On the other hand, beneficiaries may be reluctant to enroll in HMOs because they give up their freedom to choose any provider. New HMO Enrollees Show Better Health Status Overall

Comparing the two groups of beneficiaries, those who enrolled in an HMO and those who remained in FFS, we found that a larger proportion of the enrolled group had better health status. New HMO Enrollees With Chronic Conditions Are Low Cost Compared With Their FFS Counterparts

Not only were the enrollment rates for beneficiaries with chronic conditions lower than those with none of the selected conditions, but the prior costs of those who enrolled were substantially less than those who remained in FFS. Most Costly Beneficiaries in Each Health Status Group Remained in FFS

The enrollment patterns show that Medicare HMOs attracted people who did not need as costly medical care. Beneficiaries who enrolled in an HMO in 1993 or 1994 had substantially lower 1992 costs compared with those that remained in FFS during that period. The differences in prior costs ranged from 31 percent among those with no chronic conditions to 16 percent for those with multiple chronic conditions. New HMO enrollees with chronic conditions rapidly disenrolled and returned to FFS at higher rates than healthier new enrollees. Comparing the two groups of beneficiaries, those who disenrolled early also had substantially higher 1992 costs than those remaining in their HMO. The weighed average cost for beneficiaries who returned to FFS was 79 percent more than those who stayed on in an HMO. Conclusions

Compared with healthier beneficiaries, California Medicare beneficiaries with selected chronic conditions were less likely to enroll in HMOs and more likely to rapidly disenroll from HMOs. Thus, this study helps explain a pattern of favorable selection in California Medicare HMOs despite the presence of some new enrollees with chronic conditions. Scope, Data Sources, and Methodology

This appendix describes our (1) scope and data sources, (2) methodology for identifying Medicare fee-for-service (FFS) beneficiaries with selected chronic conditions, and (3) methodology for analyzing the health maintenance organization (HMO) enrollment and disenrollment patterns of FFS beneficiaries. In 1995, over 40 percent of all Medicare beneficiaries enrolled in risk contract HMOs resided in the state. Identifying FFS Beneficiaries With Chronic Conditions

We also used claims information contained in the SAFs to determine the health status of each beneficiary, as measured by the presence or absence of any of five chronic conditions; that is, whether a claimant had been diagnosed with zero, one, or two or more of the chronic conditions. During the period, the proportion who died was 6.2 percent for those with none of the selected conditions, 9.6 percent for those with one condition, and 18.6 percent for those with two or more conditions; the percentage who moved was about 5 percent for each health status group. We then calculated their 1992 average monthly FFS expenditures, by number of chronic conditions and age group, and the proportion of the remaining beneficiaries that enrolled in an HMO.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined a mature managed care market to determine: (1) the extent to which Medicare beneficiaries with chronic conditions enroll in health maintenance organizations (HMO); (2) whether beneficiaries with chronic conditions who enroll in HMOs are as costly as those remaining in fee-for-service (FFS) Medicare; and (3) whether beneficiaries with chronic conditions rapidly disenroll from HMOs to FFS at rates different from other newly enrolled beneficiaries.

What GAO Found

GAO noted that: (1) data on California's FFS beneficiaries who enrolled in HMOs help explain why, despite the presence of chronic conditions among new HMO enrollees, their average costs are lower than the average FFS beneficiary; (2) the health status of beneficiaries, as measured by the number of selected chronic conditions they have, showed significant differences between those who enrolled in an HMO and those who remained in FFS; (3) also, when comparing beneficiaries categorized by the presence of none, one, or multiple chronic conditions, new HMO enrollees tended to be the least costly in each health status group; (4) this resulted in a substantial overall cost difference between those that did and did not enroll in HMOs; (5) about one in six 1992 California FFS Medicare beneficiaries enrolled in an HMO in 1993 and 1994; (6) HMO enrollment rates differed significantly for beneficiaries with selected chronic conditions compared to other beneficiaries; (7) among those with none of the selected conditions, 18.4 percent elected to enroll in an HMO compared to 14.9 percent of beneficiaries with a single chronic condition and 13.4 percent of those with two or more conditions; (8) GAO found that prior to enrolling in an HMO a substantial cost difference, 29 percent, existed between new HMO enrollees and those remaining in FFS because HMOs attracted the least costly enrollees within each health status group; (9) even among beneficiaries belonging to either of the groups with chronic conditions, HMOs attracted those with less severe conditions as measured by their 1992 average monthly costs; (10) GAO found that rates of early disenrollment from HMOs to FFS were substantially higher among those with chronic conditions; (11) while only 6 percent of all new enrollees returned to FFS within 6 months, the rates ranged from 4.5 percent for beneficiaries without a chronic condition to 10.2 percent for those with two or more chronic conditions; (12) also, disenrollees who returned to FFS had substantially higher costs prior to enrollment compared to those who remained in their HMO; and (13) these data indicated that favorable selection still exists in California Medicare HMOs because they attract and retain the least costly beneficiaries in each health status group.