Federal Employees' Health Program: Reasons Why HMOs Withdrew in 1999 and
2000 (Letter Report, 05/02/2000, GAO/GGD-00-100).

Pursuant to a congressional request, GAO provided information on the
withdrawal of health maintenance organizations (HMO) from the Federal
Employees' Health Benefits Program (FEHBP), focusing on: (1) changes in
the number of HMOs participating in FEHBP from plan years 1994 to 2000;
(2) reasons why HMOs withdrew from FEHBP in plan years 1999 and 2000;
and (3) FEHBP enrollment experiences for HMOs that withdrew from the
program in 2000.

GAO noted that: (1) for plan years 1999 and 2000, 136 HMOs withdrew from
FEHBP; (2) while a limited number of new plans entered FEHBP in 1999 and
2000, the withdrawals, combined with plans that either merged,
consolidated service areas, or left service areas reduced the number of
HMOs participating in FEHBP from 476 in 1996 to 277 HMOs in 2000; (3)
the growth or decline in the number of HMOs participating in FEHBP was
not always the result of plans entering or withdrawing from the program;
(4) some HMOs added new service areas, while others split their existing
service areas; (5) in other cases, HMOs merged, consolidated service
areas, or left service areas; (6) in any event, about 64,000 of the 4.1
million FEHBP enrollees were affected by HMOs' decisions to withdraw in
2000; (7) according to Office of Personnel Management (OPM) officials
and representatives from HMOs that left FEHBP, the factors most
frequently cited for HMO withdrawals from the program in plan years 1999
and 2000 were insufficient enrollments, unpredictable plan
utilization/excessive risk, and noncompetitive premium rates; (8) in
addition to citing these as the major factors influencing plans'
decisions to withdraw, these officials and representatives noted that
oftentimes it was a combination of these factors, rather than a single
factor, that caused a plan's withdrawal; (9) other factors that plan
representatives cited for withdrawing from FEHBP included mergers,
federal mandates to provide selected benefits, OPM's administrative
requirements, and saturated market areas; (10) however, plan
representatives and others with whom GAO spoke generally agreed that
mandates and administrative requirements would not have been major
factors contributing to a plan's decision to withdraw; (11) an official
from the Employee Benefit Research Institute told GAO that recent plan
withdrawals from FEHBP represented a market correction in that plans
with low FEHBP enrollments in areas dominated by large plans concluded
that they could not compete effectively and therefore withdrew; (12) OPM
plan enrollment information showed that 46 of the 62 HMOs that withdrew
from FEHBP in 2000 actually increased enrollments between 1998 and 1999,
12 plans lost enrollment between 1998 and 1999, and 4 plans only had
enrollment data for 1 year; (13) from 1998 to 1999, of the 46 HMOs that
increased enrollments, these increases numbered less than 100 enrollees
for 26 of these HMOs; and (14) in addition, of the 62 plans that
withdrew in 2000, 26 had fewer than 300 enrollees.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-00-100
     TITLE:  Federal Employees' Health Program: Reasons Why HMOs
	     Withdrew in 1999 and 2000
      DATE:  05/02/2000
   SUBJECT:  Federal employees
	     Health insurance
	     Health maintenance organizations
	     Corporate mergers
	     Insurance premiums
	     Employee medical benefits
	     Health resources utilization
IDENTIFIER:  Federal Employees Health Benefits Program

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United States General Accounting Office
GAO

Report to the Chairman

Subcommittee on Civil Service

Committee on Government Reform

House of Representatives

May 2000

GAO/GGD-00-100

FEDERAL EMPLOYEES' HEALTH PROGRAM
Reasons Why HMOs Withdrew in 1999

and 2000

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Contents
Page 161GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000
Letter                                                                      1
                                                                             
Appendix I                                                                 18
Objectives, Scope, and
Methodology
                           Objectives                                      18
                           Scope and Methodology                           18
                                                                             
Appendix II                                                                20
Comments From the Office
of Personnel Management
                                                                             
Appendix III                                                               21
GAO Contacts and Staff
Acknowledgments
                                                                             
Tables                     Table 1:  HMOs Reducing and Expanding            8
                           Service Areas (1994-2000)
                           Table 2:  Factors Contributing to                9
                           HMOs' Withdrawal Decisions for Plan
                           Years 1999 and 2000
                           Table 3:  Changes in Enrollment From            14
                           1998 to 1999 for Plans Terminating
                           FEHBP Participation
                                                                             
Figures                    Figure 1:  Number of HMOs                        2
                           Participating in FEHBP at the
                           Beginning of the Plan Year
                           Figure 2:  Number of HMOs                        5
                           Participating in FEHBP (1994-2000)
                           Figure 3:  FEHBP Plan Additions (1994-           6
                           2000)
                           Figure 4:  FEHBP Plan Reductions (1994-          7
                           2000)
                                                                             

Abbreviations

AAHP      American Association of Health Plans
EBRI      Employee Benefit Research Institute
FEHBP     Federal Employees' Health Benefits
Program
HIAA      Health Insurance Association of America
HMO       health maintenance organization
OIG       Office of the Inspector General
OPM       Office of Personnel Management

B-284492

Page 15GAO/GGD-00-100 Reasons Why HMOs Withdrew in
1999 and 2000
     B-284492

May 2, 2000

The Honorable Joe Scarborough
Chairman, Subcommittee on Civil Service
Committee on Government Reform
House of Representatives
 
Dear Mr. Chairman:

This report responds to your request for
information on the withdrawal of health
maintenance organizations (HMO) from the Federal
Employees' Health Benefits Program (FEHBP). Our
specific objectives were to identify (1) changes
in the number of HMOs participating in FEHBP from
plan years 1994 to 2000, (2) reasons why HMOs
withdrew from FEHBP in plan years 1999 and 2000,
and (3) FEHBP enrollment experiences for HMOs that
withdrew from the program in 2000.1

To identify changes in the number of HMOs entering
or leaving FEHBP in recent years, we reviewed the
Office of Personnel Management's (OPM) annual
FEHBP open season guides and benefits
administration letters.

To identify why HMOs withdrew from FEHBP in 1999,
we relied on an OPM analysis of the survey
responses it received from 40 of the 74 HMOs that
left the program. For 36 of the 62 HMOs that left
the program in 2000, we obtained information on
their reasons for withdrawing. In most cases,
these HMOs gave their reasons for leaving in
letters to OPM; in other cases, we followed up
with HMOs to clarify their reasons. We also (1)
interviewed officials from OPM and organizations
who were familiar with the national HMO
environment and (2) reviewed recent articles and
publications on changes in the national HMO
setting. We did not attempt to identify additional
documentation from HMOs to validate their reasons
for withdrawing from FEHBP.

To identify recent enrollment experiences for
plans withdrawing from FEHBP in 2000, we obtained
and analyzed OPM enrollment data for these plans.
(App. I contains a detailed description of our
objectives, scope, and methodology.)

We requested written comments on a draft of this
report from OPM. These comments are discussed at
the end of this letter and reprinted in appendix
II. We performed our work from August 1999 to
March 2000 in accordance with generally accepted
government auditing standards.

Results in Brief
For plan years 1999 and 2000, 136 HMOs withdrew
from FEHBP-74 in 1999 and 62 in 2000. While a
limited number of new plans entered FEHBP in 1999
and 2000, the withdrawals, combined with plans
that either merged, consolidated service areas, or
left service areas reduced the number of HMOs
participating in FEHBP from 476 in 1996 to 277
HMOs in 2000. (See fig. 1.)

Figure 1:  Number of HMOs Participating in FEHBP
at the Beginning of the Plan Year

Source: GAO analysis of OPM data.

The growth or decline in the number of HMOs
participating in FEHBP was not always the result
of plans entering or withdrawing from the program.
Some HMOs added new service areas, while others
split their existing service areas. In other
cases, HMOs merged, consolidated service areas, or
left service areas. In any event, about 64,000 (or
less than 2 percent) of the 4.1 million FEHBP
enrollees were affected by HMOs' decisions to
withdraw in 2000.

According to OPM officials and representatives
from HMOs that left FEHBP, the factors most
frequently cited for HMO withdrawals from the
program in plan years 1999 and 2000 were
insufficient enrollments, unpredictable plan
utilization/excessive risk, and noncompetitive
premium rates. In addition to citing these as the
major factors influencing plans' decisions to
withdraw, these officials and representatives
noted that oftentimes it was a combination of
these factors, rather than a single factor, that
caused a plan's withdrawal. Other factors that
plan representatives cited for withdrawing from
FEHBP included mergers, federal mandates to
provide selected benefits, OPM's administrative
requirements, and saturated market areas. However,
plan representatives and others with whom we spoke
generally agreed that, in most cases, mandates and
administrative requirements would not have been
major factors contributing to a plan's decision to
withdraw.

According to officials from the Health Insurance
Association of America (HIAA) and the American
Association of Health Plans (AAHP), an adequate
enrollment base is perhaps one of the most
important requirements necessary for plans to
sustain their operations. An official from the
Employee Benefit Research Institute (EBRI) told us
that recent plan withdrawals from FEHBP, in all
likelihood, represented a market correction in
that plans with low FEHBP enrollments in areas
dominated by large plans concluded that they could
not compete effectively and therefore withdrew.

OPM plan enrollment information showed that 46 of
the 62 HMOs that withdrew from FEHBP in 2000
actually increased enrollments between 1998 and
1999, 12 plans lost enrollment between 1998 and
1999, and 4 plans only had enrollment data for 1
year. From 1998 to 1999, of the 46 HMOs that
increased enrollments, these increases numbered
less than 100 enrollees for 26 of these HMOs. In
addition, of the 62 plans that withdrew in 2000,
26 had fewer than 300 enrollees. An OPM official
told us that they have the authority to terminate
a plan's participation in FEHBP if it has less
than 300 enrollees. However, OPM has seldom
exercised this authority.

Background
FEHBP is the largest employer-sponsored health
insurance program offering the widest selection of
health plans in the United States. Over 4.1
million enrollees, covering about 9 million
federal civil service employees, annuitants, and
their dependents, participated in FEHBP in 1999.
For fiscal year 2000, the cost of this program is
estimated at $20 billion.

Under FEHBP, enrollees can choose three basic
types of health plans: fee-for-service, HMOs, and
point-of-service plans. Fee-for-service plans are
traditional types of insurance in which the health
plan will either reimburse the enrollee or pay the
medical provider directly for each covered medical
expense. Upon receiving medical treatment,
enrollees usually pay a deductible and coinsurance
or a copayment. Although few in number, fee-for-
service plans cover about 70 percent of the FEHBP
enrollees.

HMOs are health plans that provide care through a
network of physicians and hospitals in particular
geographic or service areas. HMOs provide a
comprehensive set of services as long as enrollees
use doctors and hospitals affiliated with the HMO.
Enrollees pay specified copayments for primary
care and specialist visits. Point-of-service plans
are organizations in which enrollees may receive
services either from providers who are affiliated
with HMOs or from nonaffiliated providers.
Enrollees may incur substantial additional costs
in the form of deductibles or copayments when they
use nonaffiliated providers.

Number of HMOs Participating in FEHBP Declined
Since 1997
The number of HMOs participating in FEHBP
increased from 369 in 1994 to 476 in 1996. 2 Since
then, the number of HMOs participating in FEHBP
has declined steadily to 277 in 2000. 3 Although
74 HMOs left the program in 1999 and 62 left in
2000, the number of HMOs participating in FEHBP in
any particular year also depends on other factors,
such as service area consolidations or mergers
among plans (plan reductions) or 2 plans covering
a service area previously covered by 1 plan (plan
additions). Figure 2 shows the number of HMOs
participating in FEHBP as well as the number of
plan additions and reductions in each year from
1994 to 2000.

Figure 2:  Number of HMOs Participating in FEHBP
(1994-2000)

Source: GAO analysis of OPM data.

Additions to the number of HMOs participating in
FEHBP resulted from new HMOs deciding to
participate and from existing HMOs either
splitting a service area or designating an
additional service area with a different premium
rate structure. As shown in figure 3, the number
of new plans entering FEHBP has declined each year
since 1996, with substantially fewer, 13, added
during the last 2 years.

Figure 3:  FEHBP Plan Additions (1994-2000)

Source: GAO analysis of OPM data.

Reductions in the number of participating HMOs are
shown in figure 4. These reductions resulted from
HMO withdrawals from FEHBP, mergers, service area
consolidations, and HMOs deciding to terminate a
plan in one area while continuing to operate
another plan in an adjoining area. In the latter
case, each plan-the one leaving and the one
staying-had its own premium rate structure.

Figure 4:  FEHBP Plan Reductions (1994-2000)

Source: GAO analysis of OPM data.

Most of the HMOs that withdrew from FEHBP
communicated their intentions to leave the program
at about the same time that their applications for
participation in the next contract year were due.
Some plans, however, did not notify OPM of their
decisions to withdraw from the program until after
OPM had published its annual program guide.

While figures 3 and 4 show the number of additions
and reductions in the number of HMOs since 1994,
several HMOs either expanded or reduced their
service area coverage without affecting the total
number of HMOs participating in FEHBP. Table 1
shows the numbers of HMOs that either expanded or
reduced their service areas from 1994 to 2000.
Enrollees living in affected areas would have
either greater or fewer choices among HMOs,
depending on whether areas of coverage were
expanding or contracting.

Table 1:  HMOs Reducing and Expanding Service
Areas (1994-2000)

Plan year                          Service area
                               Reductio  Expansions
                                    ns
1994                                 4         35
1995                                 8         35
1996                                 4         48
1997                                 6         67
1998                                12         45
1999                                34          9
2000                                23         11
Source: GAO analysis of OPM information.

Regarding the recent decline in the number of HMOs
participating in FEHBP, an official from EBRI told
us that factors contributing to the turnover in
FEHBP were, in all likelihood, indicative of the
managed care market in general. This official
indicated that some smaller plans may not be
getting a sufficient mix of healthy and less than
healthy enrollees, and that the number of HMOs
participating in FEHBP is declining because of a
natural weeding out of those that cannot compete
in the marketplace. OPM, in its survey findings
for plans that withdrew in 1999, stated that the
HMO industry as a whole had probably expanded
beyond a point at which it could sustain itself
and an inevitable retrenchment was occurring.

Factors Influencing Plan Withdrawals in Plan Years
1999 and 2000
In 1999, 74 HMOs withdrew from FEHBP; in 2000, 62
withdrew. Our analysis of information that (1) OPM
obtained from 40 HMOs that withdrew in 1999 and
(2) we and OPM obtained on 36 HMOs that withdrew
in 2000 showed that insufficient enrollment,
unpredictable utilization/excessive risk, and
noncompetitive premiums were the reasons most
often cited for HMOs' withdrawal from FEHBP. Table
2 shows our categorizations and the frequency of
the reasons HMOs gave for their withdrawal. Some
plans provided multiple reasons for leaving the
program.

Table 2:  Factors Contributing to HMOs' Withdrawal
Decisions for Plan Years 1999 and 2000
Reasons for withdrawal (plans could          Plan
provide multiple reasons)                 years
                                       1999   2000
Insufficient enrollment                  16     18
Unpredictable utilization/Excessive      15     18
risk
Noncompetitive premiums                  17     12
HMO mergers                               9      8
Administrative requirements              13      7
FEHBP benefit requirements                5      6
Market area saturation                    2      2
Note: OPM obtained information on reasons for
withdrawal from 40 plans in 1999. For 2000, we
obtained withdrawal information from 36 plans,
either from information these plans provided to
OPM or by contacting plan representatives.
Source: GAO analysis of information provided by
HMOs.

OPM and plan officials told us that the above
reasons for withdrawal, oftentimes in combination,
either had affected or were expected to adversely
affect a plan's "loss ratio" and therefore a
plan's ability to continue to provide healthcare
benefits. Loss ratios are relationships between
premiums collected and plan expenses. According to
national organizations that study HMO issues, the
profitability of HMOs has steadily declined since
1994 to the point that many HMOs were showing
losses. According to AAHP officials, HMOs are no
longer willing to take chances or to be aggressive
in their marketing plans unless plan executives
are very confident that their plans will succeed.

Insufficient Enrollments
Eighteen of the 36 HMOs on which we obtained
information about their decision to withdraw from
FEHBP in 2000 cited insufficient enrollment as a
reason. Of the 40 HMOs that responded to OPM's
survey of plans withdrawing in 1999, 16 cited
insufficient enrollment as a reason for
withdrawal. OPM's analysis also indicated that
many of the HMOs that had joined FEHBP in recent
years were the ones that cited low enrollments as
a reason for withdrawal.

According to OPM officials, OPM has the authority
to terminate a plan's participation in FEHBP if it
has less than 300 enrollees, although this
authority has seldom been exercised. Of the 62
HMOs that withdrew in 2000, 26 plans had fewer
than 300 enrollees, and 17 of the 26 plans had
participated in FEHBP for 3 years or less. Plan
representatives told us that plan enrollment is
one of the most critical components of a plan's
overall profitability.

HIAA and AAHP officials told us that insufficient
enrollments are of a particular concern,
especially for the typical small plan. They added
that for whatever reasons, some of the smaller
HMOs in FEHBP apparently have been unable either
to increase their enrollment base or to sustain a
meaningful enrollment. When less than expected
enrollment increases or declining enrollments fail
to keep pace with utilization, these officials
said that the only prudent decision for a plan is
to withdraw from FEHBP. These officials believed
that over the years, FEHBP has suffered from a
"small case syndrome" with a large number of
smaller plans moving in and out of the program.

Unpredictable Utilization/Excessive Risk
For plan year 2000, 18 of the 36 HMOs providing
reasons for withdrawal cited utilization or risk
factors as reasons for their withdrawals. Over
half (10 of 18) of the HMOs that cited
insufficient enrollments as a reason for
withdrawing from FEHBP also cited unpredictable
utilization/excessive risk as a reason. For 1999,
15 of the 40 plans that withdrew cited
unpredictable utilization/excessive risk as a
reason for withdrawal.

On the basis of personal characteristics (age,
gender, and number of dependents) of a plan's
enrollment population, plans expect to incur
medical and administrative expenses in amounts
that will be covered by premiums collected. If
medical expenses are greater than expected, either
because medical services are used more frequently
than expected, innovative medical techniques come
to market, or medical costs increase, plan
revenues will be insufficient to cover increased
costs associated with unexpected utilization.

AAHP officials provided us with an example of
unpredictable utilization involving the premature
birth of triplets to an enrollee who belonged to a
smaller FEHBP plan. In this example, each baby had
required extensive amounts of high-cost intensive
care that had not been expected. Therefore, it was
difficult to absorb the unanticipated cost of this
care within the plan's rate structure. An OPM
official told us that on the basis of
characteristics of a plan's enrollment population
and past experiences, plans are willing to accept
only a certain amount of financial risk. If plans
are operating on thin profit margins with
declining enrollment bases or in geographic areas
where they cannot raise premiums because they are
competing with other plans, it is likely that they
would have to withdraw from the program because of
their inability to remain profitable.

     AAHP officials told us that plans develop
their premium rates on the basis of an expected
enrollment base and predicted plan utilization
while maintaining compliance with OPM
requirements. Each group of enrollees covered by
an HMO is expected to be self-supporting in that a
covered group that uses less services would not be
expected to support other covered groups that have
experienced higher-than-expected utilization
rates.

     OPM pays HMOs a fixed payment for each
federal enrollee and generally bases its payment
on the rates the plan charges for enrollees in the
two largest nonfederal employer-sponsored groups
in that community or service area. OPM refers to
this procedure under FEHBP as "community rating."

Noncompetitive Premiums
For HMOs withdrawing from FEHBP in 2000, 12 of the
36 cited noncompetitive premiums as a reason for
withdrawal. For HMOs' leaving in 1999, 17 of the
40 plans responding to OPM's survey also mentioned
noncompetitive premiums as a reason.

According to an OPM official, for plans to be
competitive in the marketplace, they must offer
their members benefit packages at premium rates
that their members view as a fair value. However,
setting rates at levels that will accomplish plan
goals and objectives, yet at the same time
maintain competitiveness with other plans,
including fee-for-service plans, is difficult.
Falling short of its enrollment goals or
experiencing utilization rates that are greater
than predicted would require a plan to raise its
premiums to cover anticipated expenses. Such
increases could make the plan less attractive to
its members if competitors' premiums do not rise
or do not rise as much.

On a somewhat unrelated premium rate issue, HIAA
officials told us that several of their members
had concerns about OPM requiring plans to prepare
rates for the next plan year about 4 months before
they would normally establish their premium rates
for other clients. Some plans set subsequent year
rates with their non-OPM clients in the October or
November time frame, whereas OPM requires signed
benefit and rate proposals by June 1, for a plan
year starting in January. According to HIAA
officials, in some cases, claims experience
information from the previous year may not be
available in time to prepare FEHBP rates and OPM's
rate submission deadlines might cause some plans
to withdraw from FEHBP. However, of the 36 plans
from which we obtained information on their
withdrawal in 2000, none raised this as an issue.
Also, an official in OPM's Office of Inspector
General (OIG) told us that it was not unusual for
HMOs, when dealing with larger plans, to prepare
rate proposals well in advance of a new plan year.

HMO Mergers
     Eight of the 36 plans withdrawing in 2000
cited mergers as a reason for leaving FEHBP, 1
less than the 9 plans that cited this reason in
1999. According to industry studies, recent years
have seen a large number of mergers among HMO
plans; 18 of the largest for-profit HMOs and
managed care companies were reduced to 6. HIAA
officials told us that as the managed care
marketplace matures, even further mergers among
HMOs are likely. A study by the University of
Minnesota School of Public Health4 concluded that
smaller and younger HMOs were more likely to merge
and exit the market or fail. Older, larger, and
more profitable HMOs were more likely to merge and
survive.

     According to HIAA officials, mergers may make
it easier for HMOs to penetrate new areas,
increase the size of their enrollment group,
improve efficiency, and decrease operational and
administrative expenses. Conversely, a 1999
magazine article5 evaluating the effect of
national mergers on local market concentration
suggests that too many mergers may adversely
affect the number of HMOs competing for enrollees.

Plan Administration Requirements
In 2000, about half as many-7 versus 13-HMOs
mentioned OPM administrative requirements as a
reason for withdrawing from FEHBP as compared to
1999. Although mentioned, OPM requirements were
viewed as relatively minor reasons for plans'
withdrawing, according to most plan
representatives to whom we talked and officials
from OPM, HIAA, and AAHP.

OPM's Annual Call Letter to plans that are
expected to participate in FEHBP describes both
administrative and benefit requirements with which
plans would need to comply. Examples of
administrative requirements discussed in the call
letter for plan year 2000 included such items as
patients' bill of rights, patients' access to
medical records, the conduct of customer service
surveys, the use of electronic communications to
send to and receive information from OPM, and
responsibility for preparing plan brochures that
comply with OPM guidelines.

In addition to meeting FEHBP administrative and
benefit requirements, the records of an HMO
participating in FEHBP could be audited by OPM's
OIG. Neither OPM nor plan representatives cited
audit requirements as a specific reason for
withdrawal from FEHBP. According to HIAA
officials, some of its members did mention that
the possibility of an OIG audit might discourage
them from merging with a FEHBP plan. Plans
believed that if they merged, OPM's OIG might
later identify audit findings for which they could
be held responsible.

FEHBP Benefit Requirements
Six HMOs cited benefit requirements as a reason
for withdrawing from FEHBP in 2000 compared to
five HMOs that cited benefit requirements in 1999.
Like FEHBP administrative requirements, OPM
officials believed that even when mentioned,
federal mandates to provide specific benefits were
rarely the primary reason for a plan's withdrawal
from FEHBP.

OPM requires FEHBP plans to provide benefits such
as (1) allowing obstetrician-gynecology physicians
to act as primary care providers or allowing their
members to have direct access to these physicians
for routine gynecological examinations, (2)
allowing consumers with complex or serious medical
problems to have direct access to a qualified plan
specialist for an adequate number of visits, and
(3) limiting drug benefit deductibles that
customers are required to pay. An OPM official
opined that the number of benefits mandated under
FEHBP pales in comparison to the number mandated
by states.

Market Area Saturation
Two HMOs in plan years 1999 and 2000 mentioned
market area saturation as a reason for withdrawing
from FEHBP. Market area saturation can relate
either to the number of HMOs providing service in
a particular area or to the low percentage of
individuals in an area who select HMOs versus fee-
for-service plans.

According to OPM, saturation rates relate
primarily to the number of HMOs in an area. For
example, smaller HMOs might have difficulty
entering areas, such as Baltimore-Washington,
Minnesota-Michigan, or California, in which many
HMOs are already doing business. One plan official
told us that even a state such as Alabama, in
which a large fee-for-service plan has more than
70 percent of the market, could have too much HMO
competition.

Enrollment Increases and Decreases for HMOs
Leaving FEHBP in 2000
     Although HMOs leaving FEHBP often said that
they left due to insufficient enrollment,
departing plans typically were not losing
enrollees. Rather, in most cases, plan enrollments
increased, but these increases were small. Even
with these increases, 1999 enrollments for the 62
plans that withdrew from FEHBP in 2000 were about
64,000, or less than 2 percent of FEHBP's 4.1
million enrollees. Table 3 shows increases and
decreases in plan enrollments for 58 HMOs that
terminated their participation in 2000 but which
participated in FEHBP in both 1998 and 1999; 4
plans had enrollment data for 1999 only.

Table 3:  Changes in Enrollment From 1998 to 1999
for Plans Terminating FEHBP Participation
Plan enrollees                   Changes in 58
                               terminating plans'
                              enrollment from 1998
                                    to 1999
                             Increase     Decreases
                                   s
Under 100                         26             7
100 to 499                        12             3
Over 499                           8             2
Total                             46            12
Source: GAO analysis of OPM enrollment information
for March 1998 and 1999.

     As shown in table 3, in many cases, the
enrollment increases were relatively small, most
often under 100 new enrollees.

     Of the 62 plans that terminated their
participation in 2000, 35 had participated in
FEHBP from 1996 to 1999. Of these 35 plans, 4 had
fewer enrollees in each subsequent year.

According to HIAA and AAHP officials, competing
plans vary widely in their ability to retain
members. A plan's poor marketing practices, less
generous benefits, higher beneficiary out-of-
pocket costs, or inferior service could cause
enrollment decreases. In addition, disenrollment
rates could be higher in areas where competition
among plans was strong or where many beneficiaries
were unaccustomed to managed care.

Agency Comments and Our Evaluation
In commenting on a draft of this report, OPM said
that it was in agreement with the report's
findings. OPM said that our report confirmed its
observations and conclusions as to why plans left
FEHBP in 1999. OPM also noted that, along with the
plans, it has processes in place to ensure that
enrollees are fully and timely notified when a
plan withdraws from FEHBP. OPM's written comments
are contained in appendix II.

As we arranged with your office, unless you
publicly announce the contents of this report
earlier, we plan no further distribution until 10
days after its date. At that time, we will send
copies of this report to Representative Elijah E.
Cummings, Ranking Minority Member, Subcommittee on
Civil Service, House Government Reform Committee;
Representative Dan Burton, Chairman, and
Representative Henry Waxman, Ranking Minority
Member, House Government Reform Committee; the
Honorable Janice R. Lachance, Director, OPM; and
the Honorable Jacob J. Lew, Director, OMB. Copies
will also be made available to others upon
request.

Key contributors to this report are listed in
appendix III. If you have any questions, please
call me or Larry Endy, Assistant Director, at
(202) 512-8676.

Sincerely yours,
 
 

Michael Brostek
Associate Director, Federal
  Management and Workforce Issues
_______________________________
1Under FEHBP, a single HMO organization may offer
different individual plans, in different
geographical areas. In this report, our unit of
analysis pertains to the individual plans.
However, to simplify report presentation, we used
the terms "plans" and "HMOs" interchangeably.
2For the purposes of this report, we considered
point -of- service plans to be HMOs.
3Plans that withdrew from FEHBP included those
that terminated their participation during the
plan year as well as those that did not continue
participating at the start of a new plan year.
4HMO Mergers: Analysis of Trends and Public Policy
Issues,University of Minnesota School of Public
Health, May 1996.
5"HMO Consolidations: How National Mergers Affect
Local Markets," Health Affairs, July/August 1999.

Appendix I
Objectives, Scope, and Methodology
Page 19GAO/GGD-00-100 Reasons Why HMOs Withdrew in
1999 and 2000
Objectives
The Chairman, Subcommittee on Civil Service, House
Committee on Government Reform, asked us, among
other things, to provide information on the
withdrawal of health maintenance organizations
(HMO) from the Federal Employees' Health Benefits
Program (FEHBP) in plan years 1999 and 2000. Our
primary objectives were to identify

ï¿½    changes in the number of HMOs participating
in FEHBP since 1994,
ï¿½    reasons why HMOs withdrew from FEHBP in plan
years 1999 and 2000, and
ï¿½    FEHBP enrollment experiences for HMOs that
withdrew from the program in 2000.

Scope and Methodology
To identify changes in the number of plans
participating in FEHBP since 1994, we reviewed the
Office of Personnel Management's (OPM) annual
FEHBP open season guides and benefits
administration letters. We counted individual
plans of an HMO separately when the benefits and
premiums applied to enrollees in specifically
defined geographical areas.  However, we did not
count as separate plans, those that offered both a
high and standard option. This method differs from
OPM's method of counting, which is based on its
number of HMO contracts irrespective of whether a
contract applies to more than one plan in more
than one service area. Our method of counting
plans was designed to capture changes in plan
availability by service area that would not
necessarily be discerned when changes in the
number of HMOs participating in FEHBP occur and
when these changes do not affect the number of
contracts between OPM and participating HMOs.

To identify reasons why HMOs withdrew from FEHBP
in plan years 1999 and 2000, we relied primarily
on information that OPM had obtained from HMOs.
For 1999, we used OPM's analysis of 40 plans'
responses to its survey asking them why they had
withdrawn from the program. For 2000, we reviewed
correspondence that 40 plans sent to OPM advising
it of their intentions to withdraw from the
program. As necessary, we followed up with plans
when their correspondence did not state reasons
for their withdrawal. Although 40 HMOs sent
letters to OPM, we could only discern, from the
letters or our follow-ups, the reasons that 36
HMOs withdrew from FEHBP in 2000. Because of time
and resource constraints, we did not attempt to
identify the reasons for withdrawal for those
plans that notified OPM of their decision to
withdraw from the program after August 1999.

To obtain additional insight on why HMOs might be
withdrawing from FEHBP, we discussed the reasons
for their withdrawal with OPM officials as well as
officials from organizations such as the Health
Insurance Association of America (HIAA), the
American Association of Health Plans (AAHP), and
the Employee Benefit Research Institute (EBRI).
HIAA officials describe HIAA as a nonprofit
research, education, and lobby association
dedicated to preserving the private free-
enterprise healthcare system. It has over 260
members that represent companies that finance and
deliver healthcare and that provide other health
insurance products and services. AAHP officials
said that AAHP represents more than 1,000 HMOs,
preferred provider organizations, and other
network-based healthcare plans. It represents HMOs
that cover federal enrollees; provides technical
support and legal expertise on state legislative
and regulatory issues; and offers education and
training programs, research, and publications to
its members. EBRI officials describe EBRI as a
nonprofit organization that conducts independent
public policy research and provides education on
economic security and employee benefits.

We also reviewed information obtained from the
Internet and other relevant health publications on
various HMO issues, such as HMO mergers or
expansion trends at the national level, mandated
benefit laws, healthcare cost escalation, and
HMOs' profitability. We accepted the reasons that
plan representatives and others gave us as reasons
for withdrawing from FEHBP. We did not visit plans
or attempt to identify or obtain other documents
to validate their reasons for withdrawing.

To determine FEHBP enrollment experiences for HMOs
that withdrew from the program in 2000, we
analyzed 1996 to 1999 enrollment head-count
information prepared by OPM's Office of the
Actuary. OPM reports head counts for all plans
participating in FEHBP semiannually in March and
September of each year. We used March data because
September 1999 data were not available when we did
our analysis. Head counts represent the total
number of FEHBP enrollees by line of coverage-
-individual or family. Each enrollee represents a
premium payer.

We did our review in Washington, D.C., from August
1999 to March 2000 in accordance with generally
accepted government auditing standards.

We requested comments on a draft of this report
from the Director of OPM, and these comments are
discussed in the letter and reprinted in appendix
II.

Appendix II
Comments From the Office of Personnel Management
Page 21GAO/GGD-00-100 Reasons Why HMOs Withdrew in
1999 and 2000

Appendix III
GAO Contacts and Staff Acknowledgments
Page 21GAO/GGD-00-100 Reasons Why HMOs Withdrew in
1999 and 2000
GAO Contacts
Michael Brostek or Larry H. Endy (202) 512-8676

Acknowledgments
     In addition to the individuals named above,
Edward R. Tasca and
Michael G. Valle made key contributions to this
report.

*** End of Document ***