NCPA - National Center for Policy Analysis

Seniors' Health Status And Managed Care Reimbursement

August 17, 1999

Medicare beneficiaries are a good judge of their own health. A recent study found that when asked, "In general, compared with other people your age, would you say your health is: excellent, very good, good, fair or poor?" beneficiaries' answers correlated with actual Medicare expenditures.

  • In the following year, expenditures for those rating their health as excellent averaged $1,627, while the average expenditure for those reporting poor health was $8,190, or five times as much.
  • However, Medicare payments per enrollee to managed care plans reflected very little difference between those who view their health as excellent and those who ranked their health as poor, and were projected to range from $3,632 to $3,846, respectively.
  • These results clearly show that Medicare drastically overpays Health Maintenance Organizations (HMOs) for those in excellent health, while substantially underpaying for those in poor health.

The reason is that the current Medicare capitation formula adjusts for demographic factors (age, sex and Medicaid status), but does not account for health. Beginning January 1, 2000, the Health Care Financing Administration will take the health of an enrollee into account when determining reimbursement rates, which is expected to reduce payments to HMOs by $11.2 billion over a five-year phase in period.

It is clear that profit-maximizing health care providers financially benefit from having healthier enrollees, while providers with sicker enrollees may be placed in financial jeopardy. Therefore, a single question about personal health may be a good predictor of the financial health of Medicare managed care plans.

Source: Arlene S. Bierman, "How Well Does a Single Question About Health Predict the Financial Health of Medicare Managed Care Plans?" Effective Clinical Practice, March/April 1999, and Medical Benefits, June 15, 1999.


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