Will Choice‐Based Reform Work for Medicare? Evidence from the Federal Employees Health Benefits Program

OBJECTIVE:. To examine the effect of premiums and benefits on the health plan choices of older enrollees who choose Federal Employees Health Benefits Program (FEHBP) health plans as their primary payer. DATA SOURCES: Administrative enrollment data from the Office of Personnel Management (OPM) and plan premiums and benefits data taken from the Checkbook Guide to health plans. STUDY DESIGN: We estimate individual plan choice models where the choice of health plan is a function of out-of-pocket premium, actuarial value, plan attributes, and individual characteristics. Plan attributes include plan structure (fee-for-service/preferred provider organization, point-of-service, or health maintenance organization), drug benefit structure, and whether or not the plan covers other types of spending such as dental services and diabetic supplies. The models are estimated by conditional logit. Our study focuses on three populations that currently choose FEHBP as their primary health care coverage and are similar to the Medicare population: current employees and retirees who are approaching the age of Medicare eligibility (ages 60-64) and current federal employees age 65+. Current employees age 65+ are eligible for Medicare, but their FEHBP plan is their primary payer. Retirees and employees 60-64 are not yet eligible for Medicare but are similar in many respects to recently age-eligible Medicare beneficiaries. We also estimate our model for current employees age 55 and younger as a comparison group. DATA COLLECTION METHODS: We select a random sample of retirees and employees age 60-64, as well as all current employees age 65+, from the OPM administrative database for the calendar year 2001. The plan choices available to each person are determined by the plans participating in their metropolitan statistical area. We match plan premium and attribute information from the Checkbook Guide to each plan in the enrollee's list of choices. PRINCIPAL FINDINGS: We find that current workers 65+, 60-64, and non-Medicare eligible retirees are sensitive to variation in plan premiums. The premium elasticities for these groups are similar in magnitude to those of the age 55 and under employee group. Older workers and retirees not yet eligible for Medicare are willing to pay a substantial amount for plans with open provider networks. The willingness to pay for open networks is significantly greater for these groups than for younger employees. Willingness to pay for open network plans varies significantly by income, but varies little by age within group. CONCLUSIONS: Our finding that older workers and non-Medicare eligible retirees are sensitive to plan premiums suggests that choice-based reform of Medicare would lead to cost-conscious choices by Medicare beneficiaries. However, our finding that these groups are willing to pay more for open network plans than younger employees suggest that higher risk individuals may migrate toward higher benefit, higher cost plans. Our findings on the relationship between income and willingness to pay for open network plans suggest that means testing is a viable reform for lowering Medicare program costs.     

Risk selection and benefits in the Medicare+Choice program

We estimate the relation between enhanced benefits offered by the Medicare+Choice (M+C) plan in 1999 and a measure of risk selection based on inpatient encounter data. Higher risks are attracted to plans that offer outpatient drug coverage. The risk score increases by 2.2 percent for drug coverage with an annual limit less than $800 and by 3.6 percent for coverage with a limit more than $800. However, some benefits such as dental coverage were related to favorable risk selection. If M+C plans competed on the basis of benefits and premiums, as they would if they could give untaxed premium rebates, benefits that attract high risks would be underprovided.     

Impact of Medicare managed care market withdrawal on beneficiaries

The 2001 Survey of Involuntary Disenrollees was conducted to investigate the impact of Medicare+Choice (M+C) plan withdrawals on Medicare beneficiaries. Eighty-four percent of a total of 4,732 beneficiaries whose Medicare managed care (MMC) plan stopped serving them at the end of 2000 responded to the survey. Their responses indicated that the withdrawal of plans from Medicare affected beneficiaries in terms of concerns about getting and paying for care, increased payments for premiums and out-of-pocket costs, and changes in health care arrangements. Of particular concern were the impacts on those in vulnerable subgroups such as the disabled, less educated, and minorities.     

Having it all: national benefit equity and local payment parity in Medicare

The Medicare Payment Advisory Commission (MedPAC) has identified two important problems with the Medicare+Choice (M+C) program: nationwide geographic inequity in government-financed benefits, and unequal government payments for M+C plans versus fee-for-service (FFS) Medicare in the same market area. MedPAC concludes that both problems cannot be solved simultaneously. We argue that both problems could be solved if Congress discontinued its policy of underwriting the cost of FFS Medicare. Instead, Congress should define a national entitlement benefit package and have all health plans submit bids on the package in each market area. The government's premium contribution should be equal to the lowest bid submitted by a qualified health plan in each market area. The contribution could be adjusted for health risk, the special obligations of FFS Medicare, and welfare enhancements associated with FFS Medicare that are valued by both beneficiaries and taxpayers but unrelated to beneficiaries' health status.     

Payment policy and competition in the Medicare+Choice program

Over the last 2 years, Medicare+Choice (M+C) plans raised premiums and reduced benefits to an unprecedented degree, arguing that these were unavoidable consequences of inadequate payments. We investigate plan premium and benefit decisions, taking advantage of a natural experiment to separate the influences of payment rates, the intensity of interplan competition, and the underlying cost of providing coverage. We find that the effects of competition are comparable in importance to the effects of payment rates, confirming empirically that it is possible for the Medicare Program to improve benefits without increasing spending or shifting additional costs to beneficiaries.     

Price and the health plan choices of retirees

This study analyzes health plan choices of retirees in an employer-sponsored health benefits program that resembles "premium support" models proposed for Medicare. In this program, out-of-pocket premiums depend on when an individual retired and his or her years of service as of that date. Since this price variation is exogenous to unobserved plan attributes and retiree characteristics, it is possible to obtain unbiased premium elasticity estimates. The results indicate a significantly negative effect of premiums. The implied elasticities are at the low end of the range found in previous studies on active employees.     

Integrating risk adjustment and enrollee premiums in health plan payment

In two important health policy contexts – private plans in Medicare and the new state-run “Exchanges” created as part of the Affordable Care Act (ACA) – plan payments come from two sources: risk-adjusted payments from a Regulator and premiums charged to individual enrollees. This paper derives principles for integrating risk-adjusted payments and premium policy in individual health insurance markets based on fitting total plan payments to health plan costs per person as closely as possible. A least squares regression including both health status and variables used in premiums reveals the weights a Regulator should put on risk adjusters when markets determine premiums. We apply the methods to an Exchange-eligible population drawn from the Medical Expenditure Panel Survey (MEPS).     

Medigap premiums and Medicare HMO enrollment

OBJECTIVE: Markets for Medicare HMOs (health maintenance organizations) and supplemental Medicare coverage are often treated separately in existing literature. Yet because managed care plans and Medigap plans both cover services not covered by basic Medicare, these markets are clearly interrelated. We examine the extent to which Medigap premiums affect the likelihood of the elderly joining managed care plans. DATA SOURCES: The analysis is based on a sample of Medicare beneficiaries drawn from the 1996-1997 Community Tracking Study (CTS) Household Survey by the Center for Studying Health System Change. Respondents span 56 different CTS sites from 30 different states. Measures of premiums for privately-purchased Medigap policies were collected from a survey of large insurers serving this market. Data for individual, market, and HMO characteristics were collected from the CTS, InterStudy, and HCFA (Health Care Financing Administration). STUDY DESIGN: Our analysis uses a reduced-form logit model to estimate the probability of Medicare HMO participation as a function of Medigap premiums controlling for other market- and individual-level characteristics. The logit coefficients were then used to simulate changes in Medicare participation in response to changes in Medigap premiums. PRINCIPAL FINDINGS: We found that Medigap premiums vary considerably among the geographic markets included in our sample. Measures of premiums from different insurers and for different types of Medigap policies were generally highly correlated across markets. Our models consistently indicate a strong positive relationship between Medigap premiums and HMO participation. This result is robust across several specifications. Simulations suggest that a one standard deviation increase in Medigap premiums would increase HMO participation by more than 8 percentage points. CONCLUSIONS: This research provides strong evidence that Medigap premiums have a significant effect on seniors' participation in Medicare HMOs. Policy initiatives aimed at lowering Medigap premiums will likely discourage enrollment in Medicare HMOs, holding other factors constant. Although the Medigap premiums are just one factor affecting the future penetration rate of Medicare HMOs, they are an important driver of HMO enrollment and should be considered carefully when creating policy related to seniors' supplemental coverage. Similarly, our results imply that reforms to the Medicare HMO market would influence the demand for Medigap policies.     

Payment Policy and Inefficient Benefits in the Medicare+Choice Program

We investigated whether constraints on premium rebates by health plans in the Medicare+Choice program result in inefficient benefits. Since relationships between revenue and benefits could be confounded by unobserved variation in the cost of coverage, we took advantage of a natural experiment that occurred following passage of the Benefits Improvement and Protection Act of 2000. Our findings indicate that benefits in zero premium plans were more sensitive to changes in payment rates than were benefits in plans that charged nonzero premiums. These results strongly suggest that current Medicare policy induces plans to offer benefits that are not valued by enrollees at or above their cost.     

Who Switches from Medigap to Medicare HMOs?

OBJECTIVE: To determine the factors affecting whether Medigap owners switch to Medicare managed care plans. DATA SOURCES: The primary data were the 1993-1996 Medicare Current Beneficiary Survey (MCBS) Cost and Use Files. These were supplemented by data available from the Centers for Medicare & Medicaid Services (CMS) website. STUDY DESIGN: Individuals on the MCBS files with Medigap coverage in the period 1993-1996 were included in the study. The person-year was the unit of analysis. We used multivariate logistic regression analysis to determine whether or not a Medigap owner switched to a Medicare-managed care plan during a particular year. Independent variables included measures of affordability, need for services, health insurance benefits, sociodemographics, and supply of managed care plans. PRINCIPAL FINDINGS: We did not detect strong evidence that beneficiaries in poorer health were more likely than others to switch from Medigap coverage to Medicare-managed care. In addition, higher Medigap premiums did not appear to induce beneficiaries to switch into managed care. CONCLUSIONS: We examined selection bias in joining managed care plans among the subset of Medicare beneficiaries who have Medigap policies. No strong evidence of selection bias was found in this population. We conclude that there was no evidence that the Medigap market is becoming prohibitively expensive as a result of unfavorable selection.     

The effect of price on switching among health plans

A recent policy change by the University of California (UC) provides a unique natural experiment for investigating the sensitivity of consumers to health plan premiums. When the UC moved to a policy of limiting its contribution to the cost of the least expensive plan, out-of-pocket premiums increased for roughly one-third of UC employees. We examine the extent to which UC employees switched plans in response to this change in premiums. Our results indicate a strong response. Individuals facing premium increases of less than $10 were roughly 5 times as likely to switch plans as those whose premiums remained constant.     

Employer Health Insurance Offerings and Employee Enrollment Decisions

Objective. To determine how the characteristics of the health benefits offered by employers affect worker insurance coverage decisions.
Data Sources. The 1996–1997 and the 1998–1999 rounds of the nationally representative Community Tracking Study Household Survey.
Study Design. We use multinomial logistic regression to analyze the choice between own-employer coverage, alternative source coverage, and no coverage among employees offered health insurance by their employer. The key explanatory variables are the types of health plans offered and the net premium offered. The models include controls for personal, health plan, and job characteristics.
Principal Findings. When an employer offers only a health maintenance organization married employees are more likely to decline coverage from their employer and take-up another offer (odds ratio (OR)=1.27, p <.001), while singles are more likely to accept the coverage offered by their employer and less likely to be uninsured (OR=0.650, p <.001). Higher net premiums increase the odds of declining the coverage offered by an employer and remaining uninsured for both married (OR=1.023, p <.01) and single (OR=1.035, p <.001) workers.
Conclusions. The type of health plan coverage an employer offers affects whether its employees take-up insurance, but has a smaller effect on overall coverage rates for workers and their families because of the availability of alternative sources of coverage. Relative to offering only a non-HMO plan, employers offering only an HMO may reduce take-up among those with alternative sources of coverage, but increase take-up among those who would otherwise go uninsured. By modeling the possibility of take-up through the health insurance offers from the employer of the spouse, the decline in coverage rates from higher net premiums is less than previous estimates.     

Estimation of a hedonic pricing model for Medigap insurance

OBJECTIVE: This paper uses a unique database to examine premiums paid by beneficiaries for Medigap supplemental coverage. Average premiums charged by insurers are reported, as well as premiums by enrollee age and gender, and additional policy characteristics. Marginal prices for Medigap benefits are estimated using hedonic price regressions. In addition, the paper considers how additional policy characteristics and geographic differences in the use and cost of medical care affect premiums. DATA SOURCES/STUDY SETTING: A comprehensive database on premiums paid by beneficiaries for newly issued Medigap policies in the year 2000 along with state-level characteristics. STUDY DESIGN: Hedonic pricing equations are used to estimate implicit prices for Medigap benefits. DATA COLLECTION/EXTRACTION METHODS: The Centers for Medicare & Medicaid Services contracted for the creation of a detailed database on Medigap premiums. Data were collected in three stages. First, letters were sent directly to insurers requesting premium data. Second, letters were directly to state insurance commissioner's offices requesting premium data. Last, each state insurance commissioner's office was visited to collect missing data. PRINCIPAL FINDINGS: With the exceptions of the part B deductible and drug benefit, Medigap supplemental insurance is priced consistent with the actuarial value of benefits offered under the standardized plans. Premiums vary substantially based on rating method, whether the policy is guaranteed issue, Medigap Select, or explicitly for smokers. Premiums increase with enrollee age, but do not vary between men and women. The relationship between premiums and enrollee age varies across rating methods. Attained-age policies show the strongest relationship between age and premiums, while community-rated premiums, by definition, do not vary with age. Medigap supplemental insurance premiums are higher in states with poorer health, greater utilization, and greater managed care penetration. CONCLUSIONS: Despite the high cost, Medigap plans are generally priced in accordance with the actuarial value of benefits. The primary exception is the drug benefit, which appears to be subject to substantial adverse selection. Benefits such as the part B deductible and at-home recovery benefit offer little value to consumers. Several states require insurers to community rate premiums. Such regulation has important implications for premiums, and research needs to consider the impact of such regulation on the Medigap market.