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Medicare Beneficiaries and HMOs: Highlights of Los Angeles and New York City Medicare HMO Markets – Fact Sheet

Medicare Beneficiaries and HMOs:
Highlights of the Los Angeles and New York City Medicare HMO Markets

January 1998

Case studies prepared by Mathematica Policy Research, Inc.

A growing number of Medicare beneficiaries are enrolling in Medicare HMOs as an alternative to the traditional Medicare program. However, Medicare HMO enrollment has not grown uniformly in market areas across the country. Case studies conducted by researchers at Mathematica Policy Research, Inc. for The Kaiser Family Foundation describe the evolution of Medicare managed care in the two largest markets in the United States: Los Angeles County (LA) and New York City (NYC). The reports also discuss the impact of the shift to Medicare managed care on Medicare beneficiaries, plans, and providers in each of the respective markets.

Similarities in the LA and NYC Markets

LA and NYC share many similarities. Both are very large urban areas, with around one million Medicare beneficiaries each (Exhibit 1). Medicare capitation rates in each locale are among the highest in the nation: $623 per enrollee per month in LA, $707 on average in NYC, compared to the $467 national average in 1997. While managed care is more extensive in LA than in NYC, it is not new in either area; both have health maintenance organizations (HMOs) that have been serving commercial clients since the 1940s. Medicare risk plans in both LA and NYC currently offer similar products, typically a zero premium plan with an enhanced benefit package that includes prescription drugs. Finally, experts agree that both markets have excess specialists and hospital capacity.

Exhibit 1: Comparison of LA And NYC Medicare Managed Care Markets With US Average, 1997 LA NYC US Total Medicare Beneficiaries 1m 1m 39m Medicare as a % of Total Population 11% 14% 12% Medicare Beneficiaries in Risk HMOs 349,710 171,604 4,700,386 Medicare HMO Penetration Rate 35% 17% 13% Medicare Monthly Payment (AAPCC) $623 $707 $467 Number of Medicare Risk HMOs 13 11 283 Source: Health Care Financing Administration, June 1997.

Differences in the Los Angeles and New York City Markets

Despite these similarities, Medicare risk plans have developed at different rates and in significantly different ways in LA and NYC. LA’s 13 plans include some of the largest Medicare risk plans in the country, several of which have been involved in risk contracting since the demonstrations in the early 1980s. About one of every three LA Medicare beneficiaries is enrolled in a Medicare managed care plan, and southern California as a whole accounts for one-fifth of all Medicare managed care enrollees nationwide. In NYC, about one in six Medicare beneficiaries are in Medicare managed care plans today. Exhibits 2 compares the growth of Medicare HMO penetration in Southern California and Greater New York, both of which are comparable to the growth experienced in LA and NYC 1. Since 1991, HMO penetration doubled in LA and increased four-fold in NYC.


In LA, plans marketed their risk products aggressively from the beginning of the Medicare risk program (1986). High monthly payment (AAPCC) rates enabled plans to offer low or zero premiums and extensive benefit packages to enrollees. A few progressive plans concluded early on that they could be profitable by enrolling large numbers of Medicare beneficiaries quickly. Once these leading plans began their aggressive marketing, others quickly followed suit. Enrollment grew rapidly due to several factors: (1) extensive benefits and relatively low out-of-pocket costs appealed to prospective enrollees, (2) many beneficiaries were able to enroll in managed care plans without changing doctors because large physician groups often contracted with multiple plans in the area, and (3) beneficiaries were familiar and relatively comfortable with the concept of managed care due to Kaiser’s long and dominant presence in the commercial market.

The LA and NYC markets have very different provider structures, which greatly influenced the development of the Medicare managed care plans in each area. Whereas the NYC health care market is dominated by large academic medical centers, the LA health care system is driven by large and powerful medical groups. Academic medical centers in NYC did not embrace managed care initially, whereas the large LA physician groups decided early on that they would participate because they wanted to maintain control over care management and were willing to share in the risk. Thus, plans in NYC transfer little risk on to providers (though this is starting to change somewhat), whereas those in LA pass nearly all of the risk on to physicians and hospitals (Exhibit 3).

Exhibit 3: Perspectives on Medicare Managed Care in Los Angeles and New York City Key Players Los Angeles New York Consumers High managed care penetration in commercial market
-Medicare beneficiaries familiar with managed care
-Widespread physician participation in plans increases appeal to beneficiaries
-Enrollment growing steadily Low managed care penetration in the commercial market
-Medicare beneficiaries less familiar with managed care
-Beneficiaries concerned about restrictions on their choice of doctors and hospitals
-Enrollment growing rapidly Physicians Large physician group practices
-Powerful groups negotiate with plans and accept risk Individual/small group practices
-Minimal market power outside of affiliations with medical centers Hospitals andAcademic Medical Centers (AMCs) -Hospitals have had minimal market power with managed care plans
-Low hospital occupancy rates (59%) despite low bed supply
-Competition for admissions reduced hospital rates AMCs dominate health market
-High hospital occupancy rates (82%) despite high bed supply
-Hospital regulatory structure historically limited competitive pressure on hospital rates Medicare Risk-Contract Plans Six plans by late 1980s; 13 plans today
-Since mid-1980s, offered zero premium products and extra benefits
-Plans transfer nearly all risk on to physician groups; joint negotiations with hospitals and physicians
-Heavily overlapping networks (except Kaiser)
-Advertised aggressively; large medical group participation attracted enrollees Only one plan until 1993; 11 plans today
-Recently began offering zero premium products and extra benefits
-Plans transfer little risk on to providers; separate negotiations with hospitals and physicians
-Some overlapping networks (except in HIP)
-Market entry delayed by high marketing costs, hospital regulation, and strength of AMCs

Future Directions for Medicare Managed Care in Los Angeles and New York City

While it is possible that Medicare risk plans in NYC and LA may come to resemble each other more as NYC’s market matures, the two markets are likely to remain fundamentally different on a number of dimensions because their underlying structure and environment are distinct. In both markets, Medicare beneficiaries are reaping substantial benefits as physicians, hospitals, and plans jockey to improve their negotiating position and their attraction to beneficiaries.

In both LA and NYC, health plans and providers have followed with interest the progression of the newly enacted changes to Medicare managed care included in the Balanced Budget Act of 1997 (BBA 97). There is obvious concern within both markets in provisions that limit future increases in capitation rates to areas with high payment rates. However, given the way the final BBA 97 legislation was structured, few immediate or major effects were anticipated in either the LA or NYC markets.

Provisions pertaining to provider sponsored organizations (PSOs) may lead to changes in both markets, but perhaps in different ways. In LA large physician groups feel capable of taking on more administrative and insurance functions, but may prefer to continue having them performed by others. In NYC, greater control is attractive to academic medical centers, but would require considerably more organizational development than now exists. In both markets, the most influential provider groups will evaluate the relative merits of signing their own risk contract or using this capability to negotiate more favorable terms with existing plans.


The case studies of Medicare managed care in Los Angeles and New York City are part of a series of four case studies prepared for the Kaiser Family Foundation by researchers at Mathematica Policy Research, Inc. In addition to Los Angeles and New York, case studies are also being conducted in Portland, Oregon and Tampa, Florida. The purpose of this project is to learn more about the factors influencing the growth of Medicare managed care in four major metropolitan areas, to explain why the growth patterns in these four areas vary, and to discuss how the shift to Medicare managed care affects Medicare beneficiaries, plans, and providers in each of the markets.

Randall Brown, Ph.D., senior fellow at Mathematica Policy Research, Inc., is the project director. The LA case study was conducted by Randall Brown and Rachel Thompson, M.P.H. Marsha Gold, Sc.D., and Anna Aizer, M.S., conducted the NYC case study. The cases are based upon interviews with health plan representatives, providers, beneficiary and consumer representatives, and policy analysts in the respective markets during the summer of 1997.

Additional copies of this factsheet (#1350), the LA Medicare HMO Case Study (#1348), and the NYC Medicare HMO Case Study (#1349) can be obtained by calling our publications request line at 1-800-656-4533 or by visiting our website at

The Kaiser Family Foundation, based in Menlo Park, California, is an independent national health care philanthropy and not associated with Kaiser Permanente or Kaiser Industries. The Foundation’s work is focused on four main areas: health policy, reproductive health, and HIV/AIDS policy in the United States, and health and development in South Africa. This study was conducted as part of the Kaiser Medicare Policy Project which was established to provide a framework for the Foundation’s ongoing work related to health coverage for the elderly and disabled.


1. Medicare HMO enrollment rates in LA and NYC are known to reflect enrollment trends in Southern California and the Greater New York Metro area. Because LA and NYC data were not available for each of the displayed years, rates for Southern California and Greater New York are presented in Exhibit 2. Return to top

Medicare Beneficiaries and HMOs:
Highlights of the Los Angeles and New York City Medicare HMO Markets

Fact Sheet


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