Plain Economic Sense News Release

Medicare Response Can Add Millions To A Rural Community's Bottom Line

September 29, 1997

By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities

The 1997 Budget Act includes changes in Medicare payment rates for risk contracts (HMOs, other managed care organizations and certain medical savings acounts for Medicare) as a means of reducing the rural differential in Medicare payments. Congress shaved about $2 billion off of the projected growth of Medicare and redistributed it to reduce the rural differential and variation in Medicare payments. However, Congress also wanted to encourage managed care. As a result, some rural counties will see their Medicare risk contract payment rates jump $100 per month per Medicare recipient during the first year and increase 30 to 92 percent for Iowa counties between 1997 and 2004. The traditional "fee for service" Medicare payment rates in rural counties are projected to grow at a much slower 3.4 percent per year. So, rural counties that continue to use the traditional "fee for service" Medicare payment methods will miss the opportunity to receive the higher Medicare payment rates.

Currently the penetration of HMO-style risk contract organizations into rural county Medicare markets in Iowa and most other states is typically below 5 to 10 percent. Up to now, managed care organizations have avoided most rural Medicare markets. So, the Medicare budget policy change represents a huge opportunity for HMO risk-contract organizations, rural providers and rural Medicare recipients.

The policy change represents both a major economic growth opportunity and a threat for rural communities, rural Medicare recipients and providers. For example Decatur County, Iowa, has 8,100 people which ranks 90th among counties for population in the state. About 20 percent of the population in a typical rural county is Medicare eligible. In Decatur County there are 1,800 Medicare eligible people with a 1997 Medicare average rate of $273 per month.

According to simulation results made available on the world wide web by the Rural Policy Research Institute, the projected growth will be 75.3 percent between 1997 and 2004 for Medicare risk contract rates in Decatur County. However, also according to the RUPRI numbers, Medicare HMO penetration in Decatur County is only 6 percent. This means if the county were to capture 100 percent of its Medicare eligible population under a county risk contract, it would add about $4.4 million annually in additional county income when the policy is fully implemented. If the managed care penetration rate stays at 6 percent, the county benefit from increased rates under Medicare risk contracts would only add $270,000 annually in additional county income when the policy is fully implemented.

Many rural community leaders and providers will be in denial because they prefer the traditional "fee-for-service" system. But the question will be: "At what cost?" Urban-based managed care organizations will be jumping at the opportunity to sign up rural Medicare recipients in Decatur County for example and give them marginally better benefits to claim a portion of the $4.4 million additional profit available from Medicare. Rural providers are in a position to work with external Medicare managed care organizations and share in the $4.4 million additional reimbursement opportunity.

Alternatively, a cluster of rural community health providers might choose to work together and form their own Medicare managed care organization. This would allow 100 percent of the risk contract reimbursement benefit to be recouped for the local community.

However, if local providers decide to sit on their thumbs and do neither, they may find local Medicare patients going to the competition. The rural competition will not necessarily be based in the local county. If you are a managed care organization about to earn an extra $4 million in a small rural county, you can afford to pay your patients a little more for travel to urban or regional care centers. In this is the case, most of the benefits from removing the rural differential in Medicare reimbursement rates will not necessarily flow to rural communities or where the Medicare patients live.

In the final analysis, it is important for rural community leaders and rural health care providers to recognize that this is not a time for business as usual. The Medicare policy changes perhaps represents one of the most significant rural economic development opportunities in rural America during the coming few years. However, the degree to which a given rural community will benefit depends on local reaction, leadership and response. If nothing is done locally, fewer benefits likely will be retained in the local economic base.

For more information see RUPRI's analysis on its web page.