Summary: Enrollment of Medicare beneficiaries in health maintenance organizations (HMO) has soared in recent years, concentrated in some states and locales. This rapid growth in enrollment highlights the urgency of correcting Medicare's excessive payment rates to HMOs--particularly in certain areas. Likewise, enrollment stagnation elsewhere underscores the need to examine the causes of payment rate disparities among states and counties. Medicare's HMO payment method is plagued by three flaws. First, the rigidity of the formula-based fixed payment rate does not allow Medicare to capitalize on the competition among HMOs that, in the private market, leads to lower rates. Second, rate adjustment for differences in beneficiaries' health status are so imprecise that Medicare overpays HMOs that enroll beneficiaries in good health. Third, the reliance on a country's fee-for-service health care costs to establish a payment rate produces rates that vary considerably within market areas. GAO concludes that a sensible approach would be to pursue three promising strategies concurrently--foster price competition among HMOs, improve risk adjusters' accuracy, and allow for adjustments in the current formula to reflect market competition and HMO's local health care costs. The Health Care Financing Administration (HCFA) plans demonstration projects using competitive bidding and improved risk adjustment but results of a full-scale evaluation of these projects are years away. In the interim, HCFA should promptly gather and use valuable design and implementation data as it become available. HCFA's legislative authority to carry out these projects does not address managed care options explicitly, which raises questions about HCFA's authority to mandate HMO participation in the projects.
