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Strengthening the Rural Health Infrastructure

New Provisions

Medicare Risk Contracts & Provider-Sponsored Organizations


Jean LeMasurier, Deputy Director, Plan and Provider Purchasing Policy Group, Center for Health Plans and Providers, Health Care Financing Administration (HCFA), U.S. Department of Health and Human Services (HHS), Baltimore, MD.


Greg R. Nycz, Director, Health Policy, Marshfield Clinic, Marshfield, WI.

Allen D. Feezor, Vice President, Insurance and Managed Care Programs, Pitt County Memorial Hospital/University Medical Center, Greenville, NC.

This session examined recent changes to the Medicare program, as stipulated in the Balanced Budget Act (BBA) of 1997, that could have a significant impact on rural areas.

HCFA's Jean LeMasurier said that in enacting these "structural" reforms, Congress hopes to modernize Medicare, preserve consumer choice, and stimulate further development of managed care options for Medicare beneficiaries in rural areas. In particular, the new Medicare+Choice program (a.k.a., Medicare Part C) adds a private fee-for-service Medicare option and significantly expands the various kinds of entities that may obtain Medicare risk contracts to include not only health maintenance organizations (HMOs), but also Preferred Provider Organizations (PPOs), and provider-sponsored organizations (PSOs). It also changes the formula for capitation payments to risk contractors, eliminating the current methodology based on adjusted average per capita costs (AAPCCs) and phasing in a blended rate formula (50:50 local and national prior adjusted payment rates) over 6 years with a minimum payment amount of $367 per member per month.

Greg Nycz of the Marshfield Clinic, which was one of the first rural-based health care organizations to participate in Medicare managed care demonstrations beginning in the late 1970's, said that the new $367 payment floor may constitute a meaningful increase in counties that historically had very low AAPCCs, (e.g., for those now below $337 per member per month in 1997, the new payment level would be more than HCFA's estimated costs of providing fee-for-service Medicare benefits in these areas).

However, he warns that even $367 per member per month (PMPM) may not be sufficient to succeed in offering a comprehensive managed care plan, noting that this is still only 76 percent of the nationwide per capita cost. Nycz said that for those already above the floor, blending the rates will provide payments above estimated costs in some counties, especially after the year 2000.

Commenting on how the BBA gives States the option to modify their existing geographic payment areas from countywide to multicounty or statewide, Nycz said such changes could further increase rural payments and help reduce the variations that often exist across county borders. Predicting a general period of "competitive unevenness" regarding the Medicare changes, Nycz highlighted that although fee-for-service Medigap insurers may use age rating, PSO/HMO risk contractors must use community rating. He predicted that the new payment rates will not be sufficient to overcome the age-rate advantage in many markets and encouraged State insurance commissioners to review regulations governing age-rate disparities.

Nycz also shared data demonstrating adverse selection in their Medicare supplemental plan and cautioned that rural-based PSOs may face similar difficulties, stressing the importance of implementing a risk adjuster in the payment methodology.

Allen Feezor began his comments by pointing out that Medicare and Medicaid payments represent a very high percentage of revenues to rural providers—as much as 75 percent to some institutional providers. He echoed LeMasurier's observations that rural providers may be interested in forming PSOs in order to eliminate the insurance "middle man," but warned that they should carefully consider the implications of getting into the insurance business. He suggested that it is important for policymakers to reconcile conflicting policy objectives, such as encouraging managed care growth, maximizing short-term savings, and enhancing rural care.

Feezor encouraged State officials not only to consider the implications on rural providers as they develop various rules/regulations regarding managed care and risk-bearing entities, but also to help rural providers understand the purpose of and various issues regarding solvency protections, consumer safeguards, and the collection and use of information.


U.S. Department of Health and Human Services, Health Care Financing Administration, Center for Health Plan Providers (CHPP), Medicaid Managed Care, Operational Policy Letter #55, OPL97.55, September 5, 1997.

Alecxih LMB, Lutzky S, Sevak P, Clayton G. Key Issues Affecting Accessibility to Medigap Insurance. Lewin Group, August 1997.

Nycz GR, Wenzel FJ, Freisinger RJ, Lewis RF. Medicare Risk Contracting-Lessons From An Unsuccessful Demonstration. Journal of the American Medical Association Feb. 1997;257(5):656-65.

Physician Payment Review Commission. Effect of Risk Adjustment on County Based Payment Rated, Top 50 Metropolitan Statistical Areas or State Rural Areas, 1997. Annual Report to Congress, pp. 98-99.

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