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CMS Payments Necessary to Support HMO Participation in Medicare Managed Care

In: Frontiers in Health Policy Research, Volume 5


  • John Cawley
  • Michael Chernew
  • Catherine McLaughlin


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 per
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Suggested Citation

  • John Cawley & Michael Chernew & Catherine McLaughlin, 2002. "CMS Payments Necessary to Support HMO Participation in Medicare Managed Care," NBER Chapters, in: Frontiers in Health Policy Research, Volume 5, pages 1-26, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:9856

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    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. 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.
    3. repec:mpr:mprres:2507 is not listed on IDEAS
    4. 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.
    5. 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.
    6. 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.
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    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.

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