify forMedicare home health services and more home health agencies to receive pay-ment for higher numbers of visits and for longer periods of care (68).
1990 P.L. 101-508, or OBRA 1990, specified further payments to hospitals and physi-cians, legislated the Part B premium for 1991 through 1995, and increased pay-ments by Medicare beneficiaries by increasing the Part B deductible amountfrom $75 to $100. It also established 10 standard Medicare supplemental insur-ance (Medigap) policies to be offered to beneficiaries and established guidelinesfor their marketing.
1993 P.L. 103-66, or OBRA 1993, mandated that for wages and self-employmentincome received after December 31, 1993, the wage base cap subject to theMedicare hospital insurance tax was removed entirely (in 1993, the maximumamount of income subject to the hospital insurance tax was $135,000). Part Apremiums were reduced on a phased-in basis for individuals and their spouseswho have at lease 30 quarters of Social Security coverage. (These premiumsapply to beneficiaries not eligible for Social Security or Railroad Retirementbenefits.) Premium reductions began at 25 percent in fiscal year 1994 andincreased by five percentage points for the next four years. Beginning in fiscalyear 1998, the reduction will remain at 45 percent. The Act also set the Part Bpremium to cover 25 percent of program costs for aged beneficiaries for 1996through 1998. OBRA 1993 also applied cost restraints on payments to urbanand rural hospitals under the PPS, to certain PPS-exempt hospitals, physicianservices (except for primary care services), skilled-nursing facilities, hospices, lab-oratory services, anesthesia care teams, other services, and expense computa-tions. It also required employers to file new health insurance information on anupdated W-2 form. OBRA 1993 also expanded a ban on physician referrals toclinical laboratories in which they hold an ownership interest (51).
1996 P.L. 104-191, the Health Insurance Portability and Accountability Act of 1996,includes Medicare provisions that give the Health Care FinancingAdministration flexibility in contracting with private firms that process Medicarefee-for-service claims. The statute also strengthens sanctions against MedicareHMOs that fail to meet contractual obligations, and establishes new mecha-nisms for combating fraud and abuse in Medicare and other federally supportedhealth care programs. Additional provisions clarify policies regarding regulationsdesigned to prevent the duplication of services in Medigap policies, including aprovision specifying that policies offering only long-term nursing home care,home health care or community-based care are allowed to coordinate benefitswith Medicare.
Appendix DAbbreviations and Glossary of TermsABBREVIATIONSAAPCC Adjusted Average Per Capita CostCalPERS California Public Employees Personal Employee Retirement SystemCBO Congressional Budget OfficeCMP Competitive Medical PlanCOBRA Consolidated Omnibus Budget Reconciliation ActCPI Consumer Price IndexDME Durable Medical EquipmentDRG Diagnosis Related GroupDSH Disproportionate Share HospitalsESRD End-Stage Renal DiseaseFFS Fee-for-ServiceGAO General Accounting OfficeGDP Gross Domestic ProductGME Graduate Medical EducationHCFA Health Care Financing Administration HI Hospital Insurance HMO Health Maintenance OrganizationIME Indirect Medical EducationIPA Independent Practice AssociationMCCA Medicare Catastrophic Coverage Act MFS Medicare Fee ScheduleMPPRP Medicare Physician Payment Reform ProgramOBRA Omnibus Budget Reconciliation ActORD Office of Research and Demonstration, HCFAPOS Point of ServicePPO Preferred Provider OrganizationPPS Prospective Payment System PSN Provider Sponsored NetworkRBRVS Resource-Based Relative Value ScaleS/HMO Social HMO SMI Supplemental Medical Insurance SNF Skilled Nursing Facility SSA Social Security AdministrationUSDHHS United States Department of Health and Human ServicesUSPCC United States Per Capita CostVPS Volume Performance Standard
GLOSSARY OF TERMS
Assignment: A process whereby a Medicare beneficiary assigns his or her right to payment fromMedicare to the physician or supplier. In return the physician or supplier agrees to acceptMedicare’s reasonable or allowed charge as payment in full for covered services. The physician(or supplier) bills Medicare directly and receives an amount usually equal to 80 percent ofMedicare’s reasonable or allowed charge. The physician (or supplier) may not charge the benefi-ciary more than the applicable deductible and coinsurance amounts.
Acute Care: Medical treatment for health problems of a short-term or episodic nature.
Adjusted Average Per Capita Cost (AAPCC): A formula used in calculating payments toMedicare Risk HMOs. The AAPCC is the per capita fee-for-service Medicare expenditure for acounty, adjusted for the attributes of its Medicare beneficiaries in terms of age, gender, medicalstatus, nursing home status, and employment status. HMOs receive 95 percent of the AAPCCfor each Medicare enrollee.
Biased Selection: See “Risk Selection.”
Capitation: A method of payment for services in which a provider (e.g., a physician, hospital,or other agency or individual) receives a fixed amount for each person served regardless of theactual cost of services provided for the person, in a specified period of time.
Carve-Out: A formal arrangement in which a health plan contracts with another entity to man-age care for patients with a particular condition or to provide particular types of covered servicesto its members. The primary health plan pays a set amount for each patient, thus minimizingthe health plan’s financial risk for these patients or services.
Case Management: The monitoring and coordinating of health services to enhance care andmanage costs for patients with specific diagnoses, or for those who require high-cost or exten-sive services.
Catastrophic Medical Expenses: Extraordinarily high medical expenses, usually for severe orlengthy illnesses, unusually costly treatments, or disability.
Center of Excellence: A health care facility that specializes in providing a high volume of partic-ular procedures or care for specific conditions, such as coronary artery disease treatment ororthopedic joint replacements, in order to lower costs and/or assure quality.
Chronic Conditions: Long term or continuing health problems.
Coinsurance: The percentage of covered health care expenses, after subtraction of anydeductible, for which the insured person is responsible.
Competitive Medical Plan (CMP): A health plan eligible to enter into a risk contract withMedicare to provide beneficiaries with covered medical services in return for a capitation pay-ment.
Competitive Purchasing: A purchasing method that allows a bidding process to establish effi-cient payment rates (usually the low bid).
Conditions of Participation: Statutory and regulatory health and safety requirements to whichproviders and suppliers of health services must comply to participate in Medicare.
Consumer Price Index (CPI): The Consumer Price Index is a relative measure of inflation andrefers to the CPI for Urban Wage Earners and Clerical Workers.
Defined Benefit Program: An insurance program in which premiums are paid in return for aguaranteed and specified set of benefits.
Defined Contribution Program: An insurance program in which premiums are paid in returnfor a specific dollar contribution toward covered benefits without guaranteeing the provision ofthose benefits.
Diagnosis Related Group (DRG): Entries in a taxonomy of types of hospitalizations based ongroupings of diagnostic categories drawn from the International Classification of Diseases andmodified by the presence of a surgical procedure, patient age, presence or absence of significantcomorbidities or complications, and other relevant criteria. DRGs have been mandated for usein establishing payment amounts for individual admissions under Medicare’s prospective hospitalpayment system as required by the Social Security Amendments of 1983 (Public Law 98-21).
Disproportionate Share Hospitals (DSH): Hospitals that serve a relatively large volume of low-income patients.
Durable Medical Equipment (DME): Medical equipment, such as wheelchairs, respirators, andoxygen tanks, whose use may be over an extended period of time.
End-Stage Renal Disease (ESRD): ESRD refers to kidney disease that requires lifetime dialysisor kidney transplant. ESRD patients are eligible for Medicare benefits and may qualify for SocialSecurity payments if they are determined to be disabled.
Fee-for-Service (FFS): A method of paying for medical services in which each service per-formed by an individual provider bears a related charge. This charge is paid by the individualpatient receiving the service or by an insurer on behalf of the patient.
Fertility: The average number of live births to women of child bearing age (15 to 49 years) ina defined population.
Gross Domestic Product (GDP): A measure of national income that is the value of all goodsand services produced in the United States.
Group Model HMO: An HMO that pays a medical group a negotiated, per capita rate, that thegroup distributes among its physicians, often as salary.
Health Care Financing Administration (HCFA): The federal agency within the Departmentof Health and Human Services that administers Medicare and, together with the states,Medicaid.
Health Maintenance Organizations (HMOs): A type of managed care plan that acts as bothinsurer and provider of a comprehensive set of health care services to an enrolled population.Benefits are typically financed through capitation with limited copayments, and services are fur-nished through a system of affiliated providers.
Home Health Care: Health services delivered in the home to aged, disabled, ill, or convales-cent individuals who do not need institutional care.
Hospice: A program that provides palliative and supportive care for terminally ill patients andtheir families, either directly or on a consulting basis with the patient’s physician or anothercommunity agency. The whole family is considered the unit of care, and care extends throughtheir period of mourning.
Hospital Insurance (HI) Trust Fund: A federal account that receives payroll taxes and otherspecified revenues and pays for services covered under Part A of Medicare, including in-patienthospital care, home health care, skilled nursing facility care, and hospice care.
Independent Practice Association (IPA) Model HMO: An HMO where individual physiciansor small physician groups provide services to beneficiaries at a negotiated per capita or fee-for-service rate. The physicians may contract with other HMOs and fee-for-service patients andmaintain their own offices.
Indirect Medical Education (IME) Payments: Payments to hospitals to compensate for over-head and other indirect costs associated with training new physicians and other medical person-nel. Such hospitals tend to have sicker patients with more complicated illnesses, and they tend toprovide more expensive services than the average hospital.
Life Expectancy: The average number of years of life remaining for a person in a particularcohort at a given age.
Long-Term Care: A continuum of health care, personal care, and social services required by thechronically or mentally ill or the disabled on a long-term basis.
Managed Care: A system of health service payments or delivery arrangements where the healthplan attempts to control or coordinate the use of health services by its enrolled members inorder to contain health expenditures and/or to improve quality.
Medicaid: A program of federal matching grants to the states to provide health insurance forcategories of the poor and medically indigent. States determine program eligibility, payments,and benefits consistent with federal standards.
Medical Savings Account: A health insurance option consisting of a high deductible insurancepolicy and a tax-advantaged savings account in which individuals may accumulate contributionsto pay for medical care or insurance.
Medicare Choices: A HCFA demonstration project, announced in June 1995, designed to offerMedicare beneficiaries a variety of managed care delivery options that are currently not availableto beneficiaries as their primary sources of coverage.
Medicare Fee Schedule (MFS): A schedule of charges allowed by Medicare for physician ser-vices based on the RBRVS with geographic and other adjustments. Medicare pays 80 percentof the allowed charge, which is either the physician’s actual charge or the MFS amount,whichever is lower.
Medicare Risk Program: A program that allows qualifying HMOs to enroll Medicare benefi-ciaries and assume full financial risk for their Medicare benefits in exchange for a monthly capi-tated payment.
Medicare Select: A program established in 1990 that allows beneficiaries in traditional fee-for-service Medicare to lower their out-of-pocket expenses for supplemental (Medigap) insurance byusing providers in designated preferred provider organizations.
Medigap: Privately purchased individual or group health insurance policies designed to supple-ment Medicare coverage. Benefits may include services not covered by Medicare and paymentof Medicare deductibles or coinsurance costs. Medigap insurance must conform to one of tenstandardized policies.
National Income: See “Gross Domestic Product.”
Open Enrollment Period: A period of time in which an insuree may enroll in or change healthplans and during which insurers must accept all applicants. Open enrollment periods assure thatinsurers, especially prepaid plans, do not enroll only good risks.
Out-of-Pocket Health Care Costs: Costs, such as copayments, coinsurance, and deductibles,incurred by insurees when they receive health care services.
Part A (Hospital Insurance) Benefits: The set of Medicare benefits that includes coverage forinpatient hospital services, home health care, skilled nursing facility care, and hospice care,financed by the Hospital Insurance Trust Fund.
Part B (Supplementary Medical Insurance) Benefits: The set of Medicare benefits thatincludes coverage for physician services, outpatient hospital services, laboratory and other diag-nostic tests, financed by the Supplementary Medical Insurance Trust Fund.
Partial Capitation: A method of risk adjusting payments to prepaid health plans based partlyon capitation and partly on fee-for-service.
Physician Payment Review Commission (PPRC): Commission created in 1985 to advise andmake recommendations to the Congress on methods to reform payment to physicians under theMedicare program.
Point of Service Plan (POS): A managed care plan in which enrollees may select among deliv-ery options (i.e., HMO, PPO, and FFS) at the time care is needed. Enrollees typically face lowerout-of-pocket costs when they choose HMO providers than when they choose PPOs orproviders with whom the plan does not have a contract.
Preferred Provider Organization (PPO): A formally organized network of providers who fur-nish health care services to purchasers according to a predetermined negotiated fee. The patientcan choose either a network or non-PPO physician, but has a financial incentive to choose aPPO physician.
Prospective Payment Assessment Commission (ProPAC): Commission created in 1983 toadvise Congress and the Secretary of Health and Human Services about implementation andsubsequent changes in Medicare’s DRG-based prospective payment system.
Prospective Payment System (PPS): A method of paying hospitals or other health programs inwhich amounts or rates of payment are established in advance for a certain time period.Organizations receive the pre-determined amounts regardless of actual costs incurred.
Provider Sponsored Network (PSN): Affiliations of providers organized and operated to offeran integrated network of health care providers to insurance companies, HMOs, or other healthplans. Employers and other organizations may contract with the PSN for health care services fortheir covered individuals.
Reinsurance: The resale of insurance products to a secondary market thereby spreading thecosts of underwriting a policy and protecting the primary insurer against catastrophic expenses.
Resource Based Relative Value Scale (RBRVS): The methodology used to determine the MFSbased on the relative value of resources used in performing each covered procedure.
Risk Adjustment: A process where premium dollars shift away from prepaid health plans that
have relatively healthy enrollees to other prepaid plans with more high-cost members. The pur-
pose of risk adjustment is to minimize prepaid health plans’ incentives to attract only relatively
healthy enrollees and to fairly compensate providers for care given to patients with more expen-
sive health care needs.
Risk Contracts: See “Medicare Risk Program.”
Risk Selection: Occurs when a disproportionate share of high or low users of care join a health
plan.
Skilled Nursing Facility (SNF): A nursing care institution that participates in the Medicare
and Medicaid programs and meets specified requirements for services, staffing, and safety.
Social HMO (S/HMO): A HCFA demonstration project that provides beneficiaries both acute
and long-term care services. S/HMOs attempt to maintain the enrollment of high-cost, frail
beneficiaries in managed care through the use of community support services and a capitated
payment with funds from Medicare, Medicaid, and private premiums.
Staff Model HMO: An HMO where physicians work only for the HMO in exchange for a
salary.
Supplemental Insurance: Health insurance that offers benefits, such as prescription drug cover-
age and preventive care, for services not covered by Medicare. See “Medigap”
Supplemental Medical Insurance (SMI) Trust Fund: A federal account that receives 25 per-
cent of its revenues from beneficiary premiums, and the rest from general tax revenues. The
SMI Trust Fund pays for Medicare Part B services, which include physician services, outpatient
hospital services, laboratory and other diagnostic tests.
Teaching Hospitals: As defined in law and regulation, these are hospitals that have at least four
physician interns and residents for each bed and that train medical personnel, conduct research,
and often provide specialized or relatively intensive patient care.
United States Per Capita Cost (USPCC): The national average cost per Medicare beneficiary.
Developed annually by HCFA’s Office of the Actuary, it contributes to the calculation of the
AAPCC.
Volume Performance Standard (VPS): A system used to adjust the Medicare Fee Schedule
based on comparisons between increases in actual expenditures and predetermined performance
standard rates of increase.
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