Review of Medicare Overpayments to Managed Care Organizations Due to Overstated Capitation Rates

The Balanced Budget Act of 1997 (BBA) established the Medicare+Choice program which directs the Health Care Financing Administration (HCFA) to use 1997 standardized county rates as the basis for all future capitation payments to managed care organizations (MCOs). This final report points out that the 1997 standardized county rates were based on actuarial estimates and, when compared with actual costs incurred, were overstated by 4.2 percent. Applying this overstatement to Congressional Budget Office projections of future Medicare payments to MCOs, we estimate that the inflated payment rates will result in Medicare overpayments to MCOs totaling $11.3 billion over the next five years and $34.3 billion over the next ten years. We recommended that HCFA seek legislation to correct the overstated base year rates, or at a minimum, use this information to suppress or eliminate any future increases in managed care capitation rates until this wide discrepancy is corrected. The HCFA did not concur, stating that the President's Medicare reform package includes a proposal to change the methodology used to set payment rates for MCOs . Since the new methodology will not use the overstated base year rates enacted under the BBA, HCFA officials believe legislation to correct the base year rates is unnecessary. However, because the Medicare reform legislation discussed by HCFA has not passed the Congress, we continue to recommend that HCFA seek legislation to correct the overstated payment rates.