Medicare risk contracting. Lessons from an unsuccessful demonstration

G. R. Nycz, F. J. Wenzel, R. J. Freisinger and R. F. Lewis

The Tax Equity and Fiscal Responsibility Act of 1982 provided a full-risk Medicare capitation financing option for health maintenance organizations and competitive medical plans. Two rounds of demonstrations were conducted, followed by the publication of final regulations in January 1985. The first-round demonstration at Marshfield, Wis, was operational for 28 months. Thirty-seven percent of all resident beneficiaries enrolled. Aggregate losses exceeded $3 million (11.6% of revenue). Management implemented increasingly more stringent utilization review. Overall hospital utilization declined 261.7 days per 1000 from fiscal year 1981 to 1982; nonetheless, federal reimbursement was insufficient to meet program costs and the demonstration was terminated. The central reimbursement method used in Medicare risk contracting (adjusted average per capita cost) does not adequately control for enrollment selection, unmet medical need, or recent regional cost variations. Reimbursement set at 95% of estimated fee-for-service costs does not recognize, and in the long run will not support, an efficiently operating delivery system.