Adverse selection among multiple competing health maintenance organizations

This study examines risk selection among nine health plans competing for 16,182 employees of one large firm in 1989: one conventional fee-for-service plan, one group-model health maintenance organization (HMO), and seven network and independent practice model HMOs. We develop and compare measures of risk using weights based on HMO and fee-for-service expenditure data, respectively. We use a multiequation statistical model to develop two sets of utilization and expenditure weights for enrollees in each plan. One set of weights, based on discharge abstracts and outpatient records from the large group-model HMO, measures how much each of the nine groups of employees and dependents would have spent, had they been enrolled in a stringently managed plan with no consumer cost sharing. The other set of weights, based on fee-for-service claims data, measures how much each group would have spent, had it been enrolled in an unmanaged health plan with significant coinsurance and deductibles. Predicted annual expenditures per enrollee exhibit a 23% range from lowest (favorable selection) to highest (adverse selection) risk plans using the HMO weights and a 17% range using fee-for-service weights. The fee-for-service plan and group-model HMO with large enrollments have risk mixes near the center of the spectrum. Smaller HMOs exhibit the extreme forms of both favorable and adverse selection. The statistical methods adopted in this study can be used to risk-adjust capitation payments to competing health plans. As mergers among HMOs and group purchasing arrangements among employers increase the average enrollment in each plan from each payor, however, risk differences among plans will be attenuated and the need to risk-adjust payments will be less severe. Key words: health insurance; adverse selection; managed competition; health maintenance organization.