Since 1982, Medicare has contracted with health maintenance organizations (HMOs) on a risk-contract
basis, paying plans based on Average Adjusted Per Capita Costs (AAPCCs). The calculation of the
AAPCCs has been criticized on several fronts. A congressional proposal encompassed in the failed 1995
Balanced Budget Act would have altered the formula by which Medicare determines payments to risk-
contracting HMOs. Many of its provisions were enacted through the 1997 Balanced Budget Act. This
paper models the effect of the earlier proposal on AAPCC rates and discusses the extent to which the
proposal and the reforms in the 1995 Balanced Budget Act would address shortcomings identified in the
original rate formula. (Inquiry 1998 Spring; 35(1): 62-77).
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