• Private insurance competition in Medicare

    Recently, there have been a number of calls to increase the role private insurance plays in Medicare. The thought is, as always, that increased competition and consumer awareness will lead to more pressure on insurance companies to innovate and bring down prices. That rarely happens.

    What happen more often is that insurance companies become better at figuring out which patients they do and don’t want to cover.

    In an important paper in the New England Journal of Medicine in 1997, researchers looked at how people moved in and out of Medicare HMO plans and traditional Medicare.  Back in the 1990′s there was a swing to “managed care”.  If you were over 65, you could choose a Medicare HMO or FFS Medicare on a month-to-month basis.  If you chose the Medicare HMO, you had to use their providers and hospitals, but you could get additional benefits.  The ground rules were these:

    • You could choose any plan
    • You could switch up and back
    • No one could deny you access to their plan
    • The benefits in the plans could go over a specific minimum (FFS Medicare), but not below

    Got that?  No cherry picking allowed.  It’s Medicare, so it’s one big community rating.  So what happened when this was set up and let loose?  Guess:

    Methods We used Medicare enrollment and inpatient billing records for southern Florida from 1990 through 1993 to examine differences in the use of inpatient medical services by 375,406 beneficiaries in the Medicare fee-for-service system, 48,380 HMO enrollees before enrollment, and 23,870 HMO enrollees after disenrollment. We also determined whether these differences were related to demographic characteristics and whether the pattern of use after disenrollment persisted over time.

    The researchers looked at Medicare billing records for over 375,000 elderly Americans over a number of years, specifically at much inpatient care those people used.  They also looked at differences in the care they used in the year before anyone went to an HMO and the three months after they left an HMO.  If there was no cherry picking, then they should have found that the amount of care used was the same in all of those groups and times.

    Results The rate of use of inpatient services in the HMO-enrollment group during the year before enrollment was 66 percent of the rate in the fee-for-service group, whereas the rate in the HMO-disenrollment group after disenrollment was 180 percent of that in the fee-for-service group. Beneficiaries who disenrolled from HMOs re-enrolled at about the time that their level of use dropped to that in the fee-for-service group.

    So here’s what they found: people who wound up joining the (private) HMOs used 66% less care before joining than those who stayed in the FFS Medicare group.  Somehow, the private HMOs figured out a way to get the healthy people to jump ship out of FFS Medicare into theirs!

    Not only that, but people who left the (private) HMOs and went back to FFS Medicare used 180% more care after leaving than the people who stayed.  Somehow the private insurance HMOs figured out a way to convince the sicker people to jump ship back to FFS Medicare.

    This is what private companies competing with FFS Medicare looks like.  Regulations prevent cherry-picking, and yet, the insurance companies figure out a way to preferentially cover healthy people.

    Now, you may complain that this study is a bit old, and that things have changed. So here are some more recent ones:

    M Mello, S Stearns, E Norton, T Ricketts. (2003). Understanding Biased Selection in Medicare HMOs. Health Services Research 38:3. June.

    We find that favorable selection persists in the cohort over time on some, but not all, measures…Most, but not all, studies of Medicare HMOs have found evidence of favorable HMO selection.

    J Ng, J Kasper, C Forrest, A Bierman. (2007). Predictors of Voluntary Disenrollment From Medicare Managed Care. Medical Care 45(6). June.

    Medicare plans experience favorable selection bias partly because sicker members are likelier to disenroll.

    S Shimada, A Zaslavsky, L Zaborski, A O’Malley, A Heller, P Cleary. (2009). Market and Beneficiary Characteristics Associated with Enrollment in Medicare Managed Care Plans and Fee-for-Service. Medical Care 47(5). May.

    …numerous studies have shown that Medicare managed care plans still attract healthier Medicare beneficiaries….Our findings extend prior research showing that [MA] plans experience favorable selection.

    Insurance companies are very, very good at what they do.  Their skills, however, don’t necessarily align with the desires and needs of the Medicare population.

    • Aaron
      Add this one to your citation list, 2011:


    • The article says the study doesn’t include the over 75,000 people that were on HMOs all during the time period, only the 50,000 that joined and 25,000 that left. So — adding those that were on A/B at the time — the study really only says something about about 5% of Southern Florida seniors 20 years ago. And it only says something about their use of in-patient services.

      So it’s a slivver of a little slice of long-eaten pie. The authors of the study concluded in 1997 (speaking of things that happened in 1990-1993):

      “The substantial increase in use of inpatient services by beneficiaries after their disenrollment from HMOs suggests that they move into the fee-for-service system in order to obtain needed services, returning to Medicare HMOs after they have obtained these services. In contrast, those who remain out of the HMO system for a year or more may be more likely to need long-term care or to have other reasons for disenrollment..”

      In other words, it was the subscribers — not the insurers — who were manipulating the system.

      (NOTE: Among all the other reasons to ignore this data relative to contemporary discussions of Medicare Advantage is that this was during a period when the insurer only got 95% as compared to today’s 110% plus or minus)

    • Dr. Carroll–

      I think that dennis byron has a point. I have never enrolled in an HMO, but my perception is that the plans are not as good as FFS. Perhaps real world experience supports this “stereotype” and people believe that when they are sick (reason healthier people enrolled in HMO) and after actual use understand that when they are sick (reason for disenrollment in HMO), they are better off under the FFS model. So people move in and out based on which plan works better (or they perceive works better) for their situation. When they are sicker, they prefer FFS because the service is better. When they are healthier, they prefer HMO because costs are lower.

      To be clear, I am a liberal and believe in some form of single payer, but I am not sure the HMO/FFS enrollment phenomenon can be explained by insurance company manipulation. As additional possible evidence that patient behavior is the reason–isn’t Medicare FFS also run by insurance companies that have the same incentive to try to get the healthiest enrollees as the Medicare HMO providers?

      Now, as long as the “taxpayers” are not overly subsidizing FFS, I don’t have a problem with patients choosing their plan of choice. The problem, however, is that I suspect that the government is subsizing a greater dollar amount for FFS plans than HMO plans. If that is the case, then of course, sicker patients will be “better off” in FFS plans and healthier patients will be “better off” in HMO plans. If that is the case, then the system should be changed so that the dollar contribution per enrollee from the “taxpayer” is fixed no matter which plan is chosen. If patients then choose different plans, fine, but I suspect that the FFS costs might increase to the extent that a greater number of people would choose the HMO.

      Please explain if I have misunderstood the analysis. I am very interested in this topic.