Medicare Managed Care: Better Risk Adjustment Expected to Reduce Excess Payments Overall While Making Them Fairer to Individual Plans

Published by the Government Accountability Office on 1999-02-25.

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

                              United States General Accounting Office

GAO                           Testimony

                              Before the Subcommittee on Health and
                              Environment, Committee on Commerce, House of

For Release on Delivery
Expected at 10:00 a.m
Thursday, February 25, 1999
                              MEDICARE MANAGED

                              Better Risk Adjustment
                              Expected to Reduce
                              Excess Payments Overall
                              While Making Them Fairer
                              to Individual Plans
                              Statement of William J. Scanlon, Director
                              Health Financing and Public Health Issues
                              Health, Education, and Human Services Division


          Because of problems in the way Medicare paid capitated managed care
          plans, the Balanced Budget Act of 1997 (BBA) changed Medicare’s payment
          rules. The act’s provisions acknowledge that the enrollment of
          beneficiaries in managed care plans has not saved the government money
          as expected. Studies by us and others show that methodological flaws
          have led to billions of dollars in excess payments and inappropriate
          payment disparities across counties.

          • Medicare’s capitation rates are excessive because payments are based
            on health care spending for the average non-enrolled beneficiary, while
            the plans’ enrollees tend to be healthier than average.
          • Excess payments continued to grow with increased enrollment, rather
            than diminish, as some have speculated. As a county’s managed care
            enrollee population grew, the concentrations of high-cost beneficiaries
            remaining in fee-for-service also grew. Rates based on these sicker
            populations resulted in increasingly excessive payments relative to the
            better health, on average, of the managed care population. Our 1997
            study of California HMO payments showed that HMOs in counties in
            which enrollment was high received a higher percentage of excess

          To correct these problems, BBA changed the rate-setting formula in 1998
          and called for the Health Care Financing Administration (HCFA) to replace
          the current risk adjuster in 2000. (The risk adjuster is a mechanism for
          modifying a plan’s average capitation rate to better reflect an enrollee’s
          expected medical costs.) The BBA provisions put in place in 1998 may
          reduce the overpayments somewhat, but substantial excess will remain,
          and payment disparities will persist that could jeopardize plan participation
          and access for costlier seniors. The inadequacy of the current risk adjuster
          continues to contribute to inappropriate payments, hurting taxpayers,
          certain plans, and beneficiaries.

          HCFA’s proposed risk adjuster for 2000 is an interim step that, while not
          perfect, can improve estimates of Medicare enrollees’ medical costs. A
          “next generation” of risk adjustment is scheduled for 2004. Better cost
          estimates producing fairer rates can reduce the unnecessary spending of
          taxpayer dollars but, at the same time, mitigate the financial disincentive
          for plans to serve a costly mix of beneficiaries. HCFA plans to phase in the
          use of the 2000 adjuster and, in so doing, anticipates the need to avoid
          sharp payment changes that could affect plans’ offerings and diminish the
          attractiveness of the Medicare+Choice program to beneficiaries. The
          success of this and future risk adjustment efforts also depends on the

          Page 1                                                       GAO/T-HEHS-99-72

quality of data HCFA uses. We believe that Medicare’s managed care plans
should therefore aggressively pursue the collection of comprehensive
encounter data on their enrollees’ medical conditions and report this
information promptly to HCFA.

Page 2                                                   GAO/T-HEHS-99-72
Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess
              Mr. Chairman and Members of the Subcommittee:

              We are pleased to be here today as you address the question of adjusting
              Medicare’s payments to managed care plans in the Medicare+Choice
              program. Although the subject matter is technical, its implications are
              significant for Medicare’s greater use of managed care. The Balanced
              Budget Act of 1997 (BBA) includes provisions designed to slow the growth
              of Medicare payments overall. BBA also encourages the expansion of
              managed care in its creation of Medicare+Choice, designed to offer
              beneficiaries more health plan options beyond those available through
              Medicare’s health maintenance organizations (HMO). BBA provisions
              modify the method used to pay health plans, and it is the details for
              implementing these provisions—representing billions of dollars in
              savings—that are under discussion here today.

              Managed care plans receive from Medicare a fixed monthly payment, called
              a capitation payment, for each beneficiary they enroll. Because the
              payment is fixed per enrollee, regardless of what the plan spends for each
              enrollee’s care, health plans lack the incentive to provide unnecessary
              services. However, the enrollment of beneficiaries in managed care plans
              has not saved the government money as expected, mainly for two reasons.
              First, as we and others previously determined, Medicare’s capitation rates
              are excessive because payments are based on health care spending for the
              average non-enrolled beneficiary, while the plans’ enrollees tend to be
              healthier than average.1 Second, instead of diminishing as more
              beneficiaries enrolled in managed care, excess payments per enrollee
              continued to grow. To correct these problems, BBA changed the rate-
              setting formula used by the Health Care Financing Administration (HCFA),
              the agency responsible for administering Medicare. It required that most of
              the rate-setting provisions be in place in 1998 and required that HCFA
              replace Medicare’s current risk adjuster—the mechanism that modifies a
              plan’s average capitation rate to better reflect an enrollee’s expected
              medical costs—with a new one to be implemented in 2000. The risk
              adjuster in place has been widely criticized as a major factor in the HMO
              overpayment problem.

              In considering Medicare’s new rate-setting method, my comments today
              will focus on (1) the importance of improving the current risk adjustment

                Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments (GAO/
              HEHS-97-16, Apr. 25, 1997).

              Page 3                                                                    GAO/T-HEHS-99-72
             Medicare Managed Care: Better Risk
             Adjustment Expected to Reduce Excess

             method, (2) the implications of rate-setting changes implemented in 1998,
             and (3) the advantages and drawbacks of HCFA’s proposed new interim
             risk adjuster. My comments are based on information drawn from our
             issued work on this subject, supplemented by relevant published studies
             and interviews with HCFA officials.

             In summary, Medicare’s current risk adjuster has failed to protect
             taxpayers, certain plans, and beneficiaries, underscoring the urgency of
             replacing it with a health-based risk adjuster.

             • Studies by us and others show that methodological flaws have led to
               billions of dollars in excess payments and inappropriate payment
             • BBA provisions now in place may reduce, but not eliminate, excess
               payments; and payment disparities persist that could jeopardize plan
               participation and access to managed care for costlier seniors.
             • The new risk adjuster required to be in place by 2000 is intended to
               improve estimates of health plan enrollees’ medical costs. Better cost
               estimates producing fairer rates could reduce the unnecessary spending
               of taxpayer dollars while minimizing the financial disincentive for plans
               to serve a costly mix of beneficiaries.

             The use of the new risk adjuster, while not perfect, is an interim step and
             improves on the one now in place. In addition, HCFA plans to phase in the
             use of the new adjuster, thereby recognizing the need to avoid sharp
             payment changes that could affect plans’ offerings and diminish the
             attractiveness of the Medicare+Choice program to beneficiaries.

Background   The long-term financial condition of Medicare is now one of the nation’s
             most pressing problems. As the nation’s largest health insurance program,
             Medicare’s size and impact on all Americans is significant. The program
             covers about 39 million elderly and disabled beneficiaries at a cost of more
             than $193 billion in fiscal year 1998. About 83 percent of the program’s
             beneficiaries receive health care on a fee-for-service (FFS) basis, in which
             providers are reimbursed for each covered service they deliver to

             Page 4                                                      GAO/T-HEHS-99-72
Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess

beneficiaries. The rest, about 6.8 million people, are provided care through
more than 450 managed care plans, as of December 1, 1998.2

To extend the solvency of Medicare’s Hospital Insurance Trust fund beyond
2008, BBA provided for substantial reforms in both the FFS and managed
care components of Medicare. BBA provisions are expected to achieve
estimated Medicare savings that reduce the program’s average annual
growth rate by more than 3 percent, representing over $100 billion over 5

One way in which BBA seeks to restructure Medicare is to encourage
greater participation in Medicare+Choice. Under this program, BBA
permits the creation of new types of Medicare health plans, such as
preferred provider organizations and provider-sponsored organizations.
BBA’s emphasis on Medicare+Choice reflects the perspective that
increased managed care enrollment will help slow Medicare spending
while expanding beneficiaries’ options in choosing health plans.

BBA also sought to improve the method for setting managed care plans’
payment rates. In general terms, the pre-BBA rate-setting methodology
worked as follows. Every year, HCFA estimated how much it would spend
in each U.S. county to serve the “average” FFS beneficiary. It would then
discount that amount by 5 percent under the assumption that the managed
care plans provided care more efficiently than the unmanaged FFS system.
The resulting amount constituted a base county rate to be paid to the plans
operating in that county. Because some beneficiaries were expected to
require more health services than others, HCFA “risk adjusted” the base
rate up or down for each beneficiary, depending on certain beneficiary
characteristics—specifically, age; sex; eligibility for Medicaid; employment
status; and residence in an institution, such as a skilled nursing facility.3

BBA’s new payment rate method seeks to address the two main factors
contributing to excess payments: (1) the disparity in expected health costs
between Medicare’s FFS and managed care populations built into each
county’s base capitation rates and (2) the failure of the risk adjuster to

2About  90 percent of the 6.8 million Medicare beneficiaries are enrolled in managed care plans that
receive fixed monthly capitation payments. The remainder are enrolled in plans that are reimbursed for
the costs they incur, less the estimated value of beneficiary cost-sharing.

 Separate rates, using the same demographic traits, are calculated for beneficiaries who qualify for
Medicare because of a disability (under age 65). Separate rates are also set for beneficiaries with end-
stage renal disease (kidney failure).

Page 5                                                                             GAO/T-HEHS-99-72
                       Medicare Managed Care: Better Risk
                       Adjustment Expected to Reduce Excess

                       correct for that disparity on an individual enrollee level. BBA required that
                       a county’s capitation rate equal the highest of

                       • a blended capitation rate, which reflects a combination of local and
                         national average FFS spending from 1997, updated for increases in
                         national spending;
                       • the previous year’s county rate increased by 2 percent; or
                       • a minimum payment amount, called a floor, set equal to $367 in 1998 and
                         updated each year.

                       Loosening the link between the current cost of Medicare’s FFS population
                       and counties’ base rates helps prevent the excess payments from
                       continuing to increase as more beneficiaries join managed care plans. BBA
                       also acknowledges the need for individual enrollee adjustments by
                       requiring the development of a risk adjustment method based on health
                       status. The law requires that HCFA develop and report on the new risk
                       adjuster by March 1 of this year and the method be in place by January

Medicare’s Current     Risk adjustment is a tool to set capitation rates so that they reflect
                       enrollees’ expected health costs as accurately as possible. This tool is
Risk Adjustment        particularly important given Medicare’s growing use of managed care and
Method Fails To        the phenomenon of favorable selection—the tendency of managed care
                       plans to attract a population of Medicare seniors whose health costs are
Prevent Overpayments   generally lower than those of the average program beneficiary. Our 1997
and Appropriately      study on payments to California HMOs, which enrolled more than a third of
Target Payments To     Medicare’s managed care population, found that Medicare overpaid plans
                       by about 16 percent because HMO enrollees had costs that were lower than
Plans                  the average beneficiary’s.5

                       Medicare’s current risk adjuster cannot sufficiently lower rates to be
                       consistent with the expected costs of managed care’s healthier population.
                       The reason is that Medicare’s risk adjuster relies on demographic factors
                       such as age and sex, which alone are poor predictors of an individual’s

                       4Technically,the law requires the Secretary of the Department of Health and Human Services to
                       develop, report, and implement the health-based risk adjustment method.

                        GAO-HEHS-97-16, Apr. 25, 1997. This is consistent with a 1996 study by HCFA researchers finding that
                       health plan enrollees had costs estimated at 12 to 14 percent below the average beneficiary’s. (Riley and
                       others, HCFA Review, 1996.)

                       Page 6                                                                             GAO/T-HEHS-99-72
Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess

health care costs. For example, two beneficiaries can be demographically
identical (same age and sex), but one may experience occasional minor
ailments while the other may suffer from a serious chronic condition.
Without the use of health status factors to make that distinction, Medicare’s
risk adjuster produces excessive payments in compensating plans for their
relatively lower cost enrollees.

The financial consequences of a poor risk adjuster are huge. In our 1997
study of California’s payment rates, we estimated that Medicare paid about
$1 billion in excess to health plans operating in California in 1995. Shortly
before we issued our report, the Physician Payment Review Commission
(PPRC), now a part of the Medicare Payment Advisory Commission,
estimated that annual excess payments to Medicare HMOs nationwide
could total $2 billion.

Some analysts have speculated that, with growing enrollment, health plans
would necessarily enroll a substantially larger share of less healthy
beneficiaries, which would raise plans’ costs and reduce Medicare’s excess
payments. Our 1997 analysis, however, showed that—rather than shrinking
excess payments—the rapid growth in Medicare managed care enrollment
actually exacerbated the situation. The counties with higher managed care
enrollment had higher, not lower, excess payments. Data indicated that the
sickest beneficiaries tended to remain in FFS while the healthier
beneficiaries joined managed care plans. Excess payments grew with
managed care enrollment partly because HCFA based the payment rates on
average FFS spending, which increased as the pool of FFS beneficiaries
shrank and, as a group, became less healthy.

Better risk adjustment is also important for plans that may not be
adequately compensated for serving higher cost beneficiaries who enroll.
Having enrollees who are sicker than the average mix of Medicare
beneficiaries can alter a plan’s costs significantly. About 10 percent of
Medicare beneficiaries account for 60 percent of Medicare’s annual
expenditures. Without adequate risk adjustment, plans with more than
their share of the costly beneficiaries are at a competitive disadvantage.

Page 7                                                       GAO/T-HEHS-99-72
                              Medicare Managed Care: Better Risk
                              Adjustment Expected to Reduce Excess

BBA Provisions May            BBA contains several provisions, implemented in 1998, that are designed to
                              improve Medicare’s rate-setting method. Certain provisions seek to reduce
Reduce Overpayments,          excess payments and inappropriate geographic disparities. These changes
but Substantial Excess        represent steps in the right direction but do not eliminate the need for a
                              health-based risk adjuster. Substantial excess payments likely persist, in
Likely Remains                part, because other BBA provisions tended to incorporate the excess that
                              existed in 1997 into the current rates.

Certain BBA Provisions May    BBA aims to reduce the excess in Medicare’s managed care payments in
Reduce Excess Payments        two ways. First, BBA holds down managed care per capita spending
                              increases for 5 years. Specifically, BBA sets the factor used to update
but Are Not Substitutes for
                              managed care payment rates equal to national per capita Medicare growth
Improved Risk Adjustment      minus a specified percent: 0.8 percent in 1998 and 0.5 percent in each of
                              the following 4 years.

                              BBA also provides for a methodological approach known as “blending,”
                              which may help reduce excess payments. The blended rate set for each
                              county combines that county’s 1997 rate, updated for increases in national
                              Medicare spending, and a national average. The blending formula is
                              currently weighted heavily toward local rates but will gradually change so
                              that local and national rates will be weighted equally in 2003. Over time,
                              blending will reduce the substantial variation in county payment rates that
                              now exist. For example, county rates ranged from a low of $380 to a high
                              of $798 in 1999. Because of BBA-mandated budget neutrality and minimum
                              payment constraints, no county received a blended rate in 1998 or 1999.
                              Blending is expected to occur for the first time in 2000.

                              Blending may help reduce excess payments because high-rate counties
                              (where excess payments are estimated to be concentrated) will receive
                              smaller annual increases relative to low-rate counties. Evidence on the
                              relationship between county payment rates and excess payments is
                              provided in a 1997 PPRC study. PPRC reported that county payment rates
                              tend to overestimate beneficiaries’ health care costs in high-payment-rate
                              areas and underestimate their costs in low-payment-rate areas.6 PPRC
                              found that a comprehensive health-based risk adjustment methodology
                              would have lowered, for example, the average Miami-area payment rate

                                  Physician Payment Review Commission, 1997 Annual Report to the Congress.

                              Page 8                                                                         GAO/T-HEHS-99-72
                           Medicare Managed Care: Better Risk
                           Adjustment Expected to Reduce Excess

                           from $616 to $460 in 1995. The same methodology would have raised the
                           average payment rate in rural Minnesota from $263 to $310.

                           Blending is a rather blunt tool for addressing the excess payment problem,
                           however, and does not obviate the need for improved risk adjustment. As
                           the PPRC results indicate, not all high-rate counties have rates that are too
                           high and not all low-rate counties have rates that are too low. For example,
                           PPRC’s risk-adjustment methodology would have reduced the average
                           payments in rural Michigan (a relatively low-payment-rate area) from $346
                           to $334. Furthermore, not all plans in high-rate counties may receive
                           excess payments. Because payment rates are based on the expected costs
                           of beneficiaries in average health, plans that attract costly beneficiaries
                           may be underpaid by the current risk adjustment method.

Some BBA Provisions Have   BBA specified that 1997 county rates be used as the basis for all future
Tended to Incorporate      county rates beginning in 1998. Although the law changed many aspects of
                           the rate-setting formula, this BBA provision had the effect of incorporating
Excess Payments From
                           the excess payments that existed in 1997 into all future rates.
1997 Into Current Rate
Structure                  As we testified before this Subcommittee in February 1997, HCFA’s then
                           current rate-setting methodology resulted in county rates that were
                           generally too high. Simply put, instead of setting rates based on the
                           expected cost of the average beneficiary in each county, the agency set
                           rates based on the expected costs of serving FFS beneficiaries. If the
                           agency had included the expected costs of serving managed care
                           beneficiaries—who as a group tend to be healthier than FFS
                           beneficiaries—the overall county average would have been lower. About
                           one-quarter of the $1 billion in overpayments we estimated in our
                           California study resulted from flaws in developing the county rate.

                           Excess payments are also built into current rates because BBA did not
                           allow HCFA to adjust 1997 county rates for previous forecast errors—a
                           critical component of the rate-setting process. Although the process for
                           setting rates was extremely complex and involved separate adjustments for
                           each county, annual payment rate updating was straightforward. Each fall,
                           HCFA would forecast total Medicare spending for the following year; the
                           estimated percentage spending increase, from the current year to the
                           following year, was used to update the county rates. Before applying the
                           increase, however, HCFA corrected any forecast errors from previous
                           years. If HCFA discovered that previous forecasts had overestimated or

                           Page 9                                                       GAO/T-HEHS-99-72
                            Medicare Managed Care: Better Risk
                            Adjustment Expected to Reduce Excess

                            underestimated the current spending, the update was appropriately

                            HCFA actuaries now estimate, based on FFS claims data, that the 1997
                            managed care rates were too high by 4.2 percent. BBA, in establishing a
                            new methodology for setting rates in 1998 and future years, specified that
                            HCFA use the 1997 rates as the basis for the new rates. While the law
                            permits HCFA to correct forecasts in future years, it did not include a
                            provision that would have allowed HCFA to correct its forecast for 1997.
                            Consequently, about $1.3 billion in overpayments were built into plans’
                            annual payment rates beginning in 1998.

HCFA’s Proposed Risk        HCFA’s proposed interim health-based risk adjustment method—to be
                            implemented in 2000—represents a major improvement over the current
Adjustment Approach         method. For the first time, Medicare managed care plans can expect to be
Improves on Current         paid more for serving beneficiaries with serious health problems and less
                            for serving relatively healthy ones. The interim method relies exclusively
Method and Minimizes        on hospital inpatient data to measure health status. Although it would be
Disruption for Plans        better to measure health status with complete and reliable data from other
and Beneficiaries           settings, such as physicians’ offices, these data are not yet available. In
                            addition, HCFA’s decision to phase in the new method will likely minimize
                            disruptive plan pull-outs and altered benefit packages, which could occur if
                            payment rate changes were implemented too suddenly.

Proposed Risk Adjustment    The proposed method, known as the Principal Inpatient Diagnostic Cost
Method Based on Available   Group (PIP-DCG) method, would use hospital inpatient data to more
                            accurately match managed care payments to beneficiaries’ expected total
Hospital Inpatient Data
                            Medicare costs. PIP-DCG would assign each individual to 1 of 15
                            categories if during the prior year they had been hospitalized for certain
                            diagnoses. For example, a beneficiary who had been hospitalized for
                            congestive heart failure would be placed in one category, while a
                            beneficiary who had been hospitalized for a kidney infection would be
                            placed in another. Those beneficiaries who were not hospitalized and
                            those who were hospitalized for diagnoses not included in PIP-DCG—
                            about 88 percent of all beneficiaries—would be placed in the base category.
                            The next year’s payment rate for each enrollee would be determined by the
                            category the individual was placed in and by certain demographic data,
                            such as age and sex. Rates for enrollees placed in one of the 15 prior
                            hospitalization groups would be higher than rates for those in the base
                            category with the same demographic characteristics.

                            Page 10                                                     GAO/T-HEHS-99-72
Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess

HCFA anticipated potential concerns about a risk adjustment methodology
based on hospital inpatient data. Such an approach could reward plans
that hospitalize patients unnecessarily or, conversely, penalize efficient
plans that provide care in other, less costly settings. HCFA has attempted
to address these concerns in several ways.

First, PIP-DCG would assign individuals to prior hospitalization categories
only when the diagnosis is for a condition that normally requires
hospitalization and is linked to further medical costs in the following year.
To determine which specific diagnoses to include, HCFA relied on the
advice of a clinical panel. The panel recommended that diagnoses
associated with about one-third of hospital admissions be excluded
because they (1) could be ambiguous, (2) were for conditions that were
rarely the main cause for an inpatient stay, or (3) were not good predictors
of future health care costs. For example, a beneficiary hospitalized for
appendicitis would not be assigned to a higher cost category because that
condition generally is not linked to further medical costs in the next year.
Also, HCFA’s proposal does not permit enhanced payments for hospital
diagnoses associated with 1-day stays. These admissions may be more
discretionary than admissions for longer stays.

Second, delaying an adjustment in payment until the following year
discourages unnecessary hospitalizations that would trigger an enhanced
payment. Further, the payment delay dampens any incentive to encourage
higher cost enrollees who have been hospitalized to switch plans, since the
plan in which the beneficiary is a member the following year receives the

The PIP-DCG method assumes that admission rates for beneficiaries of
similar health status are the same for FFS and managed care providers.
Although the evidence on managed care admission rates is limited, findings
presented by the American Association of Health Plans last month support
this hypothesis. A study conducted for the Association found that hospital
admission rates for managed care plans and FFS plans were comparable.
These findings are consistent with those of a 1993 Mathematica Policy
Research study on hospital admissions rates.

Page 11                                                      GAO/T-HEHS-99-72
                            Medicare Managed Care: Better Risk
                            Adjustment Expected to Reduce Excess

Gradual Implementation of   HCFA proposes to phase in the new interim risk adjustment method slowly.
Interim Method Will         In 2000, only 10 percent of health plans’ payments will be based on the new
                            system. This percentage will be increased each year until 2003, when 80
Minimize Impact on Health
                            percent of plans’ payments will be based on the PIP-DCG risk-adjusted
Plans and Beneficiaries     rate. In 2004, HCFA intends to implement a more accurate risk adjuster
                            that uses medical data from physicians’ offices, skilled nursing facilities,
                            home health agencies, and other health care settings and providers—-in
                            addition to inpatient hospital data.

                            Although a gradual phase-in of the interim risk adjuster delays the full
                            realization of Medicare savings, it also minimizes potential disruptions for
                            both health plans and beneficiaries. Rapid payment rate changes could
                            strain the financial soundness of some plans. Rapid rate changes could
                            also adversely affect beneficiaries if plans respond by suddenly altering
                            their benefit packages or reconsidering their commitment to the
                            Medicare+Choice program.

                            If HCFA had comprehensive patient-level data from Medicare managed
                            care plans, it could adjust the PIP-DCG methodology to reflect any
                            differences in practice patterns between managed care and FFS providers.
                            Although plans currently are required to submit only hospital inpatient
                            data, the agency intends to begin collecting more comprehensive data
                            shortly. Therefore, it may be possible to refine the PIP-DCG methodology
                            before the implementation of the full risk adjustment in 2004.

Conclusions                 The implementation of a new health-based risk adjustment system will lead
                            to major changes in Medicare managed care payments and will create more
                            desirable incentives. Plans attracting healthier beneficiaries will be paid
                            less, whereas those attracting costlier beneficiaries will be paid more. In
                            more fairly compensating individual plans for the beneficiaries they enroll,
                            the new method will reduce excess payments and produce savings for
                            taxpayers. The new method represents an interim step in the use of health-
                            based risk adjustment. We believe that to facilitate the introduction of an
                            improved risk adjuster in 2004, plans should aggressively pursue the
                            collection and reporting of more comprehensive data on beneficiaries’
                            medical conditions.

                            Page 12                                                      GAO/T-HEHS-99-72
Medicare Managed Care: Better Risk
Adjustment Expected to Reduce Excess

Mr. Chairman, this concludes my statement. I will be happy to answer any
questions you or other Members of the Subcommittee may have.

Page 13                                                  GAO/T-HEHS-99-72
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                   Medicare Managed Care: Payment Rates, Local Fee-for-Service Spending,
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                   Medicare HMO Institutional Payments: Improved HCFA Oversight, More
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                   Medicare HMOs: Setting Payment Rates Through Competitive Bidding
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                   Medicare Managed Care: HMO Rates, Other Factors Create Uneven
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                   Medicare HMO Enrollment: Area Differences Affected by Factors Other
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                   Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in
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                   Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
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                   Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing
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                   Medicare: Changes to HMO Rate-Setting Method Are Needed to Reduce
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                   Medicare: Health Maintenance Organization Rate-Setting Issues (GAO/
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(101802)   Leter   Page 16                                                 GAO/T-HEHS-99-72
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