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Health Care Costs and Financing

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During the mid-1990s, Medicare HMOs in California reduced inpatient use beyond that attributable to favorable selection

Lower costs in Medicare HMOs have been attributed primarily to favorable selection, that is, the enrollment of healthier individuals who tend to use fewer health care services than those who are less healthy and don't enroll. Yet, through the mid-1990s, Medicare HMOs in California were able to reduce use of inpatient care beyond that attributable to the high level of favorable selection, found a study supported in part by the Agency for Healthcare Research and Quality (HS10256). The reduction in inpatient days was due entirely to reduced length of stay.

The RAND and University of Southern California researchers who conducted the study linked Medicare records with California hospital discharge data over 5 years (1991-1995) in order to examine the extent of favorable selection and the impact of joining an HMO on inpatient use. The sample included 124,111 Medicare beneficiaries who switched from fee-for-service (FFS) to HMO plans in 1992 and 1993 and random samples of 108,966 Medicare beneficiaries with continuous FFS enrollment and 18,276 with continuous HMO enrollment.

When beneficiaries joined a group/staff or independent practice association (IPA) HMO, their total hospital days per year were 18 percent and 11 percent lower, respectively, than if they had remained in an FFS plan. In 1995, Medicare group/staff and IPA-model HMO enrollees used roughly 60 percent of the inpatient days used by FFS beneficiaries (976 and 928 vs. 1,679 days per thousand, respectively). In the group/staff model HMOs, favorable selection accounted for 70 percent of this difference and managed care practices 30 percent. In IPA HMOs, favorable selection accounted for 85 percent of the difference, and managed care practices 15 percent.

See "The effect of HMOs on the inpatient utilization of Medicare beneficiaries," by Nasreen Dhanani, Ph.D., June F. O'Leary, Ph.D., Emmett Keeler, Ph.D., and others, in the October 2004 Health Services Research 39(5), pp. 1607-1627.

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