Pre-Enrollment Reimbursement Patterns of Medicare Beneficiaries Enrolled in “At-Risk” HMOs

The Health Care Financing Administration (HCFA) has initiated several demonstration projects to encourage HMOs to participate in the Medicare program under a risk mechanism. These demonstrations are designed to test innovative marketing techniques, benefit packages, and reimbursement levels. HCFA's current method for prospective payments to HMOs is based on the Adjusted Average Per Capita Cost (AAPCC). An important issue in prospective reimbursement is the extent to which the AAPCC adequately reflects the risk factors which arise out of the selection process of Medicare beneficiaries into HMOs. This study examines the pre-enrollment reimbursement experience of Medicare beneficiaries who enrolled in the demonstration HMOs to determine whether or not a non-random selection process took place. The three demonstration HMOs included in the study are the Fallon Community Health Plan, the Greater Marshfield Community Health Plan, and the Kaiser-Permanente medical program of Portland, Oregon. The study includes 18,085 aged Medicare beneficiaries who had enrolled in the three plans as of April, 1981. We included comparison groups consisting of a 5 percent random sample of aged Medicare beneficiaries (N = 11,240) living in the same geographic areas as the control groups. The study compares the groups by total Medicare reimbursements for the years 1976 through 1979. Adjustments were made for AAPCC factor differences in the groups (age, sex, institutional status, and welfare status). In two of the HMO areas there was evidence of a selection process among the HMOs enrollees. Enrollees in the Fallon and Kaiser health plans were found to have had 20 percent lower Medicare reimbursements than their respective comparison groups in the four years prior to enrollment. This effect was strongest for inpatient services, but a significant difference also existed for use of physician and outpatient services. In the Marshfield HMO there was no statistically significant difference in pre-enrollment Medicare total reimbursements between the enrollee and comparison groups. However, outpatient and physician reimbursements were significantly higher (22 percent) among the enrollee group. The results of this study suggest that the AAPCC may not be an adequate mechanism for setting prospective reimbursement rates. The Marshfield results further suggest that the type of HMO may have an influence on the selection process among Medicare beneficiaries. If Medicare beneficiaries do not have to change providers to join an HMO, as in an IPA model or a staff model which includes most of the providers in an area, the selection process may be more likely to result in an unbiased risk group.