Payment to health maintenance organizations and the geographic factor - adjusted average per capita cost payment system for Medicare risk-based plans

Health Care Financing Review, Fall, 1990 by Louis F. Rossiter, Killard W. Adamache

Payment to health maintenance organizations and the geographic factor

Introduction

Medicare's adjusted average per capita cost (AAPCC) system for paying risk-based health maintenance organizations (HMOs) and competitive medical plans (CMPs) is perhaps one of the most complex and detailed capitation payment systems in the county. One could argue that the system has more than one-third million payment cells, because an individual beneficiary's payment-rate cell is determined by a cross classification of demographic factors, eligibility status, and county geographic location. Each item consists of numerous categories. Because there are more than 3,000 counties in the country, the county geographic factor contributes a great deal to the enormous number of payment rate cells.

Policymakers and the industry are currently debating the relative merits of increasing the complexity of the AAPCC system. An increase in complexity would better adjust payments, it is argued, for the inherent risks of an enrolled population (Lubitz, 1987; Rossiter et al., 1987; Ginsburg, 1987). However, the geographic adjustment factor in the AAPCC may require simplification before it is made more complex for three reasons:

* Year-to-year variation in AAPCC at the county-level is a source of doubt and confusion among managers of risked-based plans (Langwell et al., 1986 and 1987). Some of this variation is the result of using the relatively small numbers of beneficiaries in some counties to calculate the AAPCC (a point discussed later in this article). Combining counties to increase the number of beneficiaries used in the calculation would reduce yearly variations.

* Border crossing is a form of "gaming" the AAPCC system in which beneficiaries are enrolled in high-payment counties and treated in low-payment counties (Langwell et al., 1986). Using relatively small areas (counties) to distinguish the geographic adjustment facilitates border crossing.

* Comparability with the prospective payment system (PPS) is not a critical issue today, but may become more important as the risk-based system (RBS) grows. If the geographic factors for Part A payments under RBS and PPS are markedly different, as they are today, the tendency will arise to compare local area disparities in changes in the payment level for HMOs and hospitals, and the clamor will increase for changes to treat both the same.

One way to simplify the AAPCC is to abandon the county as the basis of the geographic adjustment factor and combine groups of counties in logical and meaningful ways. Reconfiguring the geographic adjustment would address all three reasons for AAPCC simplification and reduce the total number of cells. The annual process of attempting to explain, when the new rates are published, unexplainable variation in a particular county AAPCC or the reasons for one county having a markedly different AAPCC payment rate from another neighboring county would be greatly simplified, if for no other reason than the number of geographic areas for which comparisons are possible would be reduced.

The purpose of this article is to develop and propose a new definition of the AAPCC geographic adjustment factor. Two new definitions are examined--one for urban counties and once for rural counties. For urban counties, counties within a metropolitan statistical area (MSA) are combined, and a MSA-wide AAPCC is calculated. For rural counties, non-MSA counties within a State are combined to form a statewide rural AAPCC. Using this method to reconfigure counties matches the way in which the geographic areas for the PPS wage adjustment factor is currently defined. New AAPCCs for reconfigured areas are calculated and compared with the current county AAPCC system. In addition, we present descriptive statistics comparing counties within MSAs to their MSA-wide payment rates and analyzes "winner" and "loser" counties.

First we examine in more detail the complexity and the extent of geographic variation in the current AAPCC system. Then, we compare the current with the reconfigured geographic adjustment factor. Finally, we provide a brief policy analysis of the impact of reconfiguring the current county system.

Geographic adjustment factor

Payment and its components

The AAPCC is mandated by section 1976 of the Social Security Act as amended by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. The legislation defines the AAPCC as average Medicare program expenditures in a geographic area, making allowances for "... appropriate classes of members, based on age, disability status, and such other factors as the Secretary determines to be appropriate." By law, the AAPCC is suppose to be the best estimate of fee-for-service equivalent costs the Secretary of Health and Human Services can determine for defined geographic areas with adjustments for actuarial equivalent categories of individuals (Langwell and Hadley, 1986). The legislation does not require that counties be used in the definition of geographic area.