Medicare Advantage Payments

CRS Report for Congress
Medicare Advantage Payments
Updated June 20, 2005
Hinda Chaikind
Specialist in Social Legislation
Domestic Social Policy Division
Paulette C. Morgan
Analyst in Social Legislation
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Medicare Advantage Payments
Summary
Medicare has a long-standing history of offering its beneficiaries managed care
coverage through private plans as an alternative to the traditional fee-for-service
(FFS) program, in which a payment is made for each Medicare-covered service
provided to a beneficiary. Beginning in the 1970s, private health plans were allowed
to contract with Medicare on a cost-reimbursement basis. In 1982, Medicare’s risk
contract program was created, allowing private entities, mostly health maintenance
organizations (HMOs), to contract with Medicare. Then, in 1997, Congress passed
the Balanced Budget Act of 1997 (BBA, P.L. 105-33), replacing the risk contract
program with the Medicare+Choice (M+C) program. Most recently, Congress passed
the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(MMA, P.L.108-173) which included provisions to create the Medicare Advantage
(MA) program offering a variety of managed care options for Medicare beneficiaries.
The MA program replaces the M+C program.
The newly created MA program offers a new payment structure and provides
more options than its predecessor, the M+C program. In addition to the immediate
payment increases to plans, beginning in 2006, the MA program will change the
payment structure and introduce regional plans that operate like Preferred Provider
Organizations — a popular option in the private health insurance market. The MA
program provides financial incentives for plans to participate in this new regional
option. Additionally, in 2006, beneficiaries will have access to a Medicare Part D
prescription drug plan whether they are in fee-for-service Medicare or enrolled in
Medicare managed care. Finally, beginning in 2010, for a six-year period, a limited
number of geographic areas will be selected to examine enhanced competition among
local MA plans and competition between private plans and FFS Medicare.
This report focuses on MA payments. For a discussion on the effect of the
MMA on Medicare managed care, see CRS Report RS21761, Medicare Advantage:
What Does It Mean for Private Plans Currently Serving Medicare Beneficiaries?
This report will be updated as necessary to reflect significant changes to the program.

Contents
In troduction ......................................................1
Overview of Payment Changes in MMA............................2
Payments for Local MA Plans........................................4
Blended Rates................................................5
Minimum Payment (Floor) Rate..................................6
Minimum Percentage Increase....................................6
Fee-for-Service Rate...........................................7
Exclusion of Payments for Graduate Medical Education (GME).........8
Budget Neutrality..............................................8
National Growth Percentage.....................................9
Risk Adjustment.............................................12
Summary of Local MA Plan Payments............................13
Variations in Local MA Payment Rates................................15
Geographic Payment Rates.....................................17
Payments for Regional MA Plans....................................21
Calculation of the Regional Monthly Benchmark....................23
Risk Adjustment.............................................24
Stabilization Fund............................................25
Risk Corridors...............................................26
Essential Hospitals............................................26
Summary of Regional MA Plan Payments.........................27
Payments for MA Plans and FFS Premiums in Cost Containment Areas......28
Calculation of the “Comparative Cost Adjustment (CCA) Benchmark
Amount ................................................29
Payments to MA Plans for Part D Medicare Prescription Drug Benefits......31
Conclusion ......................................................32
List of Figures
Figure 1. Rule Used to Determine County Payment Rates, by Year,
1998-2006 ..................................................16
Figure 2. Range of County Medicare Managed Care Payment Rates
for the Aged, by Location, 1997-2006.............................19

List of Tables
Table 1. Major Factors for Determining Medicare Payments to Local
Medicare Advantage Plans......................................11
Table 2. Total Non-Drug Payments to MA Local Plans for Required
Parts A and B Services, Starting in 2006...........................14
Table 3. Calculation of Monthly Payment Rates for Selected Counties, 2004..17
Table 4. Monthly Payment Rates for Aged Enrollees in Selected Areas, in
2005 and 2006...............................................20
Table 5. Medicare Advantage Regions, Beneficiaries and Per Capita
Monthly Payments for Aged Beneficiaries, 2005....................22
Table 6. Total Non-Drug Payments to MA Regional Plans for Required
Part A and B Services, Starting in 2006............................27

Medicare Advantage Payments
Introduction
Medicare has a long-standing history of offering its beneficiaries managed care
coverage through private plans as an alternative to the traditional fee-for-service
(FFS) program, in which a payment is made for each Medicare-covered service
provided to a beneficiary. Beginning in the 1970s, private health plans were allowed
to contract with Medicare on a cost-reimbursement basis. In 1982, Medicare’s risk
contract program was created, allowing private entities, mostly health maintenance
organizations (HMOs), to contract with Medicare.
Then, in 1997, Congress passed the Balanced Budget Act of 1997 (BBA, P.L.

105-33), replacing the risk contract program with the Medicare+Choice (M+C)

program. The M+C program established a new payment structure, designed to
achieve two major goals: (1) reduce spending, and (2) reduce the variation in
payments across the country. In general, the program made monthly payments in
advance to participating private health plans for each enrolled beneficiary in a
payment area (typically a county). In exchange, the plans agreed to furnish all
required Medicare-covered items and services, except hospice services, to each
enrollee. Several legislative changes have been enacted since 1999, to address some¹
of the issues arising from the passage of the BBA.
Most recently, Congress made substantial changes to the M+C program with the
passage of the Medicare Prescription Drug, Improvement and Modernization Act of
2003 (MMA, P.L.108-173). The act creates the Medicare Advantage (MA) program
to replace the M+C program and introduces several enhancements intended to
increase the availability of private plans to Medicare beneficiaries. In addition to the
immediate payment increases to plans, beginning in 2006, the MA program will
change the payment structure for local plans and introduce regional plans that operate
like Preferred Provider Organizations — a popular option in the private health
insurance market. The MA program provides financial incentives for plans to
participate in this new regional option. Additionally, in 2006 beneficiaries will have
access to a Medicare Part D prescription drug plan whether they are in FFS Medicare
or enrolled in Medicare managed care.² Finally, beginning in 2010 a limited number

¹ The Balanced Budget Refinement Act of 1999 (BBRA, P.L. 106-113) as well as the
Medicare, Medicaid, and SCHIP Benefits Improvements and Protection Act of 2000 (BIPA,
P.L. 106-554) amended M+C to increase reimbursement and to make it easier for Medicare
beneficiaries and plans to participate in the program.
² For more information on the Medicare Part D program, see CRS Report RL31966,
Overview of the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
(continued...)

of geographic areas will be selected to examine enhanced competition among local
MA plans and competition between those private plans and FFS Medicare.
Overview of Payment Changes in MMA
The MMA made many changes to the payments for Medicare managed care
plans, including immediate changes, effective March 2004, and then other changes
that do not take effect until 2006 and 2010. This set of changes creates a multi-tiered
payment system, one for local plans, another for regional plans and then beginning
in 2010 another one for local plans in areas designated as cost containment areas.
The immediate changes became effective on March 1, 2004. First, a fourth
payment mechanism was added to the calculation of MA payments, so that in 2004,
plans are paid the highest of the floor, minimum percent increase, the blend, or a new
amount. (See below for a description of the three previous payment amounts.) The
new payment amount is 100% of fee-for-service (FFS) payments made for persons
enrolled in traditional Medicare. The FFS payment is calculated based on the
adjusted average per capita costs for the year for an MA payment area (a county), for
services covered under Medicare Parts A and B for beneficiaries entitled to benefits
under Part A, enrolled in Part B and not enrolled in an MA plan. Other immediate
changes were also made to modify the statutory formulas used to calculate MA
payments. All of these immediate changes, discussed in more detail below, had the
effect of increasing payments to MA plans.
Additional changes to payments for local MA plans will be made, beginning in
2006. The Secretary will determine MA payment rates by comparing plan bids (the
plan’s estimated average revenue requirement, (i.e., their estimate of the cost of
providing required Medicare Parts A and B services) to a benchmark (the maximum
amount the federal government is willing to pay a plan for providing these required
benefits). After plans submit their bids, the Secretary will have the authority to
negotiate the bid amount, similar to the authority of the Director of the Office of
Personnel Management (OPM) with respect to the Federal Employees Health
Benefits program. The Secretary will calculate the benchmark by updating the
previous year’s payment in a local area by the statutorily required increase. If a
plan’s bid is less than the benchmark, its payment will equal its bid plus a rebate of
75% of the difference (between the benchmark and the bid). The rebate may be used
to provide additional benefits, reduce cost sharing, or may be applied towards the
monthly Part B premium, prescription drug premium, or supplemental premium (for
services beyond required Medicare benefits). The remaining 25% of the difference
will be retained by the federal government. If a plan’s bid is equal to or above the
benchmark, its payment will be the benchmark amount and each enrollee in that plan
will pay an additional premium equal to the amount by which the bid exceeds the
benchmark.

² (...continued)
by Jennifer O’Sullivan, Hinda Chaikind, Sibyl Tilson, Jennifer Boulanger, and Paulette
Morgan.

Although the program is identified as competitive beginning in 2006, in fact the
local benchmark will not be determined in a competitive manner; that is, a payment
to one plan in an area will not be based on any other plan’s bid to provide the
standard package of Medicare services. Local plans will still continue to compete
with one another in order to attract beneficiaries, but payments to plans in local areas
will continue to be based solely on statutorily defined increases. Beginning in 2006,
MA plans that choose to offer prescription drug coverage, will also receive a
benchmark payment for Part D prescription drug benefits. The benchmark will be
competitively determined, based on an adjusted average of all plan bids for the area.
By basing the benchmark for Part D benefits on the bids submitted by other plans, the
payment methodology applied to MA plans for providing prescription drug coverage
introduces a new form of competition into the program.
Also beginning in 2006, the MA program will begin to offer MA regional plans
in 26 regions across the country. MA regional plans cover both in- and out-of-
network required services and have both a limit on out-of-pocket expenses and a
unified Parts A and B deductible. Each year an organization will submit a separate
monthly bid amount for each plan it intends to offer in a region. The regional
benchmark, will include two components; (1) a statutorily determined increase, and
(2) a weighted average of plan bids. As with the Part D benchmark for MA plans
that offer a prescription drug benefit, the addition of the second component
introduces a new form of competition among plans, by basing part of the benchmark
on the bids submitted by the plans. Similar to local plans, plans with bids below the
benchmark will be given a rebate while plans with bids above the benchmark will
require an additional enrollee premium.
Additional financial incentives will be provided to encourage regional plan
participation. First, starting in 2007, the MMA establishes a stabilization fund to
provide incentives for regional plans to enter into and to remain in the MA program.
There will be $10 billion initially provided to the stabilization fund in 2007 and
additional amounts will be added to the fund. Second, during 2006 and 2007,
Medicare will share risk with an MA regional plan if its costs fall above or below a
statutorily-specified risk corridor. Third, there will be $25 million available
beginning in 2006 (with an increased amount each year) for additional payments to
certain hospitals in regional areas that demonstrate they have high costs, that would
otherwise prevent them from joining an MA network.
The MMA requires the Secretary to establish a program for the application of
comparative cost adjustment (CCA) in CCA areas. The six-year CCA program is
required to begin January 1, 2010, and to end December 31, 2015, in a fixed number
of geographic locations. The program is designed to examine the efficiency both
among local private plans and between the MA program and traditional Medicare.
For that purpose (1) payments to local MA plans will, in part, be based on
competitive bids (similar to payments for regional MA plans), and (2) Part B
premiums for individuals enrolled in traditional Medicare may be adjusted, either up
of down, depending on the relative costs of Medicare FFS and managed care. This
program will be phased-in so that payments and Part B premium adjustments will be
fully phased in by the beginning of the fourth year. There is also a 5% annual limit
on the Part B premium adjustment, so that the amount of the adjustment for a year
can not exceed 5% of the amount of the monthly Part B premium, in non-CCA areas.

In addition to these payment changes, all MA plans will be able to offer Part D
Medicare prescription drug coverage beginning in 2006. As part of the annual
bidding process, managed care organizations offering MA plans with prescription
drug coverage must include their estimate for the cost of the Part D prescription drug
coverage for each MA plan they intend to offer. Plans may also choose to offer
supplemental benefits, such as vision or dental coverage, which are not included in
the basic Medicare package. Plans will be required to submit a bid for any
supplemental benefits they intend to offer.
Each part of the MA local, regional, and CCA payment structure is discussed
in more detail below, along with an analysis of the effect of the change in the MMA
on Medicare managed care.
Payments for Local MA Plans
The Medicare statute for the M+C program set the annual managed care per
capita rate for a payment area (for a contract in a calendar year) at the highest of one
of three amounts calculated for each county:
^!a rate calculated as a blend of an area-specific (local) rate and a
national rate,
^!a minimum payment (or floor) rate, or
^!a rate reflecting a minimum increase from the prior year’s rate.
The revised law for the MA program added a fourth payment type so that
beginning March 2004, MA plans are paid the highest of the floor, minimum percent
increase, the blend, or a new amount. The new payment amount is 100% of fee-for-
service (FFS) payments made for persons enrolled in traditional Medicare in the
county. Beginning in 2005, the law no longer allows MA payments to be annually
updated by the floor or blend, although the increase that was applied to both the floor
and blend, the national growth percentage, is incorporated into the minimum increase
amount.
Beginning in 2006, the MMA changes the payment structure for MA local plans
by establishing benchmarks. In general, the benchmark amount is the maximum
amount that the federal government would be willing to pay to private plans in an
area for the provision of required Medicare Parts A and B benefits. The benchmark
amount for a local plan will be calculated by increasing the previous year’s payment³
rate by the minimum increase, or in certain years, by the greater of the minimum
increase or 100% of the per capita FFS amount.

³ The Secretary must rebase, or update, 100% of FFS at least once every three years, but
may also choose to update as often as annually. For 2005, the Secretary chose to rebase
FFS, and as a result, the 2005 payment rate will be the higher of the minimum increase or
the FFS amount. In years in which the Secretary does not rebase FFS payments, MA
payments will be based on the minimum increase update only.

Although many of the components of the MA payment structure are not in effect
after 2004, each is described in more detail below, in part to provide an historical
perspective and in part to provide a better understanding of the effect of the MMA
on Medicare managed care. The major factors for determining Medicare’s annual
local MA per capita rates are summarized in Table 1.
Blended Rates
The goal of the blended rate was to reduce variation in payments across the
country by gradually shifting county rates away from solely local rates (reflecting
wide variations in fee-for-service costs) toward a national average rate. Blending is
designed to reduce payments in counties where the adjusted average per capita costs
(AAPCCs)⁴ historically were higher than the national average rate, and to increase
payments in counties where AAPCCs were lower. The blended rate in effect for
2004 was based on 50% of the annual area-specific M+C per capita rate for the year
for the payment area and 50% of the input-price adjusted annual national M+C per
capita rate for the year.
The component of the blend determined by the area-specific (local) rate is based
on the 1997 AAPCC for the payment area with two adjustments. First, the
area-specific rate is reduced to remove an amount corresponding to graduate medical⁵
education (GME) payments. Second, rates are updated each year by a national
growth percentage (described below). The component of the blend determined by
the national rate is a weighted average of all local area-specific rates. This
component of the blend is adjusted to reflect differences in certain input prices, such
as hospital labor costs, by a formula stated in the law. Each year, the blended rates
are raised or lowered to achieve budget neutrality; however, there was no budget
neutrality adjustment for payments effective March 2004 (described below).
Effect of MMA. Although the blend will not be used to update payments after

2004, eliminating it will have almost no material effect on payments to plans.

Because of the budget neutrality requirement, the blend was used only once to update
payments between 1998 and 2003. The MMA waives budget neutrality for 2004,
only, so that plans in about 3% of counties (covering about 8% of enrollees) were
paid the blend in 2004. (See budget neutrality, below.) Additionally, for 2004, the
MMA required an adjustment to the local component of the blend to include

⁴ Prior to enactment of the BBA, payments for care of Medicare beneficiaries in risk health
maintenance organizations (HMOs) were based on the AAPCC. The AAPCC represented
a monthly payment to cover the cost of treatment in a Medicare risk HMO. It was calculated
according to a complex formula based on the cost of providing Medicare benefits to
beneficiaries in the fee-for-service portion of the Medicare program. The per capita
payment was set at 95% of the AAPCC, and was adjusted for certain demographic
characteristics of HMO enrollees. The FFS payment, which was added in the MMA, is also
based on the AAPCC (for an MA payment area — a county).
⁵ Medicare pays for the both the direct and indirect costs of GME. Direct payments include
payment for expenses such as salaries of residents, interns and faculty. The indirect
adjustment accounts for factors not directly related to education which may increase the
costs in teaching hospitals, such as treating more severely ill patients and increased testing.

additional payments that would have been made to plans if Medicare beneficiaries
entitled to benefits from facilities of the Department of Veteran Affairs (VA) and the
Department of Defense (DOD) had not used those services (VA/DOD adjustment).
Including the adjustment may have increased payments to plans; however, CMS did
not implement this adjustment as it did not have the necessary data.
Minimum Payment (Floor) Rate
Each county is also subject to a floor rate, designed to raise payments in certain
counties more quickly than would occur through the blend alone. Initially, the BBA
provided for a floor rate that would apply to all counties within the United States and
for 2000 this minimum rate was $402 per month. A separate minimum was also
established for areas outside (i.e., territories) the United States. Beginning March
2001, BIPA established multiple floor rates, based on population and location. For
2001, the floor was $525 for aged enrollees within the 50 states and the District of
Columbia residing in a Metropolitan Statistical Area (MSA) with a population of
more than 250,000. For any other areas within the 50 states and the District of
Columbia, the floor was $475. For any area outside the 50 states and the District of
Columbia, the $525 and $475 floor amounts were also applied, except that the 2001
floor could not exceed 120% of the 2000 floor amount. As required by law, these
payment amounts are increased annually by a measure of growth in program
spending (see discussion of national growth percentage, below). In 2002, the floor
was $553 for the larger MSAs and $500 for any other areas within the 50 states. The
2003 floors were lower than the 2002 floors; $548 for the larger MSAs and $495 for
any other areas within the 50 states.⁶ The March 2004 floors were $614 for the larger
MSAs and $555 for any other areas within the states.
Effect of MMA. The floor will not be used to update payments after 2004. The
floor amount was included in the original M+C payment structure as a means to
achieve one of its goals — reducing variation in payments across the country. The
BBA established a minimum amount that could be paid to a plan; increasing the
lowest plan payments in the country. For example, prior to M+C the lowest payment
to a plan in 1997 was $221 and with the introduction of the floor, that payment was
increased to $367 in 1998, a jump of 67%. In 1997, the gap from lowest to highest
payment was $546, declining to $416 with the introduction of the floor. Payments
for the floor were reset in 2001, which further decreased variation. In 2004, plans
in about 67% of counties (covering about 29% of enrollees) were paid based on the
floor. The gap from lowest to highest payment increased in 2004 to $592 and is
expected to continue to increase under the new payment rules for MA plans created
in the MMA.
Minimum Percentage Increase
Historically, the minimum increase rule was included to protect counties that
would otherwise receive only a small (if any) increase. In 1998, the minimum rate
for any payment area was 102% of its 1997 AAPCC. For 1999 and 2000, the

⁶ See discussion of national growth percentage for an explanation of how the adjustment for
prior year’s errors actually lowered the floor payments in 2003.

increase was 102% of the annual M+C per capita rate for the previous year. BIPA
applied a 3% minimum update for 2001, beginning in March. For subsequent years,
the minimum increase returned to an annual January update of an additional 2% over
the previous year’s amount. The minimum percentage increase was the only positive
update for 2003 M+C payments. The MMA changed the calculation of the minimum
percentage increase. For 2004 and beyond the minimum percentage increase will be
the greater of a 2% increase over the previous year’s payment rate (as under current
law), or the previous year’s payment increased by the national growth percentage
(discussed below).
Effect of MMA. Previously, the national growth percentage was only applied to
the floor rate or the local portion of the blend rate.⁷ Plans received the minimum
update rate only if they fared better with a (2% or 3%) minimum update to their
previous year’s rate, than if they received a payment calculated by increasing the
floor by the national growth percentage. This was the case for minimum update
counties because their payment rate from the prior year was so much higher than the
floor rate. Under the new MA payment rules, a plan has its prior year amount
increased by the higher of the minimum update or the increase in the national growth
percentage. This could result in higher payments to plans than under the previous
system. Adding the second component to the minimum increase (the national growth
percentage) incorporates the increase that had been used to update the floor and
blend, both of which will no longer be used after 2004.
Another difference is that the calculation of the national growth percentage
includes an adjustment for prior year’s errors. MMA eliminated the effect of prior
years errors for years before 2004. In 2004, plans in about 4% of counties (covering
about 23% of enrollees) were paid based on the new minimum increase. In 2005,
about 21% of counties (covering about 53% of enrollees) are paid based on the new
minimum increase. In 2006, all counties will receive the minimum update payment.
Fee-for-Service Rate
For payments, effective March 2004, a fourth payment type was added. The
new payment amount is 100% of fee-for-service (FFS) payments made for persons
enrolled in traditional Medicare. The FFS payment is calculated based on the
adjusted average per capita cost for the year for an MA payment area (a county), for
services covered under Medicare Parts A and B for beneficiaries entitled to benefits
under Part A, enrolled in Part B and not enrolled in an MA plan. This payment is
adjusted to remove payments for direct medical education costs and to include the
VA/DOD adjustment.⁸
Effect of MMA. In 2004, payments in about 26% of counties (covering about
40% of enrollees) were based on the FFS payments. In future years, the Secretary
must rebase FFS at least once every three years, but could choose to rebase more
often, such as each year or every two years. For 2005, the Secretary decided to

⁷ The blend is more difficult to assess, because of the budget neutrality which prevented the
blend payments from being paid in all years except 2000 and 2004, when it was eliminated.
⁸ As previously mentioned, CMS is currently unable to make this adjustment.

rebase FFS. Rebasing FFS rates means that the Centers for Medicare and Medicaid
Services (CMS) actuaries recalculate the per capita FFS expenditures for each county
(for End Stage Renal Disease (ESRD) beneficiaries FFS expenditures are calculated
by state) so that FFS rates reflect more recent growth in FFS expenditures. In 2005,
payments in about 21% of counties are based on the updated FFS rates. In these
counties, the rebased FFS local growth rates were larger than the national growth
percentage (used in the minimum percentage increase) for that year, and the MA
payment increase was be based on 100% FFS service. However, about 80% of
counties had slower (or negative) growth in FFS compared to national rates, and in
those counties the minimum update was applied. In 2006, the Secretary will not
rebase FFS rates. In years in which the Secretary chooses to rebase more frequently
than required by statute, the announcement will be provided in the annual “Advance
Notice” (released 45 days prior to the first Monday in April).
Exclusion of Payments for Graduate Medical Education
(GME)
The BBA required that payments for GME, including both indirect and direct
medical expenses, must be excluded or “carved out’” of the payments to M+C plans,
phased in over five years (by 2002). According to the BBA, GME payments can only
be carved out of the blend payment amount, not the floor or minimum increase
payment. As a result, the GME carve out could not occur in a year in which no
payment was based on the blended rate. The MMA allows a GME carve-out for
payments to MA plans when based on 100% of FFS, but only for Direct Medical
education costs.
Effect of MMA. Beginning in 2005, when the blend payment is no longer used
to update payments for plans, there will no longer be any carve-out for Indirect
Medical education costs. Further, any adjustment for Direct Medical education costs
will be limited to those MA plans whose payments are based on 100% of FFS.
Payments can only be based on 100% FFS in years in which the Secretary rebases
FFS. However, as previously discussed, Medicare payments to plans have rarely
been based on the blend, the only payment mechanism that allowed a GME
adjustment prior to the passage of MMA. Therefore, this change should have very
little material impact on MA payments to local plans.
Budget Neutrality
The BBA required that once the preliminary rate was determined for each
county, a budget neutrality adjustment would be applied to determine final payment
rates. This adjustment was made so that estimated total M+C payments in a given
year would equal total payments that would be made if payments were based solely
on area-specific rates. A budget neutrality adjustment was only applied to the
blended rates because rates could not be reduced below the floor or minimum
increase amounts. As a result of this limitation, it was not always possible to achieve
budget neutrality. The law made no provision for achieving budget neutrality after
all county rates were assigned either the floor or minimum increase. When this
situation occurred for the 1998, 1999, 2001, 2002, and 2003 rates, the Centers for
Medicare and Medicaid Services (CMS) chose to waive the budget-neutrality rule

rather than the floor or minimum rate rules. While the cost of waiving budget
neutrality was not significant in 1998 and 1999 (less than $100,000 each year), the
cost was about $1 billion in 2002, and $900 million in 2003. In 2004, the MMA did
not allow the budget neutrality adjustment to be applied to blend payments and
beginning in 2005, the blend will no longer be used to update payments.
Effect of MMA. Budget neutrality is only eliminated for 2004. However, it only
affects the blend, which will not be used after 2004. Eliminating budget neutrality
in 2004 ensured that the blend payment did not have to be reduced and plans in 3%
of counties were able to get a payment based on the blend.
National Growth Percentage
The national per capita M+C growth percentage is defined as the projected per
capita increase in total Medicare expenditures minus a specific reduction set in law
for certain years.⁹ Because this increase is tied to total Medicare expenditures, it
maintains a link between national Medicare fee-for-service spending and managed
care spending. Starting with the 1999 M+C payments, adjustments were also made
for errors in the previous years’ spending projection.
The national growth percentage for 2001, after the reduction and adjustments,
was -1.3%. However because BIPA set the floor rates in 2001, the national growth
percentage was not used to calculate the floor rate in 2001. It was only used to
calculate the blend rate for 2001.
For 2002, the estimated national growth percentage increase over the pre-BIPA
payment amount (used for January and February of 2001) was 8.3%. This figure was
based on a 5.6% projected per capita increase in total Medicare expenditures, a 0.3
percentage point reduction set by the BBRA, a minus 0.3% adjustment for errors in
the previous years’ projection of spending (1998 - 2001), and an increase of 3.2% to
account for the impact of BIPA.¹⁰ The increase used to calculate the floor payment
for 2002 was 5.3%, reflecting only the projected per capita increase in total Medicare
expenditures of 5.6% and the 0.3 percentage point reduction set by the BBA. There
was no adjustment for prior year errors, as the floor amounts were reset by the
amounts established in BIPA.
For 2003, the projected national growth percentage increase was actually a
decrease of 2.9%. This decrease reflected a 0.9% increase in per capita costs and a
negative 3.8% adjustment for prior years’ errors. The -2.9% factor was used to

⁹ In 1998, the reduction was 0.8 percentage points, from 1999 through 2001 it was 0.5
percentage points, and in 2002 the BBRA set the reduction at 0.3 percentage points. There
is no reduction after 2002.
¹⁰ Because BIPA increased M+C payments beginning in March 2001, CMS calculated a
revised national growth percentage of 4.9% for 2002 to be applied to these new BIPA
payment levels. The difference between the revised national growth percentage increase and
the original increase is the 3.2% increase for BIPA adjustments. It was not necessary to
include this 3.2% adjustment in the revised increase, as it was already reflected in the
Mar. 1, 2001, payment levels.

update the 2002 blend rate. The 2003 update for the floor was -1%, reflecting the
same 0.9% increase in per capita costs, but only a 1.9% decrease for the prior year
error in 2002 estimates.¹¹ Because both of these updates were negative, the minimum
percentage increase was the only positive update for 2003, yielding the highest M+C
payment for most counties.
For 2004, the projected national growth percentage increase for January and
February was 9.5% for the blend and 8.2% for the floor. The revised projection, due
to the passage of the MMA was 12.9% for the blend and 12.1% for the floor,
beginning in March. As required by the MMA, the revised increases did not include
an adjustment for prior year’s errors.
For 2005, the projected national growth percentage increase is 6.6%. This
increase reflects a .5% correction for prior year’s (2004) estimates.
For 2006, the projected national growth percentage is 4.8%. This increase
reflects a -.3% correction for prior years (2004 and 2005) estimates.
Effect of MMA. Although both the blend and floor payments will not be used
to update payments after 2004, the same increase that was applied to these payments
every year, the national growth percentage, will continue to be a part of the “MA
payment calculation,” as it will become one of the two possible increases to the
minimum increase amount. Historically, the adjustment for prior year’s errors was
negative each year. The MMA wipes the slate clean of prior year adjustments, so that
there will be no adjustments for prior year’s errors before 2004. However, for 2004
payments, the adjustments would have been positive, so that in fact if these
adjustments had been included in the calculation of the national percentage growth
increase, the increase for MA payments in 2004 would have been higher; 29.4% for
the blend instead of a 12.9% and 16.9% for the floor instead of 12.1%. Had this
occurred, the increase is large enough that payments in many more counties would
have been based on either the blend or the floor.

¹¹ Because BIPA reset the floor payments in 2001, adjustments to the floor were only made
for prior year errors occurring in 2002 and beyond.

Table 1. Major Factors for Determining Medicare Payments to
Local Medicare Advantage Plans
^Factor^R^u^l^e^es^tab^lⁱ^s^h^e^dⁱⁿ^BBA^{97, BBR}^A^{99, BI}^PA^{, or M}^M^A
^B^l^en^{d of}^{local an}^d^Gen^e^r^a^l^T^r^aⁿ^s^itioⁿ^o^v^er^six^y^ear^{s to}⁵⁰^-⁵⁰^b^l^en^d^o^f^lo^{cal an}^d
ⁿ^a^tioⁿ^a^{l r}^a^tesⁿ^a^tioⁿ^a^{l r}^a^{tes. Natio}ⁿ^a^{l r}^a^{tes ar}^{e ad}^j^u^sted^f^o^r
^dⁱ^f^f^e^r^eⁿ^{ces in}ⁱⁿ^p^u^{t p}^r^ices.
¹⁹⁹⁸^90%^l^o^cal^{, 10%}ⁿ^a^tⁱ^oⁿ^a^l
¹⁹⁹⁹^82%^l^o^cal^{, 18%}ⁿ^a^tⁱ^oⁿ^a^l
²⁰⁰⁰^74%^l^o^cal^{, 26%}ⁿ^a^tⁱ^oⁿ^a^l
²⁰⁰¹^66%^l^o^cal^{, 34%}ⁿ^a^tⁱ^oⁿ^a^l
²⁰⁰²^58%^l^o^cal^{, 42%}ⁿ^a^tⁱ^oⁿ^a^l
^2003-²⁰⁰⁴^50%^l^o^cal^{, 50%}ⁿ^a^tⁱ^oⁿ^a^l
^Mⁱⁿⁱ^mu^{m p}^a^ymeⁿ^t¹⁹⁹⁸^{$367 (or 150%}^of^{1997 pay}^m^en^t^ou^t^sⁱ^d^{e U}ⁿⁱ^t^e^{d S}^t^at^es⁾
^(f^l^{oor) rat}^e^1999-²⁰⁰⁴^Prevⁱ^o^u^s^y^ear’^s^pay^m^en^t^tⁱ^m^es^a^nnua^l^p^e^r^c^eⁿ^t^a^ge
ⁱⁿ^creas^{e, ex}^cept^f^o^{r 2001 w}^h^en^t^h^{e am}^ouⁿ^t^w^a^s^s^e^tⁱⁿ
^l^a^w^{($380 f}^o^{r 1999, $402 f}^o^{r 2000, an}^{d $525/}^{$475 f}^o^r
^2001-^{or 120%}^of^{2000 pay}^m^en^t^ou^t^sⁱ^d^{e U}ⁿⁱ^t^e^{d S}^t^at^es^,
^$553/^{$500 f}^o^{r 2002, $548/}^{$495 f}^o^{r 2003, an}^d^a
^$614/^{$555 f}^o^{r 2004)}
^Mⁱⁿⁱ^mu^{m p}^e^r^c^eⁿ^t¹⁹⁹⁸^102%^of^{1997 A}^A^P^C^C^pay^m^en^t^rat^e
ⁱⁿ^creas^e^1999-²⁰⁰⁰^102%^of^pri^o^{r y}^ear’^s^rat^e
²⁰⁰¹^103%^of^pri^o^{r y}^ear’^s^rat^e
^2002-²⁰⁰³^102%^of^pri^o^{r y}^ear’^s^rat^e
^F^r^om²⁰⁰⁴^Hⁱ^g^h^e^{r of}^102%^of^pri^o^{r y}^ear’^s^rat^e^{or i}ⁿ^creas^{e i}ⁿ
ⁿ^a^tioⁿ^a^{l g}^r^o^w^th^p^e^r^cen^tag^e
^F^ee-^f^o^r-^s^e^rvⁱ^c^e²⁰⁰⁴^{100% FFS pay}^m^en^ts^f^o^{r pers}^on^s^en^{rolled in}^FFS
^F^r^om²⁰⁰⁵^Mu^s^t^{be rebas}^e^{d at leas}^{t on}^{ce ev}^ery^th^{ree y}^ears
^Gradu^a^{te Medical}^Gen^e^ral^{GME pay}^m^en^ts^ex^clu^d^{ed (f}^rom^blen^{ded rate on}^ly⁾
^Edu^cation^{(direct an}^d^ph^as^{ed i}ⁿ^begⁱⁿⁿⁱⁿ^gⁱⁿ^{1998, ov}^{er f}ⁱ^v^e^y^ears^.
ⁱⁿ^{direct )}²⁰⁰⁴^Rem^o^{ve GME}^f^r^o^m^b^l^end^and^DME^f^r^o^m^FFS.
^F^r^om²⁰⁰⁵^Only^DME^r^e^m^o^ved^f^r^o^m^FFS.
^B^u^d^g^{et n}^e^u^t^r^a^lity^Gen^e^r^a^l^T^o^{tal M+C p}^a^y^m^en^{ts m}^u^{st eq}^u^a^{l w}^h^{at w}^o^u^l^d^h^a^v^e
^been^s^p^en^{t if}^pay^m^en^ts^w^e^{re en}^tirely^bas^e^{d on}^local
^rates^(ex^{cept n}^o^{rate can}^{be redu}^{ced below}^th^{e f}^l^{oor or}
^miⁿⁱ^mu^m)
²⁰⁰⁴^C^aⁿⁿ^o^t^{be appl}ⁱ^e^{d t}^o^bl^en^{d pay}^m^en^t^s
^Natioⁿ^a^{l g}^r^o^w^th¹⁹⁹⁸^In^creas^{e in}^{Medicare per capita ex}^pen^d^itu^res^(MP^C^E)
^percen^tag^e^mⁱⁿ^u^s^{0.8 percen}^t^a^g^e^poiⁿ^t^s
^1999-²⁰⁰¹^In^creas^{e in}^MP^C^E^mⁱⁿ^u^s^{0.5 percen}^tag^e^poin^t^s
²⁰⁰²^In^creas^{e in}^MP^C^E^mⁱⁿ^u^s^{0.3 percen}^tag^e^poin^t^s
^F^r^om²⁰⁰³^In^creas^{e in}^MP^C^E
^Rⁱ^s^k^adj^u^s^t^m^eⁿ^t^2000-²⁰⁰³^10%^h^eal^t^h^s^t^at^u^s^{, 90%}^dem^o^g^r^aphⁱ^c
²⁰⁰⁴^30%ⁱⁿ^patⁱ^eⁿ^t^an^{d am}^bu^l^a^t^o^ry^{, 70%}^dem^o^g^r^aphⁱ^c
²⁰⁰⁵^50%ⁱⁿ^patⁱ^eⁿ^t^an^{d am}^bu^l^a^t^o^ry^{, 50%}^dem^o^g^r^aphⁱ^c
²⁰⁰⁶^75%ⁱⁿ^patⁱ^eⁿ^t^an^{d am}^bu^l^a^t^o^ry^{, 25%}^dem^o^g^r^aphⁱ^c
^F^r^om²⁰⁰⁷^{100 %}ⁱⁿ^patⁱ^eⁿ^t^an^{d am}^bu^l^a^t^o^ry
^So^urce^:^C^oⁿ^g^r^es^sⁱ^on^al^R^e^s^earch^Serv^ice^(C^R^S^{) an}^aly^s^is^of^prov^is^ion^sⁱⁿ^B^B^A^{, B}^B^R^A^,^B^I^P^A^,^an^d
^MMA^.
^No^te^:^In^f^o^rm^atⁱ^oⁿ^f^o^{r pay}^m^en^t^ru^l^e^sⁱ^sⁿ^o^t^provⁱ^d^{ed bey}^oⁿ^d^{2004 i}^f^ru^l^eⁿ^o^l^oⁿ^g^e^{r appl}ⁱ^e^s^.
^{a. Beg}ⁱⁿⁿⁱⁿ^gⁱⁿ^{2001, t}^h^{ere i}^s^{a h}ⁱ^g^h^e^{r f}^l^{oor pay}^m^en^t^f^o^r^couⁿ^tⁱ^e^s^wⁱ^t^hⁱⁿ^MS^A^s^wⁱ^t^h^a^popu^l^a^tⁱ^oⁿ^of
^m^o^{re t}^h^an^{250,000 an}^{d a l}^o^w^e^{r f}^l^{oor pay}^m^en^t^f^o^{r an}^y^ot^h^e^{r cou}ⁿ^t^yⁱⁿ^t^h^{e U}ⁿⁱ^t^e^{d S}^t^at^es^.

Risk Adjustment
MA (formerly M+C) payments are risk adjusted to control for variations in the
cost of providing health care among Medicare beneficiaries. For example, if sicker
and older patients all sign up for one plan, risk adjustment is designed to compensate
the plan for their above average health expenses. The former Medicare risk contract
program adjusted the AAPCCs for demographic risk factors, and when the M+C
program was implemented, it also used these demographic risk adjusters.
Demographic risk adjusters include those for age, gender, working status, Medicaid
coverage, whether the beneficiary originally qualified for Medicare on the basis of
disability, and institutional (nursing home) status.
However, these demographic risk adjusters accounted for only a very limited
portion of the variation in health care costs, and as a result, the BBA required the
Secretary of HHS to develop a new risk adjustment mechanism that would also
account for variations in health status. Beginning in January 2000, CMS
implemented this new risk adjustment mechanism built on 15 principal inpatient
diagnostic cost groups (PIP-DCGs). Payments were adjusted based on inpatient data
using the PIP-DCG adjuster and demographic factors, so that this new system
accounted for both demographic and health-status variations. In addition to a
demographic adjustment, under this mechanism, the per capita payment made to a
plan for an enrollee was also adjusted if that enrollee had an inpatient stay during the
previous year. Separate demographically-based payments were used for newly
eligible aged persons, newly eligible disabled Medicare enrollees, and others without
a medical history.
The BBRA and BIPA made changes to the Secretary’s proposed phase-in
schedule of this new system, through 2002. Plans were concerned because this new
risk adjustment methodology reduced aggregate M+C payments; slowing down its
implementation lessened the reduction. Through 2003, 10% of payments included
risk adjustment adding the PIP-DCG method and 90% were based solely on the older
demographic method.
BIPA made additional changes to risk adjustment, in order to account for more
of the variation in health status. A new risk adjustment methodology began in 2004,
which adds data from ambulatory settings. This new risk adjustment will be phased
in at the rate of 30% in 2004, 50% in 2005, 75% in 2006 and 100% beginning in
2007. In March 2002, CMS announced that the new risk adjustment methodology
would be based on a “selected significant condition” model comprised of
approximately 61 disease groups chosen because of their statistical and clinical
significance for the Medicare population. Beginning July 1, 2002, M+C
organizations have been required to collect information on the selected diagnoses and
they have been required to submit that data to CMS since October 2002.
Effect of MMA. Starting in 2006, MMA expands risk adjustment in two ways.
First, it introduces a new measure of risk when adjusting beneficiary rebates. MMA
directs the Secretary to adjust the benchmark and the bid for the average of
demographic and health history risk characteristics of MA enrollees, as described in
the law, when calculating a beneficiary rebate. For local plans, the Secretary has the
discretion to calculate average risk based on the demographic and health

characteristics of enrollees in each state, or on a basis other than states, such as the
enrollment of an individual plan. The beneficiary rebate for a local MA plan is
calculated as 75% of the amount by which the MA area-specific non-drug monthly
benchmark, adjusted with the average risk adjustment factor, exceeds the MA
statutory non-drug monthly bid, adjusted with the average risk adjustment factor. By
applying the average risk adjustment factor to the benchmark and the bid, all private
plans that are equally efficient will offer the same rebate to beneficiaries in a
particular market.
Second, MMA expands the Secretary’s discretion when risk adjusting payments
to private plans. Previously, payments to plans were adjusted based solely on the
demographic and health status risk factors associated with each enrollee. MMA
expands the Secretary’s ability to adjust payments by directing the Secretary to
consider variation in local payment rates within an area. Ultimately, the Secretary
is directed to ensure that the sum of the payment from CMS, and the basic
beneficiary premium do not exceed a plan’s risk adjusted bid. This provision ensures
that plans are not paid more than their estimated cost of serving beneficiaries.
Summary of Local MA Plan Payments
A summary of payments made to local MA plans is provided in Table 2. The
table includes the payment made to a plan for covered Medicare services, depending
on whether the plan’s bid or benchmark is higher. It also includes any required
enrollee basic beneficiary premium or rebate. The table provides an explanation of
how risk adjustment is applied to the different payments. Not included, are any
payments made to plans that choose to offer a Medicare prescription drug program.
Plans that provide Medicare prescription drug coverage will receive a separate¹²

additional payment.
¹² See CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, by Jennifer O’Sullivan, Hinda Chaikind, Sibyl Tilson,
Jennifer Boulanger, and Paulette Morgan.

Table 2. Total Non-Drug Payments to MA Local Plans for
Required Parts A and B Services, Starting in 2006
^Paym^en^{t am}^ouⁿ^tⁱ^f^M^A^Paym^en^{t am}^ouⁿ^tⁱ^f^M^A^area-
^st^a^t^ut^o^r^y^no^n-^drug^m^o^nt^hly^specifⁱ^{c no}^n-^drug^m^o^nt^hly
^P^a^y^m^ent^s^{, including}^aⁿ^y^{bid is}^{greater than or equal}^benchm^a^r^k^{is g}^rea^t^{er t}^h^aⁿ
^{plan prem}^ium^{or rebate}^{to the M}^A^area-s^{pecific non-}^t^h^{e M}^A^st^a^t^ut^o^r^y^no^n-^drug
^drug^m^o^nt^hly^benchm^a^r^k^m^o^nt^hly^bid
^(bⁱ^d$^benchm^a^r^k⁾^(benchm^a^rk^>^bid)
^C^M^S^p^a^y^m^en^{t to a plan}^f^o^r^M^A^a^r^e^a^-^sp^eci^fⁱ^{c no}^n-d^r^ug^M^A^area-^sp^e^cⁱ^fi^c^no^n-d^r^ug
^o^r^{iginal FFS Med}ⁱ^car^e^m^oⁿ^t^hl^y^b^e^nc^hm^a^r^k^m^o^nt^hl^y^bⁱ^d⁽^bid^{) adj}^u^s^t^{ed f}^o^r
^b^eⁿ^e^f^{its (}^o^th^er^th^an^h^o^sp^ice⁽^benchm^a^r^k^{) adj}^u^s^t^{ed f}^o^{r th}^e^th^{e d}^e^m^o^g^r^aphⁱ^{c an}^{d h}^ealth
^care)^dem^o^g^r^aphⁱ^c^an^{d h}^ealth^hⁱ^s^t^ory^hⁱ^s^t^ory^ch^aracteris^tics^of^t^h^e
^ris^k^ch^aracteris^ti^cs^of^th^e^en^rollee,^an^{d at th}^{e Secretary}^’^s
^en^{rollee, an}^{d at th}^{e Secretary}^’^s^dⁱ^scr^e^tioⁿ^,ⁱⁿ^tr^a-^ar^{ea v}^a^rⁱ^atioⁿ^,
^dis^c^retion^,ⁱⁿ^t^r^a-^{area v}^a^riation^,^su^b^j^e^c^t^t^o^an^ad^d^itioⁿ^a^l^a
^su^b^j^ect^t^o^aⁿ^a^d^d^itioⁿ^a^l^a^con^s^train^t^.
^con^s^train^t^.
^En^{rollee pay}^m^en^{t to a plan}^T^h^e^a^m^o^unt^b^y^w^hⁱ^c^{h t}^h^e^$0
^(B^asⁱ^c^B^eⁿ^e^fⁱ^ciary^una^d^j^ust^e^d^bid^exceed^s^th^e
^Pr^e^mⁱ^u^m⁾^una^d^j^ust^e^d^benchm^a^r^k^.
^Eⁿ^r^o^l^l^e^e^r^e^b^a^t^e^f^r^o^m^a^p^l^aⁿ^$⁰^Th^e^p^l^aⁿ^receiv^e^s⁷⁵^%^o^f^t^h^e
^a^m^o^unt^b^y^w^hⁱ^c^{h t}^h^e^a^d^j^u^st^e^d
^benchm^a^r^k^exceeds^th^e^b
^adj^u^s^t^ed^bid^.^T^h^{e adj}^u^s^t^m^eⁿ^t
^is^bas^e^d^on^th^{e s}^t^ate-^wⁱ^de
^av^erag^{e of}^dem^o^g^r^aphⁱ^c^an^d
^h^ealth^s^t^atu^s^ris^k^f^actors^(or
^so^m^e^ot^he^r^b^a^sis,^a^t^the
^Secretary^’^s^dis^c^retion⁾^{. T}^h^is
^am^ouⁿ^t^is^redu^{ced by}^an^y^P^a^{rt B}
^p^r^emⁱ^u^m^rebat^e^of^f^e^{red by}^t^h^e
^pl^an^.
^G^o^ve^rⁿ^meⁿ^t^sa^vi^ngs^$0^T^h^{e go}^v^e^rn^m^eⁿ^t^receiv^e^s^25%
^(g^ov^ern^m^ent^’^s^s^h^are^of^o^f^th^{e am}^o^uⁿ^t^b^y^w^h^ich^th^e
^rebat^e⁾^adj^u^s^t^ed^benchm^a^r^k^excee^ds
^t^h^{e adj}^u^s^t^ed^bid^{. T}^h^e
^ad^j^u^s^t^m^eⁿ^tⁱ^s^bas^e^{d on}^t^h^e
^s^t^a^t^e^w^{ide av}^erag^{e o}^f
^dem^o^g^r^a^p^hⁱ^{c an}^{d h}^ealth^s^t^atu^s
^rⁱ^sk^fa^c^t^o^r^{s (}^o^r^so^m^e^o^t^he^r^b^a^sis,
^{at th}^{e Secretary}^’^s^dis^c^retion⁾^.
^So^urce^{: T}^h^{e C}^oⁿ^g^r^es^sⁱ^on^{al R}^e^s^earch^Serv^{ice (C}^R^S^{) an}^aly^s^is^of^MMA^prov^is^ion^s^.
^{a. T}^h^{e Secretary}^m^u^s^t^adj^u^s^t^pay^m^en^ts^to^local^MA^plan^s^to^en^s^u^{re th}^{at th}^{e s}^u^m^of^th^{e pay}^m^en^{t f}^r^om
^C^M^S^a^{nd th}^{e B}^a^sⁱ^{c B}^eⁿ^e^fⁱ^ciary^P^r^em^iu^m^doesⁿ^o^{t ex}^{ceed th}^{e plan}^{bid, adj}^u^s^t^{ed f}^o^{r th}^e
^dem^o^g^r^aphⁱ^{c an}^{d h}^ealth^hⁱ^s^t^ory^ris^k^f^actors^of^plan^en^rollees^.
^b^.^T^h^{e r}^e^b^a^{te to}^b^e^p^a^id^to^th^{e p}^l^an^{, th}^{e b}^eⁿ^e^fⁱ^ciar^y^r^e^b^a^t^e^{, m}^a^y^oⁿ^ly^b^e^u^s^ed^to^p^r^o^v^id^{e ad}^d^itioⁿ^a^l
^b^eⁿ^e^f^its,^r^e^d^u^ce^co^{st sh}^arⁱⁿ^g^,^o^r^ap^p^lied^to^w^a^r^d^{s th}^{e m}^oⁿ^t^h^l^y^P^a^r^t^B^p^r^em^iu^m^,^p^r^escr^ip^tioⁿ^d^r^u^g
^premⁱ^u^m^,^{or s}^u^ppl^em^en^t^a^l^premⁱ^u^m^(f^{or s}^e^rvⁱ^ces^bey^oⁿ^d^requⁱ^r^{ed Medi}^{care ben}^e^fⁱ^t^s^).

Variations in Local MA Payment Rates
As noted above, between 1997 and 2003, under the M+C program, each county
rate was set at the highest amount calculated under three rules (blend, minimum
increase, and floor), and then adjusted for budget neutrality. In 2004, plans were paid
the highest amount calculated under four rules, with 100% of FFS payments for
persons enrolled in traditional Medicare added to the calculation. Figure 1 shows
the distribution of payment types by year, since the beginning of the M+C program.
Because of the low national growth percentage in 1998 and 1999, no county rate was
set by the blended-rate rule after applying the budget neutrality adjustments. In 2000,
the national growth percentage was sufficiently large (5%), so that payments in 63%
of counties were based on the blended-rate rule. However, the national growth
percentage for 2001 was -1.3%, as previously discussed. Therefore, in 2001, no
county was paid using the blended-rate rule and about 72% of all county payments
were set at the floor, with the remainder of counties receiving the minimum 3%
increase. Similarly in 2002, no county was paid using the blended-rate rule, and
about 79% of all counties had their payment set at the floor with the remainder of
payments set at the minimum update of 2%. For 2003, all but six counties had their
payments set at the minimum update of 2%, with the remaining six set at the higher
floor payment ($548). In 2004 about 26% of counties were paid 100% of FFS, while
most counties, about 67%, were paid the floor; 4% were paid the minimum update
and 3% received the blend. In 2005, the Secretary chose to rebase payment rates, or
in other words, allow the county rate to equal 100% of FFS if that rate was higher
than the previous year’s rate increased by the minimum percentage increase (6.6%
in 2005). As a result, in 2005, about 20% of county payment rates are based on the
100 percent of FFS payment rate, with the remaining 80% based on the minimum
percentage increase. In 2006, the Secretary will not rebase payment rates and all
county rates will be based on the minimum percent increase (4.8%) above the
county’s 2005 rate.

Figure 1. Rule Used to Determine County Payment Rates, by
Year, 1998-2006

Calculations for selected 2004 county payment rates are shown in Table 3. The
table shows the calculation under the four rules. For the eight counties selected, two
have their rate set using the minimum update (Los Angeles, California; Dade,
Florida;), two set at the floor amount (Hennepin, Minnesota; and Fairfax, Virginia),
two set at the blended rate (Bristol Bay, Alaska and San Benito, California) and two
set at 100% FFS ( Lackawanna, Pennsylvania and Queens, New York). Starting in

2005, county payment rates will be based on the minimum update rate, or, if larger,

100% of FFS in years when the Secretary rebases payment rates. The floor and blend
payments will be eliminated in 2005.
Table 3. Calculation of Monthly Payment Rates
for Selected Counties, 2004
Calculation using each of the four separate rules
Blend 50%
local and
Minimum50%100% fee-
Selected countiesupdateFloornationalfor-service
Los Angeles, CA$753$614$715$742
Dade, FL905614770891
Hennepin, MN600614547597
Fairfax, VA600614557557
Bristol Bay, AK543555579472
San Benito, CA566614618616
Lackawanna PA606614585641
Queens, NY796614742804
^So^urce^{: C}^oⁿ^g^r^es^sⁱ^on^{al R}^e^s^earch^Serv^{ice (C}^R^S^{) an}^aly^s^is^of^C^M^{S data.}
Geographic Payment Rates
Large variation in county payment rates was one of the motivating forces behind
changes enacted in the Balanced Budget Act. The M+C payment method was
designed to reduce this variation. Raising the floor in 2001 supported the goal of
reducing both the overall variation and increasing the average payment. However,
the effect of “negative” updates for both the blend and floor payments in 2003
slightly increased variation in payments across counties. The effect of the payment
rule changes in the MMA will no longer decrease variation, and in fact over time,
variation will begin to increase.
Examining variations across all counties, Figure 2 shows that the substantial
range above and below the average payment rate will continue to exist in 2006.
Although the differences between highest and lowest payment had diminished each
year since the start of the M+C program through 2002, in 2004, the gap increased a
to $592. For example, in 1997, the average monthly payment rate weighted by the

number of Medicare beneficiaries in each county was $467. The lowest rates in the
country were $221 in two rural Nebraska counties (Arthur and Banner). The highest
rates in 1997 were $767 and $748, respectively, in Richmond County, New York
(Staten Island), and Dade County, Florida (Miami). Examining the variation, from
highest to lowest payments, the range was $546 in 1997. By 2002, the range had
diminished to $356, as the lower floor rate was $500 and the highest rate (Richmond
County) was $856. The average payment in 2002 was $571. Although not shown
in the table, in 2003, the range from lowest to highest payment increased to $363 (an
increase of $7 per month per beneficiary, i.e., 2% higher than $356). The average
payment increased to $582, an increase of $11 per month per beneficiary over the
2002 amount. While the low floor payment decreased from $500 to $495, no M+C
plan was paid that amount. The lowest rate in the country was $510, representing a
2% increase over the low floor rate of $500 for 2002. The highest rate in 2003 was
again in Richmond County at $873, with Dade County (Miami) at $851 and Bronx,
New York at $828. In 2004, the highest rate was in St. Bernard (New Orleans) at
$1,147, with Dade County (Miami) at $905. The lowest rate, the floor in non-MSA
areas, was $555 in areas such as Champaign (Illinois), San Luis Obispo (California),
Santa Cruz (Arizona), and Chautauqua (New York). In 2005, the difference between
the highest and lowest payments is $630, with the highest rate, again, in St. Bernard
(New Orleans) at $1,222. The lowest rate in 2005 is $592, in areas that had
previously received the low floor payment, such as Champaign (Illinois), San Luis
Obispo (California), and Santa Cruz (Arizona). In 2006, all payment rates will be
increased by a 4.8% increase over the 2005 payment. Even though all county rates
will increase by the same percentage, the difference between the highest and lowest
rates will increase to $661. The highest rate in 2006 will be $1,281 in St. Bernard
(New Orleans). The lowest rate in 2006 will be $620 in counties that had in prior
years received a low floor payment.
Payment rates vary geographically, as well, with higher payments generally
occurring in more urban areas (Figure 2). Because the blend rate was only paid in
2000 and 2004, the large variations in payment rates that existed prior to the M+C
program, have been only partially reduced. The 2001 floor rate (increased by BIPA)
mostly affected rural counties, but it raised rates for some urban counties as well.
Payments continue to be higher in urban areas and lower in most rural areas. The
2005 average payment is $758 in central urban counties, $82 above that for other
urban counties, $131 above that for rural-urban fringe counties, and $145 above that¹³
for other rural counties. In 2006, the average payment rate will be approximately
$794 in central urban counties, $85 above that for other urban counties, $167 above
that for rural-urban fringe counties, and $152 above that for other rural counties. The
range within each of the urban — rural categories remains substantial as well.

¹³ Central urban counties are the central counties in metropolitan areas of 1 million
population or more. Other urban refers to other counties in those metropolitan areas and any
county in smaller metropolitan areas. Rural-urban fringe counties are defined as those non-
metropolitan counties that are adjacent to a metropolitan area, and other rural refers to non-
metropolitan counties not adjacent to a metropolitan area.

Figure 2. Range of County Medicare Managed Care Payment Rates for the Aged, by
Location, 1997-2006

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Payment rates range widely across geographic areas, as well as within
geographic areas, as shown in Table 4. For example, plans serving Miami are paid
an average of $986 per month in 2005, compared with $654 in Fairfax County,
Virginia. But even within neighboring geographic areas, there can be wide variation
in payment rates. The payment rate for Dade County in southern Florida is $123
more than the rate for neighboring Palm Beach County in 2005 and $128 more in
2006. Furthermore, plans competing in the same market may receive substantially
different payments for beneficiaries who live on opposite sides of a county boundary.
As illustrated in the Washington, DC metro area and the New Orleans metro area,
these differing payment levels may affect plan participation and enrollment.
Table 4. Monthly Payment Rates for Aged Enrollees
in Selected Areas, in 2005 and 2006
^C^o^uⁿ^t^y^P^aym^en^{t 2005}^Paym^en^{t 2006}
^Wa^shing^t^oⁿ^{, DC-}^M^a^ry^la^nd-^Virg^inia
^Priⁿ^{ce G}^e^org^e^’^s^C^o^uⁿ^t^y^,^MD^$814^$853
^Was^hⁱⁿ^g^t^on^{, D}^C⁷⁷⁹⁸¹⁶
^M^o^nt^go^m^e^r^y^Co^unt^y^,^M^D⁷⁰⁰⁷³³
^{Falls Ch}^u^r^ch^City^{, VA}⁶⁸⁹⁷²²
^A^r^lⁱⁿ^g^t^on^C^o^uⁿ^t^y^,^V^A⁶⁶¹⁶⁹³
^A^l^ex^an^dri^a^Cⁱ^t^y^{, V}^A⁶⁵⁴⁶⁸⁶
^F^aⁱ^r^f^a^x^Cⁱ^t^y^{, V}^A⁶⁵⁴⁶⁸⁶
^L^o^u^douⁿ^,^V^A⁶⁵⁴⁶⁸⁶
^F^aⁱ^r^f^a^x^C^o^uⁿ^t^y^,^V^A⁶⁵⁴⁶⁸⁶
^So^ut^{hern F}^l^o^r^ida
^D^a^{de (Mi}^a^mⁱ⁾^$986^$1,033
^Brow^{ard (F}^t^.^L^a^u^d^erdal^e⁾⁹¹⁷⁹⁶¹
^P^a^lm^B^each⁸⁶³⁹⁰⁵
^So^ut^{hern Ca}^lif^o^r^nia
^L^o^s^Aⁿ^g^e^l^e^s^$813^$852
^O^r^an^g^e⁷⁶⁹⁸⁰⁶
^Rⁱ^v^e^rsⁱ^d^e⁷⁵⁰⁷⁸⁶
^S^aⁿ^Bern^ardiⁿ^o⁷⁴⁸⁷⁸⁴
^N^e^w^Orl^e^an^s^-^M^e^tari^e-Kenⁿ^{er, L}^o^uⁱ^sⁱ^an^{a, M}^e^trop^olⁱ^t^an^s^t^ati^s^ti^cal^area
^S^t^{. Bern}^ard^$1,222^$1,281
^Pl^aqu^e^mⁱⁿ^e^s⁹³⁸⁹⁸³
^S^t^{. Joh}ⁿ^Baptⁱ^s^t⁹⁰¹⁹⁴⁵
^S^t^{. T}^a^m^m^aⁿ^y⁸⁹²⁹³⁴
^O^r^l^ean^s⁸⁶⁶⁹⁰⁷
^Jef^f^e^rs^on⁸³⁹⁸⁷⁹
^S^t^{. C}^h^arl^e^s⁸²¹⁸⁶⁰
^So^urce^{: C}^eⁿ^t^ers^f^o^{r Medicare an}^{d Medicaid Serv}^ices^.

Payments for Regional MA Plans
Starting in 2006, the MA program will allow plans to operate regionally. MA
plans may serve a single region or multiple regions (including all 26 regions) as part
of a new regional program. The regional program is designed to encourage plans to
serve areas they had not previously served, particularly rural areas. Regional plans
will operate like Preferred Provider Organizations — a popular option in the private
health insurance market so that a plan participating in the new regional program will
(1) have a network of providers who agree to a contractually specified reimbursement
for covered benefits, and (2) provide for reimbursement for all covered benefits,
regardless of whether the benefits are provided within the network. In addition, both
Medical Savings Account (MSA) plans and Private Fee-for-Service (PFFS) plans
may serve one or more regions.¹⁴
The Secretary established 26 regions taking into account such factors as (1) an
adequate number of eligible beneficiaries, (2) presence of existing commercial and
Federal Employees Health Benefits plans that may consider serving an MA region,
(3) limiting the variation of payment rates within regions, and (4) preservation of
existing patient flow in areas where beneficiaries have a tendency to seek care
outside of their state of residence. Table 5 shows the 26 MA regions, the number of
beneficiaries in each region, the range of risk adjusted county-level MA rates in the
region, the difference between the highest and lowest risk adjusted county-level MA
rate in each region, and an average risk adjusted region-level MA rate. The number
of eligible beneficiaries in each MA region range from a high of about 4 million in
Region 24 (California), to a low of approximately 50 thousand in Region 26
(Alaska). The difference between the highest and lowest risk adjusted MA rate in
each region range from a high of $493 in Region 17 (Texas) to a low of $64 in
Region 1 (Maine and New Hampshire), Region 21 (Arizona) and Region 25
(Hawaii). Because the Secretary has the discretion to make adjustments to account
for intra-regional variation, the spread of MA rates within a region might not pose as
much of a risk to plans as it might otherwise have. An MA regional plan may choose
to serve more than one region, or may serve the entire nation, but it can not segment
its service area to offer either different benefits or different cost-sharing requirements
to beneficiaries within the same region.
Only the regional plans (not local plans) will be required to have both a single
deductible for Parts A and B services and a catastrophic limit on expenditures. The
deductible may be applied differently for in-network services and may be waived for
preventive or other items and services. The law specifies that there be one
catastrophic limit for in-network required Parts A and B services and another for all
required Parts A and B services, although the amount of the catastrophic limit is not
specified in the law.

¹⁴ A Medical Savings Account (MSA) is a combination of a high deductible insurance policy
and tax-advantaged personal savings account for medical expenses. A Private Fee-for-
Service (PFFS) plan is a private indemnity health insurance policy. In a PFFS plan, the
insurer reimburses hospitals, doctors and other providers at a rate determined by the plan
on a fee-for-service basis without placing the providers at any financial risk.

Table 5. Medicare Advantage Regions, Beneficiaries and Per
Capita Monthly Payments for Aged Beneficiaries, 2005
^Difference^A^v^erage
^Ra^ng^{e o}^f^betw^{een the}^ris^k
^couⁿ^t^{y l}^e^vel^hⁱ^gh^es^{t an}^d^ad^ju^s^t^ed
^To^t^a^l^rates^wⁱ^thⁱⁿ^lo^w^e^st^region
^R^e^gi^on^S^t^ates^benefⁱ^cia^r^ies^{each region}^{county rate}^lev^e^{l ra}^t^e
¹^M^aiⁿ^e^{, N}^e^w^H^a^m^p^s^hⁱ^r^e^422,515^$614-^$678^$64^$613
²^C^o^nne^c^tⁱ^c^ut^,^M^a^ssa^c^huse^t^t^s^,^1,805,085^$614-^$831^$217^$746
^R^h^{ode Is}^l^aⁿ^d^an^{d V}^e^rm^on^t
³^N^ew^Y^o^rk^2,845,450^$614-^$903^$289^$814
⁴^N^ew^Jers^ey^1,255,829^$678-^$786^$108^$790
⁵^D^elaw^{are, Dis}^t^{rict of}^901,259^$614-^$811^$197^$741
^Co^lu^m^b^{ia an}^d^Mar^y^lan^d
⁶^P^e^nnsy^l^vaⁿⁱ^a^aⁿ^d^W^e^st^2,527,088^$614-^$787^$173^$746
^Vir^gⁱⁿ^ia
⁷^N^ort^h^C^a^rolⁱⁿ^{a an}^{d V}ⁱ^rgⁱⁿⁱ^a^2,239,963^$614-^$789^$175^$634
⁸^G^eorgⁱ^a^an^{d S}^o^u^t^h^C^a^rolⁱⁿ^a¹^,655,581^$614-^$741^$127^$647
⁹^F^l^o^ri^da^3,041,852^$614-^$893^$279^$777
¹⁰^A^l^abam^{a an}^{d T}^eⁿⁿ^e^s^s^e^e¹^,663,097^$614-^$842^$228^$655
¹¹^Mi^chⁱ^g^an^1,501,197^$614-^$826^$212^$690
¹²^O^hⁱ^o^1,784,284^$614-^$868^$254^$687
¹³^In^di^an^{a an}^{d K}^eⁿ^t^u^c^k^y^1,588,640^$614-^$749^$135^$641
¹⁴^Illin^ois^an^{d W}ⁱ^s^c^on^sⁱⁿ²^,555,008^$614-^$722^$108^$641
¹⁵^A^r^k^aⁿ^s^as^an^{d Mi}^s^s^o^u^rⁱ¹^,389,193^$614-^$778^$164^$644
¹⁶^L^o^uⁱ^sⁱ^an^{a an}^{d Mi}^s^sⁱ^s^sⁱ^ppi^1,107,824^$614-^$1,101^$487^$785
¹⁷^T^e^x^a^s²^,504,912^$614-^$1,107^$493^$777
¹⁸^K^aⁿ^s^as^an^{d O}^k^l^a^h^o^m^a^947,170^$614-^$845^$231^$648
¹⁹^I^o^w^a^,^Mⁱ^nne^so^t^a^,^M^o^nt^aⁿ^a^,
^Neb^r^ask^a^{, No}^rth^Dak^o^ta,^1,913,827^$614-^$836^$222^$581
^So^ut^{h D}^a^ko^t^a^,^W^y^o^mⁱⁿ^g
²⁰^C^o^l^o^{rado, N}^e^w^Mexⁱ^co^778,442^$614-^$861^$247^$628
²¹^A^rⁱ^z^on^a^769,443^$614-^$678^$64^$633
²²^N^e^v^a^da^291,959^$614-^$792^$178^$688
²³^Idah^{o, O}^r^eg^on^{, U}^t^ah^,^1,764,310^$614-^$793^$179^$615
^W^a^shi^ngt^oⁿ
²⁴^C^a^lⁱ^f^ornⁱ^a⁴^,257,579^$614-^$1,046^$432^$778
²⁵^H^a^w^aⁱⁱ^182,651^$614-^$678^$64^$623
²⁶^A^l^as^k^a^51,198^$614-^$921^$307^$624
^So^urce^{: T}^a^{ble created by}^th^{e C}^oⁿ^g^r^es^sⁱ^on^{al R}^e^s^earch^Serv^{ice (C}^R^S^{) bas}^e^{d on}^C^M^{S an}^aly^s^is^.
^No^te^{: P}^a^y^m^en^{t r}^a^{tes in}^th^{is tab}^l^{e ar}^{e r}ⁱ^sk^ad^j^u^sted^.^R^e^gⁱ^on^lev^e^{l rates}^{are adj}^u^s^t^{ed u}^sⁱⁿ^g^av^erag^{e s}^t^ate
^ag^g^r^eg^{ate ris}^k^s^c^ores^m^u^{ltiplied by}^th^{e w}^e^ig^h^t^{ed 2005 cou}ⁿ^t^y^ratesⁱⁿ^each^s^t^ate.
Payments to regional plans, like local plans, will also be based on a benchmark
amount. However, the calculation of regional benchmarks will be different than the

calculation of the local benchmarks. For a region, the benchmark for part A ad B
benefits is comprised of two components, one determined according to statute and
one based on plan bids. The regional statutory component is the weighted average
of all the statutorily determined local payment rates in the region. The weight for the
statutory component is based on the percent of eligible individuals in the area, as
opposed to enrollees.¹⁵ The plan-bid component is the weighted average of all the
MA regional bids submitted in a region. This weight is based on enrollment by plan.
Similar to local plans, each regional plan will submit a bid to provide coverage of all
required benefits, but unlike the benchmark for local plans, the regional benchmark
depends on all plan bids. By incorporating the plan bid into the calculation of the
benchmark, the payments amount to any one plan that participates in a region will
depend on the bids submitted by other plans in the region. This introduces a new
type of competition, not previously used in determining Medicare payments.
Calculation of the Regional Monthly Benchmark
The MA monthly region-specific non-drug benchmark amount will be
calculated according to the following formula, for a region for a month in a year.
Regional Statutory Pl an Bi d⎛ ⎞ ⎛ ⎞ −⎛ ⎞
= ⎜ ⎟ + ⎜ ⎟
Benchmar k Compon ent Component⎝⎜ ⎠⎟ ⎝ ⎠ ⎝ ⎠
1. The statutory component of the benchmark is calculated as follows, for a region
and year:
StatutoryStatutory Regional SpecificStatutory National⎛⎞⎛⎞
= ⎜ ⎟ × ⎜ ⎟
componentnondrug amountmarket share percentage−⎝⎠⎝⎠
a. The statutory region-specific non-drug amount is equal to the sum (for
each of the MA local areas within the region) of the calculations for the
following formula:
(MA area-specific non-drug monthly benchmark amount for the area
and the year) x (number of MA eligible individuals residing in the
local area/total number of MA eligible individuals residing in the
region)
b. The statutory national market share percentage is the proportion of MA
eligible individuals nationally who were not enrolled in an MA plan during
the reference month. The reference month is defined as the most recent
month during the previous year for which data are available.
2. The plan-bid component of the benchmark is calculated as follows, for a region
and a year:

¹⁵ This weight may be based on eligible individuals, rather than enrollees because the ratio
of eligible individuals may be a more stable percentage than those who chose to enroll.

Non statutory⎛ ⎞
Pl an bi d Wei ght ed ave ra g e⎛ ⎞ ⎜ ⎟
mar ket s h a re= ⎜ ⎟ × ⎜ ⎟
co mp o n ent o f pla n b ids⎝ ⎠ ⎜ ⎟
p er cen tag e⎝ ⎠
a. The weighted average of plan bids for an MA region and a year is equal
to the sum (for all MA regional plans in that region and year) of the
calculations of the following formula:
(unadjusted MA statutory non-drug monthly bid¹⁶ amount for the plan
for the year) x (number of individuals who reside in the region who
were enrolled under that regional plan during the reference
month/total number of individuals for all MA regional plans for that
region and year, for plans offered in the region in the reference
month)
b. The non-statutory market share percentage is the complement of the
statutory market share percentage (1-statutory market share percentage)
and is the proportion of MA eligible individuals who were enrolled in an
MA plan.
Plans not offered in the previous year are excluded. The Secretary will compute
the benchmark for each region before the beginning of each annual election period.
Risk Adjustment
Beginning in 2006, the Secretary will annually determine the average of the risk
adjustment factors to be applied to regional plan payments. If no plan was offered
in the region in the previous year, the Secretary will generate an estimate using
factors such as the average for comparable regions or the national average. The
Secretary could apply risk adjustment factors other than on a regional basis, including
a state basis, or a plan-specific basis.
Both the plans bids and benchmarks will be risk-adjusted for demographic
factors (including age, disability, gender, institutional status), health status, intra-
regional variation, and if applicable, a monthly rebate. To adjust for intra-regional
variation, the Secretary will adjust the amounts to take into account variation in MA
local payment rates among the different MA local areas included in the region. The
Secretary shall adjust payments to MA regional plans to ensure that the sum of the
monthly payment and any required basic beneficiary premium equals the unadjusted
MA statutory non-drug bid amount, adjusted for the demographic factors and intra-
regional variation.

¹⁶ The statutory non-drug monthly bid amount is the portion of the bid amount attributable
to the provision of benefits under original Medicare Parts A and B fee-for-service.

Stabilization Fund
The MMA establishes a regional plan stabilization fund to encourage regional
plans to serve at least one or even all regions, and to encourage plans to stay in
regions they might otherwise leave. Initially, in 2007, $10 billion is to be available
to the fund, but additional amounts may be added.¹⁷ The funds are to be available
through December 2013. The Secretary will be responsible for determining the
amounts that may be given to MA regional plans from this fund, based on statutory
requirements.
These funds can be offered either on a national or regional basis. The nationally
based bonus payment will be available for one year to an MA organization that offers
a MA regional plan in all regions, but only if there was no national plan in the
previous year. The national bonus amount is 3% of the benchmark amount otherwise
applicable for each MA regional plan offered by the organization (the national plan
is comprised of regional plans offered in all regions). More than one national plan
could qualify for this bonus, if the plans were first offered in the same year.
However, there would be no regional bonus in a year that a national bonus was
awarded.
If no national plan was offered in a year, regional bonuses could be awarded.
To encourage participation in regions, the Secretary may increase the benchmark in
a region that offered no regional MA plans in the previous year. The Secretary will
determine the bonus amount which will be based on the bids submitted for each
qualifying plan and could vary across regions. Funding could be available for more
than one year.
Further, if a plan indicates that it will leave a region, the Secretary may increase
the benchmark, within limits for up to two years, in that region in order to retain and
attract new plans. In this situation, the plan exits must result in fewer than two
remaining regional organizations, and the percentage of MA enrollment in the region
must be less than the national percentage enrollment. Plans receiving an increased
payment for entering an area would not be able to receive an increased payment for
retention, in the following year. The increased payment amount would be the greater
of: (1) 3% of the benchmark amount in the region, or (2) an amount that makes the
following two ratios equal to each other — (a) the benchmark plus bonus amount
divided by the adjusted average per capita cost for the region, as risk adjusted and (b)
the weighted average of the benchmarks for all regions, divided by the average per
capita cost for the United States, as risk adjusted.
For payments from the stabilization fund, the Secretary must certify that the
there are adequate funds to cover payments and may limit enrollment in regional
plans receiving the bonus to ensure adequate funding.

¹⁷ If a plan’s bid is below the benchmark, then 75% of the savings is returned to the plan for
the beneficiary according to statutory limitations and 25% is returned to the government.
One-half of the government’s share of rebates, attributable to regional plans, will be used
to increase funding for the stabilization fund.

Risk Corridors
To further encourage plan participation in the regional program, Medicare will
initially share risk with MA regional plans in 2006 and 2007. If a plan’s costs fall
outside of a specified range or “risk corridor,” plans will assume only a portion of
the risk for unexpected high costs and plans will be required to return a portion of the
savings to Medicare for unexpected low costs. A plan’s allowable costs will be
measured against a target amount.¹⁸
If allowable costs are between 97% and 103% of the target amount for the plan
for the year, there will be no payment adjustment for the plan. If the Secretary
determines that a plan’s allowable costs are over 103% but no greater than 108% of
a specified target amount, the plan will receive an additional payment equal to 50%
of the difference between the allowable costs and 103% of the target amount. For
costs above 108% of the target amount, the Secretary will increase the payment by
the sum of 2.5% of the target and 80% of the difference between allowable costs and

108% of the target.

Conversely, if a regional plan’s allowable costs are less than 97% but greater
than or equal to 92% of the target amount, the Secretary will reduce the payments by
50% of the difference between 97% of the target amount and allowable costs. If
allowable costs are less than 92% of the target amount for the plan and year, the
Secretary will reduce the monthly payment by the sum of 2.5% of the target amount
and 80% of the difference between 92% of the target amount and such allowable
costs.
Essential Hospitals
The MMA also allows the Secretary to provide for an increased payment
amount for certain hospitals that provide inpatient hospital services to MA regional
plan enrollees. This provision was designed to aid MA organizations who offer
regional plans to meet the provider access requirement. To qualify for these
payments, an MA organization offering a plan must certify to the Secretary that the¹⁹
organization was unable to reach an agreement with an essential hospital to provide
inpatient hospital services to plan enrollees. Further, the hospital must prove that the
costs of serving the plan’s enrollees exceeds the Medicare Part A payment. In such

¹⁸ Allowable costs include the total amount of costs that an organization incurred in
providing required Parts A and B benefits for all enrollees under the plan in the region in
the year, reduced by the portion of such costs attributable to administrative expenses, plus
the total amount of costs the organization incurred in providing any supplemental benefits
as part of any required rebate. The target amount is the sum of total monthly payments
made to the organization for enrollees in the plan for the year for required Parts A and B
benefit, total MA monthly basic beneficiary premium, and the total amount of the rebates,
reduced by the amount of administrative expenses assumed in the bid.
¹⁹ An essential hospital is defined in this section as a general acute care hospital, as defined
in Section 1886(d) of the Social Security Act, that the Secretary determines must be part of
a regional plan’s network in order for the plan to meet the access requirements. 69 Federal
Register 46883, Aug. 3, 2004.

cases, the plan must also pay the hospital at least the Medicare Part A payment for
inpatient hospital services provided to enrollees. Beginning in 2006, there is to be
$25 million available (with an increased amount each year) for these payments.
Summary of Regional MA Plan Payments
A summary of payments made to regional MA plans is provided in Table 6.
The table includes the payment made to a plan for covered Medicare services,
depending on whether the plan’s bid or benchmark is higher. It also includes any
required enrollee basic beneficiary premium or rebate. The table provides an
explanation of how risk adjustment is applied to the different payments. Not
included, are any payments made to plans that choose to offer a Medicare
prescription drug program. Plans that provide Medicare prescription drug coverage
will receive an separate additional payment.
Table 6. Total Non-Drug Payments to MA Regional Plans for
Required Part A and B Services, Starting in 2006
Payment if MA statutoryPayment if MA region-
Payments,non-drug monthly bid isspecific non-drug monthly
including any plangreater than or equal to MAbenchmark is greater than
premium or rebate,region-specific non-drugMA statutory non-drug
and othermonthly benchmarkmonthly bid
adjustments (bid $ benchmark)(benchmark > bid)
CMS payment to aMA region-specific non-drugMA region-specific non-drug
plan for original FFSmonthly benchmarkmonthly bid (bid) adjusted for
Medicare benefits(benchmark) adjusted for thethe demographic and health
(other than hospicedemographic and health historyhistory characteristics of the
care), including an in-risk characteristics of theenrollee, and at the Secretary’s
network plan andenrollee, and at the Secretary’sdiscretion, intra-regional
total catastrophicdiscretion, intra-regionalvariation, subject to an
limitvariation, subject to an^aadditional constraint.^a
additional constraint.
Basic beneficiaryThe amount by which the $0
premium — enrolleeunadjusted bid exceeds the
payment to a plan unadjusted benchmark.
Enrollee rebate from$0The plan receives 75% of the
a planamount by which the adjusted
benchmark exceeds the^b
adjusted bid. The adjustment
is based on the region-wide
average of demographic and
health status risk factors (or
some other basis, at the
Secretary’s discretion). This
amount is reduced by any Part
B premium rebate offered by
the plan.

Payment if MA statutoryPayment if MA region-
Payments,non-drug monthly bid isspecific non-drug monthly
including any plangreater than or equal to MAbenchmark is greater than
premium or rebate,region-specific non-drugMA statutory non-drug
and othermonthly benchmarkmonthly bid
adjustments (bid $ benchmark)(benchmark > bid)
Government savings$0The government receives 25%
(government’s shareof amount by which adjusted
of rebate)benchmark exceeds the
adjusted bid. Adjustment
based on region-wide average
of demographic and health
status risk factors (or some
other basis, at the Secretary’s
discretion).
Stabilization fundSecretary may increaseSame as previous column,
paymentsbenchmark in region to promotealthough unlikely to occur if
plan entry and plan retention.bid was less than benchmark.
Risk Corridors — Additional payment will beSame as previous column.
CMS payment tomade to plan in 2006 and 2007
plan based on sharedif its cost exceed a specified risk
riskcorridor.
Risk corridors — Reduced payment will be madeSame as previous column.
government savingsto plan in 2006 and 2007 if its
based on shared riskcosts are below a specified risk
corridor.
Essential hospitalSecretary could allow forSame as previous column,
paymentsincreased payment to certainalthough unlikely to occur if
hospitals that prove costs forbid was less than benchmark.
serving plan exceed the
Medicare Part A payment.
^So^urce^{: T}^h^{e C}^oⁿ^g^r^es^sⁱ^on^{al R}^e^s^earch^Serv^{ice (C}^R^S^{) an}^aly^s^is^of^MMA^prov^is^ion^s^.
^a^.^T^h^{e Secretary}^m^u^s^t^adj^u^s^t^pay^m^en^ts^{to reg}ⁱ^on^{al MA}^plan^s^{to en}^s^u^{re th}^{at th}^{e s}^u^m^of^th^e^p^a^y^m^eⁿ^t
^f^r^om^C^M^{S an}^{d t}^h^e^B^a^sⁱ^c^B^eⁿ^e^fⁱ^ciary^P^r^em^iu^m^{do n}^o^{t ex}^{ceed th}^{e plan}^{bid, adj}^u^s^t^{ed f}^o^{r th}^e
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Payments for MA Plans and FFS Premiums
in Cost Containment Areas
Beginning in 2010, the Secretary will establish a program for the application of
comparative cost adjustment (CCA) in CCA areas. The six-year program will begin
January 1, 2010 and end December 31, 2015. The program is designed to test direct

competition among local MA plans, as well as competition between local MA plans
and fee-for-service Medicare.
This program will only occur in a limited number of statutorily qualifying areas
in the country. The Secretary will select CCA areas from among those Metropolitan
Statistical Areas (MSAs), or such similar areas as the Secretary recognizes, which
meet the following requirements for the relevant reference month: (1) at least 25%
of MA eligible individuals who reside in the MSA were enrolled in an MA local
plan; and (2) before the beginning of 2010, at least two MA local plans will be
offered by different organizations in the MSA during the annual coordinated election
period, each meeting the current law minimum enrollment requirements for a plan.
The total number of CCA areas will be the lesser of six MSAs or 25% of the number
of MSAs meeting the requirements. Additionally, an MA local area (a county) in an
MSA will be excluded from the CCA area, if, in 2010 it does not offer at least two
MA local plans, each offered by a different MA organization. If an MA local area
meets the requirement for 2010 it will continue to be included in the CCA area for
subsequent years, even if it no longer meets the requirements as long as there is at
least one MA local plan offered in the local area.
The benchmark for MA local plans in a CCA area will be calculated using a
formula that weights the FFS portion and a local plan portion, described below. The
FFS portion is based on the projected FFS amount for the area, with certain
adjustments for demographics and health status. The local plan portion is based on
a weighted average of bids for plans in the area.
For Medicare beneficiaries in FFS, Part B premiums in CCA areas will be
adjusted either up or down, depending on whether the FFS amount is more or less
than the CCA area benchmark. If the FFS amount is greater than the benchmark,
beneficiaries in traditional Medicare FFS will pay a higher Part B premium than other
FFS beneficiaries in non-CCA areas. If the FFS amount is less than the benchmark,
the Part B premium for FFS beneficiaries will be reduced by 75% of the difference.
These increases and decreases are subject to a 5% limit, that is, adjustments to Part
B premiums in CCA areas cannot exceed 5% of the national part B premium.
Beneficiaries in traditional Medicare FFS with incomes below 150% of poverty, who
qualify for low-income subsides under the Medicare prescription drug program, will
not have their Part B premium increased.
Calculation of the “Comparative Cost Adjustment (CCA)
Benchmark Amount
Beginning in 2010, the CCA non-drug monthly benchmark amount will be
calculated according to the following formula, for a CCA area for a month in a year.
CCA NonDrugMA localFFS−⎛⎞⎛⎞⎛⎞
⎜ ⎟ = ⎜ ⎟ + ⎜ ⎟

Monthly Benchmark Amountcomponentcomponent⎝⎠⎝⎠⎝⎠

1. The MA local component is calculated as follows, for an area in a year:

MA N o n F FS⎛ ⎞()
MA l o ca l Weighted average of⎛ ⎞ ⎜ ⎟
ma rk et sh a r e= ⎜ ⎟ × ⎜ ⎟
component th e MA p la n b i d s⎝ ⎠ ⎜ ⎟
pe rc e n t a ge⎝ ⎠
a. The weighted average²⁰ of the MA plan bids is equal to the sum (across
each of the MA local plans for the area) of the calculations for the
following formula:
(the accepted unadjusted MA statutory non-drug monthly bid) x
(number of individuals who reside in the area and who were enrolled
under the plan during the reference month for that year/total enrollees
for all MA plans for that area and year, for plans offered in the CCA
in the reference month).
b. The MA (non FFS) market share percentage is the proportion of MA
eligible individuals who, during the reference month, were enrolled in an
MA plan, or if greater, the same proportion determined on a national basis.

2. The FFS component is calculated as follows, for an area in a year:

FFS FFS are a spec if ic FFS= ⎛ ⎞ × ⎛ ⎞
component no n d r u g a mo un t mark et share⎝⎜ ⎠⎟ ⎝⎜ ⎠⎟
a. The FFS area-specific non-drug amount is the adjusted average per
capita cost, which is risk adjusted and also excludes direct graduate
medical education and includes the additional payments that would have
been made if Medicare beneficiaries entitled to benefits from facilities of
the Department of Veteran Affairs (VA) and the Department of Defense
(DOD) hadn’t used those services.
b. The FFS market share percentage is complement of the MA market
share percentage (1- MA market share percentage). It is the proportion of
MA eligible individuals who, during the reference month, were not
enrolled in an MA plan, or if greater, the same proportion determined on
a national basis.
Plans not offered in the previous year are excluded. The Secretary will compute
the benchmark for each CCA area before the beginning of each annual election
period, beginning in 2010 and continuing until the end of the program. The CCA
program will be phased-in over four years, so that in 2010 only one-fourth of the
benchmark will be based on the CCA benchmark and three-fourths of the benchmark

²⁰ In the case of an MA local plan that has only part of its service area located in the CCA
area, the MA organization offering the plan will submit a separate bid for the portion within
the CCA area.

will be calculated in the same manner as the benchmark for local MA plans. By

2013, the benchmark will be 100% CCA.

Payments to MA Plans for Part D Medicare
Prescription Drug Benefits
Beginning in June 2004, MA plans could begin offering Medicare-endorsed
drug discount cards, that were effective in July 2004, to their own enrollees through
the newly established drug discount card program under MMA. The cards can
provide discounts on drug prices even if the plan does not have a drug benefit, or if
the plan benefit cap is reached.
Beginning in 2006, MA plans may, but are not required to, offer Part D
prescription drug coverage. Furthermore, enrollment in Part D is voluntary and as
a result, beneficiaries who chose to enroll in MA plans will not be required to enroll
in an MA-Prescription drug (MA-PD) plan. However, the requirements placed on
MA plans could lead to a situation in which the only MA plans available in an area
are those offering prescription drug coverage. At least one plan offered by an MA
organization in an area is required to be an MA-PD plan, one that offers Part D
prescription drug coverage. Therefore, if only one organization offers an MA plan
in an area and it offers only one plan, that plan would have to be an MA-PD and the
beneficiary would have to enroll in Part D in order to enroll in an MA plan. In this
situation, a beneficiary who did not want to enroll in Part D would have to receive
Medicare services through traditional FFS Medicare. If an MA organization offers
more than one plan in an area, only one is required to provide Part D prescription
drug coverage. Each organization in an area is subject to this standard, so that even
if there are multiple plans in an area, each organization must offer at least one plan
that includes prescription drug coverage.
MA-PD plans will receive drug subsidies, for their enrollees. MA organizations
offering prescription drug coverage will receive a direct subsidy for each enrollee in
an MA-PD plan equal to the plan’s risk adjusted standardized bid amount (reduced
by the base beneficiary premium). The plan will also receive the reinsurance
payment amount²¹ for the federal share. Finally, an MA-PD plan will also receive
reimbursement for premium and cost-sharing reduction for its qualifying low-income
enrollees.
Beneficiaries who enroll in a plan offering Part D, must pay the standard Part
D premium. However, MA-PD plans offering a rebate, may use all or part of that
rebate as a credit toward the MA monthly prescription drug beneficiary premium.
The prescription drug programs offered through MA plans have the potential to
be very different than coverage offered to FFS beneficiaries, and as a result, costs

²¹ Assuming the standard drug package in 2006, plans will receive 80% of qualifying drug
expenditures between $250 and $2250 and 90% for qualifying expenditures over $5,100.

and/or enrollment in MA plans could be affected. Plans might be able to decrease
costs or increase services, thus becoming a more attractive benefit, for the following
reasons: (1) MA plans that currently offer prescription drug coverage will have more
experience working with Medicare beneficiaries and may be more efficient; (2) MA
plans could augment funds they already use for prescription drugs and offer more
generous coverage than the standard benefit; (3) MA plans could also transfer their
“old” prescription drug money to offer other services; and (4) MA plans cover Parts
A and B benefits and may therefore be able to realize some savings (which could be
passed onto the beneficiary), such as reduced hospitalization, from Medicare’s
prescription drug coverage. On the other hand, enrollment in MA plans could
decrease if beneficiaries move from MA plans to FFS, once they can receive
prescription drug coverage without the restrictions of a more limited provider
network.
Conclusion
The MMA made many substantial changes to the Medicare managed care
program, ranging from increasing funds to creating a new regional program. By
2010, a limited number of geographic areas will be selected to examine enhanced
competition among local MA plans and competition between private plans and FFS
Medicare. These changes are designed to increase private plan participation in
Medicare and thus provide more Medicare beneficiaries with an alternative to FFS
coverage. The M+C program had difficulty meeting similar goals and the MMA
changes were designed to address some of these problems. As the major program
changes in MA will not take effect until 2006, it will take a few years, at a minimum,
to determine the success of these changes. Part of the success will depend on
whether private plans are receptive to providing services in accordance with these
new statutes.