Medicare risk contracting. Lessons from an unsuccessful demonstration

Area of Science:

• Health economics
• Healthcare policy
• Public health

Background:

• The Tax Equity and Fiscal Responsibility Act of 1982 introduced Medicare risk capitation financing for Health Maintenance Organizations (HMOs) and Competitive Medical Plans (CMPs).
• Demonstration projects were implemented to test this financing model.
• Final regulations were published in January 1985.

Purpose of the Study:

• To evaluate the financial viability and operational challenges of Medicare risk capitation financing.
• To assess the effectiveness of the adjusted average per capita cost (AAPCC) reimbursement method.

Main Methods:

• Analysis of a 28-month demonstration project in Marshfield, Wisconsin.
• Examination of enrollment data, financial performance, and hospital utilization rates.
• Review of reimbursement mechanisms and their impact on program costs.

Main Results:

• The Marshfield demonstration incurred aggregate losses exceeding $3 million (11.6% of revenue).
• Despite stringent utilization reviews and a decline in hospital days, federal reimbursement was insufficient.
• Enrollment reached 37% of resident beneficiaries.

Conclusions:

• The adjusted average per capita cost reimbursement method inadequately addresses enrollment selection, unmet medical needs, and regional cost variations.
• Reimbursement at 95% of estimated fee-for-service costs is insufficient to sustain efficient healthcare delivery systems under Medicare risk contracting.
• The demonstration project was terminated due to financial unsustainability.