Medicare HMOs: Rapid Enrollment Growth Concentrated in Selected States
(Letter Report, 01/18/96, GAO/HEHS-96-63).

Pursuant to a congressional request, GAO provided information on the:
(1) number of Medicare beneficiaries enrolling in health maintenance
organizations (HMO); and (2) factors that influence beneficiaries'
decisions to enroll in HMO.

GAO found that: (1) about 2.8 million Medicare beneficiaries are
enrolled in risk-contract HMO and another 2 percent are enrolled in
cost-reimbursement HMO; (2) the number of risk-contract HMO that offer
care to Medicare beneficiaries has doubled from 93 in 1991 to 171 in
August 1995; (3) many HMO sign risk contracts with Medicare in areas
with well-established medical providers and high enrollee payments; and
(4) Medicare beneficiaries enroll in HMO to avoid Medicare's normal
deductibles and coinsurance, take advantage of HMO low monthly premiums,
and continue receiving medical benefits from their former employers.

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

 REPORTNUM:  HEHS-96-63
     TITLE:  Medicare HMOs: Rapid Enrollment Growth Concentrated in 
             Selected States
      DATE:  01/18/96
   SUBJECT:  Health maintenance organizations
             Health care services
             Health insurance cost control
             Employee medical benefits
             Insurance premiums
             Cost analysis
             Elderly persons
             Managed health care
IDENTIFIER:  Medicare Program
             California
             Florida
             Pennsylvania
             Texas
             Oregon
             Arizona
             
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Cover
================================================================ COVER


Report to the Honorable
John F.  Kerry, U.S.  Senate

January 1996

MEDICARE HMOS - RAPID ENROLLMENT
GROWTH CONCENTRATED IN SELECTED
STATES

GAO/HEHS-96-63

Medicare Managed Care Growth

(101333)


Abbreviations
=============================================================== ABBREV

  AAPCC - adjusted average per capita cost
  AMCRA - American Managed Care and Review Association
  GHAA - Group Health Association of America
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  POS - point of service
  PPO - preferred provider organization
  SFAS - statement of financial accounting standards

Letter
=============================================================== LETTER


B-232994

January 18, 1996

The Honorable John F.  Kerry
United States Senate

Dear Senator Kerry: 

Medicare, the nation's largest health care insurer, has traditionally
provided health insurance coverage to its elderly and disabled
beneficiaries on a fee-for-service basis.  But the option of
receiving managed health care through a health maintenance
organization (HMO) has existed for more than 2 decades.  To date,
however, Medicare beneficiaries have enrolled in HMOs to a much
lesser degree than persons with private-sector health insurance. 
Private-sector insurers cite extensive use of HMOs and other managed
care approaches as a key factor in slowing the growth of their
insurance premiums.  As a result, part of the current attention to
controlling rising Medicare costs has focused on how to bring about
greater use of HMOs. 

To help the Congress study this matter, you asked us to develop
information on trends in the number of (1) Medicare beneficiaries
enrolling in HMOs and (2) HMOs enrolling beneficiaries.  You also
asked us to analyze this and other available information for any
indications of factors that might be influencing decisions by HMOs to
enroll Medicare beneficiaries and decisions by beneficiaries to
enroll in HMOs. 

We based our analysis on data obtained primarily from two sources: 
the Health Care Financing Administration (HCFA)\1 and the Group
Health Association of America (GHAA).\2 We focused our work on HMOs
that had entered into risk contracts with HCFA.\3 Under such
contracts, HMOs receive a fixed payment for each Medicare beneficiary
enrolled.  As a result, they assume a level of risk in managing the
cost of providing care in that for any particular patient the cost of
care may exceed the fixed payment.\4 We used this information to
analyze trends in HMO usage and as a basis for identifying factors
affecting the level of usage.  In addition, we talked with officials
at HCFA and GHAA and representatives of two management consulting
firms and five HMOs to obtain more information on factors that are
associated with usage.  We performed our work between February and
November 1995 in accordance with generally accepted auditing
standards. 


--------------------
\1 HCFA, an agency of the Department of Health and Human Services,
administers the Medicare program. 

\2 GHAA is the national trade association representing most HMOs.  As
of November 1, 1995, GHAA merged with the American Managed Care and
Review Association (AMCRA) to become GHAA/AMCRA. 

\3 These contracts can also be awarded to a competitive medical plan,
which is a provider that is subject to similar regulatory
requirements as HMOs but has greater flexibility in setting its
commercial premium rates and the services offered to commercial
members.  In this report, our use of the term HMO includes such
plans. 

\4 HCFA pays some HMOs on a cost-reimbursement basis.  This approach
is essentially similar to reimbursement on a fee-for-service basis in
that the provider assumes no risk that fees will be insufficient to
cover costs and therefore does not have the same incentive to reduce
costs.  We did not include cost-reimbursement HMOs in our analysis. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

About 2.8 million Medicare beneficiaries--about 7 percent of the
total--were enrolled in risk-contract HMOs as of August 1995.\5

This was double the percentage enrolled in 1987.  The growth has been
particularly rapid in the past 4 years and has centered on certain
states.  California and Florida, for example, have more than half of
all enrollees.  The number of risk-contract HMOs offering care to
Medicare beneficiaries, while decreasing between 1987 and 1991, has
nearly doubled from 93 in 1991 to 171 in August 1995.  Distribution
of these HMOs across the country, however, is far from uniform; 4
states account for nearly half of them, and 19 states have none. 

The available data show two key characteristics that are common to
many locations where HMOs have decided to sign risk contracts with
Medicare.  One is that HMOs are relatively well-established as
medical providers to the general population.  The other is that the
amount of money the government pays risk-contract HMOs for each
enrollee, which varies from county to county throughout the nation,
tends to be relatively high where enrollment is the highest. 

In addition, two key factors may affect Medicare beneficiaries'
decisions to enroll in HMOs.  The first factor deals with costs and
services:  HMOs increase their attractiveness by not charging
Medicare's normal deductibles and coinsurance and often providing
services beyond basic Medicare coverage (such as outpatient drugs);
and many HMOs offer coverage with no or low monthly premiums.  The
other factor is that some Medicare beneficiaries join HMOs to
continue receiving medical benefits provided by their former
employers. 


--------------------
\5 Another 2 percent were enrolled in cost-reimbursement HMOs. 


   BACKGROUND
------------------------------------------------------------ Letter :2

HMOs have become a significant part of the nation's health care
delivery system.  By the end of 1994, more than 50 million people
received their health care through an HMO.  However, the importance
of HMOs varied considerably from state to state.  For example, five
states (Arizona, California, Maryland, Massachusetts, and Oregon) had
more than 30 percent of their population enrolled in HMOs, while
three states (Alaska, West Virginia, and Wyoming) had no HMO
enrollees. 

Medicare beneficiaries cannot enroll in an HMO unless the HMO
contracts with HCFA.  Medicare's current approach for contracting
with HMOs on a risk-contract basis has been in place for more than 10
years.  Medicare pays the HMO a capitated (fixed) payment for each
Medicare beneficiary enrolled.  This payment, the adjusted average
per capita cost (AAPCC) rate, differs from county to county.\6 In
return, the HMO must provide or arrange for all the services covered
under Medicare part A, Hospital Insurance, and Medicare part B,
Supplemental Medical Insurance.\7 To the extent that the Medicare
payment exceeds the HMO's cost to provide these services, the HMO
must provide additional benefits of an actuarially equivalent value. 

HMOs are generally the only form of managed care available to
Medicare beneficiaries.  Private purchasers and employer-sponsors of
health insurance also use other forms of managed care, such as
preferred provider organizations (PPO) and point-of-service (POS)
health plans.\8 These other approaches may provide enrollees with a
wider choice over their medical provider than the HMO approach. 

In many cases, Medicare beneficiaries pay a monthly premium to the
risk-contract HMO.\9 This premium covers the portion of costs not
borne by Medicare under the capitated payment.  For those HMOs
charging premiums, the median monthly premium was $39 as of August
1995. 


--------------------
\6 For each Medicare beneficiary enrolled, the HMO is paid at a rate
of 95 percent of the average amount HCFA would expect to spend on
fee-for-service Medicare in the county where the beneficiary resides. 
The Senate and House have passed bills that, among other things,
would change the way HMOs are paid. 

\7 For fiscal year 1995, total risk-contract program payments were
estimated to be $12.2 billion. 

\8 Under PPOs, services are provided on a discounted basis to plan
members by contracted service providers.  Members can use other
providers but have a financial incentive to use participating
providers.  Under a POS plan, members choose how to receive services
when the service is needed, with different cost-sharing levels
associated with the choice. 

\9 This is in addition to the premium that all beneficiaries must pay
to receive physician services under Medicare part B.  Under
fee-for-service Medicare, beneficiaries also have other cost-sharing
responsibilities. 


   HMO ENROLLMENT GROWTH IS RAPID
   BUT CONCENTRATED IN A FEW
   STATES
------------------------------------------------------------ Letter :3

Medicare's use of HMOs is considerably less than private-sector
insurers, but it is growing.  For private-sector insurers, HMOs and
other forms of managed care now account for about 70 percent of their
insurance, compared with just 5 percent in 1980.  By contrast,
Medicare's current use of HMOs is comparable to the level that
private-sector insurers reached in the early 1980s.  However, the 2.8
million Medicare beneficiaries enrolled in HMOs in August 1995 were
more than double the number enrolled in 1987 and were increasing
rapidly.  Since 1993, for example, the annual growth rate for
beneficiaries enrolled in risk-contract HMOs has been about 25
percent. 

Medicare also differs from private-sector patterns in terms of the
types of managed-care approaches that are growing.  As figure 1
shows, the market-share growth rate of HMOs in the Medicare program
more than doubled from 1991 to 1994 compared with 1987 to 1990, while
the growth rate of HMOs in the private sector actually declined. 
However, private insurers continued to expand in other managed-care
approaches such as PPOs and POS plans.  These managed-care approaches
are currently not available in the Medicare market.\10

   Figure 1:  Growth in Market
   Share of Managed Care Health
   Plans, 1987-90 and 1991-94

   (See figure in printed
   edition.)

Source:  Medicare data from monthly reports, Office of Managed Care,
HCFA, and Medicare enrollment database files.  Private sector data
from KPMG Peat Marwick, Health Benefits in 1994, (1994), p.  25; and
Elizabeth W.  Hoy, Richard E.  Curtis, and Thomas Rice, "Change and
Growth in Managed Care," Health Affairs, Winter (1991), pp.  18-36. 

While the number of Medicare beneficiaries choosing the risk-contract
HMO option continues to grow each year, the vast majority (about 87
percent) live in 10 states.  Since 1987, the number of Medicare
enrollees has increased in 22 states (and the District of Columbia)
and decreased in 14.  As further evidence of how concentrated the
Medicare risk-contract program is, about 44 percent of all enrollees
are currently in 10 of the 171 HMOs with risk contracts.  Appendix I
contains additional information on HMO enrollment, including
state-by-state information. 


--------------------
\10 While the PPO option is still not available to Medicare
beneficiaries, the POS plan option may be available starting January
1, 1996. 


   RESURGENCE OF GROWTH IN
   PARTICIPATING HMOS
------------------------------------------------------------ Letter :4

The number of risk-contract HMOs participating in Medicare dropped
from 161 in 1987 to 93 in 1991, then reversed direction to 171 by
August 1995.  As with enrollees, HMOs offering their services to
Medicare beneficiaries are concentrated in relatively few states. 
Forty-five percent of the HMOs enrolling Medicare beneficiaries were
located in four states--California, Florida, Pennsylvania, and Texas. 
Five states saw declines in the number of HMOs offering services to
Medicare beneficiaries between 1991 and 1995, and 19 states have no
HMOs with Medicare risk contracts.\11 Appendix II contains additional
information on the number of HMOs participating in the Medicare
risk-contract program. 


--------------------
\11 The 19 states with no HMOs with Medicare risk contracts in August
1995 were Alaska, Arkansas, Delaware, Georgia, Idaho, Iowa, Kansas,
Maine, Mississippi, Montana, New Hampshire, North Dakota, South
Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and
Wyoming. 


   SOME RELATIVELY CONSISTENT
   FACTORS ASSOCIATED WITH HMO AND
   BENEFICIARY DECISIONS EXIST
------------------------------------------------------------ Letter :5

Our data analysis shows a range of factors that could be influencing
HMO decisions to offer services to Medicare beneficiaries.  These
factors vary considerably from location to location, but two factors
emerged more consistently than any others.  First, while exceptions
exist, states with the highest concentration of HMOs offering
services to Medicare beneficiaries tend to be the ones with the
highest levels of HMO participation in the general population.  For
example, in 1994, the three states with the highest
percentage--greater than 20 percent--of their Medicare population
enrolled in HMOs (Arizona, California, and Oregon) were also among
those states with the highest percentage of their total population
enrolled in HMOs.  Second, those counties with the highest monthly
rates paid by the government for each Medicare beneficiary--over
$500--also tend to have higher levels of HMO participation.  About 40
percent of the counties with high payment rates also had a high
percentage of Medicare beneficiaries enrolled in 1994.  In contrast,
only about 3 percent of the counties with low payment rates--under
$375--had a high percentage of beneficiaries enrolled. 

To attract Medicare beneficiaries, participating HMOs have
increasingly turned to incentives for beneficiaries.  One incentive
is to offer coverage with no monthly premium or a low monthly premium
that Medicare beneficiaries must pay.  Over the past 3 years, the
number of HMOs charging Medicare beneficiaries no premiums for the
services provided increased from about 26 percent to about 49
percent.  Another incentive is to provide services--such as
outpatient drugs or dental benefits--beyond those required under
Medicare.  For example, while about 32 percent of the HMOs provided
outpatient drugs in 1993, about 49 percent did so in August 1995. 

As retiree health benefit costs rise, HMOs appear to be a more
attractive approach to major employers for providing retiree
benefits.  As more employers look to managed care to reduce their
costs, Medicare beneficiaries and persons nearing 65 years old may
have to enroll in HMOs to receive health care benefits.  Appendix III
contains more information on these factors.  Also, appendix IV
contains supplemental state data on Medicare risk-contract HMOs. 


---------------------------------------------------------- Letter :5.1

We provided copies of a draft of this report to officials of HCFA's
Office of Managed Care and GHAA.  These officials generally agreed
with the information presented.  They did offer some technical
suggestions that we incorporated where appropriate.  As arranged with
your office, unless you announce its contents earlier, we plan no
further distribution of this report until 30 days after the date of
this letter.  At that time, we will send copies to the Secretary of
the Department of Health and Human Services.  We will make copies
available to others on request.  Please contact me on (202) 512-7119
if you have any questions.  Major contributors to this report are
listed in appendix V. 

Sincerely yours,

Jonathan Ratner
Associate Director,
 Health Financing Issues


RAPID GROWTH IN MEDICARE
RISK-CONTRACT HMO ENROLLMENT
CONCENTRATED IN A FEW STATES
=========================================================== Appendix I

Medicare beneficiaries enrolled in risk-contract HMOs at a relatively
slow rate during the first years of the program, but more recently,
enrollment has taken off.  As of August 1995, about 2.8 million
beneficiaries--roughly 7 percent of the total--were enrolled in
risk-contract HMOs.  Although the percentage of Medicare
beneficiaries enrolled remains small compared to the Medicare
population, enrollment has been growing since 1987 when fewer than
half that many beneficiaries--only about 3 percent--were in HMOs. 
Moreover, risk-contract HMO enrollment has been increasing at a
double-digit rate in recent years--much faster than in the early
years of the risk-contract HMO option. 

Most Medicare beneficiaries in risk HMOs are concentrated in just a
few states and a few large HMOs.  About 55 percent live in two
states--California and Florida.  Similarly, 10 large HMOs enroll
about 44 percent of all Medicare beneficiaries in the risk-contract
program. 


   BENEFICIARY ENROLLMENT GROWING
   IN MEDICARE'S RISK-CONTRACT
   PROGRAM
--------------------------------------------------------- Appendix I:1

After existing for nearly a decade, the current Medicare risk-
contract program now appears to be attracting more beneficiaries. 
Since 1987, the number of beneficiaries enrolled in a risk-contract
HMO grew nationwide.  Figure I.1 shows that enrollment more than
doubled between 1987 and 1995; enrollment went from about 1.0 million
to about 2.8 million.  Furthermore, figure I.2 shows that enrollment
has grown each year, with annual growth rates reaching about 25
percent between 1993 and 1994. 

   Figure I.1:  Number of Medicare
   Beneficiaries Enrolled in a
   Risk-Contract HMO, 1987-95

   (See figure in printed
   edition.)

Notes:  Data as of December of each year from 1987 to 1994.  Data as
of August 1995. 

Source:  Monthly reports, Office of Managed Care, HCFA. 

   Figure I.2:  Annual Growth
   Rates for Medicare
   Beneficiaries Enrolled in a
   Risk-Contract HMO, 1987-95

   (See figure in printed
   edition.)

Notes:  Data as of December of each year from 1987 to 1994.  Data as
of August 1995. 

Source:  GAO calculations based on data from monthly reports, Office
of Managed Care, HCFA. 

While enrollment in risk-contract HMOs grew throughout the more than
7-year period, the rate of growth continues to escalate with annual
rates approaching 25 percent by 1994.  However, even though recent
growth has been rapid, the Medicare risk-contract program is still in
its early stages of development.  About 7 percent of the Medicare
population is enrolled in such HMOs compared with about 25 percent of
the population with private health insurance. 


      BENEFICIARY ENROLLMENT
      GROWING FASTER IN RECENT
      YEARS
------------------------------------------------------- Appendix I:1.1

During the past few years, more Medicare beneficiaries have been
enrolling in risk-contract HMOs.  While beneficiary enrollment
increased by about 6 percent between 1987 and 1988, it increased by
about 16 percent between 1992 and 1993.  In the following
year--between 1993 and 1994--the number of beneficiaries choosing the
HMO option grew by about 25 percent.  Moreover, during the 8 months
between December 1994 and August 1995, enrollment had already
increased by 25 percent.  Although about 2.8 million Medicare
beneficiaries were enrolled in an HMO in August 1995, this enrollment
was not distributed consistently throughout the country. 


   19 STATES HAVE NO BENEFICIARIES
   ENROLLED IN RISK-CONTRACT HMOS
--------------------------------------------------------- Appendix I:2

Medicare beneficiaries have not enrolled in risk-contract HMOs in all
states.  Enrollment by state splits into several different groups,
including those states that have (1) no beneficiaries enrolled, (2)
limited Medicare HMO penetration, and (3) the highest Medicare HMO
penetration.  Figure I.3 shows that in 1994, no Medicare beneficiary
was enrolled in a risk-contract HMO in 19 states.\12 In 24 states,
fewer than 10 percent of the Medicare beneficiaries were
enrolled--more significantly, enrollment was less than 1 percent in
half of these states.  Therefore, 31 states had no or insignificant
enrollment in Medicare risk-contract HMOs.  In only three states in
the west--Arizona, California, and Oregon--more than 20 percent of
the Medicare beneficiaries were enrolled in a risk-contract HMO. 

   Figure I.3:  Percentage of
   Medicare Beneficiaries Enrolled
   in a Risk-Contract HMO, by
   State, 1994

   (See figure in printed
   edition.)

Note:  Not shown is the District of Columbia with no Medicare
beneficiaries enrolled in a risk-contract HMO. 

Source:  December 1994 monthly report, Office of Managed Care, HCFA. 
Number of Medicare beneficiaries as of July 1994 from 1995 Data
Compendium, HCFA.  Percent enrolled calculated by GAO. 

The strong concentration of HMO Medicare beneficiaries in a handful
of states can be clearly seen in figure I.4.  About 2.4 million of
the more than 2.8 million Medicare beneficiaries enrolled in August
1995--about 87 percent--lived in 10 states.  These states were in
different regions of the country.  However, half of these
states--Arizona, California, Colorado, Oregon, and Washington--were
in the west.  Furthermore, more than half of the beneficiaries lived
in either California or Florida. 

   Figure I.4:  Ten States With
   the Largest Number of Medicare
   Beneficiaries Enrolled in a
   Risk-Contract HMO, August 1995

   (See figure in printed
   edition.)

Source:  Monthly Report, Medicare Prepaid Health Plans, Office of
Managed Care, HCFA, and GAO calculation. 


--------------------
\12 Includes the District of Columbia. 


      FEW STATES SHOW LARGE
      INCREASES IN BENEFICIARY
      ENROLLMENT
------------------------------------------------------- Appendix I:2.1

For the most part, states with the largest number of Medicare
beneficiaries enrolled in a risk-contract HMO in August 1995 have
also experienced the most growth since 1987.  Even though beneficiary
enrollment increased in 23 states\13 during that period, the number
enrolled increased by more than 100,000 in only 6 states.  Table I.1
shows that the increases in beneficiary enrollment varied
significantly.  For example: 

  States like California and Florida, which already had significant
     penetration, still grew substantially. 

  Some states, like Washington, initially had very limited
     penetration but grew to a relatively large program. 

  A handful of states entered risk contracting and have fledgling
     programs. 



                               Table I.1
                
                 Twenty-Three States With Increases in
                  the Number of Medicare Beneficiaries
                 Enrolled in a Risk-Contract HMO, 1987-
                                   95


                                                                Increa
                                                                    se
States ranked in descending order of                             1987-
increase\a                                      1987\b  1995\c      95
----------------------------------------------  ------  ------  ------
California                                      225,88  1,106,  880,68
                                                     4     568       4
Florida                                         184,14  440,74  256,60
                                                     6       8       2
Arizona                                          9,027  175,16  166,13
                                                             5       8
Texas                                            6,085  130,41  124,32
                                                             0       5
New York                                        34,617  138,26  103,64
                                                             5       8
Pennsylvania                                    20,886  122,39  101,50
                                                             4       8
Washington                                         101  87,218  87,117
Oregon                                          44,427  108,49  64,072
                                                             9
Colorado                                        26,740  65,309  38,569
Nevada                                          13,711  43,205  29,494
Illinois                                        48,705  77,420  28,715
Louisiana                                            0  26,619  26,619
Missouri                                         1,305  26,338  25,033
Ohio                                             7,191  27,759  20,568
New Mexico                                      14,258  30,933  16,675
Oklahoma                                         4,234  16,193  11,959
Massachusetts                                   55,029  65,079  10,050
Rhode Island                                     4,365  13,913   9,548
Alabama                                              0   8,103   8,103
Virginia                                             0   3,729   3,729
Kentucky                                             0   3,621   3,621
Maryland                                         3,404   6,487   3,083
District of Columbia                                 0   2,111   2,111
======================================================================
Total                                           704,11  2,726,  2,021,
                                                     5     086     971
----------------------------------------------------------------------
\a Includes the District of Columbia, which is counted as a state. 

\b Data as of December. 

\c Data as of August. 

Source:  Monthly reports, Office of Managed Care, HCFA, and GAO
calculation. 


--------------------
\13 For this analysis, the District of Columbia is counted as a
state. 


      SEVERAL STATES SHOW
      DECREASES IN BENEFICIARY
      ENROLLMENT
------------------------------------------------------- Appendix I:2.2

While the number of Medicare beneficiaries enrolled in a risk-
contract HMO grew in nearly half the states between 1987 and 1995, 14
states also lost enrollment.  For example, table I.2 shows that

  some states, like Minnesota and Michigan, with a relatively large
     HMO penetration, lost a significant number of risk- contract
     enrollees;

  Hawaii's HMO risk-contract program shrank by about half; and

  the HMO risk-contract program disappeared in several states with
     small HMO concentrations. 



                               Table I.2
                
                 Fourteen States With Decreases in the
                    Number of Medicare Beneficiaries
                 Enrolled in a Risk-Contract HMO, 1987-
                                   95


                                                                Decrea
                                                                    se
                                                                 1987-
States ranked in descending order of decrease   1987\a  1995\b      95
----------------------------------------------  ------  ------  ------
Minnesota                                       161,30  58,716  102,58
                                                     0               4
Michigan                                        45,337   7,246  38,091
Indiana                                         19,070   3,056  16,014
Kansas                                          13,110       0  13,110
Hawaii                                          26,003  13,418  12,585
Connecticut                                     12,164   1,274  10,890
Tennessee                                        5,520       0   5,520
Wisconsin                                        3,709       0   3,709
Iowa                                             2,863       0   2,863
New Jersey                                      15,199  13,683   1,516
North Carolina                                   1,141       0   1,141
Nebraska                                         3,850   3,468     382
Georgia                                            153       0     153
Utah                                                 1       0       1
======================================================================
Total                                           309,42  100,86  208,55
                                                     0       1       9
----------------------------------------------------------------------
\a Data as of December. 

\b Data as of August. 

Source:  Monthly reports, Office of Managed Care, HCFA. 


   BENEFICIARY ENROLLMENT IN
   MEDICARE'S RISK- CONTRACT
   PROGRAM CONCENTRATED AT 10 HMOS
--------------------------------------------------------- Appendix I:3

While there are more than 570 HMOs in the United States and about 30
percent of them enrolled Medicare beneficiaries, a surprisingly small
number of large HMOs commands a substantial share of total Medicare
risk-contract HMO enrollment.  Ten HMOs with individual risk
contracts accounted for about 44 percent of the beneficiaries
enrolled, as shown in table I.3.  Half of the 10 largest individual
HMOs enrolling Medicare beneficiaries in 1995 were in California. 



                               Table I.3
                
                  Ten Medicare Risk-Contract HMOs That
                Have the Largest Number of Beneficiaries
                         Enrolled, August 1995

                                                                Percen
                                                                  tage
                                                                    of
                                                                nation
                                                        Benefi      al
                                                        ciarie  total\
HMOs ranked in descending order\a                          s\b       c
------------------------------------------------------  ------  ------
Pacificare--Los Angeles, Orange County, California      275,87     9.8
                                                             7
Humana--Florida                                         213,72     7.6
                                                             2
FHP--California                                         208,65     7.4
                                                             6
Kaiser--Los Angeles, California                         149,53     5.3
                                                             1
Kaiser--Oakland, California                             98,393     3.5
FHP--Arizona                                            84,818     3.0
Pacificare--Northern California                         67,740     2.4
HIP--New York                                           48,313     1.7
Group Health Coop--Puget Sound, Washington              46,141     1.6
CAC-Ramsey Health Plans--Coral Gables, Florida          44,564     1.6
======================================================================
Total (top 10 HMOs)                                     1,237,    43.8
                                                           755
======================================================================
Total (171 HMOs)                                        2,826,
                                                           947
----------------------------------------------------------------------
\a Enrollment figures are for unique risk contracts.  HMOs must have
a risk contract for each distinct geographic location in which they
operate. 

\b Data are as of August. 

\c Detail does not add to total due to rounding. 

Source:  Monthly Report, Medicare Prepaid Health Plans, Office of
Managed Care, HCFA. 


NUMBER OF MEDICARE RISK-CONTRACT
HMOS HAS GROWN RAPIDLY IN THE PAST
FEW YEARS
========================================================== Appendix II

Medicare beneficiaries cannot enroll in an HMO unless the HMO
contracts with HCFA to serve the beneficiaries.  While the number of
beneficiaries enrolling has increased, participation by HMOs has been
considerably more erratic.  The number of HMOs participating actually
fell between 1987 and 1991 before reversing direction and increasing
each year since then.  The increase was especially rapid between 1993
and August 1995. 

Moreover, patterns of HMO participation in the Medicare risk-
contract program varied considerably by state.  In 1995, about
one-third of the HMOs that were enrolling Medicare beneficiaries were
located in just two states, and 19 states had no HMO enrolling
Medicare beneficiaries. 


   NUMBER OF HMOS ENTERING INTO
   MEDICARE RISK CONTRACTS HAS
   FLUCTUATED SINCE 1987
-------------------------------------------------------- Appendix II:1

Nationwide, significant changes occurred in the number of HMOs that
had Medicare risk contracts in the years between 1987 and 1995. 
Figure II.1 shows that the number has changed over time, initially
decreasing and then increasing more rapidly in recent years.  By
December 1991, risk-contract HMOs had dropped to 93.  Since that
time, the number has continued to grow.  And in the past few years,
growth has been especially rapid.  In just 1 year, 1993 to 1994, the
number of risk-contract HMOs grew from 110 to 154--about 40 percent. 
As of August 1995, the number had increased by another 17 to 171
risk-contract HMOs. 

   Figure II.1:  Number of
   Medicare Risk-Contract HMOs,
   1987-95

   (See figure in printed
   edition.)

Notes:  Data as of December of each year from 1987 to 1994.  Data as
of August 1995. 

Source:  Monthly reports, Office of Managed Care, HCFA. 

When growth resurfaced in the Medicare risk-contract program, much of
it occurred in a handful of states.  Table II.1 shows that between
December 1991 and August 1995 the number of risk-contract HMOs
increased by 50 in just four states--a significant part of the
overall total.  In California alone, 23 more HMOs entered into
Medicare risk contracts during that time. 



                               Table II.1
                
                Four States Where the Number of Medicare
                 Risk-Contract HMOs Increased, 1991-95


State                                                   1991\a  1995\b
------------------------------------------------------  ------  ------
California                                                  12      35
Florida                                                      7      21
Pennsylvania                                                 2      11
Texas                                                        6      10
======================================================================
Total                                                       27      77
----------------------------------------------------------------------
\a Data as of December. 

\b Data as of August. 

Source:  Monthly reports, Office of Managed Care, HCFA. 

In sharp contrast to the resurgence of growth in these four states,
several states showed no growth or even declined.  Indeed, five
states had fewer HMOs with Medicare risk contracts in 1995 than in
1991.  In fact, in two of these states--Georgia and Kansas--the
Medicare HMO program disappeared as the number of HMOs with Medicare
risk contracts dropped to zero. 


   MOST STATES HAVE FEW HMOS WITH
   MEDICARE RISK CONTRACTS
-------------------------------------------------------- Appendix II:2

In most states, a small number of HMOs had Medicare risk contracts. 
Figure II.2 shows that in August 1995, 19 states\14 did not have a
risk contract HMO and 17 states\15 had three or fewer--71 percent of
all the states.  More significantly, however, about 45 percent of all
the risk-contract HMOs were located in just four states.  These HMOs
were distributed as follows: 

  35 in California,

  21 in Florida,

  11 in Pennsylvania, and

  10 in Texas. 

   Figure II.2:  Number of
   Medicare Risk-Contract HMOs, by
   State, August 1995

   (See figure in printed
   edition.)

Note:  Not shown is the District of Columbia with one risk- contract
HMO. 

Source:  Monthly Report, Medicare Prepaid Health Plans, Office of
Managed Care, HCFA. 


--------------------
\14 The 19 states that had no HMO with a Medicare risk contract in
August 1995 were Alaska, Arkansas, Delaware, Georgia, Idaho, Iowa,
Kansas, Maine, Mississippi, Montana, New Hampshire, North Dakota,
South Carolina, South Dakota, Tennessee, Utah, Vermont, West
Virginia, and Wyoming. 

\15 Includes the District of Columbia. 


FACTORS ASSOCIATED WITH AN HMO
ENTERING INTO A MEDICARE RISK
CONTRACT OR A MEDICARE BENEFICIARY
ENROLLING IN AN HMO
========================================================= Appendix III

During the past few years, the resurgence of HMOs entering into a
Medicare risk contract and the continuing growth of beneficiaries
enrolling in these HMOs have been influenced by a number of key
factors.  Entry or re-entry by HMOs into the market appears to be
associated with HMO penetration of health care markets in general and
with the growth in Medicare's AAPCC rates for HMOs relative to the
HMOs' costs of providing care. 

Risk-contract HMOs may appeal to Medicare beneficiaries because
beneficiaries may obtain services in addition to those offered
through the regular Medicare fee-for-service program.  Moreover,
these additional services may be available to beneficiaries at little
or no cost.  Employers who are trying to reduce retiree health care
costs may continue to look to HMOs as a way to save money.  As a
result, more Medicare beneficiaries may have to enroll in a
risk-contract HMO to obtain retiree benefits through their former
employers. 


   TWO FACTORS ASSOCIATED WITH
   HMOS' DECISIONS TO ENTER
   MEDICARE'S RISK- CONTRACT
   PROGRAM
------------------------------------------------------- Appendix III:1

Before deciding to enter into a Medicare risk contract and to enroll
beneficiaries, an HMO has to consider the many questions that can
affect the profitability of entering a new market.  In general, an
HMO's market strategy--the type of patients that it wants to serve
and how it wants to expand--plays a role in how it plans for the
future.  While many factors contribute to HMO decisions in any given
location, two factors that appear to have influenced the decisions of
HMOs that have entered the Medicare market are the size of the (1)
existing market share and (2) AAPCC rate. 


      EXTENT OF HMO MARKET SHARE
      MAY PLAY A ROLE IN AN HMO'S
      RISK-CONTRACT DECISION
----------------------------------------------------- Appendix III:1.1

In general, states with higher total HMO enrollment among the states'
populations also have a higher enrollment among the Medicare
population.  However, not all states with high non-Medicare HMO
enrollment also have high Medicare enrollment.  Several notable
exceptions exist. 

Before Medicare beneficiaries in each state can enroll in an HMO,
HMOs must be operating in the state and must have entered into a
Medicare risk contract.  Table III.1 shows that, in the states with
the largest number of HMOs, the number of HMOs that had Medicare risk
contracts varied.  In 1994, for example: 

  89 percent of the HMOs in California and 53 percent in Florida had
     Medicare risk contracts, and

  none of the HMOs in Wisconsin had a Medicare risk contract. 



                        Table III.1
          
          Seven States With the Largest Number of
             HMOs and HMOs With a Medicare Risk
                       Contract, 1994

States ranked in                      HMOs with a Medicare
descending order            HMOs\a         risk contract\b
------------------------  --------  ----------------------
California                      36                      32
Florida                         36                      19
New York                        33                       9
Ohio                            31                       6
Texas                           31                       7
Illinois                        27                       3
Wisconsin                       27                       0
----------------------------------------------------------
\a Data as of the end of 1994. 

\b Data as of December 1994. 

Source:  Number of HMOs from Patterns in HMO Enrollment, GHAA. 
Number of HMOs with a Medicare risk contract from monthly report,
Office of Managed Care, HCFA. 


         ABOUT 20 PERCENT OF THE
         TOTAL POPULATION WAS
         ENROLLED IN AN HMO AT THE
         END OF 1994
--------------------------------------------------- Appendix III:1.1.1

At the end of 1994, about 51 million people were enrolled in 572 HMOs
nationwide.\16 Overall, about 20 percent of the total population in
the country--and about one-fourth of the population with private
health insurance--received its health care through an HMO.  More
importantly, however, HMO enrollment varies by state.  Figure III.1
shows that in five states--Arizona, California, Maryland,
Massachusetts, and Oregon--more than 30 percent of the state
population was enrolled in HMOs--the highest market share in the
country.  Conversely, three states--Alaska, West Virginia, and
Wyoming--had no people enrolled in an HMO at the end of 1994.  While
these are the extremes, HMOs are just beginning to make their
presence felt in many states throughout the country. 

   Figure III.1:  HMO Market
   Share, by State, 1994

   (See figure in printed
   edition.)

Note:  Not shown is the District of Columbia with a 25.6 percent
market share. 

Source:  Patterns in HMO Enrollment, GHAA. 


--------------------
\16 Total HMO enrollees include, among others, members of employer
groups, individuals, federal employees, Medicare beneficiaries, and
Medicaid recipients.  Data are for the 50 states and the District of
Columbia; data from Guam are excluded. 


         MEDICARE RISK-CONTRACT
         HMO ENROLLMENT MIRRORS
         NON-MEDICARE MARKET SHARE
         IN SOME STATES
--------------------------------------------------- Appendix III:1.1.2

Each state's total HMO market share provides an overview of how
heavily HMOs have penetrated the health care market.  However, table
III.2 shows the percentage of Medicare beneficiaries enrolled in an
HMO and the percentage of non-Medicare HMO enrollees in each
state.\17 Several states with a high percentage of Medicare enrollees
in risk-contract HMOs also had high non-Medicare enrollment.  For
example, the three states with the highest Medicare risk-contract HMO
enrollment in 1994--Arizona, California, and Oregon--also had high
non-Medicare enrollment.  Nevada is the only state that had a higher
percentage of Medicare beneficiaries enrolled in risk-contract HMOs
than non-Medicare HMO enrollees.  However, high non-Medicare
enrollment is no guarantee that HMOs will play a large role in the
Medicare program.  Several states with fairly high HMO activity have
little or no activity in the Medicare risk-contract program.  For
example: 

  in Maryland, non-Medicare enrollment was over 40 percent but
     Medicare risk-contract HMO enrollment was less than 1 percent,

  in Massachusetts, non-Medicare enrollment was over 40 percent but
     Medicare risk-contract HMO enrollment was about 4 percent,

  in Connecticut, non-Medicare enrollment was over 30 percent but
     Medicare risk-contract HMO enrollment was less than 1 percent,
     and

  in Wisconsin, non-Medicare enrollment was about 29 percent but no
     Medicare beneficiary was enrolled in an HMO with a risk
     contract. 



                                       Table III.2
                         
                            Percent of Medicare Beneficiaries
                         Enrolled in an HMO With a Risk Contract
                             and Percent of Non-Medicare HMO
                              Enrollees for All States, 1994

                                                                   Percent of
                       Percent of                                    Medicare  Percent of
                         Medicare    Percent of                    beneficiar        non-
                     beneficiarie          non-                           ies    Medicare
                       s enrolled  Medicare HMO                      enrolled         HMO
State                     in HMOs     enrollees  State                in HMOs   enrollees
-------------------  ------------  ------------  ----------------  ----------  ----------
Arizona                      27.0          37.9  Indiana                  0.3         8.5
California                   26.8          40.0  Alabama                  0.3        11.6
Oregon                       22.2          40.5  Virginia                 0.2         9.6
Nevada                       19.9          14.4  Delaware                 0.1        23.9
Florida                      14.9          21.5  Connecticut             0.04        32.3
New Mexico                   13.8          18.1  New Hampshire           0.02        19.8
Colorado                     12.2          26.3  Alaska                   0.0         0.0
Washington                   10.3          17.5  Arkansas                 0.0         4.6
Minnesota                     9.1          29.5  District of              0.0        29.4
                                                  Columbia
Hawaii                        9.1          25.3  Georgia                  0.0        10.0
Rhode Island                  6.9          33.1  Idaho                    0.0         1.3
Illinois                      4.3          19.0  Iowa                     0.0         5.0
Massachusetts                 4.3          40.8  Maine                    0.0         7.3
Texas                         4.1          10.5  Mississippi              0.0         0.3
New York                      3.9          27.7  Montana                  0.0         1.8
Pennsylvania                  2.7          25.3  North Carolina           0.0         9.8
Oklahoma                      2.6           8.1  North Dakota             0.0         1.4
Missouri                      1.9          17.1  South Carolina           0.0         4.9
Nebraska                      1.3          11.0  South Dakota             0.0         3.5
Ohio                          1.2          22.4  Tennessee                0.0        19.1
Kansas                        0.6          12.7  Utah                     0.0        21.5
Kentucky                      0.5          14.2  Vermont                  0.0        14.7
Michigan                      0.5          23.5  West Virginia            0.0         0.0
Louisiana                     0.4           8.1  Wisconsin                0.0        28.5
New Jersey                    0.4          19.8  Wyoming                  0.0         0.0
Maryland                      0.3          41.1
-----------------------------------------------------------------------------------------
Source:  December 1994 Medicare HMO enrollment data from monthly
report, Office of Managed Care, HCFA.  Number of Medicare
beneficiaries and state population estimates as of July 1994 from
1995 Data Compendium, HCFA.  Year-end 1994 non-Medicare HMO
enrollment data from Patterns in HMO Enrollment, GHAA.  Percent
enrolled calculated by GAO. 


--------------------
\17 Each state's non-Medicare HMO enrollment provides an estimate for
what is happening in the private sector.  Non-Medicare HMO enrollees
include all HMO enrollees in a state except Medicare beneficiaries
enrolled in a risk-contract HMO. 


      HIGHER MEDICARE HMO
      PENETRATION APPEARS TO BE
      LINKED TO HIGHER MEDICARE
      PAYMENT RATES
----------------------------------------------------- Appendix III:1.2

Among other factors considered, HMOs may weigh the financial pros and
cons of enrolling Medicare beneficiaries.  Medicare risk-contract
HMOs are paid a monthly amount by the government for each beneficiary
enrolled; this is the AAPCC rate.  AAPCC rates, which are developed
for each county in the country, vary considerably.  For 1995, AAPCC
rates range from a low of $177.32\18 to a high of $678.90.  Over
time, these payment rates have been increasing.  In 1992, the lowest
AAPCC rate in the 50 states and the District of Columbia was $139.30,
while the highest was $507.88. 

A relationship appears to exist between the amount of money paid to
an HMO for each Medicare beneficiary enrolled and the Medicare
enrollment in that county.\19 Of all the counties in the country that
had low AAPCC rates in 1994, most of them also had low Medicare HMO
penetration rates.  Very few counties had low payment rates and high
penetration.  Interestingly, however, table III.3 shows that for
counties with high AAPCC rates, an equal percentage had high Medicare
risk-contract HMO penetration as did those with low penetration. 



                              Table III.3
                
                 Percent of Counties With High and Low
                 Medicare Risk-Contract HMO Penetration
                       Rates by AAPCC Rates, 1994


                                                         Low\a  High\b
                                                        (perce  (perce
                                                         nt of   nt of
                                                Counti  counti  counti
AAPCC rates                                         es     es)     es)
----------------------------------------------  ------  ------  ------
Low (under $375)                                 2,788      93       3
Moderate ($375 to $500)                            434      72      15
High (over $500)                                    25      40      40
----------------------------------------------------------------------
\a Penetration rate--percent of Medicare beneficiaries enrolled in
risk-contract HMOs--less than or equal to 1 percent. 

\b Penetration rate--percent of Medicare beneficiaries enrolled in
risk-contract HMOs--greater than 5 percent. 

Source:  AAPCC rates obtained from Office of Managed Care, HCFA. 
Enrollment information based on computer runs using the denominator
file, Bureau of Data Management and Strategy, HCFA. 

The same patterns shown in table III.3 also hold when only the 500
counties with the largest number of Medicare beneficiaries are
included in the analysis.  High AAPCC rates are more likely to be
associated with higher Medicare HMO penetration, but high AAPCC rates
alone are not sufficient to generate HMO risk-contract program
participation. 

Table III.4 identifies all 25 counties that had high AAPCC
rates--rates over $500--and the degree of their Medicare
risk-contract HMO penetration.  As shown in the table, high AAPCC
rates alone do not generate high penetration rates.  In future work,
we intend to examine the various factors that may affect Medicare
risk-contract HMO penetration.  For example, areas like Washington,
D.C., and Detroit, Michigan, that have low penetration of Medicare
risk- contract HMOs despite high AAPCC rates will be examined,
especially the characteristics of the retired workforce and the
health care market in these communities. 



                              Table III.4
                
                   Counties With High AAPCC Rates and
                Medicare Risk-Contract HMO Penetration,
                                  1994


Low\a                   Moderate\b              High\c
----------------------  ----------------------  ----------------------
Washington, D.C.        Jefferson, La.          Los Angeles, Cal.
Plaquemines, La.        St. Charles, La.        Broward, Fla.
St. Bernard, La.        Suffolk, Mass.          Dade, Fla.
Baltimore City, Md.     New York, N.Y.          Bronx, N.Y.
Prince Georges, Md.     Rockland, N.Y.          Kings, N.Y.
Genesee, Mich.                                  Queens, N.Y.
Oakland, Mich.                                  Richmond, N.Y.
Wayne, Mich.                                    Philadelphia, Pa.
Chambers, Tex.                                  Liberty, Tex.
Norton City, Va.                                Montgomery, Tex.
----------------------------------------------------------------------
\a Penetration rate less than or equal to 1 percent. 

\b Penetration rate greater than 1 percent and less than or equal to
5 percent. 

\c Penetration rate greater than 5 percent. 

Source:  AAPCC rates obtained from Office of Managed Care, HCFA. 
Enrollment information based on computer runs using the denominator
file, Bureau of Data Management and Strategy, HCFA. 

Most of the counties (2,778) had low AAPCC rates--rates under $375. 
For these counties, table III.5 shows a sample of 10 randomly
selected counties with low Medicare risk-contract HMO penetration and
a sample of 10 randomly selected counties with high penetration.  As
shown in the table, while most of the counties with low AAPCC rates
also had low Medicare risk-contract HMO penetration, 78 counties,
including some in California and Oregon, had high penetration despite
low AAPCC rates; a situation we will examine further in future work. 



                              Table III.5
                
                  Randomly Selected Counties With Low
                 AAPCC Rates and Low and High Medicare
                  Risk-Contract HMO Penetration, 1994


Low\b (N = 2,577)                   High\c (N = 78)
----------------------------------  ----------------------------------
10 randomly selected counties:      10 randomly selected counties:

Mason, Ill.                         Graham, Ariz.
Beaver, Okla.                       Eldorado, Cal.
Fannin, Ga.                         Santa Barbara, Cal.
Pike, Ga.                           Honolulu, Hawaii
Union, Ky.                          Cass, Mo.
Gallatin, Mont.                     Bernalillo, N. Mex.
Darke, Ohio                         Valencia, N. Mex.
Custer, Okla.                       Lane, Ore.
Anasco, P.R.                        Marion, Ore.
Jack, Tex.                          Walla Walla, Wash.
----------------------------------------------------------------------
\a 123 counties had moderate penetration rates--greater than 1
percent and less than or equal to 5 percent. 

\b Penetration rate less than or equal to 1 percent. 

\c Penetration rate greater than 5 percent. 

Source:  AAPCC rates obtained from Office of Managed Care, HCFA. 
Enrollment information based on computer runs using the denominator
file, Bureau of Data Management and Strategy, HCFA. 


--------------------
\18 Excludes payments for Guam, Puerto Rico, and the Virgin Islands. 

\19 This plausible relationship is also supported by a statistical
analysis of Medicare HMO enrollment that controls for several other
factors in addition to payment rates.  See:  Physician Payment Review
Commission, Annual Report to Congress, Physician Payment Review
Commission, 1995 (Washington, D.C.:  1995), pp.  92-94. 


   TWO FACTORS ASSOCIATED WITH
   MEDICARE BENEFICIARY DECISIONS
   TO ENROLL IN A RISK-CONTRACT
   HMO
------------------------------------------------------- Appendix III:2

High Medicare penetration in risk-contract HMOs takes more than a
decision by the HMO community to target the Medicare population.  The
Medicare beneficiary must make the choice, and this has typically
required extensive marketing and expansion of benefits to attract the
Medicare population.  HMOs have increasingly turned to lower payments
by the elderly in terms of reduced premiums to attract them.  They
also have expanded the benefits provided to Medicare beneficiaries by
including such additional benefits as outpatient drugs and dental
benefits.  In addition, in an effort to save money, more employers
are limiting the health care coverage choices of retirees.  As a
result, Medicare beneficiaries may have to consider receiving health
benefits through a risk-contract HMO. 


      MANY RISK-CONTRACT HMOS
      PROVIDE ADDITIONAL SERVICES
      TO BENEFICIARIES
----------------------------------------------------- Appendix III:2.1

An attractive feature of the Medicare risk-contract program is the
additional services that beneficiaries may receive if they enroll. 
In many cases, in addition to not having to pay Medicare's normal
deductibles and coinsurance, Medicare beneficiaries enrolling in
these HMOs may receive one or more services not covered by the
regular fee-for-service Medicare program.  For example, routine
physicals, eye examinations, and outpatient drugs may be provided by
an HMO with a risk contract.  Table III.6 shows the types of
additional services provided to Medicare beneficiaries that enroll. 
While all services are not offered by all risk-contract HMOs, the
percentage of HMOs offering these services has been changing since
1993.  In particular, a higher percentage of HMOs offered outpatient
drugs and dental benefits in 1995 than in 1993. 



                              Table III.6
                
                 Number and Percent of HMOs With a Risk
                 Contract Providing Additional Benefits
                to Medicare Beneficiaries, 1993 and 1995



                                                Percen          Percen
Additional benefit provided             Number       t  Number       t
--------------------------------------  ------  ------  ------  ------
Routine physicals                          102    96.2     154    96.3
Immunizations                               94    88.7     139    86.9
Eye exams                                   89    84.0     142    88.8
Ear exams                                   68    64.2     118    73.8
Health education                            35    33.0      39    24.4
Outpatient drugs                            34    32.1      78    48.8
Foot care                                   28    26.4      55    34.4
Dental care                                 26    24.5      56    35.0
Eyeglasses                                   5     4.7       8     5.0
Hearing aids                                 1     0.9       6     3.8
----------------------------------------------------------------------
\a Data as of December. 

\b Data as of August. 

Source:  Monthly Report, Medicare Prepaid Health Plans, Office of
Prepaid Health Care Operations and Oversight, HCFA. 

Medicare beneficiaries may have to pay monthly premiums when they
enroll in an HMO.  While Medicare beneficiaries' basic HMO premiums
were as high as $111, the average was $22 and the median was $39 in
August 1995.  However, table III.7 shows that the percent of HMOs
that did not charge any premiums increased between 1993 and 1995 from
about 26 percent to nearly 50 percent.  The lack of premiums can
provide an incentive for more Medicare beneficiaries to consider this
form of health care. 



                              Table III.7
                
                   Range of Premiums Charged Medicare
                   Beneficiaries by HMOs With a Risk
                        Contract, 1993 and 1995



                                                Percen          Percen
Range of premiums charged               Number       t  Number       t
--------------------------------------  ------  ------  ------  ------
$0                                          27    25.5      79    49.4
$0.01 to $39.99                             28    26.4      42    26.3
$40.00 to $79.99                            45    42.5      33    20.6
$80.00 or more                               6     5.7       6     3.8
----------------------------------------------------------------------
\a Data as of December. 

\b Data as of August. 

Source:  Monthly Report, Medicare Prepaid Health Plans, Office of
Prepaid Health Care Operations and Oversight, HCFA. 


      EMPLOYER DECISIONS MAY CAUSE
      MORE BENEFICIARIES TO
      CONSIDER RISK-CONTRACT HMOS
----------------------------------------------------- Appendix III:2.2

Although Medicare is the primary payer for medical care among people
over 65, many Medicare beneficiaries rely on employer-based health
benefits to cover deductibles, coinsurance, and non-Medicare-covered
items such as prescription drugs.  However, employer-provided retiree
health benefit coverage has been eroding over the past decade due,
primarily, to the rising cost of such coverage according to a recent
study by KPMG.\20 The number of firms offering retiree health
coverage has been dropping, while retirees are bearing an increasing
share of this cost.  This trend may increase the number of Medicare
beneficiaries enrolling in HMOs, which deliver the same or broader
coverage without deductibles or coinsurance. 

In the mid-1980s, almost two-thirds of employees of large or mid-size
firms were offered retiree health benefits by their employers. 
However, by 1993, the percentage of active workers slated to receive
retiree health benefits had fallen to 45 percent.  Retirees who
received coverage from their employers paid only 15 percent of the
cost of single coverage in 1988, 31 percent in 1992, and 42 percent
in 1993.  The rising cost of retiree health benefits is driving this
trend.  The average total monthly cost in 1993 for retirees over 65
was $118 per month for single coverage, up from about $40 per month
in 1985. 

Employers may be playing a role in driving the growth of Medicare
risk-contract HMO enrollments according to HCFA and industry experts. 
HMOs look attractive to employers because of the rising cost of
retiree health benefits.  The effect of retiree health benefits on
companies' bottom lines was highlighted when the Financial Accounting
Standards Board adopted the Statement of Financial Accounting
Standards (SFAS) 106. 

SFAS 106 requires private-sector employers with 500 or more plan
participants to treat obligations for present and future years on an
accrual instead of a pay-as-you-go basis.  In 1992, SFAS 106 expenses
cost Fortune 100 companies one-third of their operating income
because most decided to write off the cost of retiree coverage
immediately.  According to one industry analyst, SFAS 106 liability
is the number one motivation for employers to get retirees into
managed care.  The effect of these health care cost realities is for
employers not only to encourage retirees to join HMOs, but to provide
them financial incentives to do so. 


--------------------
\20 KPMG Peat Marwick, "1994 Retiree Health Benefits:  The
Uncertainty Continues," (U.S.A.:  1994). 


SUPPLEMENTAL STATE DATA ON
MEDICARE RISK-CONTRACT HMOS
========================================================== Appendix IV



                              Table IV.1
               
               Medicare Beneficiary Enrollment in HMOs
                 With Medicare Risk Contracts and HMO
                     Participation by State, 1994

                        Enrollment                            Number
                       in Medicare                           of HMOs
                         HMOs as a     Number of              with a
                        percent of      Medicare            Medicare
                         the total  beneficiarie    Number      risk
                          Medicare    s enrolled   of HMOs  contract
                        population  in an HMO in        in        in
State                       1994\a        1994\b    1994\c    1994\b
--------------------  ------------  ------------  --------  --------
Arizona                       27.0       154,939        20         6
California                    26.8       946,668        36        32
Oregon                        22.2       101,823       7\d       9\d
Nevada                        19.9        35,873         7         2
Florida                       14.9       377,966        36        19
New Mexico                    13.8        27,939         6         4
Colorado                      12.2        49,469        12         5
Washington                    10.3        68,590        11         6
Minnesota                      9.1        56,421         9         3
Hawaii                         9.1        13,044         7         1
Rhode Island                   6.9        11,437         3         1
Illinois                       4.3        68,355        27         3
Massachusetts                  4.3        39,129        16         5
Texas                          4.1        82,685        31         7
New York                       3.9       100,421        33         9
Pennsylvania                   2.7        55,913        19         9
Oklahoma                       2.6        12,590         6         2
Missouri                       1.9        15,793        18         5
Nebraska                       1.3         3,285         5         1
Ohio                           1.2        19,678        31         6
Kansas                         0.6         2,269        10         1
Kentucky                       0.5         2,705         7         1
Michigan                       0.5         6,964        17         2
Louisiana                      0.4         2,344        11         2
New Jersey                     0.4         4,449        14         1
Maryland                       0.3         1,823        16         4
Indiana                        0.3         2,549        12         2
Alabama                        0.3         1,630         8         1
Virginia                       0.2         1,306        13         1
Delaware                       0.1            91         6         1
Connecticut                   0.04           193        14         1
New Hampshire                 0.02            23         3         1
Alaska                         0.0             0         0         0
Arkansas                       0.0             0         6         0
District of Columbia           0.0             0         2         1
Georgia                        0.0             0        11         0
Idaho                          0.0             0         2         0
Iowa                           0.0             0         3         0
Maine                          0.0             0         3         0
Mississippi                    0.0             0         1         0
Montana                        0.0             0         1         0
North Carolina                 0.0             0        12         0
North Dakota                   0.0             0         2         0
South Carolina                 0.0             0         4         0
South Dakota                   0.0             0         1         0
Tennessee                      0.0             0        17         0
Utah                           0.0             0         8         0
Vermont                        0.0             0         1         0
West Virginia                  0.0             0         0         0
Wisconsin                      0.0             0        27         0
Wyoming                        0.0             0         0         0
====================================================================
Total                                  2,268,364       572       154
--------------------------------------------------------------------
\a Enrollment data as of December.  Number of Medicare beneficiaries
as of July. 

\b Data as of December. 

\c Data as of the end of the year. 

\d Data as reported by HCFA and GHAA. 

Source:  Medicare HMO enrollment data and number of HMOs with a
Medicare risk contract from December monthly report, HCFA.  Number of
Medicare beneficiaries from 1995 Data Compendium, HCFA.  Number of
HMOs from Patterns in HMO Enrollment, GHAA. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

Michael F.  Gutowski, Assistant Director, (202) 512-7128
Howard N.  Cott
Aleta L.  Hancock
Rajiv Mukerji
Joseph A.  Petko


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