At the Eye of the Medicare Storm lick Foster of the Health Care Financing Administration IF ew actuaries have more impact on the American people's pocketbooks than the chief actuary of the Health Care Financing Administration (HCFA), which administers Medicare and Medicaid . During Rick Foster's 2 years in that job, both programs have come under careful scrutiny by Congress and the administration . Medicare's Hospital Insurance trust fund is due to go bankrupt in 2001, which gives extra urgency to reform . Foster's chief
function at HCFA is to evaluate the financial status of Medicare, but any proposal to change the program must also use his cost estimates . At the time of this interview in mid-March, Foster was analyzing competing proposals from the administration and Capitol Hill, as well as e xaminin g the policy implications of some outside studies on health spending . can you tell us what your office is working on right now? The Office of the Actuary performs a broad range of activities in addition to our "real work" of making
cost projections. Right now, we are analyzing a Duke University study on the health status of the elderly. The study shows a significant decline in disabilities among elderly
Risk Adjustment Change Could save Medicare Dollars Current Medicare reimbursement methodologies have serious limita Lions, Alice senblatt told the U.S. House Ways and Means Health Subcommon February 25 . She suggested that Congress consider modification of the Medicare risk adjustment mechanism . Rosenblatt, a member of the Academy Board of Directors and Health Practice Council, represented the Academy before the House panel, which requested . comments on proposed changes to Medicare's HMO payment method . At issue was a Clinton administration proposal to lower Medicare's per-enrollee payment to managed care plans from 95 perAlice Resanblatt answers the quegtrans ottbe ways and cent of fee-for-service costs to 90 percent . Means Health Subannrmitfae The 95 percent rate is generally thought too at tie Febmary2fi bearing high because enrollees in Medicare managed care tend to be younger, healthier, and less expensive than Medicare beneficiaries who opt for fee-for-service coverage. (See Academy Closeup of Rick Foster, above.) Rosenblatt cited a study by the Physician Payment Review Commission that showed managed-care enrollees spent only 63 percent as much as the average Medicare beneficiary The data indicate that current payments overcompensate managed care plans because of Medicare's prepayment risk adjustment mechanism, called the Average Adjusted Per Capita Cost (AAPCC) . The AAPCC methodology places beneficiaries into risk categories that account for age, sex, welfare status, institutional status, and basis for Medicare eligibility. The AAPCC is supplemented by an adjustment called the ACR (Adjusted Community Rate) that theoretically adjusts for the health plan's cost structure . This methodology, Rosenblatt said, discourages HMOs from offering coverage in areas where the ACR is low, increases adverse selection against fee-for-service plans, and may compromise quality of care. Rosenblatt also offered suggestions to correct problems in the current methodology. • Reduce the wide cost variations among geographic regions . • Base payment on a combination of prepayments and actual claims experience. • Carve out particular disease populations, such as diabetes, or procedures, such as coronary artery bypass graft surgery • Modify the ACR methodology. • Shift the AAPCC away from a fee-for-service basis, perhaps through competitive bidding . Said Rosenblatt, "It is important to address this issue, but a different approach is needed . The Academy is ready to work with Congress and the administration in developing a methodology that will work ." Since Rosenblatt's testimony, the Academy has been asked to testify at two additional congressional hearings on Medicare. See next month's Update for details.
people. That's good news , and seems to be supported by the data. However, people on Capitol Hill and elsewhere who should know better are concluding that this natural reduction in disability prevalence over time will take care of the financial Rick Faster problems of Medicare. That is just flat-out wrong. On very short notice, our ofi ng numbers to show the for the National Institutes of Health (NIH), which helped underwrite the study, and for policy makers interested in this question. How did your d& eceme involved? The Health and Human Services administrator called us and asked : Is this right? In cases like this, the Office of the Actuary steps in to provide accurate information about potentially misleading statistics . Clarifying this question is important because it could distract people from the real issue, which is the serious long--range financing problem of Medicare.
Most current proposals offer a 1(1-year fix. Is that a good approach? Prompt short-term legislation could postpone the depletion of the Medicare Hospital Insurance trust fund, which is estimated to run out of money in 4 years . Thus is an urgent problem and can be fixed for the time being through traditional legislative measures . Such an approach will buy us time to agree on a solution for the much more serious long-term problem that involves the retirement of the baby boomers . However, we can't afford to postpone action for very long. Delaying action will mean fewer feasible options in the fixture and more abrupt, disruptive impacts .
Is demographics the problem? Yes, in large part. The number of beneficiaries will increase much more rapidly than the number of workers who pay for the system . Another phenomenon, which applies to health care in general as well as to Medicare, is the increasing utilization, cost, and complexity of
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health care services . We've seen an improvement in these trends in recent years, but utilization and costs are still growing faster than the payroll that supports the program.
i lixatinn problem?
Is managed core the solution for the uti-
Managed care seems to do a better job than fee-for-service in reducing unnecessary utilization and promoting cost-effective treatment . Medicare's problem is that under current law we are paying too much for managed care . For each enrollee in a managed-care organization, Medicare pays 95 percent of the cost of a fee-for-service enrollee, even though most studies show that managed care enrollees are somewhat healthier on average . Moreover, savings due to the management of care do not affect the Medicare payment rate. Because of the reimbursement formula and the effects of favorable selection, the typical enrollee in a managed program would cost Medicare less in fee-for-service . The cost savings of managed care are not being passed on to Medicare .
Would the administrations proposed reduction to 911 percent be effective? The administration's proposal is a somewhat crude step in the right direction. It would offset the average effect of favorable selection among plans . A better fix in the long-term would be to improve our risk-adjustment methods to include diagnosis-based judgments . Of course, such a system would require a large amount of data from managed-care providers, including information that currently is not being recorded. Providers would be very reluctant to take on this additional burden . Besides the reduction to 90 percent, the administration plan would reduce the wide variation of payment rates across the country : This variation has the effect of concentrating managed-care plans in highcost areas. The impact of reducing
the variation has been the subject of considerable debate among actuaries . Are uniform health records that follow individuals throughout their lives feasible? Speaking as a good actuary, it would be nice to have that information. However, the public's concerns about privacy would be hard to answer. Who would have access to such files and how would the data be used? Collecting and maintaining those records also would be very expensive. What solutions nu looking at? HCFA is currently sponsoring some health studies that should help provide answers to these financing questions . For example, we are conducting act on competitive bidding i rover . Many people think that competitive bidding is the best way to reduce costs to a minim um . Other demonstration projects look at improved methods of risk adjustment to better determine the difficulty of acquiring data and to test their effectiveness at matching payment amounts to beneficiary characteristics .
You have one of the most sensitive jobs of any actuary. no you feel the political heat? Nobody tells us what kinds of estimates to make or how those estimates should turn out . They know better than to try With occasional exceptions, most politicians recognize the need for independent and unbiased information. Questions of future cost of social programs have become more crucial, and most Washington decision makers realize that they need good information to make sound decisions . My theory has always been that all parties in the debate should have access to the same information . That is not always a popular philosophy, but we try to adhere to it as close as we possibly can in our work at HCFA. Through the efforts of Bob Myers, Gordon Trapnell, Haeworth Robertson, Guy King, and others, our office has earned a reputation for steadfast integrity and professionalism. My highest priority is to uphold this proud tradition.