MCBS Highlights: Risk Adjustment and the Health of the Medicare HMO Population

Before the changes instituted by the Balanced Budget Act (BBA) of 1997, Medicare payments to managed care organizations were based on per capita fee-forservice (FFS) costs in each county for the aged and disabled populations. Wi t h i n each county Medicare payments were adjusted by demographic factors including age and sex, as well as welfare and institutional status. This payment system, which is called the adjusted average per capita cost (AAPCC) methodology, was implemented in 1985. Since that time critics of the AAPCC methodology challenged that selection bias was prevalent. Selection bias occurs when e n rollees of Medicare health maintenance o rganizations (HMOs) are, on average, healthier than those in FFS, after contro lling for the demographic factors used in AAPCC-based reimbursement. Ultimately, these concerns about selection bias lead to the re f o rms mandated by the BBA. The BBA requires a risk adjusted payment system be implemented for M e d i c a re+Choice plans, with phase-in beginning on January 1, 2000. Risk adjustment will replace the demographic adjustments with relative health status risk adjusters. The goal is to pay Medicare HMOs better estimates of health care costs of the enrolled population, thereby addressing the problem of selection bias. An analysis of 1998 data from the M e d i c a re Current Beneficiary Surv e y (MCBS) shows that beneficiaries in HMOs w e re, in fact, healthier than the FFS population, even when controlling for age and dual e l i g i b i l i t y. Based on a stratified random sample, the MCBS provides information about the health care use, expenditure, and financing of Medicare’s beneficiaries. Figures 1-8 c o m p a re the health status of Medicare HMO enrollees with FFS beneficiaries. Some of these figures show comparisons c o n t rolled by age and dual eligibility.