Favorable Selection in the Medicare Program


Adverse and favorable selection are not just concerns of private insurers; they are also significant issues for the federal Medicare program for the elderly. Since the 1970s, the Medicare program has allowed beneficiaries to be in traditional Medicare or to join a Medicare HMO.

Until 2006, the program allowed Medicare beneficiaries to transfer to or from traditional Medicare each month. As with most HMOs, Medicare HMOs provide a limited panel of physicians and hospitals. Traditional Medicare covers virtually all providers. However, many Medicare HMOs offer broader coverage, including prescription drug coverage and annual physicals, which were particular advantages in the days prior to Medicare Part D prescription drug coverage.

The Medicare program paid its participating HMOs on a capitated basis for each covered beneficiary. The payment was essentially 95% of the average Medicare cost of care in the local community. Medicare HMOs are required to accept all beneficiaries who choose to enroll, but if a Medicare HMO is able to somehow attract sufficiently low utilizers of care, it could reap substantial profits.

The commission used the same methodology as did the Jackson-Beeck and Kleinman study discussed earlier to look at 1989 to 1994 Medicare claims data. It identified those who newly enrolled in a Medicare HMO and then examined their Medicare claims experience in the six months prior to switching to the HMO and compared it to the average claims experience of all those in traditional Medicare in those months. As is clear in Box 4-3, those who ultimately switched to a Medicare HMO had total covered claims experience that was only 63% of average. This suggests substantial favorable selection, to say the least!

The study also examined the claims experience of those Medicare HMO enrollees who switched back to traditional Medicare. In the six months following their switchback, they had claims experience that was 160 % of the average. It is easy to speculate that the HMOs sought out low utilizers, encouraged them to join the plan, and if they had health problems, somehow pushed them out of the plan.

However, much less pernicious scenarios also are consistent with these data. Consider a reasonably healthy, elderly, Medicare-eligible woman. She joins a Medicare HMO perhaps because of its coverage of an annual physical or its encouragement of preventive services. Unfortunately, her hip has deteriorated, and she discovers that she needs a hip replacement.

Her primary care doctor refers her to the plan''s orthopedic surgeon, but her children want her to see the "orthopod" they consider the best in town. That surgeon is not in the HMO''s panel. Under the terms of the Medicare program, the woman can disenroll from the HMO, be immediately covered by traditional Medicare, and have her surgery. Once she has recovered, she may even switch back to the HMO. If stories of this sort are common, they could explain the lower claims experience prior to joining the HMO and the higher experience after disenrollment. Other scenarios, such as the urban legend in Box 4-4, are also possible, but unethical at best.

In more recent work, Batata used county Medicare enrollment over the 1990 to 1994 period to estimate the effect on one-year change in traditional Medicare''s share of seniors to estimate the marginal cost of Medicare HMO enrollees. She found that a 1% reduction in the traditional share was associated with an increase in average county Medicare expenditures of $1,033, almost all of this coming from Medicare Part A hospital services. This is consistent with favorable selection. It says that when Medicare HMOs had a somewhat larger enrollment, those people who remained in traditional Medicare had higher average costs; that is, the lower utilizers disproportionately moved out. Batata concluded that, in their first year of enrollment, Medicare HMO enrollees had costs that were 20 to 30 % lower than the average 1994 costs of $3,932.

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This article was sent to us by: Celia Rumbers at 09112010

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