Risk adjustment of Medicare capitation payments using the CMS-HCC model

Health Care Financing Review,  Summer, 2004  by Gregory C. Pope,  John Kautter,  Randall P. Ellis,  Arlene S. Ash,  John Z. Ayanian,  Lisa I. Iezzoni,  Melvin J. Ingber,  Jesse M. Levy,  John Robst

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Table 4 presents frequencies and mean annualized expenditures from the 5-percent FFS sample data for new enrollees and continuing enrollees. Continuing enrollees are defined as beneficiaries having 12 months of Parts A and B Medicare enrollment in the base year and at least 1 month in the prediction year. For female and male new enrollees age 65, mean annualized expenditures are $2,729 and $2,900, respectively, less than one-half of costs of continuing enrollees ($6,952 for female and 86,055 for male). For almost all new enrollees age 65, the original reason for Medicare entitlement is age. (18) In contrast, continuing enrollees age 65 were originally entitled to Medicare by disability, and hence are much more expensive. For other ages, mean expenditures of new and continuing enrollees are much more similar. To achieve sufficient sample sizes in all age ranges to calibrate the new enrollees model, we merged the new and continuing enrollees samples, which resulted in a sample size of 1,495,225 with mean expenditures of $5,184. For age 65, actual new enrollees dominate the combined sample, and the cost weight reflects their (low) relative costs. Continuing enrollees age 65 are included in the sample to calibrate the originally disabled coefficient for age 65. For other than age 65, the sample is dominated by continuing enrollees, but their costs appear to proxy actual new enrollee costs reasonably well for younger or older ages.

Beneficiaries for Whom Medicare is a Secondary Payer

Working aged beneficiaries are Medicare beneficiaries, age 65 or over, with private group health insurance coverage from their or their spouse's employer. By law, Medicare is a secondary payer for these beneficiaries. The primary private health plan must pay for medical expenses to the extent of its defined benefits. Only if Medicare covers services not covered by the private plan, or has more generous coverage (e.g., lower deductibles or copayments) for Medicare-covered services, is Medicare responsible for payment, and then only to the extent of the difference in coverage. Medicare expenditures for working aged beneficiaries are lower for this reason, as well as because working may be a proxy for better health. (19) Estimation of a separate model for the working aged is not feasible with the sample sizes available from the Medicare's 5-percent FFS sample. A simple adjustment to CMS--HCC model predictions is a multiplier that scales cost predictions to be lower for these beneficiaries.

We defined the working aged as beneficiaries otherwise satisfying the requirements of our 1999-2000 aged/disabled prospective modeling sample who had at least 1 month of working aged status in the prediction year (2000). There are 19,057 beneficiaries in our working aged sample, or about 1.4 percent as many individuals as in our aged/disabled sample. The mean annualized expenditures of the working aged are $966, less than one-fifth as much as for the aged/disabled community sample ($5,213). The CMS-HCC community model over-predicts mean working aged expenditures by a factor of 3.66. Essentially, we define the working aged multiplier as the ratio of mean actual to mean predicted expenditures for the working aged sample, where expenditures are predicted by the CMS-HCC community model. With an adjustment for beneficiaries who have a mixture of working aged and non-working-aged months in the payment year, the working aged multiplier is 0.215.