Currently Viewing:
The American Journal of Managed Care April 2007
Employee Costs Before and After Treatment Initiation for Bipolar Disorder
Richard A. Brook, MBA; Nathan L. Kleinman, PhD; and Krithika Rajagopalan, PhD
Impact of Chest Radiography Screening on Healthcare Spending
Lorenzo Pesce, PhD. Author reply by Konstantinos Kamposioras, MD; Davide Mauri, MD; Panagiota Tsekoura, MD; Antonis Valachis, MD; Maria Tsappi, MD; and Nikolaos P. Polyzos, MD
Impact of Telephonic Interventions on Glycosylated Hemoglobin and Low-density Lipoprotein Cholesterol Testing
Carter Coberley, PhD; Brent Hamar, DDS, MPH; Bill Gandy, EdD; Patty Orr, RN, EdD; Sadie Coberley, PhD; Matthew McGinnis, BS; Laurel Hudson, RN, MSN; Sam Forman, MD, MPH, MBA; Dexter Shurney, MD, MPH, MBA; and James Pope, MD
A Review of Methods to Measure Health-related Productivity Loss
Soeren Mattke, MD, DSc; Aruna Balakrishnan, BS; Giacomo Bergamo, BS; and Sydne J. Newberry, PhD
Currently Reading
Selection Bias Between 2 Medicare Capitated Benefit Programs
Walter Leutz, PhD; Kathleen K. Brody, BSN, PHN; Lucy L. Nonnenkamp, MA; and Nancy A. Perrin, PhD
Overcoming Information Asymmetry in Consumer-directed Health Plans
Sheldon M. Retchin, MD, MSPH

Selection Bias Between 2 Medicare Capitated Benefit Programs

Walter Leutz, PhD; Kathleen K. Brody, BSN, PHN; Lucy L. Nonnenkamp, MA; and Nancy A. Perrin, PhD

Objectives: To assess enrollment selection bias between a standard Medicare health maintenance organization (HMO) and a higher-priced social health maintenance organization (SHMO) offering full prescription drug and unique home-based and community-based benefits and to assess how adverse selection was handled through SHMO finances.

Study Design: Kaiser Permanente Northwest offered the dual-choice option in the greater Portland region from 1985 to 2002. Analysis focused on 3 "choice points" when options were clear and highlighted for beneficiaries. Data collected included age and sex, utilization 1 year before and after the choice points, health status data at enrollment (1999-2002 only), mortality, and cost and revenues. Data were extracted from health plan databases.

Methods: Hospital, pharmacy, and nursing facility utilization for 1 year before and after the choice points are compared for HMO and SHMO choosers. Health and functional status data are compared from 1999 to 2002. Utilization and mortality data are controlled by age and sex.

Results: SHMO joiners evidenced adverse selection, while healthier members tended to stay in the HMO, with leaner benefits. Despite adverse selection, the health plan maintained margins in the SHMO, assisted by frailty-adjusted Medicare payments and member premiums.

Conclusion: This high-low option strategy sought to offer the "right care at the right time" and may be a model for managed care organizations to serve aging and disabled beneficiaries under Medicare's new special needs plan option.

(Am J Manag Care. 2007;13:201-207)

For 25 years, social health maintenance organizations (SHMOs) have operated prototypes for Medicare special needs plans serving disproportionate shares of beneficiaries with severe or disabling conditions. This study looks at how one health plan used a SHMO to control costs.

  • Kaiser Permanente offered its SHMO alongside its standard health maintenance organization (HMO), and sicker and more disabled beneficiaries chose the high-benefit, high-cost social HMO.
  • The SHMO stayed solvent by using a frailty-adjusted Medicare payment formula and by charging much higher member premiums.
  • Health plans are ill advised to offer special needs plans with benefits for frail beneficiaries (eg, personal care, homemakers, and adult day services) unless Medicare offers a frailty adjuster and allows these benefits to be paid for with savings.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 allows Medicare to contract with a new type of managed care organization called a special needs plan (SNP). The SNPs exclusively or disproportionately serve 1 of the following 3 categories of special needs beneficiaries: institutional residents, Medicaid eligibles, and those with severe or disabling conditions.1 Besides this targeting provision, the legislation and regulations to date do not require SNPs to do much that is "special" for special needs beneficiaries. Nor is there much experience in the Medicare health maintenance organization (HMO) market about what types of benefits to offer these beneficiaries or how beneficiaries will choose SNPs versus other options, particularly in the third category focused on beneficiaries with chronic illnesses and disabilities.

This article details the experience of Kaiser Permanente Northwest (KPNW) from 1985 to 2002, during which time it offered Medicare-aged beneficiaries a choice between a standard HMO and a social health maintenance organization (SHMO).2,3 Operating under Medicare demonstration waivers, SHMOs can be seen as a precursor to SNPs for beneficiaries with chronic illnesses and disabilities. They offer complete prescription coverage plus benefits for "community care" (eg, personal care, homemaking, adult day services, personal emergency response systems, and short institutional respite care), as well as service coordinators to manage these latter benefits and to coordinate with medical care.

The KPNW strategy for marketing the SHMO was similar to its approach to its earlier HMO demonstration,4 including mailings, newspaper advertisements, and internal marketing to aged KPNW HMO members and to members turning age 65 years ("age-ins"). The SHMO members were also allowed to switch to the HMO. Marketing representatives explained how to compute personal out-of-pocket drug copayments under both plans, because this was often the deciding factor.

Our hypothesis is that the 2 KPNW Medicare programs attracted different memberships: persons joining the SHMO would be sicker, while healthier HMO members would stay with the HMO's leaner benefits and lower monthly premiums. If Medicare capitations were sensitive to risk characteristics and if member premiums covered additional costs, the programs could operate in a cost-effective manner.


Analytic Approach

We gathered and analyzed data on benefits, prices, marketing, enrollment levels, enrollee characteristics, and utilization. After discussing the historical record with KPNW staff, we decided to illustrate choice patterns by focusing analysis on specific "choice points" when options were clear and highlighted for beneficiaries. We call these beneficiaries the decision makers.

The first choice points are geographic expansions when the SHMO expanded from Multnomah and Washington counties (greater Portland) to Clackamas County (Oregon) in 1990, and to Clark County (Washington) in 1995. The KPNW Medicare HMO members in the new counties, as well as age-ins, were offered the SHMO option. The second choice point is 1991, when the differential in member premiums between the HMO and the SHMO jumped from $26 to $59 because of the repeal of the Medicare Catastrophic Coverage Act. During this period, we analyze those who chose to convert from the SHMO to the HMO and those who converted to the SHMO despite premium differences. The third choice point is 1999 to 2002, when switching was allowed at any point during the year. Self-report health status data on new members to the 2 programs were available to compare selection bias. Table 1 summarizes the benefit and price differences between the HMO and the SHMO during the study period.


We linked the SHMO membership files with the KPNW membership files to form a consolidated file that merges small eligibility gaps (<90 days) when subscribers changed programs. These data include only Medicare-aged beneficiaries who were individual members of the HMO or the SHMO, as the SHMO option was not offered to groups because it was not available throughout the service area. We used the ZIP code for residential address at year end to determine the county. We selected persons continuously enrolled during the calendar year before the decision point and created a variable for the number of months enrolled in the year after the decision point. Date of birth and enrollment year were used to determine age. The membership system holds a termination date and a reason code for the end of every enrollment episode.

Utilization data are from KPNW systems. Hospital and nursing facility days beyond the cutoffs were truncated to year end. The following 2 pharmacy utilization measures were developed: total days supplied and total number of prescriptions. Health status data for beneficiaries joining from 1999 to 2002 were collected using the KP standard mailed questionnaire (response rate, 80%-90%).5 The following 2 probability risk indexes have been developed using these data: the risk of frailty (being dependent on another person for daily care) and the risk of advanced illness care (likelihood of surviving the next 36 months). Definitions are available in the online Appendix A (available at

Statistical Analysis

Analysis files were created from multiple annual administrative files using SAS statistical software (SAS Institute, Cary, NC) to form longitudinal person-based files. SPSS version 13.0 (SPSS Inc, Chicago, Ill) was used for t tests, analysis of variance, and logistic regression analysis to test for group differences. Unadjusted means of the outcome variables are reported, and the odds for joining the SHMO are adjusted by age and by months of eligibility.


Enrollment and Demographics

At the end of 1985, the SHMO had 3087 members, and the HMO had almost 10 000 nongroup members. The HMO peaked at about 18 000 individual members in 1987 and fell to 16 000 in 2002. The SHMO membership peaked at 6081 in 1990 and then fell (after premiums jumped) to around 4000 for the rest of the study period. The proportion of SHMO members 85 years or older rose from 7.7% in 1985 to 23.6% in 2002. The percentage of HMO members 85 years or older held steady at 10% during the study period.

Selection Bias

Choice Point 1: 1990 and 1995 Expansions. In late 1989, HMO nongroup members and age-ins were informed that the SHMO would be offered in Clackamas County. Clackamas is a large, mostly rural county whose northwest corner reaches the Portland area. The analysis is based on 2094 persons who were offered the choice and had a full year of health plan data before and after the decision point. Of these decision makers, 354 (16.9%) joined the SHMO. Switchers did not differ in age from nonswitchers, but switchers had higher hospital and prescription use before and after switching (Table 2). A multiple regression analysis controlling for age (the statistics are available online in Appendix B at found that, for every additional 10 days of hospital use in the prior year, decision makers were 1.26 times more likely to choose the SHMO. Also, those who selected the SHMO were 1.57 times more likely to have died by 2002, after controlling for age. Expansion to Clark County in 1995 resulted in 11.5% of decision makers switching to the SHMO, with similar differentials in preutilization and postutilization after controlling for age (data not shown).

Choice Point 2: 1991 Heightened Dual Choice. In 1991, the SHMO premium rose from $75 to $125, while the HMO premium rose only from $49 to $66. The KPNW marketing brochure presented options in a manner that was unique during the study period. Not only were HMO members in covered counties mailed information about how to switch to the SHMO, but members in the SHMO were also explicitly offered the option to switch to the cheaper and less comprehensive HMO.

Almost 1000 family units asked for information to join or leave the SHMO. Having peaked at 6081 members in December 1990, SHMO membership fell to 5170 a year later. The proportion of age-ins choosing the SHMO decreased from 40% in 1985 to 17% in 1991. After this increase in the premium differential, SHMO membership dropped steadily for 10 years to a low of 3913 at the end of 2000.

We compared preutilization and postutilization for the 3 decision groups (selected SHMO, dropped SHMO, and remained in SHMO), controlling for age. Results show that members leaving the SHMO in 1991 had fewer total hospital days, prescriptions filled, and prescription days supplied in 1990 than those who selected the SHMO or chose to remain in the SHMO (Table 3). Those leaving the SHMO continued to have lower hospital and drug utilization than the other 2 groups in 1991 (Table 4). For the group selecting the SHMO, the 2 prescription measures increased from the preperiod to the postperiod from a mean days' supply of 765 to 924. This could indicate declining health status or a constrained demand relieved by a richer prescription benefit.

Choice Point 3: Internal Consolidation From 1999 to 2002. This analysis used 4612 individuals joining the HMO or the SHMO in this 4-year period for whom we had self-report health data. The mean age for 1623 SHMO joiners from KP was 72.3 years, which was significantly younger than the mean age for 276 SHMO joiners from the community (74.8 years). The mean age for the HMO joiners was 73.2 years. There were 2 other significant differences between the SHMO joiner subgroups: The community group was more impaired than the KP joiners in instrumental activities of daily living movement tasks (meals, shopping, chores, and getting places) and in instrumental activities of daily living cognitive tasks (money management, taking medications, and using the telephone). The former difference disappeared after controlling for age, while the latter did not. Because only 1 difference remained after age adjustment, the 2 subgroups of SHMO joiners were merged for the selection bias analysis.

Copyright AJMC 2006-2020 Clinical Care Targeted Communications Group, LLC. All Rights Reserved.
Welcome the the new and improved, the premier managed market network. Tell us about yourself so that we can serve you better.
Sign Up