Alternative geographic adjustments in Medicare payment to health maintenance organizations

The payment received by a health maintenance organization (HMO) for its Medicare enrollees is proportionate to the average cost of Medicare beneficiaries in that county. However, HMO market share in an area appears to decrease costs in the fee-for-service sector, so that HMOs are paid less. For this and other reasons, alternative payment formulas may be desirable and several are developed in this article. The conceptually simplest location factor would be an input price index. An alternative strategy would also recognize systematic variation in utilization. Utilization rate is regressed on variables such as county population density and physicians per 1,000 persons. The predicted utilization rate times an input price index could serve as a location factor. The value of alternative location factors are presented for specific counties.