HPA 420, Risk Selection Practice

HPA 420, Risk Selection Practice DUE: April 11, 2000 Medicare payments to HMOs

We’ll be completing part of this exercise in class, and then you’ll do the rest as homework.

(1) Suppose that 90% of Medicare beneficiaries in the traditional fee-for-service plan in Centre County are low expense, and 10% are high expense. The program pays an average of $400 per month in claims for low-expense beneficiaries. Fee-for- service claims for high-expense beneficiaries average $1500 per person per month. As the AAPCC has traditionally been calculated, how much would Medicare pay HMOs in Centre County?

NOTE: The relevant calculations would actually pertain to each of 142 AAPCC cells, defined by age, type of enrollment, etc. Also, Medicare HMO payments are now based on county-specific costs blended with national costs, subject to a payment floor. But here we’re ignoring those complications.

(2) If 95% of the Medicare beneficiaries who sign up with HMOs are low-cost beneficiaries, Medicare is losing money by having managed care plans operate in Centre Country.

(a) Calculate the per-capita cost to the Medicare program of serving the HMO enrollees in traditional, fee-for-service Medicare.

(b) How much is the program losing on average on each HMO enrollee?

(3) How could Medicare change its HMO payment method to fix this problem?

(4) Imagine that one of the HMOs in Centre County is particularly good at caring for high-expense beneficiaries. Consequently, it attracts a considerable number of more costly enrollees. If 20% of its enrollees are costly cases, what is this HMO’s profit or loss on its Medicare business? (Assume that it can serve all of its Medicare beneficiaries at 95% of the traditional, fee-for-service cost for each person.) Question 1

Fee-for-service claims

X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X

Low 90 x $400 = $36,000 High 10 x $1500 = $15,000 51,000  100 = $510 per person

Payment formula: 95% of average (adjusted) per capita cost

.95 x $510 = $484.50 per person (paid by HCFA to HMO) Question 2

Fee-for-service claims for new HMO enrollees

95 x $400 = $38,000 5 x $1500 = 7,500 $45,500  100 = $455

HCFA is paying plans: $484.50 HMO enrollees were costing HCFA 455.00 HCFA is losing 29.50 Question 3

Fee-for-service claims for new HMO enrollees

95 x $400 = $38,000 5 x $1500 = 7,500 $45,500  100 = $455 per person

Apply HMO efficiency factor to claims for plan’s mix of risks: 95% of average (risk-adjusted) per capita cost

.95 X $455 = $432.25

HCFA is paying plans: $432.25 HMO enrollees were costing HCFA 455.00 HCFA is saving 22.75 (5% of $455) Question 4

Fee-for-service claims in plan that attract 20% high-cost cases

Low 80 x $400 = $32,000 High 20 x $1500 = $30,000 62,000  100 = $620 per person

Apply HMO “efficiency factor” to fee-for-service claims

.95 x $620 = $589 (average cost to HMO)

Profit/loss = Revenues – Costs

$484.50 - $589 = - $104.50 (loss per person)