Academic journal article Health Care Financing Review

Including Hospice in Medicare Capitation Payments: Would It Save Money?

Academic journal article Health Care Financing Review

Including Hospice in Medicare Capitation Payments: Would It Save Money?

Article excerpt


Hospice services have been a covered benefit under Part A of Medicare since 1983. To qualify for hospice benefits, a beneficiary must have a life expectancy of 6 months or less, assuming the illness runs its normal course (as certified by a physician), and must voluntarily elect hospice care. Once a beneficiary elects hospice care, the beneficiary foregoes all curative treatment for the terminal illness and related conditions (though curative treatment is covered for unrelated conditions), and in return is eligible to receive a variety of palliative care services, including some not normally available under regular Medicare benefits. Hospice services are paid for on the basis of four prospective per diem rates, with each rate determined by the level of service and whether it is provided at home or on an inpatient basis. Hospice use has increased significantly in recent years, accounting for just 0.1 percent of Medicare expenditures in 1988 and 1.0 percent in 1998 (Health Care Financing Administration, 1989; 2000). About 20 percent of Medicare beneficiaries who died in 1998 used hospice services (U.S. General Accounting Office, 2000). Despite the growth in hospice use, many experts believe that access to hospice care under Medicare is limited, and that enrollment in hospice often occurs too late (Medicare Payment Advisory Commission, 1999; Christakis and Escarce, 1996; Rhymes, 1990; U.S. General Accounting Office, 2000; Virnig et al., 1999).

Under Medicare's risk contracting program, managed care plans are paid a capitated rate for providing all Medicare covered services except hospice services. Prior to 2000, capitated payment was based on the adjusted average per capita cost (AAPCC); beginning in 2000, payment is partly based on principal inpatient diagnosis cost groups (PIPDCGs), which incorporate diagnostic information from inpatient hospital stays (Pope et al., 2000). Payment for hospice services has always been made outside the capitation rate, using the same per diem rates applied in the FFS sector. Hospice costs were originally excluded from the AAPCC because at the time the hospice benefit was introduced into Medicare in 1983, there were few hospices and little financial data on which to base cost estimates. Hospice payment under managed care was addressed in the Balanced Budget Act of 1997, which specified that for Medicare+Choice enrollees electing hospice care, the Medicare+ Choice plan receives a reduced capitation payment to cover only additional benefits the plan provides outside the regular Medicare benefit package. Medicare-covered services are paid on a FFS basis and hospice care is paid using standard per diem rates.

Payment for hospice services outside the Medicare capitation rate produces financial incentives for HMOs to encourage their terminally ill enrollees to elect hospice care. The reason is that medical care expenses in the last months of life tend to be very high (Lubitz and Riley, 1993). Medicare's capitation rate is not adjusted for end-of-life care, so HMOs will usually lose money on enrollees who are near the end of life. If terminally ill enrollees elect (non-capitated) hospice care, HMOs can avoid incurring high terminal care expenses for these enrollees, and any associated losses.

Previous research has shown that HMO enrollment is associated with greater use of hospice services among terminally ill Medicare beneficiaries (Virnig et al., 2000; Virnig et al., 1999; Mentnech et al., 1999). With the growth in hospice care, Medicare's hospice payment policies have become a potentially important influence on patterns of end-of-life care in HMOs. Although the optimal level of hospice use is unknown, it is of policy interest to know how the use of hospice care differs in the HMO and FFS sectors, and what the financial implications are of carving out hospice services from capitated payments.

This article has two primary purposes: (1) to compare levels of hospice enrollment between Medicare's HMO and FFS sectors, and (2) to simulate the impact on Medicare expenditures of using a capitation-based method of paying for hospice care received by risk-based HMO enrollees. …

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