Medicare: Second Status Report on Medicare Insured Group Demonstration Projects

Published by the Government Accountability Office on 1990-06-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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GAO                                          Report to Congressional Committees

                                             Second Status Report
                                             on Medicare Insured
                                             Group Demonstration


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United States
General Accounting Office
Washington, D.C. 20548

Human Resources Division


June 6,199O

The Honorable Lloyd Bentsen
Chairman, Committee on Finance
United States Senate

The Honorable John D. Dingell
Chairman, Committee on Energy and Commerce
House of Representatives

The Honorable Dan Rostenkowski
Chairman, Committee on Ways and Means
House of Representatives

Section 4015(a) of the Omnibus Budget Reconciliation Act of 1987
(OBRA)  authorizes the Secretary of Health and Human Services (HHS) to
conduct demonstrations of contracting on a prepaid capitation basis
with Medicare Insured Groups (MIGS) to provide Medicare benefits to
retirees.1 The law also requires us to monitor contracts with these MIGS
and report on the status of the projects. This is our second status report.

In our first status report,” we noted that HHS'S Health Care Financing
Administration (HCFA) had entered into cooperative agreements with
three companies to establish MIGS. We also questioned HCFA'S interpreta-
tion of section 4015(a) because MIG contracts awarded under its interpre-
tation could lead to increased Medicare costs. We recommended that
HCFA apply section 40 15(a) payment limitation and surplus retention
restrictions to all MIG projects. In HHS’S comments on the report, it agreed
to implement our recommendations.

‘Section 4016(a) pertains explicitly to “Medicare Insured Group Demonstration Projects.” Such
groups may include Medicare qualified health maintenance organizations and other entities that meet
the specified restrictions and requirements. Reference is made to employers in section 4015(a)(7). The
legislative history suggests that employment-related groups, such as employers and unions, were the
entities most likely to participate.

‘Medicare: Status Report on Medicare Insured Group Demonstration Projects (GAO/HRD-89-64,
June 27, 1989).

Page 1                               GAO/HRD90-117      Status Report on Medicare    Group Projects

                    The Southern California Edison Company (SCEC) and Amalgamated Life
Current Status of   Insurance Company MIGS were still in the feasibility analysis stage of
Three Cooperative   their cooperative agreements with HCFA in April 1990.:) SCECwas continu-
Agreements          ing to develop its proposed method for determining Medicare payment
                    rates to it, and Amalgamated was still in the process of developing its
                    health care delivery system. As of April 1990, neither MIG had enrolled
                    any Medicare beneficiaries, and HCFA was not sure when either project
                    would become operational. Chrysler Motors Corporation terminated its
                    MIG demonstration project after a feasibility study found it would not
                    operate at a profit. Because section 4015(a) authorized three projects,
                    HCFA is continuing to negotiate with other prospective sponsors.

                    Medicare is a federal program that assists most elderly and some dis-
Background          abled people in paying for their health care, generally on a fee-for-
                    service basis. The program, administered by HCFA, provides two basic
                    forms of protection, Part A, Hospital Insurance, covers inpatient hospi-
                    tal, skilled nursing facility, hospice, and home health services. Part B,
                    Supplementary Medical Insurance, covers physician services and vari-
                    ous other health care services, such as laboratory and outpatient hospi-
                    tal services. In 1989, Medicare covered about 33.7 million beneficiaries
                    and spent about $58.2 billion for part A and $38.2 billion for part B.

                    In February 1985, as part of an effort to contain the growth of Medicare
                    costs, III% initiated a nationwide program to expand the use of risk-
                    based health maintenance organizations (HMOS) by Medicare benefi-
                    ciaries.4 These HMOS operate at risk because they contract to provide
                    enrollees’ covered health care for a predetermined monthly capitation
                    rate equal to 95 percent of the Adjusted Average Per Capita Cost
                    (AAPCC).AAPCCrates are actuarial estimates of the costs Medicare will
                    incur, on average, for serving beneficiaries on a fee-for-service basis.
                    AAPCCrates are developed for each county in the nation.

                    Because Medicare law requires that HMO capitation rates be based on 95
                    percent of Medicare’s average costs in the areas covered by the HMOS,

                    “These cooperative agreements require completion of a feasibility analysis phase and an operational
                    development phase before a company can proceed to the implementation phase of its demonstration
                    project, the point at which it can begin to enroll Medicare beneficiaries.
                    %ICFA also has risk contracts with competitive medical plans which operate like HMOs in that they
                    are paid a predetermined fixed capitation rate, are subject to essentially the same Medicare regula-
                    tory requirements, but are permitted greater flexibility in how they set their commercial rates and
                    the services they offer commercial members. For the remainder of this report, when we use the term
                    HMO, it also refers to competitive medical plans.

                    Page 2                               GAO/HID-90-117     Status Report on Medicare    Group Projects

                  the program is designed to reduce Medicare outlays for HMO enrollees by
                  5 percent. In July 1987, HHS submitted a legislative proposal to the Con-
                  gress to further expand the program, seeking authority to enter into
                  risk-based contracts with employer-related plans.

                  We reported on unresolved issues in HHS’S proposal to contract with
                  employer-related groups on a capitation basis.” Because the MIG concept
                  had not been tested and HHS had problems implementing previous capi-
                  tation initiatives, we urged caution in proceeding with the proposal,
                  thereby recommending that the Congress consider deferring authoriza-
                  tion to implement the program until HHS demonstrated that MIG rate-
                  setting methods and beneficiary and program safeguards are reasonable
                  and adequate. Section 4015(a) authorizes such demonstrations and con-
                  tains important safeguards for both Medicare and its beneficiaries.

                  Many employers and unions provide their Medicare-eligible retirees with
The MIG Concept   supplemental policies that pay for part of the retirees’ medical expenses
                  not covered by Medicare. An HHS study concluded that in 1987, an esti-
                  mated 10.7 million retirees and their dependents were covered by
                  employer-sponsored health benefit plans6 We estimated that employers”
                  annual benefit payments for retirees’ medical care were about $9 billion
                  in 1988.7 Although retirees over age 65 (Medicare eligible) made up two-
                  thirds of all retirees covered by company health plans, they received
                  only about one-third of the benefits because Medicare pays a large por-
                  tion of their health care costs.

                  Under the MIG demonstration program, Medicare beneficiaries decide
                  whether to enroll in a MIG. For beneficiaries who enroll, the MIG assumes,
                  for a fixed capitation payment from Medicare, the financial risk of pro-
                  viding the full range of Medicare-covered services. The MIG program
                  enables employer-related groups to combine Medicare and employer-
                  sponsored Medicare supplemental benefits into one integrated health
                  care plan. HHS postulated that, by managing all their retirees’ health care
                  benefits, employer-related groups could effectively monitor and control
                  the price and utilization of benefits, thereby holding down overall costs.

                  “Medicare: Uncertainties Surround Proposal to Expand Prepaid Health Plan Contracting (GAO/
                      -88 _14, Nov. 2,19&37).

                  “Health Insurance Coverage of Retired Persons, National Medical Expenditure Survey, U.S. Depart-
                  ment of Health and Human Services, Public Health service, September 1989.

                  Page 3                              GAO/HRD-90-117 Status Report on Medicare Group Projects

                         Under this theory, Medicare costs would be reduced. Likewise, the
                         employer-based group would have lower costs for Medicare supplemen-
                         tal benefits than it otherwise would. In addition, MIG enrollees should
                         benefit from having to deal with only one party for claims processing
                         and from receiving the additional benefits the MIGS may offer as incen-
                         tives to enroll.

                         As specified in section 4016(a), our objectives were to (1) monitor the
Objectives, Scope,and-   status of HCFA'S implementation of the MIG demonstrations and the status
Methodology              of any projects awarded and (2) review the potential effects of section
                         4016(a) requirements on these projects.

                         We reviewed HCFA and HHS documentation related to the MIG demonstra-
                         tion to determine the projects’ status, To obtain information on current
                         developments, we discussed the demonstration program with officials in
                         HCFA'S Office of Research and Demonstrations, which is responsible for
                         implementing the demonstration and awarding the cooperative agree-
                         ments. We also reviewed OBRA requirements for projects and reviewed
                         prior GAO work on HCFA’S capitation initiatives under the Medicare and
                         Medicaid programs.

                         We did not obtain written comments from HHS on this report; however,
                         HCFA officials’ comments have been incorporated where appropriate.

                         Our work was conducted between February 1989 and April 1990 in
                         accordance with generally accepted government auditing standards.

                         In November 1989, Chrysler Motors Corporation decided to discontinue
Chrysler Decides to      its MIG demonstration project during the feasibility analysis phase.
Discontinue Its MIG      Chrysler concluded that a MIG was not feasible. The overall operating
Project                  costs of a MIG would not be at least 6 percent lower than Medicare fee-
                         for-service costs and, therefore, the MIG would operate at a loss.

                         A major objective for Chrysler when it began analyzing its MIG project
                         was to explore a method to help control the rising health expenditures
                         for approximately 62,000 retired employees under its Medicare supple-
                         mental benefits program.8 The MIG was a joint project between Chrysler

                         ‘According to Chrysler’s 1987 annual report, it incurred $202.9 million in expenses during 1987 for
                         health and life insurance for its retirees. In 1987 Chrysler had about 82,000 retired employees cov-
                         ered by its pension plan, of which 20,000 were not eligible for Medicare benefits.

                         Page 4                               GAO/I%UWO-117       Status Report on Medicare    Group Project8

                      and the International Union (United Automobile, Aerospace and Agri-
                      cultural Implement Workers). Chrysler’s 1988 health benefits program
                      covered up to 365 days of inpatient hospital care, up to 730 days of
                      skilled nursing care, prescription drugs, and Medicare deductibles and

                      The first phase of Chrysler’s project was to analyze the feasibility of a
                      MIG. Chrysler hired a consultant to (1) analyze available information
                      about current health care costs and utilization, (2) estimate savings from
                      available managed care initiatives, (3) develop a proposal for a Medicare
                      rate-setting methodology, and (4) investigate administrative issues.
                      Chrysler’s consultant concluded that a MIG was not feasible because it
                      would not be able to operate at a profit for the following reasons:

                    . HCFA'S recent success in cost containment, such as controlling the price
                      of care through prospective payment programs, had reduced the poten-
                      tial for savings through further initiatives. Based on 1986 data, a
                      Chrysler MIG could only achieve a net savings equivalent to 3.8 percent
                      of Medicare and company-furnished health payments by implementing a
                      number of managed care initiatives, including case management, exclu-
                      sive provider organizations, and retrospective utilization review. This
                      falls short of the S-percent reduction necessary for a MIG to be profitable
                      under section 40 15(a).
                    l A MIG could achieve administrative cost levels as low as Medicare’s only
                      after many years and substantial investment. A Chrysler MIG'S adminis-
                      trative costs would be 6 percent of claims costs. This compares to an
                      estimate of 2.3 percent in administrative costs for Medicare and com-
                      pany-furnished benefits combined.
                    . A MIG would probably not be able to negotiate provider payment rates as
                      low as Medicare’s payment levels because the MIG would lack Medicare’s
                      market power and government status.

                      In January 1989, HCFA entered into a cooperative agreement with the
Status of SCECMIG     Southern California Edison Company to explore establishing a MIG, and
Project               the project is still in the feasibility analysis phase. HCFA budgeted about
                      $198,000 for its share of that phase, which was scheduled to be com-
                      pleted in January 1990. HCFA, however, granted an extension through
                      April 1990 and is planning to grant another extension through March
                      31, 1991, allowing SCECadditional time to develop a proposal for a
                      method of setting the capitation rate HCFA would pay during the demon-
                      stration period. At the completion of the feasibility analysis phase, sc~c
                      will decide whether to continue with the MIG demonstration project.

                      Page 6                     GAO/HRD-90-117   Status Report on Medicare   Group Projects


                  SCEC,an investor-owned utility company, is interested in a MIG project as
                  a possible means to moderate rising retiree health care costs without
                  reducing benefits. About 10,000 retirees and their dependents receive
                  health services through SCEC'Sbenefit plan, about 4,800 of whom are
                  Medicare eligible. The combined cost of health care and life insurance
                  benefits for all of SCEC’Sretirees and their dependents was about $23
                  million in 1988.

                  Retirees can choose to obtain their health care services from an HMO or
                  from SCEZC’S provider organization, PrimeCare. Nearly all SCECretirees
                  have selected PrimeCare, which pays in full for covered services at par-
                  ticipating providers, including clinics operated by SCEC.If the retirees go
                  to a nonparticipating provider, PrimeCare pays 80 percent of reasonable
                  charges. PrimeCare covers inpatient, outpatient, substance abuse,
                  mental health, and chiropractic services; and it pays the part B premi-
                  ums for Medicare-eligible retirees. Additionally, PrimeCare has an
                  annual out-of-pocket expense limit of $1,500 per person. PrimeCare has
                  opened one geriatric health care center and is in the process of opening
                  two others.

                  SCECproposes to use PrimeCare for its MIG project with the possibility of
                  adding benefits for long-term care and hearing aids. SCECproposes to
                  open its MIG to all Medicare-eligible retirees, except dialysis and trans-
                  plant patients and beneficiaries who are eligible because of a disability.

                  SCIZ proposed a Medicare payment-rate methodology. HCFA, however,
                  questioned the methodology because portions of it were not based on the
                  cost experience of SCEC’SMedicare-eligible retirees. As of April 30, 1990,
                  a final rate-setting methodology had not been approved by HCFA, nor had
                  an operational date for the MIG been finalized.

                  Amalgamated Life Insurance Company remains in the feasibility analy-
Status of the     sis phase of its cooperative agreement with HCFA. Amalgamated is the
Amalgamated MIG   administrator for the Amalgamated Clothing and Textile Workers Union
Project           health insurance benefit plan, which covers about 500,000 workers and
                  their families, including approximately 130,000 retirees and spouses.
                  Most of the retirees are low-income Medicare beneficiaries who received
                  only limited health insurance coverage during their working years. In
                  1988, Amalgamated supplemented union retirees’ Medicare benefits by
                  covering the inpatient hospital deductible and hospital coinsurance. The
                  union provides direct care, at subsidized rates, to its retirees and active

                  Page 6                      GAO/IiRBBO-117   Status Report on Medicare   Group Projects


                       workers through its network of health centers, one of which is in Phila-
                       delphia. Medicare-eligible retirees are responsible for part B deductible
                       and coinsurance for services received at these health centers and receive
                       nothing from Amalgamated when other providers are used. The union
                       has about 12,000 Medicare-eligible retirees and spouses in the Philadel-
                       phia area, and Amalgamated has proposed this area as the initial site for
                       its MIG demonstration project.

                       In September 1988, HCFA and Amalgamated signed a cooperative agree-
                       ment to establish a MIG demonstration project. HCFA extended for the sec-
                       ond time the feasibility analysis phase through December 31,1990, due
                       to Amalgamated’s difficulties in negotiating a contract for inpatient care
                       with a Philadelphia health care facility. HCFA informed Amalgamated
                       that the remaining $129,500 budgeted for this phase will not be made
                       available until an inpatient-care contract is signed.

                       At the time of our November 1987 report, HCFA planned to update MIGS'
How Rates Will Be      initial experience-based payment rates using some index of cost growth,
Updated Has Not Been   such as overall Medicare cost changes. HCFA would no longer be
Determined             obtaining cost data for MIG enrollees because it would not receive claims
                       from them and, thus, would not be able to directly update payment
                       rates. We pointed out that, as time passed, it might become increasingly
                       difficult to measure objectively whether under-payments or overpay-
                       ments to MIGS were occurring. We concluded that the MIG rate-setting
                       methodology should be thoroughly tested before general legislation
                       authorizing agreements was granted.

                       As of April 1990, HCFA had not decided how to update experience-based
                       payment rates. HCFA officials said they are waiting for a prospective MIG
                       to present a payment updating method for the agency to evaluate.
                       Under the demonstration, HCFA plans to collect demographic, enrollee
                       satisfaction, and health service cost and utilization data. The specifics
                       about the exact data to be collected and the uses of them had not been
                       finalized. Cost and use of service data will be critical to determining
                       whether a suitable method for updating rates can be found. We will con-
                       tinue to monitor developments in the rate-updating and data collection

                       Page 7                     GAO/HRD-90-117   Statue Report on Medicare   Group Projects

                      In our June 1989 report, we questioned HCFA'S interpretation of the
HHS Agrees            requirements placed on MIG demonstrations, In line with our interpreta-
With Our Prior        tion, we recommended that the Secretary of HHS require HCFA to
Recommendations   . apply the 95 percent of the experience-based rate payment limitation
                    and the surplus retention restrictions of OBRA to all MIG projects,
                  . define surplus as the excess of Medicare payments over the costs of pro-
                    viding Medicare-covered services, and
                  . require that all surplus over that amount either be used for additional
                    benefits not previously funded by the employer or be returned to the
                    Medicare program.

                      In November 7, 1989, comments on these recommendations, HHS stated
                      that after consultation with its Office of the General Counsel, it intends
                      to implement all three.

                      HCFA has been working for about 2 years to implement MIG demonstra-
Conclusions           tion projects. Currently, none of the projects have progressed further
                      than the feasibility analysis phase. At the end of its feasibility analysis,
                      Chrysler decided not to proceed with the demonstration, concluding that
                      it would not be able to operate a MIG profitably. Little progress has been
                      made in the last year by Amalgamated or Southern California Edison.
                      Neither company has developed a method of setting capitation rates
                      that HCFA has approved. Both companies have received extensions of the
                      feasibility analysis phase of their cooperative agreements.

                      Based on Chrysler’s decision to drop out of the MIG demonstration and
                      the slow progress being made by Amalgamated and SCEC,it is not known
                      when any MIG project will become operational.

                      Page 8                      GAO/HRDBO-117   Status Report on Medicare   Group Projects
We are sending copies of this report to other congressional committees;
the Director, Office of Management and Budget; the Secretary of Health
and Human Services; and other interested parties. This report was pre-
pared under the direction of Janet L. Shikles, Director, Health Financing
and Policy Issues, who may be reached on (‘202) 276-6461 if you or your
staff have any questions. Other major contributors are listed in appen-
dix I.

Lawrence H. Thompson
Assistant Comptroller General

Page 9                     GAO/HUD-90-117   Status Report on Medicare   Group Projects
Appendix I

Major Contributors to This Report

                        Jane L. Ross, Senior Assistant Director, (202) 275-6196
Human Resources         Thomas G. Dowdal, Assistant Director
Division,               G. Jeff Ch&-tey, Assignment Manager
Washington, DC.

                        Michael J. Stepek, Evaluator-in-Charge
Philadelphia Regional   Linda P. Schmeer, Evaluator


(106851)                Page 10                    GAO/HRD-90417   Status Report on MedIcare   Group Projecte
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