Daniel Altman, David Cutler, Richard Zeckhauser“Enrollee mix, treatment intensity, and cost in

competing indemnity and HMO plans”Journal of Health Economics 22 (2003) 23–45

• Study of why HMOs cost less than indemnity health plans. Setting:Massachusetts Group Insurance Commission (GIC) dataState employees and their dependents. One indemnity, ten HMOs. FY 1998 For single coverage, in FY 1998 Indemnity premium was 77 percent higher than the highest HMO premium. WHY?

Study decomposes cost differences between HMOS and Indemnity care

Selection: healthier people enrollIntensity: HMOs offer lower intensity of treatmentPricing: HMOs negotiate lower pricesCould be Interactions of these three

(May also differ due to coverage differences –which services are covered. These differences are not significant in the MA GIC data.) Study uses a difference in difference approach

Model

Indexesj = index of conditionsk = index of treatment P = index for plansi = index of patient demographic groups variables tk = treatment kdij = = fraction of people in demographic group i with condition jqP

j = incidence of people with condition j in plan P

tPijk = treatment k rate in plan P for demographic group i for

condition j rP

ijk = reimbursement rate for treatment k in plan P for demographic group i for condition j XP

j = average spending in plan P for condition j Key equation (1):

Taking differences:

First term: difference in incidence of condition Second term: difference in demographic composition Third large term: differences in treatment intensity Fourth term: difference in prices (only an approximation, since interactions ignored

Altman, David Cutler, and Richard Zeckhaurser, AER May 1998"Adverse Selection and Adverse Retention"

Table 1 Plan Premiums, Enrollment and Benefit Costs

Enrollment PremiumBenefit

Cost

Adjusted Benefit

CostIndemnity 66,000 2,670$ 2,176$ 1,908$ PPO 24,000 1,631 1,115 1,202 HMO (10 plans) 118,000 1,686 1,233 1,320

DifferenceIndemnity - HMO 984$ 943$ 588$

208,000

Benefit Cost = claims paidAdjusted Benefit Cost = age and sex weighted claims paid

Earlier paper

This paperData 1995 GIC data 215,000 enrollees under age 65. 3 types of plans

Table 1GIC plan premiums, enrollment, and benefit costs for fiscal year 1995

Plan group Premium (US$) Enrollment Benefit cost (US$)Indemnity 2670 67,789 2638PPO 1631 25,077 1340HMOs 1686 122,421 1226

Note: Enrollment and benefit costs include only individuals under age 65. Premiums and benefit costs representmeans over entire plan groups.

Table 2Summary of medical conditions examinedCondition Demographic universe Major treatments Claim identification

Acute myocardial infarction (AMI)

Live birth

CancersBreast ColonCervix Prostate

Diabetes (juvenile and adult-onset)

Table 3Demographic distributions of GIC enrollees by insurance plan group, FY1995Age group Indemnity plan HMOs

Males Females Males Females0–19 9.00 8.65 12.68 16.2820–34 6.26 7.15 9.76 12.0335–49 12.51 16.13 14.59 16.4350–64 15.47 19.80 6.77 7.28All ages 45.78 54.22 47.99 52.01