Copyright ©2003 Allan Baumgarten
After peaking in 1998 and 1999, enrollment in HMOs continues to decrease in many states. In this Trend Note, we look at developments in the three major market segments of HMOs - commercial, Medicare and Medicaid - and suggest some reasons for decline.
This analysis is based on the research we perform to prepare our annual Managed Care Reviews in eight states: California, Colorado, Florida, Illinois, Michigan, Minnesota, Ohio and Texas. In the next few weeks, we will release two more Trend Notes examining HMO profitability and premium trends in recent years.
The mid-1990s were years of significant growth for HMOs, as shown in Exhibit 1. In 1996, for example, enrollment increases of 15 to 20% were typical in many states. At the same time, numerous new HMOs were formed. Hospitals sponsored many new plans as part of a strategy to reclaim economic power lost to HMOs. National managed care companies grew through expansion and acquisitions.
Exhibit 1: Rates of HMO Enrollment Increase and Decrease, 1996-June 2002*
* Michigan and Minnesota based on September 2002 enrollment
Enrollment grew in all three lines of business, as employers, the federal government and state Medicaid agencies saw HMOs as the solution to cost increases. Some thought that the movement to HMOs was inevitable, as employers would abandon their other health plans to gain the price advantage enjoyed by HMOs.
However, the growth rate turned down steadily so that by 2001 HMO enrollment had stopped growing and was actually declining in five of the seven states shown. In general, enrollment in commercial and Medicare+Choice plans declined, but was partly offset by a surge in enrollment in Medicaid HMOs and in state children's health insurance plans run under contract with HMOs. In past few years, dozens of hospital-sponsored HMOs that were formed in the mid-1990s have exited the business. They found that they could easily lose money and would be better off focusing on their core business of acute hospital care.
In the first half of 2002, HMO enrollment declined in every state in this group, except Minnesota. Minnesota was the first in this group to see a decline in enrollment, as early as 1998. Now it is the first state in the group to grow once again.
The biggest decreases have been in employer sponsored plans. Enrollment dropped in all seven states, ranging from 875,000 lives in Texas to 21,000 in Minnesota. (Minnesota HMOs lost many commercial enrollees prior to 2000.) On average, HMOs in these states lost 17% of their commercial members, a decrease of nearly 2.6 million. Exhibit 2 summarizes changes during that 18-month period.
Exhibit 2: Change in Commercial HMO Enrollment in 18 Months from December 2000 to June 2002
State December 2000 June 2002* Change %
Colorado 1,303,722 1,030,023 (273,699) -21.0%
Florida 3,631,676 2,997,320 (634,356) -17.5%
Illinois 2,090,615 1,882,674 (207,941) -9.9%
Michigan 1,965,175 1,825,666 (139,509) -7.1%
Minnesota 819,212 798,456 (20,756) -2.5%
Ohio 2,127,289 1,719,798 (407,491) -19.2%
Texas 3,030,822 2,155,107 (875,715) -28.9%
TOTAL 14,968,511 12,409,044 (2,559,467) -17.1%
* Michigan and Minnesota based on September 2002 enrollment
Exhibit 3 shows the rise and fall of commercial enrollment from 1994 to 2002. Where did all of those commercial enrollees go? Reliable data are scarce, but there is good reason to believe that most of them shifted into other health benefit arrangements, such as PPOs. As we have discussed before, the price differential that favored HMOs has narrowed to the point that it makes little difference to employers. Consumers usually find themselves paying more in the form of deductibles and co-payments. In some states, including Michigan, HMOs are strictly limited in their ability to offer plan designs with more significant enrollee cost-sharing, providing another reason for employers to look elsewhere.
Exhibit 3: Enrollment in HMO Commercial Plans, 1994-2002
Some of the push away from insured and more strictly regulated HMO plans comes from the health plans themselves. In many cases, they are much less interested in managing insurance risk and have focused their efforts on providing plan administration services, especially to large, multi-site, self-funded employers. Minnetonka-based UnitedHealthGroup, parent of United HealthCare, provides the best example of this, through its Uniprise business group. In four western states, United HealthCare turned in its HMO license, but Uniprise is doing a lot of PPO/ASO business. United HealthCare has its own HMO in five of the seven states discussed here. In Texas, its HMO commercial enrollment declined by 114,000 members, or 33.5% in that same 18-month period. In Ohio it lost 103,000 commercial members from its HMO. Many of those employer groups converted to PPO plans through Uniprise.
Its major competition in that area are Blue Cross plans around the country that now have the administrative structure in place so that they can work with those multi-state companies. Other companies, such as Humana and Aetna Health, also have the necessary infrastructure and are marketing to those companies. Both Humana and Aetna Health also saw a marked decline in their commercial HMO membership during that 18-month period. PacifiCare is also trying to expand its PPO offerings, but has not had the systems in place.
Not all groups that left HMOs move on to some other kind of insurance plan. In some states, particularly Texas, it appears that some number of former HMO members have joined the ranks of the uninsured. While we don't have good data on the extent of that shift, it does appear that some number of small employers have concluded that they cannot afford the rising cost of insurance benefits.
Medicare HMO Plans
The rise and fall of enrollment in senior plans is especially dramatic in these states. In 1994, there were about 800,000 seniors in HMO plans in these seven states, although almost half of them were in Florida. As shown in Exhibit 4, enrollment in Medicare+Choice plans in those states peaked in 1999 at just over 2 million. The number of plans grew rapidly - from 2 to 19 in Ohio, for example. But even in 1999 plans were beginning to drop out or reduce their service areas.
Exhibit 4: Enrollment in HMO Medicare Plans, 1994-2002
Just as fast as it had grown, enrollment in Medicare plans dropped rapidly in these states. By the middle of 2002 it was only 1.4 million, and the number of plans also declined. For example, only two are left in the Cincinnati area - Anthem and United HealthCare. Most plans would probably say that they have left the program (or stayed but increased enrollee co-premiums and reduced supplemental benefits) because of inadequate federal payments. That is probably correct, though not complete. Medical costs were increasing faster than federal payments. But HMOs had initially prospered by passing much of the risk on to provider systems. Those provider systems eventually realized that they were losing money on those capitation contracts and notified the HMOs that they would no longer take risk. In some cases, they said they would not even participate in the HMO's network for Medicare. There are examples of that in Michigan. At that point, the HMOs ran the numbers and saw that they would lose money or would not have an adequate provider network. And so they dropped out or cut back on service areas.
Medicaid Managed Care
Enrollment in Medicaid HMOs has been the only growth area in the past few years and now comprises a significant percentage of overall HMO membership. States like Michigan and Texas expanded their HMO contracts into different parts of the state and converted recipients from other arrangements into HMOs. Medicaid enrollment in Texas HMOs is almost 900,000,or about 30% of total HMO enrollment in the state. Other states, including Minnesota, have enrolled all or most of their Children's Health Insurance Plan recipients in HMOs. As shown in Exhibit 5, enrollment in Medicaid and related HMO plans tripled from 1.1 million in 1994 to 4.5 million in 2002.
Exhibit 5: Enrollment in HMO Medicaid Plans, 1994-2002
The growth has not been completely consistent. Most states enjoyed a decline in Medicaid caseloads during the economic boom that lasted until 2000. Many expected that to continue into 2001 and 2002 and budgeted continued reductions in their Medicaid budgets. To their distress, Medicaid caseloads turned sharply upward, and states like Ohio and Texas faced unexpected holes in their Medicaid accounts in 2001.
The growth has also come with some amount of pain. Although Medicaid plans have generally been profitable, health plans in Michigan and other states are regularly at the Legislature seeking increases in their payments. In Ohio, four investor-owned Medicaid HMOs went insolvent. That left the state with only one contractor in most of its major metropolitan areas. Under federal rules, it could no longer mandate enrollment in those counties. Colorado now has only two contractors for Medicaid and it has been in court with its contractors. The HMOs have successfully argued that the state's payment rates were inadequate. The state replied that the HMOs should not have signed the contracts if that were the case. Colorado has wondered out loud whether or not Medicaid managed care is saving the state money, especially since it has been directed to pay HMOs more for past years.
The outlook for HMO enrollment is likely to be continued decline in commercial and Medicare plans and steady growth in Medicaid managed care. Employers might be lured back to HMOs by the promise of lower-cost plans that offer limited networks (sound familiar?) although the recent U.S. Supreme Court decision might limit their ability to offer such networks. Medicaid enrollment growth could be tempered if states, facing severe financial strains, reverse the recent expansions of Medicaid eligibility.