HMO enrollment is further concentrated in urban areas. Although the HMO share nationwide is small, recent HMO enrollment of Medicare beneficiaries has grown rapidly. 2.) 3.) HMO Rate-Setting Methodology Thwarts Medicare’s Efforts to Realize Savings

Our work suggests that Medicare’s HMO rate-setting methodology does not maximize the potential of managed care to yield cost savings and, in some cases, can even discourage HMO participation in the program. By linking HMO payments to Medicare costs in the fee-for-service sector, the current methodology causes three problems. This risk adjustment is inadequate, however, because it does not specifically adjust for the health status of enrollees. In our view, HCFA could generate the most Medicare savings if it would pursue strategies in all three categories concurrently. Competitive bidding, rate negotiation, and beneficiary incentive approaches have been used successfully in other public health insurance programs. HCFA Plans Tests of HMO Payment Reforms

HCFA is planning to conduct demonstration projects to examine several proposals for modifying or replacing the current method of determining payment rates to HMOs. A sensible approach would be to pursue three promising strategies concurrently—foster price competition among HMOs, improve risk adjusters’ accuracy, and allow for adjustments in the current formula to reflect market competition and HMOs’ local health care costs. Matters for Consideration

In light of the increasingly urgent need to realize savings from the Medicare HMO program and to develop viable new methods of paying HMOs, Congress may wish to consider giving the Secretary of the Department of Health and Human Services authority to selectively reduce Medicare HMO payment rates (the AAPCC rate) in areas where market data indicate that the Medicare rates are too high and expand HCFA’s authority to mandate HMO participation in demonstration projects in order to conduct more meaningful studies of alternative payment methods. Medicare: Increase in HMO Reimbursement Would Eliminate Potential Savings (GAO/HRD-90-38, Nov. 1, 1989). Medicare: Reasonableness of Health Maintenance Organization Payments Not Assured (GAO/HRD-89-41, Mar.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed Medicare payments to health maintenance organizations (HMO), focusing on: (1) current trends in Medicare beneficiary enrollment in HMO; (2) flaws in Medicare's rate-setting method that prevent it from realizing potential savings from HMO; and (3) the Health Care Financing Administration's (HCFA) efforts to test HMO payment reforms.

What GAO Found

GAO found that: (1) since 1993, the annual increase in Medicare beneficiary HMO enrollment has exceeded 20 percent; (2) HMO enrollment increases have been concentrated in 15 states; (3) Medicare links HMO payment rates to the average cost of fee-for-service care and fails to adjust HMO payment rates to reflect beneficiaries' health status or local differences in utilization rates; (4) strategies to improve Medicare HMO payments include giving HCFA new authority to use competitive bidding or to negotiate with HMO, modifying the HMO rate-setting formula to include a health status risk adjuster, and requiring larger discounts from HMO in areas where HMO payment rates are too high; (5) HCFA could generate the most savings if it combines all three cost-reduction strategies and tailors the strategy to local conditions; and (6) although HCFA is planning demonstration projects using competitive bidding and improved risk adjustments, HCFA needs to gather and use available data to adjust HMO payments.