FEDERAL

EMPLOYEES’

HEALTH PROGRAM

Reasons Why HMOs

Withdrew in 1999

and 2000

United States General Accounting Office

GAO Report to the Chairman

Subcommittee on Civil Service

Committee on Government Reform

House of Representatives

May 2000

GAO/GGD-00-100

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

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May 2, 2000

The Honorable Joe Scarborough

Chairman, Subcommittee on Civil Service

Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

This report responds to your request for information on the withdrawal of

health maintenance organizations (HMO) from the Federal Employees’

Health Benefits Program (FEHBP). Our specific objectives were to identify

(1) changes in the number of HMOs participating in FEHBP from plan

years 1994 to 2000, (2) reasons why HMOs withdrew from FEHBP in plan

years 1999 and 2000, and (3) FEHBP enrollment experiences for HMOs

that withdrew from the program in 2000.1

To identify changes in the number of HMOs entering or leaving FEHBP in

recent years, we reviewed the Office of Personnel Management’s (OPM)

annual FEHBP open season guides and benefits administration letters.

To identify why HMOs withdrew from FEHBP in 1999, we relied on an

OPM analysis of the survey responses it received from 40 of the 74 HMOs

that left the program. For 36 of the 62 HMOs that left the program in 2000,

we obtained information on their reasons for withdrawing. In most cases,

these HMOs gave their reasons for leaving in letters to OPM; in other

cases, we followed up with HMOs to clarify their reasons. We also (1)

interviewed officials from OPM and organizations who were familiar with

the national HMO environment and (2) reviewed recent articles and

publications on changes in the national HMO setting. We did not attempt to

identify additional documentation from HMOs to validate their reasons for

withdrawing from FEHBP.

To identify recent enrollment experiences for plans withdrawing from

FEHBP in 2000, we obtained and analyzed OPM enrollment data for these

plans. (App. I contains a detailed description of our objectives, scope, and

methodology.)

 1

Under FEHBP, a single HMO organization may offer different individual plans, in different

geographical areas. In this report, our unit of analysis pertains to the individual plans. However, to

simplify report presentation, we used the terms “plans” and “HMOs” interchangeably.
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We requested written comments on a draft of this report from OPM. These

comments are discussed at the end of this letter and reprinted in appendix

II. We performed our work from August 1999 to March 2000 in accordance

with generally accepted government auditing standards.

For plan years 1999 and 2000, 136 HMOs withdrew from FEHBP—74 in

1999 and 62 in 2000. While a limited number of new plans entered FEHBP

in 1999 and 2000, the withdrawals, combined with plans that either

merged, consolidated service areas, or left service areas reduced the

number of HMOs participating in FEHBP from 476 in 1996 to 277 HMOs in

2000. (See fig. 1.)

Source: GAO analysis of OPM data.

The growth or decline in the number of HMOs participating in FEHBP was

not always the result of plans entering or withdrawing from the program.

Some HMOs added new service areas, while others split their existing

service areas. In other cases, HMOs merged, consolidated service areas, or

left service areas. In any event, about 64,000 (or less than 2 percent) of the

4.1 million FEHBP enrollees were affected by HMOs’ decisions to

withdraw in 2000.

Results in Brief

Figure 1: Number of HMOs Participating

in FEHBP at the Beginning of the Plan

Year
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Page 3 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

According to OPM officials and representatives from HMOs that left

FEHBP, the factors most frequently cited for HMO withdrawals from the

program in plan years 1999 and 2000 were insufficient enrollments,

unpredictable plan utilization/excessive risk, and noncompetitive premium

rates. In addition to citing these as the major factors influencing plans’

decisions to withdraw, these officials and representatives noted that

oftentimes it was a combination of these factors, rather than a single

factor, that caused a plan’s withdrawal. Other factors that plan

representatives cited for withdrawing from FEHBP included mergers,

federal mandates to provide selected benefits, OPM’s administrative

requirements, and saturated market areas. However, plan representatives

and others with whom we spoke generally agreed that, in most cases,

mandates and administrative requirements would not have been major

factors contributing to a plan’s decision to withdraw.

According to officials from the Health Insurance Association of America

(HIAA) and the American Association of Health Plans (AAHP), an

adequate enrollment base is perhaps one of the most important

requirements necessary for plans to sustain their operations. An official

from the Employee Benefit Research Institute (EBRI) told us that recent

plan withdrawals from FEHBP, in all likelihood, represented a market

correction in that plans with low FEHBP enrollments in areas dominated

by large plans concluded that they could not compete effectively and

therefore withdrew.

OPM plan enrollment information showed that 46 of the 62 HMOs that

withdrew from FEHBP in 2000 actually increased enrollments between

1998 and 1999, 12 plans lost enrollment between 1998 and 1999, and 4

plans only had enrollment data for 1 year. From 1998 to 1999, of the 46

HMOs that increased enrollments, these increases numbered less than 100

enrollees for 26 of these HMOs. In addition, of the 62 plans that withdrew

in 2000, 26 had fewer than 300 enrollees. An OPM official told us that they

have the authority to terminate a plan’s participation in FEHBP if it has

less than 300 enrollees. However, OPM has seldom exercised this

authority.

FEHBP is the largest employer-sponsored health insurance program

offering the widest selection of health plans in the United States. Over 4.1

million enrollees, covering about 9 million federal civil service employees,

annuitants, and their dependents, participated in FEHBP in 1999. For fiscal

year 2000, the cost of this program is estimated at $20 billion.

Background
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Under FEHBP, enrollees can choose three basic types of health plans: feefor-service, HMOs, and point-of-service plans. Fee-for-service plans are

traditional types of insurance in which the health plan will either

reimburse the enrollee or pay the medical provider directly for each

covered medical expense. Upon receiving medical treatment, enrollees

usually pay a deductible and coinsurance or a copayment. Although few in

number, fee-for-service plans cover about 70 percent of the FEHBP

enrollees.

HMOs are health plans that provide care through a network of physicians

and hospitals in particular geographic or service areas. HMOs provide a

comprehensive set of services as long as enrollees use doctors and

hospitals affiliated with the HMO. Enrollees pay specified copayments for

primary care and specialist visits. Point-of-service plans are organizations

in which enrollees may receive services either from providers who are

affiliated with HMOs or from nonaffiliated providers. Enrollees may incur

substantial additional costs in the form of deductibles or copayments

when they use nonaffiliated providers.

The number of HMOs participating in FEHBP increased from 369 in 1994

to 476 in 1996. 2 Since then, the number of HMOs participating in FEHBP

has declined steadily to 277 in 2000. 3 Although 74 HMOs left the program

in 1999 and 62 left in 2000, the number of HMOs participating in FEHBP in

any particular year also depends on other factors, such as service area

consolidations or mergers among plans (plan reductions) or 2 plans

covering a service area previously covered by 1 plan (plan additions).

Figure 2 shows the number of HMOs participating in FEHBP as well as the

number of plan additions and reductions in each year from 1994 to 2000.

 2

For the purposes of this report, we considered point -of- service plans to be HMOs.

3

Plans that withdrew from FEHBP included those that terminated their participation during the plan

year as well as those that did not continue participating at the start of a new plan year.

Number of HMOs

Participating in FEHBP

Declined Since 1997
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Page 5 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Source: GAO analysis of OPM data.

Additions to the number of HMOs participating in FEHBP resulted from

new HMOs deciding to participate and from existing HMOs either splitting

a service area or designating an additional service area with a different

premium rate structure. As shown in figure 3, the number of new plans

entering FEHBP has declined each year since 1996, with substantially

fewer, 13, added during the last 2 years.

Figure 2: Number of HMOs Participating in FEHBP (1994-2000)
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Page 6 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Source: GAO analysis of OPM data.

Reductions in the number of participating HMOs are shown in figure 4.

These reductions resulted from HMO withdrawals from FEHBP, mergers,

service area consolidations, and HMOs deciding to terminate a plan in one

area while continuing to operate another plan in an adjoining area. In the

latter case, each plan—the one leaving and the one staying—had its own

premium rate structure.

Figure 3: FEHBP Plan Additions (1994-2000)
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Page 7 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Source: GAO analysis of OPM data.

Most of the HMOs that withdrew from FEHBP communicated their

intentions to leave the program at about the same time that their

applications for participation in the next contract year were due. Some

plans, however, did not notify OPM of their decisions to withdraw from the

program until after OPM had published its annual program guide.

While figures 3 and 4 show the number of additions and reductions in the

number of HMOs since 1994, several HMOs either expanded or reduced

their service area coverage without affecting the total number of HMOs

participating in FEHBP. Table 1 shows the numbers of HMOs that either

Figure 4: FEHBP Plan Reductions (1994-2000)
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Page 8 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

expanded or reduced their service areas from 1994 to 2000. Enrollees

living in affected areas would have either greater or fewer choices among

HMOs, depending on whether areas of coverage were expanding or

contracting.

Service area

Plan year Reductions Expansions

1994 4 35

1995 8 35

1996 4 48

1997 6 67

1998 12 45

1999 34 9

2000 23 11

Source: GAO analysis of OPM information.

Regarding the recent decline in the number of HMOs participating in

FEHBP, an official from EBRI told us that factors contributing to the

turnover in FEHBP were, in all likelihood, indicative of the managed care

market in general. This official indicated that some smaller plans may not

be getting a sufficient mix of healthy and less than healthy enrollees, and

that the number of HMOs participating in FEHBP is declining because of a

natural weeding out of those that cannot compete in the marketplace.

OPM, in its survey findings for plans that withdrew in 1999, stated that the

HMO industry as a whole had probably expanded beyond a point at which

it could sustain itself and an inevitable retrenchment was occurring.

In 1999, 74 HMOs withdrew from FEHBP; in 2000, 62 withdrew. Our

analysis of information that (1) OPM obtained from 40 HMOs that

withdrew in 1999 and (2) we and OPM obtained on 36 HMOs that withdrew

in 2000 showed that insufficient enrollment, unpredictable

utilization/excessive risk, and noncompetitive premiums were the reasons

most often cited for HMOs’ withdrawal from FEHBP. Table 2 shows our

categorizations and the frequency of the reasons HMOs gave for their

withdrawal. Some plans provided multiple reasons for leaving the

program.

Table 1: HMOs Reducing and

Expanding Service Areas (1994-2000)

Factors Influencing

Plan Withdrawals in

Plan Years 1999 and

2000
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Page 9 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Reasons for withdrawal (plans could Plan years

provide multiple reasons) 1999 2000

Insufficient enrollment 16 18

Unpredictable utilization/Excessive risk 15 18

Noncompetitive premiums 17 12

HMO mergers 9 8

Administrative requirements 13 7

FEHBP benefit requirements 5 6

Market area saturation 2 2

Note: OPM obtained information on reasons for withdrawal from 40 plans in 1999. For 2000, we

obtained withdrawal information from 36 plans, either from information these plans provided to OPM

or by contacting plan representatives.

Source: GAO analysis of information provided by HMOs.

OPM and plan officials told us that the above reasons for withdrawal,

oftentimes in combination, either had affected or were expected to

adversely affect a plan’s “loss ratio” and therefore a plan’s ability to

continue to provide healthcare benefits. Loss ratios are relationships

between premiums collected and plan expenses. According to national

organizations that study HMO issues, the profitability of HMOs has steadily

declined since 1994 to the point that many HMOs were showing losses.

According to AAHP officials, HMOs are no longer willing to take chances

or to be aggressive in their marketing plans unless plan executives are very

confident that their plans will succeed.

Eighteen of the 36 HMOs on which we obtained information about their

decision to withdraw from FEHBP in 2000 cited insufficient enrollment as

a reason. Of the 40 HMOs that responded to OPM’s survey of plans

withdrawing in 1999, 16 cited insufficient enrollment as a reason for

withdrawal. OPM’s analysis also indicated that many of the HMOs that had

joined FEHBP in recent years were the ones that cited low enrollments as

a reason for withdrawal.

According to OPM officials, OPM has the authority to terminate a plan’s

participation in FEHBP if it has less than 300 enrollees, although this

authority has seldom been exercised. Of the 62 HMOs that withdrew in

2000, 26 plans had fewer than 300 enrollees, and 17 of the 26 plans had

participated in FEHBP for 3 years or less. Plan representatives told us that

plan enrollment is one of the most critical components of a plan’s overall

profitability.

HIAA and AAHP officials told us that insufficient enrollments are of a

particular concern, especially for the typical small plan. They added that

for whatever reasons, some of the smaller HMOs in FEHBP apparently

Table 2: Factors Contributing to HMOs’

Withdrawal Decisions for Plan Years

1999 and 2000

Insufficient Enrollments
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Page 10 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

have been unable either to increase their enrollment base or to sustain a

meaningful enrollment. When less than expected enrollment increases or

declining enrollments fail to keep pace with utilization, these officials said

that the only prudent decision for a plan is to withdraw from FEHBP.

These officials believed that over the years, FEHBP has suffered from a

“small case syndrome” with a large number of smaller plans moving in and

out of the program.

For plan year 2000, 18 of the 36 HMOs providing reasons for withdrawal

cited utilization or risk factors as reasons for their withdrawals. Over half

(10 of 18) of the HMOs that cited insufficient enrollments as a reason for

withdrawing from FEHBP also cited unpredictable utilization/excessive

risk as a reason. For 1999, 15 of the 40 plans that withdrew cited

unpredictable utilization/excessive risk as a reason for withdrawal.

On the basis of personal characteristics (age, gender, and number of

dependents) of a plan’s enrollment population, plans expect to incur

medical and administrative expenses in amounts that will be covered by

premiums collected. If medical expenses are greater than expected, either

because medical services are used more frequently than expected,

innovative medical techniques come to market, or medical costs increase,

plan revenues will be insufficient to cover increased costs associated with

unexpected utilization.

AAHP officials provided us with an example of unpredictable utilization

involving the premature birth of triplets to an enrollee who belonged to a

smaller FEHBP plan. In this example, each baby had required extensive

amounts of high-cost intensive care that had not been expected. Therefore,

it was difficult to absorb the unanticipated cost of this care within the

plan’s rate structure. An OPM official told us that on the basis of

characteristics of a plan’s enrollment population and past experiences,

plans are willing to accept only a certain amount of financial risk. If plans

are operating on thin profit margins with declining enrollment bases or in

geographic areas where they cannot raise premiums because they are

competing with other plans, it is likely that they would have to withdraw

from the program because of their inability to remain profitable.

AAHP officials told us that plans develop their premium rates on the basis

of an expected enrollment base and predicted plan utilization while

maintaining compliance with OPM requirements. Each group of enrollees

covered by an HMO is expected to be self-supporting in that a covered

group that uses less services would not be expected to support other

Unpredictable

Utilization/Excessive Risk
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Page 11 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

covered groups that have experienced higher-than-expected utilization

rates.

OPM pays HMOs a fixed payment for each federal enrollee and generally

bases its payment on the rates the plan charges for enrollees in the two

largest nonfederal employer-sponsored groups in that community or

service area. OPM refers to this procedure under FEHBP as “community

rating.”

For HMOs withdrawing from FEHBP in 2000, 12 of the 36 cited

noncompetitive premiums as a reason for withdrawal. For HMOs’ leaving

in 1999, 17 of the 40 plans responding to OPM’s survey also mentioned

noncompetitive premiums as a reason.

According to an OPM official, for plans to be competitive in the

marketplace, they must offer their members benefit packages at premium

rates that their members view as a fair value. However, setting rates at

levels that will accomplish plan goals and objectives, yet at the same time

maintain competitiveness with other plans, including fee-for-service plans,

is difficult. Falling short of its enrollment goals or experiencing utilization

rates that are greater than predicted would require a plan to raise its

premiums to cover anticipated expenses. Such increases could make the

plan less attractive to its members if competitors’ premiums do not rise or

do not rise as much.

On a somewhat unrelated premium rate issue, HIAA officials told us that

several of their members had concerns about OPM requiring plans to

prepare rates for the next plan year about 4 months before they would

normally establish their premium rates for other clients. Some plans set

subsequent year rates with their non-OPM clients in the October or

November time frame, whereas OPM requires signed benefit and rate

proposals by June 1, for a plan year starting in January. According to HIAA

officials, in some cases, claims experience information from the previous

year may not be available in time to prepare FEHBP rates and OPM’s rate

submission deadlines might cause some plans to withdraw from FEHBP.

However, of the 36 plans from which we obtained information on their

withdrawal in 2000, none raised this as an issue. Also, an official in OPM’s

Office of Inspector General (OIG) told us that it was not unusual for

HMOs, when dealing with larger plans, to prepare rate proposals well in

advance of a new plan year.

Noncompetitive Premiums
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Page 12 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Eight of the 36 plans withdrawing in 2000 cited mergers as a reason for

leaving FEHBP, 1 less than the 9 plans that cited this reason in 1999.

According to industry studies, recent years have seen a large number of

mergers among HMO plans; 18 of the largest for-profit HMOs and managed

care companies were reduced to 6. HIAA officials told us that as the

managed care marketplace matures, even further mergers among HMOs

are likely. A study by the University of Minnesota School of Public Health4

concluded that smaller and younger HMOs were more likely to merge and

exit the market or fail. Older, larger, and more profitable HMOs were more

likely to merge and survive.

According to HIAA officials, mergers may make it easier for HMOs to

penetrate new areas, increase the size of their enrollment group, improve

efficiency, and decrease operational and administrative expenses.

Conversely, a 1999 magazine article5

 evaluating the effect of national

mergers on local market concentration suggests that too many mergers

may adversely affect the number of HMOs competing for enrollees.

In 2000, about half as many—7 versus 13—HMOs mentioned OPM

administrative requirements as a reason for withdrawing from FEHBP as

compared to 1999. Although mentioned, OPM requirements were viewed

as relatively minor reasons for plans’ withdrawing, according to most plan

representatives to whom we talked and officials from OPM, HIAA, and

AAHP.

OPM’s Annual Call Letter to plans that are expected to participate in

FEHBP describes both administrative and benefit requirements with which

plans would need to comply. Examples of administrative requirements

discussed in the call letter for plan year 2000 included such items as

patients’ bill of rights, patients’ access to medical records, the conduct of

customer service surveys, the use of electronic communications to send to

and receive information from OPM, and responsibility for preparing plan

brochures that comply with OPM guidelines.

In addition to meeting FEHBP administrative and benefit requirements, the

records of an HMO participating in FEHBP could be audited by OPM’s

OIG. Neither OPM nor plan representatives cited audit requirements as a

specific reason for withdrawal from FEHBP. According to HIAA officials,

some of its members did mention that the possibility of an OIG audit might

 4

HMO Mergers: Analysis of Trends and Public Policy Issues,University of Minnesota School of Public

Health, May 1996.

5

“HMO Consolidations: How National Mergers Affect Local Markets,” Health Affairs, July/August 1999.

HMO Mergers

Plan Administration

Requirements
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Page 13 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

discourage them from merging with a FEHBP plan. Plans believed that if

they merged, OPM’s OIG might later identify audit findings for which they

could be held responsible.

Six HMOs cited benefit requirements as a reason for withdrawing from

FEHBP in 2000 compared to five HMOs that cited benefit requirements in

1999. Like FEHBP administrative requirements, OPM officials believed that

even when mentioned, federal mandates to provide specific benefits were

rarely the primary reason for a plan’s withdrawal from FEHBP.

OPM requires FEHBP plans to provide benefits such as (1) allowing

obstetrician-gynecology physicians to act as primary care providers or

allowing their members to have direct access to these physicians for

routine gynecological examinations, (2) allowing consumers with complex

or serious medical problems to have direct access to a qualified plan

specialist for an adequate number of visits, and (3) limiting drug benefit

deductibles that customers are required to pay. An OPM official opined

that the number of benefits mandated under FEHBP pales in comparison

to the number mandated by states.

Two HMOs in plan years 1999 and 2000 mentioned market area saturation

as a reason for withdrawing from FEHBP. Market area saturation can

relate either to the number of HMOs providing service in a particular area

or to the low percentage of individuals in an area who select HMOs versus

fee-for-service plans.

According to OPM, saturation rates relate primarily to the number of

HMOs in an area. For example, smaller HMOs might have difficulty

entering areas, such as Baltimore-Washington, Minnesota-Michigan, or

California, in which many HMOs are already doing business. One plan

official told us that even a state such as Alabama, in which a large fee-forservice plan has more than 70 percent of the market, could have too much

HMO competition.

Although HMOs leaving FEHBP often said that they left due to insufficient

enrollment, departing plans typically were not losing enrollees. Rather, in

most cases, plan enrollments increased, but these increases were small.

Even with these increases, 1999 enrollments for the 62 plans that withdrew

from FEHBP in 2000 were about 64,000, or less than 2 percent of FEHBP’s

4.1 million enrollees. Table 3 shows increases and decreases in plan

enrollments for 58 HMOs that terminated their participation in 2000 but

which participated in FEHBP in both 1998 and 1999; 4 plans had

enrollment data for 1999 only.

FEHBP Benefit

Requirements

Market Area Saturation

Enrollment Increases

and Decreases for

HMOs Leaving FEHBP

in 2000
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Page 14 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Changes in 58 terminating plans’

enrollment from 1998 to 1999

Plan enrollees Increases Decreases

Under 100 26 7

100 to 499 12 3

Over 499 8 2

Total 46 12

Source: GAO analysis of OPM enrollment information for March 1998 and 1999.

As shown in table 3, in many cases, the enrollment increases were

relatively small, most often under 100 new enrollees.

Of the 62 plans that terminated their participation in 2000, 35 had

participated in FEHBP from 1996 to 1999. Of these 35 plans, 4 had fewer

enrollees in each subsequent year.

According to HIAA and AAHP officials, competing plans vary widely in

their ability to retain members. A plan’s poor marketing practices, less

generous benefits, higher beneficiary out-of-pocket costs, or inferior

service could cause enrollment decreases. In addition, disenrollment rates

could be higher in areas where competition among plans was strong or

where many beneficiaries were unaccustomed to managed care.

In commenting on a draft of this report, OPM said that it was in agreement

with the report’s findings. OPM said that our report confirmed its

observations and conclusions as to why plans left FEHBP in 1999. OPM

also noted that, along with the plans, it has processes in place to ensure

that enrollees are fully and timely notified when a plan withdraws from

FEHBP. OPM’s written comments are contained in appendix II.

As we arranged with your office, unless you publicly announce the

contents of this report earlier, we plan no further distribution until 10 days

after its date. At that time, we will send copies of this report to

Representative Elijah E. Cummings, Ranking Minority Member,

Subcommittee on Civil Service, House Government Reform Committee;

Representative Dan Burton, Chairman, and Representative Henry

Waxman, Ranking Minority Member, House Government Reform

Committee; the Honorable Janice R. Lachance, Director, OPM; and the

Honorable Jacob J. Lew, Director, OMB. Copies will also be made available

to others upon request.

Table 3: Changes in Enrollment From

1998 to 1999 for Plans Terminating

FEHBP Participation

Agency Comments and

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

Key contributors to this report are listed in appendix III. If you have any

questions, please call me or Larry Endy, Assistant Director, at

(202) 512-8676.

Sincerely yours,

Michael Brostek

Associate Director, Federal

 Management and Workforce Issues
Page 16 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Contents

1 Letter

18

Objectives 18

Scope and Methodology 18

Appendix I

Objectives, Scope, and

Methodology

Appendix II 20

Comments From the

Office of Personnel

Management

Appendix III 21

GAO Contacts and

Staff

Acknowledgments

Table 1: HMOs Reducing and Expanding Service Areas

(1994-2000)

8

Table 2: Factors Contributing to HMOs’ Withdrawal

Decisions for Plan Years 1999 and 2000

9

Table 3: Changes in Enrollment From 1998 to 1999 for

Plans Terminating FEHBP Participation

14

Tables

Figure 1: Number of HMOs Participating in FEHBP at the

Beginning of the Plan Year

2

Figure 2: Number of HMOs Participating in FEHBP

(1994-2000)

5

Figure 3: FEHBP Plan Additions (1994-2000) 6

Figure 4: FEHBP Plan Reductions (1994-2000) 7

Figures
Contents

Page 17 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Abbreviations

AAHP American Association of Health Plans

EBRI Employee Benefit Research Institute

FEHBP Federal Employees' Health Benefits Program

HIAA Health Insurance Association of America

HMO health maintenance organization

OIG Office of the Inspector General

OPM Office of Personnel Management
Appendix I

Objectives, Scope, and Methodology

Page 18 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

The Chairman, Subcommittee on Civil Service, House Committee on

Government Reform, asked us, among other things, to provide information

on the withdrawal of health maintenance organizations (HMO) from the

Federal Employees’ Health Benefits Program (FEHBP) in plan years 1999

and 2000. Our primary objectives were to identify

• changes in the number of HMOs participating in FEHBP since 1994,

• reasons why HMOs withdrew from FEHBP in plan years 1999 and 2000,

and

• FEHBP enrollment experiences for HMOs that withdrew from the program

in 2000.

To identify changes in the number of plans participating in FEHBP since

1994, we reviewed the Office of Personnel Management’s (OPM) annual

FEHBP open season guides and benefits administration letters. We

counted individual plans of an HMO separately when the benefits and

premiums applied to enrollees in specifically defined geographical areas.

However, we did not count as separate plans, those that offered both a

high and standard option. This method differs from OPM’s method of

counting, which is based on its number of HMO contracts irrespective of

whether a contract applies to more than one plan in more than one service

area. Our method of counting plans was designed to capture changes in

plan availability by service area that would not necessarily be discerned

when changes in the number of HMOs participating in FEHBP occur and

when these changes do not affect the number of contracts between OPM

and participating HMOs.

To identify reasons why HMOs withdrew from FEHBP in plan years 1999

and 2000, we relied primarily on information that OPM had obtained from

HMOs. For 1999, we used OPM’s analysis of 40 plans’ responses to its

survey asking them why they had withdrawn from the program. For 2000,

we reviewed correspondence that 40 plans sent to OPM advising it of their

intentions to withdraw from the program. As necessary, we followed up

with plans when their correspondence did not state reasons for their

withdrawal. Although 40 HMOs sent letters to OPM, we could only discern,

from the letters or our follow-ups, the reasons that 36 HMOs withdrew

from FEHBP in 2000. Because of time and resource constraints, we did not

attempt to identify the reasons for withdrawal for those plans that notified

OPM of their decision to withdraw from the program after August 1999.

To obtain additional insight on why HMOs might be withdrawing from

FEHBP, we discussed the reasons for their withdrawal with OPM officials

as well as officials from organizations such as the Health Insurance

Objectives

Scope and

Methodology
Appendix I

Objectives, Scope, and Methodology

Page 19 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Association of America (HIAA), the American Association of Health Plans

(AAHP), and the Employee Benefit Research Institute (EBRI). HIAA

officials describe HIAA as a nonprofit research, education, and lobby

association dedicated to preserving the private free-enterprise healthcare

system. It has over 260 members that represent companies that finance

and deliver healthcare and that provide other health insurance products

and services. AAHP officials said that AAHP represents more than 1,000

HMOs, preferred provider organizations, and other network-based

healthcare plans. It represents HMOs that cover federal enrollees; provides

technical support and legal expertise on state legislative and regulatory

issues; and offers education and training programs, research, and

publications to its members. EBRI officials describe EBRI as a nonprofit

organization that conducts independent public policy research and

provides education on economic security and employee benefits.

We also reviewed information obtained from the Internet and other

relevant health publications on various HMO issues, such as HMO mergers

or expansion trends at the national level, mandated benefit laws,

healthcare cost escalation, and HMOs’ profitability. We accepted the

reasons that plan representatives and others gave us as reasons for

withdrawing from FEHBP. We did not visit plans or attempt to identify or

obtain other documents to validate their reasons for withdrawing.

To determine FEHBP enrollment experiences for HMOs that withdrew

from the program in 2000, we analyzed 1996 to 1999 enrollment head-count

information prepared by OPM’s Office of the Actuary. OPM reports head

counts for all plans participating in FEHBP semiannually in March and

September of each year. We used March data because September 1999

data were not available when we did our analysis. Head counts represent

the total number of FEHBP enrollees by line of coverage-–individual or

family. Each enrollee represents a premium payer.

We did our review in Washington, D.C., from August 1999 to March 2000 in

accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from the Director of

OPM, and these comments are discussed in the letter and reprinted in

appendix II.
Appendix II

Comments From the Office of Personnel

Management

Page 20 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000
Appendix III

GAO Contacts and Staff Acknowledgments

Page 21 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000

Michael Brostek or Larry H. Endy (202) 512-8676

In addition to the individuals named above, Edward R. Tasca and

Michael G. Valle made key contributions to this report.

GAO Contacts

Acknowledgments
Page 22 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000
Page 23 GAO/GGD-00-100 Reasons Why HMOs Withdrew in 1999 and 2000
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