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.

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