Setting Medicare Capitation Rates for the Frail and Elderly

As federal efforts to promote capitated delivery and financing arrangements in the Medicare program intensify, the method of calculating the capitation rate has come under increased scrutiny. The current method is based on the adjusted average per capita cost (AAPCC), an estimate of the Medicare cost of serving participants in risk-based programs if these participants were served instead by fee-for-service providers. This Note describes the method and data used to calculate and to update the AAPCC, reviews some of the limitations of the AAPCC methodology, notes some of the proposals that have been advanced for refining the AAPCC, discusses some alternative methods for setting capitation payment rates, considers promising avenues for future research, and describes an interim calculation of a revised adjuster to the AAPCC to reflect the higher costs of caring for the frail elderly.