This concept paper extends and develops an idea for an alternative methodology Medicare might use to determine capitation payments to health plans that participate in the Medicare+Choice program. The Direct Payment Method, first suggested by Greenwald et al. (1998), would shift the basis of payment away from the current approach, which builds on county-based Medicare fee-for-service (FFS) expenditures, to a national model that predicts expenditures for individual Medicare enrollees. Ideally, the Direct Payment Method would use detailed encounter data for Medicare+Choice enrollees, information on the cost of the services they received, and a health-based risk adjuster to predict expenditures for individual enrollees. When combined with geographic adjustments for input prices and local market conditions, the resulting payment would be independent of the extreme and highly problematic geographic variations in Medicare's FFS payments per enrollee.
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