United States General Accounting Office

GAO Report to the Honorable 

John F. Kerry, U.S. Senate

May 1997 MEDICARE HMO

ENROLLMENT

Area Differences

Affected by Factors

Other Than Payment

Rates

GAO/HEHS-97-37

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-276654 

May 2, 1997

The Honorable John F. Kerry

United States Senate

Dear Senator Kerry:

Enrollment nationwide in the Medicare managed care program has more

than tripled in the last decade—growing from about 1 million enrollees in

1987 to about 3.8 million in 1996—but differences in enrollment by state

and by market area are striking. In some metropolitan areas like Portland,

Oregon, and Tucson, Arizona, the dominant form of Medicare managed

care—the health maintenance organization (HMO)—has enrolled more than

40 percent of the Medicare beneficiaries. By contrast, HMO enrollment in

most rural areas, and even in some metropolitan markets, is negligible.

Although such large disparities are sometimes attributed to areas’

Medicare payment rates for HMOs, studies have identified this as only one

of several influences at work. In a recent report prepared at your request,

we identified a number of areas where Medicare HMO enrollment was

higher despite lower payment rates and others where higher payments had

failed to generate enrollment.1

 To explore this issue further, you asked us

to

• identify patterns in HMO enrollment and Medicare payment rates, and

• examine selected geographical areas—in particular, some with higher

enrollment/lower payment rates and some with lower enrollment/higher

payment rates—and describe how the presence or absence of certain

factors could affect enrollment.

To identify where beneficiaries were enrolled in HMOs and the rates that

Medicare paid to HMOs, we used data obtained from the Health Care

Financing Administration’s (HCFA) Office of Managed Care.2

 For each of

3,141 counties in 1995, the latest data available at the time of our review,

these data showed (1) the number of eligible Medicare beneficiaries,

(2) the number enrolled in managed care plans with Medicare risk

1

Medicare HMOs: Rapid Enrollment Growth Concentrated in Selected States (GAO/HEHS-96-63,

Jan. 18, 1996).

2

HCFA, part of the Department of Health and Human Services, administers Medicare’s fee-for-service

and managed care programs. The Office of Managed Care within HCFA provides national direction and

leadership for Medicare managed care operations.

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contracts,3 and (3) the per enrollee amount that Medicare paid plans (that

is, the adjusted average per capita cost (AAPCC) rate for the county).4

 We

categorized county enrollment as lower, intermediate, or higher, and in a

similar manner categorized counties by payment rates. We then placed

each county in one of nine categories based on its combination of risk HMO

enrollment and payment rate. We focused our work primarily on counties

in three of the categories: lower enrollment/lower payment, lower

enrollment/higher payment, and higher enrollment/lower payment.

To identify factors that are likely to affect risk HMO enrollment, we

interviewed officials at HMO plans in three markets that had different

patterns of AAPCC payments and risk HMO enrollment—Boston, Detroit, and

Portland. To obtain more information on factors related to enrollment, we

interviewed officials at HCFA’s regional offices, six national HMO chains,

four additional regional HMOs, five management consulting firms, and five

employers. Appendix I presents a more detailed discussion of our

methodology.

Results in Brief Medicare payment rates to HMOs are often considered to be the primary

influence on Medicare HMO enrollment. However, our analysis suggests

that several other factors also play a key, and sometimes, dominant role.

These factors include HMO presence, number of Medicare beneficiaries,

and employers’ policies toward retiree health benefits. Their relative

importance varies across the country. Moreover, in markets such as

Detroit and Portland, the influence of Medicare payment rates is not

decisive.

Enrollment in risk HMOs was virtually nonexistent in most counties with

lower Medicare payment rates, but these lower rates were one of a

constellation of factors that make such counties unattractive business

propositions for Medicare HMOs. Our analysis showed that these counties

typically had few or no HMOs in their health care markets. Lower

enrollment counties were primarily rural—only 16 percent fell within a

3

Both HMOs and competitive medical plans enter into risk contracts with HCFA to provide

Medicare-covered services to beneficiaries who enroll. Although competitive medical plans are subject

to regulatory requirements similar to those for HMOs, they have greater flexibility in setting

commercial premium rates and in the services they offer to their commercial members. In this report,

our use of the term HMO includes competitive medical plans. HMOs entering into risk contracts

assume all the financial risk associated with providing Medicare-covered services to enrolled

beneficiaries. They receive a monthly per capita premium—the adjusted average per capita cost

payment—from HCFA for each Medicare beneficiary enrolled. These amounts vary by county.

4

HCFA pays some HMOs on a cost-reimbursement basis. This approach is similar to reimbursement on

a fee-for-service basis in that the provider assumes no risk that fees will be insufficient to cover costs

and therefore does not have the same incentive to reduce costs. We did not include

cost-reimbursement HMOs in our analysis.

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metropolitan statistical area (MSA)—and had fewer people overall and, in

particular, averaged a small number of Medicare beneficiaries.

Lower enrollment in risk HMOs did not occur in every county with lower

payment rates. Risk HMOs enrolled large numbers of beneficiaries in 92

lower payment counties in which factors other than payment rates were

more favorable. These counties were mostly in the West, where HMOs are

prevalent and many consumers have embraced this form of health care

delivery. A prime example is Portland, where about 41 percent of the

Medicare beneficiaries are enrolled in risk HMOs. HMOs have a long history

in the Portland area, and the share of the population enrolled in them is

high. Moreover, the risk HMO option has been available to Medicare

beneficiaries there for more than a decade. Finally, Portland illustrates a

pattern found in some other areas: higher enrollment in risk HMOs has

spread beyond the counties within the Portland MSA to the counties that

border Portland and three other Oregon MSAs.

In contrast, higher payment rates were no guarantee that risk HMO

enrollment would also be high. About one-third of the 100 counties with

the highest Medicare HMO payment rates in 1995 had risk HMO enrollments

that were slight or nonexistent. Most of these higher payment/lower

enrollment counties were in the South, where the presence of HMOs was

limited. However, several of these counties were in three Michigan urban

areas: Detroit, Ann Arbor, and Flint. Although the presence of HMOs in the

health care market was generally greater in the Michigan MSAs than in the

South, employers’ provision of richer retiree health benefits made the risk

HMO option less attractive to Medicare beneficiaries in Michigan.

In addition to population density and other factors external to HMOs, HMOs’

individual business strategies for the Medicare market are likely to affect

the future direction of risk HMO enrollment. The officials of multistate HMOs

we interviewed said they are seeking to expand their Medicare business.

Some HMOs emphasize expanding into contiguous service areas. Some

enter into new risk contracts for HMOs they already own, while others

focus on acquiring new HMOs with risk contracts. All these strategies are

likely to boost risk enrollment and, sometimes, to change the market

dynamics in certain areas. In Boston, for example, risk HMO enrollment

grew by 158 percent during a 2-year period after a new player entered the

market and offered a no-cost option to Medicare beneficiaries, causing

existing HMOs to change their offerings to remain competitive.

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Background Medicare helps the elderly and certain disabled people meet the costs of

health care services. Medicare is primarily a federally financed and

administered health insurance program, which reimburses fee-for-service

providers for each covered service rendered. However, Medicare also

offers beneficiaries the option of enrolling in managed care plans—mostly

risk contract HMOs. While nearly two-thirds of beneficiaries have access to

at least one Medicare HMO that provides service in their zip code areas,

only about 10 percent of beneficiaries belong to a Medicare HMO. Most

beneficiaries are still enrolled in the traditional fee-for-service program.

Under Medicare’s initial authority for paying HMOs that provided care to

beneficiaries, few HMOs contracted with Medicare. As enacted in 1972, the

legislation limited a participating HMO’s profit potential while losses had to

be fully absorbed. Consequently, most Medicare HMOs chose to be paid on

a cost basis. Facing neither profit nor loss from serving Medicare

beneficiaries, cost contract HMOs lacked a strong incentive to reduce

unnecessary care and deliver care efficiently.

Legislation changed Medicare’s payment mechanism in 1982.5

 Since then,

HMOs have been able to enter into more attractive risk contracts with HCFA.

The HMO receives a fixed monthly capitation payment—the AAPCC rate—for

each beneficiary enrolled6

 in exchange for providing all Medicare part A

and part B services.7

 The risk to the HMO is that for any particular

beneficiary, the cost of care may exceed the prepaid amount.8

Each year, a risk HMO must estimate what it would charge Medicare

beneficiaries for Medicare-covered services if they were commercial

enrollees. The estimate of the premiums it would charge to provide such

services to non-Medicare enrollees is adjusted to reflect the differences in

5

The change was made through the Tax Equity and Fiscal Responsibility Act of 1982 (sec. 114, 

P.L. 97-248).

6

AAPCC rates are set at 95 percent of the average amount that HCFA estimates it would spend

reimbursing fee-for-service providers who deliver medical care to a typical beneficiary in a county.

HCFA adjusts payments for different categories of beneficiaries on the basis of age, sex, Medicaid

eligibility, institutional status, and working status. The AAPCC rates change every calendar year.

7

Medicare part A—Hospital Insurance—covers services provided by hospitals, skilled nursing

facilities, hospices, and home health agencies. Medicare part B—Supplemental Medical

Insurance—covers physician and outpatient hospital services as well as other services and supplies

received on an outpatient basis, such as laboratory services and medical supplies.

8

Cost contracts are still an option. (An HMO that is losing money under a risk contract may switch to a

cost contract.) In August 1996, 34 plans had cost contracts and had 182,494 beneficiaries enrolled.

Also, a plan can contract with HCFA as a health care prepayment plan (HCPP). As an HCPP, a plan is

paid on a cost basis for Medicare part B services. Part A services are not covered by HCPPs and

remain under the fee-for-service program. There were 50 HCPPs with 300,108 enrollees in August 1996.

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(1) the benefits provided to Medicare enrollees and (2) the use of services

by Medicare beneficiaries. This estimate (which includes the normal profit

of a for-profit HMO) is used to identify any excess profits the HMO will

derive from the Medicare business. The HMO is permitted to retain all

profits up to the level earned on its non-Medicare business. If the expected

Medicare profit exceeds the estimated profit on its non-Medicare business,

the HMO must either return the excess to Medicare or provide additional

supplemental benefits or reduced copayments or deductibles to

beneficiaries. Virtually all HMOs faced with this choice have opted to

provide increased benefits, which Medicare beneficiaries can find very

attractive.

Before an HMO can enter into a risk contract, the law requires it to have at

least 5,000 commercial enrollees. An HMO serving primarily rural areas

must have at least 1,500 members. In addition, the Medicare law’s “50-50

rule” states that no more than 50 percent of an HMO’s enrollment may be

Medicare beneficiaries and Medicaid recipients.

Medicare beneficiaries enrolled in a risk HMO face a “lock-in” requirement.

Once they enroll, they must receive virtually all their health care services

through the HMO.

9

 If a beneficiary goes outside the HMO for any health care

services, neither the HMO nor Medicare is required to pay the cost.

Exceptions are made for emergency and similar type care, which can be

obtained anywhere in the country, and for which the HMO should pay. A

few risk HMOs now offer a “point of service” option through which

beneficiaries can receive certain services outside the plan’s network of

providers but must pay more than for “within-plan” services.

Beneficiaries consider a number of factors when deciding whether to

enroll in a Medicare risk HMO, including (1) their familiarity with managed

care, (2) their attachment to current health care providers, (3) whether

they travel out of the area or live part of the year in another state, and

(4) likely out-of-pocket costs in a risk HMO versus the fee-for-service

program (plus the cost of a Medigap policy10). In a risk HMO, the

beneficiary may be charged a fixed monthly premium and a copayment

9

Medicare beneficiaries may choose to disenroll from a risk HMO at any time.

10Medigap insurance provides benefits that help fill the gaps in Medicare coverage. Federal law

requires Medigap plans to offer 1 of 10 standard benefit packages—labeled plan A through plan J.

These private, supplemental plans cover various combinations of Medicare cost-sharing requirements.

Some plans also include services not covered by Medicare—for example, outpatient prescription

drugs. Plan A is the most basic while plan J is the most comprehensive. Insurance companies are not

allowed to change the letter designations or the combination of benefits offered. Although the benefits

are the same for all Medigap plans, premiums may vary greatly across companies.

Page 5 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
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each time a service is used.11 Depending on the additional benefits a

Medicare HMO provides, enrolling may be an alternative to buying Medigap

insurance, often at a lower cost to the beneficiary.

Many employers provide health benefits to retired employees who receive

Medicare. Some employers, faced with rising retiree health care costs and

new accounting rules,12 believe they can reduce costs when their

Medicare-eligible retirees enroll in risk HMOs. As a result, some employers

are providing retirees with incentives to join risk HMOs. They may limit

their contribution to just cover the cost of a Medicare risk HMO, thereby

causing retirees who do not join an HMO to face increased health care

costs. To remain in Medicare’s fee-for-service plan these beneficiaries may

have to buy a Medigap policy and pay the difference between the premium

and the employer’s contribution.

About 3.8 million Medicare beneficiaries were enrolled in risk HMOs in

August 1996, but enrollment was concentrated primarily in urban areas in

the West and in Florida. Only a handful of counties in the East, South, and

Midwest had more than 5 percent of their Medicare population enrolled in

risk HMOs. (See fig. 1.) In total, 242 of 3,141 counties had more than

5 percent enrollment in the Medicare risk HMO program—a level that for

this study we classify as “higher enrollment.” In contrast, however, 2,663

of the counties—about 85 percent—had either no beneficiaries or fewer

than 1 percent enrolled in risk HMOs. (We classify these areas as “lower

enrollment.”)

11This is in addition to the premium that all beneficiaries must pay to receive physician services under

Medicare part B.

12Starting in 1993, Financial Accounting Standards Board rule 106 required that private-sector

employers with 500 or more plan participants treat health benefit obligations for present and future

years on an accrual instead of a pay-as-you-go basis.

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Figure 1: Counties With Higher Risk HMO Enrollment, December 1995

Risk HMO Enrollment Greater Than 5 Percent

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA.

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Risk HMO Enrollment

Linked to Payment

and Other Factors

Our analysis of counties grouped by their AAPCC rates and risk HMO

enrollment levels suggests that while AAPCC rates play a role, other factors

also affect enrollment. (See table 1.) In addition to HMO presence in the

health care market, such factors as population density, the number of

Medicare beneficiaries, and employers’ policies on retiree health benefits

can influence risk enrollment. The studies we reviewed all found that

several factors—usually including AAPCC rates and HMO presence—help

account for the differences in risk HMO enrollment from county to county.13

Moreover, a study using recent data found that the factor with the

strongest influence was HMO presence.14 Greater HMO presence establishes

more familiarity in an area for managed care in general and for a particular

plan. HMOs can draw on that when trying to attract Medicare beneficiaries.

13See Physician Payment Review Commission, Annual Report to Congress, Physician Payment Review

Commission, 1995 (Washington, D.C.: 1995), pp. 92-94; Physician Payment Review Commission,

Annual Report to Congress, Physician Payment Review Commission, 1996 (Washington, D.C.: 1996),

pp. 80-81; and Carl Serrato, Randall S. Brown, and Jeanette Bergeron, “Why Do So Few HMOs Offer

Medicare Risk Plans in Rural Areas?” Health Care Financing Review, Vol. 17, No. 1 (Fall 1995), 

pp. 85-97.

14W. Pete Welch, “Growth in HMO Share of the Medicare Market, 1989-94,” Health Affairs, Fall 1996,

pp. 201-214.

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Table 1: Number of Counties With

Lower, Intermediate, and Higher

Enrollment in Risk HMOs by Lower,

Intermediate, and Higher AAPCC

Rates, December 1995

Enrollment in Medicare risk HMOs Monthly AAPCC

payment rates (per

person)a Lowerb Intermediatec Higherd Total

Lower (under $375)e 2,257f 125 92 2,474

Intermediate ($375 to

$464)g 373 93 101 567

Higher (top 100

payments—$464 to

$679)h 33 18 49 100

Total 2,663 236 242 3,141

Note: Payment rates are rounded to the nearest dollar.

aThe lower, intermediate, and higher AAPCC rate and enrollment designations were chosen for

analytic purposes. The designations are relative and do not imply that such levels are appropriate

or not appropriate.

bCounties had 1 percent or less of their beneficiaries enrolled or none enrolled.

cCounties had more than 1 percent but no more than 5 percent of their beneficiaries enrolled.

dCounties had more than 5 percent of their beneficiaries enrolled.

eThe average AAPCC rate was $306; the median, $310.

f

Of the 2,257 counties, 552 had no risk HMO enrollment. According to HCFA data, an additional

1,604 counties had fewer than 25 enrollees.

gThe average AAPCC rate was $408; the median, $403.

hThe average AAPCC rate was $512; the median, $496.

Sources: Medicare Market Penetration Report File and AAPCC Rate File, Office of Managed Care,

HCFA.

Most Counties With

Lower Payment Rates

Are Less Urban and

Lack Strong HMO

Presence

Medicare risk HMO enrollment in 2,257 counties that had lower AAPCC rates

was minimal or nonexistent, but the principal barrier to risk HMO

enrollment was not the payment level. On average, the 2,257 counties with

lower AAPCC rates and lower enrollment had fewer people per square mile,

and only about 16 percent of these counties were urban in that they were

included in an MSA. For the most part, the 2,257 counties were mainly rural

or sparsely populated and consequently, most had few or no HMOs serving

non-Medicare residents.

Generally, HMOs thrive and exert a stronger presence in counties that are

part of metropolitan areas. In the 10 states with the highest percentage of

people enrolled in HMOs in 1994, about 92 percent of the population lived in

an MSA. Markets need to be of sufficient size to generate an HMO presence

Page 9 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
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in general and a risk HMO program in particular. According to one study,

the most remote counties with the smallest populations are not likely to be

included in HMO markets.15 Table 2 compares characteristics of the 10

states with the lowest level of total HMO market share (that is, commercial,

Medicaid, and Medicare enrollment) and the 10 states with the highest

total HMO market share.16 The 10 states with the lowest total HMO market

shares averaged less than two HMOs each.

Table 2: Selected Characteristics of

the 10 States With Lowest and Highest

Total HMO Market Share Characteristic

Data for 10 states

with lowest sharea

Data for 10 states

with highest shareb

Total HMO market sharec 1.9% 32.9%

Average number of HMOsc 1.6 16.6

Percentage of Medicare beneficiaries

enrolled in risk HMOsd 0.1% 17.2%

Percentage of counties in an MSA 9.7% 41.4%

Percentage of population living in an MSA 38.0% 92.0%

aThe 10 states with the lowest total HMO market share at the end of 1994 were Alaska, West

Virginia, Wyoming, Mississippi, North Dakota, Idaho, Montana, South Dakota, Arkansas, and

Iowa.

bThe 10 states with the highest total HMO market share at the end of 1994 were California,

Oregon, Maryland, Arizona, Massachusetts, Rhode Island, Connecticut, Minnesota, Colorado,

and New York. We did not include the District of Columbia, which had the ninth highest total HMO

market share in 1994.

cAs of year-end 1994.

dAs of December 1995.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; Group Health Association of America, Patterns in HMO

Enrollment, June 1995; and HCFA, 1995 Data Compendium.

Even if the counties that had lower payment rates and lower enrollments

had an HMO present, most lacked a Medicare population of sufficient size

to attract an HMO into the risk contract program. Table 3 shows these

counties had an average of about 5,600 Medicare beneficiaries. According

to officials at several multistate HMO chains we interviewed, one of the

factors they consider most when selecting areas of the country in which to

pursue the Medicare business is the size of the Medicare population. An

official at one company estimated that no more than 20 to 30 percent of

the beneficiaries in a new market will join a risk HMO, which suggests that

15See Thomas C. Ricketts, Rebecca T. Slifkin, and Karen D. Johnson-Webb, “Patterns of Health

Maintenance Organization Service Areas in Rural Counties,” Health Care Financing Review, Vol. 17,

No. 1 (Fall 1995), p. 110.

16We used state data on total HMO enrollment because reliable data for all counties were not available.

Page 10 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
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only about 1,100 to 1,700 beneficiaries in each of these counties may join.

In addition, officials at multistate HMOs said that they need to enroll at least

10,000 beneficiaries within a few years to spread the risk. In another study,

HMO officials said that they do not enroll Medicare beneficiaries in rural

areas because the Medicare population is not large enough to cover the

fixed costs associated with this coverage.17

Table 3: Selected Characteristics of

Counties With Lower AAPCC Rates

and Lower Enrollment in Risk HMOs

Characteristic

Lower payment/lower enrollment counties 2,257

Counties in an MSA 16%

Rural counties 84%

Median population per square mile 31

Average Medicare beneficiaries 5,603

Counties with 10,000 or more Medicare beneficiaries 13%

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; U.S. Bureau of the Census, County and City Data Book: 1994

(Washington, D.C.: U.S. Government Printing Office, 1994); and U.S. Bureau of the Census data.

Certain Factors

Foster Risk HMO

Enrollment in Some

Areas Despite Lower

Payment Rates

In a number of counties where AAPCC payments were relatively low, the

rate of Medicare risk HMO enrollment was relatively high, our analysis

showed. Risk HMO enrollment flourished because of other factors,

including urban settings and stronger HMO presence. Most of these

primarily urban counties were in the West, where HMOs have a longer

history than in many other parts of the country. The counties in and

around the Portland MSA and three other MSAs in Oregon illustrate how

factors other than payment rates serve to raise risk HMO enrollment.

A large number of Medicare beneficiaries were enrolled in risk HMOs that

serve more urban, lower payment counties. About 400,000

beneficiaries—nearly 18 percent of those eligible—were enrolled in risk

HMOs in 92 counties that had lower payment rates (less than $375) and

higher enrollment (greater than 5 percent). Most of these 92 counties were

urban—or closer to urban areas—rather than rural; about 62 percent were

part of the 35 MSAs shown in figure 2. Another 33 percent bordered these

or other MSAs. Some of the 35 MSAs were scattered throughout the country,

but most were in the West.

17See Serrato, Brown, and Bergeron, p. 93.

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Figure 2: 35 MSAs With One or More Counties With Lower AAPCC Rates and Higher Enrollment in Risk HMOs,

December 1995

aOne county in the Boston metropolitan area—Bristol County—had a lower AAPCC payment and

higher enrollment. The county is on the Rhode Island border near the Providence MSA. Generally,

the counties in the Boston MSA had relatively high AAPCC rates. We discuss the Boston MSA

later in this report.

bOne county in the Washington MSA—Loudoun County, Virginia—had a lower AAPCC payment

and higher enrollment. The county is on the West Virginia border and is primarily rural with the

exception of the Leesburg and Sterling Park areas, which are within commuting distance of

Washington, D.C.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files, Office

of Managed Care, HCFA.

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In many of the 35 MSAs, HMO presence was high, which is favorable to

enrollment in risk HMOs. Table 4 illustrates the total HMO enrollment for 10

of the 35 MSAs. Every county included in 8 of these 10 MSAs had lower AAPCC

payments and higher enrollment in risk HMOs—the two exceptions were

the Santa Fe MSA (where one of two counties did not have lower AAPCC

payments and higher enrollment) and the Denver MSA (where three of five

counties did not have lower AAPCC payments and higher enrollment). While

most of the 10 MSAs had a relatively high percentage of their total

populations enrolled in HMOs, enrollment was particularly high in four

Oregon MSAs. In the Oregon MSAs, total HMO enrollment ranged from about

42 percent in Portland-Vancouver to about 56 percent in Medford-Ashland.

Table 4: Risk HMO Enrollment, Total

HMO Enrollment, and Number of HMOs

in 10 MSAs, 1995

MSA/state

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOsa

Percentage

estimated total

HMO enrollment

in MSAb

Number of HMOs

serving MSAc

Portland-Vancouver,

OR-WA 41.3 41.8 10

Albuquerque, NM 33.6 33.2 5

Denver, CO 30.3 27.4 9

Salem, OR 19.5 41.9 6

Boulder-Longmont, CO 18.6 49.2 4

Pueblo, CO 17.3 26.0 4

Santa Fe, NM 16.6 8.2 4

Medford-Ashland, OR 12.8 55.9 5

Colorado Springs, CO 11.7 19.1 4

Eugene-Springfield, OR 10.8 52.0 5

aAs of December.

bAs of January, includes estimated commercial, Medicare, and Medicaid enrollment.

cThe same HMO can serve more than one MSA. Data were as of January.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and InterStudy, Competitive Edge, 5.2 ed. (Minneapolis, Minn.:

1995).

Portland Area’s Experience

Illustrates Role of Greater

HMO Presence

We took a closer look at Portland, an area where higher enrollment in risk

HMOs coexisted with an equally strong total HMO presence and lower AAPCC

payment rates. Portland’s risk HMO enrollment rate of about 41.3 percent

Page 13 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
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was among the highest in the country, even though its payment rates were

relatively low.18

As table 5 shows, Portland and the three other Oregon MSAs have had an

active risk program. Four of the counties in the Portland market rank

among the top seven counties nationwide in terms of the percentage of

their Medicare beneficiaries enrolled in risk HMOs.

Table 5: Risk HMO Enrollment for 13

Oregon Counties, December 1995

County

Percentage of

eligible

Medicare

beneficiaries

enrolled in risk

HMOs

MSA

Portland-Vancouvera Columbia 45.2

Washington 44.8

Multnomah 44.7

Clackamas 44.1

Yamhill 21.8

Salem Marion 20.4

Polk 15.0

Medford-Ashland Jackson 12.8

Eugene-Springfield Lane 10.8

Non-MSA

Borders Salem and Eugene-Springfield Benton 35.8

Borders Portland-Vancouver Clatsop 16.2

Borders Salem and Eugene-Springfield Linn 15.2

Borders Eugene-Springfield and

Medford-Ashland

Douglas 6.0

aClark County, Washington, is also a part of the Portland-Vancouver MSA. It had risk enrollment of

30.2 percent.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

Portland and Oregon’s three other MSAs are clustered along the Interstate 5

corridor in the western part of the state where risk HMO enrollment has

concentrated. Figure 3 shows that the nine counties in the four Oregon

18Like Portland, and the surrounding MSAs in Oregon, several MSAs in other western states had

relatively low AAPCC rates and higher enrollment in risk HMOs. Appendix II provides additional

information on these and similar areas.

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MSAs—Portland-Vancouver, Salem, Eugene-Springfield, and

Medford-Ashland—all had higher enrollment in risk HMOs. Where higher

enrollment has occurred outside the MSAs, in every case it has been in a

county bordering one of Oregon’s MSAs. A substantial share of the

populations in the bordering counties has access to HMO providers in the

neighboring MSAs.

Figure 3: 13 Oregon Counties With Lower AAPCC Rates and Higher Enrollments in Risk HMOs, December 1995

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

About 75 percent of Oregon’s Medicare beneficiaries live in the 13

counties. HMOs have thus far expressed no interest in expanding into the

Page 15 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

eastern parts of the state because the numbers of beneficiaries needed to

induce an HMO to enter into a risk contract with HCFA appear to be absent.

In the Portland area, enrollment of Medicare beneficiaries in risk HMOs

seems to have been facilitated by consumer acceptance of HMOs. The

Portland community’s familiarity with HMOs—Kaiser introduced the

concept in Portland in the 1940s—is believed to have increased the

willingness of beneficiaries to participate in the risk program. Officials of

two Oregon risk HMOs with whom we spoke both cited beneficiaries’

familiarity with the HMO concept as the primary reason for the high

enrollment rate. Consistent with consumers’ apparently favorable attitude

toward HMOs, beneficiaries were willing to enroll in risk HMOs even though

most charge a premium.19

Because Portland’s HMOs were well-established for many years, they could

participate in the risk program when it began. This early participation has

increased beneficiary acceptance of HMOs and allowed more time for

enrollment to develop and grow, according to HMO officials we spoke with.

Kaiser participated in a Medicare risk demonstration project in 1980 and

has been enrolling beneficiaries ever since. Even before 1980, Kaiser

enrolled beneficiaries through a cost contract with HCFA. Two other HMOs

in the Portland area began to participate in the risk program in the

mid-1980s.

Employers have played a role in fostering Portland’s risk enrollment.

About half of Kaiser’s risk HMO enrollees come from employer groups. As

employees retire and age into Medicare, they are able to remain covered

by Kaiser, the plan through which they may have been receiving their

health care coverage for many years. In contrast, PacifiCare, which has

about as many risk enrollees as Kaiser, receives only about 5 percent of its

enrollment from employer groups. Its enrollment grew more than Kaiser’s

between 1993 and 1995, however, primarily because of its marketing to the

beneficiaries not enrolled through employers.

19HMOs that project Medicare profit rates near or below those for commercial enrollees are unlikely to

offer the richer level of benefits that HMOs offer where the AAPCC rate and profit levels are

considerably higher.

Page 16 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

Lack of HMO

Presence Can Impede

Risk HMO Enrollment

Where Payments Are

Higher

Higher payment rates were no guarantee that risk HMO enrollment would

also be higher. Our analysis showed that a third of the counties ranked

among the highest AAPCC payment areas in the country had no, or virtually

no, Medicare beneficiaries enrolled in risk HMOs. About 82 percent of these

counties were in the South, where HMOs generally have not achieved the

high levels of enrollment attained by those in the West. The lack of a

strong HMO presence contributed to the lower enrollment in risk HMOs that

occurred in these counties.

Few Medicare beneficiaries were enrolled in risk HMOs in one-third of the

counties that were among the highest payment areas. Our analysis showed

that 1 percent or less of the eligible beneficiaries were enrolled in risk

HMOs in 33 counties that numbered among the top 100 AAPCC payment areas

in 1995. (See table 1 for our payment/enrollment analysis.) Twenty-seven

of these counties were in the South; of these, 12 were located in 8

MSAs—Atlanta, Biloxi-Gulfport-Pascagoula, Birmingham, Chattanooga,

Lubbock, Nashville, Savannah, and Stubenville-Weirton—and 9 bordered

these or other MSAs.

HMO presence, a factor facilitating risk HMO enrollment, was relatively low

in most of the eight southern MSAs. Even larger southern metropolitan

areas like Atlanta and Birmingham, with about 15 percent total HMO

enrollment, had lower Medicare risk HMO enrollment in most of their areas.

Atlanta, where 3 of the 20 counties in the MSA had higher payment rates,

still had risk HMO enrollment below 1 percent. Only one of the four

counties in the Birmingham MSA had a higher payment rate, but risk HMO

enrollment in this county and two others was minimal.20

Employer Policies

Can Hinder Risk HMO

Enrollment When

Other Factors Are

Favorable

In southeastern Michigan, higher payment rates in the Detroit, Flint, and

Ann Arbor MSAs have not been enough to stimulate risk HMO enrollment.

However, this modest enrollment performance cannot be ascribed to weak

HMO presence. Compared with HMOs in some southern MSAs, HMOs in

Michigan have generated stronger total enrollment—as high as about

26 percent in Flint and Ann Arbor. While the combination of attractive

payment rates, a large potential market, and an active HMO industry are all

present, the Medicare risk program has been slow to take root. In these

Michigan MSAs, the retiree benefits provided by the automobile industry

reduces the attractiveness of risk HMOs and contributes to lower

enrollment by Medicare beneficiaries.

20Jefferson County, the primary county in the Birmingham MSA, had an intermediate payment rate

(between $375 and $464) and risk HMO enrollment of 7.3 percent. The remaining three counties in the

Birmingham MSA had risk enrollment of less than 1 percent.

Page 17 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

Six of the 33 counties that had lower enrollment in risk HMOs, despite being

among the 100 highest payment areas, were in Michigan. All six of these

counties were in three MSAs—Ann Arbor, Detroit, and Flint. In addition to

being higher payment, urban areas, these three MSAs had a fairly strong

HMO presence. Both Ann Arbor and Flint had total HMO enrollment of about

26 percent; in Detroit, enrollment approached 21 percent. While low

compared with some areas in the West, this level of total HMO enrollment

was considerably higher than in most of the eight southern MSAs that also

had higher payment rates and lower enrollment in risk HMOs. Despite the

presence of these factors, only about 0.5 percent of the eligible Medicare

beneficiaries in the three Michigan MSAs were enrolled in risk HMOs.

A key factor in the Michigan MSAs, according to HMO officials, is the benefit

package available to retired autoworkers and retirees from other firms

that patterned their benefit packages on the auto industry’s. These benefit

packages provide employer-sponsored comprehensive coverage of health

benefits with little or no out-of-pocket payments for the retiree. As

officials at the HMOs we interviewed in Detroit confirmed, beneficiaries

receiving these benefits have little incentive to switch to risk HMOs.

Excluding beneficiaries covered by rich benefit packages, the Medicare

population in the Michigan MSAs is still relatively large and hence attractive

to risk HMOs. Two plans whose officials we spoke with had left the risk

program in the late 1980s because they were losing money but now have

risk contract applications pending with HCFA and hope to begin enrolling

beneficiaries in 1997. The HMOs plan to target Medicare beneficiaries not

covered by rich retiree health benefits. One HMO suggested that by the end

of 1998 it expects about 30,000 Medicare beneficiaries to be enrolled.

However, if the HMO could contract with one of the “big three” automakers,

it expects that number to double.

HMO Business

Strategy May Affect

Risk Enrollment

Several multistate HMOs have been pursuing the Medicare risk market. As

the market for employer-sponsored health coverage has become more

saturated, HMOs have realized that the Medicare market is large and

potentially lucrative, that the demand for a Medicare risk product is

increasing, and that competitors are ready to move into the market. In

addition, HMOs have been encouraged by increases in the AAPCC payment

rates in some areas. Finally, publicly traded HMO companies, which are

especially concerned with short-term profits, are seeking new ways in

which to expand and grow.

Page 18 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

Companies’ business strategies for expanding their involvement with the

risk HMO program include enlarging existing risk HMO contracts through

service area expansions, applying for new risk contracts, and acquiring

other HMOs. Officials of one large multistate HMO articulated a strategy of

expanding from existing service areas into contiguous areas and

contiguous states. While acquisitions were for the most part made to

obtain a share of the commercial managed care market, with the decision

to start a risk program coming later, some acquisitions were made

specifically with the Medicare risk market in mind. For example,

PacifiCare Health Systems announced in August 1996 that it would buy

FHP International in part to ensure its dominance in the Medicare risk

market.

According to the officials we interviewed at multistate HMOs, their risk HMO

expansion efforts targeted markets with certain characteristics. Markets

were more attractive if they had a concentrated number of beneficiaries

and limited competition for them. To spread the risk, most said that an

HMO must have the opportunity to enroll at least 10,000 beneficiaries in a

few years. Also, officials at the HMOs said that the payment rate in a market

must be high enough for a risk plan to be financially viable. Furthermore,

markets must have a concentration of non-Medicare beneficiaries to be

attractive because HMOs must have at least 5,000 commercial enrollees to

apply for a risk contract. And the more people who are enrolled in the

commercial sector of a local market, the easier it is to enroll beneficiaries

because of the familiarity with managed care.

Officials at multistate HMOs had different views of the role that payment

rates play in their decisions to move into or out of a market. Officials at

one multistate company said that while they consider the AAPCC payment

rate when making a decision, a low payment would not automatically

disqualify a market. For example, they said they were considering

expanding into a low-payment market because an employer group had

specifically expressed interest in the risk program in that area. Another

company indicated that the payment rate needs to be high enough to

adequately pay health care providers. Officials at a third multistate

company believed that there were no parts of the country where the

payment rate would be too low for them to enter if the large numbers of

Medicare beneficiaries needed for the program to be successful were

present. Officials at two multistate HMOs held divergent views on the AAPCC

rate reduction that would induce their companies to leave the risk HMO

program. While officials at one company, citing “slim margins,” thought a

moderate rate reduction would induce them to switch to a Medicare cost

Page 19 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

contract, officials at another company stated that they would consider

leaving the risk contract program only if the rate reduction was “drastic.”

Expansion by dominant Medicare HMO companies can help fuel the growth

of risk enrollment in locations where it has been slow. In Boston, for

example, HMO and HCFA officials credit the entrance of a PacifiCare risk

product with sparking the growth of Boston’s risk market. As the

PacifiCare product began obtaining market share, local HMOs realized they

needed to target the Medicare market more aggressively if they wanted to

stay competitive. Their pursuit of the Boston market resulted in greatly

increased risk enrollment.

Boston’s Risk Program

Stimulated When

Beneficiaries Could Enroll

at No Cost

The Boston risk market is an attractive market because of the large base

of Medicare beneficiaries, some of the highest AAPCC rates in the country,

and a strong HMO presence. However, the number of risk HMOs pursuing the

Boston market peaked during 1987 through 1988, then declined until 1993,

when only three HMOs were left serving the market. According to HCFA

officials, a number of HMOs dropped out of the risk program because they

did not understand how to manage the senior population and did not

control enrollee costs.

The market started to turn around in Boston in 1994. According to HCFA

and HMO officials, HMOs were returning to the risk market or entering for

the first time because the industry was learning how to manage the

Medicare business. However, it took a new entrant to the risk market,

challenging the market share of the established HMOs, for risk enrollment

in Boston to take off.

Tufts Associated reentered Boston’s risk market in 1994,21 with a franchise

of SecureHorizons, the Medicare HMO product of California-based

PacifiCare. To attract beneficiaries, Tufts began offering a zero-premium

risk product—Medicare beneficiaries could enroll without having to pay

any additional premiums to the HMO. The introduction of a zero-premium

product transformed the Boston market, according to HCFA and HMO

officials. Tufts’ action created competition among HMOs for Medicare

21Tufts Associated HMO began operations in the Boston area in 1981 and started a risk program in

1985. However, it dropped out of the risk program in 1988. According to Tufts officials, the HMO was

unsuccessful in the risk program because it did not develop a specifically tailored program to manage

seniors as a distinctly different population from the non-elderly and failed to manage them effectively.

As a result, Tufts had lost money. Like other HMOs, Tufts began reconsidering the risk market in 1992

as it became apparent that some HMOs were able to manage their risk programs profitably. Tufts

negotiated a franchise of PacifiCare’s SecureHorizons product as a way of gaining the expertise

necessary to run a successful Medicare risk program.

Page 20 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
B-276654 

beneficiaries and spurred stronger beneficiary demand for risk products.

As a result, enrollment in the MSA grew 158 percent between 1993 and

1995. Prior to the introduction of the zero-premium product, HMO risk

premiums had ranged from $90 to $120 per month, and according to HCFA

officials, were hardly distinguishable from premiums for Medigap

insurance.

Conclusions Despite the considerable momentum of risk HMO enrollment growth, its

uneven pattern across the country focuses attention on understanding why

such disparities occur. Although the linkage of Medicare payment rates to

risk HMO enrollment may be important in some areas, dramatic differences

in enrollment are often associated with other factors. The presence of

HMOs, the density of population, and the number of Medicare beneficiaries,

especially those familiar with managed health care, all facilitate growth in

enrollment—and their absence hinders it. In addition, the health care

benefits provided by employers in a market area can affect beneficiaries’

willingness to enroll in risk HMOs. The rapid growth in risk HMO enrollment

during the past several years, which has occurred without any major

federal policy changes, is likely to continue as employers encourage

retirees to join HMOs and as HMOs pursue varied strategies for expanding

their Medicare business.

We provided a draft of this report to officials in HCFA’s Office of Managed

Care. These officials agreed with the information presented. We are

sending copies of this report to the Secretary of Health and Human

Services and other interested parties, and we will make copies available to

others on request. If you or your staff have any questions, please call me at

(202) 512-7114 or Michael F. Gutowski, Assistant Director, at

(202) 512-7128. Other major contributors to this report include Howard

Cott, Aleta Hancock, Joseph Petko, Wayne Turowski, and Joan Vogel.

Sincerely yours,

Jonathan Ratner

Associate Director, Health Financing and

 Systems Issues

Page 21 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Contents

Letter 1

Appendix I 

Methodology

24

Appendix II 

Risk HMO Enrollment

Substantial in Several

Western Markets With

Stronger HMO

Presence

27

Tables Table 1: Number of Counties With Lower, Intermediate, and

Higher Enrollment in Risk HMOs by Lower, Intermediate, and

Higher AAPCC Rates, December 1995

9

Table 2: Selected Characteristics of the 10 States With Lowest

and Highest Total HMO Market Share

10

Table 3: Selected Characteristics of Counties With Lower AAPCC

Rates and Lower Enrollment in Risk HMOs

11

Table 4: Risk HMO Enrollment, Total HMO Enrollment, and

Number of HMOs in 10 MSAs, 1995

13

Table 5: Risk HMO Enrollment for 13 Oregon Counties,

December 1995

14

Table I.1: National HMO Chains, Regional HMOs, Employers, and

Management Consultants Contacted

26

Table II.1: Risk HMO Enrollment for Six New Mexico and Eight

Colorado Counties, December 1995

30

Table II.2: Risk HMO Enrollment, Total HMO Enrollment, and

Number of HMOs in New Mexico and Colorado MSAs, 1995

31

Table II.3: Risk HMO Enrollment, Total HMO Enrollment, and

Number of HMOs in Six Washington MSAs, 1995

33

Table II.4: Risk HMO Enrollment and Total HMO Enrollment for

Nine Arizona Counties, 1995

35

Table II.5: Risk HMO Enrollment for All Counties in the

Minneapolis-St. Paul MSA, December 1995

36

Table II.6: 17 MSAs With One or More Counties That Received

Lower or Intermediate AAPCC Rates and Had Higher Risk HMO

Enrollment, 1995

37

Page 22 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Contents

Figures Figure 1: Counties With Higher Risk HMO Enrollment,

December 1995

7

Figure 2: 35 MSAs With One or More Counties With Lower

AAPCC Rates and Higher Enrollment in Risk HMOs,

December 1995

12

Figure 3: 13 Oregon Counties With Lower AAPCC Rates and

Higher Enrollments in Risk HMOs, December 1995

15

Figure II.1: Six New Mexico Counties With Higher Enrollment in

Risk HMOs and Lower AAPCC Rates, December 1995

28

Figure II.2: 13 Colorado Counties With Higher Enrollment in Risk

HMOs and Lower and Intermediate AAPCC Rates,

December 1995

29

Figure II.3: 19 Washington Counties With Higher Enrollment in

Risk HMOs and Lower and Intermediate AAPCC Rates,

December 1995

32

Figure II.4: Nine Arizona Counties With Higher Enrollment in

Risk HMOs and Lower and Intermediate AAPCC Rates,

December 1995

34

Abbreviations

AAPCC adjusted average per capita cost

HCFA Health Care Financing Administration

HCPP health care prepayment plan

HMO health maintenance organization

MSA metropolitan statistical area

Page 23 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix I 

Methodology

Health maintenance organizations (HMO) enter into risk contracts with the

Health Care Financing Administration (HCFA) to provide Medicare-covered

services to beneficiaries who enroll.22 Risk plans assume all the financial

risk associated with providing Medicare-covered services to enrolled

beneficiaries in return for a monthly per capita premium—the adjusted

average per capita cost (AAPCC) payment—from HCFA for each Medicare

beneficiary enrolled. The amount of these AAPCC-based payments varies by

county. HCFA pays some HMOs on a cost-reimbursement basis, with these

HMOs assuming no risk that fees will be insufficient to cover costs; our

work focused only on managed care plans that had entered into risk

contracts with HCFA.

We first obtained data from the Office of Managed Care at HCFA

headquarters. For each of 3,141 counties in the nation, these data showed

the (1) number of eligible Medicare beneficiaries, (2) number of

beneficiaries enrolled in managed care plans with a risk contract with

HCFA, and (3) AAPCC rate paid by HCFA for each Medicare beneficiary

enrolled in a risk plan. These data were as of December for 1993, 1994, and

1995, the latest data available at the time of our review. Data did not

include Guam, Puerto Rico, or the Virgin Islands.

To identify counties with similar risk enrollment and AAPCC rates, we

determined the percentage of Medicare beneficiaries enrolled in Medicare

risk plans in December 1995 and the AAPCC rates paid by HCFA in 1995 for

each of the 3,141 counties. Using these data, we placed each county into

one of nine categories based on whether it had a higher, intermediate, or

lower AAPCC rate and higher, intermediate, or lower Medicare risk

enrollment.

We placed counties with the top 100 AAPCC rates in 1995 in the higher

category. These rates ranged from $463.89 to $678.90. There were 2,474

counties with AAPCC rates under $375.00 that we considered as having

lower payments (their rates ranged from $177.32 to $374.8623). We defined

the remaining 567 counties as having intermediate AAPCC rates. Again using

December 1995 data, we placed the 2,663 counties with no Medicare risk

enrollment or enrollment of 1 percent or less in the lower enrollment

category. Of these 2,663 counties, 618 had no Medicare risk enrollment at

22Managed care plans that enter into risk contracts include both HMOs and competitive medical plans.

Although competitive medical plans are subject to regulatory requirements similar to those for HMOs,

they have greater flexibility in setting commercial premium rates and the services offered to their

commercial members. In this report, our use of the term HMO includes competitive medical plans.

23HCFA data showed that 13 areas, most of which were in Alaska, had AAPCC rates of zero.

Page 24 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix I 

Methodology

all, and 2,045 had enrollments of 1 percent or less. For the purposes of our

study, we placed the 242 counties that had enrollments of more than

5 percent in the higher enrollment category. Although 5 percent would not

be considered high for private sector managed care enrollment, it is high

for the Medicare risk program—only about 8 percent of the counties had

Medicare risk enrollments of more than 5 percent. We placed the

remaining 236 counties in the intermediate category (enrollments greater

than 1 percent and less than or equal to 5 percent). For the distribution of

the 3,141 counties in the nine categories, see table 1.

We focused our study on the following three categories: counties that had

(1) lower AAPCC rates and lower risk enrollment (2,257 counties), (2) lower

AAPCC rates and higher risk enrollment (92 counties), and (3) higher AAPCC

rates and lower risk enrollment (33 counties). Using HCFA data, we

converted the county data into metropolitan statistical area (MSA) data for

the three study categories.

In addition to analyzing data for the three study categories, we selected

three markets in which to perform more detailed work: (1) Portland,

Oregon—a market in the lower AAPCC rate and higher enrollment category;

(2) Detroit—a market in the higher AAPCC rate and lower enrollment

category; and (3) Boston—a market in which risk enrollment grew

considerably in a relatively short time. In these markets, we interviewed

officials at the applicable HCFA regional offices and at selected HMOs that

had entered into or were planning to enter into Medicare risk contracts.

Finally, we interviewed officials at all 10 HCFA regional offices, 6 national

HMO chains, and 12 regional HMOs to obtain more information and get

opinions on (1) the Medicare risk program in general, (2) enrollment

trends in particular, (3) reasons managed care plans and beneficiaries

participate in Medicare risk programs, (4) factors that made the risk

market attractive, and (5) factors affecting risk program enrollment. All of

the 18 HMOs had risk contracts or were planning to enter into contracts

with HCFA. Also, we interviewed representatives from five management

consulting firms involved in bringing employers and Medicare risk plans

together to cover Medicare-eligible retirees and five employers regarding

their efforts to enroll a portion of their retirees in Medicare risk plans.

Table I.1 shows the HMOs, employers, and management consultants we

interviewed.

Page 25 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix I 

Methodology

Table I.1: National HMO Chains,

Regional HMOs, Employers, and

Management Consultants Contacted

Group contacted Location

National HMO chains

FHP, Inc. Fountain Valley, CA

Health Systems International Woodland Hills, CA

Kaiser Foundation Health Plan, Inc. Oakland, CA

PacifiCare Health Systems Cypress, CA

Prudential Health Care Senior Care Roseland, NJ

United HealthCare Corporation Minnetonka, MN

Regional HMOs

Blue Care Network of Southeast Michigan Southfield, MI

FHP of Utah Salt Lake City, UT

Harvard Pilgrim Health Care Dedham, MA

Health Alliance Plan Detroit, MI

Intermountain Health Care of Utah Salt Lake City, UT

Kaiser Foundation Health Plan, Northern California

Region

Oakland, CA

Kaiser Foundation Health Plan of the Northwest Portland, OR

Mercy Health Plan Farmington Hills, MI

PacifiCare of Oregon Lake Oswego, OR

Tufts/SecureHorizons Waltham, MA

United HealthCare of Utah Salt Lake City, UT

U.S. Healthcare, New England Region Burlington, MA

Employers

Chevron Corporation San Francisco, CA

General Motors Corporation Detroit, MI

McKesson Corporation San Francisco, CA

Sears, Roebuck and Company Hoffman Estates, IL

University of California Oakland, CA

Management consultants

Foster Higgins and Company, Inc. Los Angeles, CA

KPMG Peat Marwick San Francisco, CA

Price Waterhouse San Francisco, CA

Towers Perrin San Francisco, CA; New York City,

NY

William Mercer, Inc. Richmond, VA

We performed our work between February 1996 and February 1997 in

accordance with generally accepted government auditing standards.

Page 26 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Counties in Oregon were not the only counties where risk HMOs had

enrolled substantial numbers of Medicare beneficiaries despite having

lower payment rates. Other counties in or bordering several western MSAs

also followed this pattern. As in Oregon, these more urban counties were

located in or bordered MSAs that usually had a strong total HMO

presence—an important factor that can affect risk enrollment. The

Albuquerque and Santa Fe MSAs in New Mexico and the Denver,

Boulder-Longmont, Colorado Springs, and Pueblo MSAs in Colorado most

closely followed the pattern exhibited in Oregon. Clearly, factors other

than payment rates affected risk HMO enrollment in these MSAs.

Risk HMO enrollment patterns for lower payment/higher enrollment

counties in Washington and Arizona were not nearly as clear as for those

in Oregon. In Washington, where HMOs generally had a strong presence,

counties exhibited the lower payment/higher risk enrollment mix, but that

enrollment was not as clearly concentrated. Higher risk enrollment

extended beyond the counties located in MSAs and bordering MSAs with

higher enrollment in risk HMOs to counties not directly adjacent to these

MSAs. Counties in two Arizona MSAs—Tucson and Phoenix-Mesa—had

higher risk HMO enrollment and, in Tucson in particular, had a strong HMO

presence. Their payment rates were in the intermediate category. Counties

bordering the MSAs, however, had the higher enrollment/lower payment

pattern. The higher enrollment/lower payment pattern also appeared in

counties located in MSAs in seven other states in different parts of the

country.

New Mexico and

Colorado: Higher Risk

HMO Enrollment

Clustered in and

Around MSAs

Counties in both New Mexico and Colorado exhibited the pattern

described previously for Oregon. HMO presence was generally strong and

higher levels of risk HMO enrollment were coupled with lower payment

rates in several of the more urban counties in MSAs with a few adjoining

counties also having higher enrollments in risk HMOs. Elsewhere in the two

states, enrollment rates were considerably lower.

In New Mexico, the counties with higher enrollments in Medicare risk

HMOs were in and around the Albuquerque and Santa Fe MSAs and had

lower AAPCC rates. (See fig. II.1.) About 48 percent of New Mexico’s

Medicare beneficiaries lived in the six counties in and around the two

MSAs, but about 98 percent of the risk HMO enrollees in the state lived there.

Risk HMO enrollment was particularly high in the Albuquerque MSA—about

34 percent of the Medicare beneficiaries in the MSA’s three counties were

enrolled.

Page 27 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Figure II.1: Six New Mexico Counties

With Higher Enrollment in Risk HMOs

and Lower AAPCC Rates,

December 1995

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

In Colorado, about two-thirds of the Medicare beneficiaries and about

99 percent of the Medicare risk HMO enrollees lived in and around four

MSAs—Boulder-Longmont, Colorado Springs, Denver, and Pueblo. (See fig.

II.2.) Risk enrollment was highest in the Denver MSA—about 30 percent of

the Medicare beneficiaries were enrolled in December 1995. Table II.1

shows risk HMO enrollment figures for counties in and around selected

New Mexico and Colorado MSAs.

Page 28 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Figure II.2: 13 Colorado Counties With Higher Enrollment in Risk HMOs and Lower and Intermediate AAPCC Rates,

December 1995

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

Page 29 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.1: Risk HMO Enrollment for Six

New Mexico and Eight Colorado

Counties, December 1995

County

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOs

New Mexico

Albuquerque Sandoval 37.6

Valencia 35.8

Bernalillo 32.8

Santa Fe Santa Fea 18.4

Borders Albuquerque and Santa Fe Torrance 17.6

Borders Albuquerque and Santa Fe Rio Arriba 9.4

Colorado

Denver Jefferson 31.2

Douglasb 22.8

Boulder-Longmont Boulder 18.6

Pueblo Pueblo 17.3

Colorado Springs El Paso 11.7

Borders Denver and Colorado Springs Elbert 10.0

Borders Denver Park 9.7

Borders Denver and Colorado Springs Teller 6.7

aThe other county in the Santa Fe MSA—Los Alamos—had 4.2 percent risk HMO enrollment.

bThe three other counties in the Denver MSA had intermediate AAPCC rates and higher

enrollments in risk HMOs: Adams County, 34.4 percent enrollment; Arapahoe County,

29.9 percent; and Denver County, 28.3 percent. Two counties bordering the Denver MSA also

had intermediate AAPCC rates and higher enrollments in risk HMOs: Gilpin County, 15 percent

enrollment, and Clear Creek County, 11 percent.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

Of the six New Mexico and Colorado MSAs shown in table II.2, the two with

the highest enrollment in risk HMOs—Albuquerque and Denver—also had a

strong HMO presence.

Page 30 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.2: Risk HMO Enrollment, Total

HMO Enrollment, and Number of HMOs

in New Mexico and Colorado MSAs,

1995

MSA/state

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOsa

Percentage

estimated total

HMO enrollment

in MSAb

Number of

HMOs serving

MSAc

Albuquerque, NM 33.6 33.2 5

Denver, CO 30.3 27.4 9

Boulder-Longmont, CO 18.6 49.2 4

Pueblo, CO 17.3 26.0 4

Santa Fe, NM 16.6 8.2 4

Colorado Springs, CO 11.7 19.1 4

aData as of December.

bIncludes estimated commercial, Medicare, and Medicaid enrollment; data as of January.

cThe same HMO can serve more than one MSA; data as of January.

Sources: Medicare Market Penetration Report File and other selected files, Office of Managed

Care, HCFA; and InterStudy, Competitive Edge, 5.2 ed. (Minneapolis, Minn.: 1995).

Washington: Risk

HMO Enrollment

Extends Beyond

MSAs

As in Oregon, New Mexico, and Colorado, higher enrollment in risk HMOs

in Washington was primarily concentrated in counties with lower AAPCC

rates that were also in and around MSAs—Seattle-Bellevue-Everett,24

Tacoma, Olympia, and Bremerton in the western part of the state and

Spokane in the eastern part.25 But as figure II.3 shows, in Washington

higher enrollment in risk HMOs also exists in counties that are neither in

nor adjacent to MSAs with higher enrollment.

24One county, King, had higher enrollment in risk HMOs and intermediate AAPCC rates. King is part of the

Seattle-Bellevue-Everett MSA.

25Clark County, Washington, is part of the Portland-Vancouver MSA.

Page 31 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Figure II.3: 19 Washington Counties With Higher Enrollment in Risk HMOs and Lower and Intermediate AAPCC Rates,

December 1995

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

Table II.3 shows that HMO presence was relatively strong in several of the

six Washington MSAs. Overall, total HMO enrollment ranged from about

50 percent in Olympia to about 11 percent in Tacoma.

Page 32 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.3: Risk HMO Enrollment, Total

HMO Enrollment, and Number of HMOs

in Six Washington MSAs, 1995

MSA/state

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOsa

Percentage

estimated total

HMO enrollment

in MSAb

Number of

HMOs serving

MSAc

Portland-Vancouver, OR-WAd 41.3 41.8 10

Seattle-Bellevue-Everett, WA 24.7 17.3 8

Olympia, WA 20.3 50.3 6

Tacoma, WA 12.4 11.1 4

Bremerton, WA 8.8 18.5 3

Spokane, WA 6.8 36.0 7

aData as of December.

bIncludes estimated commercial, Medicare, and Medicaid enrollment; data as of January.

cThe same HMO can serve more than one MSA; data as of January.

dOnly one Washington county—Clark—is in this MSA. The remaining counties in this MSA are in

Oregon.

Sources: InterStudy, Competitive Edge, 5.2 ed. (Minneapolis, Minn.: 1995); and Medicare Market

Penetration Report File and other selected files, Office of Managed Care, HCFA.

Arizona: Risk HMO

Enrollment

Concentrated in MSAs

With Higher Payment

Rates

In Arizona, higher enrollment in risk HMOs was primarily concentrated in

two MSAs—Tucson and Phoenix-Mesa. The counties in the MSAs all had

higher AAPCC rates than those in such MSAs as Albuquerque and Portland.

The payment rates in Tucson and Phoenix-Mesa fell in the intermediate

category. But for the counties outside Arizona’s MSAs where enrollment

was higher for risk HMOs, the payment rates were usually lower. Figure II.4

shows the Arizona counties with higher enrollments in risk HMOs.

Page 33 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Figure II.4: Nine Arizona Counties With

Higher Enrollment in Risk HMOs and

Lower and Intermediate AAPCC Rates,

December 1995

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; and U.S. Bureau of the Census, County and City Data Book:

1994 (Washington, D.C.: U.S. Government Printing Office, 1994).

Tucson, which had an especially high enrollment for risk HMOs—nearly

42 percent—also had a strong HMO presence as table II.4 shows.

Page 34 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.4: Risk HMO Enrollment and

Total HMO Enrollment for Nine Arizona

Counties, 1995

County

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOsa

Percentage

estimated total

HMO enrollment

in MSAb

Tucson Pimac 41.7 42.0

Phoenix-Mesa Maricopac 34.7 25.3

Pinalc 33.7

Borders Tucson and

Phoenix-Mesa

Graham 28.5 d

Borders Tucson Santa Cruz 26.0 d

Borders neither Tucson nor

Phoenix-Mesa

Greenlee 24.4 d

Borders Tucson Cochise 21.8 d

Borders Phoenix-Mesa Gilac 21.9 d

Las Vegas Mohavec 10.0 20.5

aData as of December.

bIncludes estimated commercial, Medicare, and Medicaid enrollment; data as of January.

cThis county had an intermediate AAPCC rate—between $375 and $464.

dNot applicable.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; U.S. Bureau of the Census, County and City Data Book: 1994

(Washington, D.C.: U.S. Government Printing Office, 1994); and InterStudy, Competitive Edge, 5.2

ed. (Minneapolis, Minn.: 1995).

Higher Enrollment in

Risk HMOs in Other

MSAs With Lower

Payment Rates

Counties in MSAs in California, Florida, Hawaii, Minnesota, Oklahoma,

Pennsylvania, and Texas had lower AAPCC rates but higher percentages of

beneficiaries enrolled in risk HMOs. Minneapolis-St. Paul had a large

number of Medicare beneficiaries enrolled in risk HMOs. Risk enrollment in

several southern California and Florida MSAs was also higher despite lower

AAPCC payment rates. Even parts of several MSAs in Pennsylvania had

higher enrollments in risk HMOs despite lower payment rates.

Table II.5 shows the risk HMO enrollment rates for the counties in the

Minneapolis-St. Paul MSA. Risk enrollment was higher—about

19 percent—compared with many areas of the country but not nearly as

high as in several western MSAs even though total HMO enrollment in the

Minneapolis-St. Paul MSA was close to 40 percent.

Page 35 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.5: Risk HMO Enrollment for All

Counties in the Minneapolis-St. Paul

MSA, December 1995

County/state

Percentage of eligible

Medicare beneficiaries

enrolled in risk HMOs

Anoka, MN 26.1

Ramsey, MNa 22.8

Hennepin, MN 20.0

Washington, MN 19.2

Dakota, MN 17.0

Scott, MN 9.3

Carver, MN 8.4

Sherburne, MN 6.9

Chisago, MN 6.4

Isanti, MN 3.6b

Wright, MN 3.2b

St. Croix, WI 1.1b

Pierce, WI 0.6c

aThis county had an intermediate AAPCC rate—between $375 and $464.

bIntermediate risk enrollment.

cLower risk enrollment.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA.

Risk enrollment patterns were less clear in the remaining six states. Table

II.6 compares the total HMO enrollment and risk HMO enrollment where at

least one county in an MSA had more than 5 percent of its Medicare

beneficiaries enrolled in a risk HMO and where the AAPCC rate was in the

lower payment category. These MSAs had varying degrees of risk

enrollment ranging from being higher in Florida to lower in Pennsylvania.

Page 36 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

Table II.6: 17 MSAs With One or More

Counties That Received Lower or

Intermediate AAPCC Rates and Had

Higher Risk HMO Enrollment, 1995

MSA/state

Percentage of

eligible Medicare

beneficiaries

enrolled in risk

HMOsa

Percentage

estimated total

HMO enrollment

in MSAb

Number of HMOs

serving MSAc

Daytona Beach, FL 31.8 14.7 3

Santa Barbara-Santa

Maria-Lompoc, CA 31.2 23.1 6

San Luis

Obispo-Atascadero-Paso

Robles, CA 28.6 2.9 2

San Antonio, TX 27.1d 12.5 7

Fort Worth-Arlington, TX 14.7e 14.1 8

Gainesville, FL 11.9 13.9 1

Tulsa, OK 11.2f 13.4 5

Williamsport, PA 11.2 7.9 2

Fresno, CA 9.9 22.0 8

State College, PA 9.4 11.3 3

Honolulu, HI 9.1 23.3 7

Ocala, FL 9.0 g g

Yuba City, CA 7.5h 5.5 3

Scranton-Wilkes

Barre-Hazleton, PA 5.9i 10.3 2

Oklahoma City, OK 5.1 11.4 5

Austin-San Marcos, TX 4.8j 26.3 4

Harrisburg-LebanonCarlisle, PA 3.1k 14.1 2

(Table notes on next page)

Page 37 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
Appendix II 

Risk HMO Enrollment Substantial in Several

Western Markets With Stronger HMO

Presence

aData as of December.

bIncludes estimated commercial, Medicare, and Medicaid enrollment; data as of January.

cThe same HMO can serve more than one MSA; data as of January.

dIncludes Bexar County, which has higher risk HMO enrollment and an intermediate AAPCC rate.

eIncludes Tarrant County, which has higher risk HMO enrollment and an intermediate AAPCC

rate.

f

Includes Tulsa and Wagoner counties, which have higher risk HMO enrollment and intermediate

AAPCC rates.

gData not available.

hIncludes Yuba County, which had an intermediate AAPCC rate.

i

Includes Lackawanna, Luzerne, and Wyoming counties, which all have higher risk HMO

enrollment and intermediate AAPCC rates.

j

Includes Travis County, which had a risk HMO enrollment rate of 6.7 percent.

k

Lebanon County had a risk HMO enrollment rate of 5.2 percent. The three remaining counties in

the MSA had the following risk enrollment and AAPCC rate combinations: Cumberland County,

intermediate enrollment/lower AAPCC; Dauphin County, intermediate enrollment and AAPCC; and

Perry County, lower enrollment/intermediate AAPCC.

Sources: Medicare Market Penetration Report File, AAPCC Rate File, and other selected files,

Office of Managed Care, HCFA; U.S. Bureau of the Census, County and City Data Book: 1994

(Washington, D.C.: U.S. Government Printing Office, 1994); and InterStudy, Competitive Edge, 5.2

ed. (Minneapolis, Minn.: 1995).

(101400) Page 38 GAO/HEHS-97-37 Medicare Risk HMO Enrollment
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