IDEAS home Printed from
   My bibliography  Save this article

CMS Payments Necessary to Support HMO Participation in Medicare Managed Care


  • Cawley John

    (Cornell University and NBER)

  • Chernew Michael

    (University of Michigan and NBER)

  • McLaughlin Catherine

    (University of Michigan)


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.

Suggested Citation

  • Cawley John & Chernew Michael & McLaughlin Catherine, 2002. "CMS Payments Necessary to Support HMO Participation in Medicare Managed Care," Forum for Health Economics & Policy, De Gruyter, vol. 5(1), pages 1-28, January.
  • Handle: RePEc:bpj:fhecpo:v:5:y:2002:n:2

    Download full text from publisher

    File URL:
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    1. Abraham, Jean, et al, 2000. "Enter at Your Own Risk: HMO Participation and Enrollment in the Medicare Risk Market," Economic Inquiry, Western Economic Association International, vol. 38(3), pages 385-401, July.
    2. Jean Abraham & Ashish Arora & Martin Gaynor & Douglas Wholey, 1999. "Enter at Your Own Risk: HMO Participation and Enrollment in the MedicareRisk Market," NBER Working Papers 7385, National Bureau of Economic Research, Inc.
    3. David Dranove & Mark Shanley & Carol Simon, 1992. "Is Hospital Competition Wasteful?," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 247-262, Summer.
    4. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    5. Timothy F. Bresnahan & Peter C. Reiss, 1987. "Do Entry Conditions Vary across Markets?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3, Specia), pages 833-882.
    6. repec:mpr:mprres:2507 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Chernew, Michael & DeCicca, Philip & Town, Robert, 2008. "Managed care and medical expenditures of Medicare beneficiaries," Journal of Health Economics, Elsevier, vol. 27(6), pages 1451-1461, December.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:fhecpo:v:5:y:2002:n:2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.