zations (HMOs) and competitive medical plans, all of which offer Medicare-covered benefits and the majority of which also offer coverage of cost sharing and supplemental services that replace Medigap policies. 1 Beneficiaries may choose to enroll in an HMO when they become eligible for Medicare or at other times that Medicare HMOs offer open enrollment. Plans must have at least one 30-day open season each year and may offer additional open enrollment periods. Furthermore, they must allow enrollment at other times to beneficiaries who have been disenrolled because of contract termination or nonrenewal by another managed care plan. Medicare beneficiaries can disenroll from their plans at the end of any month.

The Health Care Financing Administration's (HCFA's) managed care program has different types of contracts. Until recently, the only private health plans (risk contracts or risk plans) available to Medicare beneficiaries were HMOs, under which plans receive capitated payments for the beneficiaries whom they enroll. In general enrollees who select a risk plan are required to use the plan's network of providers and to agree to obtain all covered services through the plan, except in emergencies.

Capitation payments to the plans are based on an estimate of local fee-for-service costs and are established for each county at 95 percent of the adjusted average per capita cost (AAPCC) for Medicare fee-for-service beneficiaries. HCFA adjusts the AAPCC for enrollees' demographic characteristics such as age, sex, Medicaid eligibility, and residence in an institution such as a nursing home. The "risk adjustment" attempts to prevent HMOs from benefiting from favorable selection of health risk, which occurs when HMOs enroll beneficiaries who are healthier (and therefore less costly to care for) than those in the fee-for-service sector. In 1995 AAPCC monthly rates ranged from a low


Only beneficiaries who are eligible for Medicare because of old age or disability may choose to enroll in an HMO. Beneficiaries who are eligible for Medicare because of end-stage renal disease are not eligible unless they already were HMO enrollees at the time that they were certified to be eligible for Medicare because of end-stage renal disease. Also, beneficiaries choosing to receive care in a Medicare-certified hospice are not eligible for HMO enrollment.

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