United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Health, Committee on Ways and

Means, House of Representatives

August 1997 MEDICARE

Fewer and Lower Cost

Beneficiaries With

Chronic Conditions

Enroll in HMOs

GAO/HEHS-97-160

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-277316 

August 18, 1997

The Honorable William M. Thomas

Chairman, Subcommittee on Health

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

Some analysts contend that a way to slow the growth in Medicare

spending is to enroll more people in health maintenance organizations

(HMO), which offer to provide all covered care to patients for set fees but

restrict the choice of physicians and closely monitor treatment decisions.

Whether increased HMO use will save Medicare money depends, in part, on

whether HMOs can attract and retain beneficiaries now in traditional,

fee-for-service (FFS) Medicare, particularly those with expensive chronic

conditions.1

Research conducted on data from the 1980s and 1990s has shown that

Medicare HMOs have benefited from favorable selection—they serve

healthier-than-average beneficiaries—relative to FFS.

2

 To explore whether

HMO enrollment and disenrollment patterns of those with and without

chronic conditions might explain the favorable selection that has

occurred,3

 we examined a mature managed care market to determine

• the extent to which Medicare beneficiaries with chronic conditions enroll

in HMOs,

• whether beneficiaries with chronic conditions who enroll in HMOs are as

costly as those remaining in FFS, and

1

Unlike FFS, HMOs provide care in return for fixed premiums and therefore are financially at risk for

all covered services beneficiaries use. Medicare pays the same basic rate to all HMOs that serve

residents of a particular county, a rate equal to 95 percent of the projected average FFS Medicare

payments in counties in a plan’s service area. This amount is then adjusted in an attempt to reflect

differences in expected levels of spending by age and sex, and by Medicaid, working, and

institutionalization status.

2

For a review of recent studies and an analysis concluding that Medicare risk contract HMOs continue

to benefit from favorable selection, see Physician Payment Review Commission, Annual Report to

Congress 1996 (Washington, D.C.: 1996), ch. 15. See also “Policy Implications of Risk Selection in

Medicare HMOs: Is the Federal Payment Rate Too High?” Issue Brief, No. 4 (Washington, D.C.: Center

for Studying Health System Change, Nov. 1996).

3

In addition to new enrollees from FFS (who may be somewhat healthier than the average HMO

enrollee), the health status of HMO populations is affected by the extent to which beneficiaries with

chronic conditions age into Medicare HMOs and enrollees acquire chronic illnesses as they age within

established HMOs.

Page 1 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

• whether beneficiaries with chronic conditions rapidly disenroll from HMOs

to FFS at rates different from other newly enrolled beneficiaries.

To address these questions, we used data on Medicare beneficiaries in

California, one of the most heavily Medicare HMO-penetrated states, to

determine the HMO enrollment and disenrollment decisions of beneficiaries

belonging to three health status groups. The state’s Medicare risk HMO

enrollment experienced rapid growth, increasing nearly five-fold between

1987 and 1995. By 1995, California accounted for over one-third of all

Medicare HMO enrollment, and five California plans were among the seven

largest in the nation. Medicare HMO penetration rates averaged 27 percent

in California compared with the national average rate of about 7 percent.4

We obtained 1991 through mid-1995 enrollment and FFS claims data for

approximately 1.3 million elderly Medicare beneficiaries in California.5

 To

determine the health status of the beneficiaries in our FFS cohort, we

screened claims records for a diagnosis of any of five chronic conditions:

diabetes mellitus, ischemic heart disease, congestive heart failure,

hypertension, and chronic obstructive pulmonary disease. Beneficiaries

were then categorized as having either zero, one, or several of the selected

conditions.6

 For each health status category, we determined the

proportion and relative costs (using 1992 average monthly FFS costs) of

those who enrolled in an HMO in 1993 and 1994, and those who disenrolled

within 6 months.7

 Appendix I provides a detailed description of our scope

and methodology. Appendix II presents information on the prevalence and

average expenditures of beneficiaries with selected chronic conditions in

the California FFS Medicare population in 1992.

Results in Brief Data on California’s FFS beneficiaries who enrolled in HMOs help explain

why, despite the presence of chronic conditions among new HMO enrollees,

4

Localities where Medicare managed care is particularly well established and experiencing rapid

growth include Riverside, San Bernardino, and San Diego counties, which each had HMO market

penetration rates exceeding 40 percent.

5

The Health Care Financing Administration (HCFA) bases its payments to Medicare HMOs on these

data, which we did not independently verify. Also, although our analysis pertains to a large portion of

the risk contract program, we cannot generalize our findings to other states or to the nation.

6

The group classified as having none of the selected chronic conditions refers to all individuals not

captured by our five claims screens for chronic illnesses. It may include some beneficiaries with

chronic conditions that we failed to identify through claims records, as well as people with other

conditions, such as cancer, that may be considered chronic by other analysts.

7

The use of prior costs is necessary because no other relevant cost data are available. After a

beneficiary enrolls in an HMO, the Medicare program receives no information on the health care

services provided to the beneficiary or their costs.

Page 2 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

their average costs are lower than the average FFS beneficiary. The health

status of beneficiaries, as measured by the number of selected chronic

conditions they have, showed significant differences between those who

enrolled in an HMO and those who remained in FFS. Also, when comparing

beneficiaries categorized by the presence of none, one, or multiple chronic

conditions, new HMO enrollees tended to be the least costly in each health

status group. This resulted in a substantial overall cost difference between

those that did and did not enroll in HMOs.

About one in six 1992 California FFS Medicare beneficiaries enrolled in an

HMO in 1993 and 1994. HMO enrollment rates differed significantly for

beneficiaries with selected chronic conditions compared with other

beneficiaries. Among those with none of the selected conditions,

18.4 percent elected to enroll in an HMO compared with 14.9 percent of

beneficiaries with a single chronic condition and 13.4 percent of those

with two or more conditions.

Moreover, we found that prior to enrolling in an HMO a substantial cost

difference, 29 percent, existed between new HMO enrollees and those

remaining in FFS because HMOs attracted the least costly enrollees within

each health status group. Even among beneficiaries belonging to either of

the groups with chronic conditions, HMOs attracted those with less severe

conditions as measured by their 1992 average monthly costs.

Furthermore, we found that rates of early disenrollment from HMOs to FFS

were substantially higher among those with chronic conditions. While only

6 percent of all new enrollees returned to FFS within 6 months, the rates

ranged from 4.5 percent for beneficiaries without a chronic condition to

10.2 percent for those with two or more chronic conditions. Also,

disenrollees who returned to FFS had substantially higher costs prior to

enrollment compared to those who remained in their HMO. These data

indicated that favorable selection still exists in California Medicare HMOs

because they attract and retain the least costly beneficiaries in each health

status group.

Background

HMOs Offer Additional

Benefits but Limit Provider

Choice

Compared with the traditional Medicare FFS program, HMOs typically cost

beneficiaries less money and cover additional benefits. In addition to

covering all Medicare part A and part B benefits, advantages of Medicare

Page 3 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

HMOs typically include low or no monthly premiums, expanded benefit

coverage, and reduced out-of-pocket expenses.8

 In effect, the HMO often

acts much like a Medicare supplemental policy (Medigap insurance) by

covering deductibles, coinsurance, and additional services.

On the other hand, beneficiaries may be reluctant to enroll in HMOs

because they give up their freedom to choose any provider. If a beneficiary

enrolled in an HMO seeks nonemergency care from providers other than

those designated by the HMO or seeks care without following the HMO’s

referral policy, the beneficiary is liable for the full cost of that care.9

 In

addition, beneficiaries may be reluctant to drop Medigap coverage and

enroll in an HMO because it may be difficult to obtain supplemental

insurance later at a reasonable price if they return to FFS.

10 Because the

elderly face a higher risk of serious illness, they may prefer to remain in

the FFS program to take advantage of the ability to visit any provider or

maintain their relationships with current providers.11

Medicare Beneficiaries

Have Freedom to Switch

Between HMOs and FFS

Medicare HMOs have enrollment procedures that reflect beneficiaries’

freedom to move between the FFS program and HMO plans. Medicare rules

allow beneficiaries to select any of the federally approved HMOs in their

area and to switch plans or to return to the FFS program monthly.

Beneficiaries who otherwise would be reluctant to try an HMO know they

can easily leave if a plan does not meet their expectations. Because of this

freedom to change plans every 30 days, disenrollments can indicate

enrollee dissatisfaction with an HMO. Beneficiaries can also shift to HMOs to

get specific benefits when needed and then disenroll with ease to return to

FFS.

8

Under FFS Medicare, beneficiaries pay for most self-administered prescription drugs when not in a

hospital or skilled nursing facility. Cost-sharing features include a per admission deductible of over

$700 for hospital expenses, a $100 calendar year deductible for most other expenses, and 20 percent

copayment for most nonhospital expenses. Beneficiaries enrolled in HMOs must continue to pay the

Medicare part B premium and any specified HMO copayments.

9

In 1996, HCFA clarified its position that a “point-of-service” option (also known as a “self-referral” or

“open-ended” option) was available. This option, which covers beneficiaries for some care received

outside of the network, is not yet widely offered by Medicare HMOs.

10After the initial 6 months of enrollment in part B Medicare, insurers in most states can deny a

Medigap policy based on an applicant’s medical history. Insurers are especially selective when issuing

a Medigap policy covering prescription drugs. See Medigap Insurance: Alternatives for Beneficiaries to

Avoid Medical Underwriting (GAO/HEHS-96-180, Sept. 10, 1996).

11With the exception of staff model HMOs, changing to or among HMOs does not necessarily require

switching physicians because physicians can contract with multiple HMOs.

Page 4 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

Because enrolling more beneficiaries enables HMOs to spread their risk and

better ensure profitability, recruiting or retaining beneficiaries in a plan is

important. HMOs’ marketing strategies often call attention to the size and

geographic scope of the provider network and the quality of physicians in

the network.12 However, as we have previously reported, some HMO sales

agents have misled beneficiaries or used otherwise questionable sales

practices to attract new enrollees.13

Beneficiaries With

Chronic Conditions

Less Likely to Enroll

in an HMO

For a number of reasons, it would be expected that beneficiaries with

chronic conditions would be drawn to HMO plans. HMOs have the potential

to provide a range of integrated services required by such people. Ideally,

HMO providers should have the flexibility to treat patients with chronic

conditions or refer them to an appropriate mix of medical and nonmedical

services. They have a financial incentive for keeping people healthy and as

fully functioning as possible. To avoid use of emergency room and costly

acute-care services, HMOs often emphasize prevention services that

address the development or progression of disease complications.

The combination of more extensive benefits and lower costs was evident

in the benefit packages offered by the five largest California Medicare

HMOs (accounting for 83 percent of the state’s enrollment). In 1994, these

plans offered

• zero to $30 monthly premiums;

• hospital coverage in full with unlimited days;

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

• emergency room care, in or out of the area, with a copayment of $5 to $50

(waived if admitted to the hospital);

• coverage for preventive health services, including an annual exam, eye

glasses, routine eye and hearing tests, and health education;

• outpatient pharmacy coverage in three of the five plans, with copayments

of $5 to $7 per prescription and an annual cap from $700 to $1,200; and

• outpatient mental health services with a copayment of $10 to $20 per visit,

in most cases.

Despite these extra benefits of HMOs, California Medicare beneficiaries

with chronic conditions were less likely to enroll in an HMO than

12Attracting new enrollees to a plan can be expensive. According to some estimates, advertising, public

relations, sales, and administrative costs for signing up an enrollee can average $500 to $600.

13See Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance

(GAO/HEHS-97-23, Oct. 22, 1996).

Page 5 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

beneficiaries without any of the selected conditions. As a result, the new

enrollee group had, on the whole, better health status than those who

stayed in FFS.

Enrollment Rates Lowest

for Beneficiaries With

Multiple Chronic

Conditions

HMO enrollment typically involves only a fraction of FFS beneficiaries each

year. Between January 1993 and December 1994, 16.4 percent of the

beneficiaries in our decision-making cohort enrolled in an HMO.

14 But

beneficiaries with a single chronic condition were 19 percent less likely to

join an HMO than those without any of the selected conditions, and those

with multiple chronic conditions enrolled at a rate 27 percent below those

with none of the conditions.

One reason beneficiaries with chronic illnesses may be reluctant to enroll

in an HMO is because they are more likely than nonchronic beneficiaries to

have established provider relationships. In addition, because HMOs require

that a primary care physician or “gatekeeper” decide when a patient needs

a specialist or hospitalization, these beneficiaries may be particularly

concerned about their access to specialty providers. Beneficiaries

diagnosed with chronic conditions may prefer to remain in the FFS

program to take advantage of the ability to visit any provider or to

maintain relationships with current providers.

Within each health status group, HMO enrollment rates declined with age.

This may indicate that younger seniors are more familiar with HMOs and

thus less reluctant to try them or that they have less severe medical

problems and are more willing to switch physicians, if necessary.

Reflecting both age and health status, beneficiaries over 85 years old who

had multiple chronic conditions enrolled at about half the rate of those

aged 65 to 69 without any of the conditions. (See table 1.)

14For simplicity, this analysis excluded all FFS beneficiaries who died or moved during 1993 and 1994.

This has the effect of excluding too many high-cost cases from the FFS group and thus understating

the difference in costs between the group staying in FFS and the group of new HMO enrollees.

Page 6 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

Table 1: Rates at Which FFS

Beneficiaries Joined HMOs in 1993 and

1994, by Number of Selected Chronic

Conditions and Age

Numbers in percent

All

beneficiaries

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All beneficiaries 16.4 18.8 16.7 15.4 12.5

Beneficiaries with

none of the selected

chronic conditions 18.4 20.7 18.6 17.2 13.7

Beneficiaries with

only one of the

selected conditions 14.9 16.4 15.2 14.6 12.3

Beneficiaries with

two or more of the

selected conditions 13.4 14.8 13.8 13.3 10.9

New HMO Enrollees Show

Better Health Status

Overall

Comparing the two groups of beneficiaries, those who enrolled in an HMO

and those who remained in FFS, we found that a larger proportion of the

enrolled group had better health status. Whereas beneficiaries with none

of the selected chronic conditions represented 49 percent of those staying

in FFS, they represented 57 percent of the group enrolling to HMOs.

Conversely, the share with multiple conditions was 26 percent greater in

the group remaining in FFS than in the group joining an HMO. (See table 2.)

Table 2: Distribution of Beneficiaries

Who Enrolled in HMOs and Those Who

Remained in FFS, by Number of

Selected Chronic Conditions, 1993 and

1994

Numbers in percent

Beneficiaries

who enrolled

in HMOs

Beneficiaries who

remained in FFS

All beneficiaries 100.0 100.0

Beneficiaries with none of the selected chronic

conditions 56.5 49.0

Beneficiaries with only one of the selected

conditions 28.0 31.3

Beneficiaries with two or more of the selected

conditions 15.6 19.7

Among the 12 California Medicare HMOs receiving the largest number of

new enrollees from FFS,

15 the health status of most plans’ new enrollees

resembled aggregate patterns. However, at one plan, 22.2 percent of its

15New HMO enrollment in California was concentrated in a few large Medicare risk contract HMOs. Of

the roughly 176,000 beneficiaries leaving FFS to enroll in HMOs during 1993-94, 12 plans accounted for

92 percent of the new enrollees. Plans receiving the largest number of new enrollees from FFS

included Pacificare of Southern California with almost 60,000 enrollees (34 percent); FHP with about

33,000 beneficiaries (19 percent); and HealthNet and Pacificare of Northern California, each with

about 14,000 beneficiaries (8 percent).

Page 7 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

new enrollees had two or more selected chronic conditions. At another

plan, 8.6 percent of its new enrollees had two or more chronic conditions.

New HMO Enrollees

With Chronic

Conditions Are Low

Cost Compared With

Their FFS

Counterparts

Not only were the enrollment rates for beneficiaries with chronic

conditions lower than those with none of the selected conditions, but the

prior costs of those who enrolled were substantially less than those who

remained in FFS. As a result, the average cost of new enrollees was nearly

one-third below the cost of FFS beneficiaries that did not enroll.

New Enrollees’ Costs

Varied Dramatically by

Number of Conditions

New enrollees with chronic conditions are potential heavy users of

expensive health care services in HMOs. Preenrollment data indicate that

new enrollees with the selected chronic conditions had considerably

higher FFS costs than those without one of the chronic conditions. On

average, 1992 FFS costs for new enrollees were more than twice as high for

beneficiaries with a single chronic condition compared with persons with

none.

Having multiple chronic conditions dramatically increased the prior cost

of care among new enrollees, rising to 7 times the per capita costs of

persons with none of the conditions. Even when the age of the beneficiary

was taken into account, those with more than one chronic condition had

substantially higher costs. For example, the 1992 average monthly FFS cost

for new enrollees 70 to 74 years old ranged from $74 for individuals with

none of the selected conditions to $565 for those with two or more

conditions. (See table 3.)

Table 3: 1992 Average Monthly FFS

Cost of Beneficiaries Who Enrolled in

HMOs in 1993 and 1994, by Number of

Selected Chronic Conditions and Age

All new

enrollees

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All new enrollees $198 $143 $182 $245 $275

New enrollees with

none of the selected

chronic conditions 81 60 74 103 128

New enrollees with

only one of the

selected conditions 224 197 210 244 261

New enrollees with

two or more of the

selected conditions 580 544 565 608 582

Page 8 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

Most Costly Beneficiaries

in Each Health Status

Group Remained in FFS

The enrollment patterns show that Medicare HMOs attracted people who

did not need as costly medical care. Beneficiaries who enrolled in an HMO

in 1993 or 1994 had substantially lower 1992 costs compared with those

that remained in FFS during that period. As a group, new enrollees cost

29 percent less than those who did not join an HMO.

16 This pattern of

drawing new HMO enrollees from FFS beneficiaries with low costs held true

for each of the health status categories. The differences in prior costs

ranged from 31 percent among those with no chronic conditions to

16 percent for those with multiple chronic conditions. (See table 4.)

Table 4: Comparison of 1992 Average

Monthly FFS Costs for Beneficiaries

Who Enrolled in an HMO and Those

Who Remained in FFS, by Number of

Selected Chronic Conditions, 1993 and

1994

Beneficiaries

who enrolled

in HMOs

Beneficiaries who

remained in FFS Ratio

All beneficiaries $198 $280 0.71

Beneficiaries with none of the

selected chronic conditions 81 117 0.69

Beneficiaries with only one of the

selected conditions 224 275 0.81

Beneficiaries with two or more of

the selected conditions 580 692 0.84

Early Disenrollment

Rates Were Highest

Among Those With

Chronic Conditions

Medicare beneficiaries voluntarily disenroll from HMOs for a variety of

reasons. A 1996 Mathematica Policy Research, Inc., survey found that

disenrollees to FFS who had been in their plan for 6 months or less were

more likely than longer-term stayers to cite their reasons for disenrolling

as dissatisfaction with the choice of primary care physicians, a

misunderstanding of HMO rules, and an inability to obtain appointments

16These results are consistent with others that show favorable selection in the Medicare program. We

recently reported that California HMO enrollee costs were about two-thirds of comparable FFS

beneficiary costs in the year before enrollment. See Medicare HMOs: HCFA Can Promptly Eliminate

Hundreds of Millions in Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997). Similarly, the Physician

Payment Review Commission reported that spending by new HMO enrollees was 63 percent of that for

FFS beneficiaries in the 6 months before they joined an HMO. See Physician Payment Review

Commission, Annual Report to Congress 1996, ch. 15. In addition, an analysis of Medicare enrollment

and billing records for southern Florida from 1990 to 1993 showed that the rate of use of inpatient

services for a group of HMO enrollees during the year before enrollment was 66 percent of the rate in

the FFS group. See Robert O. Morgan, Beth A. Virnig, Carolee A. DeVito, and others, “The

Medicare-HMO Revolving Door—The Healthy Go In and the Sick Go Out,” New England Journal of

Medicine, Vol. 337, No. 3 (July 17, 1997).

Page 9 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

when needed.17 High early disenrollment rates may reflect beneficiaries’

lack of familiarity with the HMO concept. For example, a beneficiary may

realize only after joining a plan that it does not pay for care from an

out-of-network provider. These early disenrollees were more likely to

return to FFS Medicare, while beneficiaries who disenrolled after a longer

period were more likely to join other risk plans.

New Enrollees With

Multiple Chronic

Conditions Were Most

Likely to Disenroll Early

and Return to FFS

Early disenrollees to FFS were a small group relative to all new enrollees.

The vast majority of new enrollees, 91.5 percent, were still enrolled in their

HMO 6 months after joining their plan.18 Within this brief period, 6 percent

returned to FFS and 2.5 percent switched to another HMO.

19

New HMO enrollees with chronic conditions rapidly disenrolled and

returned to FFS at higher rates than healthier new enrollees.20 The early

disenrollment rates were highest among those with multiple chronic

conditions, which might indicate greater access barriers and less

satisfaction with HMOs for such beneficiaries. Those with two or more of

the selected conditions disenrolled at a rate more than twice that of new

enrollees with none of the conditions. Also, a greater proportion of older

seniors disenrolled than younger beneficiaries, regardless of health status.

(See table 5.)

17Physician Payment Review Commission, Access to Care in Medicare Managed Care: Results From a

1996 Survey of Enrollees and Disenrollees, Selected External Research Report No. 7 (Washington,

D.C.: Mathematica Policy Research, Inc., Nov. 1996). A 1993 survey found that disenrollees were more

likely than enrollees to have perceived problems with access to primary and specialty care, and

unsympathetic behaviors that potentially restrict service access. See Beneficiary Perspectives of

Medicare Risk HMOs, Department of Health and Human Services, Office of Inspector General,

OEI-06-91-00730 (Washington, D.C.: Mar. 1995).

18To distinguish voluntary from administrative disenrollments, the group of new enrollees was reduced

to exclude beneficiaries who had moved or died within 6 months of joining an HMO. We also

eliminated apparent disenrollments when an HMO no longer participated in the risk contract program

or merged with another risk plan.

19The rate of plan switching may indicate that, at least for some beneficiaries, the system of care itself

was not problematic, but rather that the market is highly competitive in these counties. Medicare

enrollees can switch fluidly from plan to plan, attracted by competing HMOs offering better or less

expensive benefit packages and wider provider networks.

20People with chronic conditions who are enrolled in managed care plans have reported being denied

access to treatment and services that they need and of being assigned to primary care physicians who

are not as well acquainted with their condition as a specialist might be. For an overview of recent

research on chronic illness, see Catherine Hoffman and Dorothy P. Rice, Chronic Care in America: A

21st Century Challenge (Princeton, N.J.: The Robert Wood Johnson Foundation, Aug. 1996).

Page 10 GAO/HEHS-97-160 HMO Enrollment Patterns
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Table 5: Rates of Early Disenrollment

to FFS for 1993 and 1994 New

Enrollees, by Number of Selected

Chronic Conditions and Age

Numbers in percent

All new

enrollees

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All new enrollees 6.0 4.6 5.6 7.0 8.3

New enrollees with

none of the selected

chronic conditions 4.5 3.4 4.2 5.7 6.5

New enrollees with

only one of the

selected conditions 6.7 6.1 6.5 6.9 8.4

New enrollees with

two or more of the

selected conditions 10.2 8.9 10.0 10.6 11.6

In the 12 plans enrolling most of new enrollees, the early disenrollment

rates for beneficiaries in each health status group exhibited a fairly

consistent pattern. At most plans, beneficiaries with two or more of the

selected chronic conditions disenrolled at about twice the rate of new

enrollees with none of the conditions. However, the disenrollment rates

for new enrollees with no chronic conditions ranged from 1.8 percent to

15.4 percent. For beneficiaries with two or more of the selected

conditions, disenrollment rates varied even more widely, from 3.3 percent

at one plan to 34.4 percent at another.

Taking the enrollment and disenrollment rates together, we found that

those beneficiaries who were least likely to enroll in an HMO were also

those that were most likely to disenroll early. For example, among

beneficiaries 70 to 74 years old with multiple chronic conditions,

13.8 percent enrolled in an HMO and 10.0 percent of those beneficiaries

disenrolled early. This compares with 18.6 percent and 4.2 percent,

respectively, for beneficiaries of the same age group with none of the

conditions.

This pattern of early disenrollment accentuates the health status

differences between those who joined an HMO and those who remained

continuously enrolled in FFS. Most of the disenrollees returning to FFS,

58 percent, had at least one of the selected chronic conditions. The

composition of the group that stayed on in their HMO had better health

status, with 42 percent having a chronic condition. (See table 6.)

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Table 6: Distribution of New Enrollees

Who Returned to FFS and Those Who

Remained in Their HMO, by Number of

Selected Chronic Conditions

Numbers in percent

Beneficiaries

who

disenrolled to

FFS within 6

months

Beneficiaries who

remained in their

HMO for more

than 6 months

All new enrollees 100.0 100.0

New enrollees with none of the selected

chronic conditions 42.5 57.8

New enrollees with only one of the selected

conditions 31.5 27.7

New enrollees with two or more of the selected

conditions 26.0 14.5

New Enrollees With the

Highest Preenrollment

Costs Disenrolled to FFS

The higher early disenrollment rate for those with multiple chronic

conditions reinforces the cost implications of an underrepresented

enrollment of beneficiaries with chronic conditions. Disenrollment

appears to winnow many of the highest cost beneficiaries out of the newly

enrolled HMO population, widening the gap between FFS and managed care.

Prior Medicare expenditures for early disenrollees ranged from $132 per

month for those with none of the selected conditions to $690 for those

with multiple conditions (see table 7). Costs generally increased with age

for beneficiary groups with none or one of the selected chronic conditions.

However, among disenrollees with multiple conditions, younger seniors

had the highest costs. Compared with the prior cost of new enrollees

(shown in table 3), the disenrollees’ prior costs were higher in every health

status group. On average, 1992 costs were 66 percent higher for early

disenrollees than for new enrollees.

Table 7: 1992 Average Monthly FFS

Cost of New Enrollees Who

Disenrolled Early to FFS, by Number of

Selected Chronic Conditions and Age

All

elderly

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All new enrollees $329 $295 $315 $350 $364

New enrollees with

none of the selected

chronic conditions 132 109 126 150 150

New enrollees with

only one of the

selected conditions 296 294 259 313 338

New enrollees with

two or more of the

selected conditions 690 739 714 672 632

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Comparing the two groups of beneficiaries, those who disenrolled early

also had substantially higher 1992 costs than those remaining in their HMO.

This was true for all the health categories. The weighed average cost for

beneficiaries who returned to FFS was 79 percent more than those who

stayed on in an HMO. (See table 8.)

Table 8: Comparison of 1992 Average

Monthly FFS Costs for Beneficiaries

Who Returned to FFS and Those Who

Remained in Their HMO

New

enrollees

who

disenrolled to

FFS within 6

months

New enrollees

who remained in

their HMO for

more than 6

months Ratio

All new enrollees $329 $184 1.79

New enrollees with none of the

selected chronic conditions 132 77 1.71

New enrollees with only one of the

selected conditions 296 214 1.38

New enrollees with two or more of

the selected conditions 690 555 1.24

The low prior costs of those who enrolled in an HMO and remained there

for more than 6 months are in sharp contrast to costs for those who stayed

in FFS continuously for the 24-month period (as shown in table 4).

Longer-term HMO enrollees had far lower preenrollment costs than the FFS

stayers, with cost differences ranging from 20 percent lower among

beneficiaries with multiple chronic conditions to 34 percent lower for

those with none of the conditions.

Conclusions Compared with healthier beneficiaries, California Medicare beneficiaries

with selected chronic conditions were less likely to enroll in HMOs and

more likely to rapidly disenroll from HMOs. This pattern was evident

despite the fact that California HMOs’ coverage of more services

(particularly preventive care and prescription drugs) with less cost-sharing

would be expected to attract beneficiaries with chronic conditions.

Furthermore, the debate about the better health status of HMO enrollees

hinges on a subtle point, but one that has significant cost implications.

That is, beneficiaries grouped within health status categories—the

presence of zero, one, or multiple chronic conditions—incur a range of

costs depending on the severity of their chronic condition(s) or the

presence of other conditions (not accounted for in this analysis). Those at

the low end tend to be the new HMO enrollees, whereas those at the high

Page 13 GAO/HEHS-97-160 HMO Enrollment Patterns
B-277316 

end are likely to remain in FFS. Thus, this study helps explain a pattern of

favorable selection in California Medicare HMOs despite the presence of

some new enrollees with chronic conditions.

We provided copies of a draft of this report to health care analysts at HCFA,

the Physician Payment Review Commission, and the Prospective Payment

Assessment Commission. They generally agreed with the information

presented and offered some technical suggestions that we incorporated

where appropriate.

As arranged with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from the

date of this letter. At that time, we will send copies to interested parties

and make copies available to others on request. Please call me on

(202) 512-7119 if you or your staff have any questions. Other major

contributors to this report include Rosamond Katz, Robert Deroy, and

Rajiv Mukerji.

Sincerely yours,

Bernice Steinhardt

Director, Health Services Quality

 and Public Health Issues

Page 14 GAO/HEHS-97-160 HMO Enrollment Patterns
Page 15 GAO/HEHS-97-160 HMO Enrollment Patterns
Contents

Letter 1

Appendix I 

Scope, Data Sources,

and Methodology

18

Scope and Data Sources 18

Identifying FFS Beneficiaries With Chronic Conditions 19

Analyzing HMO Enrollment and Disenrollment Patterns of FFS

Beneficiaries

20

Appendix II 

Prevalence and Cost

of FFS Beneficiaries

With Selected Chronic

Conditions in

California, 1992

22

Chronic Conditions Were Prevalent Among Half the Elderly 22

Beneficiaries With Multiple Chronic Conditions Are Far More

Costly Than Those Without the Conditions

23

Related GAO Products 24

Tables Table 1: Rates at Which FFS Beneficiaries Joined HMOs in 1993

and 1994, by Number of Selected Chronic Conditions and Age

7

Table 2: Distribution of Beneficiaries Who Enrolled in HMOs and

Those Who Remained in FFS, by Number of Selected Chronic

Conditions, 1993 and 1994

7

Table 3: 1992 Average Monthly FFS Cost of Beneficiaries Who

Enrolled in HMOs in 1993 and 1994, by Number of Selected

Chronic Conditions and Age

8

Table 4: Comparison of 1992 Average Monthly FFS Costs for

Beneficiaries Who Enrolled in an HMO and Those Who Remained

in FFS, by Number of Selected Chronic Conditions, 1993 and

1994

9

Table 5: Rates of Early Disenrollment to FFS for 1993 and 1994

New Enrollees, by Number of Selected Chronic Conditions and

Age

11

Table 6: Distribution of New Enrollees Who Returned to FFS and

Those Who Remained in Their HMO, by Number of Selected

Chronic Conditions

12

Table 7: 1992 Average Monthly FFS Cost of New Enrollees Who

Disenrolled Early to FFS, by Number of Selected Chronic

Conditions and Age

12

Page 16 GAO/HEHS-97-160 HMO Enrollment Patterns
Contents

Table 8: Comparison of 1992 Average Monthly FFS Costs for

Beneficiaries Who Returned to FFS and Those Who Remained in

Their HMO

13

Table II.1: Prevalence of Chronic Conditions Among FFS

Beneficiaries, by Number of Selected Chronic Conditions and

Age

22

Table II.2: 1992 Average Monthly Costs for FFS Beneficiaries, by

Number of Selected Chronic Conditions and Age

23

Abbreviations

EDB Enrollment Database

FFS fee for service

HCFA Health Care Financing Administration

HMO health maintenance organization

SAF Standard Analytic Files

Page 17 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix I 

Scope, Data Sources, and Methodology

This appendix describes our (1) scope and data sources, (2) methodology

for identifying Medicare fee-for-service (FFS) beneficiaries with selected

chronic conditions, and (3) methodology for analyzing the health

maintenance organization (HMO) enrollment and disenrollment patterns of

FFS beneficiaries.

Scope and Data

Sources

Our study is an analysis of HMO enrollment and disenrollment patterns in

14 counties in California from January 1993 through June 1995. We chose

California because it has been the hub of Medicare HMO activity

nationwide. In 1995, over 40 percent of all Medicare beneficiaries enrolled

in risk contract HMOs21 resided in the state. California had 32 HMOs with

Medicare risk contracts, including 5 of the nation’s 7 plans that had the

largest number of beneficiaries enrolled.

We selected California counties where opportunities for enrollment were

not limited by HMO participation. The 14 counties22 included in our study

each had at least one risk contract HMO operating within its boundaries,

and 10 counties listed two or more Medicare HMOs.23 In addition, all of the

counties had over 1,000 Medicare beneficiaries enrolled in risk contract

HMOs and together accounted for 99.2 percent of California risk contract

HMO enrollment. As a result of substantial HMO enrollment growth, several

of these counties had high Medicare HMO market penetration rates (the

proportion of Medicare beneficiaries enrolled in an HMO) in 1994: San

Bernardino (47 percent), Riverside (47 percent), San Diego (42 percent),

and Orange (36 percent).

We used the Health Care Financing Administration’s (HCFA) Enrollment

Database (EDB) file to select a cohort of FFS beneficiaries who lived in the

14-county area in December 1992. The EDB is the repository of enrollment

and entitlement information of anyone ever enrolled in Medicare. It

contains information on a beneficiary’s age, sex, entitlement status, state

and county of residence, and HMO enrollment history. To focus on the

enrollment behavior of people who had no recent HMO experience, we

identified beneficiaries who were eligible for Medicare part A and part B

21Under risk contracts, HMOs receive a fixed payment for each beneficiary enrolled. As a result, they

assume a level of risk in managing the cost of providing care because, for any particular patient, the

cost of care may exceed the fixed payment.

22Los Angeles, San Diego, Orange, Riverside, San Bernardino, Ventura, Kern, San Francisco, San Mateo,

Sacramento, Santa Clara, Santa Barbara, Marin, and Butte.

23Although some Medicare managed care plans were cost plans or health care prepayment plans, most

of them converted to risk contract HMOs during 1993 and 1994. Therefore, all plans were included in

our analysis.

Page 18 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix I 

Scope, Data Sources, and Methodology

for all of 1992 but were not in an HMO at any point during that year. We

further narrowed the cohort by excluding patients with end-stage renal

disease and those entitled to Medicare benefits because they were

disabled and under 65 years old.

We used HCFA’s Standard Analytic Files (SAF) to determine Medicare’s

payments for each FFS beneficiary. The SAFs contain final action claims

data for various types of Medicare-covered services, including inpatient

hospital, outpatient, home health agency, skilled nursing facility, hospice,

physician/supplier, and durable medical equipment. We obtained

expenditure information from the “payment amount” portion of the claim

and added pass-through and per diem expenses to the payment amount for

inpatient claims. From the claim files, we computed 1992 monthly average

expenditures for each beneficiary enrolled in FFS throughout 1992.

Individual expenditure information was combined with EDB data to

produce a single enrollment and expenditure file containing information

on 1,270,554 California FFS Medicare beneficiaries.

Identifying FFS

Beneficiaries With

Chronic Conditions

We also used claims information contained in the SAFs to determine the

health status of each beneficiary, as measured by the presence or absence

of any of five chronic conditions; that is, whether a claimant had been

diagnosed with zero, one, or two or more of the chronic conditions. The

chronic conditions included in this analysis were diabetes mellitus,

ischemic heart disease, congestive heart failure, hypertension, and chronic

obstructive pulmonary disease. These five conditions were identified by

Medicare officials as ranking among the most highly prevalent in the

elderly population and generating the highest costs to the program.

For each cohort beneficiary, we screened 1991 and 1992 inpatient,

outpatient, skilled nursing facility, home health agency, and

physician/supplier claims for diagnoses (3-digit ICD-9 codes) related to the

five chronic conditions. A beneficiary was classified as having a given

chronic condition if he or she had

• one or more hospital claims with a diagnosis of any of the five chronic

conditions,

• two or more other claims with the diagnosis of diabetes mellitus or

chronic obstructive pulmonary disease, or

Page 19 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix I 

Scope, Data Sources, and Methodology

• three or more other claims with the diagnosis of hypertension, ischemic

heart disease, or congestive heart failure.24

We then summarized the information for each beneficiary to determine if

he or she had zero, one, or two or more chronic conditions.

Analyzing HMO

Enrollment and

Disenrollment

Patterns of FFS

Beneficiaries

We analyzed information contained in the EDB to determine the cohort’s

HMO enrollment patterns from January 1993 to December 1994. For each

beneficiary, there were four possible occurrences: death, change of

residence (out of county), enrollment in an HMO, or 24 months of

continuous enrollment in FFS. If the first occurrence for any beneficiary

was death or a move, we excluded those beneficiaries from further

analysis. During the period, the proportion who died was 6.2 percent for

those with none of the selected conditions, 9.6 percent for those with one

condition, and 18.6 percent for those with two or more conditions; the

percentage who moved was about 5 percent for each health status group.

Excluding beneficiaries who died or moved during the 2-year period

reduced the size of the cohort to 1,074,819 beneficiaries. We then

calculated their 1992 average monthly FFS expenditures, by number of

chronic conditions and age group, and the proportion of the remaining

beneficiaries that enrolled in an HMO.

25 This 24-month requirement made

our pool of potential enrollees a somewhat healthier group than otherwise,

and therefore, our estimates of HMO enrollment rates were more favorable

than if this requirement were not a criterion for inclusion. Also, because

people in their last 12 months of life have costs that are significantly

higher than those of other Medicare beneficiaries, the health status and

1992 average costs for those who stayed in FFS was below what they would

be if a less stringent criterion were used.

To determine the early disenrollment rates, we tracked those beneficiaries

who joined an HMO (175,951) for 6 months after they enrolled using

January 1993 to June 1995 EDB information. Disenrollments may occur for

administrative reasons (the individual died or moved out of the HMO’s

24The screens may undercount or overcount beneficiaries with each chronic condition. For example,

patients may stop visiting a doctor following their recovery from heart failure or ischemic diseases. On

the other hand, the Montana-Wyoming Foundation for Medical Care, which developed and tested the

screen for beneficiaries with diabetes, found that it overcounted by 3 percent the number of those with

diabetes that could be identified through medical record reviews.

25The program payments associated with each beneficiary pertain to all services claimed, not only

those related to the treatment of chronic conditions. For example, the average monthly expenditure

for a patient with diabetes could include expenses for treating acute back pain.

Page 20 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix I 

Scope, Data Sources, and Methodology

service area) or voluntarily (to return to FFS or switch to another HMO). We

excluded from further analysis those beneficiaries who disenrolled for

administrative reasons, leaving a cohort of 14,455 who voluntarily

disenrolled within 6 months.26 We then calculated the proportion of

beneficiaries who chose to return to FFS and their 1992 average monthly

FFS expenditures, for each health status and age group.

We conducted our review of enrollment and disenrollment patterns

between April 1996 and June 1997 in accordance with generally accepted

government auditing standards.

26During this period, the California HMO market experienced a number of mergers among its risk

contract plans. Beneficiaries whose plan enrollment changed due to a merger were not counted as

voluntary disenrollees.

Page 21 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix II 

Prevalence and Cost of FFS Beneficiaries

With Selected Chronic Conditions in

California, 1992

Chronic conditions may begin in middle age but often progress in terms of

severity of symptoms and the degree to which they limit a person as the

person ages. Many people with any kind of a chronic condition have more

than one condition to manage, further adding to their health care burden.

Those who are chronically ill have substantially higher utilization of health

care services, accounting for a large share of emergency room visits,

hospital admissions, hospital days, and home care visits. This appendix

presents 1992 data on the proportion of California FFS beneficiaries that

had selected chronic conditions and how their costs compared with those

without the conditions.

Chronic Conditions

Were Prevalent

Among Half the

Elderly

In 1992, about 660,000 or one-half of the elderly Californians in our cohort

were identified as having diabetes, ischemic heart disease, congestive

heart failure, hypertension, or chronic obstructive pulmonary disease. Of

these, about 40 percent had more than one of these chronic condition. As

shown in table II.1, the prevalence of these conditions is greatest among

the oldest of the elderly. For example, for those over 75 years old, one in

three beneficiaries had a single chronic condition and at least one in four

had two or more of these chronic conditions.

Table II.1: Prevalence of Chronic

Conditions Among FFS Beneficiaries,

by Number of Selected Chronic

Conditions and Age

Numbers in percent

All

elderly

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All beneficiaries 100.0 100.0 100.0 100.0 100.0

Beneficiaries with

none of the selected

chronic conditions 48.1 59.1 51.1 42.2 37.3

Beneficiaries with only

one of the selected

conditions 30.6 26.3 30.1 33.1 33.1

Beneficiaries with two

or more of the

selected conditions 21.3 14.6 18.8 24.8 29.7

Page 22 GAO/HEHS-97-160 HMO Enrollment Patterns
Appendix II 

Prevalence and Cost of FFS Beneficiaries

With Selected Chronic Conditions in

California, 1992

Beneficiaries With

Multiple Chronic

Conditions Are Far

More Costly Than

Those Without the

Conditions

There were substantial cost differences between beneficiaries who had

none, one, or several of the selected conditions. The average cost for a

beneficiary with multiple chronic conditions was over 6 times the cost for

a beneficiary with none of the conditions, and more than twice the cost for

a beneficiary with only one of the conditions.27 As shown in table II.2, even

within the same age group, costs varied widely across health status groups.

Table II.2: 1992 Average Monthly Costs

for FFS Beneficiaries, by Number of

Selected Chronic Conditions and Age

All

elderly

Aged

65-69

Aged

70-74

Aged

75-84

Aged 85

and older

All beneficiaries $328 $237 $289 $379 $445

Beneficiaries with

none of the selected

chronic conditions 127 96 113 151 185

Beneficiaries with only

one of the selected

conditions 308 268 283 325 371

Beneficiaries with two

or more of the

selected conditions 812 756 775 839 854

27We found that a significant share of our cohort, 14 percent, showed no claims for Medicare

reimbursement in 1992. A small proportion, less than 3 percent, of FFS beneficiaries with chronic

conditions (identified from 1991 claims data) did not use Medicare-covered services, probably because

they did not experience an acute health problem in 1992. By comparison, about 28 percent of the FFS

beneficiaries with none of the selected conditions had no Medicare claims in 1992.

Page 23 GAO/HEHS-97-160 HMO Enrollment Patterns
Related GAO Products

Medicare HMOs: HCFA Can Promptly Eliminate Hundreds of Millions in

Excess Payments (GAO/HEHS-97-16, Apr. 25, 1997).

Medicare HMOs: Rapid Enrollment Growth Concentrated in Selected States

(GAO/HEHS-96-63, Jan. 18, 1996).

Medicare Managed Care: Growing Enrollment Adds Urgency to Fixing HMO

Payment Problems (GAO/HEHS-96-21, Nov. 8, 1995).

Medicare: Changes to HMO Rate Setting Methods Are Needed to Reduce

Program Costs (GAO/HEHS-94-119, Sept. 2, 1994).

(108269) Page 24 GAO/HEHS-97-160 HMO Enrollment Patterns
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