Medicare: Fewer and Lower Cost Beneficiaries With Chronic Conditions
Enroll in HMOs (Letter Report, 08/18/97, GAO/HEHS-97-160).

Pursuant to a congressional request, GAO examined a mature managed care
market to determine: (1) the extent to which Medicare beneficiaries with
chronic conditions enroll in health maintenance organizations (HMO); (2)
whether beneficiaries with chronic conditions who enroll in HMOs are as
costly as those remaining in fee-for-service (FFS) Medicare; and (3)
whether beneficiaries with chronic conditions rapidly disenroll from
HMOs to FFS at rates different from other newly enrolled beneficiaries.

GAO noted that: (1) data on California's FFS beneficiaries who enrolled
in HMOs help explain why, despite the presence of chronic conditions
among new HMO enrollees, their average costs are lower than the average
FFS beneficiary; (2) the health status of beneficiaries, as measured by
the number of selected chronic conditions they have, showed significant
differences between those who enrolled in an HMO and those who remained
in FFS; (3) also, when comparing beneficiaries categorized by the
presence of none, one, or multiple chronic conditions, new HMO enrollees
tended to be the least costly in each health status group; (4) this
resulted in a substantial overall cost difference between those that did
and did not enroll in HMOs; (5) about one in six 1992 California FFS
Medicare beneficiaries enrolled in an HMO in 1993 and 1994; (6) HMO
enrollment rates differed significantly for beneficiaries with selected
chronic conditions compared to other beneficiaries; (7) among those with
none of the selected conditions, 18.4 percent elected to enroll in an
HMO compared to 14.9 percent of beneficiaries with a single chronic
condition and 13.4 percent of those with two or more conditions; (8) GAO
found that prior to enrolling in an HMO a substantial cost difference,
29 percent, existed between new HMO enrollees and those remaining in FFS
because HMOs attracted the least costly enrollees within each health
status group; (9) even among beneficiaries belonging to either of the
groups with chronic conditions, HMOs attracted those with less severe
conditions as measured by their 1992 average monthly costs; (10) GAO
found that rates of early disenrollment from HMOs to FFS were
substantially higher among those with chronic conditions; (11) while
only 6 percent of all new enrollees returned to FFS within 6 months, the
rates ranged from 4.5 percent for beneficiaries without a chronic
condition to 10.2 percent for those with two or more chronic conditions;
(12) also, disenrollees who returned to FFS had substantially higher
costs prior to enrollment compared to those who remained in their HMO;
and (13) these data indicated that favorable selection still exists in
California Medicare HMOs because they attract and retain the least
costly beneficiaries in each health status group.

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

 REPORTNUM:  HEHS-97-160
     TITLE:  Medicare: Fewer and Lower Cost Beneficiaries With Chronic 
             Conditions Enroll in HMOs
      DATE:  08/18/97
   SUBJECT:  Health maintenance organizations
             Health care cost control
             Beneficiaries
             Health surveys
             Health care programs
             Health care costs
             Elderly persons
             Health insurance
             Medical economic analysis
IDENTIFIER:  Medicare Program
             California
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Health, Committee on Ways and
Means, House of Representatives

August 1997

MEDICARE - FEWER AND LOWER COST
BENEFICIARIES WITH CHRONIC
CONDITIONS ENROLL IN HMOS

GAO/HEHS-97-160

HMO Enrollment Patterns

(108269)


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

  EDB - Enrollment Database
  FFS - fee for service
  HCFA - Health Care Financing Administration
  HMO - health maintenance organization
  SAF - Standard Analytic Files

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


B-277316

August 18, 1997

The Honorable William M.  Thomas
Chairman, Subcommittee on Health
Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

Some analysts contend that a way to slow the growth in Medicare
spending is to enroll more people in health maintenance organizations
(HMO), which offer to provide all covered care to patients for set
fees but restrict the choice of physicians and closely monitor
treatment decisions.  Whether increased HMO use will save Medicare
money depends, in part, on whether HMOs can attract and retain
beneficiaries now in traditional, fee-for-service (FFS) Medicare,
particularly those with expensive chronic conditions.\1

Research conducted on data from the 1980s and 1990s has shown that
Medicare HMOs have benefited from favorable selection--they serve
healthier-than-average beneficiaries--relative to FFS.\2 To explore
whether HMO enrollment and disenrollment patterns of those with and
without chronic conditions might explain the favorable selection that
has occurred,\3 we examined a mature managed care market to determine

  -- the extent to which Medicare beneficiaries with chronic
     conditions enroll in HMOs,

  -- whether beneficiaries with chronic conditions who enroll in HMOs
     are as costly as those remaining in FFS, and

  -- whether beneficiaries with chronic conditions rapidly disenroll
     from HMOs to FFS at rates different from other newly enrolled
     beneficiaries. 

To address these questions, we used data on Medicare beneficiaries in
California, one of the most heavily Medicare HMO-penetrated states,
to determine the HMO enrollment and disenrollment decisions of
beneficiaries belonging to three health status groups.  The state's
Medicare risk HMO enrollment experienced rapid growth, increasing
nearly five-fold between 1987 and 1995.  By 1995, California
accounted for over one-third of all Medicare HMO enrollment, and five
California plans were among the seven largest in the nation. 
Medicare HMO penetration rates averaged 27 percent in California
compared with the national average rate of about 7 percent.\4

We obtained 1991 through mid-1995 enrollment and FFS claims data for
approximately 1.3 million elderly Medicare beneficiaries in
California.\5 To determine the health status of the beneficiaries in
our FFS cohort, we screened claims records for a diagnosis of any of
five chronic conditions:  diabetes mellitus, ischemic heart disease,
congestive heart failure, hypertension, and chronic obstructive
pulmonary disease.  Beneficiaries were then categorized as having
either zero, one, or several of the selected conditions.\6 For each
health status category, we determined the proportion and relative
costs (using 1992 average monthly FFS costs) of those who enrolled in
an HMO in 1993 and 1994, and those who disenrolled within 6 months.\7
Appendix I provides a detailed description of our scope and
methodology.  Appendix II presents information on the prevalence and
average expenditures of beneficiaries with selected chronic
conditions in the California FFS Medicare population in 1992. 


--------------------
\1 Unlike FFS, HMOs provide care in return for fixed premiums and
therefore are financially at risk for all covered services
beneficiaries use.  Medicare pays the same basic rate to all HMOs
that serve residents of a particular county, a rate equal to 95
percent of the projected average FFS Medicare payments in counties in
a plan's service area.  This amount is then adjusted in an attempt to
reflect differences in expected levels of spending by age and sex,
and by Medicaid, working, and institutionalization status. 

\2 For a review of recent studies and an analysis concluding that
Medicare risk contract HMOs continue to benefit from favorable
selection, see Physician Payment Review Commission, Annual Report to
Congress 1996 (Washington, D.C.:  1996), ch.  15.  See also "Policy
Implications of Risk Selection in Medicare HMOs:  Is the Federal
Payment Rate Too High?" Issue Brief, No.  4 (Washington, D.C.: 
Center for Studying Health System Change, Nov.  1996). 

\3 In addition to new enrollees from FFS (who may be somewhat
healthier than the average HMO enrollee), the health status of HMO
populations is affected by the extent to which beneficiaries with
chronic conditions age into Medicare HMOs and enrollees acquire
chronic illnesses as they age within established HMOs. 

\4 Localities where Medicare managed care is particularly well
established and experiencing rapid growth include Riverside, San
Bernardino, and San Diego counties, which each had HMO market
penetration rates exceeding 40 percent. 

\5 The Health Care Financing Administration (HCFA) bases its payments
to Medicare HMOs on these data, which we did not independently
verify.  Also, although our analysis pertains to a large portion of
the risk contract program, we cannot generalize our findings to other
states or to the nation. 

\6 The group classified as having none of the selected chronic
conditions refers to all individuals not captured by our five claims
screens for chronic illnesses.  It may include some beneficiaries
with chronic conditions that we failed to identify through claims
records, as well as people with other conditions, such as cancer,
that may be considered chronic by other analysts. 

\7 The use of prior costs is necessary because no other relevant cost
data are available.  After a beneficiary enrolls in an HMO, the
Medicare program receives no information on the health care services
provided to the beneficiary or their costs. 


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

Data on California's FFS beneficiaries who enrolled in HMOs help
explain why, despite the presence of chronic conditions among new HMO
enrollees, their average costs are lower than the average FFS
beneficiary.  The health status of beneficiaries, as measured by the
number of selected chronic conditions they have, showed significant
differences between those who enrolled in an HMO and those who
remained in FFS.  Also, when comparing beneficiaries categorized by
the presence of none, one, or multiple chronic conditions, new HMO
enrollees tended to be the least costly in each health status group. 
This resulted in a substantial overall cost difference between those
that did and did not enroll in HMOs. 

About one in six 1992 California FFS Medicare beneficiaries enrolled
in an HMO in 1993 and 1994.  HMO enrollment rates differed
significantly for beneficiaries with selected chronic conditions
compared with other beneficiaries.  Among those with none of the
selected conditions, 18.4 percent elected to enroll in an HMO
compared with 14.9 percent of beneficiaries with a single chronic
condition and 13.4 percent of those with two or more conditions. 

Moreover, we found that prior to enrolling in an HMO a substantial
cost difference, 29 percent, existed between new HMO enrollees and
those remaining in FFS because HMOs attracted the least costly
enrollees within each health status group.  Even among beneficiaries
belonging to either of the groups with chronic conditions, HMOs
attracted those with less severe conditions as measured by their 1992
average monthly costs. 

Furthermore, we found that rates of early disenrollment from HMOs to
FFS were substantially higher among those with chronic conditions. 
While only 6 percent of all new enrollees returned to FFS within 6
months, the rates ranged from 4.5 percent for beneficiaries without a
chronic condition to 10.2 percent for those with two or more chronic
conditions.  Also, disenrollees who returned to FFS had substantially
higher costs prior to enrollment compared to those who remained in
their HMO.  These data indicated that favorable selection still
exists in California Medicare HMOs because they attract and retain
the least costly beneficiaries in each health status group. 


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


      HMOS OFFER ADDITIONAL
      BENEFITS BUT LIMIT PROVIDER
      CHOICE
---------------------------------------------------------- Letter :2.1

Compared with the traditional Medicare FFS program, HMOs typically
cost beneficiaries less money and cover additional benefits.  In
addition to covering all Medicare part A and part B benefits,
advantages of Medicare HMOs typically include low or no monthly
premiums, expanded benefit coverage, and reduced out-of-pocket
expenses.\8 In effect, the HMO often acts much like a Medicare
supplemental policy (Medigap insurance) by covering deductibles,
coinsurance, and additional services. 

On the other hand, beneficiaries may be reluctant to enroll in HMOs
because they give up their freedom to choose any provider.  If a
beneficiary enrolled in an HMO seeks nonemergency care from providers
other than those designated by the HMO or seeks care without
following the HMO's referral policy, the beneficiary is liable for
the full cost of that care.\9 In addition, beneficiaries may be
reluctant to drop Medigap coverage and enroll in an HMO because it
may be difficult to obtain supplemental insurance later at a
reasonable price if they return to FFS.\10 Because the elderly face a
higher risk of serious illness, they may prefer to remain in the FFS
program to take advantage of the ability to visit any provider or
maintain their relationships with current providers.\11


--------------------
\8 Under FFS Medicare, beneficiaries pay for most self-administered
prescription drugs when not in a hospital or skilled nursing
facility.  Cost-sharing features include a per admission deductible
of over $700 for hospital expenses, a $100 calendar year deductible
for most other expenses, and 20 percent copayment for most
nonhospital expenses.  Beneficiaries enrolled in HMOs must continue
to pay the Medicare part B premium and any specified HMO copayments. 

\9 In 1996, HCFA clarified its position that a "point-of-service"
option (also known as a "self-referral" or "open-ended" option) was
available.  This option, which covers beneficiaries for some care
received outside of the network, is not yet widely offered by
Medicare HMOs. 

\10 After the initial 6 months of enrollment in part B Medicare,
insurers in most states can deny a Medigap policy based on an
applicant's medical history.  Insurers are especially selective when
issuing a Medigap policy covering prescription drugs.  See Medigap
Insurance:  Alternatives for Beneficiaries to Avoid Medical
Underwriting (GAO/HEHS-96-180, Sept.  10, 1996). 

\11 With the exception of staff model HMOs, changing to or among HMOs
does not necessarily require switching physicians because physicians
can contract with multiple HMOs. 


      MEDICARE BENEFICIARIES HAVE
      FREEDOM TO SWITCH BETWEEN
      HMOS AND FFS
---------------------------------------------------------- Letter :2.2

Medicare HMOs have enrollment procedures that reflect beneficiaries'
freedom to move between the FFS program and HMO plans.  Medicare
rules allow beneficiaries to select any of the federally approved
HMOs in their area and to switch plans or to return to the FFS
program monthly.  Beneficiaries who otherwise would be reluctant to
try an HMO know they can easily leave if a plan does not meet their
expectations.  Because of this freedom to change plans every 30 days,
disenrollments can indicate enrollee dissatisfaction with an HMO. 
Beneficiaries can also shift to HMOs to get specific benefits when
needed and then disenroll with ease to return to FFS. 

Because enrolling more beneficiaries enables HMOs to spread their
risk and better ensure profitability, recruiting or retaining
beneficiaries in a plan is important.  HMOs' marketing strategies
often call attention to the size and geographic scope of the provider
network and the quality of physicians in the network.\12 However, as
we have previously reported, some HMO sales agents have misled
beneficiaries or used otherwise questionable sales practices to
attract new enrollees.\13


--------------------
\12 Attracting new enrollees to a plan can be expensive.  According
to some estimates, advertising, public relations, sales, and
administrative costs for signing up an enrollee can average $500 to
$600. 

\13 See Medicare:  HCFA Should Release Data to Aid Consumers, Prompt
Better HMO Performance (GAO/HEHS-97-23, Oct.  22, 1996). 


   BENEFICIARIES WITH CHRONIC
   CONDITIONS LESS LIKELY TO
   ENROLL IN AN HMO
------------------------------------------------------------ Letter :3

For a number of reasons, it would be expected that beneficiaries with
chronic conditions would be drawn to HMO plans.  HMOs have the
potential to provide a range of integrated services required by such
people.  Ideally, HMO providers should have the flexibility to treat
patients with chronic conditions or refer them to an appropriate mix
of medical and nonmedical services.  They have a financial incentive
for keeping people healthy and as fully functioning as possible.  To
avoid use of emergency room and costly acute-care services, HMOs
often emphasize prevention services that address the development or
progression of disease complications. 

The combination of more extensive benefits and lower costs was
evident in the benefit packages offered by the five largest
California Medicare HMOs (accounting for 83 percent of the state's
enrollment).  In 1994, these plans offered

  -- zero to $30 monthly premiums;

  -- hospital coverage in full with unlimited days;

  -- physician and specialist visits with a copayment of $5 or less;

  -- emergency room care, in or out of the area, with a copayment of
     $5 to $50 (waived if admitted to the hospital);

  -- coverage for preventive health services, including an annual
     exam, eye glasses, routine eye and hearing tests, and health
     education;

  -- outpatient pharmacy coverage in three of the five plans, with
     copayments of $5 to $7 per prescription and an annual cap from
     $700 to $1,200; and

  -- outpatient mental health services with a copayment of $10 to $20
     per visit, in most cases. 

Despite these extra benefits of HMOs, California Medicare
beneficiaries with chronic conditions were less likely to enroll in
an HMO than beneficiaries without any of the selected conditions.  As
a result, the new enrollee group had, on the whole, better health
status than those who stayed in FFS. 


      ENROLLMENT RATES LOWEST FOR
      BENEFICIARIES WITH MULTIPLE
      CHRONIC CONDITIONS
---------------------------------------------------------- Letter :3.1

HMO enrollment typically involves only a fraction of FFS
beneficiaries each year.  Between January 1993 and December 1994,
16.4 percent of the beneficiaries in our decision-making cohort
enrolled in an HMO.\14 But beneficiaries with a single chronic
condition were 19 percent less likely to join an HMO than those
without any of the selected conditions, and those with multiple
chronic conditions enrolled at a rate 27 percent below those with
none of the conditions. 

One reason beneficiaries with chronic illnesses may be reluctant to
enroll in an HMO is because they are more likely than nonchronic
beneficiaries to have established provider relationships.  In
addition, because HMOs require that a primary care physician or
"gatekeeper" decide when a patient needs a specialist or
hospitalization, these beneficiaries may be particularly concerned
about their access to specialty providers.  Beneficiaries diagnosed
with chronic conditions may prefer to remain in the FFS program to
take advantage of the ability to visit any provider or to maintain
relationships with current providers. 

Within each health status group, HMO enrollment rates declined with
age.  This may indicate that younger seniors are more familiar with
HMOs and thus less reluctant to try them or that they have less
severe medical problems and are more willing to switch physicians, if
necessary.  Reflecting both age and health status, beneficiaries over
85 years old who had multiple chronic conditions enrolled at about
half the rate of those aged 65 to 69 without any of the conditions. 
(See table 1.)



                                Table 1
                
                Rates at Which FFS Beneficiaries Joined
                  HMOs in 1993 and 1994, by Number of
                  Selected Chronic Conditions and Age

                                                                  Aged
                                   All                              85
                              benefici    Aged    Aged    Aged     and
                                 aries   65-69   70-74   75-84   older
----------------------------  --------  ------  ------  ------  ------
All beneficiaries                 16.4    18.8    16.7    15.4    12.5
Beneficiaries with none of        18.4    20.7    18.6    17.2    13.7
 the selected chronic
 conditions
Beneficiaries with only one       14.9    16.4    15.2    14.6    12.3
 of the selected conditions
Beneficiaries with two or         13.4    14.8    13.8    13.3    10.9
 more of the selected
 conditions
----------------------------------------------------------------------

--------------------
\14 For simplicity, this analysis excluded all FFS beneficiaries who
died or moved during 1993 and 1994.  This has the effect of excluding
too many high-cost cases from the FFS group and thus understating the
difference in costs between the group staying in FFS and the group of
new HMO enrollees. 


      NEW HMO ENROLLEES SHOW
      BETTER HEALTH STATUS OVERALL
---------------------------------------------------------- Letter :3.2

Comparing the two groups of beneficiaries, those who enrolled in an
HMO and those who remained in FFS, we found that a larger proportion
of the enrolled group had better health status.  Whereas
beneficiaries with none of the selected chronic conditions
represented 49 percent of those staying in FFS, they represented 57
percent of the group enrolling to HMOs.  Conversely, the share with
multiple conditions was 26 percent greater in the group remaining in
FFS than in the group joining an HMO.  (See table 2.)



                          Table 2
          
             Distribution of Beneficiaries Who
          Enrolled in HMOs and Those Who Remained
           in FFS, by Number of Selected Chronic
                 Conditions, 1993 and 1994

                    (Numbers in percent)

                                Beneficiarie  Beneficiarie
                                       s who         s who
                                 enrolled in   remained in
                                        HMOs           FFS
------------------------------  ------------  ------------
All beneficiaries                      100.0         100.0
Beneficiaries with none of the          56.5          49.0
 selected chronic conditions
Beneficiaries with only one of          28.0          31.3
 the selected conditions
Beneficiaries with two or more          15.6          19.7
 of the selected conditions
----------------------------------------------------------
Among the 12 California Medicare HMOs receiving the largest number of
new enrollees from FFS,\15 the health status of most plans' new
enrollees resembled aggregate patterns.  However, at one plan, 22.2
percent of its new enrollees had two or more selected chronic
conditions.  At another plan, 8.6 percent of its new enrollees had
two or more chronic conditions. 


--------------------
\15 New HMO enrollment in California was concentrated in a few large
Medicare risk contract HMOs.  Of the roughly 176,000 beneficiaries
leaving FFS to enroll in HMOs during 1993-94, 12 plans accounted for
92 percent of the new enrollees.  Plans receiving the largest number
of new enrollees from FFS included Pacificare of Southern California
with almost 60,000 enrollees (34 percent); FHP with about 33,000
beneficiaries (19 percent); and HealthNet and Pacificare of Northern
California, each with about 14,000 beneficiaries (8 percent). 


   NEW HMO ENROLLEES WITH CHRONIC
   CONDITIONS ARE LOW COST
   COMPARED WITH THEIR FFS
   COUNTERPARTS
------------------------------------------------------------ Letter :4

Not only were the enrollment rates for beneficiaries with chronic
conditions lower than those with none of the selected conditions, but
the prior costs of those who enrolled were substantially less than
those who remained in FFS.  As a result, the average cost of new
enrollees was nearly one-third below the cost of FFS beneficiaries
that did not enroll. 


      NEW ENROLLEES' COSTS VARIED
      DRAMATICALLY BY NUMBER OF
      CONDITIONS
---------------------------------------------------------- Letter :4.1

New enrollees with chronic conditions are potential heavy users of
expensive health care services in HMOs.  Preenrollment data indicate
that new enrollees with the selected chronic conditions had
considerably higher FFS costs than those without one of the chronic
conditions.  On average, 1992 FFS costs for new enrollees were more
than twice as high for beneficiaries with a single chronic condition
compared with persons with none. 

Having multiple chronic conditions dramatically increased the prior
cost of care among new enrollees, rising to 7 times the per capita
costs of persons with none of the conditions.  Even when the age of
the beneficiary was taken into account, those with more than one
chronic condition had substantially higher costs.  For example, the
1992 average monthly FFS cost for new enrollees 70 to 74 years old
ranged from $74 for individuals with none of the selected conditions
to $565 for those with two or more conditions.  (See table 3.)



                                Table 3
                
                    1992 Average Monthly FFS Cost of
                 Beneficiaries Who Enrolled in HMOs in
                  1993 and 1994, by Number of Selected
                       Chronic Conditions and Age

                                   All                            Aged
                                   new                              85
                                enroll    Aged    Aged    Aged     and
                                   ees   65-69   70-74   75-84   older
------------------------------  ------  ------  ------  ------  ------
All new enrollees                 $198    $143    $182    $245    $275
New enrollees with none of the      81      60      74     103     128
 selected chronic conditions
New enrollees with only one of     224     197     210     244     261
 the selected conditions
New enrollees with two or more     580     544     565     608     582
 of the selected conditions
----------------------------------------------------------------------

      MOST COSTLY BENEFICIARIES IN
      EACH HEALTH STATUS GROUP
      REMAINED IN FFS
---------------------------------------------------------- Letter :4.2

The enrollment patterns show that Medicare HMOs attracted people who
did not need as costly medical care.  Beneficiaries who enrolled in
an HMO in 1993 or 1994 had substantially lower 1992 costs compared
with those that remained in FFS during that period.  As a group, new
enrollees cost 29 percent less than those who did not join an HMO.\16
This pattern of drawing new HMO enrollees from FFS beneficiaries with
low costs held true for each of the health status categories.  The
differences in prior costs ranged from 31 percent among those with no
chronic conditions to 16 percent for those with multiple chronic
conditions.  (See table 4.)



                                Table 4
                
                 Comparison of 1992 Average Monthly FFS
                Costs for Beneficiaries Who Enrolled in
                an HMO and Those Who Remained in FFS, by
                 Number of Selected Chronic Conditions,
                             1993 and 1994

                        Beneficiarie  Beneficiarie
                               s who         s who
                         enrolled in   remained in
                                HMOs           FFS        Ratio
----------------------  ------------  ------------  ------------------
All beneficiaries               $198          $280         0.71
Beneficiaries with                81           117         0.69
 none of the selected
 chronic conditions
Beneficiaries with               224           275         0.81
 only one of the
 selected conditions
Beneficiaries with two           580           692         0.84
 or more of the
 selected conditions
----------------------------------------------------------------------

--------------------
\16 These results are consistent with others that show favorable
selection in the Medicare program.  We recently reported that
California HMO enrollee costs were about two-thirds of comparable FFS
beneficiary costs in the year before enrollment.  See Medicare HMOs: 
HCFA Can Promptly Eliminate Hundreds of Millions in Excess Payments
(GAO/HEHS-97-16, Apr.  25, 1997).  Similarly, the Physician Payment
Review Commission reported that spending by new HMO enrollees was 63
percent of that for FFS beneficiaries in the 6 months before they
joined an HMO.  See Physician Payment Review Commission, Annual
Report to Congress 1996, ch.  15.  In addition, an analysis of
Medicare enrollment and billing records for southern Florida from
1990 to 1993 showed that the rate of use of inpatient services for a
group of HMO enrollees during the year before enrollment was 66
percent of the rate in the FFS group.  See Robert O.  Morgan, Beth A. 
Virnig, Carolee A.  DeVito, and others, "The Medicare-HMO Revolving
Door--The Healthy Go In and the Sick Go Out," New England Journal of
Medicine, Vol.  337, No.  3 (July 17, 1997). 


   EARLY DISENROLLMENT RATES WERE
   HIGHEST AMONG THOSE WITH
   CHRONIC CONDITIONS
------------------------------------------------------------ Letter :5

Medicare beneficiaries voluntarily disenroll from HMOs for a variety
of reasons.  A 1996 Mathematica Policy Research, Inc., survey found
that disenrollees to FFS who had been in their plan for 6 months or
less were more likely than longer-term stayers to cite their reasons
for disenrolling as dissatisfaction with the choice of primary care
physicians, a misunderstanding of HMO rules, and an inability to
obtain appointments when needed.\17 High early disenrollment rates
may reflect beneficiaries' lack of familiarity with the HMO concept. 
For example, a beneficiary may realize only after joining a plan that
it does not pay for care from an out-of-network provider.  These
early disenrollees were more likely to return to FFS Medicare, while
beneficiaries who disenrolled after a longer period were more likely
to join other risk plans. 


--------------------
\17 Physician Payment Review Commission, Access to Care in Medicare
Managed Care:  Results From a 1996 Survey of Enrollees and
Disenrollees, Selected External Research Report No.  7 (Washington,
D.C.:  Mathematica Policy Research, Inc., Nov.  1996).  A 1993 survey
found that disenrollees were more likely than enrollees to have
perceived problems with access to primary and specialty care, and
unsympathetic behaviors that potentially restrict service access. 
See Beneficiary Perspectives of Medicare Risk HMOs, Department of
Health and Human Services, Office of Inspector General,
OEI-06-91-00730 (Washington, D.C.:  Mar.  1995). 


      NEW ENROLLEES WITH MULTIPLE
      CHRONIC CONDITIONS WERE MOST
      LIKELY TO DISENROLL EARLY
      AND RETURN TO FFS
---------------------------------------------------------- Letter :5.1

Early disenrollees to FFS were a small group relative to all new
enrollees.  The vast majority of new enrollees, 91.5 percent, were
still enrolled in their HMO 6 months after joining their plan.\18
Within this brief period, 6 percent returned to FFS and 2.5 percent
switched to another HMO.\19

New HMO enrollees with chronic conditions rapidly disenrolled and
returned to FFS at higher rates than healthier new enrollees.\20 The
early disenrollment rates were highest among those with multiple
chronic conditions, which might indicate greater access barriers and
less satisfaction with HMOs for such beneficiaries.  Those with two
or more of the selected conditions disenrolled at a rate more than
twice that of new enrollees with none of the conditions.  Also, a
greater proportion of older seniors disenrolled than younger
beneficiaries, regardless of health status.  (See table 5.)



                                Table 5
                
                Rates of Early Disenrollment to FFS for
                 1993 and 1994 New Enrollees, by Number
                 of Selected Chronic Conditions and Age

                                   All                            Aged
                                   new                              85
                                enroll    Aged    Aged    Aged     and
                                   ees   65-69   70-74   75-84   older
------------------------------  ------  ------  ------  ------  ------
All new enrollees                  6.0     4.6     5.6     7.0     8.3
New enrollees with none of the     4.5     3.4     4.2     5.7     6.5
 selected chronic conditions
New enrollees with only one of     6.7     6.1     6.5     6.9     8.4
 the selected conditions
New enrollees with two or more    10.2     8.9    10.0    10.6    11.6
 of the selected conditions
----------------------------------------------------------------------
In the 12 plans enrolling most of new enrollees, the early
disenrollment rates for beneficiaries in each health status group
exhibited a fairly consistent pattern.  At most plans, beneficiaries
with two or more of the selected chronic conditions disenrolled at
about twice the rate of new enrollees with none of the conditions. 
However, the disenrollment rates for new enrollees with no chronic
conditions ranged from 1.8 percent to 15.4 percent.  For
beneficiaries with two or more of the selected conditions,
disenrollment rates varied even more widely, from 3.3 percent at one
plan to 34.4 percent at another. 

Taking the enrollment and disenrollment rates together, we found that
those beneficiaries who were least likely to enroll in an HMO were
also those that were most likely to disenroll early.  For example,
among beneficiaries 70 to 74 years old with multiple chronic
conditions, 13.8 percent enrolled in an HMO and 10.0 percent of those
beneficiaries disenrolled early.  This compares with 18.6 percent and
4.2 percent, respectively, for beneficiaries of the same age group
with none of the conditions. 

This pattern of early disenrollment accentuates the health status
differences between those who joined an HMO and those who remained
continuously enrolled in FFS.  Most of the disenrollees returning to
FFS, 58 percent, had at least one of the selected chronic conditions. 
The composition of the group that stayed on in their HMO had better
health status, with 42 percent having a chronic condition.  (See
table 6.)



                          Table 6
          
             Distribution of New Enrollees Who
           Returned to FFS and Those Who Remained
            in Their HMO, by Number of Selected
                     Chronic Conditions

                                              Beneficiarie
                                Beneficiarie         s who
                                       s who   remained in
                                 disenrolled     their HMO
                                      to FFS      for more
                                    within 6        than 6
                                      months        months
------------------------------  ------------  ------------
All new enrollees                      100.0         100.0
New enrollees with none of the          42.5          57.8
 selected chronic conditions
New enrollees with only one of          31.5          27.7
 the selected conditions
New enrollees with two or more          26.0          14.5
 of the selected conditions
----------------------------------------------------------

--------------------
\18 To distinguish voluntary from administrative disenrollments, the
group of new enrollees was reduced to exclude beneficiaries who had
moved or died within 6 months of joining an HMO.  We also eliminated
apparent disenrollments when an HMO no longer participated in the
risk contract program or merged with another risk plan. 

\19 The rate of plan switching may indicate that, at least for some
beneficiaries, the system of care itself was not problematic, but
rather that the market is highly competitive in these counties. 
Medicare enrollees can switch fluidly from plan to plan, attracted by
competing HMOs offering better or less expensive benefit packages and
wider provider networks. 

\20 People with chronic conditions who are enrolled in managed care
plans have reported being denied access to treatment and services
that they need and of being assigned to primary care physicians who
are not as well acquainted with their condition as a specialist might
be.  For an overview of recent research on chronic illness, see
Catherine Hoffman and Dorothy P.  Rice, Chronic Care in America:  A
21st Century Challenge (Princeton, N.J.:  The Robert Wood Johnson
Foundation, Aug.  1996). 


      NEW ENROLLEES WITH THE
      HIGHEST PREENROLLMENT COSTS
      DISENROLLED TO FFS
---------------------------------------------------------- Letter :5.2

The higher early disenrollment rate for those with multiple chronic
conditions reinforces the cost implications of an underrepresented
enrollment of beneficiaries with chronic conditions.  Disenrollment
appears to winnow many of the highest cost beneficiaries out of the
newly enrolled HMO population, widening the gap between FFS and
managed care. 

Prior Medicare expenditures for early disenrollees ranged from $132
per month for those with none of the selected conditions to $690 for
those with multiple conditions (see table 7).  Costs generally
increased with age for beneficiary groups with none or one of the
selected chronic conditions.  However, among disenrollees with
multiple conditions, younger seniors had the highest costs.  Compared
with the prior cost of new enrollees (shown in table 3), the
disenrollees' prior costs were higher in every health status group. 
On average, 1992 costs were 66 percent higher for early disenrollees
than for new enrollees. 



                                Table 7
                
                  1992 Average Monthly FFS Cost of New
                Enrollees Who Disenrolled Early to FFS,
                by Number of Selected Chronic Conditions
                                and Age

                                                                  Aged
                                   All                              85
                                elderl    Aged    Aged    Aged     and
                                     y   65-69   70-74   75-84   older
------------------------------  ------  ------  ------  ------  ------
All new enrollees                 $329    $295    $315    $350    $364
New enrollees with none of the     132     109     126     150     150
 selected chronic conditions
New enrollees with only one of     296     294     259     313     338
 the selected conditions
New enrollees with two or more     690     739     714     672     632
 of the selected conditions
----------------------------------------------------------------------
Comparing the two groups of beneficiaries, those who disenrolled
early also had substantially higher 1992 costs than those remaining
in their HMO.  This was true for all the health categories.  The
weighed average cost for beneficiaries who returned to FFS was 79
percent more than those who stayed on in an HMO.  (See table 8.)



                          Table 8
          
           Comparison of 1992 Average Monthly FFS
          Costs for Beneficiaries Who Returned to
          FFS and Those Who Remained in Their HMO

                                 New           New
                           enrollees     enrollees
                                 who  who remained
                         disenrolled  in their HMO
                              to FFS      for more
                            within 6        than 6
                              months        months   Ratio
----------------------  ------------  ------------  ------
All new enrollees               $329          $184    1.79
New enrollees with               132            77    1.71
 none of the selected
 chronic conditions
New enrollees with               296           214    1.38
 only one of the
 selected conditions
New enrollees with two           690           555    1.24
 or more of the
 selected conditions
----------------------------------------------------------
The low prior costs of those who enrolled in an HMO and remained
there for more than 6 months are in sharp contrast to costs for those
who stayed in FFS continuously for the 24-month period (as shown in
table 4).  Longer-term HMO enrollees had far lower preenrollment
costs than the FFS stayers, with cost differences ranging from 20
percent lower among beneficiaries with multiple chronic conditions to
34 percent lower for those with none of the conditions. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Compared with healthier beneficiaries, California Medicare
beneficiaries with selected chronic conditions were less likely to
enroll in HMOs and more likely to rapidly disenroll from HMOs.  This
pattern was evident despite the fact that California HMOs' coverage
of more services (particularly preventive care and prescription
drugs) with less cost-sharing would be expected to attract
beneficiaries with chronic conditions. 

Furthermore, the debate about the better health status of HMO
enrollees hinges on a subtle point, but one that has significant cost
implications.  That is, beneficiaries grouped within health status
categories--the presence of zero, one, or multiple chronic
conditions--incur a range of costs depending on the severity of their
chronic condition(s) or the presence of other conditions (not
accounted for in this analysis).  Those at the low end tend to be the
new HMO enrollees, whereas those at the high end are likely to remain
in FFS.  Thus, this study helps explain a pattern of favorable
selection in California Medicare HMOs despite the presence of some
new enrollees with chronic conditions. 


---------------------------------------------------------- Letter :6.1

We provided copies of a draft of this report to health care analysts
at HCFA, the Physician Payment Review Commission, and the Prospective
Payment Assessment Commission.  They generally agreed with the
information presented and offered some technical suggestions that we
incorporated where appropriate. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days from the date of this letter.  At that time, we will
send copies to interested parties and make copies available to others
on request.  Please call me on (202) 512-7119 if you or your staff
have any questions.  Other major contributors to this report include
Rosamond Katz, Robert Deroy, and Rajiv Mukerji. 

Sincerely yours,

Bernice Steinhardt
Director, Health Services Quality
 and Public Health Issues


SCOPE, DATA SOURCES, AND
METHODOLOGY
=========================================================== Appendix I

This appendix describes our (1) scope and data sources, (2)
methodology for identifying Medicare fee-for-service (FFS)
beneficiaries with selected chronic conditions, and (3) methodology
for analyzing the health maintenance organization (HMO) enrollment
and disenrollment patterns of FFS beneficiaries. 


   SCOPE AND DATA SOURCES
--------------------------------------------------------- Appendix I:1

Our study is an analysis of HMO enrollment and disenrollment patterns
in 14 counties in California from January 1993 through June 1995.  We
chose California because it has been the hub of Medicare HMO activity
nationwide.  In 1995, over 40 percent of all Medicare beneficiaries
enrolled in risk contract HMOs\21 resided in the state.  California
had 32 HMOs with Medicare risk contracts, including 5 of the nation's
7 plans that had the largest number of beneficiaries enrolled. 

We selected California counties where opportunities for enrollment
were not limited by HMO participation.  The 14 counties\22 included
in our study each had at least one risk contract HMO operating within
its boundaries, and 10 counties listed two or more Medicare HMOs.\23
In addition, all of the counties had over 1,000 Medicare
beneficiaries enrolled in risk contract HMOs and together accounted
for 99.2 percent of California risk contract HMO enrollment.  As a
result of substantial HMO enrollment growth, several of these
counties had high Medicare HMO market penetration rates (the
proportion of Medicare beneficiaries enrolled in an HMO) in 1994: 
San Bernardino (47 percent), Riverside (47 percent), San Diego (42
percent), and Orange (36 percent). 

We used the Health Care Financing Administration's (HCFA) Enrollment
Database (EDB) file to select a cohort of FFS beneficiaries who lived
in the 14-county area in December 1992.  The EDB is the repository of
enrollment and entitlement information of anyone ever enrolled in
Medicare.  It contains information on a beneficiary's age, sex,
entitlement status, state and county of residence, and HMO enrollment
history.  To focus on the enrollment behavior of people who had no
recent HMO experience, we identified beneficiaries who were eligible
for Medicare part A and part B for all of 1992 but were not in an HMO
at any point during that year.  We further narrowed the cohort by
excluding patients with end-stage renal disease and those entitled to
Medicare benefits because they were disabled and under 65 years old. 

We used HCFA's Standard Analytic Files (SAF) to determine Medicare's
payments for each FFS beneficiary.  The SAFs contain final action
claims data for various types of Medicare-covered services, including
inpatient hospital, outpatient, home health agency, skilled nursing
facility, hospice, physician/supplier, and durable medical equipment. 
We obtained expenditure information from the "payment amount" portion
of the claim and added pass-through and per diem expenses to the
payment amount for inpatient claims.  From the claim files, we
computed 1992 monthly average expenditures for each beneficiary
enrolled in FFS throughout 1992. 

Individual expenditure information was combined with EDB data to
produce a single enrollment and expenditure file containing
information on 1,270,554 California FFS Medicare beneficiaries. 


--------------------
\21 Under risk contracts, HMOs receive a fixed payment for each
beneficiary enrolled.  As a result, they assume a level of risk in
managing the cost of providing care because, for any particular
patient, the cost of care may exceed the fixed payment. 

\22 Los Angeles, San Diego, Orange, Riverside, San Bernardino,
Ventura, Kern, San Francisco, San Mateo, Sacramento, Santa Clara,
Santa Barbara, Marin, and Butte. 

\23 Although some Medicare managed care plans were cost plans or
health care prepayment plans, most of them converted to risk contract
HMOs during 1993 and 1994.  Therefore, all plans were included in our
analysis. 


   IDENTIFYING FFS BENEFICIARIES
   WITH CHRONIC CONDITIONS
--------------------------------------------------------- Appendix I:2

We also used claims information contained in the SAFs to determine
the health status of each beneficiary, as measured by the presence or
absence of any of five chronic conditions; that is, whether a
claimant had been diagnosed with zero, one, or two or more of the
chronic conditions.  The chronic conditions included in this analysis
were diabetes mellitus, ischemic heart disease, congestive heart
failure, hypertension, and chronic obstructive pulmonary disease. 
These five conditions were identified by Medicare officials as
ranking among the most highly prevalent in the elderly population and
generating the highest costs to the program. 

For each cohort beneficiary, we screened 1991 and 1992 inpatient,
outpatient, skilled nursing facility, home health agency, and
physician/supplier claims for diagnoses (3-digit ICD-9 codes) related
to the five chronic conditions.  A beneficiary was classified as
having a given chronic condition if he or she had

  -- one or more hospital claims with a diagnosis of any of the five
     chronic conditions,

  -- two or more other claims with the diagnosis of diabetes mellitus
     or chronic obstructive pulmonary disease, or

  -- three or more other claims with the diagnosis of hypertension,
     ischemic heart disease, or congestive heart failure.\24

We then summarized the information for each beneficiary to determine
if he or she had zero, one, or two or more chronic conditions. 


--------------------
\24 The screens may undercount or overcount beneficiaries with each
chronic condition.  For example, patients may stop visiting a doctor
following their recovery from heart failure or ischemic diseases.  On
the other hand, the Montana-Wyoming Foundation for Medical Care,
which developed and tested the screen for beneficiaries with
diabetes, found that it overcounted by 3 percent the number of those
with diabetes that could be identified through medical record
reviews. 


   ANALYZING HMO ENROLLMENT AND
   DISENROLLMENT PATTERNS OF FFS
   BENEFICIARIES
--------------------------------------------------------- Appendix I:3

We analyzed information contained in the EDB to determine the
cohort's HMO enrollment patterns from January 1993 to December 1994. 
For each beneficiary, there were four possible occurrences:  death,
change of residence (out of county), enrollment in an HMO, or 24
months of continuous enrollment in FFS.  If the first occurrence for
any beneficiary was death or a move, we excluded those beneficiaries
from further analysis.  During the period, the proportion who died
was 6.2 percent for those with none of the selected conditions, 9.6
percent for those with one condition, and 18.6 percent for those with
two or more conditions; the percentage who moved was about 5 percent
for each health status group. 

Excluding beneficiaries who died or moved during the 2-year period
reduced the size of the cohort to 1,074,819 beneficiaries.  We then
calculated their 1992 average monthly FFS expenditures, by number of
chronic conditions and age group, and the proportion of the remaining
beneficiaries that enrolled in an HMO.\25 This 24-month requirement
made our pool of potential enrollees a somewhat healthier group than
otherwise, and therefore, our estimates of HMO enrollment rates were
more favorable than if this requirement were not a criterion for
inclusion.  Also, because people in their last 12 months of life have
costs that are significantly higher than those of other Medicare
beneficiaries, the health status and 1992 average costs for those who
stayed in FFS was below what they would be if a less stringent
criterion were used. 

To determine the early disenrollment rates, we tracked those
beneficiaries who joined an HMO (175,951) for 6 months after they
enrolled using January 1993 to June 1995 EDB information. 
Disenrollments may occur for administrative reasons (the individual
died or moved out of the HMO's service area) or voluntarily (to
return to FFS or switch to another HMO).  We excluded from further
analysis those beneficiaries who disenrolled for administrative
reasons, leaving a cohort of 14,455 who voluntarily disenrolled
within 6 months.\26 We then calculated the proportion of
beneficiaries who chose to return to FFS and their 1992 average
monthly FFS expenditures, for each health status and age group. 

We conducted our review of enrollment and disenrollment patterns
between April 1996 and June 1997 in accordance with generally
accepted government auditing standards. 


--------------------
\25 The program payments associated with each beneficiary pertain to
all services claimed, not only those related to the treatment of
chronic conditions.  For example, the average monthly expenditure for
a patient with diabetes could include expenses for treating acute
back pain. 

\26 During this period, the California HMO market experienced a
number of mergers among its risk contract plans.  Beneficiaries whose
plan enrollment changed due to a merger were not counted as voluntary
disenrollees. 


PREVALENCE AND COST OF FFS
BENEFICIARIES WITH SELECTED
CHRONIC CONDITIONS IN CALIFORNIA,
1992
========================================================== Appendix II

Chronic conditions may begin in middle age but often progress in
terms of severity of symptoms and the degree to which they limit a
person as the person ages.  Many people with any kind of a chronic
condition have more than one condition to manage, further adding to
their health care burden.  Those who are chronically ill have
substantially higher utilization of health care services, accounting
for a large share of emergency room visits, hospital admissions,
hospital days, and home care visits.  This appendix presents 1992
data on the proportion of California FFS beneficiaries that had
selected chronic conditions and how their costs compared with those
without the conditions. 


   CHRONIC CONDITIONS WERE
   PREVALENT AMONG HALF THE
   ELDERLY
-------------------------------------------------------- Appendix II:1

In 1992, about 660,000 or one-half of the elderly Californians in our
cohort were identified as having diabetes, ischemic heart disease,
congestive heart failure, hypertension, or chronic obstructive
pulmonary disease.  Of these, about 40 percent had more than one of
these chronic condition.  As shown in table II.1, the prevalence of
these conditions is greatest among the oldest of the elderly.  For
example, for those over 75 years old, one in three beneficiaries had
a single chronic condition and at least one in four had two or more
of these chronic conditions. 



                               Table II.1
                
                 Prevalence of Chronic Conditions Among
                FFS Beneficiaries, by Number of Selected
                       Chronic Conditions and Age

                          (Numbers in percent)

                                                                  Aged
                                   All                              85
                                elderl    Aged    Aged    Aged     and
                                     y   65-69   70-74   75-84   older
------------------------------  ------  ------  ------  ------  ------
All beneficiaries                100.0   100.0   100.0   100.0   100.0
Beneficiaries with none of the    48.1    59.1    51.1    42.2    37.3
 selected chronic conditions
Beneficiaries with only one of    30.6    26.3    30.1    33.1    33.1
 the selected conditions
Beneficiaries with two or more    21.3    14.6    18.8    24.8    29.7
 of the selected conditions
----------------------------------------------------------------------

   BENEFICIARIES WITH MULTIPLE
   CHRONIC CONDITIONS ARE FAR MORE
   COSTLY THAN THOSE WITHOUT THE
   CONDITIONS
-------------------------------------------------------- Appendix II:2

There were substantial cost differences between beneficiaries who had
none, one, or several of the selected conditions.  The average cost
for a beneficiary with multiple chronic conditions was over 6 times
the cost for a beneficiary with none of the conditions, and more than
twice the cost for a beneficiary with only one of the conditions.\27
As shown in table II.2, even within the same age group, costs varied
widely across health status groups.




                               Table II.2
                
                   1992 Average Monthly Costs for FFS
                  Beneficiaries, by Number of Selected
                       Chronic Conditions and Age

                                                                  Aged
                                   All                              85
                                elderl    Aged    Aged    Aged     and
                                     y   65-69   70-74   75-84   older
------------------------------  ------  ------  ------  ------  ------
All beneficiaries                 $328    $237    $289    $379    $445
Beneficiaries with none of the     127      96     113     151     185
 selected chronic conditions
Beneficiaries with only one of     308     268     283     325     371
 the selected conditions
Beneficiaries with two or more     812     756     775     839     854
 of the selected conditions
----------------------------------------------------------------------

--------------------
\27 We found that a significant share of our cohort, 14 percent,
showed no claims for Medicare reimbursement in 1992.  A small
proportion, less than 3 percent, of FFS beneficiaries with chronic
conditions (identified from 1991 claims data) did not use
Medicare-covered services, probably because they did not experience
an acute health problem in 1992.  By comparison, about 28 percent of
the FFS beneficiaries with none of the selected conditions had no
Medicare claims in 1992. 


RELATED GAO PRODUCTS
=========================================================== Appendix 0

Medicare HMOs:  HCFA Can Promptly Eliminate Hundreds of Millions in
Excess Payments (GAO/HEHS-97-16, Apr.  25, 1997). 

Medicare HMOs:  Rapid Enrollment Growth Concentrated in Selected
States (GAO/HEHS-96-63, Jan.  18, 1996). 

Medicare Managed Care:  Growing Enrollment Adds Urgency to Fixing HMO
Payment Problems (GAO/HEHS-96-21, Nov.  8, 1995). 

Medicare:  Changes to HMO Rate Setting Methods Are Needed to Reduce
Program Costs (GAO/HEHS-94-119, Sept.  2, 1994). 


*** End of document. ***