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.     

Do determinants of medicare supplemental coverage choice vary by income

Using data from the Community Tracking Study Household Survey (1998-99), we estimate the relationship between Medigap premiums and senior Medicare beneficiaries' supplemental coverage decisions. All seniors are more likely to be enrolled in an HMO in markets with higher Medigap prices. Lower income seniors are particularly sensitive to Medigap premiums and are more likely to have no supplemental coverage when faced with higher Medigap premiums. As Medicare supplemental options evolve in response to the 2003 Medicare Modernization Act, it is important to consider that lower income beneficiaries may respond to price changes and other factors differently than their higher income counterparts.     

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.     

HMO market penetration and costs of employer-sponsored health plans

Using two employer surveys, we evaluate the role of increased health maintenance organization (HMO) market share in containing costs of employer-sponsored coverage. Total costs for employer health plans are about 10 percent lower in markets in which HMOs' market share is above 45 percent than they are in markets with HMO enrollments of below 25 percent. This is the result of lower premiums for HMOs than for non-HMO plans, as well as the competitive effect of HMOs that leads to lower non-HMO premiums for employers that continue to offer these benefits. Slower growth in premiums in areas with high HMO enrollments suggests that expanded HMO market share may also lower the long-run growth in costs.     

Open enrollment periods and plan choices

Open enrollment periods are pervasively used in insurance markets to limit adverse selection risks resulting when enrollees can switch plans at will. We exploit a change in the open enrollment rules of Medicare Advantage to analyze how beneficiaries responded to the option of switching to a 5‐star‐rated plan at anytime, in a setting where insurers adjusted premiums and benefit design to counterbalance the increased selection risk. We present three findings: Within‐year switches to 5‐star plans increase by 7–16%; demand for 5‐star plans across the years does not decline; and the enrollees who switch to a 5‐star plan during the year are in better health status than those who do not switch.     

Biased enrollment of Medicare beneficiaries in HMO plans--implications for Medicare costs

Policymakers assumed that the enrollment of Medicare beneficiaries in health maintenance organization (HMO) plans would generate significant cost savings for Medicare. The Health Care Financing Administration (HCFA) calculates the reimbursement to HMOs per Medicare beneficiary on the basis of individual and community-specific characteristics. Estimates of the individual-specific profitability rate for enrolling an individual in a Medicare HMO risk plan suggest that the probability of enrollment in HMOs increases with a higher profitability score. The probability of not enrolling high-loss cases is found to be high, indicating that the biased selection in HMO plans actually increases the overall cost of running the Medicare program.     

The effect of HMOs on premiums in employment-based health plans.

This study documents the effect of HMOs on premiums in employment-based health plans. We analyzed a survey of Minnesota employers conducted in 1986. Among 922 usable observations, 239 firms offered HMOs in addition to fee-for-service (FFS) health plans. We estimated an equation for the probability of offering an HMO, followed by equations for HMO enrollment share, and HMO and FFS premiums. The weighted average HMO and FFS premium in firms that offer HMOs was compared to the premium of FFS-only firms. We found that offering an HMO raises the average premium for family coverage health insurance by $25.14 per month and for single coverage by $3.68 per month. This effect was smaller for firms in the Twin Cities metropolitan area. HMOs may be viewed as a progressive and innovative health care benefit, but they are likely to increase firms' health insurance premiums.     

Service-level selection by HMOs in Medicare

In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of selection is that health plans may design their mix of health care services in order to effectuate favorable selection. This paper scrutinizes patterns of HMO membership and costs by service in the FFS sector for evidence consistent with the hypothesis that HMOs engage in service-level product distortion. We develop a multi-service model of choice between FFS and HMOs and show that if the HMO sector is underproviding (overproviding) a service relative to the FFS sector, we should observe a positive (negative) correlation between the HMO market share and average costs of those remaining in the FFS sector. We estimate the correlation between the HMO market share and the average FFS costs for different health care services using Medicare data for 1996. We find evidence indicating that there exists significant service-level selection by HMOs.     

Consumer information and biased selection in the demand for coverage supplementing Medicare.

This study examines how the relationship between health insurance knowledge and the health status of health insurance consumers influences their decisions to purchase insurance coverage. Data from the federal Medicare health insurance program for the elderly in the United States are used. The basic Medicare program provides a limited amount of coverage for health care services obtained from any provider in the private fee-for-service (FFS) market. Beneficiaries of this program may choose to supplement the basic coverage which they receive by two mechanisms: either they may purchase private insurance designed to fill some of the gaps left by the federal program ('Medigap' policies), thereby remaining in the FFS market and preserving their choice of provider, or they may enroll in health maintenance organizations (HMOs), thereby leaving the FFS market and agreeing to use only those providers affiliated with the HMO, and in return receiving broader coverage at little additional out-of-pocket cost. The study was made possible by a unique data set which combines measures of beneficiary knowledge of Medicare coverage with measures of perceived health status, socio-economic characteristics, and insurance coverage choices for a sample of Medicare beneficiaries who participated in an educational workshop about their insurance coverage options. These data were used to estimate a multinomial logistic model of the determinants of insurance choices, where the options included the two listed above and a basic Medicare option. The study explicitly recognizes the interaction between insurance information and health status in health plan choice. These results show that knowledge of coverage does have a differential impact on the decision to purchase health insurance depending on health status. With a high level of knowledge, sicker beneficiaries are less likely to have basic Medicare alone, compared with HMOs or Medigap policies, while healthier beneficiaries are less likely to be enrolled in HMOs, compared with Medigap policies. This finding has important implications for the use of health status measures to adjust capitated payment formulas when knowledgable consumers have the option to enroll in HMOs or remain in the FFS environment. In the absence of health status adjusters for the HMO capitation payments, high levels of coverage knowledge may exacerbate inherent selection bias among these coverage options by healthier and sicker consumers of health insurance.     

Insurers’ response to selection risk: Evidence from Medicare enrollment reforms

Evidence on insurers’ behavior in environments with both risk selection and market power is largely missing. We fill this gap by providing one of the first empirical accounts of how insurers adjust plan features when faced with potential changes in selection. Our strategy exploits a 2012 reform allowing Medicare enrollees to switch to 5-star contracts at anytime. This policy increased enrollment into 5-star contracts, but without risk selection worsening. Our findings show that this is due to 5-star plans lowering both premiums and generosity, thus becoming more appealing for most beneficiaries, but less so for those in worse health conditions.     

Understanding biased selection in Medicare HMOs

OBJECTIVE: To investigate the extent of favorable health maintenance organization (HMO) selection for a longitudinal cohort of Medicare beneficiaries, examine whether the extent of favorable selection varies with the degree of Medicare HMO market penetration in a county, and explain conflicting findings in the literature on favorable HMO selection. DATA SOURCES: A panel of 1992-1996 data from the Medicare Current Beneficiary Survey (MCBS), supplemented with linked data from the Area Resource File and Medicare administrative datasets. STUDY DESIGN: Using random effects probit estimation, we model a beneficiary's HMO enrollment status as a function of self-reported health status and Medicare HMO market penetration. DATA EXTRACTION METHODS: The MCBS data for beneficiaries residing in states served by Medicare HMOs in 1992-1996 were linked by county to the supplementary datasets. PRINCIPAL FINDINGS: We find that favorable selection persists in the cohort over time on some, but not all, measures. We find no substantial association between favorable HMO selection and HMO market penetration. We find that conflicting findings in the literature on favorable HMO selection may be explained by several methodological choices, including the choice of health status measure and the structure of the sample. CONCLUSIONS: Our results support further risk adjustment of the adjusted average per capita cost (AAPCC) payment formula.     

Dropped out or pushed out? Insurance market exit and provider market power in Medicare Advantage

This paper explores how provider and insurer market power affect which markets an insurer chooses to operate in. A 2011 policy change required that certain private insurance plans in Medicare form provider networks de novo; in response, insurers cancelled two-thirds of the affected plans. Using detailed data on pre-policy provider and insurer market structure, I compare markets where insurers built networks to those they exited. Overall, insurers in the most concentrated hospital and physician markets were 9 and 13 percentage points more likely to exit, respectively, than those in the least concentrated markets. Conversely, insurers with more market power were less likely to exit than those with less, and an insurer's market power had the largest effect on exit in concentrated hospital markets. These findings suggest that concentrated provider markets contribute to insurer exit and that insurers with less market power have more difficulty surviving in concentrated provider markets.     

The effect of HMOs on the inpatient utilization of medicare beneficiaries

OBJECTIVE: To determine the effect of joining HMOs (health maintenance organizations) on the inpatient utilization of Medicare beneficiaries. DATA SOURCES: We linked enrollment data on Medicare beneficiaries to patient discharge data from the California Office of Statewide Health Planning and Development (OSHPD) for 1991-1995. DESIGN AND SAMPLE: A quasi-experimental design comparing inpatient utilization before and after switching from fee-for-service (FFS) to Medicare HMOs; with comparison groups of continuous FFS and HMO beneficiaries to adjust for aging and secular trends. The sample consisted of 124,111 Medicare beneficiaries who switched from FFS to HMOs in 1992 and 1993, and random samples of 108,966 continuous FFS beneficiaries and 18,276 continuous HMO enrollees yielding 1,227,105 person-year observations over five years. MAIN OUTCOMES MEASURE: Total inpatient days per thousand per year. PRINCIPAL FINDINGS: When beneficiaries joined a group/staff HMO, their total days per year were 18 percent lower (95 percent confidence interval, 15-22 percent) than if the beneficiaries had remained in FFS. Total days per year were reduced less for beneficiaries joining an IPA (independent practice association) HMO (11 percent; 95 percent confidence interval, 4-19 percent). Medicare group/staff and IPA-model HMO enrollees had roughly 60 percent of the inpatient days per thousand beneficiaries in 1995 as did FFS beneficiaries (976 and 928 versus 1,679 days per thousand, respectively). In the group/staff model HMOs, our analysis suggests that managed care practices accounted for 214 days of this difference, and the remaining 489 days (70 percent) were due to favorable selection. In IPA HMOs, managed care practices appear to account for only 115 days, with 636 days (85 percent) due to selection. CONCLUSIONS: Through the mid-nineties, Medicare HMOs in California were able to reduce inpatient utilization beyond that attributable to the high level of favorable selection, but the reduction varied by type of HMO.     

The effect of market structure on HMO premiums

We examine the effects of HMO market structure on HMO premiums from 1988 to 1991. More competition, measured by the number of HMOs in the market area, reduces HMO premiums. Although this effect does not appear for IPAs before the highest level of competition is reached, it appears throughout the competitive range for Group HMOs. More market penetration, measured by the percent of the market area population enrolled in HMOs, reduces premiums for IPAs. Since the goal of managed competition is to reduce health care costs by creating competition among managed health care plans, our results offer encouragement for managed competition advocates.     

The Effect of Health Plan Characteristics on Medicare+Choice Enrollment

Objective. To provide national estimates of the effect of out-of-pocket premiums and benefits on Medicare beneficiaries' choice among managed care health plans.
Data Sources/Study Setting. The data represent the population of all Medicare+Choice (M+C) plans offered to Medicare beneficiaries in the United States in 1999.
Study Design. The dependent variable is the log of the ratio of the market share of the j th health plan to the lowest cost plan in the beneficiary's county of residence. The explanatory variables are measures of premiums and benefits in the j th health plan relative to the premiums and benefits in the lowest cost plan.
Data Collection Methods. The data are from the 1999 Medicare Compare database, and M+C enrollment data from the Centers for Medicare and Medicaid Services (CMS).
Principal Findings. A $10 increase in an M+C plan's out-of-pocket premium, relative to its competitors, is associated with a decrease of four percentage points in the j th plan's market share (i.e., from 25 to 21 percent), holding the premiums of competing plans constant.
Conclusions. Although our price elasticity estimates are low, the market share losses associated with small changes in a health plan's premium, relative to its competitors, may be sufficient to discipline premiums in a competitive market. Bidding behavior by plans in the Medicare Competitive Pricing Demonstration supports this conclusion.     

Issues regarding health plan payments under Medicare and recommendations for reform.

The failures of the market for current Medicare health plans include poor information and price distortions and can be attributed to government policy. Reforms that could improve its structure are annual open enrollment periods, premium rebates from health management organizations (HMOs) to members, and termination of the federal government's subsidy of Medicare supplementary insurance. However, the price for a basic Medicare benefits package would still be distorted because Medicare bases its contribution on the cost of a comparable package in the fee-for-service (FFS) sector rather than on the cost of the most efficient plan available to beneficiaries in each market area. The present Medicare HMO program almost certainly increases total Medicare costs and actually discourages HMO growth by shielding beneficiaries from the true price difference between basic benefits in the HMO and FFS sectors. Lacking payment reforms, the Medicare HMO program should be terminated.     

Variations in patterns of care and outcomes after acute myocardial infarction for Medicare beneficiaries in fee-for-service and HMO settings

OBJECTIVE: To assess revascularization and mortality after acute myocardial infarction (AMI) for all Medicare patients in fee-for-service (FFS) and health maintenance organization (HMO) settings in California. DATA SOURCES/STUDY SETTING: Hospital discharge abstract and death certificate data linked with Medicare enrollment files for patients aged 65 and over with Medicare coverage (69,040) discharged from a California-licensed hospital in 1994-1996. STUDY DESIGN: Risk-adjusted results were assessed for HMOs and FFS, as well as for FFS beneficiaries from areas served by each plan. DATA COLLECTION/EXTRACTION METHODS: Risk models were based on all sampled patients. The HMO patients were aggregated into 17 pseudoplans: 5 individual plans, 4 large plans split geographically (10 observations), and 2 "pseudoplans" of small HMOs. Observed versus expected 30-day mortality rates, lengths-of-stay (LOS) during the index hospitalization and any transfers, revascularization (coronary artery bypass graft [CABG] surgery and/or percutaneous transluminal coronary angioplasty [PTCA]) during the index hospitalization or 30 days after admission, were calculated for each pseudoplan. PRINCIPAL FINDINGS: Risk-adjusted death rate was slightly higher in FFS than in HMO settings (p < .01 with one risk adjustment model, n.s. with another). Three pseudoplans had significantly (p < .01) better than expected mortality rates. One pseudoplan was significantly worse (p < .05) with one risk adjustment model but not the other. The LOS and revascularization rates varied widely, but were not associated with outcomes. Plans with among the best results had the lowest LOS and revascularization rates. These pseudoplans were less likely to have their patients initially admitted to a hospital with revascularization capability, but the hospitals they used had higher CABG volumes. Even if CABG facilities were available during the index admission, in these plans with better than expected mortality rates, revascularization was often postponed or carried out elsewhere. CONCLUSIONS: For Medicare patients having an AMI in the mid-1990s in California, risk-adjusted outcomes were no different, or slightly better on average, for those in HMOs than in FFS. Not all plans performed equally well, so understanding what leads to differences in quality is more important than simple comparisons of HMOs versus FFS.     

HMO mergers and medicare: the antitrust issues

This paper presents a theoretical framework to predict the effects that may arise from mergers in the rapidly-growing Medicare HMO market. We argue that mergers of large Medicare HMOs should be targeted for antitrust investigation because there are significant barriers into this market. The recent merger of PacifiCare and FHP is used to illustrate the potential antitrust issues raised by Medicare HMO mergers. © 1998 John Wiley & Sons, Ltd.