This study examined the effect of being in a Medicare HMO on inpatient utilization. A unique database constructed by linking Medicare records with California hospital discharge data over five years allowed us to measure inpatient utilization after people switched to HMOs. We also calculated the difference in use between all California Medicare FFS and HMO beneficiaries and apportioned it to an HMO effect and a selection effect. Previously, researchers had no way of estimating the effects of being in a Medicare HMO and had to estimate selection in HMOs based on data before enrollment and after disenrollment. Our data on enrollees before, during, and after they enrolled in Medicare HMOs, provide new evidence on the extent of selection and the impact of joining an HMO on inpatient use.
Our results confirm prior studies showing substantial favorable selection in HMOs, which accounts for most of the difference in inpatient use but it varies by type of HMO. Beneficiaries in group/staff HMOs were less healthy than beneficiaries in IPA HMOs. We also report new estimates on the effect of enrolling in HMOs on inpatient use. Our findings also suggest that after adjustment for population differences, Medicare beneficiaries in HMOs used significantly fewer inpatient days than they would have used had they remained in FFS. Our analytic sample included over a million observations allowing us to calculate fairly precise and robust estimates of the reduction in hospital days due to joining an HMO with the reduction ranging from 11 percent for IPAs to 18 percent for group/staff HMOs. The differences in impact by type of HMO are consistent with the expectation that HMOs with greater utilization control protocols such as group/staff HMOs can be more successful in reducing utilization than IPA HMOs (Welch, Hillman, and Pauly 1990
; Hillman, Welch, and Pauly 1992
; Miller and Luft 1993
Surprisingly, the reduction in inpatient days is due entirely to reduced length of stay. Medicare HMOs' large effect on length of stay is unexpected for many reasons. First, the Medicare program has paid hospitals a fixed amount per admission using DRGs since 1983, which has contributed to substantially reduced lengths of stay (Carter and Melnick 1990
). This payment method contains a strong incentive for hospitals to lower length of stay, since any savings accrue directly to the hospital. Second, the consensus in the literature on favorable selection in Medicare HMOs challenges the idea that these HMOs can reduce hospital days even further among a healthier population. Finally, California with its history of Medicare and non-Medicare managed care, has long stood out as having the lowest hospital utilization rates in the country (Zwanziger, Melnick, and Bamezai 2000
). Thus, in an already lean system, Medicare HMOs might not have been successful at extracting additional reductions in inpatient utilization. However, because many California HMOs pay hospitals on a per diem basis, they do have incentives to reduce days per year.
The Medicare program and CMS have struggled with a wide range of implementation issues surrounding HMOs including payment methods, payment rates, and HMO withdrawals from the program that have forced Medicare beneficiaries to involuntarily switch plans or return to FFS. These problems have made Medicare HMOs increasingly controversial and have reduced support for Medicare HMOs, particularly since most believe that Medicare HMOs increase rather than decrease total Medicare program costs each year (General Accounting Office 1997
). The implementation of risk-adjusted capitation payments by CMS to Medicare HMOs addresses the issue of favorable selection, and could potentially reduce funds available to subsidize the additional benefits that Medicare HMOs have used to attract members. Thus, the ability of HMOs to maintain and expand membership may depend largely on their ability to generate cost savings.
Although the reduction in inpatient days is substantial, the actual net cost savings may be somewhat less. Because the reduction in inpatient days is due to reduced length of stay, the net inpatient hospital cost-savings to Medicare HMOs are likely to be smaller than the estimated reduction in utilization. The marginal cost of an additional day in the hospital is less than the average cost (Carter and Melnick 1990
). It is also plausible that managed care practices involve more intensive treatment per day resulting in additional limits on cost-savings. Moreover, shorter lengths of stay may lead to higher use of post-acute care services.
This study has several limitations. First, our state database does not include federal hospitals, or hospitalizations occurring outside the state. However, because it relies on within-person comparisons, this gap will bias the results only to the extent that use of Veteran's Administration or out-of-state hospitals is systematically affected by joining an HMO. Second, it is based on data from a single state, California. Since almost 40 percent of all Medicare risk enrollment was in California by 1995, our findings are significant for policymakers, but it is unclear whether the experience of California Medicare beneficiaries generalizes to the rest of the country (Zarabozo, Taylor, and Hicks 1996
). Third, our findings do not cover noninpatient use. High-quality outpatient data for most HMO and FFS beneficiaries that is needed to quantify the reduction in overall costs is not yet available. However, HMOs have historically achieved their savings primarily through reductions in inpatient use (Miller and Luft 2002
). Moreover, results of the Medicare TEFRA evaluation showed no increase in home health services and only slightly higher outpatient use for HMOs (Hill et al. 1992
). Finally, this study does not address the extent to which reduced inpatient use from Medicare HMOs affects health outcomes, and in particular outcomes for vulnerable populations (e.g., those age 85 and over, African Americans, those with chronic disease).
The last two limitations point to important areas for further research. First, data on outpatient, pharmacy, and home health use would provide a more complete picture of the potential cost savings by Medicare HMOs. While the impact of Medicare HMOs on total costs is itself important, a fair judgment of the program must also consider the impact on patient outcomes, especially those patients who may be less desirable to Medicare HMOs. Investigating use and outcomes for such patients and determining whether reduced hospital days are the result of increased efficiency or decreased quality is a critical next step.