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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
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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

The goal of the selection bias analysis was to take a snapshot of utilization and health status differences between those who joined the SHMO (n = 1899) and those who joined the HMO (n = 2713). Consistent with prior analytic findings, KPNW records show that the SHMO joiners in the year after joining used 100% more total hospital days, 91% more skilled nursing facility days, 64% more total days of prescription drug supply, and 57% more total drug records than the HMO joiners, adjusting for eligibility months and age (data not shown). The health status survey data show the SHMO joiners reporting double the rates of hospitalization, almost 5 times the rates of emergency department use, and triple the rates of daily use of 5 or more prescriptions (Table 5). Odds ratios for frailty measures and for use of community care services and devices also show wide differentials. These utilization and functional status differences reflect underlying differences in major chronic disease: 51% of the SHMO joiners reported diabetes mellitus, heart trouble, or lung problems, compared with 32% of the HMO joiners (unadjusted for age). Moreover, logistic regression analysis, adjusting for age, demonstrated that the SHMO joiners were more than twice as likely to be at risk of frailty and advanced illness.

Selection Bias and the Bottom Line

How did the SHMO survive adverse selection? The key factor was a Medicare waiver for a frailty-adjusted capitation formula, which paid about double the standard Medicare HMO underwriting factors for members who resided in the community but who met nursing facility preadmission screening criteria. To maintain budget neutrality, the formula also paid a little less than the standard factors for members who did not meet these criteria.6 This formula was phased out from 2004 to 2007 in favor of a frailty adjustment to Medicare's new diagnosis-adjusted payment.7 Another payment difference is that the SHMO was paid 100% of the estimated county-based fee-for-service equivalents, while the HMO was paid 95%.

As SHMO members' frailty rose beyond community averages, revenues rose above what the program would have received using the standard formula. For example, in 1992 the SHMO accounted for 13% of KPNW Medicare members and 14% of Medicare revenues. By 2002, the SHMO represented only 9% of membership but still accounted for 13% of Medicare revenues. The ratio of the SHMO to HMO Medicare payments per member per month (PMPM) went from 1.13 in 1992 to 1.48 in 2002.

The higher Medicare payments were justified by higher acute care utilization. The ratio of SHMO to HMO hospital days per 1000 rose from 1.03 in 1986 to 1.40 in 1992 and to 1.66 in 2002. The ratios of skilled nursing facility days per 1000 and outpatient visits per 1000 were much steadier, rising from 1.28 in 1986 to 1.64 in 1992 and to 1.51 in 2002 for skilled nursing facilities and from 1.30 in 1986 to 1.24 in 1992 and to 1.23 in 2002 for outpatient visits. In addition, costs for community care and resource coordination grew from $21 PMPM in 1986 to a high of $98 PMPM in 2001, amounting to about 15% of Medicare revenues in all study years. During the later years, more than 30% of the members lived at home but met nursing facility preadmission screening criteria, and about 25% received community care.8

The rising costs in both programs, relative to Medicare revenues, led to increases in beneficiary premiums, which have been much higher in the SHMO than in the HMO. The differential has been more than 2:1 since 1997, with the absolute differential about $100 per month since 2000 (Table 1). In addition, community care benefit copayment revenue rose from about $5 PMPM in the early 1990s to more than $10 PMPM by 2001.

Finally, the effect of the high-low choice on overall Medicare revenues should be considered. Although the standard diagnosis-based Medicare payment system and the frailty-adjusted version were actuarially sound standing alone, this is threatened by our finding that frailer elders tended to pick the high-option side of a high-low choice and that healthier elders tended to choose the HMO. Clearly, the 2 payment formulas produced a more favorable revenue situation for KPNW than would have occurred with only 1 formula, aside from the "extra" 5% in the SHMO payment.


Since the inception of Medicare managed care, policy makers and providers have struggled to find the combination Selection Bias Between 2 Medicare Capitated Benefit Programs of appropriate payment systems and care models to serve increasingly frail beneficiaries. Kaiser Permanente Northwest used subtle, but potentially important, changes in financing, marketing, care delivery, and organization to create a new choice of benefits for Medicare elders–a standard HMO supplement alongside a more expensive SHMO with full prescription drug and community care benefits. Despite adverse selection into the SHMO, KPNW successfully adjusted the member premiums and copayments to maintain margins, assisted by frailty-adjusted Medicare payments. Rising cost and benefit differentials further drove adverse selection, but the SHMO remained viable and compelling, attracting persons with poorer health seeking more services. This high-low strategy sought to offer the "right care at the right time" to beneficiaries, and many were ready to pay when the time came.

Because the SHMO waivers end in December 2007, it is not clear which elements of this approach will be available to KPNW or other health plans in the future. One option is for the SHMOs at KPNW, Elderplan, and SCAN Health Plan (the initial sites) to become "disproportionate share" SNPs, because 25% of members in each of the plans meet nursing facility level-of-care requirements.9 Elderplan took this option in 2006. However, the new regulations make no provision for frailty-adjusted payment for SNPs not operating under demonstration waivers. Given KPNW's experience with adverse selection, Medicare Advantage plans would be ill advised to offer such a choice to beneficiaries without similar payment protections. The Centers for Medicare & Medicaid Services is phasing out the current SHMOs' frailty adjuster from 2008 to 2010.

One policy option for Medicare would be to give the frailty adjuster only to SNPs that offer benefits designed for special needs beneficiaries (eg, community care, comprehensive prescription coverage, and more). Kaiser Permanente Northwest met these criteria in 2006, offering comprehensive drug coverage through the "doughnut hole" in the SHMO and an increase in the value of its community care benefit from $12 000 to $14 400 per year. The beneficiary premium jumped to $215 a month versus $76 for the HMO, but the SHMO continued its modest growth. The fact that significant numbers of beneficiaries continue to pay this high monthly premium shows the value they place on the benefits.

Unfortunately, even if the Centers for Medicare & Medicaid Services were to extend the frailty adjuster to protect against adverse selection, their policy for 2006 further discouraged the option of offering community care benefits by prohibiting Medicare Advantage plans from using savings to pay for services that are not "health care related," including "homemaker assist people to meet personal, family, or domestic needs."10 Under this policy, it will be difficult if not impossible for SNPs to follow the SHMO model and offer benefits to meet nonmedical special needs.


We are indebted to Kevin Lutz, MFA, for his assistance with the manuscript.

Author Affiliations: From Schneider Institute for Health Policy, Heller School for Social Policy and Management, Brandeis University, Waltham, Mass (WL); and Center for Health Research, Kaiser Permanente (KKB, NAP), Kaiser Foundation Health Plan of the Northwest (LLN), and Office of Research Development, School of Nursing, Oregon Health & Science University (NAP), Portland.

Funding Source: This study was supported in part by grant 4-00500 from the Robert Wood Johnson Foundation Health Care Financing and Organization and by the Kaiser Permanente Northwest Social HMO Medicare demonstration's longitudinal consortium database and health status survey.

Correspondence Author: Walter Leutz, PhD, Schneider Institute for Health Policy, Heller School for Social Policy and Management, Brandeis University, Waltham, MA 02454. E-mail:

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8. Leutz W, Nonnenkamp L, Dickinson L, Brody K. Utilization and costs of home-based and community-based care within a social HMO: trends over an 18 year period. Int J Integr Care. 2005;5:e25. Available at: Accessed April 19, 2006.

9. Leutz W, Ford T, Leung M, Mueller M, Nonnenkamp L, Newcomer R. Medicare managed care and frail elders: lessons from social HMOs. Care Manag J. 2003;4:161-169.

10. Centers for Medicare & Medicaid Services. 2006 "Call letter." Medicare Advantage, Medicare Advantage-Prescription Drug Plans CY 2007 Instructions. April 4, 2006. Available at: Accessed March 19, 2007.

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