Summary

Rapid growth in the number of Medicare beneficiaries enrolled in health maintenance organizations (HMO) increases the urgency of correcting rate-setting flaws that undermine the cost-saving potential of managed care for Medicare. Medicare has paid HMOs much more than it would have paid traditionally more expensive fee-for-service providers. Two lessons can be learned from GAO's review of ways to fix Medicare's HMO capitation payments. First, a multipronged approach to rate setting makes sense. The large disparities in market conditions between states--from California to Maine--call for solutions keyed to market conditions. Second, with respect to achieving the promise of such initiatives, details matter. How these strategies are designed and implemented could mean the difference between success and failure. GAO believes that in the short term, the Health Care Financing Administration (HCFA) can overcome its capitation rate problem by introducing a better health status risk adjuster. HCFA should also promptly test competitive bidding and other promising approaches to setting HMO rates that reduce Medicare costs.