An outlier pool for Medicare HMO payments

Area of Science:

• Health Economics
• Healthcare Policy
• Medical Insurance

Background:

• Medicare pays "at-risk" health maintenance organizations (HMOs) via prospective capitation using the adjusted average per capita cost (AAPCC) formula.
• The AAPCC formula estimates enrollee costs within the fee-for-service sector but explains little variation in actual beneficiary costs.

Purpose of the Study:

• To investigate methods for improving the AAPCC formula's predictive accuracy.
• To examine a payment system combining AAPCC with an outlier payment mechanism to better account for high-cost beneficiaries.

Main Methods:

• Analysis of Medicare payment systems for "at-risk" HMOs.
• Evaluation of a hybrid payment model integrating AAPCC with outlier payments.
• Assessing the impact of removing high-cost beneficiaries from the standard AAPCC calculation.

Main Results:

• The AAPCC formula explains a small percentage of beneficiary cost variation.
• Removing high-cost beneficiaries is proposed as a strategy to enhance the AAPCC's explained variance.
• The study examines a combined AAPCC and outlier payment approach.

Conclusions:

• Improving the AAPCC formula is crucial for accurate Medicare capitation payments.
• Integrating outlier payments with AAPCC offers a potential solution for managing high-cost enrollee expenditures.
• This approach could lead to more equitable and efficient risk adjustment in Medicare managed care.