Review of Managed Care Payments for Dual Eligible Beneficiaries with Institutional Status

This final report points out that for some managed care organizations (MCOs) there was a disparity between the Medicare payment and the cost of the medical care provided to beneficiaries with institutional status. Some MCOs were significantly overpaid while others were significantly underpaid. For example, one MCO had an annual average shortfall of almost $4,500 per beneficiary during 1998, and a second MCO had an annual average overage exceeding $4,000 for each beneficiary during the same period. This disparity in payments may have hurt the Centers for Medicare and Medicaid Services (CMS) ability to provide managed care options to beneficiaries. Underpayments could reduce the number of MCOs willing or able to remain in the Medicare program. If they remain in the program, these MCOs might be forced to target only healthier beneficiaries for enrollment, limiting the health care choices of those individuals who are sicker. To help correct for this the CMS is implementing a risk adjustment methodology based on the beneficiary's health status, but it is planned to be phased in over the 8-year period 2000 through 2007. We believe that delaying the risk-adjusted payment structure perpetuates the payment problems of the existing system. We recommended that CMS consider the results of our work as it proceeds with the implementation of the risk adjustment factors and seek legislation to accelerate the phase-in of the risk adjustment payment system.