New opportunities: Medicare changes to expand disease management

Careful planning now may pay off big down the road

Medicare’s decision to restructure payment rates for risk plans may be bad news for health maintenance organizations but good news for the field of disease management, experts say. The catch? Once again, disease managers will be expected to do more with less.

At issue is the Baltimore-based Health Care Financing Administra-tion’s (HCFA) recently enacted plan to alter the adjusted average per capita cost (AAPCC) — the rate at which it pays Medicare risk plans.

The change was based on HCFA’s determination, based on its own studies, that HMOs enroll healthier than average Medicare members but receive payments based on average health status, resulting in overpayment of 10% to 15%. Under the new rules, which went into effect Jan. 1, 1998, payment rates are based on national trends less 0.8% this year and 0.5% in the years 1999 through 2002. That means that in 1998 HCFA will pay roughly 94.2% of the AAPCC, down from 95% in 1997. "And this downward trend will continue over a period of years," says Earl L. Whitney, FSA, consulting actuary with Milliman & Robertson’s Radnor, PA, office.

Changing the AAPCC represents another attempt by the federal government to rein in out-of-control Medicare costs, says Bruce Kobritz, MBA, president of Crossroads Capital Partners, a health care consulting and management firm in Newport Beach, CA. "There’s a looming deficit in the system, and the shortfall is only expected to grow," he says. "So the government basically only has a few choices: They can raise revenue or cut benefits, neither of which is popular, or they can make an effort to do things in a more cost-effective way. And the more you have that cost focus, you’re going to have a real opportunity to expand disease management initiatives for the Medicare risk population."

The new rules combine local payment rates with adjusted national payment rates to get the actual rate paid to HMOs. The blend, or combination, for 1998 is 90% local and 10% national. The local component will drop by 8% annually until the blend reaches 50% local and 50% national in the year 2003, says Whitney. The effect of blending is a significant reduction in payment rates for many areas now highly penetrated by Medicare-risk HMOs. HMOs in urban areas may receive an effective rate as low as 80% of their previous AAPCC, but it opens new opportunities for rural areas, says Whitney.

"There’s a minimum AAPCC combined Part A and Part B of $367 for 1998. This is a significant increase for certain rural areas, creating opportunities which previously didn’t exist," he says. "Rural areas are looking a lot more attractive than they have in the past for Medicare HMOs. For some counties, $367 represents an amount greater than 100% of estimated fee-for-service payments in the county. It means that in some counties a Medicare HMO could essentially enroll members, provide no medical management, and still make a profit. This is the time for someone to take advantage and move into these areas."

Cindy Klug, MST, CHES, director of the regional chronic care program at Providence Health Systems in Portland, OR, says that because Providence covers an area with "a very low rate," she’s excited about the change. But she’s skeptical about how much the new rules will really encourage the formation of rural Medicare HMOs. She says that in Oregon, HMOs have historically pulled out of rural markets. "They were seeing a much sicker population and having terrible access to services. Managing the population within the cost constraints can be very difficult. It’s not just the insurance coverage; it’s the whole health care delivery system."

Calculation of base rates biggest change

Perhaps one of the biggest changes under the Balanced Budget Act of 1997 is the way HCFA calculates base payments, says Whitney. "Currently, HCFA bases rates on age, gender, and institutional status. Starting in the year 2000, that’s out and HCFA begins calculating rates based on health status. HMOs will get more money for enrolling sicker members. It has the potential to not only change the way HMOs attract members but to crush this whole industry," he says.

The move to risk adjusted payments alters the playing field for Medicare HMOs, says Whitney. "It reduces any financial benefits HMOs achieve from selecting healthy members. HMOs that have succeeded based on positive selection may find it difficult to continue to make a profit when risk adjusters are added to the payment method."

Whitney predicts that disease management is going to take on even more importance under the new rules. "Many HMOs have disease management departments and think they’re doing OK without really testing themselves," he says. "Disease managers are going to be very important to helping Medicare HMOs survive under the new rules. You’ll have to do your job and do it right."

To prepare for this more stringent environment, Whitney suggests identifying patient protocols against which to benchmark. "Your disease management will have to be state of the art. Now more than ever you’ll need to eliminate unnecessary care and keep all necessary care. If you just cut, cut, cut in response to lower reimbursement rates, patient care will suffer."

David Shulkin, MD, chief medical officer and chief quality officer with the University of Pennsylvania Health System in Philadelphia doesn’t anticipate major changes in response to the new rules. "The only way I can look at it is, we’re doing this to establish the right way to practice medicine," he says. "It doesn’t matter to us what the reimbursement is. There’s scientific evidence that there’s a best way of managing a diabetic, for instance, and that’s the only way we’re going to approach it."

Nevertheless, Shulkin believes the new AAPCC rules will affect how other systems and health plans provide care. "If you’re in this to make money for shareholders, and the government lowers the AAPCC, that suggests that there’s even more reason to intensify your disease management efforts for your sickest and most resource-intensive patients." For example, says Shulkin, if there’s less money available in the system, a plan is less likely to focus on diabetes management as opposed to congestive heart failure (CHF). "Diabetes turns out to be much more of an ambulatory-based condition, one where people don’t consume the type of short-term resources that CHF and oncology patients do."

[For more information on Medicare risk, contact the following:

Cindy Klug, MST, CHES, director, regional chronic care program, 4805 N.E. Gleason, Providence Health Systems, Portland, OR. Telephone: (503) 215-3729.

Bruce Kobritz, MBA, president , Crossroads Capital Partners, 1600 Dove St., Suite 300, Newport Beach, CA 92660. Telephone: (714) 261-1600, Ext. 308.

David Shulkin, MD, chief medical officer and chief quality officer, University of Pennsylvania Health System, 3400 Spruce St., Philadelphia, PA 19104. Telephone: (215) 662-2271.

Earl L. Whitney, FSA, consulting actuary, Milliman & Robertson, 259 Radnor Chester Rd., Suite 300, Radnor, PA 19087. Telephone: (610) 687-5644.

Whitney is co-author of a Milliman & Robertson report titled "Implications of the Balanced Budget Act of 1997 on Medicare Risk Contractors." To receive a copy of this report, contact Milliman & Robertson’s representative, Dan Burris with Donley Communications, at (212) 751-6126.]