Volume 5, Issue 1

In recent years, many health maintenance organizations (HMOs)have exited the market for Medicare managed care; since 1998, the number of participating plans has fallen from 346 to 174. As a result of this reduced participation by HMOs, hundreds of thousands of Medicare beneficiaries have been involuntarily disenrolled from the program at the end of each year from 1998 to 2001.This paper estimates the Centers for Medicare and Medicaid Services (CMS) capitation payments that are necessary to support the participation of various numbers of HMOs in Medicare managed care per county market. This paper does not make a normative statement about how many HMOs should be supported in this program; rather, it makes a positive statement about the levels of payment necessary to support various numbers of HMOs.The identification strategy is to observe how the number of participating HMOs varies over counties and time in response to CMS payment, while controlling for estimated costs. This paper studies the period 1993-2001 and focuses in particular on the variation in payment, independent of costs, that occurred as a result of the Balanced Budget Act of 1997, which dramatically changed the way that HMOs are paid in this program. In light of the fact that it may not be cost-effective for CMS to support HMO participation in relatively rural or unpopulated counties, the sample used in this paper is limited to the 60 percent of U.S. counties with the largest populations of Medicare beneficiaries.The ordered probit results presented in this paper indicate that, to support one Medicare HMO in 2001 in half of the counties in the sample, CMS would have to pay $682.08 per average enrollee per month in the marginal county. To support one Medicare HMO in 2001 in every county in the sample, CMS would need to pay $1,008.25 per enrollee per month in the maximum-payment county. For comparison, the maximum monthly payment paid by CMS to any county in 2001 was $833.55.This paper finds that 79.3 percent of counties in the sample received a CMS payment in 2001 that was less than what was necessary to support a single HMO in Medicare managed care. Compared to those counties that received a payment exceeding the estimated threshold for HMO participation, these counties are, on average, more rural and less populated, with citizens who are less wealthy and less educated. The relative disadvantage of rural and unpopulated counties persists three years after the Balanced Budget Act of 1997, designed in part to eliminate such disparities, took effect.

Medicare, which provides health insurance to Americans over the age of 65 and to Americans living with disabilities, is one of the government’s largest social programs. It accounts for 12 percent of federal on- and off-budget outlays, and in fiscal year 1999,$212 billion in Medicare benefits were paid. The largest shares of spending are for inpatient hospital services (48 percent) and physician services (27 percent). In thirty years, the number of Americans covered by Medicare will nearly double to 77 million, or 22 percent of the U.S. population.Perhaps the most important question we can ask about the Medicare program is, What impact does it have on the health of the U.S. population? One feature of the Medicare program can be exploited to shed light on its impacts: its age specificity. Most people become eligible for Medicare suddenly, the day they turn 65. Consequently, the age profiles of health services utilization and health outcomes (morbidity and mortality) can provide revealing evidence about Medicare’s impacts.My objective is to obtain precise estimates of medical utilization and outcomes, by single year of age, for ages close to age 65. The most precise estimates can be obtained by using information obtained from medical providers (hospitals and doctors) pooled over several years.Utilization of ambulatory care and, to a much smaller extent, inpatient care increases suddenly and significantly at age 65, presumably due to Medicare eligibility. The evidence points to a structural change in the frequency of physician visits precisely at age 65. Attainment of age 65 marks not only an upward shift but also the beginning of a rapid upward trend (up until age 75) of about 2.8 percent per year in annual visits per capita. The number of physician visits in which at least one drug is prescribed also jumps up at age 65. Reaching age 65 has a strong positive impact on the consumption of hospital services, but most of this impact appears to be the result of postponement of hospitalization in the prior two years.We also examine whether this increase in utilization leads to an improvement in outcomes--a reduction in morbidity and mortality--relative to what one would expect given the trends in outcomes prior to age 65. The estimates are consistent with the hypothesis that the Medicare-induced increase in health care utilization leads to a reduction in days spent in bed of about 13 percent and to slower growth in the probability of death after age 65. Physician visits are estimated to have a negative effect on the male death rate, conditional on age and the death rate in the previous year. The short-run elasticity of the death rate with respect to the number of physician visits is -.095, and the long-run elasticity is -.497: a permanent or sustained 10 percent increase in the number of visits ultimately leads to a 5 percent reduction in the death rate.Data on age-specific death probabilities every 10 years since 1900, i.e., before as well as after Medicare was enacted, provide an alternative way to test for the effect of Medicare on longevity. They also provide strong support for the hypothesis that Medicare increased the survival rate of the elderly by about 13 percent.

Competition and prospective payment systems have been widely used to attempt to control health care costs. Although much of the increase in medical costs over the past half-century has been concentrated among a few high-cost users of health care, prospective payment systems may provide incentives to reduce expenditures selectively on high-cost users relative to low-cost users, and this pressure may be increased by competition. We use data on hospital charges and cost-to-charge ratios from California in 1983 and 1993 to examine the effects of competition on costs for high- and low-cost admissions before and after the establishment of the Medicare Prospective Payment System (PPS). Comparing persons above and below age 65 before and after the establishment of PPS, we find that competition is associated with increased costs before PPS in both age groups, but decreased costs afterwards, especially among those above age 65 with the highest costs. We conclude that the combination of competition and prospective payment systems may result in incentives to reduce spending selectively among the most expensive patients. This conclusion raises important issues relevant to the use of competition and prospective payment to control costs. It also implies that, at minimum, there is a need to carefully monitor outcomes for the sickest patients under prospective payment systems in competitive environments.

This paper investigates the impact of a$1,000 refundable tax credit for self-only coverage on net premiums and insurance purchases for a representative sample of potential buyers in the individual insurance market. Two methods are used to estimate the distribution of premiums: predicted premiums based on a sample of actual purchasers, and premium quotations drawn from an e-insurance website. In most of the simulations, the net premiums for half or more of the prospective buyers are reduced to zero or low levels. The number of uninsured is reduced by 21 to 85 percent, depending on the size of the deductible in the benchmark plan. However, the results are sensitive to assumptions about insurer underwriting practices.

This paper reviews recent empirical evidence on the effects of hospital ownership conversions on quality of care and provision of public goods, such as uncompensated care, and presents new results on these topics based on hospital discharge data from the Healthcare Cost and Utilization Project’s (HCUP) Nationwide Inpatient Sample. My analysis of these data reveals that conversion from government or private nonprofit to for-profit ownership has no effect on in-hospital mortality, but rates of pneumonia complications increased following conversion to for-profit status. Other research, discussed in the paper, found increased mortality rates following discharge from the hospital for patients admitted to hospitals that had converted to for-profit ownership. There was no effect of such conversions on the propensity to admit uninsured or Medicaid patients. Clearly, there is considerable heterogeneity in outcomes attributable to conversions. Overall, the evidence suggests a role for public scrutiny of hospital ownership conversions.