Page 33 - Management Theory 2023-2024 Edition

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Different Types of Medicare Programs

There were three major types of Medicare managed care plans (prior to 1998) based on the type of contract
held with an HCFA.

1. Risk Contract Medicare Program
2. Cost Contract Medicare Program
3. Prepayment Plan

1. Risk Contract Medicare Program: It is the most popular among the given options. Under this type of
Medicare program, an HCFA pays approximately 95% of the projected average annual per capita cost of
service (AAPCC) to the Medicare HMO in the form of the per capita payment system.

The AAPCC number is normally calculated by government actuaries by estimating the total cost of
medical services divided by the number of Medicare enrollees receiving services under the traditional
fee-for-service Medicare system. Under this method, the contracting HMO assumes the full financial
risks for all Medicare covered services. Depending on the county of service, the HMO may receive from
$367 to $780 per member per month (PMPM).

2. Cost Contract Medicare Program: In this type of Medicare program, the predetermined PMPM cost is
paid to the plan administrator based on the total estimated budget. At the end of the year, the
difference between actual costs and the monthly payments are reconciled. Medicare recipients can
obtain services outside the plan network without any restriction.

3. Healthcare Prepayment Plan: This plan is similar to cost-contract Medicare plans. The only difference is
that this plan only covers Part B Medicare services (outpatient services, durable medical equipment
services). Part A Medicare services such as inpatient hospital services, hospice care services, and home
healthcare related services are not covered under this plan.

4. Medicare Plus Choice: This plan was introduced in 1997, and also known as Medicare Part C. Under this
new payment plan, the plan sponsor is reimbursed at the rate of 95% of AAPCC.

Normally, Medicare beneficiaries prefer to join an HMO over traditional fee-for-service Medicare
programs. The main reason behind this is that in certain counties, the reimbursement rates are so high
that it may allow these HMOs to offer benefits beyond those benefits offered by traditional fee-for-
service Medicare plans.

A Medicare recipient who joins the HMO may receive benefits which include dental coverage,
eyeglasses reimbursement, hearing aids, reduced copayment fee structures, immunizations, health
educations and many more.

A Medicare recipient who joins a traditional fee-for-service Medicare plan is also required to purchase
an additional policy known as a MediGap policy in order to cover his out of pocket expenses. This policy
costs around $1000 per year. However, if the Medicare recipient joins the Medicare plan offers through
the HMO, he may not be required to purchase such a policy since Medicare-HMO provides services
without any additional fee-for-services. Therefore, if the recipient joins the Medicare HMO plan over the
traditional Medicare plan, he or she can save $1000.

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