Improving Medicare payments to HMOs: urban core versus suburban ring

This article considers improvements in the location adjustment now used in Medicare's payment formula to HMOs. Average Medicare expenditure increases with metropolitan area population size and is higher in the urban core of a metropolitan area than in the suburbs. Input prices rather than the health or poverty status of residents appear to be the major cause of these patterns. At present Medicare payment to HMOs varies by county and is proportionate to Medicare fee-for-service expenditures there. The article suggests modifying the current payment, which depends on the county unit, by having one payment rate for the core of each metropolitan area and another for the ring. In areas where HMO penetration is large, payment should be based on Medicare expenditures in areas with similar characteristics, such as population size and wages. Because these proposals are incremental, they are politically feasible.