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Health Care Costs and Financing

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Not all types of HMOs benefit financially from so-called "selection bias"

Previous studies have shown that health maintenance organizations (HMOs) tend to attract healthier beneficiaries, who tend to use fewer health services. Clearly, HMOs can benefit financially from this so-called "selection bias." However, a review of studies published after 1993 on selection bias in HMOs concludes that not all Medicare HMOs, Medicaid HMOs, and employer-based HMOs necessarily profit from selection bias.

In their review, Agency for Healthcare Research and Quality investigators Fred J. Hellinger, Ph.D., and Herbert S. Wong, Ph.D., found that healthier individuals are still more likely to join HMOs in the Medicare and Medicaid programs but not in the workplace. Because no selection bias was found in the market for employer-based insurance, selection bias does not result in HMOs being overpaid in the private sector. Even in Medicaid, because most States are moving toward mandatory Medicaid HMO programs, concern about the impact of selection bias on the appropriateness of HMO payments is diminishing. On the other hand, there is still concern about the impact of selection bias on the appropriateness of Medicare HMO payments. Also, there is conflicting evidence about whether Medicare HMOs are overpaid.

Medicare HMOs still attract healthier beneficiaries. Medicare rates were transformed in the past year to include a health-based measure that is calculated using inpatient data. However, there are seemingly contradictory findings that are difficult to reconcile. Medicare payments to HMOs were between 6 and 7 percent too high before implementation of the current diagnosis-based risk adjustment system that reduced payments by 7 percent. Yet, health status, as measured by functional status and self-reported general health status between HMO and fee-for-service enrollees, remains quite different, even after implementation of a diagnosis-based risk adjustment system.

For more information, see "Selection bias in HMOs: A review of the evidence," by Drs. Hellinger and Wong, in the December 2000 Medical Care Research and Review 57(4), pp. 405-439.

Reprints (AHRQ Publication No. 01-R026) are available from the AHRQ Publications Clearinghouse.

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