Developing Medicare HMO market areas and their implications for HMO capitation rates

Medicare+Choice (M+C) rates have replaced the average adjusted per-capita cost (AAPCC) payment method to HMOs as a result of the use of disparate benefit packages. However, the creation of M+C rates has likely caused HMOs to withdraw from the program. The underlying AAPCC problems are argued herein to be statistical in nature and arise because the AAPCC rates have been calculated on a county basis, although the county is generally not a health care market area. The author provides a method for empirically defining empirical market areas (EMAs), key principles to which one should adhere in developing these EMAs, and evidence that EMAs can serve as health care market areas.