Medicare HMOs Lower Costs in Medicare Program

Strategic Insights -

A study by Price Waterhouse found that an increase in Medicare Risk HMO membership would result in significant cost savings for the Medicare program. The study showed that each 10 percentage point increase in people getting care in Medicare Risk HMOs was associated with a 7.6 percent reduction in fee-for-service sector costs. If the percentage of beneficiaries receiving care in Medicare Risk HMOs were to increase from six percent to 20 percent, Medicare would save almost $17 billion. With continued growth, Medicare would save about $38 billion in 1995 dollars.

Key Takeaways:

  • The study found that each 10 percentage point increase in people getting care in Medicare Risk HMOs is associated with a 7.6 percent reduction in fee-for-service sector costs.
  • If the percentage of beneficiaries receiving care in Medicare Risk HMOs were to increase from six percent to 20 percent, Medicare would save almost $17 billion.
  • If Medicare Risk HMO membership grew to 40 percent, Medicare would save about $38 billion in 1995 dollars.
  • The study found that the impact of Medicare Risk HMOs on costs for the Medicare program can be attributed to the introduction of a strong competitive market discipline, which influences the practice patterns of physicians, regardless of insurance coverage.
  • The study also found that a "spillover" effect occurs in local areas where a sizable percentage of Medicare beneficiaries receive care in risk contracting HMOs.
  • The study suggests that an increase in Medicare HMO membership can lead to cost savings for the Medicare program due to its influence on physician practice patterns and the competitive market discipline it introduces.

Statistics:

  • 7.6 percent reduction in fee-for-service sector costs for each 10 percentage point increase in people getting care in Medicare Risk HMOs.
  • $17 billion in potential cost savings if the percentage of beneficiaries receiving care in Medicare Risk HMOs were to increase from six percent to 20 percent.
  • $38 billion in potential cost savings in 1995 dollars if Medicare Risk HMO membership grew to 40 percent.
  • 40 million people enrolled in health plans operated by member companies of the Group Health Association of America, which is the national association for health maintenance organizations.

Sources:

  • Price Waterhouse
  • Group Health Association of America (GHAA)
  • Office of the Actuary of the Health Care Financing Administration
  • GHAA President Karen Ignagni
  • Jack Rodgers, Ph.D., Health Policy Economics Group, Price Waterhouse