Although the GAO has engaged in extensive review of this subject, there is no indication that they have developed a new payment methodology that eliminates the problem of favorable selection. Managed care plans unable to employ favorable selection will drop out. Plans making money will stay in the pool and cost HCFA millions. Those losing money will simply drop out. If HMOs experience 'adverse selection,' HCFA will save more than 5 percent, but risk plans may lose money and drop out of the program.
Selection problems are particularly acute among the elderly.
Health care costs are not spread evenly over the population. A 1991 analysis of the managed care industry by Health Care Financing Review estimated that the sickest 5 percent consume as much as 50 percent of the health care dollars. Moreover, most Medicare retirees consume a significant portion of their life-time health care expenses during the final six months of life. Given the tremendous costs incurred in caring for even a few very sick Medicare enrollees, even a slightly favorable selection bias can save an HMO hundreds of thousands of dollars in profits. Again, this will prevent the HMO program from meeting its goal of reducing Medicare spending.