Consequently, if a plan attracted a disproportionate share of beneficiaries in better-than-average health, an outcome known as favorable selection, Medicare’s payments to the plan would exceed the expected FFS cost of providing Medicare-covered benefits to the plan’s enrollees.Our 1997 study of Medicare payments to California HMOs found that, on average, payments exceeded the expected FFS costs of the plans’ enrollees by approximately 19 percent in 1995.Other studies have also found substantial excess plan payments. 1998 Medicare+Choice Payments Exceeded Estimated FFS Costs

Our analysis shows that Medicare+Choice payments in 1998 were 21 percent, or $5.2 billion, higher than the amount Medicare would have spent if plan beneficiaries had received care in the traditional FFS program. That is, Medicare payments were not adjusted sufficiently to account for the generally better health, and lower expected costs, of plan enrollees.Excess payments due to inadequate risk adjustment will persist as long as there is favorable selection and plan payment rates do not sufficiently account for beneficiary health status. While health plans tended to enroll less-expensive beneficiaries, Medicare’s payments were too generous because they were based on the expected costs of enrollees in average health.Consequently, we estimate that in 1998 Medicare paid plans an average of 13.2 percent more than it would have spent if the plans’ enrollees had received care under the traditional FFS arrangement. Our analysis indicates that the combination of a spending forecast error and the BBA payment provisions resulted in aggregate plan payments that exceeded enrollees’ estimated FFS costs by approximately 8 percent, or $2 billion, in 1998. Thus, even without considering the effects of favorable selection, the combination of the forecast error in the 1997 rates and the minimum annual rate increase resulted in $2 billion in excess payments to Medicare+Choice plans in 1998. Medicare+Choice plans must, at a minimum, provide all of the services available to beneficiaries under the traditional FFS program. 1). The largest estimated excess payment to an individual plan totaled $334 million, or 40 percent more than Medicare would have spent if the plan’s enrollees had been covered under FFS. Among the nine plans that were paid less than their enrollees’ estimated FFS costs, the largest difference between estimated costs and payments was $8.4 million (see table 3). However, when excess payments due to forecast error are included, only 2 plans were paid less ($1.7 million and $175,000) than their enrollees’ expected costs. However, Medicare+Choice plans may not be paid enough for what they have been offering to attract beneficiaries—a more comprehensive benefit package beyond that covered for FFS beneficiaries for only modest or no premiums. HCFA noted that it is phasing in a risk adjustment method based on hospital diagnosis data to help reduce excess payments caused by favorable selection. 1. 3.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed Medicare Choice program payment issues, focusing on: (1) whether program spending for Medicare Choice plan enrollees has exceeded what Medicare-covered care for these beneficiaries would have cost in the fee-for-service (FFS) Medicare program; and (2) the extent to which payments to individual plans differ from expected FFS costs.

What GAO Found

GAO noted that: (1) Medicare Choice has not been successful in achieving Medicare savings; (2) Medicare Choice plans attracted a disproportionate selection of healthier and less-expensive beneficiaries relative to traditional FFS Medicare (a phenomenon known as favorable selection), while payment rates largely continued to reflect the expected FFS costs of beneficiaries in average health; (3) consequently, in 1998 GAO estimated that the program spent about $3.2 billion, or 13.2 percent, more on health plan enrollees than if they had received services through traditional FFS Medicare; (4) this year the Health Care Financing Administration implemented a new methodology to adjust payments for beneficiary health status; (5) however, GAO's results suggest that this new methodology, which will be phased in over several years, may ultimately remove less than half of the excess payments caused by favorable selection; (6) in addition, the combination of spending forecast errors built into plan payment rates and Balanced Budget Act payment provisions caused an additional $2.0 billion, or 8 percent, in excess payments to plans; (7) instead of paying less for health plan enrollees, GAO estimates that aggregate payments to Medicare Choice plans in 1998 were about $5.2 billion (21 percent), or approximately $1,000 per enrollee, more than if the plans' enrollees had received care in the traditional FFS program; (8) it is largely these excess payments, and not managed care efficiencies, that enable plans to attract beneficiaries by offering a benefit package that is more comprehensive than the one available to FFS beneficiaries, while charging modest or no premiums; (9) nearly all of the 210 plans in GAO's study received payments in 1998 that exceeded expected FFS costs because their enrollees were healthier than average beneficiaries; (10) however, the percentage of estimated excess payments varied substantially among plans; (11) about two-thirds of the plans received payments that were at least 10 percent more than enrollees would have cost Medicare in the traditional program, even without considering excess payments due to forecast errors; (12) the largest estimated excess payment to an individual plan totalled $334 million, or 40 percent more than Medicare would have spent if the plan's enrollees had been covered under FFS; (13) GAO also estimated that nine plans received payments below its enrollees' expected FFS costs; and (14) however, when excess payments due to forecast error are included, only 2 of the 210 plans were paid less ($1.7 million and $175,000) than its enrollees' expected FFS costs.