Medicare managed healthcare options have been available to some Medicare beneficiaries since 1982 and Medicare has paid health plans a monthly per person county rate. The monthly per person, or “per capita,” county rates were determined under the Adjusted Average Per Capita Cost (AAPCC). AAPCCs are five-year moving averages per beneficiary spending at the county level for fee-for-service Medicare. The county rates were used as the base rates for paying MA plans in 2004 and 2005. Beginning in 2006, however, the county rates were used to create benchmarks against which the plans will bid. Rates were set through competitive bid, rather than administered pricing. The benchmark for each plan was a weighted average of the county rates for the counties in the plan’s service area. The Centers for Medicare and Medicaid Services (CMS) based the Medicare payment is used for private plan on the relationship between the bid and its benchmark. Medicare payments are also based on enrolled beneficiaries’ demographics and health risk characteristics. Section 1853(a)(3) of the Social Security Act required the Secretary to develop and implement a new risk-adjustment methodology to be used to adjust the county-wide rates to reflect the expected relative health status of each enrollee. The purpose of risk adjustment is to use health status indicators to improve the accuracy of payments and establish incentives for plans to enroll and treat less healthy Medicare beneficiaries. The base payment for an enrollee is the base rate for the enrollee’s county of residence, multiplied by the enrollee’s risk measure. Coordinated care plans, such as health maintenance organizations (HMOs) and preferred provider organizations (PPOs), and PACE plans are generally required to reimburse non-contracting providers at least the original Medicare rate for Medicare covered services.
Key components of the Medicare Advantage rates include: 1) Revision to the risk-adjustment model to better account for fully dual eligible beneficiaries. 2) Adjustment to certain measures within the Star Ratings program for socioeconomic status. 3) Update to the blended risk scores using 75 percent of the risk score calculated using data from the Risk Adjustment Processing System (RAPS) and 25 percent of the risk score calculated using encounter data. 4) Incentives to Medicare Advantage organizations to offer plans with lower maximum out-of-pocket