Balanced Budget Act brings big changes to Medicare risk plans
Careful planning may pay off big down the road
The Balanced Budget Act of 1997 includes some significant changes that began impacting the way Medicare risk plans operate Jan. 1 of this year. If you work for a Medicare risk plan and haven’t already taken note and prepared for this new environment, you’ll want to read carefully what one consultant sees in your future.
"Case managers with Medicare risk plans will once again be asked to do more with less, and this downward trend will continue over a period of years," says Earl L. Whitney, FSA, consulting actuary with Milliman & Robertson’s office in Radnor, PA.
The Health Care Financing Administration (HCFA) in Baltimore conducted numerous studies and determined that health maintenance organizations (HMOs) enroll healthier than average Medicare members, but they receive payments based on average health status, resulting in overpayment of between 10% to 15%, a practice HCFA plans to end, Whitney says.
"Under the new rules, which went into effect on the first of this year, payment rates will be based on national trends less 0.8% in 1998 and 0.5% in the years 1999 through 2002. For example, in 1998, this is equivalent to paying roughly 94.2% of the payment rate [AAPCC or adjusted average per capita cost], down from 95% in 1997. And the effective percentage payment will continue to drop through 2002 because of this provision of the law."
The new rules combine local payment rates with adjusted national payment rates to get the actual rate paid to HMOs. The blend, or combination, for 1998 is 90% local and 10% national. The local component will drop by 8% annually until the blend reaches 50% local and 50% national in the year 2003, Whitney says. "The effect of blending is a significant reduction in payment rates for many areas now highly penetrated by Medicare risk HMOs. HMOs in urban areas may receive an effective rate as low as 80% of their previous AAPCC, but it opens new opportunities for rural areas.
"There’s a minimum AAPCC combined Part A and Part B of $367 for 1998. This is a significant increase for certain rural areas, creating opportunities which previously didn’t exist," he says.
"Rural areas are looking a lot more attractive than they have in the past for Medicare HMOs. For some counties, $367 represents an amount greater than 100% of estimated fee-for-service payments in the county. It means that in some counties, a Medicare HMO could essentially enroll members, provide no medical management, and still make a profit. This is the time for someone to take advantage and move into these areas."
Calculated change is risky
One of the biggest changes under the Balanced Budget Act that case managers should take more seriously is the way HCFA calculates base payments, Whitney says. "Currently, HCFA bases rates on age, gender, and institutional status. Starting in the year 2000, that’s out and HCFA begins calculating rates based on health status. HMOs will get more money for enrolling sicker members. It has the potential to not only change the way HMOs attract members but to crush this whole industry."
The move to risk-adjusted payments alters the playing field for Medicare HMOs, he says. "It reduces any financial benefits HMOs achieve from selecting healthy members. HMOs that have succeeded based on positive selection may find it difficult to continue to make a profit when risk adjusters are added to the payment method."
In addition, Whitney urges Medicare HMOs to be less adversarial in their relationships with providers. The Balanced Budget Act provides a mechanism that allows providers or groups of providers to contract directly with HCFA as Medicare risk contractors, effectively cutting HMOs out of the mix.
"These provider sponsored organizations [PSOs] will give providers an option not previously open to them," he says. "Basically, hospitals and other providers having been accepting global capitation because that’s all the market was offering them. Hospitals will seriously consider the option of dealing directly with HCFA and not having HMOs take money off the top."
He warns that Medicare HMOs must begin building stronger partnership arrangements now with their providers. "Forget the vendor approach and take providers on as real partners in patient care. If you don’t, you may find that your providers are your competitors," he says, adding that HCFA is scheduled to publish initial rules for PSOs in April.
Key role for case managers
Whitney predicts that medical management is going to take on even more importance under the new rules. "Many HMOs have case management departments and think they’re doing OK without really testing themselves," he says. "Case managers are going to be very important to helping Medicare HMOs survive under the new rules. You’ll have to do your job and do it right."
To prepare for this more stringent environment, Whitney suggests that case managers identify patient protocols against which to benchmark and test themselves.
"Your medical management will have to be state of the art. Now more than ever, you’ll need to eliminate unnecessary care and keep all necessary care. If you just cut, cut, cut in response to lower reimbursement rates, patient care will suffer."
[Editor’s note: Earl Whitney is co-author of a Milliman & Robertson report titled "Implications of the Balanced Budget Act of 1997 on Medicare Risk Contractors." To receive a copy of the report, contact Milliman & Robertson’s representative, Dan Burris with Donley Communications, at (212) 751-6126.]
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