United States General Accounting Office

GAO Report to the Honorable

John F. Kerry, U.S. Senate

January 1996 MEDICARE HMOs

Rapid Enrollment

Growth Concentrated

in Selected States

GAO/HEHS-96-63

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-232994 

January 18, 1996

The Honorable John F. Kerry

United States Senate

Dear Senator Kerry:

Medicare, the nation’s largest health care insurer, has traditionally

provided health insurance coverage to its elderly and disabled

beneficiaries on a fee-for-service basis. But the option of receiving

managed health care through a health maintenance organization (HMO) has

existed for more than 2 decades. To date, however, Medicare beneficiaries

have enrolled in HMOs to a much lesser degree than persons with

private-sector health insurance. Private-sector insurers cite extensive use

of HMOs and other managed care approaches as a key factor in slowing the

growth of their insurance premiums. As a result, part of the current

attention to controlling rising Medicare costs has focused on how to bring

about greater use of HMOs.

To help the Congress study this matter, you asked us to develop

information on trends in the number of (1) Medicare beneficiaries

enrolling in HMOs and (2) HMOs enrolling beneficiaries. You also asked us to

analyze this and other available information for any indications of factors

that might be influencing decisions by HMOs to enroll Medicare

beneficiaries and decisions by beneficiaries to enroll in HMOs.

We based our analysis on data obtained primarily from two sources: the

Health Care Financing Administration (HCFA)1

 and the Group Health

Association of America (GHAA).2

 We focused our work on HMOs that had

entered into risk contracts with HCFA.

3

 Under such contracts, HMOs receive

a fixed payment for each Medicare beneficiary enrolled. As a result, they

assume a level of risk in managing the cost of providing care in that for

1

HCFA, an agency of the Department of Health and Human Services, administers the Medicare

program.

2

GHAA is the national trade association representing most HMOs. As of November 1, 1995, GHAA

merged with the American Managed Care and Review Association (AMCRA) to become

GHAA/AMCRA.

3

These contracts can also be awarded to a competitive medical plan, which is a provider that is subject

to similar regulatory requirements as HMOs but has greater flexibility in setting its commercial

premium rates and the services offered to commercial members. In this report, our use of the term

HMO includes such plans.

Page 1 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

any particular patient the cost of care may exceed the fixed payment.4 We

used this information to analyze trends in HMO usage and as a basis for

identifying factors affecting the level of usage. In addition, we talked with

officials at HCFA and GHAA and representatives of two management

consulting firms and five HMOs to obtain more information on factors that

are associated with usage. We performed our work between February and

November 1995 in accordance with generally accepted auditing standards.

Results in Brief About 2.8 million Medicare beneficiaries—about 7 percent of the

total—were enrolled in risk-contract HMOs as of August 1995.5

 This was

double the percentage enrolled in 1987. The growth has been particularly

rapid in the past 4 years and has centered on certain states. California and

Florida, for example, have more than half of all enrollees. The number of

risk-contract HMOs offering care to Medicare beneficiaries, while

decreasing between 1987 and 1991, has nearly doubled from 93 in 1991 to

171 in August 1995. Distribution of these HMOs across the country,

however, is far from uniform; 4 states account for nearly half of them, and

19 states have none.

The available data show two key characteristics that are common to many

locations where HMOs have decided to sign risk contracts with Medicare.

One is that HMOs are relatively well-established as medical providers to the

general population. The other is that the amount of money the government

pays risk-contract HMOs for each enrollee, which varies from county to

county throughout the nation, tends to be relatively high where enrollment

is the highest.

In addition, two key factors may affect Medicare beneficiaries’ decisions

to enroll in HMOs. The first factor deals with costs and services: HMOs

increase their attractiveness by not charging Medicare’s normal

deductibles and coinsurance and often providing services beyond basic

Medicare coverage (such as outpatient drugs); and many HMOs offer

coverage with no or low monthly premiums. The other factor is that some

Medicare beneficiaries join HMOs to continue receiving medical benefits

provided by their former employers.

4

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

5

Another 2 percent were enrolled in cost-reimbursement HMOs.

Page 2 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

Background HMOs have become a significant part of the nation’s health care delivery

system. By the end of 1994, more than 50 million people received their

health care through an HMO. However, the importance of HMOs varied

considerably from state to state. For example, five states (Arizona,

California, Maryland, Massachusetts, and Oregon) had more than

30 percent of their population enrolled in HMOs, while three states (Alaska,

West Virginia, and Wyoming) had no HMO enrollees.

Medicare beneficiaries cannot enroll in an HMO unless the HMO contracts

with HCFA. Medicare’s current approach for contracting with HMOs on a

risk-contract basis has been in place for more than 10 years. Medicare

pays the HMO a capitated (fixed) payment for each Medicare beneficiary

enrolled. This payment, the adjusted average per capita cost (AAPCC) rate,

differs from county to county.6

 In return, the HMO must provide or arrange

for all the services covered under Medicare part A, Hospital Insurance, and

Medicare part B, Supplemental Medical Insurance.7

 To the extent that the

Medicare payment exceeds the HMO’s cost to provide these services, the

HMO must provide additional benefits of an actuarially equivalent value.

HMOs are generally the only form of managed care available to Medicare

beneficiaries. Private purchasers and employer-sponsors of health

insurance also use other forms of managed care, such as preferred

provider organizations (PPO) and point-of-service (POS) health plans.8

These other approaches may provide enrollees with a wider choice over

their medical provider than the HMO approach.

In many cases, Medicare beneficiaries pay a monthly premium to the

risk-contract HMO.

9

 This premium covers the portion of costs not borne by

Medicare under the capitated payment. For those HMOs charging

premiums, the median monthly premium was $39 as of August 1995.

6

For each Medicare beneficiary enrolled, the HMO is paid at a rate of 95 percent of the average amount

HCFA would expect to spend on fee-for-service Medicare in the county where the beneficiary resides.

The Senate and House have passed bills that, among other things, would change the way HMOs are

paid.

7

For fiscal year 1995, total risk-contract program payments were estimated to be $12.2 billion.

8

Under PPOs, services are provided on a discounted basis to plan members by contracted service

providers. Members can use other providers but have a financial incentive to use participating

providers. Under a POS plan, members choose how to receive services when the service is needed,

with different cost-sharing levels associated with the choice.

9

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

Medicare part B. Under fee-for-service Medicare, beneficiaries also have other cost-sharing

responsibilities.

Page 3 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

HMO Enrollment

Growth Is Rapid but

Concentrated in a Few

States

Medicare’s use of HMOs is considerably less than private-sector insurers,

but it is growing. For private-sector insurers, HMOs and other forms of

managed care now account for about 70 percent of their insurance,

compared with just 5 percent in 1980. By contrast, Medicare’s current use

of HMOs is comparable to the level that private-sector insurers reached in

the early 1980s. However, the 2.8 million Medicare beneficiaries enrolled

in HMOs in August 1995 were more than double the number enrolled in

1987 and were increasing rapidly. Since 1993, for example, the annual

growth rate for beneficiaries enrolled in risk-contract HMOs has been about

25 percent.

Medicare also differs from private-sector patterns in terms of the types of

managed-care approaches that are growing. As figure 1 shows, the

market-share growth rate of HMOs in the Medicare program more than

doubled from 1991 to 1994 compared with 1987 to 1990, while the growth

rate of HMOs in the private sector actually declined. However, private

insurers continued to expand in other managed-care approaches such as

PPOs and POS plans. These managed-care approaches are currently not

available in the Medicare market.10

10While the PPO option is still not available to Medicare beneficiaries, the POS plan option may be

available starting January 1, 1996.

Page 4 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

Figure 1: Growth in Market Share of

Managed Care Health Plans, 1987-90

and 1991-94

Percent

0

10

20

30

40

50

60

70

HMOs HMOs PPO/POS Plans

18.2

54.0

25.0

8.7

63.6

66.7

Medicare

Managed

Care

Private-Sector Managed Care

1987-90

1991-94

Source: Medicare data from monthly reports, Office of Managed Care, HCFA, and Medicare

enrollment database files. Private sector data from KPMG Peat Marwick, Health Benefits in 1994,

(1994), p. 25; and Elizabeth W. Hoy, Richard E. Curtis, and Thomas Rice, “Change and Growth in

Managed Care,” Health Affairs, Winter (1991), pp. 18-36.

While the number of Medicare beneficiaries choosing the risk-contract

HMO option continues to grow each year, the vast majority (about

87 percent) live in 10 states. Since 1987, the number of Medicare enrollees

has increased in 22 states (and the District of Columbia) and decreased in

14. As further evidence of how concentrated the Medicare risk-contract

program is, about 44 percent of all enrollees are currently in 10 of the 171

HMOs with risk contracts. Appendix I contains additional information on

HMO enrollment, including state-by-state information.

Page 5 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

Resurgence of Growth

in Participating HMOs

The number of risk-contract HMOs participating in Medicare dropped from

161 in 1987 to 93 in 1991, then reversed direction to 171 by August 1995. As

with enrollees, HMOs offering their services to Medicare beneficiaries are

concentrated in relatively few states. Forty-five percent of the HMOs

enrolling Medicare beneficiaries were located in four states—California,

Florida, Pennsylvania, and Texas. Five states saw declines in the number

of HMOs offering services to Medicare beneficiaries between 1991 and 1995,

and 19 states have no HMOs with Medicare risk contracts.11 Appendix II

contains additional information on the number of HMOs participating in the

Medicare risk-contract program.

Some Relatively

Consistent Factors

Associated With HMO

and Beneficiary

Decisions Exist

Our data analysis shows a range of factors that could be influencing HMO

decisions to offer services to Medicare beneficiaries. These factors vary

considerably from location to location, but two factors emerged more

consistently than any others. First, while exceptions exist, states with the

highest concentration of HMOs offering services to Medicare beneficiaries

tend to be the ones with the highest levels of HMO participation in the

general population. For example, in 1994, the three states with the highest

percentage—greater than 20 percent—of their Medicare population

enrolled in HMOs (Arizona, California, and Oregon) were also among those

states with the highest percentage of their total population enrolled in

HMOs. Second, those counties with the highest monthly rates paid by the

government for each Medicare beneficiary—over $500—also tend to have

higher levels of HMO participation. About 40 percent of the counties with

high payment rates also had a high percentage of Medicare beneficiaries

enrolled in 1994. In contrast, only about 3 percent of the counties with low

payment rates—under $375—had a high percentage of beneficiaries

enrolled.

To attract Medicare beneficiaries, participating HMOs have increasingly

turned to incentives for beneficiaries. One incentive is to offer coverage

with no monthly premium or a low monthly premium that Medicare

beneficiaries must pay. Over the past 3 years, the number of HMOs charging

Medicare beneficiaries no premiums for the services provided increased

from about 26 percent to about 49 percent. Another incentive is to provide

services—such as outpatient drugs or dental benefits—beyond those

required under Medicare. For example, while about 32 percent of the HMOs

provided outpatient drugs in 1993, about 49 percent did so in August 1995.

11The 19 states with no HMOs with Medicare risk contracts in August 1995 were Alaska, Arkansas,

Delaware, Georgia, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, New Hampshire, North Dakota,

South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wyoming.

Page 6 GAO/HEHS-96-63 Medicare Managed Care Growth
B-232994 

As retiree health benefit costs rise, HMOs appear to be a more attractive

approach to major employers for providing retiree benefits. As more

employers look to managed care to reduce their costs, Medicare

beneficiaries and persons nearing 65 years old may have to enroll in HMOs

to receive health care benefits. Appendix III contains more information on

these factors. Also, appendix IV contains supplemental state data on

Medicare risk-contract HMOs.

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

Managed Care and GHAA. These officials generally agreed with the

information presented. They did offer some technical suggestions that we

incorporated where appropriate. As arranged with your office, unless you

announce its contents earlier, we plan no further distribution of this report

until 30 days after the date of this letter. At that time, we will send copies

to the Secretary of the Department of Health and Human Services. We will

make copies available to others on request. Please contact me on

(202) 512-7119 if you have any questions. Major contributors to this report

are listed in appendix V.

Sincerely yours,

Jonathan Ratner

Associate Director,

 Health Financing Issues

Page 7 GAO/HEHS-96-63 Medicare Managed Care Growth
Contents

Letter 1

Appendix I 

Rapid Growth in

Medicare

Risk-Contract HMO

Enrollment

Concentrated in a Few

States

12

Beneficiary Enrollment Growing in Medicare’s Risk-Contract

Program

12

19 States Have No Beneficiaries Enrolled in Risk-Contract HMOs 15

Beneficiary Enrollment in Medicare’s Risk-Contract Program

Concentrated at 10 HMOs

20

Appendix II 

Number of Medicare

Risk-Contract HMOs

Has Grown Rapidly in

the Past Few Years

22

Number of HMOs Entering Into Medicare Risk Contracts Has

Fluctuated Since 1987

22

Most States Have Few HMOs With Medicare Risk Contracts 24

Appendix III 

Factors Associated

With an HMO Entering

Into a Medicare Risk

Contract or a

Medicare Beneficiary

Enrolling in an HMO

26

Two Factors Associated With HMOs’ Decisions to Enter

Medicare’s Risk-Contract Program

26

Two Factors Associated With Medicare Beneficiary Decisions to

Enroll in a Risk-Contract HMO

33

Appendix IV 

Supplemental State

Data on Medicare

Risk-Contract HMOs

37

Page 8 GAO/HEHS-96-63 Medicare Managed Care Growth
Contents

Appendix V 

Major Contributors to

This Report

39

Tables Table I.1: Twenty-Three States With Increases in the Number of

Medicare Beneficiaries Enrolled in a Risk-Contract HMO, 1987-95

19

Table I.2: Fourteen States With Decreases in the Number of

Medicare Beneficiaries Enrolled in a Risk-Contract HMO, 1987-95

20

Table I.3: Ten Medicare Risk-Contract HMOs That Have the

Largest Number of Beneficiaries Enrolled, August 1995

21

Table II.1: Four States Where the Number of Medicare

Risk-Contract HMOs Increased, 1991-95

24

Table III.1: Seven States With the Largest Number of HMOs and

HMOs With a Medicare Risk Contract, 1994

27

Table III.2: Percent of Medicare Beneficiaries Enrolled in an HMO

With a Risk Contract and Percent of Non-Medicare HMO

Enrollees for All States, 1994

30

Table III.3: Percent of Counties With High and Low Medicare

Risk-Contract HMO Penetration Rates by AAPCC Rates, 1994

31

Table III.4: Counties With High AAPCC Rates and Medicare

Risk-Contract HMO Penetration, 1994

32

Table III.5: Randomly Selected Counties With Low AAPCC Rates

and Low and High Medicare Risk-Contract HMO Penetration,

1994

33

Table III.6: Number and Percent of HMOs With a Risk Contract

Providing Additional Benefits to Medicare Beneficiaries, 1993 and

1995

34

Table III.7: Range of Premiums Charged Medicare Beneficiaries

by HMOs With a Risk Contract, 1993 and 1995

35

Table IV.1: Medicare Beneficiary Enrollment in HMOs With

Medicare Risk Contracts and HMO Participation by State, 1994

37

Figures Figure 1: Growth in Market Share of Managed Care Health Plans,

1987-90 and 1991-94

5

Figure I.1: Number of Medicare Beneficiaries Enrolled in a

Risk-Contract HMO, 1987-95

13

Figure I.2: Annual Growth Rates for Medicare Beneficiaries

Enrolled in a Risk-Contract HMO, 1987-95

14

Page 9 GAO/HEHS-96-63 Medicare Managed Care Growth
Contents

Figure I.3: Percentage of Medicare Beneficiaries Enrolled in a

Risk-Contract HMO, by State, 1994

16

Figure I.4: Ten States With the Largest Number of Medicare

Beneficiaries Enrolled in a Risk-Contract HMO, August 1995

17

Figure II.1: Number of Medicare Risk-Contract HMOs, 1987-95 23

Figure II.2: Number of Medicare Risk-Contract HMOs, by State,

August 1995

25

Figure III.1: HMO Market Share, by State, 1994 28

Abbreviations

AAPCC adjusted average per capita cost

AMCRA American Managed Care and Review Association

GHAA Group Health Association of America

HCFA Health Care Financing Administration

HMO health maintenance organization

POS point of service

PPO preferred provider organization

SFAS statement of financial accounting standards

Page 10 GAO/HEHS-96-63 Medicare Managed Care Growth
Page 11 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Medicare beneficiaries enrolled in risk-contract HMOs at a relatively slow

rate during the first years of the program, but more recently, enrollment

has taken off. As of August 1995, about 2.8 million beneficiaries—roughly

7 percent of the total—were enrolled in risk-contract HMOs. Although the

percentage of Medicare beneficiaries enrolled remains small compared to

the Medicare population, enrollment has been growing since 1987 when

fewer than half that many beneficiaries—only about 3 percent—were in

HMOs. Moreover, risk-contract HMO enrollment has been increasing at a

double-digit rate in recent years—much faster than in the early years of

the risk-contract HMO option.

Most Medicare beneficiaries in risk HMOs are concentrated in just a few

states and a few large HMOs. About 55 percent live in two

states—California and Florida. Similarly, 10 large HMOs enroll about

44 percent of all Medicare beneficiaries in the risk-contract program.

Beneficiary

Enrollment Growing

in Medicare’s

Risk-Contract

Program

After existing for nearly a decade, the current Medicare risk-contract

program now appears to be attracting more beneficiaries. Since 1987, the

number of beneficiaries enrolled in a risk-contract HMO grew nationwide.

Figure I.1 shows that enrollment more than doubled between 1987 and

1995; enrollment went from about 1.0 million to about 2.8 million.

Furthermore, figure I.2 shows that enrollment has grown each year, with

annual growth rates reaching about 25 percent between 1993 and 1994.

Page 12 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Figure I.1: Number of Medicare

Beneficiaries Enrolled in a

Risk-Contract HMO, 1987-95

Number of Beneficiaries (in millions)

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1987 1988 1989 1990 1991 1992 1993 1994 1995

Year

Notes: Data as of December of each year from 1987 to 1994. Data as of August 1995.

Source: Monthly reports, Office of Managed Care, HCFA.

Page 13 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Figure I.2: Annual Growth Rates for

Medicare Beneficiaries Enrolled in a

Risk-Contract HMO, 1987-95

Percent Increase

0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

Year

5.5 6.0

11.4

10.0

12.7

15.9

25.0 24.6

Notes: Data as of December of each year from 1987 to 1994. Data as of August 1995.

Source: GAO calculations based on data from monthly reports, Office of Managed Care, HCFA.

While enrollment in risk-contract HMOs grew throughout the more than

7-year period, the rate of growth continues to escalate with annual rates

approaching 25 percent by 1994. However, even though recent growth has

been rapid, the Medicare risk-contract program is still in its early stages of

development. About 7 percent of the Medicare population is enrolled in

such HMOs compared with about 25 percent of the population with private

health insurance.

Beneficiary Enrollment

Growing Faster in Recent

Years

During the past few years, more Medicare beneficiaries have been

enrolling in risk-contract HMOs. While beneficiary enrollment increased by

about 6 percent between 1987 and 1988, it increased by about 16 percent

between 1992 and 1993. In the following year—between 1993 and

1994—the number of beneficiaries choosing the HMO option grew by about

25 percent. Moreover, during the 8 months between December 1994 and

August 1995, enrollment had already increased by 25 percent. Although

about 2.8 million Medicare beneficiaries were enrolled in an HMO in

Page 14 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

August 1995, this enrollment was not distributed consistently throughout

the country.

19 States Have No

Beneficiaries Enrolled

in Risk-Contract

HMOs

Medicare beneficiaries have not enrolled in risk-contract HMOs in all states.

Enrollment by state splits into several different groups, including those

states that have (1) no beneficiaries enrolled, (2) limited Medicare HMO

penetration, and (3) the highest Medicare HMO penetration. Figure I.3

shows that in 1994, no Medicare beneficiary was enrolled in a risk-contract

HMO in 19 states.12 In 24 states, fewer than 10 percent of the Medicare

beneficiaries were enrolled—more significantly, enrollment was less than

1 percent in half of these states. Therefore, 31 states had no or

insignificant enrollment in Medicare risk-contract HMOs. In only three

states in the west—Arizona, California, and Oregon—more than 20 percent

of the Medicare beneficiaries were enrolled in a risk-contract HMO.

12Includes the District of Columbia.

Page 15 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Figure I.3: Percentage of Medicare Beneficiaries Enrolled in a Risk-Contract HMO, by State, 1994

No Medicare Beneficiaries in HMOs 

Fewer Than 10 Percent 

10 to 20 Percent 

Greater Than 20 Percent 

Note: Not shown is the District of Columbia with no Medicare beneficiaries enrolled in a

risk-contract HMO.

Source: December 1994 monthly report, Office of Managed Care, HCFA. Number of Medicare

beneficiaries as of July 1994 from 1995 Data Compendium, HCFA. Percent enrolled calculated by

GAO.

Page 16 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

The strong concentration of HMO Medicare beneficiaries in a handful of

states can be clearly seen in figure I.4. About 2.4 million of the more than

2.8 million Medicare beneficiaries enrolled in August 1995—about

87 percent—lived in 10 states. These states were in different regions of the

country. However, half of these states—Arizona, California, Colorado,

Oregon, and Washington—were in the west. Furthermore, more than half

of the beneficiaries lived in either California or Florida.

Figure I.4: Ten States With the Largest Number of Medicare Beneficiaries Enrolled in a Risk-Contract HMO, August 1995

175,165

6.2%

130,410

4.6%

122,394

4.3%

108,499

3.8%

87,218

3.1%

77,420

65,309 2.7%

2.3%

4

1,106,568

39.1%

440,748

15.6%

138,265

4.9%

Source: Monthly Report, Medicare Prepaid Health Plans, Office of Managed Care, HCFA, and

GAO calculation.

Page 17 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Few States Show Large

Increases in Beneficiary

Enrollment

For the most part, states with the largest number of Medicare beneficiaries

enrolled in a risk-contract HMO in August 1995 have also experienced the

most growth since 1987. Even though beneficiary enrollment increased in

23 states13 during that period, the number enrolled increased by more than

100,000 in only 6 states. Table I.1 shows that the increases in beneficiary

enrollment varied significantly. For example:

• States like California and Florida, which already had significant

penetration, still grew substantially.

• Some states, like Washington, initially had very limited penetration but

grew to a relatively large program.

• A handful of states entered risk contracting and have fledgling programs.

13For this analysis, the District of Columbia is counted as a state.

Page 18 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Table I.1: Twenty-Three States With

Increases in the Number of Medicare

Beneficiaries Enrolled in a

Risk-Contract HMO, 1987-95

Beneficiaries

States ranked in descending order of

increasea 1987b 1995c

Increase

1987-95

California 225,884 1,106,568 880,684

Florida 184,146 440,748 256,602

Arizona 9,027 175,165 166,138

Texas 6,085 130,410 124,325

New York 34,617 138,265 103,648

Pennsylvania 20,886 122,394 101,508

Washington 101 87,218 87,117

Oregon 44,427 108,499 64,072

Colorado 26,740 65,309 38,569

Nevada 13,711 43,205 29,494

Illinois 48,705 77,420 28,715

Louisiana 0 26,619 26,619

Missouri 1,305 26,338 25,033

Ohio 7,191 27,759 20,568

New Mexico 14,258 30,933 16,675

Oklahoma 4,234 16,193 11,959

Massachusetts 55,029 65,079 10,050

Rhode Island 4,365 13,913 9,548

Alabama 0 8,103 8,103

Virginia 0 3,729 3,729

Kentucky 0 3,621 3,621

Maryland 3,404 6,487 3,083

District of Columbia 0 2,111 2,111

Total 704,115 2,726,086 2,021,971

aIncludes the District of Columbia, which is counted as a state.

bData as of December.

cData as of August.

Source: Monthly reports, Office of Managed Care, HCFA, and GAO calculation.

Several States Show

Decreases in Beneficiary

Enrollment

While the number of Medicare beneficiaries enrolled in a risk-contract HMO

grew in nearly half the states between 1987 and 1995, 14 states also lost

enrollment. For example, table I.2 shows that

Page 19 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

• some states, like Minnesota and Michigan, with a relatively large HMO

penetration, lost a significant number of risk-contract enrollees;

• Hawaii’s HMO risk-contract program shrank by about half; and

• the HMO risk-contract program disappeared in several states with small

HMO concentrations.

Table I.2: Fourteen States With

Decreases in the Number of Medicare

Beneficiaries Enrolled in a

Risk-Contract HMO, 1987-95

Beneficiaries

States ranked in descending order of decrease 1987a 1995b

Decrease

1987-95

Minnesota 161,300 58,716 102,584

Michigan 45,337 7,246 38,091

Indiana 19,070 3,056 16,014

Kansas 13,110 0 13,110

Hawaii 26,003 13,418 12,585

Connecticut 12,164 1,274 10,890

Tennessee 5,520 0 5,520

Wisconsin 3,709 0 3,709

Iowa 2,863 0 2,863

New Jersey 15,199 13,683 1,516

North Carolina 1,141 0 1,141

Nebraska 3,850 3,468 382

Georgia 153 0 153

Utah 1 0 1

Total 309,420 100,861 208,559

aData as of December.

bData as of August.

Source: Monthly reports, Office of Managed Care, HCFA.

Beneficiary

Enrollment in

Medicare’s

Risk-Contract

Program

Concentrated at 10

HMOs

While there are more than 570 HMOs in the United States and about

30 percent of them enrolled Medicare beneficiaries, a surprisingly small

number of large HMOs commands a substantial share of total Medicare

risk-contract HMO enrollment. Ten HMOs with individual risk contracts

accounted for about 44 percent of the beneficiaries enrolled, as shown in

table I.3. Half of the 10 largest individual HMOs enrolling Medicare

beneficiaries in 1995 were in California.

Page 20 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix I 

Rapid Growth in Medicare Risk-Contract

HMO Enrollment Concentrated in a Few

States

Table I.3: Ten Medicare Risk-Contract

HMOs That Have the Largest Number

of Beneficiaries Enrolled, August 1995

HMOs ranked in descending ordera Beneficiariesb

Percentage

of national

totalc

Pacificare—Los Angeles, Orange County, California 275,877 9.8

Humana—Florida 213,722 7.6

FHP—California 208,656 7.4

Kaiser—Los Angeles, California 149,531 5.3

Kaiser—Oakland, California 98,393 3.5

FHP—Arizona 84,818 3.0

Pacificare—Northern California 67,740 2.4

HIP—New York 48,313 1.7

Group Health Coop—Puget Sound, Washington 46,141 1.6

CAC-Ramsey Health Plans—Coral Gables, Florida 44,564 1.6

Total (top 10 HMOs) 1,237,755 43.8

Total (171 HMOs) 2,826,947

aEnrollment figures are for unique risk contracts. HMOs must have a risk contract for each distinct

geographic location in which they operate.

bData are as of August.

cDetail does not add to total due to rounding.

Source: Monthly Report, Medicare Prepaid Health Plans, Office of Managed Care, HCFA.

Page 21 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix II 

Number of Medicare Risk-Contract HMOs

Has Grown Rapidly in the Past Few Years

Medicare beneficiaries cannot enroll in an HMO unless the HMO contracts

with HCFA to serve the beneficiaries. While the number of beneficiaries

enrolling has increased, participation by HMOs has been considerably more

erratic. The number of HMOs participating actually fell between 1987 and

1991 before reversing direction and increasing each year since then. The

increase was especially rapid between 1993 and August 1995.

Moreover, patterns of HMO participation in the Medicare risk-contract

program varied considerably by state. In 1995, about one-third of the HMOs

that were enrolling Medicare beneficiaries were located in just two states,

and 19 states had no HMO enrolling Medicare beneficiaries.

Number of HMOs

Entering Into

Medicare Risk

Contracts Has

Fluctuated Since 1987

Nationwide, significant changes occurred in the number of HMOs that had

Medicare risk contracts in the years between 1987 and 1995. Figure II.1

shows that the number has changed over time, initially decreasing and

then increasing more rapidly in recent years. By December 1991,

risk-contract HMOs had dropped to 93. Since that time, the number has

continued to grow. And in the past few years, growth has been especially

rapid. In just 1 year, 1993 to 1994, the number of risk-contract HMOs grew

from 110 to 154—about 40 percent. As of August 1995, the number had

increased by another 17 to 171 risk-contract HMOs.

Page 22 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix II 

Number of Medicare Risk-Contract HMOs

Has Grown Rapidly in the Past Few Years

Figure II.1: Number of Medicare

Risk-Contract HMOs, 1987-95 Number of HMOs

0

25

50

75

100

125

150

175

200

1987 1988 1989 1990 1991 1992 1993 1994 1995

Year

161 155

131

96 93 96

110

154

171

Notes: Data as of December of each year from 1987 to 1994. Data as of August 1995.

Source: Monthly reports, Office of Managed Care, HCFA.

When growth resurfaced in the Medicare risk-contract program, much of it

occurred in a handful of states. Table II.1 shows that between December

1991 and August 1995 the number of risk-contract HMOs increased by 50 in

just four states—a significant part of the overall total. In California alone,

23 more HMOs entered into Medicare risk contracts during that time.

Page 23 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix II 

Number of Medicare Risk-Contract HMOs

Has Grown Rapidly in the Past Few Years

Table II.1: Four States Where the

Number of Medicare Risk-Contract

HMOs Increased, 1991-95

Number of HMOs

State 1991a 1995b

California 12 35

Florida 7 21

Pennsylvania 2 11

Texas 6 10

Total 27 77

aData as of December.

bData as of August.

Source: Monthly reports, Office of Managed Care, HCFA.

In sharp contrast to the resurgence of growth in these four states, several

states showed no growth or even declined. Indeed, five states had fewer

HMOs with Medicare risk contracts in 1995 than in 1991. In fact, in two of

these states—Georgia and Kansas—the Medicare HMO program

disappeared as the number of HMOs with Medicare risk contracts dropped

to zero.

Most States Have Few

HMOs With Medicare

Risk Contracts

In most states, a small number of HMOs had Medicare risk contracts. Figure

II.2 shows that in August 1995, 19 states14 did not have a risk contract HMO

and 17 states15 had three or fewer—71 percent of all the states. More

significantly, however, about 45 percent of all the risk-contract HMOs were

located in just four states. These HMOs were distributed as follows:

• 35 in California,

• 21 in Florida,

• 11 in Pennsylvania, and

• 10 in Texas.

14The 19 states that had no HMO with a Medicare risk contract in August 1995 were Alaska, Arkansas,

Delaware, Georgia, Idaho, Iowa, Kansas, Maine, Mississippi, Montana, New Hampshire, North Dakota,

South Carolina, South Dakota, Tennessee, Utah, Vermont, West Virginia, and Wyoming.

15Includes the District of Columbia.

Page 24 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix II 

Number of Medicare Risk-Contract HMOs

Has Grown Rapidly in the Past Few Years

Figure II.2: Number of Medicare Risk-Contract HMOs, by State, August 1995

No Medicare Risk-Contract HMOs 

1-3 HMOs 

4 or More HMOs 

Note: Not shown is the District of Columbia with one risk-contract HMO.

Source: Monthly Report, Medicare Prepaid Health Plans, Office of Managed Care, HCFA.

Page 25 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

During the past few years, the resurgence of HMOs entering into a Medicare

risk contract and the continuing growth of beneficiaries enrolling in these

HMOs have been influenced by a number of key factors. Entry or re-entry

by HMOs into the market appears to be associated with HMO penetration of

health care markets in general and with the growth in Medicare’s AAPCC

rates for HMOs relative to the HMOs’ costs of providing care.

Risk-contract HMOs may appeal to Medicare beneficiaries because

beneficiaries may obtain services in addition to those offered through the

regular Medicare fee-for-service program. Moreover, these additional

services may be available to beneficiaries at little or no cost. Employers

who are trying to reduce retiree health care costs may continue to look to

HMOs as a way to save money. As a result, more Medicare beneficiaries

may have to enroll in a risk-contract HMO to obtain retiree benefits through

their former employers.

Two Factors

Associated With

HMOs’ Decisions to

Enter Medicare’s

Risk-Contract

Program

Before deciding to enter into a Medicare risk contract and to enroll

beneficiaries, an HMO has to consider the many questions that can affect

the profitability of entering a new market. In general, an HMO’s market

strategy—the type of patients that it wants to serve and how it wants to

expand—plays a role in how it plans for the future. While many factors

contribute to HMO decisions in any given location, two factors that appear

to have influenced the decisions of HMOs that have entered the Medicare

market are the size of the (1) existing market share and (2) AAPCC rate.

Extent of HMO Market

Share May Play a Role in

an HMO’s Risk-Contract

Decision

In general, states with higher total HMO enrollment among the states’

populations also have a higher enrollment among the Medicare population.

However, not all states with high non-Medicare HMO enrollment also have

high Medicare enrollment. Several notable exceptions exist.

Before Medicare beneficiaries in each state can enroll in an HMO, HMOs

must be operating in the state and must have entered into a Medicare risk

contract. Table III.1 shows that, in the states with the largest number of

HMOs, the number of HMOs that had Medicare risk contracts varied. In 1994,

for example:

• 89 percent of the HMOs in California and 53 percent in Florida had

Medicare risk contracts, and

• none of the HMOs in Wisconsin had a Medicare risk contract.

Page 26 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Table III.1: Seven States With the

Largest Number of HMOs and HMOs

With a Medicare Risk Contract, 1994 States ranked in descending order HMOsa

HMOs with a Medicare risk

contractb

California 36 32

Florida 36 19

New York 33 9

Ohio 31 6

Texas 31 7

Illinois 27 3

Wisconsin 27 0

aData as of the end of 1994.

bData as of December 1994.

Source: Number of HMOs from Patterns in HMO Enrollment, GHAA. Number of HMOs with a

Medicare risk contract from monthly report, Office of Managed Care, HCFA.

About 20 Percent of the Total

Population Was Enrolled in an

HMO at the End of 1994

At the end of 1994, about 51 million people were enrolled in 572 HMOs

nationwide.16 Overall, about 20 percent of the total population in the

country—and about one-fourth of the population with private health

insurance—received its health care through an HMO. More importantly,

however, HMO enrollment varies by state. Figure III.1 shows that in five

states—Arizona, California, Maryland, Massachusetts, and Oregon—more

than 30 percent of the state population was enrolled in HMOs—the highest

market share in the country. Conversely, three states—Alaska, West

Virginia, and Wyoming—had no people enrolled in an HMO at the end of

1994. While these are the extremes, HMOs are just beginning to make their

presence felt in many states throughout the country.

16Total HMO enrollees include, among others, members of employer groups, individuals, federal

employees, Medicare beneficiaries, and Medicaid recipients. Data are for the 50 states and the District

of Columbia; data from Guam are excluded.

Page 27 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Figure III.1: HMO Market Share, by State, 1994

0 to 9.9 Percent 

10 to 19.9 Percent 

20 to 29.9 Percent 

30 Percent or More 

Note: Not shown is the District of Columbia with a 25.6 percent market share.

Source: Patterns in HMO Enrollment, GHAA.

Page 28 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Medicare Risk-Contract HMO

Enrollment Mirrors

Non-Medicare Market Share in

Some States

Each state’s total HMO market share provides an overview of how heavily

HMOs have penetrated the health care market. However, table III.2 shows

the percentage of Medicare beneficiaries enrolled in an HMO and the

percentage of non-Medicare HMO enrollees in each state.17 Several states

with a high percentage of Medicare enrollees in risk-contract HMOs also

had high non-Medicare enrollment. For example, the three states with the

highest Medicare risk-contract HMO enrollment in 1994—Arizona,

California, and Oregon—also had high non-Medicare enrollment. Nevada

is the only state that had a higher percentage of Medicare beneficiaries

enrolled in risk-contract HMOs than non-Medicare HMO enrollees. However,

high non-Medicare enrollment is no guarantee that HMOs will play a large

role in the Medicare program. Several states with fairly high HMO activity

have little or no activity in the Medicare risk-contract program. For

example:

• in Maryland, non-Medicare enrollment was over 40 percent but Medicare

risk-contract HMO enrollment was less than 1 percent,

• in Massachusetts, non-Medicare enrollment was over 40 percent but

Medicare risk-contract HMO enrollment was about 4 percent,

• in Connecticut, non-Medicare enrollment was over 30 percent but

Medicare risk-contract HMO enrollment was less than 1 percent, and

• in Wisconsin, non-Medicare enrollment was about 29 percent but no

Medicare beneficiary was enrolled in an HMO with a risk contract.

17Each state’s non-Medicare HMO enrollment provides an estimate for what is happening in the private

sector. Non-Medicare HMO enrollees include all HMO enrollees in a state except Medicare

beneficiaries enrolled in a risk-contract HMO.

Page 29 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Table III.2: Percent of Medicare Beneficiaries Enrolled in an HMO With a Risk Contract and Percent of Non-Medicare HMO

Enrollees for All States, 1994

State

Percent of

Medicare

beneficiaries

enrolled in HMOs

Percent of

non-Medicare

HMO enrollees State

Percent of

Medicare

beneficiaries

enrolled in

HMOs

Percent of

non-Medicare

HMO enrollees

Arizona 27.0 37.9 Indiana 0.3 8.5

California 26.8 40.0 Alabama 0.3 11.6

Oregon 22.2 40.5 Virginia 0.2 9.6

Nevada 19.9 14.4 Delaware 0.1 23.9

Florida 14.9 21.5 Connecticut 0.04 32.3

New Mexico 13.8 18.1 New Hampshire 0.02 19.8

Colorado 12.2 26.3 Alaska 0.0 0.0

Washington 10.3 17.5 Arkansas 0.0 4.6

Minnesota 9.1 29.5 District of Columbia 0.0 29.4

Hawaii 9.1 25.3 Georgia 0.0 10.0

Rhode Island 6.9 33.1 Idaho 0.0 1.3

Illinois 4.3 19.0 Iowa 0.0 5.0

Massachusetts 4.3 40.8 Maine 0.0 7.3

Texas 4.1 10.5 Mississippi 0.0 0.3

New York 3.9 27.7 Montana 0.0 1.8

Pennsylvania 2.7 25.3 North Carolina 0.0 9.8

Oklahoma 2.6 8.1 North Dakota 0.0 1.4

Missouri 1.9 17.1 South Carolina 0.0 4.9

Nebraska 1.3 11.0 South Dakota 0.0 3.5

Ohio 1.2 22.4 Tennessee 0.0 19.1

Kansas 0.6 12.7 Utah 0.0 21.5

Kentucky 0.5 14.2 Vermont 0.0 14.7

Michigan 0.5 23.5 West Virginia 0.0 0.0

Louisiana 0.4 8.1 Wisconsin 0.0 28.5

New Jersey 0.4 19.8 Wyoming 0.0 0.0

Maryland 0.3 41.1

Source: December 1994 Medicare HMO enrollment data from monthly report, Office of Managed

Care, HCFA. Number of Medicare beneficiaries and state population estimates as of July 1994 from

1995 Data Compendium, HCFA. Year-end 1994 non-Medicare HMO enrollment data from Patterns in

HMO Enrollment, GHAA. Percent enrolled calculated by GAO.

Page 30 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Higher Medicare HMO

Penetration Appears to Be

Linked to Higher Medicare

Payment Rates

Among other factors considered, HMOs may weigh the financial pros and

cons of enrolling Medicare beneficiaries. Medicare risk-contract HMOs are

paid a monthly amount by the government for each beneficiary enrolled;

this is the AAPCC rate. AAPCC rates, which are developed for each county in

the country, vary considerably. For 1995, AAPCC rates range from a low of

$177.3218 to a high of $678.90. Over time, these payment rates have been

increasing. In 1992, the lowest AAPCC rate in the 50 states and the District

of Columbia was $139.30, while the highest was $507.88.

A relationship appears to exist between the amount of money paid to an

HMO for each Medicare beneficiary enrolled and the Medicare enrollment

in that county.19 Of all the counties in the country that had low AAPCC rates

in 1994, most of them also had low Medicare HMO penetration rates. Very

few counties had low payment rates and high penetration. Interestingly,

however, table III.3 shows that for counties with high AAPCC rates, an equal

percentage had high Medicare risk-contract HMO penetration as did those

with low penetration.

Table III.3: Percent of Counties With

High and Low Medicare Risk-Contract

HMO Penetration Rates by AAPCC

Rates, 1994

Penetration rates

AAPCC rates Counties

Lowa

(percent of

counties)

Highb

(percent of

counties)

Low (under $375) 2,788 93 3

Moderate ($375 to $500) 434 72 15

High (over $500) 25 40 40

aPenetration rate—percent of Medicare beneficiaries enrolled in risk-contract HMOs—less than or

equal to 1 percent.

bPenetration rate—percent of Medicare beneficiaries enrolled in risk-contract HMOs—greater

than 5 percent.

Source: AAPCC rates obtained from Office of Managed Care, HCFA. Enrollment information

based on computer runs using the denominator file, Bureau of Data Management and Strategy,

HCFA.

The same patterns shown in table III.3 also hold when only the 500

counties with the largest number of Medicare beneficiaries are included in

the analysis. High AAPCC rates are more likely to be associated with higher

18Excludes payments for Guam, Puerto Rico, and the Virgin Islands.

19This plausible relationship is also supported by a statistical analysis of Medicare HMO enrollment

that controls for several other factors in addition to payment rates. See: Physician Payment Review

Commission, Annual Report to Congress, Physician Payment Review Commission, 1995 (Washington,

D.C.: 1995), pp. 92-94.

Page 31 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Medicare HMO penetration, but high AAPCC rates alone are not sufficient to

generate HMO risk-contract program participation.

Table III.4 identifies all 25 counties that had high AAPCC rates—rates over

$500—and the degree of their Medicare risk-contract HMO penetration. As

shown in the table, high AAPCC rates alone do not generate high penetration

rates. In future work, we intend to examine the various factors that may

affect Medicare risk-contract HMO penetration. For example, areas like

Washington, D.C., and Detroit, Michigan, that have low penetration of

Medicare risk-contract HMOs despite high AAPCC rates will be examined,

especially the characteristics of the retired workforce and the health care

market in these communities.

Table III.4: Counties With High AAPCC

Rates and Medicare Risk-Contract

HMO Penetration, 1994

Penetration rates

Lowa Moderateb Highc

Washington, D.C.

Plaquemines, La.

St. Bernard, La.

Baltimore City, Md.

Prince Georges, Md.

Genesee, Mich.

Oakland, Mich.

Wayne, Mich.

Chambers, Tex.

Norton City, Va.

Jefferson, La.

St. Charles, La.

Suffolk, Mass.

New York, N.Y.

Rockland, N.Y.

Los Angeles, Cal.

Broward, Fla.

Dade, Fla.

Bronx, N.Y.

Kings, N.Y.

Queens, N.Y.

Richmond, N.Y.

Philadelphia, Pa.

Liberty, Tex.

Montgomery, Tex.

aPenetration rate less than or equal to 1 percent.

bPenetration rate greater than 1 percent and less than or equal to 5 percent.

cPenetration rate greater than 5 percent.

Source: AAPCC rates obtained from Office of Managed Care, HCFA. Enrollment information

based on computer runs using the denominator file, Bureau of Data Management and Strategy,

HCFA.

Most of the counties (2,778) had low AAPCC rates—rates under $375. For

these counties, table III.5 shows a sample of 10 randomly selected

counties with low Medicare risk-contract HMO penetration and a sample of

10 randomly selected counties with high penetration. As shown in the

table, while most of the counties with low AAPCC rates also had low

Medicare risk-contract HMO penetration, 78 counties, including some in

California and Oregon, had high penetration despite low AAPCC rates; a

situation we will examine further in future work.

Page 32 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Table III.5: Randomly Selected

Counties With Low AAPCC Rates and

Low and High Medicare Risk-Contract

HMO Penetration, 1994

Penetration ratesa

Lowb (N = 2,577) Highc (N = 78)

10 randomly selected counties:

Mason, Ill.

Beaver, Okla.

Fannin, Ga.

Pike, Ga.

Union, Ky.

Gallatin, Mont.

Darke, Ohio

Custer, Okla.

Anasco, P.R.

Jack, Tex.

10 randomly selected counties:

Graham, Ariz.

Eldorado, Cal.

Santa Barbara, Cal.

Honolulu, Hawaii

Cass, Mo.

Bernalillo, N. Mex.

Valencia, N. Mex.

Lane, Ore.

Marion, Ore.

Walla Walla, Wash.

a123 counties had moderate penetration rates—greater than 1 percent and less than or equal to

5 percent.

bPenetration rate less than or equal to 1 percent.

cPenetration rate greater than 5 percent.

Source: AAPCC rates obtained from Office of Managed Care, HCFA. Enrollment information

based on computer runs using the denominator file, Bureau of Data Management and Strategy,

HCFA.

Two Factors

Associated With

Medicare Beneficiary

Decisions to Enroll in

a Risk-Contract HMO

High Medicare penetration in risk-contract HMOs takes more than a

decision by the HMO community to target the Medicare population. The

Medicare beneficiary must make the choice, and this has typically required

extensive marketing and expansion of benefits to attract the Medicare

population. HMOs have increasingly turned to lower payments by the

elderly in terms of reduced premiums to attract them. They also have

expanded the benefits provided to Medicare beneficiaries by including

such additional benefits as outpatient drugs and dental benefits. In

addition, in an effort to save money, more employers are limiting the

health care coverage choices of retirees. As a result, Medicare

beneficiaries may have to consider receiving health benefits through a

risk-contract HMO.

Many Risk-Contract HMOs

Provide Additional

Services to Beneficiaries

An attractive feature of the Medicare risk-contract program is the

additional services that beneficiaries may receive if they enroll. In many

cases, in addition to not having to pay Medicare’s normal deductibles and

coinsurance, Medicare beneficiaries enrolling in these HMOs may receive

one or more services not covered by the regular fee-for-service Medicare

Page 33 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

program. For example, routine physicals, eye examinations, and

outpatient drugs may be provided by an HMO with a risk contract. Table

III.6 shows the types of additional services provided to Medicare

beneficiaries that enroll. While all services are not offered by all

risk-contract HMOs, the percentage of HMOs offering these services has been

changing since 1993. In particular, a higher percentage of HMOs offered

outpatient drugs and dental benefits in 1995 than in 1993.

Table III.6: Number and Percent of

HMOs With a Risk Contract Providing

Additional Benefits to Medicare

Beneficiaries, 1993 and 1995

1993a 1995b

HMOs

Additional benefit provided Number Percent Number Percent

Routine physicals 102 96.2 154 96.3

Immunizations 94 88.7 139 86.9

Eye exams 89 84.0 142 88.8

Ear exams 68 64.2 118 73.8

Health education 35 33.0 39 24.4

Outpatient drugs 34 32.1 78 48.8

Foot care 28 26.4 55 34.4

Dental care 26 24.5 56 35.0

Eyeglasses 5 4.7 8 5.0

Hearing aids 1 0.9 6 3.8

aData as of December.

bData as of August.

Source: Monthly Report, Medicare Prepaid Health Plans, Office of Prepaid Health Care

Operations and Oversight, HCFA.

Medicare beneficiaries may have to pay monthly premiums when they

enroll in an HMO. While Medicare beneficiaries’ basic HMO premiums were

as high as $111, the average was $22 and the median was $39 in

August 1995. However, table III.7 shows that the percent of HMOs that did

not charge any premiums increased between 1993 and 1995 from about

26 percent to nearly 50 percent. The lack of premiums can provide an

incentive for more Medicare beneficiaries to consider this form of health

care.

Page 34 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

Table III.7: Range of Premiums

Charged Medicare Beneficiaries by

HMOs With a Risk Contract, 1993 and

1995

1993a 1995b

HMOs

Range of premiums charged Number Percent Number Percent

$0 27 25.5 79 49.4

$0.01 to $39.99 28 26.4 42 26.3

$40.00 to $79.99 45 42.5 33 20.6

$80.00 or more 6 5.7 6 3.8

aData as of December.

bData as of August.

Source: Monthly Report, Medicare Prepaid Health Plans, Office of Prepaid Health Care

Operations and Oversight, HCFA.

Employer Decisions May

Cause More Beneficiaries

to Consider Risk-Contract

HMOs

Although Medicare is the primary payer for medical care among people

over 65, many Medicare beneficiaries rely on employer-based health

benefits to cover deductibles, coinsurance, and non-Medicare-covered

items such as prescription drugs. However, employer-provided retiree

health benefit coverage has been eroding over the past decade due,

primarily, to the rising cost of such coverage according to a recent study

by KPMG.20 The number of firms offering retiree health coverage has been

dropping, while retirees are bearing an increasing share of this cost. This

trend may increase the number of Medicare beneficiaries enrolling in

HMOs, which deliver the same or broader coverage without deductibles or

coinsurance.

In the mid-1980s, almost two-thirds of employees of large or mid-size firms

were offered retiree health benefits by their employers. However, by 1993,

the percentage of active workers slated to receive retiree health benefits

had fallen to 45 percent. Retirees who received coverage from their

employers paid only 15 percent of the cost of single coverage in 1988,

31 percent in 1992, and 42 percent in 1993. The rising cost of retiree health

benefits is driving this trend. The average total monthly cost in 1993 for

retirees over 65 was $118 per month for single coverage, up from about

$40 per month in 1985.

Employers may be playing a role in driving the growth of Medicare

risk-contract HMO enrollments according to HCFA and industry experts.

HMOs look attractive to employers because of the rising cost of retiree

20KPMG Peat Marwick, “1994 Retiree Health Benefits: The Uncertainty Continues,” (U.S.A.: 1994).

Page 35 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix III 

Factors Associated With an HMO Entering

Into a Medicare Risk Contract or a Medicare

Beneficiary Enrolling in an HMO

health benefits. The effect of retiree health benefits on companies’ bottom

lines was highlighted when the Financial Accounting Standards Board

adopted the Statement of Financial Accounting Standards (SFAS) 106.

SFAS 106 requires private-sector employers with 500 or more plan

participants to treat obligations for present and future years on an accrual

instead of a pay-as-you-go basis. In 1992, SFAS 106 expenses cost Fortune

100 companies one-third of their operating income because most decided

to write off the cost of retiree coverage immediately. According to one

industry analyst, SFAS 106 liability is the number one motivation for

employers to get retirees into managed care. The effect of these health

care cost realities is for employers not only to encourage retirees to join

HMOs, but to provide them financial incentives to do so.

Page 36 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix IV 

Supplemental State Data on Medicare

Risk-Contract HMOs

Table IV.1: Medicare Beneficiary

Enrollment in HMOs With Medicare

Risk Contracts and HMO Participation

by State, 1994

State

Enrollment in

Medicare

HMOs as a

percent of the

total Medicare

population

1994a

Number of

Medicare

beneficiaries

enrolled in an

HMO in 1994b

Number

of HMOs

in 1994c

Number

of HMOs

with a

Medicare

risk

contract

in 1994b

Arizona 27.0 154,939 20 6

California 26.8 946,668 36 32

Oregon 22.2 101,823 7d 9d

Nevada 19.9 35,873 7 2

Florida 14.9 377,966 36 19

New Mexico 13.8 27,939 6 4

Colorado 12.2 49,469 12 5

Washington 10.3 68,590 11 6

Minnesota 9.1 56,421 9 3

Hawaii 9.1 13,044 7 1

Rhode Island 6.9 11,437 3 1

Illinois 4.3 68,355 27 3

Massachusetts 4.3 39,129 16 5

Texas 4.1 82,685 31 7

New York 3.9 100,421 33 9

Pennsylvania 2.7 55,913 19 9

Oklahoma 2.6 12,590 6 2

Missouri 1.9 15,793 18 5

Nebraska 1.3 3,285 5 1

Ohio 1.2 19,678 31 6

Kansas 0.6 2,269 10 1

Kentucky 0.5 2,705 7 1

Michigan 0.5 6,964 17 2

Louisiana 0.4 2,344 11 2

New Jersey 0.4 4,449 14 1

Maryland 0.3 1,823 16 4

Indiana 0.3 2,549 12 2

Alabama 0.3 1,630 8 1

Virginia 0.2 1,306 13 1

Delaware 0.1 91 6 1

Connecticut 0.04 193 14 1

New Hampshire 0.02 23 3 1

Alaska 0.0 0 0 0

(continued)

Page 37 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix IV 

Supplemental State Data on Medicare

Risk-Contract HMOs

State

Enrollment in

Medicare

HMOs as a

percent of the

total Medicare

population

1994a

Number of

Medicare

beneficiaries

enrolled in an

HMO in 1994b

Number

of HMOs

in 1994c

Number

of HMOs

with a

Medicare

risk

contract

in 1994b

Arkansas 0.0 0 6 0

District of Columbia 0.0 0 2 1

Georgia 0.0 0 11 0

Idaho 0.0 0 2 0

Iowa 0.0 0 3 0

Maine 0.0 0 3 0

Mississippi 0.0 0 1 0

Montana 0.0 0 1 0

North Carolina 0.0 0 12 0

North Dakota 0.0 0 2 0

South Carolina 0.0 0 4 0

South Dakota 0.0 0 1 0

Tennessee 0.0 0 17 0

Utah 0.0 0 8 0

Vermont 0.0 0 1 0

West Virginia 0.0 0 0 0

Wisconsin 0.0 0 27 0

Wyoming 0.0 0 0 0

Total 2,268,364 572 154

aEnrollment data as of December. Number of Medicare beneficiaries as of July.

bData as of December.

cData as of the end of the year.

dData as reported by HCFA and GHAA.

Source: Medicare HMO enrollment data and number of HMOs with a Medicare risk contract from

December monthly report, HCFA. Number of Medicare beneficiaries from 1995 Data

Compendium, HCFA. Number of HMOs from Patterns in HMO Enrollment, GHAA.

Page 38 GAO/HEHS-96-63 Medicare Managed Care Growth
Appendix V 

Major Contributors to This Report

Michael F. Gutowski, Assistant Director, (202) 512-7128

Howard N. Cott

Aleta L. Hancock

Rajiv Mukerji

Joseph A. Petko

(101333) Page 39 GAO/HEHS-96-63 Medicare Managed Care Growth
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