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Rural Health Roundtable

Medicare: Establishing Fairness for Rural America

April 1997

Today, all working Americans contribute 2.9 percent of payroll to the Medicare Trust Fund during their working lives. Medicare beneficiaries, regardless of where they live, pay the same Part B premium. Although the payment into Medicare is equitable, beneficiaries can receive vastly different health care choices and benefits. Some Medicare bene-ficiaries have the choice of receiving their Medicare health care benefits either from Health Maintenance Organizations (HMOs) or from traditional fee-for-service (FFS) Medicare. Other beneficiaries only have one option-FFS. Beneficiaries who choose HMOs can receive additional benefits, such as prescription drug coverage, hearing aids, and other benefits not covered by traditional Medicare for little or no additional premium.

The Health Care Financing Administration (HCFA) contracts with HMOs to offer beneficiaries an alternative to traditional FFS Medicare, known as a risk contract. To pay HMO risk contractors, HCFA totals up all the FFS spending for Medicare Part A, which reflects hospital spending, and Part B for physician and outpatient services for every beneficiary in each county. This figure is known as the adjusted average per capita cost (AAPCC). Ninety-five percent of the AAPCC is paid to qualified HMO risk contractors, who use the payment to cover all traditional Medicare services and any additional benefits that they can afford to offer. Unfortunately, it is widely accepted that the current payment formula for Medicare risk contracts is flawed.

Variation in Payment

The variation in the AAPCC payment is extreme. In 1997, the county with the lowest AAPCC payment is Arthur, Nebraska, where an HMO would receive a monthly payment of $221. The county with the highest AAPCC payment is Richmond, New York, with a monthly payment of $767, approximately three and a half times greater than the lowest payment. Real AAPCC payment differences can be due in part to cost differences-Graduate Medical Education (GME), Indirect Medical Education (IME), Disproportionate Share Hospitals (DSH), and other factors. The key difference, however, is in the utilization of health care services that can separate the more than 3,500 counties into three distinct health care markets.

Three Distinct Health Care Markets

One type of market found in a handful of urban centers (Miami, New York City, Los Angeles, and the District of Columbia) contain a high number of health care providers, overcapacity of facilities, high patient demand, and little interest in controlling costs.

Another type of market, currently found in such cities as Minneapolis/St. Paul, Portland, and Seattle, is one that, over time, demonstrates efficiency in its practice and delivery of medicine with fewer wasteful practice patterns and a decline in unnecessary capacity. This market plan is economically sound, reduces overall medical costs, and reflects a lower than average AAPCC- a penalty for delivering cost-controlled, effective health care.

Rural America experiences the direct opposite of urban markets. Rural markets are under-utilized. These rural communities have few physicians and other health care providers, less Medigap coverage, and fewer health care facilities. It is not surprising that in these communities the per capita spending lags dramatically behind urban and efficient markets. Approximately one-third of all states (Idaho, Iowa, Maine, Minnesota, Montana, Nebraska, New Hampshire, New Mexico, North Dakota, Oregon, South Carolina, South Dakota, Vermont, Washington, Wisconsin, and Wyoming) receive less than the national average AAPCC, $467 in 1997; for many of the counties in these 16 states, the payment is well below 30 percent of the national average. There is a wide variation within states as well. Upstate New York, northern Michigan, and southern Ohio are just as low as rural areas elsewhere.

Geographic disparity has the greatest negative impact on Medicare beneficiaries. In areas with high payments from Medicare, beneficiaries get more and pay less out of pocket than those in low payment areas. In rural counties with low utilization of services, there are no choices of health plans. HMOs simply cannot offer a risk contract because the payment is too low to do so. Until the payment formula is changed, some Florida beneficiaries will continue to be offered an unlimited prescription drug benefit through an HMO, simply a dream for rural and efficient market beneficiaries. Why? Because there are no Medicare risk contract health plans available, let alone prescription drug benefits.

The Coalition for Fairness in Medicare and other groups and organizations believe a fair payment will help distribute more health care choices with equitable benefits to all beneficiaries while preserving the program for future generations. One strategy to accomplish this would be to set a payment floor to create a minimum monthly payment. This will help reduce the vari-a-tions in AAPCC payments so Medicare risk contractors in all counties can attract beneficiaries and provide high-quality, efficient Medicare coverage. A payment floor will ensure that all AAPCC payments, particularly in low AAPCC areas, will cover comprehensive benefits that have historically been the main selling point of HMOs-extra benefits such as eye glasses, dental coverage, hearing aids, lower out-of-pocket payments, prescription drugs, and preventative care. Coupled with mechanisms to further reduce variation over time (i.e., blended rates), the Medicare program will become more equitable for all beneficiaries.

For additional information about the Coalition and its efforts, contact: