Improving the method Medicare uses to pay health maintenance organizations and competitive medical plans

by Joseph P. Newhouse

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This paper, the text of a statement before the Subcommittee on Health, U.S. House of Representatives Committee on Ways and Means, March 10, 1988, discusses improving the method Medicare uses to pay health maintenance organizations (HMOs) and competitive medical plans. The author outlines inadequacies in the current payment method--the adjusted average per capita cost (AAPCC)--which is able to explain only about 1 percent of the variations in health care expenditures. In order to achieve an estimated 15 to 20 percent improvement in predictions of cost variations, the author recommends adding adjusters to the formula. The most promising short-term strategy is to introduce measures of utilization into the formula; the most promising step for the mid-term would be to base only a portion of the HMO's reimbursement on an improved AAPCC and base the remainder on the nature of the actual services given an individual.

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