S/HMO versus TEFRA HMO Enrollees: Analysis of Expenditures

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INTRODUCTION

A topic of perennial interest in health services research is the potential cost savings that could be realized from the substitution of community-based services for inpatient care or nursing home care, particularly for the subgroup of elderly patients who have multiple admissions due to chronic illnesses, persons with exceptionally long stays, and those with high-cost episodes during terminal illnesses (Eggert and Friedman, 1988). The choice of appropriate treatment settings and types of care may be thought of as the choice of a cost-effective combination of "inputs," used to promote and maintain the health of a population, including treatment of chronic illnesses. Choice of appropriate inputs is more likely to occur when there is an organization that is able to coordinate the use of different inputs and when that organization has a financial incentive to choose the most cost-effective input mix. One delivery system model that has an interesting mix of organizational structure and incentives is the S/HMO. HCFA has supported research on S/HMOs for more than a decade and continues to support the S/HMO model through demonstration projects.

The purpose of this study is to compare expenditures on health care services for enrollees in a S/HMO and a TEFRA-risk Medicare HMO. Both the S/HMO and the TEFRA HMO were operated by the same parent organization, Group Health, Inc. (GHI). Medicare Partners (under the name Seniors Plus) was the S/HMO demonstration project offered jointly by GHI and the Ebeneezer Society of Minneapolis/St. Paul (Twin Cities) and was one of four original S/HMO demonstration projects. Because the TEFRA HMO and S/HMO were offered by the same organization, many characteristics of the two plans were held constant, and this analysis was able to focus on the marginal effect of the S/HMO's coverage of additional LTC and case management services. Seniors Plus differed from the TEFRA HMO in that it provided a LTC benefit plus case management services for chronic illness in addition to the full package of Medicare inpatient and ambulatory services. However, enrollees in the two plans used the same physicians and hospitals. Because the S/HMO was capitated for both acute care services and LTC services beyond the basic Medicare benefit, the S/HMO had an incentive to make cost-effective substitutions of one type of care for another, e.g., substitution of home care for nursing home care or nursing home care for acute hospital care.

The S/HMO demonstration has moved into its second phase, with additional demonstration sites, and enrollment in TEFRA HMOs continues to grow. Evidence that S/HMOs could reduce acute care costs, while providing additional LTC benefits in a TEFRA HMO setting, could have a dramatic impact on the availability of LTC benefits nationwide. HMOs may be willing to add services such as case management even without additional Federal dollars if the cost can be covered by reduced acute care costs or reasonable supplementary premiums.

LITERATURE REVIEW

Many previous demonstrations have focused on service substitution and several have investigated the substitution of community-based services for inpatient care for the elderly. Kemper, Applebaum, and Harrigan (1987) reviewed 16 demonstrations that were funded through special waivers of the Medicare and/or Medicaid programs from 1972 through 1984. Weissert, Gredy, and Pawelak (1988) reviewed 31 studies carried out over the past three decades, under a variety of auspices and funding sources. Both reviews examined the extent to which the community-based LTC projects were able to reduce both nursing home and hospital use and their ability to meet their stated goals of achieving overall cost savings. In both of these reviews, the authors conclude that hospital use has been largely unaffected by the demonstrations. Though some demonstrations were successful in reducing hospital and nursing home utilization, only 7 of 19 studies showed cost savings, and the other 12 showed cost increases in the treatment group. …