R E P O R T T O T H E C O N G R E S S

Social Health Maintenance

O rganization (S/HMO):

Recommendations for the

Future of the Demonstration
Executive summary

The social health maintenance organization (S/HMO) demonstration tests a model of service delivery

intended to integrate acute, chronic, and long-term care. It has operated since 1985 and been

evaluated twice. The Secretary of Health and Human Services submitted the final report of his

evaluation of the S/HMO to the Congress on February 28, 2003. The Balanced Budget Refinement

Act of 1999 required MedPAC to submit recommendations regarding the project to the Congress no

later than six months after the Secretary submits the final evaluation report. We have reviewed the

evaluations and are submitting our recommendations on the future of the demonstration and on the

issue of risk adjustment for frail beneficiaries.

Two evaluations found no conclusive evidence of positive effects on beneficiary health or

functioning. They found that the demonstration did not consistently reduce hospital use or long-term

nursing facility use or consistently deliver superior quality care. Any favorable effects on service use

and use of preventive care were attributable to general characteristics of tightly organized managed

care rather than to the features of the model being tested in the demonstration.

Our concern with equity for plans and beneficiaries leads us to conclude that all beneficiaries should

be able to receive the same benefit package regardless of where they live and that certain plans

should not be advantaged relative to other plans. Equity in payment and coverage policies requires

that Medicare treat similar health plans and providers the same unless a payment differential is

warranted based on the performance of an organization. 

S/HMOs are currently paid more than regular Medicare+Choice (M+C) plans and are mandated to

provide certain additional services. Since there is no clear evidence that S/HMOs improve outcomes

or reduce costs, and since S/HMOs and Medicare+Choice plans enroll similar types of members,

converting S/HMOs to Medicare+Choice and paying them as M+C plans is appropriate. At its April

2003 public meeting, the Commission agreed to recommend that plans participating in the S/HMO

demonstration be converted to Medicare+Choice coordinated care plans on December 31, 2003.

Medicare makes risk-adjusted payments to Medicare+Choice plans to improve the accuracy of

payments to plans that enroll a cross section of beneficiaries, but refinements may be needed for

those plans that concentrate on certain types of enrollees. Thus, the Commission also recommends

that the Secretary of Health and Human Services study payment adjustments for the frail population

in the Medicare+Choice program.
organization (S/HMO): recommendations for

the future of the demonstration

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 RECOMMENDATIONS

1 The Commission recommends that, at the conclusion of the demonstration on

December 31, 2003, the Secretary request that the existing social health 

maintenance organization (S/HMO) plans apply to participate in the

Medicare+Choice program as coordinated care plans. The benefit mandate would 

 end. During the transition period from 2004 through 2007, comprehensive risk 

 adjustment applied to the S/HMO plans should be the same as for 

 Medicare+Choice plans and the 5.3 percent would be phased out.

 *YES: 15 • NO: 0 • NOT VOTING: 0 • ABSENT: 2

 

 2 The Secretary should consider making payment adjustments for frail populations. 

Options may include using administrative data, survey data, or statistical

modifications to the CMS HCC risk-adjustment model. After 2007

the Secretary should set capitation payments for frail beneficiaries based on

their characteristics, if frailty adjustment is found to be necessary. This

adjuster could either be a component of the risk adjustment or a separate

frailty adjuster.

 *YES: 15 • NO: 0 • NOT VOTING: 0 • ABSENT: 2 

 *COMMISSIONERS’ VOTING RESULTS
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 1 

As the number of Medicare beneficiaries with multiple chronic conditions increases,

policymakers have become interested in innovations in their care. Techniques of chronic care

have advanced in recent years. In combination with changes in life style, use of preventive

care, economic growth, and improved health care early in life, changes in medical technology and

new medications for chronic conditions have contributed to reduced disability at older ages (Cutler

2001). 

The Medicare program has long supported the development of new models of care and the spread of

information on promising care techniques. Innovative approaches are tested in demonstrations that

are intended to rigorously examine alternatives and identify options that promote quality care and are

cost effective. When effective programs are identified and their features analyzed, the results are

made available to encourage replication and adoption of proven techniques by other professionals in

the field.

The social health maintenance organization (S/HMO) demonstration is an example of interest in new

models of care. The first four plans under S/HMO I began in 1985. When the evaluation found that

model did not have the desired result (DHHS 2003), a second generation model was developed. But

the first model was allowed to continue as well. Only one S/HMO II plan was actually started, in

1996. 

The Centers for Medicare & Medicaid Services (CMS) submitted the final evaluation report on the

S/HMO demonstration in February 2003. It also announced its plans to bring S/HMOs on to riskadjusted payment using the phase-in schedule mandated by the Benefits Improvement and Protection

Act of 2000 (BIPA) for all Medicare+Choice (M+C) plans, with some modifications, as discussed

below (CMS 2003a). The evaluation report provides the Congress and the Secretary an opportunity

to decide whether the social health maintenance organization is an effective model of chronic care

and to determine the lessons that the Medicare program can derive from the demonstration. The

Balanced Budget Refinement Act of 1999 required MedPAC to submit recommendations regarding

the project to the Congress no later than six months after the Secretary submitted the final evaluation

report.

The Commission, in this report, reviews the experience with the S/HMO and considers the

demonstration in the context of recent developments in chronic care and disease management. We

begin with a description of the S/HMO model—what it does, how it is financed, and how it has

evolved. We review both the policy context in which the model arose and the history of the two

generations of the S/HMO model. We then detail results of the extensive evaluations of this longrunning demonstration. Finally, we review the policy issues surrounding this model and, based on

three principles that should guide further consideration of the future of the demonstration,

recommend that S/HMOs be converted to Medicare+Choice plans on December 31, 2003.

The Social Health Maintenance Organization Model

The S/HMO is a managed care model that seeks to integrate acute and long-term care. The model

includes two types of plans, S/HMO I and S/HMO II. The first generation S/HMO I model, founded

in the 1980s, emphasizes case management. The second generation S/HMO II plan, established in

1996, emphasizes geriatric care and more comprehensive case management. All plans are paid rates 

that are 5.3 percent more than those paid to regular M+C plans in the same county and are required to
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 2 

TABLE 1

provide expanded benefits. Currently, four plans are in operation. The smallest, Kaiser in Portland,

has 4,500 members, and Elderplan in New York has 12,000. Two other plans, SCAN in Long Beach

and Health Plan of Nevada (HPN), each have approximately 50,000 for a total of around 115,000

(Table 1). The first three are the first generation plans founded in 1985 and HPN is the sole second

generation plan.

S/HMO Plans: December 1998 - July 2003

Enrollment

Market S/HMO Sponsor December December July

Plan area model HMO model 1998 2002 2003

Elderplan Brooklyn, NY I IPA/Network 5,234 10,699 11,812

Senior Care Action

 Network (SCAN) Long Beach, CA I IPA/Network 34,057 55,092 50,883

Kaiser North West Portland, OR I Group 4,207 4,351 4,475

Health Plan of

 Nevada (HPN) Las Vegas, NV II Staff and network 26,209 42,166 47,725

Total 69,707 112,308 114,895

Source: CMS Medicare managed care monthly report.

What S/HMOs provide

The S/HMO tests a model of service delivery and financing intended to furnish acute, chronic, and

long-term care, along with the services deemed important to a smooth transition between these types

of care. These services include care coordination and screening of enrollees to identify frail

beneficiaries for whom use of community-based long-term care is expected to reduce the need for

institutional care. 

Depending on their health status, enrollees in S/HMOs can receive up to three types of benefits: basic

Medicare, supplemental (such as prescription drugs and eyeglasses), and expanded care (such as

personal care and homemaker services). All enrollees are entitled to basic and supplemental benefits. 

In the S/HMO I plans, only enrollees determined to be nursing home certifiable under their state’s

Medicaid standards may use the expanded care benefits, which include intermediate nursing care,

homemaker and chore services, personal health aide care, medical transportation, adult day health

care, respite care, and case management.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 3 

The S/HMO plans offer these services hoping to forestall or reduce the use of expensive

medical—particularly institutional—care. For example, providing home and community-based care 

to some beneficiaries, it was hoped, would keep them from being admitted to a nursing home. 

Another feature of the S/HMO is the notion of integrating care delivery between acute and long-term

care—that is, someone within the plan would track and coordinate all of these services to avoid

duplication and to share information about the patient.

An early evaluation (Harrington et al. 1993), however, found that the S/HMO I plans did not

effectively integrate acute and long-term care. Coordination between case managers (generally social

workers) and physicians was poorly developed. Results on the use of institutional care were mixed. 

On the one hand, S/HMO members had higher nursing home costs; on the other hand, they had lower

hospital costs than fee-for-service beneficiaries with similar medical conditions. The conclusion was

that the first-generation sites had not achieved their objective of care integration with reduced

institutional care use (DHHS 2003). Based on these findings, the Health Care Financing

Administration (HCFA) developed a second-generation model.

One goal of the S/HMO II demonstration that differs from S/HMO I was to incorporate practices that

geriatricians have developed into the operations of the plan. These practices include comprehensive

geriatric assessment for certain patients, treatment of functional problems, and a team approach that

brings together nurse practitioners, pharmacists, and other health care professionals. In S/HMO II,

these benefits are not limited to those who are nursing home certifiable; they are also provided to all

those identified as high-risk for needing nursing home care.

How S/HMOs are paid

Both types of S/HMO plans are paid on a capitation basis and both are paid 5.3 percent more than the

Medicare+Choice county payment rates. This additional payment is meant to cover expanded

benefits not covered by Medicare Part A or Part B. It is a holdover from the years when managed

care payments were set to 95 percent of fee-for-service payments for a county—S/HMOs were to be

paid 100 percent of these amounts.

Payments to S/HMO plans reflect the characteristics of their members, but the specific approach

varies by the generation of the demonstration. First generation S/HMO plans use a variation on the

demographic risk adjusters used for Medicare+Choice payments that incorporates a factor to reflect

nursing home certifiable status. Payments for community residents who meet nursing home

certifiable criteria are increased and payments for other community beneficiaries are reduced with the

intent to make aggregate payments to each plan equal to payments using Medicare+Choice

demographic factors. By contrast, the payment method for the second generation plan is based on

results of a regression model. Payment reflects a member’s sex, presence of ten chronic conditions,

ability to perform three activities of daily living and one instrumental activity of daily living, selfreported general health rating, and ability to walk a quarter of a mile. CMS is dropping both payment

methods and, starting in 2004, will phase in Medicare+Choice risk-adjusted payment and add a

frailty adjustment as discussed in detail below.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 4 

Policy context: care for beneficiaries with chronic conditions

The Congress has long expressed concern for developing protocols in the Medicare program that

both improve quality of care and reduce unnecessary expenditure. Since care for chronic conditions

is an important concern, new models for approaching the issue have long been encouraged. This

provides the context in which the S/HMO and other demonstration projects evolved.

 

The social health maintenance organization demonstration was started in 1985 and was an early

experiment with approaches to care for elderly populations in need of care for chronic illnesses. At

the time the demonstration was conceived, policymakers hoped that providing the enhanced benefits

(e.g., community-based long-term care, personal health aide services) would lead to better outcomes

and less use of institutional care. The S/HMO is now the longest running demonstration of care for

the chronically ill.

CMS (formerly HCFA) has tested several other major approaches to chronic and long-term care since

the beginning of Medicare. The first line of analysis was to see whether community-based long-term

care (e.g., home health) would reduce the use of more expensive nursing home care. The On Lok

demonstration, a test of a model of community-based long-term care which began in 1972, provided

the basis for the Program of All-Inclusive Care for the Elderly (PACE) long-term care demonstration,

now a permanent Medicare program. The National Long Term Care Channeling demonstration

provided home and community-based care management between 1981 and 1985. Studies of the

demonstration found that the intervention did not reduce cost.

Nevertheless, the Congress continued to express its concern over the value of care coordination for

high-cost and vulnerable populations, specifically around questions of care management 

(e.g., disease management). The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990)

mandated that HCFA sponsor demonstrations of case management services for beneficiaries with

high-cost conditions. Three demonstration sites for beneficiaries in fee-for-service were chosen and

operated from October 1993 through November 1995. An evaluation found no impact on Medicare

spending or beneficiary self-care or symptom control. It attributed these results to lack of physician

involvement in case management, lack of project focus, inadequate case manager expertise, and

absence of financial incentives (Schore et al. 1999).

The Balanced Budget Act of 1997 (BBA) authorized the Secretary to conduct demonstration projects

to evaluate methods, such as case management and other models of coordinated care, that improve

the quality of care and reduce Medicare expenditures. It authorized a demonstration with at least

nine sites for beneficiaries with chronic illnesses who receive care in fee-for-service Medicare. In

2001, CMS chose 15 sites for a pilot program providing disease and case management services. It

sponsored a study of best practices in coordinated care. The BBA required a report to Congress on

the demonstration at least two years after the April 2002 start of the demonstration and authorized the

Secretary to act on demonstration findings.

CMS was mandated by BIPA in 2000 to conduct demonstrations of disease management in the feefor-service beneficiary population. In response, CMS is reviewing proposals for a capitated disease

management demonstration to test disease management techniques for frail and dual-eligible

beneficiaries with chronic conditions. The demonstration is expected to start in January 2004.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 5 

TABLE 2

Medicare managed care plans, although not demonstrations, have developed a variety of approaches

to care management and expanded Medicare benefits. Most large Medicare managed care plans use

some form of case management (National Chronic Care Consortium 1997). Many have offered a

wide range of extra benefits, although the generosity has varied by geographic area and over time. In

1990, approximately one-third of plans offered outpatient drug benefits, increasing to one-half in 

1995 (CMS 1990, 1995). Plans have reduced this coverage, with the proportion of enrollees in

coordinated care plans with drugs in the lowest-cost plan declining from 84 percent in 1999 to 69

percent in 2003 (CMS 2003c). S/HMOs offer benefits similar to those of Medicare+Choice plans in

their market areas (Table 2).

Social health maintenance organization and

Medicare+Choice benefits by market area

Kaiser Permanente SCAN Health plan

Characteristics Senior Advantage II Health Plan Elderplan of Nevada

Number of Medicare+Choice

plans 8 10 13 5

Premiums

Medicare+Choice $56/93 $0/60 $0/125 $0/88

S/HMO 196 0/30 0 0

Prescription drug coverage

Number of Medicare+Choice

 plans offering benefit 1 10 12 4

S/HMO offers benefit Yes Yes Yes Yes

Generic drug copayment

Medicare+Choice $10 $8/10 $5/15 $10/15

S/HMO 10 10 10 10

Vision: coverage of eyeglasses and contact lenses

Number of Medicare+Choice

 plans offering benefit 3 9 8 0

S/HMO offers benefit Yes Yes Yes No

Hearing aid benefits

Number of Medicare+Choice

 plans offering benefit 2 3 8 0

S/HMO offers benefit Yes Yes Yes No

Note: S/HMO (social health maintenance organization). Medicare+Choice refers to all Medicare+Choice plans within a S/HMO market

area, not including S/HMO. 

Source: Medicare Compare, 2003, http://www.medicare.gov/MPHCompare/Home.asp/.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 6 

History of the S/HMO demonstration

The Deficit Reduction Act of 1984 mandated the S/HMO demonstration. The Congress extended the

demonstration in 1987, 1990, 1993, 1997, 1999, and 2000. OBRA 1990 authorized extension and

expansion of the first generation demonstration and mandated the development of new S/HMO sites

differing from the S/HMO I plans. The BBA in 1997 required that the Secretary submit two reports

to Congress. The first, submitted in February 2001, recommended ending the demonstration 

and moving the plans into the Medicare+Choice program. The second, sent to Congress in February

2003, is the final evaluation report on the project.

HCFA approved four S/HMO demonstration sites in 1985, of which three remain in operation. The

four were Elderplan in Brooklyn, New York (now providing services there and in other counties in

New York); Medicare Plus II (now Senior Advantage II), operated by Kaiser North West in Portland,

Oregon; Senior Care Action Network (SCAN) in Long Beach, California; and Seniors Plus in

Minneapolis, Minnesota. Seniors Plus closed in 1995. Based on negative findings of an evaluation

conducted from 1985 to 1989, the Congress authorized the establishment of a second generation

demonstration plan incorporating a new approach to care management. One second generation plan,

operated by Health Plan of Nevada, was started in 1996. Five applicants received developmental

grants to start S/HMO II model plans but chose not to establish them. The first generation sites were

offered the opportunity to convert to the S/HMO II model. They chose to retain the older model of

care after considering the requirements of the new model and the financial uncertainties associated

with use of the new regression-based S/HMO II payment method.

Evaluating S/HMOS: Process and Results

Evaluation has been an integral part of the S/HMO demonstration since its inception. HCFA first

evaluated S/HMO I sites in the 1980s. A second evaluation conducted for CMS —focused on the

S/HMO II site —has also been completed. CMS reported preliminary findings of the second

evaluation and additional findings on S/HMO I in 2001 and final results on S/HMO II in February

2003.

The first evaluation found that although the S/HMO I plans did indeed offer long-term care services,

they did not develop well-coordinated systems of care with effective communication across acute and

chronic medical benefits. The principal problem was that the projects did not establish good working

relationships between physicians and case managers (Harrington et al. 1993). Physicians did not

change their practice style and remained uninvolved with other participants in the delivery system.

Since the first evaluation, one S/HMO I plan, Kaiser North West in Portland Oregon (a group model

HMO) has successfully integrated care. This plan has adopted several interdisciplinary team

organization and numerous geriatric care techniques in the S/HMO and in its Medicare+Choice plan. 

The other S/HMO I plans have not made similar use of geriatric care techniques (DHHS 2003).
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 7 

The 2001 Report to the Congress

The February 2001 Report to the Congress (DHHS 2001) included additional findings on the S/HMO

I plans and preliminary findings from the evaluation of the S/HMO II plan. The evaluation estimated

plan case-mix using a composite of measures—self-reported health status, mental and physical

functioning, and the presence of a chronic condition. After adjustments were made for differences in

enrollee age, sex, and Medicaid status—the factors used to determine payment in the S/HMO I

demonstration—members in two of the plans did not appear to have greater frailty on these measures

than members of Medicare+Choice plans. The exception was the Kaiser plan, which did enroll a

more frail population.

The evaluation also examined member satisfaction in the S/HMO I plans. It used data on 10

measures of satisfaction from the Consumer Assessments of Health Plans Study (CAHPS) to 

compare responses of S/HMO members and members of area Medicare+Choice plans. The

comparison showed that S/HMO enrollees are no more satisfied than members of Medicare+Choice

plans even though they receive greater benefits.

The 2001 report also concluded that there was no consistent evidence of a positive effect of S/HMO

II benefits on health or functional status and that the S/HMO II plan had small or statistically

insignificant effects on service use. The report recommended that all existing S/HMOs be converted

to standard Medicare+Choice plans. It recommended phasing out supplemental payments and

phasing in the M+C risk-adjustment approach during a transition period.

The 2003 Report to the Congress

The February 2003 Report to the Congress (DHHS 2003) expanded on the research on the S/HMO II

reported in 2001, but the findings did not differ substantially from those of the earlier report. The

2003 report does not include recommendations. It focuses on performance of S/HMO II regarding

care coordination, service utilization, health and functional status, and quality of care.

Care coordination

The 2003 report presents some evidence that care coordination at the S/HMO II directed its expanded

and supplemental benefits to targeted members. Fifteen percent of S/HMO II members and 47

percent of members who may have been eligible based on health status received comprehensive

assessments. Care plans were prepared for 17 percent of members. Use of expanded and

supplemental benefits was concentrated among those with an assessment or care plan. For example,

2.3 percent of all members received personal assistance services while 10.8 percent of those with an

assessment or care plan received them. In general, members at high risk of hospitalization were

significantly more likely to have had assessments and care plans and were more likely to receive both

expanded and supplemental benefits (DHHS 2003).
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 8 

Service use

Like the first evaluation, the final evaluation found mixed effects of S/HMO II on service use

contrasted with a comparison Medicare+Choice plan:

• The S/HMO II did not consistently reduce the rate of hospitalization in the overall sample of

S/HMO members. S/HMO members with no nursing home use followed for the full 22 months

showed a 1.5 percent lower rate of hospitalization. Although this finding was statistically

significant, analysis of a sample of S/HMO members followed less than 22 months due to

disenrollment or death found a statistically significant 4.1 percent greater rate of hospitalization.

• S/HMO members with no nursing home use before the demonstration used more physician visits

and had more home health use but did not use less hospital care compared to members of the

comparison plan.

• The S/HMO substantially reduced the rate of hospitalization among community beneficiaries

who had two or more hospitalizations in the prior year (the hospitalization risk group). Since

S/HMO II benefits were targeted at higher risk beneficiaries, this greater impact was expected. 

However, the hospitalization risk group was very small. Although 27 percent of members were

targeted and received either a special evaluation or extended services, only about 1 percent of

S/HMO community members had two or more hospitalizations

• S/HMO members living in the community were more likely to be admitted to skilled nursing

homes than was the case for M+C enrollees. Too few enrollees were admitted to custodial

nursing care to assess whether the S/HMO affected their use rates. Inability to determine the

S/HMO’s effect on nursing home care is unfortunate, as one of the original goals of the

demonstration was to reduce institutionalization. 

A separate study of service use from 1998 to 2000 (after the end of the CMS evaluation) found that

the S/HMO II plan had mixed impacts on hospital use (Newcomer et al. 2002). The number of

hospital discharges decreased by 7 percent, and the number of hospital inpatient days by 1 percent,

for patients seen in plan clinics (70 percent of S/HMO II members are in clinics and 30 percent are in

less organized network medical practices). Hospital discharges increased 5 percent and inpatient

days 17 percent for patients seen by plan network physicians, however. These findings suggest that

more organized delivery systems control utilization better than less organized systems but do not

necessarily demonstrate that the S/HMO II delivery model in and of itself is effective.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 9 

Health and functional status

One of the goals of S/HMO II is to maintain function of frail beneficiaries and slow the progression

of disability. The 2003 report also examined data from a survey on health status, limitations in

ADLs, and limitations in instrumental activities of daily living (IADLs) to determine whether the

S/HMO slowed or reversed decline in health status or progression of disability. The plan surveys

members with a Health and Functioning Assessment instrument to gather data for risk-adjusted

payment and to identify members at risk of health care use or disability. The evaluation findings in

this area were:

• The S/HMO did not consistently improve physical, cognitive, and emotional health of members

in the overall S/HMO sample. The evaluation compared members of the S/HMO with a

comparison group of members of a Medicare+Choice plan also operated by HPN. The S/HMO

and the comparison plan differed in two of ten comparisons, with fewer S/HMO than

Medicare+Choice members reporting improved general health but more reporting memory

improved or unchanged.

• The S/HMO did not consistently improve performance of ADLs or IADLs by members in the

overall S/HMO sample. In 10 of 12 ADL comparisons there were no differences between the 

S/HMO and the comparison group. In two ADL comparisons significantly fewer S/HMO

members reported new or continuing difficulty eating. In 11 of 14 IADL comparisons there were

no differences between the S/HMO and the comparison group. Fewer S/HMO members reported

new difficulty with meal preparation, housework, or managing finances.

• The S/HMO did not consistently improve measures of physical, cognitive, and emotional health,

ADL performance, and IADL performance across eight groups of S/HMO members considered 

at high risk of health problems or decline in functioning. The evaluation concluded that the

limited number of apparently significant results were not statistically meaningful and could be

attributable to chance when the 624 comparisons were made.

Quality of care

Another goal of the S/HMO model is to improve overall quality of care for all members. The

evaluation, however, shows no strong evidence of superior quality of care for S/HMO II members: 

• The S/HMO performed better than the comparison plan on two measures of preventive services

use but was no different on two other measures. Consistent with other research on preventive

service use in managed care, both the S/HMO and the comparison plan had greater preventive

service use than traditional Medicare. In other analyses, Health Plan Employer Data and

Information Set (HEDIS) data indicated no difference between S/HMO and area

Medicare+Choice plans. These findings suggest that the performance of the S/HMO is

associated with characteristics of managed care rather than with the unique features of the

demonstration.
1 This period included the startup of the geriatric team and care coordination at the second generation plan (Newcomer et al.

 2000).

Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 10 

• S/HMO enrollees with chronic obstructive pulmonary disease (COPD) and congestive heart

failure (CHF) had higher rates of recommended physician visits than those in the comparison

plan. There was no difference in diabetes care. HEDIS data show that the S/HMO performs

better than the comparison plan on some measures of diabetes and heart disease care and worse

on others. In comparison with area Medicare+Choice plans, the S/HMO generally performs no

better than and in some cases worse on these measures.

• S/HMO enrollees did not consistently have lower rates of hospitalization for potentially

avoidable hospitalization conditions than the comparison Medicare+Choice plan, with a higher

risk for pneumonia hospitalization and a lower risk for respiratory complications. In 12

comparisons with fee-for-service, the S/HMO showed significantly lower rates for 7 cases, higher

rates for 2, and no significant difference for 3 cases.

The evaluation: the 2003 versus 2001 report

The 2003 evaluation report remedied several limitations of the 2001 report. The first report was

conducted at an early stage of the demonstration and followed beneficiaries for only a year. Both the

timing and the short period may have made it difficult to capture impacts on health status and

functioning. Health Plan of Nevada, the HMO participating in the demonstration, maintained a

comparison Medicare+Choice plan from the start of the evaluation period in July 1997 until April

1999. The closure of the comparison plan reduced the opportunity to find evidence of impacts. In

addressing some of these problems, the 2003 report:

• studied the impact on functional status over twice as long and used twice as large a sample as that

used in the 2001 study.

• analyzed service use data by following enrollees for 22 months, as compared with about one year

for the 2001 analysis.1

• compensated for loss of the comparison group before the end of the demonstration by adding

analysis of Medicare Current Beneficiary Survey data to the basic evaluation.

• analyzed an S/HMO sample that included more beneficiaries 85 and older, with COPD or CHF,

or with low income.

Despite these refinements in the evaluation process, the 2003 effort produced essentially the 

same results as those reported in 2001.

Risk Adjustment

Medicare makes risk-adjusted payments to Medicare+Choice and demonstration plans to match

payments to members’ expected costs of care. This encourages plans to compete on the basis of the

benefits and services they offer beneficiaries. Appropriate risk adjustment is important to counter

incentives plans would otherwise have to avoid frail beneficiaries with higher costs.
2 Beneficiaries report functional status data directly to CMS contractors. Plans do not collect or report these data, possibly

mitigating any inappropriate change in coding.

Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 11 

Starting in 2004, CMS will begin phasing in a new risk adjustment system. It will use the CMS

hierarchical condition category (HCC) model based on diagnoses from both hospital inpatient and

ambulatory settings. This model is a better predictor of Medicare costs than the model currently in

use, which uses only diagnoses collected from hospital stays. 

Under the new risk adjustment system, CMS will use special models for several types of beneficiaries

and plans. Beneficiaries residing in institutions and those on dialysis with ESRD (starting in 2005)

are paid under models specially calibrated for them. CMS will risk adjust payments to PACE

programs, S/HMOs, and other demonstration plans using a hybrid system that combines the CMS

HCC model with additional adjusters based on ADLs. CMS will use Health Outcomes Survey

(HOS) data to measure the risk of frail beneficiaries in S/HMO demonstration plans with plan-level

risk adjusters.

CMS will introduce risk adjustment for the S/HMOs using a modified version of the phase-in

schedule mandated by BIPA for all Medicare+Choice plans together with the frailty adjuster. 

Payment will be a blend of 90 percent of the old S/HMO payment method and 10 percent new riskadjusted payment in 2004 (compared with a 70/30 old/new blend for Medicare+Choice plans that

year). The risk-adjusted portion increases to 50 percent in 2005, 75 percent in 2006, and 100 percent

in 2007. Each beneficiary’s total risk score will equal the sum of the individual’s risk adjustment

score from the CMS-HCC model and the average frailty score for the plan based on the plan’s HOS

survey respondents. The total risk score is multiplied by the county rate to determine the riskadjusted portion of payment.

Risk adjustment for specialty plans such as the S/HMO raises problems of data and measurement. 

The Commission is concerned with the accuracy of functional status data, the basis for the

calibration, and the potential for changes in the coding of functional status that would inappropriately

increase payments.2

 Risk adjustment using survey data or other information not available for all

beneficiaries in a given county would require modification of Medicare+Choice county payment

rates for consistent treatment of costs. Consequently, risk adjustment using functional status data

cannot be used for all M+C plans even if they have a high share of frail enrollees. We address this in

our discussion of issues for future consideration.

Some Medicare+Choice plans enroll significant numbers of beneficiaries with chronic conditions and

limitations in ADLs. However, functional status information on ADLs and IADLs is not available

for all members of plans. As a result, the frailty adjuster adopted by CMS for the S/HMO plans

cannot be applied to all members of Medicare+Choice plans. Since HOS data are now available for

samples of members of all Medicare+Choice plans, PACE organizations, and demonstration plans, it

would be possible to calculate organization level frailty adjusters for all plans subject to

Medicare+Choice risk adjustment. This approach is the only feasible option for functional status

adjustment in light of current data and models.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 12 

Recommendations and Policy Issues

The social health maintenance organization is scheduled to end by December 31, 2004. CMS has

announced that, in the absence of Congressional action, it intends to continue the demonstration with

a risk-adjusted payment incorporating a frailty adjustment through 2004. As CMS considers options

for the future of the demonstration, it will take into account the findings of the evaluations,

experience with other demonstrations, and developments in Medicare+Choice risk adjustment.

To guide its consideration of the future of the S/HMO demonstration, the Commission has relied on

three principles: 

• Equity among beneficiaries. Medicare provides a national benefit package, regardless of what

type health plan a beneficiary is in. Beneficiaries enrolled in Medicare+Choice obtain care from

private health plans and receive Part A and Part B covered benefits. They may also receive other

benefits, such as reduced cost-sharing requirements or some coverage for outpatient drugs or

other products or services not covered by traditional Medicare for a premium paid by the

beneficiary, employer, or former employer or from efficiencies in delivering Part A and Part B

services, but the government does not pay for these or mandate that they be provided. All

beneficiaries should have access to the same package of government financed benefits.

• Equity among health plans and providers. Medicare makes payments to cover the costs of a

reasonably efficient provider with adjustments to reflect the local price level and to meet specific

policy objectives. In general, payment is varied by service provided and by beneficiary

characteristics rather than according to the plan or provider that supplies the service. Certain

plans should not be advantaged relative to other plans. 

• Capitation payments for frail beneficiaries. Payments should be based on beneficiaries’

characteristics, not on the type of plan to which they belong. The Commission has previously

recommended that payments follow the person and not depend on characteristics of the plan

(MedPAC 1999).

The Commission has considered each of these principles in arriving at the recommendations that it

adopted at its April 2003 public meeting listed below. Equal treatment of beneficiaries, equity for

plans, using demonstrations to learn during limited periods of time, and payments that follow the

person, not the plan, are all underlie our recommendations.
3 At the time of Commission action, the demonstration was scheduled to conclude on December 31, 2003. CMS subsequently

 extended it through December 31, 2004.

Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 13 

RECOMMENDATION 1

The Commission recommends that, at the conclusion of the demonstration on

December 31, 2003, the Secretary request that the existing social health maintenance

organization (S/HMO) plans apply to participate in the Medicare+Choice program as

coordinated care plans. The benefit mandate would end. During the transition period

from 2004 through 2007, comprehensive risk adjustment applied to the S/HMO plans

should be the same as for Medicare+Choice plans and the 5.3 percent would be phased

out.

In its concern for equal treatment of all beneficiaries, the Commission has considered the impact on

beneficiaries of ending the demonstration. Members who choose to leave the former demonstration

plans could enroll in another Medicare+Choice plan. All the markets in which the S/HMOs operate

have multiple plan choices (Table 2). If available options stay as they are in 2003, beneficiaries

could choose plans with outpatient drug coverage in all affected markets and zero premium plans in

three of four areas. Beneficiaries who choose to return to fee-for-service Medicare would have the

same protections as members of Medicare+Choice and demonstration plans that stop serving their

area or go out of business. They would be guaranteed availability of Medigap plans A, B, C, and F. 

In states like New York and Nevada they would have additional protections under state law.

The Commission recommends that the demonstration end because certain plans should not be

advantaged relative to other plans, and the 5.3 percent add-on received by S/HMO plans unfairly

advantages these plans relative to others.3

 When the demonstration ends, the plans would not be

required to offer the S/HMO expanded benefit package. They could, however, choose to continue to

offer expanded benefits by realizing cost reductions or by charging members premiums for the

expanded benefits.

The Commission does not believe as a general rule that the Congress should mandate a specific

delivery system. This is particularly true in the case of S/HMOs, as there is scant evidence that these

models have achieved their objectives. The S/HMO demonstration plans enroll members with health

and functional status similar to beneficiaries enrolled in Medicare+Choice plans. To the extent that

Medicare+Choice plans enroll frail members, the plans should be paid adequately to minimize

incentives to avoid them or to stint on their care. The same adjustment would apply to payment for

all plans.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 14 

RECOMMENDATION 2

The Secretary should consider making payment adjustments for frail populations. 

Options may include using administrative data, survey data, or statistical modifications

to the CMS HCC risk-adjustment model. After 2007 the Secretary should set capitation

payments for frail beneficiaries based on their characteristics, if frailty adjustment is

found to be necessary. This adjuster could either be a component of the risk

adjustment or a separate frailty adjuster.

The risk-adjustment approach employed by CMS for all Medicare+Choice plans improves the

accuracy of payments to plans that enroll a cross section of beneficiaries. In keeping with the

principle of equity for plans, the Commission believes that CMS should continue examining methods

to improve payment accuracy for high cost and frail populations. It should not apply a frailty

adjuster to S/HMOs before it is ready for all plans.

CMS has proposed applying frailty risk adjustment to S/HMOs, PACE programs, and certain other

demonstrations. It is considering the appropriate method for implementing frailty adjustment across

the Medicare+Choice program. Many Medicare+Choice plans enroll beneficiaries with chronic

conditions and limitations in ADLs. The Commission has recommended that, in the long term, the

Secretary should set capitation payments for frail beneficiaries based on their characteristics, not on

the type of plan to which they belong (MedPAC 1999). 

Issues for future consideration

Medicare+Choice rates are based on 1997 county payment rates in effect before implementation of

the BBA. Currently, new Medicare+Choice risk adjusters can only be implemented after rescaling

the Medicare+Choice county rates to eliminate demographic adjustments built into the 1997 rates and

incorporate county risk adjustment based on the new adjusters. These rules reduce the flexibility

CMS has to introduce new risk adjusters such as those based on functional status data collected by

survey. Since survey data are not currently available for all fee-for-service enrollees in every county,

it is not possible to rescale county payment rates to make them consistent with survey-based risk

adjusters. The Secretary may need to seek a technical correction to the statute from the Congress to

allow an improved risk and frailty adjustment system to be implemented. CMS intends to collect

functional status data on a sample of fee-for-service beneficiaries and may find that an adjustment to

county payment rates is not necessary. In that case, a change to the statute may not be necessary.

The Congress could further improve payment accuracy by creating a level playing field by paying the

same amount to plans as it spends in the fee-for-service program. The Congress should set payments

to Medicare+Choice plans at 100 percent of per capita local fee-for-service spending, risk adjusted

(MedPAC 2002).
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 15 

In 2004, CMS will make risk adjustment budget neutral to the original demographic system for M+C

plans. It estimates that, in the absence of budget neutrality, risk adjustment would reduce aggregate

M+C payments (CMS 2003b). Payments to plans will be increased that year by a constant 

percentage (estimated at 16.3 percent when fully phased in) to keep aggregate M+C payments from

declining. As a result, payments for beneficiaries enrolled in M+C plans will be higher than

payments for fee-for-service beneficiaries of similar risk.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 16 

References

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services.

Advance notice of methodological changes for calendar year (CY) 2004 Medicare+Choice (M+C)

payment rates, March 28, 2003a.

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services.

Announcement of calendar year (CY) 2004 Medicare+Choice (M+C) payment rates, May 12, 2003b.

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services.

Summary of benefits for 2003 and major changes since 1998, at

http://www.cms.gov/healthplans/trends/BenefitsCoverRV.pdf, accessed March 31, 2003c.

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services.

Medicare Managed Care Contract Report (Data as of December 1, 1990).

Centers for Medicare & Medicaid Services (CMS), Department of Health and Human Services.

Medicare Managed Care Contract Report (Data as of December 1, 1995).

Cutler DM. Declining disability among the elderly. Health Affairs. November/December 2001,

Vol. 20, No.6, p. 9-27.

Department of Health and Human Services. Report to the Congress on evaluation results for the

social/health maintenance organization II demonstration and evaluation results for the ESRD

managed care demonstration. Washington (DC), HHS. 2003.

Department of Health and Human Services. Report to the Congress. Social health maintenance

organizations: transition into Medicare+Choice. Washington (DC), HHS. 2001.

Harrington C, Lynch M, Newcomer R. Medical services in social health maintenance organizations.

The Gerontologist. December 1993, Vol. 33, No. 6, p. 790-800.

Medicare Payment Advisory Commission. Report to the Congress: Medicare payment policy.

Washington (DC), MedPAC. March 2002.

Medicare Payment Advisory Commission. Report to the Congress: Selected Medicare issues.

Washington (DC), MedPAC. June 1999.

National Chronic Care Consortium. Case management for the frail elderly: a literature review on

selected topics. Bloomington (MN), National Chronic Care Consortium. October 1997. Available

at http://www.nccconline.org/products/M10097.pdf.
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 17 

Newcomer R, Harrington C, Kane R. Challenges and accomplishments of the second generation

social health maintenance organization. The Gerontologist. December 2002, Vol. 42, No. 6,

p. 843-852.

Newcomer R, Harrington C, Kane R. Implementing the second generation social health maintenance

organization. Journal of the American Geriatrics Society. July 2000, Vol. 48, No. 7, p. 829-834.

Schore JL, Brown RS, Cheh VA. Case management for high-cost Medicare beneficiaries. Health

Care Financing Review. Summer 1999, Vol. 20, No. 4, p. 87-101.
Commissioners

 voting 

on recommendations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration * August 2003 

Commissioners’ voting on recommendations

In the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, the

Congress required MedPAC to call for individual Commissioner votes on each recommendation, and

to document the voting record in its report. The information below satisfies that mandate.

Recommendation 1

The Commission recommends that, at the conclusion of the demonstration on December 31, 2003,

the Secretary request that the existing social health maintenance organization (S/HMO) plans apply

to participate in the Medicare+Choice program as coordinated care plans. The benefit mandate

would end. During the transition period from 2004 through 2007, comprehensive risk adjustment

applied to the S/HMO plans should be the same as for Medicare+Choice plans and the 5.3 percent

would be phased out.

Yes: DeBusk, DeParle, Durenberger, Feezor, Hackbarth, Muller, Nelson, Newhouse,

Raphael, Reischauer, Rosenblatt, Smith, Stowers, Wakefield, Wolter

Absent: Burke, Rowe

Recommendation 2

The Secretary should consider making payment adjustments for frail populations. Options may

include using administrative data, survey data, or statistical modifications to the CMS HCC riskadjustment model. After 2007 the Secretary should set capitation payments for frail beneficiaries

based on their characteristics, if frailty adjustment is found to be necessary. This adjuster could

either be a component of the risk adjustment or a separate frailty adjuster.

Yes: DeBusk, DeParle, Durenberger, Feezor, Hackbarth, Muller, Nelson, Newhouse,

Raphael, Reischauer, Rosenblatt, Smith, Stowers, Wakefield, Wolter

Absent: Burke, Rowe
More about MedPAC

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration | August 2003

Commission members

Glenn M. Hackbarth, J.D., chairman

Independent consultant

Bend, OR

Robert D. Reischauer, Ph.D., vice chairman

The Urban Institute

Washington, DC

Term expires April 2004

Sheila P. Burke, M.P.A.,

R.N., F.A.A.N.

Smithsonian Institution

Washington, DC

Allen D. Feezor

University Health Systems

of Eastern North Carolina

Greenville, NC

Ralph W. Muller

University of Pennsylvania Health System

Philadelphia, PA

Joseph P. Newhouse, Ph.D.

Harvard University

Boston, MA

Alice Rosenblatt, F.S.A.,

M.A.A.A.

WellPoint Health Networks

Thousand Oaks, CA

John W. Rowe, M.D.

Aetna Inc.

Hartford, CT

Term expires April 2005

Nancy-Ann DeParle, J.D.

JPMorgan Partners

Washington, DC

David F. Durenberger, J.D.

Nat'l Institute of Health Policy, U. of St. Thomas

Minneapolis, MN

Carol Raphael

Visiting Nurse Service of New York

New York, NY

Mary K. Wakefield, Ph.D.,

R.N., F.A.A.N.

Center for Rural Health

University of North Dakota

Grand Forks, ND

Nicholas J. Wolter, M.D.

Deaconess Billings Clinic

Billings, MT

Term expired April 2003

Autry O.V. “Pete” DeBusk

DeRoyal

Powell, TN

Glenn M. Hackbarth, J.D.

Alan R. Nelson, M.D.

American College of Physicians

Washington, DC

Robert D. Reischauer, Ph.D.

David A. Smith

AFL–CIO

Washington, DC

Ray E. Stowers, D.O.

Oklahoma State University College 

of Osteopathic Medicine

Tulsa, OK
Social Health Maintenance Organization (S/HMO): Recommendations for the Future of the Demonstration | August 2003

Commission staff

Mark E. Miller, Ph.D.

Executive director

Publications director

Sarah Thomas, M.S.

Research directors

Jack Ashby, M.H.A.

Jill Bernstein, Ph.D.

Scott Harrison, Ph.D.

Kevin J. Hayes, Ph.D.

Sally Kaplan, Ph.D.

Karen Milgate, M.P.P.

Julian H. Pettengill, M.A.

Nancy Ray, M.S.

Analysts

Sharon Bee Cheng, M.S.

David V. Glass, M.S.

Timothy F. Greene, M.B.A.

Craig K. Lisk, M.S.

Ann Marshall, M.S.P.H.

Anne Mutti, M.P.A.

Susanne Seagrave, Ph.D.

Joan Sokolovsky, Ph.D.

Ariel Winter, M.P.P.

Chantal Worzala, Ph.D.

Daniel Zabinski, Ph.D.

Research assistant

Sarah Lowery, B.A.

Special assistant to the 

executive director

Marian Lowe

General counsel

Helaine Fingold, J.D.

Administrative staff

Reda H. Broadnax, B.S., 

Executive officer

Wylene Carlyle

Diane E. Ellison

Plinie (Ann) Johnson

Cheron McCrae

Rachel Vallieres, B.A.

Cynthia Wilson