CRS Report for Congress
Received through t he CRS W e b
Upda ted J une 6, 2003
Hinda Ripps Chaikind
Specialist in Social Legislation
Domestic Social Policy Division
Paulette C. Morgan
Analys t in Social Legislation
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Medicare h as a l ong-standing history o f o ffe ring its benefici aries an alternative
t o t h e t raditional fee-for-service program. Health Maintenance Organizations an d
other t yp es of managed care p lans have been al l o wed t o p art i ci p at e i n t he Medi care
program, begi nning with private h ealth plans contracts i n t he 1970s and t he Medicare
risk contract program i n t he 1980s. Then , in 1997, Congress passed t he Balanced
Budget Act o f 1997 (BBA, P .L. 105-33), replacing the risk contract program with the
Medi care+C hoi ce (M+C ) p rogram . T he M+C p rogram est abl i s hed n ew rul es for
beneficiary and plan participation, along with a n ew paym ent m ethodology. In
addition t o controlling costs, t he M+C program was also des igned t o ex pand private
heal t h p l a n s t o m arkets where access t o m anaged care p lans was limited o r
nonex i stent and to offer n ew types o f p rivate health plans. The 106th Congress
enact ed l egi sl at i o n t o address s om e i ssues ari s i n g from t he BBA change s . The
Balanced Budget Refinement Act o f 1999 (BBR A, P.L. 106-113) changed t he M+C
program i n an effort make it eas ier for Medicare beneficiaries and plans to participat e
in the p rogram. Further refinements t o t he M+C p rogram were inclu d e d i n t he
Medicare, Medicaid, and S CHIP Benefits Im provement and P rotection Act of 2000
(BIP A, P.L. 106-554). The 107 th Congress made only minor change s t o t h e M +C
program and was not abl e t o reach consensus o n com prehensi ve m odi fi cat i ons. T he

108th Congress is considering m ajor changes t o t he program.

In 2003, Medicare+Choice plans were available t o about 59% of the over 4 0
million M edicare b en ef iciaries, and in March 2003 about 12% of them chose t o
enroll in one of the 146 (including two p rivat e-fee-for s ervi ce pl a n s) avai l abl e
Medi care+C hoi ce pl a n s . The rapi d growt h rat e of Medi care m anaged care
enrollment in the 1990s level e d o ff with the implementation o f t he M+C p rogram,
and i n fact, t here has b een a continuous decline i n enrollment since 1999 when 17%
of beneficiaries were enrolled i n M +C plans.
In order t o i ncreas e enrollment in Medicare m anaged care and to allow
benefi ci ari es t o b et t er m eet t h ei r h eal t h care n eeds, t h e M +C program o ffers a d i v erse
assortment of managed care p lans . H o wever, achi evi ng t h e goal s of t h e M +C
program h as been di ffi cul t , i n part because t h e goal t o c o n t r o l M edi care s pendi ng
which l ed to a s lowdown i n t he rate of increase i n p a yments t o p lans, m ay have
dampened interest by managed care entities i n devel oping new m arkets, adding plan
options, and maintaining t heir current market s.
The C ongressional Budget Office (CBO ) estimates t hat i n 2003 Medicare will
spend $35.9 billion for all M edicare group pl ans, (including M+C and other p rivate
Medicare arrangements, s u ch as d emonstrations). By 2013 the p rojected spending
for M edicare group plans will increase t o $46.9 billion.
Thi s report focuses on t h e recent t rends i n Medi care m anaged care, al ong wi t h
an overview o f t he M+C p rogram. It w ill be updated as n ecessary to reflect
significant changes made to the M +C program. For a more detailed analysis of M +C
paym ents, s ee CRS Report R L30587, Medi care+C hoi ce Payment s .

OverviewoftheMedicare+ChoiceProgram .........................2
Current Status oftheMedicare+ChoiceProgram .....................3
Trends in M+C Availability and Enrollment .............................5
Availability of Medicare M anaged Care ............................5
MedicareManaged CareTerminations .............................7
Enrollment Trends for M edicare M anaged Care ......................8
Enrollment Patterns i n Urban and R ural Locations ...................11
Regi onal and Geographic Variations in Enrollment ..................15
ContractsbyPlanModel .......................................15
Rules for Enrollment in M+C P lans ..................................16
Medicare+ChoicePayments toPlans ..................................18
BlendedRates ...............................................19
MinimumPayment (Floor)Rate .................................19
MinimumPercentageIncrease ...................................20
ExclusionofPaymentsforGraduateMedical Education ..............20
Budget Neutrality .............................................21
NationalGrowthPercentage ....................................21
Bonus Paym ents ..............................................22
RiskAdjustment .................................................24
Risk Adjustment Method in Place for 2003 .........................31
Scenario1: Demographically-BasedRiskAdjustment (oldsystem) .........32
S cenari o 2: P h ased-i n Heal t h S t at us Based R i s k Adj ust m ent (usi ng a
combinationof10%ofthenewsystem and90%oftheold system) ....33
New R isk Adjustment Methodology Beginning in 2004 ...............34
AdjustedCommunityRates .........................................38
Additional o r S upplemental Benefits ..............................40
CoverageforPrescriptionDrugs .................................42
M+CPremiums ..................................................43
BeneficiaryProtections ............................................45
Benefici ary Financi al Li abilit y...................................45
Quality Standards .............................................45
InformationandDisclosureRequirements .........................48
Grievances andAppeals ........................................48
Access t o S ervi ces ............................................49
Current ProgramStandardsandContract Requirements ...................49
Minimum Enrollment Standards .................................49
StatePreemption .............................................49
OrganizationalandFinancialRequirements ........................50

Protections AgainstFraud ......................................50
Sanctions andTerminationofContracts ...........................51
Medicare+ChoiceOptions ..........................................51
PrivateFee-for-ServicePlans ....................................51
PreferredProviderOrganizationDemonstration ....................53
ReasonableCostContracts .....................................54
ProgramofAll-InclusiveCarefortheElderly(PACE) ................55
Social Health MaintenanceOrganizations Demonstration .............55
Medical Savings Account (MSA) Demonstration ....................55
Medicare C ompetitive P rici ng Demonstration ......................56
Fi gure 1. Number of Managed C are P lans/Contract s P articipating i n
Medicare, 1987-2003 ...........................................6
Fi gu re 2. P ercent o f Benefi ci ari es Enrol l ed i n M edi care M anaged C are P l ans,
Actual and P rojected, 1990-2013 ..................................9
Fi gu re 3. P ercent o f M edi care Benefi ci ari es and M edi care+C hoi ce Enrol l ees
in Urban and Rural Locations, 2003 ..............................12
Fi gu re 4. P ercent V ari at i o n i n N um ber o f M edi care+C hoi ce P l ans
Avai l abl e t o M edi care Benefi ci ari es i n Urban and R u ral Locat i ons,
J anuary 2003 ................................................13
Fi gu re 5. P ercent o f M edi care Benefi ci ari es Enrol l ed i n M edi care+C hoi ce, by
State, March 2003 ............................................14
Fi gu re 6. P ercent o f M +C Enrol l ees Offered Benefi t s Beyond Tradi t i onal
Medi care C overed S ervi ces, i n t he Lo west P rem i u m P ackage Avai l abl e,
1999 and 2002 ...............................................41
Tabl e 1 . M edi care+C hoi ce C ont ract Term i n at i ons and S ervi ce Area
Reductions ...................................................8
Table 2 . C ounties W ith and W ithout Medicare M anaged Care Plans,
1997-2003 ..................................................10
Tabl e 3 . P ercent D i s t ri but i o n o f M edi care Benefi ci ari es by Managed C are
Plans Available i n Their Area, 1995-200 3..........................11
Table 4 . P ercent o f M edicare+Choice Enrollees and M edicare P opulation
Residing in Four States, M arch 2003 ..............................15
Table 5 . M edicare+Choice C ontracts b y P lan M odel, 2003 ................16
Tabl e 6 . M aj or Fact ors for Det erm i n i n g M edi care P aym ent s t o
Medicare+ChoicePlans ........................................23
Table 7 . M edicare Demographic-Only Risk Adjustment Factors for
Aged Beneficiaries, 2003 .......................................26
Table8. Diagnoses IncludedinEach PIP-DCG .........................27
Tabl e 9 . M edi care Dem ographi c and Heal t h -S t at u s Based R i sk Adj u st m ent
Fact ors, for A ged Benefi ci ari es wi t h One o r M ore Y ears E x p eri ence,

2003 .......................................................30

Table 10. Medical Conditions, M edical Condition Interactions, and
Demographic Fact ors Included i n t he CMS Hierarchical Condition
Catego ry Risk Adjustment Model for 2004 .........................35
Table11. M+CEnrollees with DrugCoveragein aBasicPlan .............42
Table 12. Percent o f E nrollees with an Annual Drug C ap in Basic M +C
Plans, Weighted by Enrollment, 1999-2003 ........................42
Tabl e 13. P ercent o f M +C Enrol l ees by P rescri p t i o n Drug C o-P aym ent s ,
Weighted by Enrollment, 1999-2003 ..............................43
Tabl e 14. P ercent o f M edi care Benefi ci ari es wi t h Access t o a Zero-P rem i u m
M+CPlan,byArea ...........................................44
Table15. DistributionofM+C Enrollees,byBasicPremiumLevels ........44
Table 16. Beneficiary C ost S haring and P rovider R eimbursement Under
Medicare+ChoicePlansforBasicBenefit Package ..................47

Medicare h as a l ong-standing history o f o ffe ring its benefici aries an alternative
t o t h e t radi t i onal fee-for-servi ce program , i n w h i c h a p aym ent i s m ade for each
individual M edicare-covered s ervice provided t o a b e n e f i c i ary. Begi nning in the

1970s, p rivate health plans were allowed t o contract with Medicare o n a cost-

reimbursement ba s i s . In 1982, Medicare’s risk contract program was created,
allowing privat e e ntities, mostly health maintenance organizations (HMOs), t o
cont ract wi t h Medi care. In ex change for a preset m ont hl y p er capi t a paym ent from
Medi care, p r i v a t e h eal t h pl ans agreed t o furni s h al l Medi care-covered i t em s and
services t o each enrollee. By 1997, 15 years aft er the start of the risk contract
program, Medicare m anaged care covered m ore t han 5 million p eople o r about 14%
of beneficiaries.
Then, i n 1997, Congress passed t he Balanced Budget Act o f 1997 (BBA, P .L.

105-33), repl a c i n g the risk contract program with the M edicare+Choice (M+C)

program. The M +C program established n ew rules for benef i c i ary and plan
participation, along with a new payment methodology. The M+C program was
design ed to ex pand the availability of h ealth pl a n s i n m a r kets where access t o
managed care p lans was limited o r nonex i sten t, and t o o ffer n ew types o f h ealth plans
in all areas. T he M+C p rogram has not been successful at ex panding coverage, and
the i nitial m oderate growth through 1999, which i ncreased M+C enrollment to about

17% of beneficiaries, has s ince taken a downward t urn. In March 2003 about 12%

of the M edicare population (4. 7 million enrollees) remained i n t he M+C p rogram,
compared to the 14% of the M edicare population who were enrolled i n M e d i c are
managed care p rior to the enactment of BBA.
The 106 th C ongress enact ed l egi sl at i o n i n o rder t o address s om e i ssues ari s i n g
from t he BBA changes. The Balanced Budget Refinement Act o f 1999 (BBR A, P.L.
106-113) as well as the M edicare, Medicaid, and S CHIP Benefits and Improvement
and P rotection Act of 2000 (BIP A P .L. 106-554) amended t he M+C p rogram in an
effort t o i n crease rei m bursem ent and t o m ake i t easi er for Medi care b enefi ci ari es and
plans t o p articipate i n t he program.
The 107 th Congress passed The Public Health Security and Bioterrorism
Preparedness and R esponse Act (P.L. 107-188) which i ncluded a few t emporary
changes t o d eadl i n es i n t h e M edi care+C hoi ce p rogram . Addi t i onal l y, t he 107th
C o n g r e s s consi d ered, but was not abl e t o reach agreem ent o n m aj or l egi sl at i v e
changes t o t he Medicare+Choice program. The House p assed H.R. 4954 on J une 28,
2002, a b ill that would h ave i ncreased M+C p ayments i n 2003 and 2004 and t hen i n
2005 would h ave created a n ew Medicare+C h o i ce competition p rogram and a
demonstration p rogram. Two bills were introduced in the S enate t hat would h ave
also made major changes to the M +C program. S. 3018 (introduced by the S enators
Baucus and Grassley et al.) contai ned s imilar provisions to H.R. 4954 to increase
M+C p ayments 2003 and 2004. S. 2729 (introduced by Senator Grassley et al. - the

t r ipartisan bill) would have based paym ents in M+C on competitive bids by p l a n s .
Neither bill was passed b y t he Senate. The 108th Congress is considering s imilar
options to revise the M +C program.
Thi s paper d escri b es t h e current st at us of the M +C program, as amended, along
with the rules and s tandards under which the p rogram operates. Data for 1998 and
preceding years covers the M e d i care risk contract program and begi nning in 1999,
data covers the M +C program.
Overvi ew of the M edi care+Choice Program
In order t o i ncrease enrollment in Medicare m an aged care, and t o allow
ben e f i ciaries access t o s imilar options av ailable i n t he non-Medicare m arket for
m eet i n g t hei r heal t h care n eeds, t h e M +C program w as creat ed t o offer a d i verse
assortment of managed care p lans. M +C options include not only coordinated care
pl ans, but al so pri v at e fee-for-servi ce pl ans, and, on a d em o n s t r at i o n b asi s , a
combination o f a medical savings account (MSA) p lan and contributions to an M+C
MSA. Coordinated care p lans are p lans t h at prov i d e a f u l l range of servi ces i n
ex change for a per capi t a paym ent , t h e m ost t yp i cal of whi ch i s t he HMO. An HMO
is a t ype of m anaged care plan primarily owned and operated b y i nsurers t hat acts as
bot h t he insurer and the p rovider o f h ealth care s ervices to an enrolled population.
The BBA also allows for c o n tracts with provider-sponsored organiz ations (PSOs),
which are coordinated care p lans ownedandoperatedbyproviders,aswellas
preferred p rovider o rganiz ations (PPOs), which are gr oups of doctors and hospitals
t h a t c o n t ract with an insurer t o o ffer t heir services on a fee-for-service basis at
n e go t i ated rates that are l ower than thos e charged to non-enrollees. Unlike o the r
m anaged care p l ans, P P Os d o not t radi t i onal l y have pri m ary-care gat ekeepers, who
oversee heal t h care s ervi ces.
Alternativel y, a b enefi ci ary m ay s el ect a p ri vat e fee-for-servi ce (PFFS) plan, that
covers enrollees through a privat e i ndemnity health insurance policy f o r w hich t he
C ent ers for Med i care and Medi cai d S ervi ces (C MS ) m akes per capi t a paym ent s t o
t h e i nsurer for each enrol l ee. The i nsurer t h en rei m burses hospi t al s , d o c t o r s , and
other p roviders at a rate d etermined by th e p lan o n a fee-for-service basis without
placing the p roviders at any additional finan cial risk. It also does not vary rates b ased
on utilization. En ro llees may s ee any M edicare-approved provider who agrees to
furnish s ervices under t he plan’s terms and conditions of paym ent.
Fi nally, t he demonstration M SA plans reimburse enrollees for t heir ex penses for
Medi care-covered s ervi ces aft er a speci fi ed hi gh deduct i b l e i s m et . The d i fference
between the premium for the high-deductible plan and t he applicable M+C per capita
paym ent would b e p laced into an account for t he beneficiary t o u se to meet medical
ex penses below t he deductible.
However, to date no Medicare b eneficiary has enrolled i n an M SA. Three PPOs
serve 2,241 beneficiaries t hrough the M+C pro gram. PPOs are more widely available
through a demonstration p rogram, with 56,677 enrollees as of March 2003. On J u ly

1, 2000, a p rivate f e e -for-service (PFFS ) plan, Sterling Life Insurance Company,

became available t o M edicare b eneficiaries. Beginning J anuary 2003, a s econd P FFS
pl an, H u m ana, In c. al so becom e avai l abl e t o M edi care b enefi ci ari es. A s o f M arch

2003 there w ere 20,761 enrollees in the t wo PFFS plans t hroughout the country. 1

Additionally, t here are another 1,748 enro llees in a P FFS demonstration p rogram.
In addition t o ex panding options for M edicare m anaged care coverage, t he BBA
al so substantially restruct ured the s ys tem f o r s e t ting M edicare payment rates t o
private p lans. Under t he M+C p rogram, t he per capi t a rat e for a paym ent area i s s et
at the h ighest of three amounts. The n ew paym ent s tructure is design ed to reduce t he
variation i n p ayments across t he count ry by increasing p ayments i n a r e a s with
t raditionally low payments and slowing t he rate of growth in areas with h i gh er
paym e n t s . Although v ariations in paym ents have been somewhat reduced,
substantial payment differentials remain nationwide.
Initially, M +C paym ents were al so adjusted for dem ographic risk fact ors, such
as age, gender, and coverage by Medicaid t o account for v ar i a t i o n s in health care
cost s. The BBA requi red t he S ecret ary o f H eal t h a n d H um an S ervi ces (HHS ) t o
de v e lop a method for risk adjusting p ayments t o i nclude health status, i n o rder to
account for a larger share o f t he variation i n costs. The interim m ethod established
by t h e S ecret ary adj ust ed for heal t h st at us based o n d iagnoses for p rior year inpatient
hospitaliz at i o n s . A lthough phase-in of t hese health-based risk adjusters b egan in
J anuary 2000, the BBR A s lowed d o w n t he Secr etary’s p lanned phase-in s chedule.
Fu rther refinements included i n BIP A ex t e n d e d t he current risk-adjustment
methodology t hrough 2003 and t hen, begi nning in 2004, a n ew methodology b ased
on disease grouping will be phased-in based o n d ata from i npatient h o s p i t als and
ambulatory s ettings . This s ys tem will be fully phased i n beginning in 2007.
The BBR A and BIPA made several o ther revisions to the M +C program, raising
M+C p ayments t o p l a n s and p roviding bonus paym ents for certain plans t hat enter
areas where n o o t h er pl an i s i n operat i o n t o encourage p art i ci p at i o n i n rural areas.
The BBR A m oved t he deadline for plans t o s u b m i t t h e i r adjusted community rate
(ACR) proposals from M ay 1 t o J uly 1 of each year, and allowed p lans to segm ent
their s ervice areas along county lines, i n o rder to better m atch revenues t o costs.
Additional changes in BIPA permit M+C p lans to offer reduced M e dicare P art B
premiums begi n n i n g i n 2003 and revised paym ents for End Stage R enal Disease
(ESRD) M+C enrollees.
Cur r e nt Status of the M ed icare+Choi ce Program
Achi evi n g t he go al s o f t he M+C p rogram has b een di ffi cul t , i n part because t h e
go al t o cont rol M edi care s pendi n g m a y h a v e d am pened i nt erest b y m anaged care
entities i n devel oping new m arkets, adding plan options, and maintaini n g t h eir
current markets. This cautious behavior may partially be a reaction t o a slowdown
in the rat e of i ncreas e for Medicare m anaged care payment, t he initial s lowdown i n
spending for M edicare t raditional fee-for-s ervice paym ents following the p assage of
the BBA, and the uncertainty about the future o f t he paym ents or organiz ation o f t he

1 For a more det a i l e d a nal ysi s of PFFS pl ans s ee CRS Report RL31122, Medicare+Choice:
Private Fee-for-Service Plans , by Paulette Morgan and M adeleine Smith.

Further, ben e f i c i aries i n rural ar eas still have limited acces s t o m anaged care
plans and enrollment growth has s lowed or declined across all geographic areas .
Benefi ci ari es h ave al s o b een offered l ess ge n erous benefi t p ackages and fewer
options for z ero o r l ow m o n t hly M +C premiums. Obstacles relating t o d ata
collection and quality improvement requirements may make it more difficult for
som e pl ans t o m eet t h ese requi rem ent s, t h erefore, furt her d i s couragi n g p art i ci p at i o n
in the Medicare program . M+C plans have i ncreasingl y n o t ed t h at in addition t o
concerns about paym ent amounts, the regul atory requirements are burdensome and
make it difficult for t hem t o participat e i n t he program.
As pl ans w i t h draw from t he M+C p rogram , s om e enrol l ed b enefi ci ari es are
forced to cho o s e n ew M+C p lans, while others are l eft without any access t o
Medi care m anaged ca r e . T h ey are forced t o ret u rn t o Medi care’s fee-for-servi ce
program. Even among those who still have an option t o choose another p lan, some
benefi c i a ri es h ave s el ect ed Medi care’s fee-for-servi ce program b ecause t h ey are
concerned t hat additional p lan withdrawal s cou l d b e d i sruptive t o t heir health care
In 2003, M+C p lans are available t o about 59% of the m ore t han 40 million
Medicare b eneficiaries, and in March 2003 about 12% of all b eneficiaries chose t o
enroll in one of the 146 (includes t wo PFFS plan) available M +C plans. The rapid
gr o w t h r a te of Medicare m anaged care enrollment in the 1990s leveled o ff an d
although enrollment initially increased moderately with the implementation o f t he
M + C p r o gr am , b y M arch 2003 enrollment w a s t w o p e r cen t a ge p o i n t s b el o w p r e- BBA
enrollment. The Congressional Budget Office (CBO) project s t hat M +C enrollment
will decline m oderately through 2008, when it will reach about 9% of the M edicare
p o pulation and then slowly decline t o about 8% by 2013. CBO estimates t h a t i n
2003 Medicare will spend $35.9 billion for all M ed icare group plans, (including
M+C and other p rivate Medicare arrangem ents, s uch as d emonstrations). By 2013
the p rojected spending for M edicare group plans will increase t o $46.9 billion.
Enrollment is widely segm ented across the country, however, with the m ajority
of enrol l ees i n j u st four st at es: C al i forni a, New Y o r k , F l ori d a, and P ennsyl vani a.
Not s urpri s i n gl y, Medi care b enefi ci ari es i n urban areas have great er access t o p l ans.
W h ile 92% of beneficiaries i n center cities h ave access t o at l east one plan, only 6 %
have access i n t he m o st rural areas.

Trends in M+C Ava ilability a nd Enrollment
Availability of M edicare M anaged Care
The M +C program b egan operation o n J anuary 1, 1999, 2 a s a u thoriz ed by the
BBA. By M arch 2003, there were 146 M+C contra c t s with CMS under t he M+C
program.3 Over time, t he number o f M +C co n t racts h as fluctuated. From 1987 to
the early 1990s many risk plans t erminated ex isting contracts, decreasing t he number
of available p l a n s f r o m 1 6 1 in 1987 to 93 in 1991. Then, t he trend s hifted as the
number o f M edicare risk p lans began i ncreasing i n 1992, more than tripling from 110
in 1993 to 346 in 1998. W ith the implementation of t he M+C program in 1999, the
downward cycle of availability began o nce again, as s everal M+C organizations
wi t hdrew from t he Medi care p rogram (or reduced t h e s i z e o f t hei r servi ce area). A s
shown i n Fi gure 1 , t hese reductions have resulted i n fewer providers of Medi c a re
managed care under t he M+C p rogram than previously ex isted, dropping from a high
of 346 plans i n 1998 to 267 contracts i n 2000 and t hen t o 146 as of March 2003.

2 Although most of t he components of t he M+C progr am were effective i n 1999, the M +C
payment s tructure was i mplemented in 1998.
3 T he BBA changed t he designation of “ p l a n s ” , b e gi nning in 1999. T he old definition of
“ plans” i s now referred t o as “contracts” and each contract may i nclude several different
“plans”. In Mar. 2003 there were a bout 442 plans a va ilable t h r ough 146 M+C c ontracts.
For example, t he M+C organization may offer one plan providing only t he basic M edicare-
covered benefits and other plans t hat also i nclude optional s upplemental benefits.

Figure 1 . Number of Managed Ca re Plans/Contracts P articipating in Me dicare, 1987-2003

nu mb er of pl ans
1987 1989 1991 1993 1995 1997 1999 2001 2003
Yea r
So urce: Prep ared b y t he Con gression al Research Service ( CRS) b ased on Decemb er CM S M ed icare M an aged Ca re Con tract (MMCC ) Mon th ly Rep ort s, 20 0 3 d a ta from M ar ch.
No te : Medicare man aged care p lans in clude ri sk plan s throu gh 1998 an d Med i care+Choi ce contract s b eginning in 1999.

M edicare M anaged Care Terminations
Since t he implementation of t he M+C program , a substantial n u m b e r of
m anaged care o rgani z at i ons have ei t h er t erm i n at ed cont ract s o r reduced t h ei r s ervi ce
area, as shown i n Table 1. The contract terminations and s ervi ce area reduct i ons i n
J anuary 1999 affected about 407,000 (6.5%) o f t he more than 6 million M ed icare
beneficiaries enrolled i n m anaged car e, leaving 51,000 (less t han 1 %) of all M +C
enrollees without any access t o M +C plans. About half of the b eneficiaries who h ad
access t o o t h er M+C p l ans chose a n ew pl an, w hi l e t h e o t h er hal f c h o s e M edi care
fee-for-servi ce. In t o t al , 372 count i es w ere affect ed by t h e w i t hdrawal s o r s ervi ce
area red u ct i ons and 7 2 count i es l ost access t o M edi care m anaged care. Then i n
J anuary 2000, additional contr act terminations and s ervice area reductions affected
327,000 (5%) of M+C enrollees in 329 c ounties, some of whom had also been
affected the p revious year. T his cycle of contract changes l eft 79,000 (1.3%) o f all
managed care enrollees in 105 counties without access t o any other M +C plan.
Prior t o t he passage of BIP A, C MS released information about contract
ter m i n ations, effective J anuary 2001. Thos e figures were ex pected to affect about
934,000 M+C enrollees, l eaving almost 159,000 of these enrollees with no access t o
Medicare m anaged care. After t he passage of BIPA, M +C organiz ations were gi ven
an opportunity to reconsider their earlier d ecision and as a r e s u l t four M+C
organiz at i o n s d e cided t o return t o t he program. In total t hese organiz ations had
provided s erviced to approx imately 13,000 beneficiaries i n 2000, covering 11
counties. In five counties, there were no o ther M+C p lans offered. De s p i t e t h e
changes m ade t o contract terminations after BIP A, this series of contract terminations
affect ed m o re benefi ci ari es t han t h e c o m b i n ed t o t al for t h e p revi ous 2 years.
Nationwide, just two m anaged-care companies, AETNA and CIGNA, accounted for
about half of the t otal number o f b eneficiaries affected by these withdrawals.
Fo r contract renewals effective o n J anuary 1, 2002, 36 plans r e d uced their
service area and 22 did not renew t heir contract. T his round of withdrawals affected
more than 536,000 M+C enrollees, l eaving about 38,000 without access t o any M+C
plan. For an additional 52,000 individuals , t heir only M +C option was the S terling
pri v at e-fee-for-servi ce pl an and t hey h ad no access t o any ot her t yp e o f M +C pl an,
such as an HMO. Fo r contract r e n e w als effective J anuary 2003, nine plans
terminated their contracts, and 2 4 re duced their s ervice area, affecting 215,000
enrollees and l eaving 29,000 with no M+C options. For 3,000 enrollees, t heir only
o p t ion was a P FFS plan and for another 3,000 their only option was the P P O
demonstration program . P lans withdrawing from t he M+C p rogram affect not only
c u rrent M+C enrol l ees, but al so affect both current Medicare fee-for-s e r v i c e
beneficiaries and newly eligible Medicare b eneficiaries who might choose t o enroll
i n an avai l abl e m anaged care p l an.

Table 1. M edicare+Choice Contract Terminations
and Service Area Reductions
Ef fective Effective Pre-B IPA, Ef fective Ef fective
J a nua ry J a nua ry Effective J a nua ry J a nua ry
1999 2000 Janua ry 2001 2002 2003
T erminatio ns 45 41 65 22 9
Service area
reductio ns 54 58 53 36 24
Numb er o f
enrollees befo re
withdrawals 6 ,056,000 6,347, 000 6,242,000 5,600,000 4,939,000
T o tal e nr o llees
affected 407,000 327,000 934,000 536,000 215,000
enrollees with
no access to any
plan 51,000 79,000 159,000 38,000 29,000
enrollees with
access limited to
PFFS plan N/A N/A N/A 52,000 3,000
enrollees with
access limited to
Demo nstr atio n
PPO plan N/A N/A N/A N/A 3,000
Source: P r epared by the Congr essional Research Service ( CRS) b ased on data fr om the CMS.
No te: Enrol l e e c o u nts r ound ed to the nearest tho usand and enrollee count befo re January 2002
withdrawals r epresents d ata from March 2003.
Enrollment Trends for M edicare M anaged Care
W h i l e t h e num ber o f p l ans/ cont ract s participating in Medi care m anaged care h as
fluctuat ed over time, t he percent of beneficiaries enrolled i n M edicare m anaged care
continued t o i ncrease until 1999. As shown i n Fi gure 2 , i n 1990 only about 3% of
Medicare b eneficiaries were enrolled i n t he managed care p rogram, but by 1998 this
fi gu re had i ncreased si gn i fi cant l y t o 16% of Medi care b enefi ci ari es, coveri ng j u st
over 6 million enrollees . S ince the implementation of t he M+C program , enrollment
growth increa s e d t hrough 1999, but today h as declined below t he 1998 level;
reaching almost 17% of beneficiaries i n Decem b e r 1999 (6.3 million enrollees),
declini n g s lightly to 16% (6.2 million enrollees) b y December 2000, and t o about
12% (5.6 million enrollees) b y M arch 2003. CBO p rojects t hat enrollment in M+C
p l ans will reach about 9% of all b eneficiaries by 2008 covering about 3 . 9 million
enrollees. C BO projects t hat b y 2013 M+C will have the s ame number o f enrollees,
3.9 million, however, b ecause of the growth in t he overall Medicare population, the
percen t a ge o f e n rollees in M+C will actually decline t o about 8% of all M edicare

Figure 2 . P ercent of Beneficiaries Enrolled in Medicare Managed Ca re Plans, Ac tual and Projected, 1990-2013

per c ent o f b ene f i ciar i es
1990 1992 1994 1996 1998 2000 2002 2008 2013
Source: Pr e pa re d by CRS ba s e d on Me dPAC Cha rt B ook, Oc tob e r 1 997, c ha pt e r 3. C MS, Me di c a re Me dic a r e Ma na ge d Ca r e Re po rt s, De c e mbe r 19 98, 1999 ,
2000, 2001, 20 02 a nd Ma r c h 200 3 a nd CBO Ma r c h 2003 Ba se li ne for pr oj e c t i ons for 2008 a nd 2013.
Not e: Me di c a r e Ma na ge d Ca re Pl a n s i nc l ude r i sk pla ns t hr ough 1998 a nd Me dic a r e +Choi ce pla ns be ginn i ng in 1 999.

Enrollment in any i ndividual plan i s open only t o t hose beneficiaries living i n
a s pecific s ervice area. Pl ans d efine a s ervice area as a s et of counties and county
parts, identified a t t h e z i p code level.4 As a resul t , not al l M edi care b enefi ci ari es
have access t o an M +C plan. As o f 2003, Medi care m anaged care w as available i n
only 17% of counties (Table 2). However, while 83% of counties d id not offer M +C
plans i n 2003, most Medicare b eneficiaries had acces s t o an M +C plan. T his
occurred b ecause the population and plans are not distributed equally across counties,
but rather they are concentrated in the m ore u rban counties. In J anuary 2003, only
41% of al l M edi care b enefi ci ari es l i v ed i n an area t h at had n o access t o an M +C pl an
(Table 3). Am ong t h e 59% of benefi ci ari es wi t h access t o t he M+C p rogram 40%
had a choice of at least t wo plans; 30% had a choice of two t o four plans and another

10% had five o r m ore p lans available t o t hem. By comparison, in December 1999,

not onl y d i d m o re benefi ci ari es h ave access t o an M +C pl an, but t h ey al so had m ore
Table 2. C ounties W ith and Without
M edicare M anaged Care Plans, 1997-2003
Exi s t i ng pl ans i n c ount y No e xi st i ng pl a ns i n count y
Num be r of Num be r of
Year count i e s % counties %

1997 740 24% 2,387 76%

1999 896 29% 2,231 71%

2000 1,095 35% 2,049 65%

2001 636 20% 2,509 80%

2002 575 18% 2,570 82%

2003 549 17% 2,597 83%

So urce : MedPAC computatio ns based o n CMS public data fo r 1997 and 1999; CRS analysis o f CMS
data fo r 2000-2003.
No te: D o e s no t includ e P FFS p lans, d e mo nstr atio n p lans, c o st p lans, o r p lans ser ving P ue r to Rico .
Medicare managed care p lans includ e r isk p lans through 1998 and M+C plans b eginning in 1999.

4 M+C organizations can vary premiums , benefits, a n d cost-s haring across i ndivi duals
enrolled i n a plan, s o l ong as these are uniform within segments of a s ervi c e a r ea. A
segment i s defined as one or more counties within the plan’s s ervi ce area.

Table 3. Percent D istribution o f M edicare B eneficiaries by
M anaged C are Plans Available in Their Ar ea, 1995-2003
plans June June December F e bruary F e bruary January
available 1995 1997 1999 2001 2002 2003
None 45% 33% 28% 36% 39% 41%
One 16% 9% 11% 12% 18% 19%
T wo t o f our 26% 24% 27% 37% 33% 30%
Five or more 14% 34% 34% 14% 10% 10%
Source: P r epared by CRS b ased on MedPAC Chart B o o k, July 1998, Chart 2 -10, Mathematica
analysis of CMS d ata for 1999, and CRS analysis of CMS d ata for 2001, 2002 and 2003.
No te: Do es no t inc lud e p r ivate-fee-fo r ser vice p lan s , d e mo n str atio n o r c o st p lans, o r p lans ser ving
Puerto Rico. Medicare managed care p lans includ e r isk p lans through 1998 and M+C plans b eginning
in 1999. T o tals may not add, due to round ing.
Enrollment Patterns i n Urban and Rural Locations
Patterns of M +C enrollment are not uniform across urban and rural local es , as
shown i n Fi gure 3 . T he geographi c areas are d efi n ed as fol l o ws:
1. Central urban – central counties of m et ropolitan areas of at leas t 1 million
2. Other urban – either fringe counties of m et ropolitan areas of at leas t 1
million population o r counties o f m etropolitan areas up to 1 million
3. Urban/rural fringe – urban population o f at l east 2,500 adjacent t o a
metropolitan area;
4. Other rural– i ncludes u rban population o f at l east 2,500, not adjacent t o a
metropolitan area, and rural areas (defined as, p laces wi t h a population
of less than 2,500).
M o s t M + C enrollees reside in central urban areas; about 69% of the M + C
p o pulation as o f 2003. However, a s maller p roportion, only 39% of al l M e d i c a r e
benefi ci ari es resi d e i n t he cent ral urban areas. In al l geographi c areas, ex cept cent ral
urban areas, t he percent age of M+C enrol l ees i s l ess t h an t h e p ercent age of Medi care
beneficiaries. Thu s , a l a rger proportion o f t he Medicare population i n t he city
chooses to enroll in managed care t han i n all other geographic areas. T h i s o ccurs
because of a combination o f i nterrelated factors, such as availability of M+C p lans
and p l an b enefi t s .
As shown i n Fi gure 4 , access t o M +C pl ans i s m uch great er i n urban areas t h an
in rural areas. Only about 8% of beneficiaries i n central urban areas lack access t o
M+C p l ans. Am ong t h e 92% of Medi care b enefi ci ari es wi t h access t o s uch p l ans,
40% have a choice of at least five d iffere nt plans and another 40% have a choice of
t w o t o four pl ans. By cont rast , M edi care b enefi ci ari es l i v i n g i n rural areas r a r e l y
have even a s ingl e p lan available t o t hem, l eaving m ost o f t hese beneficiaries (about

9 4 % ) w i t h no access t o p l ans. A m ong t h e b enefi ci ari es i n t h ese areas who h a v e

access t o M edicare m anaged care, about 2% have a choice of two t o four plans and

4% have access t o onl y one pl an.

Figure 3 . P ercent of Medicare Beneficiaries and Medicare+Choice
Enrollees in Urban a nd Rural Locations, 2003
70% percent of benefi ci ari es
Medi care+Choi ce enr ol l ees
Medi care benefi ci ar i es
Ce nt r al Urban Ot her Urban Ur ban/Rur al Fri nge Ot her Rur al
Sour c e : PreparedbyCRSbasedon CMS data.

Figure 4 . P ercent V ariati on in Number of Me dicare+Choice Plans
Available to Medicare Beneficiaries in Urban a nd Rural Locations,

100% per cent of benef i ci ar i es
90% Ot h e r Ur b a n
Ur b a n- Ru r a l Fr i nge
0 plans 1 pl an 2 to 4 plans 5 or more plans
Sour c e : Pr e pa r e d by CRS ba s e d on CMS da t a f r om Me di c a r e c ompa r e da t a ba s e .

Figure 5 . P ercent of Medicare Beneficiaries Enrolled in Medicare+Choice, by State, Ma rch 2003


Regi onal a nd Geogr aphi c V ar i a ti ons i n Enr ol l ment
In addition t o rural and urban variations, enrollment patterns a l s o v ary o n a
regi onal bas is. M +C enrollment is much higher in western and southwes tern stat es ,
as shown i n Fi gure 5 . Approx imately 30% of the b eneficiaries in Arizona, 33% of
t h e b enefi ci ari es i n C al i forni a, and 28% of t h e b enefi ci ari es i n Oregon are i n M +C
plans. The h ighest levels of enrollment in the eastern states are i n R hode Is l a n d
(34%), Fl orida (19%), Pennsyl va n i a ( 2 3 %) a nd Massachusetts (18%). In contrast,
22 st at es have no (or m argi nal) plan enrollment, and an additional 13 states have
bet w een 2% and 10% of t h ei r M edi care b enefi ci ari es enrol l ed i n an M +C pl an, w hi ch
is lower t han t he U.S. average enrollment of 12% of benefici aries.
M+C enrol l ees are far m o re co n c e n t r at ed geographi cal l y t h an Medi care
beneficiaries as a whole. In fact, f o u r s t a t e s a c count for over h alf o f all M+C
enrollment: C alifornia, Fl orida, Pennsyl vania, and New York. These fo u r s t at es ,
alone, account for 59% of all M +C enrollees , but they are home t o only 30% of all
Medi care b enefi ci ari es. Table 4 compares the percent of M+C enrollment to the
percent o f t he total M edicare population for each of these four states.
Table 4. Percent o f M edicare+Choice Enrollees and M edicare
Population R esiding in Four States, M arch 2003
P ercent of t otal P ercent of t otal
State enrollment popul at i o n
California 28% 10%
Pennsyl va nia 10% 5%
Source: P r epared b y C R S, b ased on CM S, Managed Care Contra ct Reports, March 2003.
(Numbers may not add, due to round ing).
Contr acts by P l a n M odel
In addition t o regional a n d geographic variation, M+C plans al so vary by
contract model and plan ownership. M+C contract mode l s i n c l ude independent
practice associ ations (IPAs), grou p models, and staff m odels. P lan ownership can
either be for p rofit o r nonprofit. Table 5 displays the distribution of M+C plans by
plan contract model and type of ownership.
The m aj ori t y of M+C cont ract s are for IP A s m odel s . A n IP A i s a m anaged care
organiz ation t hat contracts with physician s i n s o l o p ractice or with associ ations of
physi ci ans t hat , i n t u rn, cont ract wi t h t h ei r m em ber physi ci ans t o p rovi de heal t h care
servi ces. M any physi ci ans i n IP As h ave a s i gni fi cant num ber o f p at i ent s who are not
IP A enrollees. Group model m anaged care o rganiz ations contract with one or more
group pract i ces of physi ci a n s t o p r o vi de heal t h care s ervi ces, and each group
pri m ari l y t reat s t he plan’s members. S t aff m odel m anaged care o rgani z at i ons em pl oy

health providers, s uch as physicians and nurses, d i r e ctly. The providers are
em pl oyees of t h e p l an and deal ex cl usi v el y w i t h t h ei r enrol l ees. T he great m aj o ri t y
of M+C contracts are with for-profit o rganiz a t i o n s . A s o f M arch 2003, 66% of
contract ors were with for-profit entities.
Table 5. M edicare+Choice Contracts b y Plan M odel, 2003
Num be r of P ercent of Num be r of P ercent of
contracts contracts enrollees enrollees
IPA 76 54 2,585,090 57
Group 55 39 1,482,730 33
Staff 11 8 474,595 10
Profit 96 66 2,635,306 57
Non Profit 49 34 1,960,335 43
Source: Prepared by CRS, based o n CMS, Medicare Managed Care Co ntract Report, March 2003.
Rules for Enrollment i n M +C Plans
Medi care b enefi ci ari es are el i gi b l e t o enrol l i n any M +C pl an t h at serves t h ei r
area, with the following restrictions: 1) benef i c iaries must be entitled t o benefits
under P art A of Medicare and enr o l l e d i n P art B of Medicare, and 2 ) b eneficiaries
who qualify for Medicare s olely o n t he basis o f end st at e renal di sease (ES R D) m ay
not enroll in an M+C plan. Two ex ceptions apply t o i ndividuals with ESRD: 1) a
beneficiary e nrolled i n an M +C plan wh o l ater develops ESRD may continue to
remain enrolled i n t hat plan, and 2) i f a plan terminat es its contract or reduces its
service area (for an enrollee t his i s referred t o as an i nvoluntary t ermination), ESRD
enrol l ees m ay enrol l i n anot her M +C pl an. T he second ex cept i o n i s ret roact i v e for
an involuntary t ermination o ccurring on or after December 31, 1998.
In general, M+C o rganiz ations are required t o enroll eligible individuals during
election p eriods, and they cannot deny enrollment on the b asis of health status-related
fact ors. Thes e fact ors i nclude health stat u s , m edical condition (incl uding both
physi cal and m ent a l i l l n esses), cl ai m s ex peri ence, recei pt of heal t h care, m edi cal
history, genetic information, evidence of insurability (including conditions arising out
of act s of domestic violence) and disability. However, an o rgan ization m ay deny
enrollment if it has reached the limits of its capacity. Organiz ations may only
terminat e an enrollee’s election for failu re t o p a y premiums on a timely basis,
di srupt i v e b ehavi o r, or because t h e p l an ends for al l M+C enrol l ees.
The S e c r e t a ry i s aut hori z ed t o col l ect a u ser fee from each M+C o rgani z at i o n
for use in carryin g o u t enrollment information dissemination activities for the
program as well as t he health insurance and counseling assistance program. The fee
is based on t he ratio of the organization’s number o f M edicare enrollees to the t otal
num ber o f M edi care b enefi ci ari es.

Through 2004, 5 individuals are able t o m ake and change election t o an M +C
plan on an ongoing basis. Begi nning in 2005, elections and changes to elections will
be available on a more limited basis. 6 Individuals will be able to make or change
elections each November, during t he annual coordinated election p eriod. In addition,
current Medicare beneficiaries may also change t heir el ection at any time during t he
first 6 months of 2005 ( o r first 3 m onths of any s ubsequent year). Although
individuals are limited t o only one change during t his 6 (or 3) m onth period, this limit
does not apply t o either changes m ade durin g t he annual coordinated election p eriod
in November or to speci al en ro l l m ent periods. S peci al enrollment periods are
provided for limited s ituations such as an enrollee who changes place of residence.
For newly eligible aged benefici aries, thei r 6 (or 3) m onth period for making
elections or changes t o election b egins once t h e i ndividual i s eligible for an M +C
pl an. S peci al el ect i o n p eri ods al so appl y t o n ewl y el i gi b l e age d ( n o t di sabl ed)
Medicare b eneficiaries. BIP A required t hat b eginning in J une 2001 requests t o enroll
or disenroll i n an M +C plan are effective o n t he first d ay of the n ex t calendar m onth.
(Prior to the passage of BIPA, requests t o enroll or disenroll in an M+C plan m ade
after t he 10th of the m onth were not effective until the first day o f t he second calendar
month t hereafter.)
Furt herm ore, benefi ci ari es enrol l ed i n an M +C pl an t h at t erm i n at es i t s cont ract
with Medicare are gu a r a n t eed access t o certain Medicare s upplemental i nsurance
policies (i.e., “Medigap” policies) within either 63 days from t he d a t e : 1) t hey
recei ve not i ce from t hei r M+C o rgani z at i o n t hat t hei r pl an i s l eavi n g t he program ; or
2 ) coverage is terminat ed. A plan leaving a portion of its service area m ay offer
enrollees the o p t i o n of continuing enrollment in the plan, only i f t here is no other
M+C p lan o ffered i n t he affect ed area at that time. Howev er, t he plan may require
t h e enrol l ee t o o b t a i n al l basi c (ex cept for em ergency o r u rgent l y needed care)
services ex cl usivel y at t he facilities designated by t he organization within the plan’s
A further protection m ade available w ith the passage of BIPA ex tended t he
period for M edigap enrollment for M +C enro l l ees affect ed by termination of
coverage during t heir “trial period.” ( T h e t r ial period allows individuals to try out
M e d i c are managed care for 12 months, while still gu aranteeing them access t o a
Medigapplaniftheychose to returntoMedicare fee-for-service). For individuals
enrolled i n an M +C plan during t heir initial 12-month t rial period, thei r t rial period
begi ns again i f t hey re-e n r o lled i n anot her M +C plan because of an involuntary
termination. During this new t ri al p e riod, they retain thei r rights t o enroll i n a
Medigap policy; however the t otal time for a trial p eriod cannot ex ceed 2 years from
the time they first enrolled i n an M +C plan.

5 Pr ior t o t he passage of the Public Health Security and Bi o t e r r o r i s m Pr eparedness and
Response Act (P.L. 107-188), i ndivi duals were only a ble t o make a nd change elections on
an ongoing basis t hrough 2002.
6 Institutionalized beneficiaries will continue to have access t o ongoing open enrollment f or
purposes of enrolling i n a n M +C plan or changi ng from one M+C plan t o a nother.

Medicare+Choice Payments to Plans
The Bal an ced Budget Act s ubstantially restruct ured the s ys tem for setting t he7
rates b y which Medicare p ays p lans, b eginning in 1998. In general , Medi care m akes
m ont hl y p aym ent s i n advance t o p art i ci p at i n g h eal t h p l ans for each enrol l ed
beneficiary i n a paym ent area (typically a county). T he Secretary o f HHS is required
to determine annually, a nd announce by the s econd Monday i n M ay for 2003 and
2004 (and then not later t han M arch 1 for subsequent years) in the year before the
calendar year affected, t he annual M +C per capita rate for each paym ent area, and t he
ri sk and o t h er fact ors t o b e u sed i n adj ust i n g s uch rat es. P aym ent s t o M +C
organiz ations are m ade from t he Medicare Trust Funds in proportion t o t he relative
weights t hat b enefits under P arts A and B represent of the actuarial value o f M edicare
benefits (approx imately 56%:44%, res pectivel y).
The m ajor factors for determining M ed icare’s annual M +C per capita rates are
summarized in Table 6. T he annual M +C per capita rate for a paym ent area (for a
contract for a calendar year) i s s et at the h ighest of one of three amounts calculated
! a rat e c a l c u l a t e d as a bl end o f an area-speci fi c (l o cal ) rat e and a
! a minimum payment (or floor) rat e, or
! a rat e refl ect i n g a m i n i m u m i ncrease from t he previ ous year’s rat e.
Each part of the s ys tem i s des cribed in more detail below. 8 For a more detailed
analys is of M+C p ayments, see CRS Report R L30587, Medi care+C hoi ce Payment s .

7 Prior t o enactment of the BBA, payments f or care of Medicare beneficiaries in risk health
maintenance organizations (HMOs) wer e b a s e d on t he adj usted average per capita costs
( AAPCC) . T he AAPCC r e pr e s e nted a mo nthly payment to cover t he cost of treatment in
a M edicare r isk HMO. It was calculated according t o a complex f ormula based on t he cost
of providing Medicare benefits to beneficiaries i n t he fee-for-service portion of t he Medicare
p r o gr a m. T he per capita payment was set a t 95% of the AAPCC, and was adj ust e d f o r
cer t a i n demogr aphic characteristics of HMO enrollees. Payments based on the AAPCC
varied wi dely across the country. Additionally county payments f luctuated, year to year.
8 A s tate may r equest a geogr aphic adj ustment t o a payment area t o e s t a b l i s h a single
statewide M +C area, a metropolitan based system, or t he consolidation i nto a single area of
noncontiguous counties. For disabled a nd ESRD beneficiaries, payment r ates are s et using
a s imilar method as that for aged beneficiaries, except t hat ESRD r ates are calculated on a
statewide basis. Beginning in J a n. 2002, BIPA re quired t hat t he Secretary i ncrease t he M+C
payment r ates for enrollees with ESRD to reflect the demonstration r ate ( including the r isk-
adj ustment methodology) of social health maintenance organizations’ ( S H M O) ESRD
capitation de mo n s t r a t ions. T he revi sed r ates increased the base r ate by 3% and also
included a dj ustments for a ge and s ex f a c t o r s . Begi nning J a n. 2005, CMS has announced
that it plans t o i ncorporate M +C enrollees with ESRD into the new risk adj ustment model
(using a ESRD specific version of the model) in an effort to further align payments with the
me thod used in the ESRD SHMO demonstration.

The b lended p er capita rate was i ntended t o s hift county rates gr a d u a l l y a way
from s olel y l ocal (generally co unty) rates, which reflect the wide variations in
fee-for-service costs, toward a n ational average rate. Blendin g w a s d esigned t o
reduce p ayments i n counties where the adj usted average per capita costs (AAPCCs)
historically were higher than the national average rate, and to increas e payments i n
counties where AAPCCs were lower. The blended rat e i s def i n ed as t h e wei ghted
! a p ercentage of the annual area-specific M +C per capita rate for t he
year for t he paym ent area, and
! a p e r centage of the i nput-price adjusted annual n ational M +C per
capi t a rat e for t he year.
The component of the b lend determined by the area-specific (local) rate i s b ased
on the 1997 AAPCC for t he paym ent area with two adjustments. Fi rst, the
area-specific rate i s reduced to remove an amount corresponding to graduate medical
educat i o n (GME)9 paym ents. S econd, rates are updated each year by a n ational
growt h percent age (descri b ed bel o w).
The component of the b lend determined by the n a t i o n a l r ate i s t he weighted
average o f al l local area-sp ecific rates. This component of the b lend is adjusted to
reflect differences in certain input prices, such as l abor costs, by a formula stated in
the l aw. The BBA allows the S ecretary t o change t he method for m aking i nput-price
adjustments i n t he future.
Under current law, the percentage in the blend assigned to the area-speci fic rat e
was reduced in increments over 6 years from 90% in 1998 to 50% in 2003, while the
corresponding percentage for t he national component was i ncreased from 10% to
50%. In 2003 and b eyond, the b lended rate i s b ased on 50% of the area-specific rate
and 50% of the n ational, input-price adjust ed rate. E ach year, t he blended rates may
be raised or lowered t o achieve budget neutrality (ex p lained below).
M i ni mum P ayment (Fl oor ) Rate
Each county i s also s ubject to a floor rate, d esigned t o raise paym ents in certain
counties m ore quickly than would occur t hrough t he blend alone. Initially, t he BBA
provided for a floor rate that would apply t o all counties within the United S tates and
for 2000 this m i n i m u m r a t e was $402 per m onth. A s eparate minimum was also
established for ar eas o utside (i.e., territories ) t he United S tates. Begi nning March10

2001, BIPA established m ultiple floor rates, based o n population and location. Fo r

9 Medicare pays f or the both t he direct and i ndi rect costs of GME. Direct payments include
payment f or expenses such as salaries of residents, in t e r n s and faculty. T he indirect
adj u s t me n t accounts f or factors not directly related t o education which may i ncrease t he
costs i n t eaching hospital, such as more severely ill patients and increased testing.
10 Generally, i ncreases in M+C payments are effective on J an. 1, of each year. However, t he

2001, t he floor was $525 for aged enrollees within the 50 states and the District of
Columbia residing in a M etropolitan S tatistical A r ea (MSA) with a population of
more than 250,000. Fo r all other areas within the 50 stat e s a n d t h e District of
Columbia, t he floor was $475. Fo r any area outside the 50 states and the District of
Columbia, t he $525 and $475 floor amounts were also applied, ex cept t hat t he 2001
floor could not ex ceed 120% of the 2000 floor amount. As required b y l aw, t h ese
paym ent amounts are increase d annually by a m easure o f growth i n p rogram
spending (see discussion of national gro wth p ercentage, b elow). In 2002, the floor
was $553 for t he larger MSAs and $500 for t he smaller M SAs. The 2003 floors are
lower t han t he 2002 floors; $548 for t he larger MSAs and $495 f o r t h e s m a ller
MSAs.11 In 2003, M+C p ayments i n only 6 counties are based o n t he floor paym ents,
because these counties were able t o change t heir design ation from a low floor county
paym ent area t o a high floor county p ayment area. 12 T h e 2003 paym ent t o M +C
organiz ations in these counties i s b ased on the floor paym ent o f $548. Fo r 2004, the
floor amounts will be $592 for l arger M SAs and $536 for s maller M SAs.
M i nimum P ercentage Increase
The m i n i m u m i ncrease rul e p rot ect s count i es t hat woul d o t h erwi se recei ve onl y
a s mall (if any) i ncrease. In 1998, the minimum rate for any p ayment area was 102%
of its 1997 AAPCC. Fo r 1999 and 2000, the i ncrease was 102% of the annual M +C
per capita rate for t he previous year. BIP A applied a 3% minimum update for 2001,
begi nning in March. Fo r s ubse q u e n t ye a r s, the minimum i ncreas e ret urned t o an
annual J anuary updat e of an additional 2% over t he previous year’s am ount. The
minimum p ercentage increase i s t he only positive update for 2003 M+C p ayments.13
Excl usi on of P ayments f or Gr aduate M e di cal Educati on
P aym ent s for Graduat e Medi cal Educat i o n (GME) are ex cl uded o r “carved out ”
of t h e p aym ent s t o M +C pl ans, phased-i n over 5 years. S p eci fi cal l y, i n d et erm i n i n g
the l ocal rate prior t o d etermining t he ble nded rate, amounts attributable to paym ents
for GME costs were d educted from t he 1997 paym ent amount. The percent o f GME

10 (...continued)
changes r esulting from BIPA were effective on Mar. 1, 2001. As a r esult, M+C plans were
paid at a pre-BIPA r ate f or J an. and Feb. of 2001, and t hen beginning in Mar. the new rates
went into effect. In f uture years, increases are effective on J an. 1.
11 See discussion of national growth percentage for a n e xplanation of how the a dj ustment
for prior year’s errors actually lowers the f loor payments in 2003.
12 M+C payments f or five of these counties was set a t t he lower f loor rate in 2002, while
payments for t he sixth county was set at t he mi nimum update rate in 2002. Regardless of
their actual 2002 payment a mount, t he high floor amount yi elds the highest M+C payme nt
for e ach of t hese six c ounties i n 2003.
13 If the Secretary determi nes t hat a change in the M edicare covered benefits would r esult
in a sign i f i c ant increase i n cost t o M+C plans, the Secretary is required t o adj ust
appropriately the M +C payments to reflect this gr eater cost. In 2004, an adj ustment of 0.2%
will be added t o M +C payments to account for c hanges in Medicare c overage. T he 0.2%
adj ustme nt will result in a 2.2% increase a bove t he 2003 payment f or counties r eceivi ng the
mi nimum percentage i ncrease payment in 2004.

paym ents ex cl uded began at 20% i n 1998, rising in equal amounts. Begi nning in
2002, GME p ayments were s et to be fully deducted each year. However, t he GME
“carve out ” wi l l not occur i n a year i n whi ch n o p aym ent i s based o n t he bl ended rat e,
because t h i s carve out onl y appl i es t o t he bl ended rat e and not t o ei t h er t h e m i n i m u m
percentage increase o f t he floor rate. P ayments for disproportionate share hospitals
(DS H )14 are not carved out.
Budget Neutr al i t y
Once the p reliminary rate i s d etermin ed for each county, a budget neutrality
adjustment is required by l aw to determine final paym ent rat es . This adjustment is
made so that estimated t otal M+C payments i n a gi ven year will be equal t o t he total
paym ent s t h at woul d b e m ade i f p aym ent s w ere b ased sol el y on area-speci fi c rat es.
A budget neutrality adjustment may only b e applied t o t he blended rates because rates
cannot be reduced below t he floor or minimum i ncrease amounts. As a result o f t his
limitation, it is not always possible t o ach ieve budget neutrality. The law m akes no
provision for achieving budget neutrality after all county rates are assign ed either the
floor or minimum i ncrease. W h en this situation o ccurred for the 1998, 1999, 2001,
2002 and 2003 rates, the C enters for M edicare and Medicaid S ervices (CMS) chose
to waive t he budget-neutrality rule rather than the floor or minimum r at e r ules.
While the cost o f waivi ng budget neutrality was not sign ificant i n 1998 and 1999
(less t han $100,000 each year), the estimated cost was about $1 billion i n 2001, $900
million i n 2002, $2.9 billion i n 2003, and $1.1 billion i n 2004.
National G row t h P ercentage
The n at i onal p er capi t a M+C growt h p ercent age i s defi ned as t he proj ect ed per
capi t a i n crease i n t ot al Medi care ex p endi t u res m i nus a s peci fi c reduct i o n s et i n l aw.
Because t h i s i n crease i s t i ed t o t ot al Medi care ex p endi t u res, i t m ai n t ai n s a l i n k
between Medicare fee-for-service and m anaged care s pending. In 1998, the reduction
was 0.8 percentage points, from 1999 through 2001 it was 0.5 percentage points, and
in 2002 the BBR A s et the reduction at 0.3 percentage points. There i s n o reduction
after 2002. Starting with the 1999 M+C p ayments, adjustments were also m ade for
errors in the p revious years’ spending projection.
The n ational growth p ercentage for 2001, after t he reduction and adjustments,
was -1.3%. However because BIP A set t he floor rates i n 2001, the n ational growth
percentage was not used to calculate the floo r r a t e i n 2001. It was only u sed t o
calculate the b lend rate for 2001.
Fo r 2002, the estimated n ational growth p ercentage increase over t he pre-BIPA15
paym ent amount (used for J anuary and February o f 2001) was 8.3%. This figu re

14 DSH payme nts a re a payme nt adj ustme nt for t he h i gh e r c o s t s t hat hospitals incur a s a
result of serving a large number of l ow income patients.
15 Because BIPA increased M+C p a yme n t s beginning in Mar. 2001, CMS calculated a
revi sed national growth percentage of 4.9% for 2002 to be applied t o t hese new BIPA
payment l evels. T he difference between the r evised national growt h percentage i ncrease and

was b ased on a 5.6% projected per capita increase i n t otal Medicare ex p enditures, a
0.3 percentage point reduction, a minus 0.3% adjustment for errors in the p revious
years’ projection o f s pending (1998-2001), and an increase o f 3.2% to account for t he
impact of BIPA. The increase u sed t o calculate the floo r p a ym e n t for 2002 was
5.3%, reflecting only t he projected per capita increase i n t otal Medicare ex p enditures
of 5.6% and t he 0.3 percentage point reduction. There was no adjustment for p rior
years errors, as t he floor amounts were res et by the amounts established i n BIP A.
Fo r 2003, the p rojected national growt h p ercentage increase i s actually a
decrease o f 2.9%. T his d ecrease reflect s a 0.9% increase i n p er capita costs and a
negative 3.8% adjustment for p rior years’ errors. The -2.9% factor is used to update
the 2002 blend rate. The 2003 update for t he floor is -1%, reflecting t he same 0.9%
increase i n p er capita costs, but only a 1.9% decrease for the p rior year error i n 2002
estimates.16 Becau s e both of t hese updates are negative, the minimum percentage
increase i s t he only positive update for 2003, yi elding the h ighest M+C p ayment for
The p rojected national growth p ercentage i n c r e a s e i n 2004 is 9.5%. This
increase reflects a 3.7% increase i n p er capita costs and a positive 5.6% adjustment
for p rior years’ errors. The 9.5% factor is used to update the 2003 blend rate. The
2 0 0 4 update for t he floor is 8.2%, reflecting t he same 3.7% increase i n p e r c a p i t a
costs, but only a 4.3% increase for the p rior year error i n 2003 estimates.
BBR A established a bonus paym ent t o encourage n ew M+C p lans t o enter
counties t hat would otherwise not have a participating plan. The first plan to enter
a p revious l y u n s erved county (or an area where all organiz ations announced their
withdrawal from t he area as of October 13, 1999) would receive a 5 % added p ayment
during t heir first year and a 3% added p ayment during t heir second year. BIP A
f u r t her ex t ended t hese bonus paym ents for M +C plans t o i nclude areas for w h i c h
notification h a d been provided, as of October 3 , 2000, that no plans would b e
a v ailable J anuary 1, 2001. Fo r 2003, 6 M +C contracts qualified for these bon u s
paym ents for s ome o f t he counties l ocated the following states; M aryl and, Missouri,
New York, Virginia, and Puerto Rico, as wel l as for some counties i n s tates s erved
by the S terling P rivate Fee-for-Service Plan.17

15 (...continued)
the origi nal i ncrease i s t he 3.2% increase f or BIPA adj ustme nts. It w a s n o t necessary to
include this 3.2% adj ustment in the r evised increase, as it was already r eflected in the M ar.

1, 2001 payment l evels.

16 Because BIPA reset t he floor payments in 2001, adj ustme nts will only be made f or prior
year errors occurring in 2002 and beyond.
17 Sterling qualified f or a bonus in some of the counties l ocated in Alaska, Arizona, Iowa,
Illinois, Montana, Oklahoma, Pennsyl va nia, S outh Carolina and Washingt on state. (For a
more detailed discussion of Medicare private fee -f o r-service plans, See CRS Report,
RL31122, Medic a r e+Choice Private Fee-for-Service Plans , by Paulette Morgan and
Madeleine Smith.)

Table 6. M ajor Factors f or Determining M edicare
Payments to M edicare+Choice Plans
Factor Rule established in BBA 97, BBRA 99, or BIPA
B lend o f local and Gene r a l T r a nsitio n o ve r 6 year s to 5 0 -5 0 b lend o f lo cal and
na t i o na l r a t e s national r ates. National r ates are adj usted for
differences in input p rices
1998 90% lo cal, 10% natio nal
1999 82% lo cal, 18% natio nal
2000 74% lo cal, 26% natio nal
2001 66% lo cal, 34% natio nal
2002 58% lo cal, 42% natio nal
2003 and after 50% lo cal, 50% natio nal
M i n i mu m p a y me n t 1998 Minimum o f $367 (or 150% of 1997 payment
(“floor”) rate o utsid e U .S.)
1999 and after Previo us year’s payment times a nnua l p e r c e nt a ge
increase, except for 2001 when the amo unt was set
in law ($380 fo r 1999, $402 fo r 2000, and
$525/$475 fo r 2001-or 120% of 2000 payment
outsid e U.S., $553/$500 fo r 2002, $548/$495 fo r18
2003 and $592/$536 fo r 2004)
Minimum p ercent 1998 102% of 1997 AAP CC payment rate
increase 1999 to 2000 102% of prio r year’s rate
2001 103% of prio r year’s rate
2002 and after 102% of prio r year’s rate
GME a nd DSH General GME payments exclud ed (from b lend ed rate only)
payments in equal increments o ver 5 years, fully phased in by
2002. DSH p ayments not exclud ed
B ud get ne utrality Gene ral T o tal M+C p ayme nts may no t e xceed what wo uld
have been sp ent if p ayments were entirely b ased on
local rates ( except no r ate can be reduced below the
f l o o r o r mi n i mu m)
Natio na l gr o wth 1998 Increase in M edicare p er capita expend itures
percentage ( M P C E ) mi nus 0 . 8 p e r c e nt a ge p o i nt s
1999-2001 Increase in MP CE minus 0.5 p ercentage points
2002 Increase in MP CE minus 0.3 p ercentage points
2003 and after Increase in MP CE
Risk adj ustment 1998-1999 100% demo graphic
2000-2003 10% health status, 90% demo gr aphic
2004 30% inpatient and amb ulatory, 70% demo graphic
2005 50% inpatient and amb ulatory, 50% demo graphic
2006 75% inpatient and amb ulatory, 25% demo graphic
2007 and after 100% inpatient and amb ulatory
Source: Co ngr essional Research Service analysis o f p rovisions in B B A, B B RA, and B IP A.

18 Begi nning in Mar. 2001, t h e r e i s a higher floor payment f or counties i n t he U.S. with a
population of more t han 250,000 and a lower f loor payment f or all other counties i n t he U.S.

M+C p aym ent s are ri sk adj u st ed t o cont ro l for variations in the cost of providing
heal t h care am ong Medi care b enefi ci ari es. For ex am pl e, i f si cker and o l d er pat i ent s
al l sign up for one M+C plan, risk adjustment is designed to compensate the plan for
its increased health ex penses. By 2004, three d ifferent risk adjustment methods will
have been used t o adj u st Medi care+C hoi ce paym ent rat es:
! Demographic m ethod (through 1999),
! Principal Inpatient Diagnostic C o st Group (P IP -DC G), which
uses hospital i npatient and d emographic d ata (2000-2003),
! CMS Hierarchical Condition C at egory R isk Adjustment
Model (CMS-HCC), which uses ambulatory, inpatient and
demographic d ata (begi nning in 2004).
The former M edicare risk contract program adjusted t he A A P C C s for
demographic risk factors, and when t he M+C p rogram w a s i m p l e m ented, i t also
solely used these d emographic risk adjus ters until 2000. Demographic risk adjusters
include adjustments for age, gender, workin g s tatus, Medicai d coverage, whether the
b e neficiary o rigi nally qualified for Medicare o n t he basis o f d isabili t y, a n d
institutional (nursing home) stat us.
Each aged Medi c a r e b enefi ci ary can be cat egori z ed accordi n g t o t hese
demographic factors, as shown i n Table 7. S eparate d emographic adjustments are
m ade for P art A and P art B of t h e M edi care p rogram (P art A adj u st m ent s appl y t o
about 56% of the p ayment and P art B adjustments apply t o t he remaining 44%). The
paym ent t o t he M+C p lan for an individual i s adjusted b y t he relevant factors. Fo r
ex am pl e, t h e P a r t A share o f t he paym ent t o an M +C pl an for a m al e benefi ci ary,
aged 75-79 who was not working, not in an institution and not on Medicai d would
be increased by 5% (multiplied b y 1.05 as shown i n t he table). The Part B s hare of
the p ayment for t hat s ame b eneficiary would b e m ultiplied b y a factor of 1.10. Fo r
an individual of t he same age, who was institutio n a lized, t he paym ent would be
multiplied b y 2.25 for t he Part A s hare and 1.95 for t he Part B s hare.
These d emographic risk adjusters account for only a very limited portion o f t he
vari at i o n i n h eal t h care cost s , and as a resul t , t h e BBA requi red t he S ecret ary o f HHS
to develop a new risk adjustment mechanism t hat would also consider variations in
health status. Beginning in J anuary 2000, the C enters for M edicare and Medicaid
Services (CMS) implemented this new risk adjustment mechanism b u ilt on 15
principal i npatient diagnostic cost groups (PIP -DCGs) in order t o p redict incremental
costs above the average.19 Table 8 displays the 1 5 P IP -DCGs i ncluding the v arious
di agno s e s i n each cat egory. P er capi t a paym ent s t o pl ans are adj u st ed based o n

19 In a M ar. 1999 r e p o r t t o Congress, CMS c alculated t hat t he PIP-DCG model offered a
substantial i mprovement in explaining variations in health spending over the demographic
risk adj ustment model. T he demographic adj usters was estimated to explain about 1% of
the variation i n health spending among indivi duals, while the PIP-DCG model was estimated
to explain about 6% of indivi dual variation. According t o CMS, t he new CMS-HCC model
described below is estimated to explain approximately 9.8% of the variation i n health care
spending among indivi duals.

inpatient data using t he PIP-DCG adjuster, for t hose enrollees with an inpatient stay
during t h e previous year. Additionally, adjustments are made for d emographic
fact ors (see Table 9), so that this new s ys tem accounts for b o t h d emographic and
health-status variations.
The BBRA slowed down t he implementation o f t he Secretary’s p roposed phase-
in schedule o f t his n ew system through 2002, and BIP A m ade further revisions to the
ri sk adj u st m ent syst em . (P l ans were concerned, because t h i s new ri s k adj ust m ent
methodology reduces aggregate M +C paym ents; s lowing down its implementation
lessens the reduction.) Through 2003, 10% of paym ents will include introduction of
risk adjustment using t he PIP-DCG m ethod and 90% will be b a s e d s olely on t he
older d emographic m ethod.
One further change required b y BIP A, although t emporary, fully implemented
risk adjustment based o n i npatient hospital d iagnoses for an i ndividual who had a
qualifyi ng congestive h eart failure inpatient diagnosis between J u ly 1, 1999 and J une
30, 2000, if that individual was enrolled i n a c oordinated care p lan o ffered o n J anuary

1, 2001. This applied for only 1 year, b eginning on J anuary 1, 2001. This paym ent20

amount was ex cluded from t he determination o f t he budget neutrality factor.
20 This payment adj ustment i s different from CMS’s initiative f or the “Extra Paymen t i n
Recognition of t he Costs of Successful Outpatient Congestive Heart Failure Care.”

Table 7. M edicare D emographic-Only Risk Ad justment Factors
for Aged B eneficiaries, 2003
P art A — Hospital Insurance
Gender a nd age Non-
gr oup Institutional Medicaid Medicaid Worki ng aged
65-69 1.75 1.15 0.65 0.40
70-74 2.25 1.50 0.85 0.45
75-79 2.25 1.95 1.05 0.70
80-84 2.25 2.35 1.20 0.80
85 and ove r 2.25 2.60 1.35 0.90
65-69 1.45 0.80 0.55 0.35
70-74 1.80 1.05 0.70 0.45
75-79 2.10 1.45 0.85 0.55
80-84 2.10 1.70 1.05 0.70
85 and ove r 2.10 2.10 1.20 0.80
P art B — Suppl em ent ary Medi c al Insurance
Gender a nd age Non-
gr oup Institutional Medicaid Medicaid Worki ng aged
65-69 1.60 1.10 0.80 0.45
70-74 1.80 1.35 0.95 0.65
75-79 1.95 1.55 1.10 0.80
80-84 1.95 1.70 1.15 0.90
85 and ove r 1.95 1.70 1.15 1.00
65-69 1.50 1.05 0.70 0.40
70-74 1.65 1.15 0.85 0.55
75-79 1.65 1.25 0.95 0.70
80-84 1.65 1.25 0.95 0.75
85 and ove r 1.65 1.25 1.00 0.85
So urce : Centers fo r M edicare and Medicaid Services.
No te : V a l u e s i nd icate the multip lier used fo r a b eneficiar y with a p ar ticular set o f c ha r acter istics;
aver age b e n e f iciar y ha s a multip lier o f 1 .0 0 . A sep ar ate set o f r isk ad j uster s is used fo r d isab led
b e ne fi c i a r i e s, und e r t he a ge o f 6 5 .

Table 8. D iagnoses Included in Each PIP-DCG
....HIV /AIDSa
....Blood, Lymphatic Cancers/Neoplasms b
....Metastatic Cancerb
....Brain/Nervous System Cancer b
....Liver/Pancreas/Esophagus Cancerb
....End Stage Liver Disorders
....Cardio-Respiratory Failure and Shock
....Decubitus a nd Chronic Ski n Ulcers
....Diabetes with Chronic Complications
....Coma a nd encephalopathy
....Aspiration Pneumonia
....Renal Failure/Nephritis
PIP-DCG 18 b
....Cancer of Placenta/Ova ry/Uterine Adnexa
....Blood/Immune Disorders
....Paralytic and Other Neurologic Disorders
....Gram-Nega tive/Staphylococcus Pneumonia
PIP-DCG 16 b
....Mouth/Pharynx/ Larynx/Other Respiratory Cancer
....Lung Cancer b
....Cirrhosis, Other Liver Disorders
....Congestive Heart Failure
....Atherosclerosis of Maj or V essel
....Chronic Obstructive Pulmonary Disease
....Septicemia (Blood Poisoning)/Shock
....Adrenal Gland, Metabolic Disorders
....Delirium/ Hallucinations
....Paranoia a nd Other Psychoses
....Anxiety Disorders
....Personality Di sorders
....Degenerative Neurologi c Disorders
....Spinal Cord Inj ury
....T uberculosis
....Stomach, Sma ll Bowel, Other Digestive Cancerb
....Rectal Cancer b
....Cancer of Bladder, K i dney, Urinary Organs
....Benign Brain/Nervous System Neoplasm
....Diabetes with Acute Complications/Hypoglycemia Coma
....Inflamma tory Bowel Disease
....Rheumatoid Arthritis and Connective T issue Disease
....Bone/J oint Infections/Necrosis
....Drug/ Alcohol Psyc hoses
....Maj or Depression/Manic a nd Depressive Disorders

....Epilepsy a nd Other Seizure Disorders
....Cerebral Hemorrhage
....Peripheral V ascular Disease
....Pulmonary Fibrosis and Bronchiectasis
....Pleural Effusion/Pneumothorax/Empye ma
....Gastrointestinal Obstruction/Perforation
....Gastrointestinal Hemorrhage
....Paroxysmal V e ntricular T achycardia
....Bacterial Pneumonia
....Cellulitis and Bullous Skin Di sorders
PIP-DCG 10 b
....Schizophrenic Disorders
....Post-Myocardial Infarction
....Unstable Angina
....T hromboembolic V a scular Disease
....K idney Infection
....V ertebral Fracture W ithout Spinal Cord Inj ury
....Other Cancersb
....Pancreatitis/Other Pancreatic Di sorders
....Acute Myocardial Infarction
....T ransient Cerebral Is chemia
....Fractures of Skull/Face
....Pelvi c Fracture
....Internal Inj uries/T r auma tic Amputations/T hird Degr ee Burns
....Cancer of Uterus/Cervi x/Fema le Genital Organs
....V alvular a nd Rheuma tic Heart Disease
....Hypertension, Complicated
....Coronary Atherosclerosis
....Angina Pectoris
....Atrial Arrhyt hmia
....Precerebral Arterial Aneurys m
....Aortic and Other Arterial Aneurysm
....Artificial Opening of Gastrointestinal T r act Status
....Central Nervous System Infections
....Abdominal Hernia, Complicated
....Alcohol/Drug Dependence
....Cancer of Prostate/T estis/Male Genital Organsb
....Breast Cancer b
....Ongoing Pregnancy with Complications
....Ongoing Pregnancy with No or Minor Complications

....No or Excluded* Inpatient Admi ssions
....Ectopic Pregnancy
....Miscarriage/T erminated Pregnancy
....Completed Pregnancy with Maj or Complications
....Completed Pregnancy with Complications
....Completed Pregnancy without Co mplications (Normal Delivery)
Source: Health Economics Research, I nc.
*E xc lud e d a d missio ns a r e fo r tho se co nd itio ns that wo uld no t b e likely to ( o r co uld no t) r e-o ccur the
fo llo wing year , suc h a s a p p e nd icitis o r fr actur es o f the lo wer limb .
a Includ es principal and second ary inp atient diagno sis o f HIV/AIDS.
b I nc l ud e s p r i nc i p a l d i a gno se s a nd se c o nd a r y d i a gno se s whe n t he p r i nc i p a l d i a gno si s i s c he mo t he r a p y.

Table 9. M edicare D emographic and Health-Status B ased
Risk Ad justment Factors, for Aged B eneficiaries
w ith One o r M ore Years Experience, 2003
Dem ographi c a dj ust ers
Age B ase di sabl ed Medi cai d
65-69 0.541 0.415 0.440
70-74 0.705 0.398 0.457
75-79 0.907 0.334 0.461
Male 80-84 1.077 0.287 0.445
85-89 1.258 0.237 0.404
90-94 1.376 0.189 0.331
95+ 1.357 0.141 0.242
65-69 0.453 0.605 0.433
70-74 0.588 0.576 0.440
Female 75-79 0.747 0.519 0.454
80-84 0.918 0.415 0.423
85-89 1.096 0.313 0.327
90-94 1.162 0.232 0.231
95+ 1.128 0.152 0.168
Health status adjusters
P I P - DCG group F actor
Source: CM S.

Risk Adjustment M e thod in Place for 2003
The following illustration ex amines calculations of risk factors i n 2003, based
on two scenari o s: 1) t h e d em ographi cal l y-based ri sk adj u st m ent syst em i n pl ace pri o r
to 2000, and 2 ) t he actual s ys tem i n p lace for 2003, which u ses a combination o f 10%
of the current health-status-based s ys tem and 90% of the o ld demogr a p hic-based
syst em . C om pari ng t h ese t wo scenari o s provides an evaluation o f t he impact of the
different risk adjustment methodologies o n M +C paym ents.
Three beneficiaries are considered; each i s m al e, aged 75. The illustration
as s u m e s t hat none of these b eneficiaries is disabled, i nstitutionalized, covered by
Medi cai d, or worki n g. Because t h e s ys t em i s p rospect i v e, hospi t al i z at i o n i n t he pri o r
year, 2002, would d etermine t he health-status adjustment factor used in 2003. The
first b eneficiary was not hospitaliz ed in 2002. The s econd was hospitaliz ed in 2002,
with a d iagnosis of kidney i nfection (PIP-DCG code 10), while the t hird was
hospitaliz ed with a d iagnosis of lung cancer (PIP -DCG code 16).
As shown i n t he scenarios b elow, m onthl y payments t o plans for beneficiaries
with no prior year hospitalization will be lower using the current risk adjustment
methodology, compared with paym ents using t he old d emographically-based
methodology. T h r o u g h 2003, only 10% of the p ayments will be based o n t he new
methodology, with the bulk of t he paym ent, 90%, b ased on the o ld demographic-only
adjusters. Paym ents for beneficiaries with no prior year hospitalization will decline
even more, as a larger percentage of the payment is based on t he more comprehensive
ri s k adjusters. Alternativel y, for any enrollee with a prior year hospitalization,
paym ents under t he new s ys t e m w i l l be high er than paym ents under t he old
demographic-only b ased system. In 2004, the n ew risk adjustment methodology will
begi n t o b e phased i n, taking into account data from both i npatient and ambulatory

Scenario 1: Demographically-Based Risk
Adjustment (old system)
Under t he old risk adjustment system in place prior t o 2000, a p lan’s p ayment was
adj u st ed t o refl ect t h e gender and age o f t he enrol l ee. The s am e adj ust m ent s were
assi gn ed t o al l m al e b e n e f i c i a ri es ages 75 t o 79, who were not di sabl ed,
institutionalized, covered by M edicai d, or working, regardless of health stat us. As
shown i n Table 7 separate demographic adjustment s are m ade for P art A and P art
B o f t he Medicare p rogram, as follows:
! Part A coverage increased by 5% (i.e., 1.05% of the p ayment), and
! Part B coverage increased by 10% (i.e., 1.10% of the p ayment).
The adjustment for P art A applies t o about 56% of the p ayment and t he adjustment
for P art B applies t o t he remaining 44%, res ulting i n a weighted adjustment of
about 1.072 to each county p ayment, regardless o f h ealth status.
As shown b elow, u sing the d emographically based m ethod, paym ents to plans for
t h ese t hree benefi ci ari e s w i l l onl y v ar y across counties and not within counties,
from a low o f $547 per m onth p er beneficiary i n Arthur, NE t o a high of $935 per
month per beneficiary in R ichm ond, NY (the county with the highest
Medicare+Choice rate nationwide i n 2003).
Calculation of Monthly Payment Rate Under S cenario 1
Reason f or hospitalization ( if any) in 2002
K i dney i nfection Lung cancer (PIP-
None ( P IP -D C G 1 0 ) DCG 16)
Medicare Part A 1.05 1.05 1.05
Medicare Part B 1.10 1.10 1.10
Total weighted 1.072 1.072 1.072
adj ustment (based
Adjusted monthly payment i n s elected counties
Richmond, NY $935 $935 $935
Dade, FL 912 912 912
Hennepin, MN 605 605 605
Arthur, NE 547 547 547

Scenario 2: Phased-in Health Status Based Risk
Adjustment (using a c ombination of 10% of the
new s ys tem a nd 90% of the old system)
Scena r i o 2 represents t he ex pected paym ent for 2003 when risk adjustment is
based o n 10% of the h e a l t h - s tatus m ethod and 90% of the o ld demographic
method. The factors u sed t o calculate the adjustment under t his m ethodology are
found in Table 9. For each benefi ci ary, t h ere i s a si ngl e adj u st m ent for
demographics (no s plit between Parts A and B of Medicare). The base adjustment
for a 75 year ol d m al e who i s not di sabl ed, not a M edi cai d b enefi ci ary and was not
hospita l i z ed during t he previous year is 0.907. Adjustments for prior year
hospi t a l i z a t i o ns are added t o t he base adjustment. However, only 10% of the
paym ent for each of t h e t hree benefi ci ari es w oul d b e b ased t h e fol l o wi ng
applicable adjustment:
! 0.907 for n o p rior year hospitaliz ation,
! 0.907+1.170=2.077 for k idney i nfection (PIP-DCG 10), and
! 0.907+2.438=3.345 for l ung cancer (PIP -DCG 16).
The remaining 90% of the p ayment is risk adjusted using t he old m ethodology
(i.e., 90% of the 1.072 adjustment for d emographics, found in Scenario 1).
As shown b elow, p ayments t o p lans for t hese three b eneficiaries range from a low
of $539 for a beneficiary i n Arthur, NE with no prior year hospitaliz ation t o a high
of $1,134 in Richmond, NY for a beneficiary with a p rior year hospitaliz ation for
Calculation o f Monthly Payment Rates Under S cenario 2
Reason f or hospitalization ( if any) in 2002
K i dney i nfection Lung cancer ( PIP-
None ( P IP -D C G 1 0 ) DCG 16)
Old method 1.072 1.072 1.072
Current me thod 0.907 2.077 3.345
Adjusted monthly payment i n s elected counties
Richmond, NY $921 $1,023 $1,134
Dade, FL 898 998 1,106
Hennepin, MN 595 661 733
Arthur, NE 539 598 663

New Ri s k Adj ustment M ethodol ogy Begi nni ng i n 2004
As required b y BIP A, begi nning in 2004, a n ew risk adjustment method will be
u s e d t o a ccount for m ore o f t he variation i n h ealth care ex p enditures t han a r e
accounted for u sing prior m ethods. The new m odel, the C MS Hierarchical Condition
C a t e go r y R i s k A d j u s t m e n t M o d e l ( C M S - H C C ) , i ncorporates data from both i npatien t
hospital and am bulat ory s ettings , as wel l as dem ographic fact ors. 21 The C MS-HCC
model categoriz es approx imately 3,300 In ternational C lassification o f Disease (ICD-
9) codes i nto approx imately 800 disease clusters, and furt h er aggregat es t hose i nt o

64 di sease cat egori es. The C MS -HC C al so i n cl udes s everal condi t i on-i n t eract i ons 22

and dem ographic fact ors, such as age, sex , Medicai d eligibility and origi nal disability
status. Table 10 d i s p lays a list o f d isease groups, i nteractions and d emographic
factors i ncluded i n t he CMS-HCC m odel.
The p ayment for an aged b eneficiary under t he CMS-HCC m odel i s calculated
by summing all of the relevant condition adjustment factors for the p rior year with
the dem ographic adjustment fact ors and multiplying t hat sum by the average paym ent
rat e f o r t he beneficiary’s county o f residence. Any event which o ccurs during t he
year would b e i ncorporated into the risk adjusted p ayment for t he following ye a r.
Unlike t he PIP-DCG m ethod, which allows only one inpatient diagnosis to modify
the p ayment rate, i n general, t he CMS-HCC m odel t akes into account multiple23
diagnoses. For ex am p l e, i f i n t he previ ous year, a benefi ci ary h as been di agnosed
wi t h congest i v e h eart fai l u re, a hi p fract ure, and cancer, al l of t h ese condi t i ons woul d
be factored into the risk adjustment for t he beneficiary’s 2004 paym ent. T h e n ew
risk adjustment will be phased i n at a rate of 30% in 2004, 50% in 2005, 75% in 2006
and 100% begi nning in 2007. The portion o f t he paym ent not weighted by the C MS-
HCC will be weighted by the d emographic-only m ethod.

21 On May 25, 2001 CMS a nnounced that M+C organizations would no t b e r e quired t o
submit hospital outpatient or physician encounter data for dates of service prior to J uly 1,
2002. Data collection r equirements and procedures were revi sed t o r educe administrative
burden and data collection began in July 2002. Data collected between July 1, 2002 and
J une 30, 2003 will be used to calculate r isk a dj ustment f actors f or CY2004 M+C payme nts.
22 Separate adjustment factors are listed for certain combinations of conditions, such as
diabetes and c o n ge s t i ve heart f ailure, because the cost of t reating a beneficiary with the
combination i s greater than could be accounted for by t he s u m o f t h e t w o s eparate r isk
adj ustment factors.
23 If a beneficiary’s illness progr esses within a disease process, such as dia b e t e s wi t h
increasing s everity, only t he most costly diagnosis made for t he beneficiary will be applied
to the payment rate.

Table 10. M edical Conditions, M edical Condition Interactions,
and D emographic F actors Included in t he CM S H ierarchical
Condition Category R isk Adjustment M odel f or 2004
Co mmunit y Inst it ut io na l
Variable Description factor factor
Disea se g ro ups
HCC1 HIV/AIDS 0.685 1.344
HCC2 Septicemia/Sho ck 0.890 0.946
HCC5 Opportunistic Infectio n 0 .652 1.344
HCC7 Metastatic Cancer, Acute Leukemia 1 .464 0.540
Lung, U p p e r D i g e s t i v e T r a c t , a nd O t he r
HCC8 Severe Cancers 1 .464 0.540
Lymp ha tic, Head and Neck, B rain, a nd
HCC9 Other Maj or Cancers 0 .690 0.452
B r east, P r ostate, Colorectal and Other
HCC1 0 Cancers and T umo rs 0.233 0.259
Diabetes with Re na l o r P eriphe ral
HCC1 5 Circulatory Manifestatio ns 0.764 0.612
Diabetes with Neur ologic or Othe r
HCC1 6 Sp ecified Manifestatio ns 0.552 0.612
HCC1 7 Diabetes with Acute Complicatio ns 0.391 0.612
Diab etes with Op htha lmo lo gic o r
HCC1 8 Unsp ecified Manifestatio ns 0.343 0.612
HCC1 9 Diabetes without Complicatio ns 0.200 0.255
HCC2 1 P r o tein-Calo r ie Malnutr itio n 0 .9 2 2 0 . 4 2 7
HCC2 5 End -Stage Liver Disease 0 .900 0.268
HCC2 6 Cirrhosis of Liver 0 .516 0.268
HCC2 7 Chr o nic Hep a titis 0 . 3 5 9 0 . 2 6 8
HCC3 1 Intestinal Ob structio n/Perforatio n 0 .408 0.268
HCC3 2 P ancreatic Disease 0 .445 0.268
HCC3 3 Inflammato ry Bowel Disease 0 .307 0.268
HCC3 7 B one/Joint/Muscle Infectio ns/Necrosis 0.496 0.495
Rheuma to id Ar thr itis and I nflamma to r y
HCC3 8 Co nnective T issue Disease 0 .322 0.285
HCC4 4 Severe Hematological Diso rders 1 .011 0.448
HCC4 5 Disorders of Immunity 0.830 0.448
HCC5 1 Drug/Alcoho l P sychosis 0.353 0.221
HCC5 2 Drug/Alcoho l Dependence 0 .265 0.221
HCC5 4 Schizophrenia 0 .543 0.221
Maj o r Depressive, B ipolar and P aranoid
HCC5 5 Diso rders 0 .431 0.221
HCC6 7 Quadrip legia/Extensive P aralysis 1.181 0.098
HCC6 8 P araplegia 1 .181 0.098
HCC6 9 Spinal Cord Disorders/Inj uries 0 .492 0.098
HCC7 0 Muscular Dystrophy 0 .386 0.098
HCC7 1 P olyneuropathy 0 .268 0.098
HCC7 2 M ultip le Scler o sis 0 .5 1 7 0 . 0 9 8

Co mmunit y Inst it ut io na l
Variable Description factor factor
HCC7 3 P arkinsons and Huntingtons Disease 0 .475 0.098
H C C7 4 S e i z ur e D i so r d e r s a nd Co nvul si o ns 0 . 2 6 9 0 . 0 9 8
C o ma , B r a i n C o mp r e s s i o n / A n o x i c
HCC7 5 Damage 0.568 0.098
Resp irator Depend ence/T r acheostomy
HCC7 7 Status 2.102 1.415
HCC7 8 Respirato ry Arrest 1.429 1.415
HCC7 9 Cardio-Resp iratory Failure and Sho ck 0.692 0.289
HCC8 0 Congestive Heart Failure 0.417 0.176
HCC8 1 Acute Myocardial Infarctio n 0 .348 0.288
U nst a b l e Angi na a nd O t he r Ac ut e
HCC8 2 Ischemic Heart Disease 0 .348 0.288
Angina P ectoris/Old Myocardial
HCC8 3 Infarctio n 0 .235 0.288
HCC9 2 Specific Heart Arrhythmias 0.266 0.187
HCC9 5 Cerebral Hemorrhage 0 .392 0.151
HCC9 6 Ischemic o r Unspecified Stroke 0.306 0.151
HCC100 Hemiplegia/Hemip aresis 0.437 0.098
Ce rebral P a lsy a nd Othe r P aralytic
HCC101 Synd romes 0 .164 0.098
HCC104 Vascular Disease with Co mp licatio ns 0.677 0.509
HCC105 Vascular Disease 0 .357 0.114
HCC107 Cystic Fibrosis 0.376 0.230
HCC108 Chronic Obstructive P ulmo nary Disease 0 .376 0.230
Aspiration a nd Specified B acterial
HCC111 Pneumo nias 0.693 0.463
P neumo coccal P neumo nia, Empyema,
HCC112 Lung Ab scess 0 .202 0.463
P r o lifer ative D iab e tic Retino p a thy a nd
HCC119 Vitreous Hemo rrhage 0.349 0.995
HCC130 Dialysis Status 3.076 3.112
HCC131 Renal Failure 0.576 0.420
HCC1 3 2 Nep hr itis 0 . 2 7 3 0 . 4 2 0
HCC148 Decubitus Ulcer of Skin 1.030 0.317
Chronic Ulcer of Skin, E xcept
HCC149 Decubitus 0 .484 0.262
HCC150 Extensive T hird-Degree B urns 0.962 0.248
HCC154 Severe Head Inj ury 0.568 0.248
HCC155 Maj o r Head Inj ury 0.242 0.248
Vertebral Fractur es without Spinal
HCC157 Chord Inj ury 0 .490 0.098
HCC158 Hip Fractur e/Dislocatio n 0 .392 0.000
HCC161 T raumatic Amputatio n 0 .843 0.248
Maj o r Complicatio ns of Medical Care
HCC164 and T rauma 0 .262 0.263
HCC174 Maj o r Organ T r ansp lant Status 0.722 0.882

Co mmunit y Inst it ut io na l
Variable Description factor factor
Ar tificial O p e nings fo r Feed ings o r
HCC176 Eliminatio n 0 .7 9 0 0 . 8 8 2
Amp utatio n status, Lo we r
HCC177 Limb /Amp utatio n Complicatio ns 0.843 0.248
Disa bled/disea se interactions
D-HCC5 Disabled*Opportunistic Infectio ns 0.789 0.000
Disabled*Severe Hematological
D-HDD4 4 Diso rders 0 .893 0.000
D-HCC5 1 Disabled*Drug/Alcoho l P sychosis 0.509 0.000
D-HCC5 2 Disabled*Drug/Alcoho l Dependence 0 .414 0.000
D-HCC107 Disabled*Cystic Fibrosis 1.861 0.000
Disease interactions
Diab etes Mellitus*Co nge stive H ear ta
INT 1 Failur e 0.253 0.207
Diab etes Mellitus*Cer e b r o vascular
INT 2 Disease 0 .125 0.000
Co nge stive H ear t Failur e *Chr o nic
INT 3 Ob structive P ulmo nary Disease 0 .241 0.372
Chr o ni c O b s t r uc t i ve P ul mo na r y
INT 4 Disease*Co ronary Ar tery Disease 0 .079 0.000
I N T 5 Rena l Failur e *Co nge stive H ear t Failur e a 0.234 0.000
Rena l Failur e *Co nge stive H ear ta
INT 6 Failur e *D iab e tes M ellitus 0.864 0.000
M e dica id a nd o rig i na lly disa bl ed interactions w ith age and sex
Medicaid female, disabled 0.221 0.000
Medicaid female, aged 0.183 0.000
Medicaid male, disabled 0.115 0.000
Medicaid male, aged 0.184 0.000
Or iginally-d isab led female 0 .2 3 6 0 . 0 0 0
Or iginally-d isab led male 0 .1 4 8 0 . 0 0 0
Demographic f actors
Men, age 0 -3 4 0 .068 1.104
Men, age 35-44 0.120 1.104
Men, age 45-54 0.190 1.104
Men, age 55-59 0.270 1.104
Men, age 60-64 0.342 1.104
Men, age 65-69 0.346 1.450
Men, age 70-74 0.453 1.238
Men, age 75-79 0.577 1.211
Men, age 80-84 0.657 1.209
Men, age 85-89 0.790 1.241
Men, age 90-94 0.901 1.049
Men, age 95+ 1.035 0.836
Women, age 0 -3 4 0 .117 1.064
Women, age 35-44 0.197 1.064

Co mmunit y Inst it ut io na l
Variable Description factor factor
Women, age 45-54 0.214 1.064
Women, age 55-59 0.265 1.064
Women, age 60-64 0.375 1.064
Women, age 65-69 0.307 1.164
Women, age 70-74 0.384 1.179
Women, age 75-79 0.483 0.992
Women, age 80-84 0.572 0.938
Women, age 85-89 0.665 0.880
Women, age 90-94 0.795 0.789
Women, age 95+ 0.805 0.581
Source: [ h t t p : / / www. c m s . h h s . g o v / h e a l t h p l a n s / r a t e s / 2004/cover-exhibit-1.asp]
a. I nter actio n ter ms ma r ked wi t h a s u p er scr ip t 1 a r e no t a d d itive; a b eneficiar ys p a yment will b e
b a sed o n the mo st seve r e , b ut no t multip le d iagno ses. All o ther inter actio n ter ms ar e a d d itive.
Adjusted Community Rates
M+C p l ans are requi red t o i ncl ude al l M edi care-co v e r e d s ervi ces. In s om e
ci rcum st ances, p l ans m ay al s o b e requi red t o o ffer addi t i onal b enefi t s or reduced cost
sharing t o t heir beneficiaries. The basic benefi t p ackage i ncl udes al l of t h e M edi care-
covered b enefi t s (ex cept hospi ce servi ces) a s wel l as t he addi t i onal b enefi t s , as
determined by a formula which i s s et in law. The adjusted community rate (ACR)
m echani s m i s t he process t h r o u g h whi ch heal t h pl ans d et erm i n e t he m i n i m u m
amount of additional b enefits they are requi red t o p rovide to Medicare enrollees and
the cost s haring they are permitted t o charge for those benefits. This s ys tem was in
place for t he risk contract program and continued with only a few changes under t he
In general , no l at er t han J ul y 1 of each year, each M+C o rgani z at i o n i s requi red
t o subm i t t o t h e S ecret ary o f HHS , for each of i t s M+C p l ans, s peci fi c i nform at i o n
about premiums, cost s haring, and additional b enefits (if any). However, as specified
below, this deadline h as been and will c ontinue to be shifted t hrough 2004. Because
BIPA was enact ed after t he J u l y d ead l i ne, t here was a speci al timeline devised for
2001. Plans t hat p reviously provided notice of t heir intention t o t erminate contracts
or reduc e t h e i r service area for 2001 had until J anuary 18, 2001, to rescind t heir
notice and subm i t ACR i nformation. Fu rt her, any M +C organiz ation t hat would
recei ve hi gh er capi t at i o n p aym ent s as a resul t of BIP A was requi red t o s ubm i t revi sed
ACR i nformation b y J anuary 18, 2001. Plan s could only reduce p remiums, reduce
cost sharing, enhance b enefits, u tilize s tabilization funds, or stabilize or enhance
benefi ci ary access t o p rovi ders (as l ong as t h i s di d not resul t i n i n creased benefi ci ary
premiums, i ncreas ed cost-sharing, or reduced benefits). Any regulations that limited
stabilization fund amounts were waived, with respect to ACR s ubmissions
Fo r 2002, an M+C o rganiz ation’s d eadline for notifyi ng CMS o f its intention
to renew its contract as well as a final ACR s ubmission was ex t ended t o S eptember

17, 2001. M+C o rganiz ations only h ad to submit a o n e - p a ge s ummary on J u ly 2,

2001 and t his was not binding on the o rganiz ation. CMS announced this ex tension
in order t o give o rganiz ations more time to gather data for forecasting costs. As p art
of the P ublic Health Security and Bioterrorism Preparedness and R esponse Act (P.L.
107-188) Congress legi slated the d eadline change for 2002, and furt h e r , s e t the
deadline for 2003 and 2004 at no later t han t he second Monday i n S eptember. Under
current law, the deadline will return to J uly 1 st of each year, b eginning in 2005.
Under M edi care’s rul es, a pl an m ay not earn a hi gh er ret u rn from i t s Medi care
business t han i t does i n t he commercial m arket. T h e S e cretary reviews t his
information and approves o r d isapproves t he premiums, cost-sharing amounts, and
benefits. The Secretary does not have the authority to review the premiums for either
MSA p lans or private fee-for-service plans. Begi nning May 1 , 2001 ACR
submissions are reviewed b y t he CMS C hief Actuary.
Benefi ci ari es s hare i n any p roj ect ed cost savi ngs b et ween Medi care’s p er capi t a
paym ent t o a plan and what i t would cost t he plan to provide Medicare b enefits to its
commercial enrollees. T o accomplish this, plans must provide either reduced cost
shari n g o r addi t i onal b enefi t s t o t h ei r M edi care enrol l ees t h at are v al ued at t he
di fference b et ween t h e p roj ect ed cost of providing Medicare-covered s ervi ces and t he
ex pect ed revenue for M edi care enrol l ees. 24 Additionally, beginning in 2003, plans
may also reduce t he Medi care P art B prem i u m . 25 Plans can choose which additional
benefits to offer, however, t he total co s t o f t hese benefits must at least equal t he

24 Alternatively, under t he A C R p r o cess, plans may also charge a premi um if they
demonstrate higher “costs”, r ather t han “savi ngs” for provi ding the basic benefit package.
plan. For the basic benefit package and any r equired additional s ervi ces in an M+C plan,
the beneficiary premium and actuarial value of t he deductibles, coinsurance and copayments
on a ve r a ge t o enrolled i ndivi duals may not exceed the actuarial value of t he deductibles,
coinsurance, and copayments that would be applicable on average t o i ndivi duals entitled t o
Part A and enrolled under Part B if they were not in an M+C plan.
25 Al l M +C enrollees (as well as FFS Medicare beneficiaries enrolled i n Part B) are required
to pay t he Medicare Part B monthly premi um. T he monthly premi um was s et at $45.50 for
2000, $50 for 2001, $54 for 2002 and $58.70 f o r 2 003. Begi nning in 2003, an M+C
organization may elect to reduce its M+C payment up to 125% of the a nnual Part B
premium. Howeve r, only 80% of this amount can be used to reduce an e nrollee’s actual Part
B premi um. T his has the eff e c t o f returning up t o 100% of the beneficiary’s Part B
premium. T he r eduction applies uniformly to each enrollee i n t he plan. Plans must include
information about Part B premi um reductions as part of the r equired i nformation t ha t i s
provided to enrollees for comparing plan options.

“savi n gs ” from M edi care-covered s ervi ces. 26 P l ans m ay al so pl ace t h e addi t i onal
funds in a s tabilization fund or return funds to the Treasury.
Addi ti onal or S uppl emental Benefi t s
Nearly all p lans o f f e r s ome b enefits to enrollees beyond those i n t raditional
Medi care (Fi gure 6 ). Fo r ex ample, i n 2002, about 87% of M+C enrollees were
offered vision care as part of their lowest premium package, 100% were offered
routine physicals, and about 72% we r e o ffered s ome coverage of prescription
(outpatient) drugs . H eari n g c are was offered t o s lightly more than half of al l
enrol l ees. O t h er servi ces offered i ncl uded p revent i v e d ent al care, p odi at ry, and
chiropractic services. W hile plans m ay offer even m o r e s e r v i c es, those s hown i n
Fi gure 6 are t he most frequently offered b enefits. Fi gure 6 shows t hat t he percent
of e n r o l l e e s offered t hese benefits has decl i n ed for al l servi ces, ex cept rout i n e
physicals b etween 1999 and 2002. However, this figu re does not show how the
generosity of benefits or the l evel of cost sharing m ay have declined o v er t he time

26 Plans may also offer extra benefits beyond the “additional” benefits required t o s pend the
“savings” calculated i n t h e ACR process. T hese extra benefits are r eferred t o as
“supplemental” benefits. Plans are permitted t o charge M edicare enrollees the expected cost
of these s upplemental benefits, plus t he nationa l a ve rage amount of beneficiary c ost s haring
for M edicare-covered s ervi ces. Plans can collect these payments t hrough a combination of
cost sharing a nd premiums , but the s um of the premi ums a nd the actuarial va lue of t he
deductibles, coinsurance a nd copayments for s uch benef i t s ma y not exceed the a dj usted
community rate for t hese benefits. Plans may choose t o waive part or all of t his allowable
premium f or all enrollees.

Figure 6 . P ercent of M+C Enrollees Offe red Benefits Beyond Traditional
Me dicare Covered Services, in the Low est Premium P ackage Ava ilable,
Prescription drugs
Pr event i v e dent al

0 % 10% 20% 30 % 40 % 5 0% 6 0% 7 0% 80% 90 % 1 00%

Percent of Medi care+Choi ce Enrol l ees
Source: Fi gur e p r e p a r e d b y C RS b a se d o n M a t he ma t i c a Ana l ysi s o f C M S d a t a . Lo r i Ac hma n, a nd
Marsha Go ld ,T r ends in Medicare+Choice Benefits and P remiums, 1999-2002, The Commonwealth
Fund .

Cove rage for P r escription Drugs
One o f t h e a d vant ages of Medi care m anaged care, over t radi t i onal fee-for-
service M edicare, is that most plans i nclude some outpatient pres cription drug
coverage. H owever, accordi n g t o C MS dat a, current l y fewer e nrol l ees have M+C
prescription d rug coverage and among those with coverage, t he drug b e n e f i t h as
become less generous over time. As s hown i n Table 11, about 84% of enrollees had
prescription d rug coverage through a basic plan i n 1999, declining t o about 69% by
2003. Plans are s i m u l t aneously decreasing t he amount of covered d rug s pending
while also increasing out-of-pocket costs. As s hown i n Table 12, v ery few pl ans h ad
no limits (1.4%) o n d rug b enefits in 2003 and an i ncreas ing number o f p lans set
annual b enefit limits at $500 or less (10.6% of plans i n 1999 compared to 53.4% of
As shown i n Table 13, almost all p lans required s ome l evel of copaym ent for
pres cription drug coverage i n 2003 and the copayment amount has i ncreas ed over
time. About 92% of beneficiaries were o ffered p lans with copaym ents of $10 or less
(including no copaym ents) for generic d rugs in 1999, compared to 77% in 2000. Fo r
brand n am e d r u gs , t he percent age of enrol l ees wi t h i n creased requi red copaym ent
amounts over time have been even greater. In 1999, 14% of enrollees paid more than
a $20 copay for brand n ame d rugs , compared t o over 73% in 2003.
Table 11. M +C Enrollees w ith Drug Coverage in a B asic Plan

2001 (post-

1999 2000 (pre-B IP A) BIPA) 2002 2003
Numb er o f
enrollees 4,947,098 4,437,416 3, 771,551 3,832,308 3,480,000 3,140,000
P ercent o f
enrollees 84.3% 72.6% 68.9% 70% 71% 69%
Source: Centers for Medicare and Medicaid Services (CMS) d ata.
Table 12. Percent o f Enrollees w ith an Annual D rug C ap in
Basic M +C Plans, Weighted by Enrollment, 1999-2003
Annual drug c ap 1999 2000 2001 2002 2003
$500 or less 10.6% 20.8% 28.2% 50.1% 53.4%
$501-$1000 36.4% 38.0% 21.5% 26.4% 35.2%
$1001-$2000 27.2% 32.9% 34.8% 18.5% 16.7%
$2001 or more 4.1% 3.4% 5.2% 2.9% 3.4%
No cap 21.7% 14.9% 10.4% 2.2% 1.4%
Source: Mathematica P olicy Research Analysis of CM S d ata: Lo ri Achman, and Marsha Gol d ,
Medicare+Choice Plans Continue to Shift More Costs to Enrollees,” Ap r. 2003.
No te: Plans with generic-only benefits are classified a having a benefit limit less than $500 per year.

Table 13. Percent o f M +C Enrollees by Prescription Drug Co-
Payments, W eighted by Enrollment, 1999-2003
1999 2000 2001 2002 2003
None 7.6% 7.1% 7.8% 7.1% 5.1%
$10.00 or less 84.4% 90.4% 83.4% 73.1% 71.9%
$10.01 or more 8.0% 2.5% 8.8% 19.8% 23.0%
None 6.3% 5.5% 2.4% 0.0% 0.7%
$10.00 or less 35.9% 19.8% 21.7% 4.6% 5.7%
$10.01 to $20.00 43.8% 54.3% 43.6% 14.8% 20.1%
$20.01 or more 14.0% 20.4% 32.3% 80.6% 73.5%
Source: Mathematica P olicy Research Analysis of C M S d ata: Lo ri Achman, and Marsha Gold,
Medicare+Choice Plans Continue to Shift More Costs to Enrollees,” Ap r. 2003.
In addition t o t he Part B premium, plan s a re permitted t o charge enrollees
additional out-of-pocket fees, s uch as p remiums a n d coinsurance, depending on
which p lan t he individual elects. However, organiz ations may d ecide to offer z ero-
p r e m i u m p l ans. If M edi care’s p er capi t a paym ent t o a pl an ex ceeds i t s cost s ( a
“savings ” i n t he terms o f t he ACR), t he plan may choose t o add only enough b enefits
to match t he savings, requiring no additional p remium under t he ACR rules. Another
rationale for wai ving premiums is to stay competitive i n l ocal market s. In this latter
case, t h e p l an m ay not be at ri sk of t a k i n g a l oss o n i t s Medi care busi n ess b ecause
profits and overhead b a sed on commercial rat es are i ncluded i n its allowed costs
under t he ACR calculation.
Between 1999 and 2003, the p ercentage of beneficiaries, nationally, with access
to a z ero premium plan has declined. As s hown i n Table 14, t he availability of these
plans, nationally, d ropped i n h alf, from over 60% to just under 30%. Although, the
data for u rban and rural areas was only available t hrough 2001, the t r e nd seems t o
i ndi cat e t h a t t he i m p act on rural areas was even great er, especi al l y si nce t hese
individuals had fewer opportunities for en r o lling in the M+C program and fewer
choices among plans.

Table 14. Percent o f M edicare B eneficiaries w ith Access
to a Z ero-Premium M +C Plan, b y Area
Area 1999 2000 2001 2002 2003
National 61% 53% 39% 32% 29%
Urban a reas 75% 66% 50% na na
Rural a reas 14% 9% 4% na na
So urce : MedPAC analysis o f Medicare Compare data from CMS website, Aug. 1999, Jan. 2000, and
Feb. 2001; CMS analysis 2002 and 2003. Na=not available.
Table 15, s hows t he distribution o f M +C enrollees by the m onthly p remium
amount. Between 2000 and 2003, the p ercent o f enrollees in z ero prem ium p lans
declined significantly, s o t hat t he majority of Medicare e n r o llees were no longer
enrolled i n z ero premium plans. At t he same tim e, t h e percent of enrollees payi ng
over $50 in monthly premiums inc r e a s e d f r o m 7% t o 35%. In 2003, 0.2% of all
M+C b eneficiaries (or 9,129 i n d i viduals) were enrolled i n p lans that reduced their
monthly P art B premium, while 4.2% of all beneficiaries had access t o s uch a plan.
Table 15. Distribution o f M +C Enrollees,
by Basic Premium Levels
Enrollees Enrollees in
with $0.01 to Enrollees in
reduced Enrollees in $20.00 $20.01 to Enrollees in
Part B zero premium premium $50.00 over $50.00
premium pl an pl an premium plan premium plan
J une
2000 na na 3,735,524 61% 783,611 13% 1,168,828 19% 426,388 7%
Jan. a
2001 na na 2,465,295 45% 636,100 12% 1,517,169 28% 856,569 16%
2002 na na 2,020,351 41% 238,272 5% 1,131,794 23% 774,305 32%
2003 9,129 0.2% 1,738,980 38% 59,335 1% 1,150,192 25% 1,606,617 35%
Source: Mat h e ma t i c a P olicy Research Analysis of CM S d ata: Lo ri Achman, and Marsha Gold,
Medicare+Choice Plans Continue to Shift More Costs to Enrollees Apr. 2003.
a P o st-B IP A p remium levels

Beneficiary P rotections
The M +C program i ncludes req uirements des igned t o limit benefici aries’
financial liability and t o assure benefici aries of certain rights and rem edies.
Benefici ary protections or rights incl ude es tablished beneficiary liability standards,
quality standards, information and disclosure requirements, a grievance and appeal s
process, and access t o s ervi ces.
Beneficiary Financial Li ability
Enrol l ees i n M+C coordi nat ed care p l a n s are l i k el y t o ex p eri ence t he l east
amount of out-of-pocket costs (compared to o ther M+C options). Cost sharing p er
enrollee (including premiums) for covered s ervices cannot be more than the actuarial
value o f t he deductibles, coinsurance, an d copaym ents under t raditional Med i care
(Table 16). However, while the total o f cost sharing i s limited, the plan m ay set
different amounts for sp e cific services, such as a lower (or high er) d eductible for
hospital i np at i e n t services or skilled nursing care s ervices . Enrollees in an M+C
coordinated care p lan cannot be charged additional b alanced billing amounts b y any27
The rules for p rivate fee-for-service (P FFS ) plans and PPO demonstration plans
are d ifferent (Tab l e 1 6). Generally, contract provi ders will be allowed t o bill
enrollees in private fee-fo r-service plans u p t o 15% above the fee schedule t he plan28
uses. In contrast to traditional M edicare, this privilege ex tends to al l cat egories of
provi ders, i ncl udi ng hospi t al s . For t h e P P O dem onst rat i o n p roj ect , t he t erm s o f each
individual d emonstration p roposal specify i f , a nd to what ex tent, p roviders may
Quality Standards
M +C plans must have a quality assurance program focused on outcomes for
services it p rovides t o enrollees. M +C re gulations es tablished guidelines for
organizations to ex amine t he continuity and coordination of care. Thes e quality
standards focus on items such as high volum e, hi gh ri sk, acut e care and chroni c care
services. The program m ust p rovide the S ecretary with information t o m onitor and
eval uate the plan’s quality. Only certain M+C plans (not PFFS , P P O s , an d P P O
demonstration p lans if so specified in their p r o posal) h ave t o comply with other
quality assurance requirements, such as providing for i nternal peer review,

27 Coordinated care plans must pay a noncontracting provi der a t l east t he same amount they
would have r eceived i f t he enrollee was in traditional M edicare, including allowed balance
billing amounts. A “contract provider” i s a provider who enters i nto an explicit agreement
with a plan establishing payment amounts f or services rendered t o t he plan’s enrollees. A
non-contracting provi der may also provide s ervi ces, but does not have an explicit agreement
28 T h e t wo PFFS pl ans c ur r e nt l y of f e r e d i n t he M+C p r o gr am do not al l o w p r o vi der s t o

establishing written protocols for utilization review, and establishing mechanisms to
detect under and over u tilization.
Additionally, m ost M edicare+Choice organiz ations a r e s ubject to ex ternal
review for both t he quality of their s ervice and t heir response t o written complaints
about poor quality of care. M+C p lans may u se Peer Review Organizations (PROs),
which are also used for t hes e functions i n t radi t i onal fee-for-servi ce Medi care.
P ri v at e fee-for-servi ce pl ans and P P O Dem onst rat i o n P l ans (i f s p e c i fi ed i n t h ei r
proposal) t hat d o n o t have utilization review p rograms are ex empt from t his
The S ecret ary i s req u i red t o ensure t hat t he ex ternal review activities do not
duplica t e t h e r eview activities conducted as p art o f t he accreditation p rocess. The
S ecret ary m ay wai v e t he ex t ernal revi ew requi rem en t s ( e x c ept i n t h e case o f
complaints about q uality) for organizations with an ex cellent record of quality and
com p l i ance w i t h ot her M edi care+C hoi ce requi rem ent s . P l a n s m ay be deem ed t o
have m et al l t h ese requi rem ent s i f t hey are accredi t ed b y an o rgani z at i o n approved
by t h e S ecret ary, accordi n g t o s t at u t o ry requi rem ent s.

Table 16. Beneficiary C ost Sharing and Provider R eimbursement U nder
M edicare+ Choice Plans f or Basic B enefit Package
Item Coordi nated care pl an P ri vate f ee-for-servi ce P P O demons trati on
neficiary out-o f-pocket costs (p remium plus P r emi u m an d act u ari al val u e o f o t h er co st Th e act u ari al val u e o f t h e co st sh ari n g ( n o t P lan s may propose to waive an y M+C statutes,
y d ed u ct i b l es, co i n su ran ce, an d co p aymen t s ). sh ari n g ( fo r examp l e, co i n s u r an ce) o n average including the p remium) o n average cannot regu lations or policies r e lated to premiums,
cannot exceed t h e act u a r i al val u e o f t h e co st exceed t h e act u ari al val u e o f co s t s h a r i n g o n co st-sharing, p ayments to p lans, such a s
sh aring applicab le on average under traditional average under traditional Med icare. act u ari al eq u i val en ce. Ben efi ci ari es may face
M ed i care. co st sh aring that can be high er than FFS.
neficiary liability fo r b alan ce billing. B e n e f i c i a r i e s a r e n o t l i a b l e f o r a n y b a l a n c e Contract pro v i d ers can bill 15% above the Balanced billing requirements may vary by plan
billing amounts. private fee schedule (or other p ro vi der a n d a r e sp eci fi ed i n each i n d i v i d u a l
reimbursement amount). demonstration application. In the
Noncontract provi d ers cannot balance b ill demonstration application, plan s should
beneficiaries. describe the p ro cedure for en ro llee complaints
rel ating to b alan ce billing requests from
iki/CRS-RL30702ed i care+Ch o i ce p l an p aymen t o b l i gat i o n t o Contract providers are paid fees or rates that are Co n t ract p r o vi d ers are p ai d p r i v at e fees (o r Contract providers are paid fees or rates that are
g/wsician s, hospitals, and other p ro viders. privately n egotiated b y the plan with them. rates) minus beneficiary cost shar ing amounts. privately n egotiated b y the plan with them.
s.or Fee sch edule o r rat es mu st be as generous as
leak No n co n t ract p r o vi d ers mu s t accep t as p aymen t M ed i care u n l ess p l a n h as a s u ffi ci en t n u mb er P lan s p ay FFS out of network.
in fu ll Medicares fee schedule (o r o ther an d r an ge o f p r o vi d er co n t ract s.
://wiki Medica r e reimbursement rate) including theallowed b alan ce billing amounts ( if an y) Noncontract providers same as for non-contract
http allowed under Med icare. providers in coordinated care p lans.
sk sharing between plans and CMS P l a n s accep t fu l l r i s k o f a l l co st s b eyo n d t h e Same as fo r Coordinated Care P lans. P lan s h a ve t h e o p t ion o f sharing financial risk
monthly cap itated p ayment made by C M S o n wi t h CM S , acco rd i n g t o t h e p art i cu l ar ri sk
behalf of the b en eficiary. sh ari n g agreemen t mad e b et ween t h e p l an an d
ovider Network Enrollee choice of providers generally restricted E n ro l l ees may s eek care fro m an y p r o vi d er Enrollees may seek care from any willing
to a closed n et wo rk. willin g t o accep t t h e p l an ’s terms an d p r o vi d er, b u t t h ey h ave a fi n an ci al i n cen t i ve t o
conditions of participation, Th e p lan does not seek care fro m p ro vi d ers i n t h e p l an s n et wo rk.
provide enrollees with a finan cial incen tive for
choosing p articular providers.
Co ngr essional Research Service and Medicare P ayment Ad viso ry Co mmission analysis of provisio ns in the B alance Budget Act o f 1997; Medicare P rogr am: So licitatio n
P roposals. CMS-4042-N.

I nfor m ati on a nd Di scl osur e Requi r e ments
The M +C program requires t he Secret ary t o provide for activities t o disseminat e
cert ai n i n form at i o n t o M edi care b enefi ci ari es s o t h at t h ey m ay m ake i nform ed
choices about their M edicare coverage. T hi s i nformation i ncludes notice o f an open
season, a list o f p lans and p lan options, a general des cription of t he benefits covered
under t raditional M edicare, a d escription o f grievance and appeals p rocedures, and
comparative plan i nformation (such as benefits, premiums, s ervice area, and quality
and p erform ance i ndi cat ors).
When an M+C organization t erminat es its contract with CMS, it must provide
and p ay for advance written notice t o each of its enrollees, along with a d escription
of alternatives for obtaining benefits.
Fur t h e r , M +C o rganiz ations must disclose to each enrollee (at time or
enrollment and at leas t annually) information on t heir service area, benefits, t he
number, mix , and distribution o f p r o v i d ers, out-of-area coverage, emergency
c o v e rage, s upplemental b enefits, p rior auth o r i z a t i o n r u l e s , p l a n g r i e v a n c e a n d a p p e a l s
procedures, and the quality assurance p ro gram. Other information i s available upon
requ e s t , s u c h as information o n p rocedures used by the o rganiz ation t o control
utilization of services and ex penditures.
Grieva nces and Appeals
An M+C o rgani z at i o n m ust h ave p r o cedures for h eari n g and resol v i n g
grievances between the organization and en rol l ees. It al s o m ust m ai nt ai n a process
for d etermining whether an individual enr olled within the plan i s entitled t o receive
a h ealth service and the amount (if any) t hat t he individual m ust p ay for t he service.
Thes e det erminations must be made on a timely basis, appropriate to the urgency of
the s ituation. A denial of coverage ex planation m ust s tate the reasons for t he denial,
in understandable l angu age, a n d also m ust p rovide information about the
reconsi d erat i o n and appeal processes.
An enrollee m ay request a reconsideration o f a dete r m i n a t i o n. The
recons i deration m ust occur within a time period speci fied by the S ecret ary, but
(ex cept w here an ex pedi t ed p rocess i s a p p r o p r i at e) n o l onger t h an 60 days aft er
recei pt of t h e request . A reconsi d erat i on o f a deni al of coverage based o n l ack of
medical necessity must be made by a physici an with appropriate ex pertise who was
not involved i n t he initial determination.
An enrol l ee i n an M +C pl an or a physi ci an m ay r e q u e s t an ex pedi t ed
deter m i n a t i o n o r reconsideration. M+C o rganiz ations must ex pedite a physician’s
request for a determination or reconsideration, if th e p h ys i ci an indicat es that the
normal time frame could s eriously jeopardize t he life or health of the enrollee or t he
enrollee’s ability to regain max imum function.

Access to Services
Each pl an m u st m ake benefi t s avai l abl e and accessi bl e t o i t s enrol l ees wi t h i n t h e
service area with reas onable p ro m p tness, and m ust ensure continuity in providing
benefits. This care m ust b e available, when necessary, 24-hours 7 days per week.
Coverage of em ergency s ervices for emergency medical condition s i s s ubject
to the prudent layperson s tandard. This definition s tates t hat an emergency medical
condition i s one manifesting itsel f by acute symptoms of suffici ent s everity
(including severe pain) t hat a p r udent layp erson, who possesses an average
knowledge o f h ealth and m edicine, could reasonably expect the absence of immediate
medical attention to result in: 1 ) p l acing the h ealth of the i ndividual i n s erious
jeopardy (and i n case o f a pregnant woman, her h ealth or that of her unborn child);
2) serious impairment t o bodily functions; o r 3 ) s e r i ous dysfunction of any bodily
M+C o rganiz ations are financially responsible for emergency and u rgently
needed services. There is no prior authoriz ation requirement for t hese services and
no requirement that services must be obtai ned within the M +C organiz ation. Fu rther,
t h e physi ci an t reat i n g t he enrol l ee m ust d eci de when t h e enrol l ee m ay be consi d ered
stabiliz e d for t ransfer o r d ischarge. That d ecision is binding on the M +C
Current Program Standards
and C ontract Requirements
M i ni mum E nr ol l m ent S tandar ds
C ont ract s b et ween M+C o rgani z at i ons and C MS are m ade for at l east 1 year and
are automatically renewable, unles s either party gives notice t o t erminat e t he contract.
Organizations must have at least 5,000 i ndi vi duals (or 1,500 in the case of a PSO)
who are receiving health benefits through t he organiz ation o r at l east 1,500
i ndi vi dual s ( o r 500 i n t h e case o f a P S O) who are recei vi ng heal t h benefi t s i f t h e
organiz ation p rimarily serves individuals residing outside of urbaniz ed areas. These
minimum requirements m ay be waived during t he first 3 years o f t he contract, i f t he
organization can demonstrat e t o C MS that it can administer and manage an M+C
contract and also m anage t he level o r risk required under t he contact.
Federal s tandards for M+C p lans preempt any i nconsistent state l aw or
regulation with respect to: 1) benefit requirements – incl udi n g cost-sharing
requirem ents o r s ummaries and s chedules of benefits, 2 ) requirements rel ating t o
inclusion o r t reatment by providers, 3 ) coverage determinations – i ncluding related
appeal s and gri evance p rocesses, and 4 ) m arket i n g m at eri al s . N o p rem i u m , t ax , fee,
or other similar assessment m ay be imposed on a plan by any stat e.

Or gani z a ti onal a nd Fi nanci a l Requi r e ments
In general, an M+C o rganiz ation m ust b e organiz ed and licensed under s tate law
as a risk-bearing entity eligible to offer health insurance or health benefits coverage
i n each st at e i n w hi ch i t offers an M+C p l an. A M edi care+C hoi ce organi z at i o n m ust
assum e ful l ri sk for M edi care b enefi t s on a p rospect i v e b asi s . However, t hi s doesn’t
preclude an organiz ation from obtaining in surance o r m aki n g o t h er arrangem ent s t o
cover certain costs, such as medically necessary services provided b y non-network
provi ders and p art o f t he cost s e x ceedi n g i t s i n com e. T he organi z at i o n al s o m ay
make arrangem ents with providers to assume some or al l of t he fin a n c ial risk for
covered b enefits t h ey provide, however, P FFS organiz ations cannot put providers
Pr ovi der Pr otecti ons and Requi r e ments
Each M + C o r g ani z at i o n (ot her t han a P FFS ) m ust est abl i s h physi ci an
participation procedures that provide: 1) notice of t he participation rules; 2) written
notice of adverse participation deci sions ; and 3) a p rocess for appealing adverse
decisions. The organiz ation m ust consult with cont ract i n g physi ci ans regardi ng t h e
organization’s m edical policy, quality, and medical management procedures .
Although p lans may i nclude providers onl y t o t he ex tent necessary to meet the
needs of t heir enrollees , t hey can not discriminat e with respect to providers who are
acting within the scope of thei r license or certification un d e r a p plicable stat e l aw,
solely on the basis of such licence or ce rt i f i cat ion. Restricting communications
b e t ween providers and t heir patients (a gag cl ause) i s p rohi bi t ed. The u se o f
physi ci an fi nanci al i ncent i v e p l ans, (com p ensat i ons arrangem ent s bet ween
organizations and i ndividual o r groups of physi ci ans t hat m ay reduce or limit
services) i s also limited.
Pr otecti ons Agai nst Fr a ud
M+C organizat i o n s must al so comply with disclosure and notification
requi r em ent s. They m u st report fi n anci al i n form at i o n t o t he S ecret ary, coveri ng
ownership, transactions between the organization and parties i n i nterest, and evidence
that they are fiscally sound.
The S ecretary m ust conduct annual aud i t s o f t h e financial records o f at l east
one-third of the M +C organizations (including data relating t o utilization, costs, and
computation of t he adjusted community rate). In addition, the S ecret ary has the right
to ex amine t he quality, appropriateness, timelines s of s ervices , ability to bear risk of
a plan, as well as the organization’s facilities, if there i s reas onable evidence of need
for s uch i nspection. M+C o rganiz ations must not i fy t he S ecret ary o f l oans and o t h er
speci al fi n a n cial arrangem ents made with subcontract ors, affiliates, and rel at ed

Sancti ons and Ter mi nati on of Contr acts
In cert ai n ci rcum st ances, s uch as a p l a n t h at fai l s t o carry out i t s cont ract , t he
Secret ary m ay impose civil monetary penalties, temporary s uspension of enrollment
or even t erm i n at i o n o f a cont ract . T he S ecret ary i s aut hori z ed t o carry out speci fi c
remedies in the event that an M+C organizatio n : 1 ) fails substantially to provide
medically necessary item s an d s ervices required t o b e p rovided, if the failure
adversely affects t he individual; 2) imposes premiums in ex ces s of t hose allowed; 3)
act s t o ex pel or refuses t o reenroll an individual i n violation of s tated requirements;
4) engages i n any practice t hat would h ave t he effect of denying o r d iscouraging
enrollment (ex cept as permitted by l aw) o f e ligible individuals whose m edical
condition or his t o ry i ndicat es a need for substantial future m edical services; 5)
m i s repres ents or falsifies i nformation t o t he Secret ary or others; 6) fails to co m p l y
with rules regarding physici an p a rticipation; 7) employs o r contracts with any
individual or entity that has b een ex cl u ded from participation i n Medicare; or 8)
terminat es its contract other t han at an appropriate time after providing appropriate
Medicare+Choice Options
In addition t o t he coordinated care plans typically associ at ed with managed care,
the M +C program o ffers a v ariety of optional arrangements, either through a standard
program arrangement o r o n a demonstration b asis.
Private Fee-for-Service Plans
Privat e fee-for-service (PFFS ) p lans are one of the new types of pri vate plans
available t o M edicare b eneficiaries as a result o f t he Balanced Budget Act o f 1997. 29
A P F F S p l an has t hree defi ni ng charact eri s t i cs t hat d i s t i n gu i s h i t from o t h er
Medicare+Choice options: 1 ) i t allows an y p rovider t o p a r t i c i p ate who is both
l awful l y aut hori z ed t o serve M edi care b enefi ci ari es and w ho accept s t h e p l an’s t erm s
of paym ent; 2) it pays providers at a rate d etermined on a fee-for-servi c e basis
without placing providers at financial ris k; and 3 ) i t d o e s n o t v a r y paym ent rates
based o n how often a particular service i s p rovided.
P FFS pl ans, l i k e t radi t i onal M edi care, al l o w p rovi ders t o del i v er m edi cal care
without joining a network. Providers are p aid o n a fee-for-service basis s o t hey d o
not accept fi n anci al ri sk or reduced paym ent s and, furt her, t h ey do no face i n cent i v es
to either limit services or limit referrals to specialists. P roviders under P FFS plans
may bill enrollees up to 15% more than the plan’s allowable rat e, while providers in
other types of M+C plans may not “balance bill.”30 Moreover, PFFS plans h ave
fewer restrictions on balance billing t han t raditional fee-for-service Medicare. Unlike

29 For a more detailed a nalysis of PFFS plans see CRS Report RL31122, Medicare+Choice:
Private Fee-for-Service Plans , by Paulette Morgan and M adeleine Smith.
30 Both of the PFFS plans currently available t o beneficiaries (Sterling and Humana) do not
allow provi ders to balance bill enrollees.

traditional M edicare p roviders, however , P FFS providers can lose reimbursements
if the P FFS plan becomes i nsolvent.
Beneficiaries choosing a PFFS plan can choose any provider who is willing t o
provi de servi ces and w ho accept s t h e P FFS pl ans’ t erm s o f p aym ent . T he benefi ci ary
must inform the provider of his or her enrollment in the P FFS plan. The PFFS plan
may o ffer additional b enefits beyond those covered under t raditional M edicare, but
may also charge an additional p remium for these s ervices. If p roviders choose not
to accept a PFFS plan, b eneficiary choice w o u l d b e limited, much as it would b e
Currently, S terling Life Insurance Company and Hu m ana In c. offer t he only
Medi care P FFS pl ans.31 They operate in 2 7 s t at es,32 over hal f of all United S tates
counties, and are available t o about 37% of al l M edicare b eneficiaries. S terling and
Humana primarily serve rural counties that p reviously did not have a M +C option.
P o ssi bl e reasons for s ervi ng t hose areas are: 1) on average, Medi care+C hoi ce rat es
a r e h igher t han t he average cost o f t raditional M edicare i n t hose countie s ; 2 ) a n
organiz ation receives a bonus (5% t he first year and 3 % t he second year33) for serving
counties not served by any o ther Medi care+C hoi ce pl an; 3 ) P FFS d o e s n o t requi re
a n et w o r k o f providers, which is difficult to assemble in rural areas; and 4) for
S t erl i n g, i t s parent com p any h as speci al i z ed i n servi n g rural areas. Bot h
organiz ations pay p rovide r s t h e s ame rate t hey would receive from t raditional
Medicare, and prohibit bal ance billing.
S t erl i n g p rov i des v ery few addi t i onal b enefi t s beyond t h e requi red M edi care
benefit p acka g e. It provides worldwide emergency hospital care, but does not
provide coverage for outpatient pres cription drugs , eye ex am s, hearing aid, or glasses.
Fo r 2003, Sterling enrollees must pay b etween $88 and $108 in monthly p remiums,
depending on where t hey live, in addition t o t he standard Medicare P art B premium
of $58.70. Humana provides a limited d rug b en efit under one of its plans, but few
additional b enefits. Humana enrollees pay $19 in mo n t h l y p remiums, ex cept for
those i n DuPage, Illinois who pay $89 per m onth, in addition t o t he Part B premium.
Humana enrollees have an out-of-pocket limi t o f $5,000. PFFS enrollees might
ex perience l o w e r ( or high er) cost s haring under either Sterling and Humana than
under fee-for-service Medicare, depending on the ex act quantity and mix of services
t h at t h ey use.

31 Beneficiaries i n Sterling’ s s ervi ce area were able to enroll as of J uly 2000. Beneficiaries
in Humana’s service area were able t o enroll as of J an. 2003. In addition t o t he two s tandard
PFFS pl ans, t here i s a l s o a PFFS demonst r at i on pl a n a va i l a bl e i n 2003, wi t h 1,748 enrol l e es
32 A PFFS pl an i s avai l a bl e t o benef i c i a r i es i n al l , or par t of t he f ol l owi ng st at es: Al a ska,
Arizona, Arkansas ( part), Delaware, Idaho, Il l i n o i s, Iowa, K entucky, Louisiana ( part),
Minnesota, M ontana ( part), Nebraska , N e vada, New Mexico, North Dakota ( part), Ohio
(part), Okl ahoma, Oregon, Pennsyl va nia, Sout h Carolina, South Dakota ( part), T ennessee
(part), T exas (part), Utah, Washington, West Virginia (part), and Wisconsin.
33 Whi l e bonus payment s ma y have been an i ncent i ve f or PFFS pl ans i n previ ous year, t hese
bonus payments will no longer by available t o plans begi nning in 2004.

As of March 2003, approx imately 21,000 of t h e o ver 1 4 million M edicare
beneficiaries w ho had access t o a P FFS pl an, chose t o enroll i n one. Though m ost
of the 27 states served by a PFFS plan h a v e recei ved some enrollment, t he highest
proportion o f enrollees live i n Louisiana (16%), Tex as (15%), W ashingt on (13%),
Illinois (9%) and Pennsyl vania (8%). About t wo-thirds of PFFS enrollees did not
have a choice of another M edi care+C hoi ce pl an.
As PFFS plans h ave only b een available s ince J u ly 2000, it will take some more
time to determine: 1) thei r ability and des ire t o rem ai n i n t he M+C program , 2) t he
impact of these k inds of plans o n b e n e f i ciary and p rovider s atisfaction; and 3 ) t he
rel at i v e cost o f P FF S p l a ns com p ared t o ot her M +C opt i ons as wel l as fee-for-
Preferred Provi der Organization Demonstration
On April 15, 2002, CMS announced a 3 -year Preferred P rovider Organiz ation
(PPO) dem onstration project within the M +C program. A PPO is a t ype of m anaged
care p lan arrangement under which insurers contract with doctors and hospitals who
agree t o p rovi de t h ei r s ervi ces on a fee-for-servi ce basi s at n egot i at ed rat es whi ch are
lower t han t hose charged to non-enrollees.
PPOs are not a n ew option for the M +C program as t hey h ave b een able to serve
beneficiarie s s ince the p assage of BBA. However, i n 2003, only t hree PPOs
participate i n t he M+C p rogram. The PPO demonstration d iffers from s tandard P P Os
in that it is designed to test whet her or not changes i n payment rates, risk sharing and
administrative requirements will encourage great er plan participation.34 Fi rst, while
PPO plans outside of the demonstration are paid under t he regu lar M +C p aym ent
system , plans in the PPO dem onstration are paid the l argest of either the M+C
paym ent rate, or 99% o f p e r -capita fee-for-service in the county (ex cluding all
graduate medical education ex p enditures). S econd, non-demonstration PPO plans
are at ful l fi n anci al ri sk for h i gher-t han-ex pect ed m edi cal cost s accr u e d b y t hei r
enrollees . P lans in the PPO demonstration have t he option of s haring financial risk
wi t h C M S , accordi n g t o a ri sk-shari ng agreem ent s whi ch m ay vary from p l an t o p l an.
A ri s k-shari n g agreem ent d efi n es a t arget m edi cal l o ss rat i o , o r t he percent o f revenue
devot ed t o provi di ng m edi cal servi ces. P l ans are at fi n anci al ri s k i f t h ei r act ual
medical lo s s r a t i o i s 2 p ercentage points above or below t he target. Beyond 2
percent age poi nt s, C M S and t h e p l an s hare t h e ri s k accordi n g t o t h ei r agreem ent ,
t hough C M S is never at risk for more than 80 percent of t he am ount beyond 2
percent age poi nt s from t he t arget . T he ri sk-shari ng agreem ent s are s ym m et ri cal , s o
if the act ual m edical loss ratio is less than 2 percentage points from t he target , C MS
shares i n t h e ex cess p rofi t , and i f i t i s m ore t han 2 p ercent age poi nt s from t he t arget ,
CMS s hares i n t he additional costs. The third difference bet ween a PPO within and
outside of the dem o n s t r at i on pertains t o quality assurance requirements. PPOs
outside of the dem onstration m ust c o m p l y with the s am e quality assurance
requirements as health maintenance organizations (HMOs). PPOs i n t h e
demonstration, h o w ever, m ay comply with the “less prescriptive quality

34 4 2 U.S.C. 1395b-1(a)(1)(A) grants t he Secretary of Health and Human Services the
authority to conduct demonstration proj ects t o determi ne if changes i n methods of payment
would i ncrease t he efficiency and economy of health services.

requirements” required o f p ri vat e fee-for-servi ce pl ans.35 The higher payment rate,
the risk s haring agreem ents, and the decreas ed quality assurance requirements m ay
encourage greater plan participation, though t o what ex t ent i t will encourage
participation i s uncertain.
PPOs participating i n t he demonstration m ust offer beneficiaries the s tan dard
M edi care fee-for-servi ce benefi t s , and t h ey m ay o ffer addi t i onal b enefi t s such as
prescription d rugs . C M S ex pects t he monthly p remium and cost sharing o f t he
demonstration plans to be higher than those o f M +C H M O s , but less than the
premiums of Medicare s upplemental i nsurance policies. Beneficiaries enrolled i n a
PPO may s eek care from any provider, though t hey h ave a financial i ncentive t o u se
doctors and hospitals in the PPO’s network. Fo r s ome b eneficiaries, t he additional
benefits (if o ffered) and greater provider choice may b e worth the h igher cost s haring
required under t he demonstration p lans.
In 2003, PPO demonstration p lans are o ffered b y 1 7 o rganiz ations in 23 states,
with an enrollment of 56,667 as of March 2003 – t he first 3 months of the p rogram.
Approx imately 11 million ben eficiaries in 243 counties h ave acces s t o o n e of the
demonstrations, o f which about 2.2 million are already enrolled i n a
Medicare+Choice plan. The organiz ations offering the PPO demonstrations have
chosen t o offer t hem p ri m ari l y i n areas t h at are al ready b ei ng served by M+C
organi z at i ons, possi bl y t o capi t al i z e o n t hei r ex i s t i n g p rovi der n et works, or because
of favorable market conditions. Only 4% of beneficiaries in the PPO demonstration
service area d o not have another M +C option.
Fo r 80% of counties s erved b y a PPO demonstration i n 2003, the M +C paym ent
rate is high er than 99% of fee-for-ser v i c e e x penditures i n t he county, thus plan
paym ent rat es wi l l be based o n t he M+C rat e. 36 PPO demonstration plans serving t he
remaining 20% of counties will be paid the 99% of FFS rate, which is higher than the
Reasonabl e Cost Contr acts
The BBA included p rovisions to phase out the reasonable cost contracts. Cost-
based contra c t s are paid on the b asis of the reasonable cost actually incurred t o
provide Medicare covered s ervices to enro llees. R easonable cost contract plans are
p a i d a m ont hl y i nt eri m per capi t a rat e for each Medi care enrol l ee. Tot al m o n t h l y
paym ents are det ermined by multiplying t he interim per capita rate by the number of
the enrollees , plus or minus adjustments m ade by C MS. Further adjustments m ay be
made at t h e end of the contract period to reconcile interim payments with
reimbursement amounts p ayable for s ervices furnished t o M edicare enrollees during
that period. Since t he passage of BBA, t he contracts h ave b een e x t e n d e d and
currently, t he Sec r e t ary can not ex tend or renew a reasonable cost reimbursement
contract for any period beyond December 31, 2004. As o f M a r ch 2003, there were
over 334,000 Medicare enrollees in cost contract plans.

35 Solicitation f or Proposals f or Medicare Preferred Provi der Organization ( PPO)
Demonstrations in the M edicar e+Choice program [ CMS-4042-N].
36 Information on FFS expenditures per county can be found at
[ ht t p: / / heal t hpl ans/ r e sear ch/ ppodemo.asp] , l a st accessed M ar . 31, 2003.

A H eal t h C are P repaym ent P l an (HC P P ) i s anot her t yp e o f m anaged c a r e
a rrangem ent creat ed pri o r t o t he BBA. H C P P s cover onl y P art B servi ces o f
Medicare. HCPPs are a specific t yp e o f cost-based p lan which is either 1) sponsored
by a union or an employer, o r 2 ) does not provide, o r arrange for the p rovision of any
inpatient hospital s ervices. HCPPs are responsible fo r t he organiz ation, financing
and d el i v ery o f covered P art B servi ces on a p repaym ent b asi s . 37 In March 2003, 15
HCPPs provided P art B services to 101,728 enrollees.
Pr ogr am of Al l - I ncl usi ve Car e f or the E l der l y (PACE)
The P rogram of Al l -In cl usi v e C a re for t h e E l d erl y (P AC E) was creat ed as a
demonstration project in Omnibus Bu d get Reconciliation Act (OBR A) 86. The
S ec r e t a r y w as requi red t o grant wai v ers o f cert ai n Medi care and Medi cai d
requirements t o community-based organiz at i ons to provide hea l t h a n d l o n g - t e r m c a r e
services on a capitated bas is to frail el derly persons at risk of being i nstitutionalized.
BBA made PACE a p ermanent part of Medicare and a state option for the Medicai d
The P ACE m odel was developed t o addres s t he needs o f l ong-t erm care cl i ent s,
provi ders, and payers. P AC E p rovi ders recei ve m ont hl y M edi care and Medi cai d
capi t at i o n p aym ent s for each el i gi b l e enrol l ee. The M edi care port i o n o f t he provi der
paym ent i s bas ed on the M +C capitation rat e with a frailty adjuster. P ACE providers
assume full financial risk for participants care, without limits on amount, duration,
or scope of services. As o f M arch 2003, there were about 2,000 Medicare enrollees
Social Health M aintenance Organi z ati ons Demonstr ati on
The Deficit R e d u ction Act of 1984 es tablished a 3-year Social Health
Maintenance Organiz ations (SHMO) demonstration t o p rovide prepaid, capitated
paym ent s for i nt egrat ed h eal t h and l ong-t erm care s ervi ces. P aym ent s are based o n
adj u st m ent s t o t he M+C c a p i t at i o n rat e. The d em onst rat i o n h as been ex t ended
M e di cal Savi ngs Account (M SA) Demonstr ati on
Th e Bal anced Budget Act authorized a dem onstration t o t es t t he feas ibility of
medical savings accounts for the M edicar e p rogram. The M+C option combined a
he a l t h i n surance p lan with a l arge deductible and an M +C MSA. Contributions to
an M+C M SA would b e m ade annually from t he enrollee’s capitation rate after the
plan’s insurance premium had been paid. These contributions, as well as account
earnings would b e ex empt from t ax es. W ithdrawals u sed t o p a y unreimbursed
enrollee m edical ex penses (that are de ductible under t he Internal Revenue Code)
would not be tax ed. N e w enrollments would b e allowed after 2002 or after t he
number o f enrollees reached 390,000. Howeve r, no p rivate p lans established an
M+C M S A for M edi care b enefi ci ari es before t h e d eadl i n e.

37 42 C.F.R. 417.800

M e di car e Competi ti ve Pr i c i ng Demonstr ati on
Under its demonstration authority, C MS attempted t o i nitiate a project to
determine i f n egotiated rates could i ncr ease t he efficiency an d economy o f p roviding
Medicare s ervices through coordinated care plans. C MS’s initial plan called for the
application of competitive bidding as a m et hod for establishing paym ents for risk
contract HMOs in either the Baltimore or the Denver area. Through a combination
of court and legi slative d ecisions, t hese demonstrations have been terminated.
The Bal anced Budget Act o f 1 9 9 7 r e q u i r e d t he S ecret ary o f HHS t o est abl i s h
a d emonstration p roject under which paym en ts to M+C o rganiz ations in certain areas
are d etermined in accordance with a competitive p ricing methodology.
The S ecret ary w as requi red t o d esi gnat e, i n accordance wi t h recom m endat i ons
of the newly creat ed Competitive P rici ng Advisory Committee (CPAC), up to seven
Medicare p ayment areas i n which t he project would b e conducted. The S ecretary
was t o (i n accordance wi t h recom m endat i ons of t h e C P AC ), e s t a b l i s h t he benefi t
design among plans, structure t he method for s electing p lans, establish m ethods for
setting t he price t o be pai d t o plans, and provide for t he collection and dissemination
of plan information. The first two s ites chosen were Phoenix , Ariz ona, and Kansas
City, Kansas/Kansas City, Missouri.
However, both t he BBRA and t he Consolidat ed Appropriations Act of 2000
altered t he terms of t his dem onstration. The Appropriation Act d i sallowed any
funding of the demonstration for 2000 in Ariz ona and p arts of Kansas and M issouri.
The BBR A d elayed implementation o f t he project until J anuary 1, 2002 or, i f l ater,
6 m onths after C PAC s ubmits reports on: 1) incorporating origi nal fee-for-service
Medicare i nto t he demonstration; 2) quality activities required by participating plans;
3) the viability of ex panding the d em o n s t r ation project to a rural site, and 4) the
n a t u re of the b en efit struct ure required from p lans that participat e i n t h e
dem onst rat i on. The S ecret ary i s al s o required (subject to CPAC recommendations)
to allow plans that make bids below t he established government contribution rate t o
offer b eneficiaries P art B p remiums rebates.
CPAC submitted its report t o C ongress on J anuary 2001. In its report, CPAC
highlighted several l essons learn e d from t he competitive bidding demonstrations.
Though t he demonstrations were never implemented, C PAC noted that the
p r eliminary s tages were completed ex pe ditiously and without administrat i v e
difficulties. The l atest round of demonstrations showed how benefits could b e
standardized und er co m petitive bidding, particularly a prescription drug benefit.
Area Advisory Committees (A A C ) f o r each area helped to develop a standardiz ed
benefi t w hi ch refl ect ed l o cal m arket charact eri s t i cs and t h e v i ews of t h e v a ri ous
stakeholders. Howeve r , according t o C P A C, the p roposed demonstration p roject
underestimated t he importance o f educating and communicating with health plans,
heal t h c a re p rovi ders and o t h er st akehol ders. Furt h er, b ecause t h e d em onst rat i ons
w e r e n e v e r i m p l e m e n t e d , t h e y d i d n o t p rovide information about whet h e r c o m p e titive
bidding would result i n m ore effici ent M edi care+C hoi ce paym ent s . 38

38 For more i nforma tion a bout Comp e titive Bidding, please see CRS Report RL31434
Medicare+Choice: Us ing Competitive Bidding to Determine Payments , by Christopher J .