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Do the market size and competition affect the increase in real out-of-pocket premium in Medicare managed care plans?

Chun-Chih Huang, PhD, Outcomes Measurement Programs, Medstar Research Institute, 6495 New Hampshire Avenue, Suite 305, Hyattsville, MD 20783, 301-560-2920, jim.huang@medstar.net and Mahmud Khan, PhD, Health Systems Management, Tulane University, 1440 Canal Street, Suite 1900, New Orleans, LA 70112.

The objective of this study is to examine the factors affecting the real out-of-pocket premium changes in the Medicare managed care plans. Contract level data for Medicare managed care plans for the years 1999 to 2003 were obtained from various sources. Changes in real premium levels of the managed care contracts over the years was used as the dependent variable with various organizational, geographic, benefit attributes and the degree of market competition as independent variables. Heckman's model was used to correct for potential presence of selection bias in the sample of contracts remaining in the market. At the first stage, a probit model was run to identify the factors affecting continuation of Medicare managed care contracts. By selecting the sub-set of contracts that remained in the market, a regression equation was estimated to explain the changes in real premium. The sample consists of 710 observations and over the five year period of the study, 120 of the contracts withdrew from the market. The results show that Medicare HMO contracts with higher enrollees, higher Medicare payment rate and growth, smaller variance of Medicare payment growth in their service areas have higher probability of continuing in the market. The second part of the analysis indicates that the increase in real premium for for-profit contracts were lower than that for not-for-profit contracts. As expected, higher drug coverage increases the premium. Competition in the market tends to reduce the real premium; one extra contract in the service area in a year compared to the previous year reduces the premium by $1.15. Increase in the percent of metro area in the service area by 1% reduces the real premium by $0.63. Increasing penetration of HMO in a market area actually increases the premium, controlling for the number of contracts in the market. A 1% increase in poverty rate among the elderly reduces the premium by $3.48. This study indicates that higher degree of market competition and profit-motive of the contracts help to reduce the growth of premium increase for Medicare managed care enrollees. It is interesting that the analyses did not find any relationship between Medicare managed care payment level changes and premium increase. Therefore, increasing the reimbursement from Medicare is unlikely to affect the real premium of Medicare managed care enrollees unless more direct price control measures are instituted. The policy makers can also encourage competition in the market place to lower the premium.

Learning Objectives:

Keywords: Medicare, Economic Analysis

Presenting author's disclosure statement:

Any relevant financial relationships? No

Applications of Health Economics to Medicare and Hospital Efficiency

The 134th Annual Meeting & Exposition (November 4-8, 2006) of APHA