Payment to health maintenance organizations and the geographic factor

The adjusted average per capita cost (AAPCC) payment system for Medicare risk-based plans uses a county level geographic adjustment factor to account for differences in beneficiary costs across areas. The implications of abandoning the county unit as the basis of the geographic area are examined and the merging of counties to match the geographic definition used in the prospective payment system are considered. Year-to-year variation in a county AAPCC is inversely associated with county population size and, based on year-to-year AAPCC variation, 86 percent of all counties are too small to be used for the geographic adjustment.