March 26, 2009
HMO Enrollment’s Downward Trend
By Debra A. Donahue

The current economic crisis has often been compared to the recession that began in 1973. In December of that year, then President Richard M. Nixon signed into law the Health Maintenance Organization Act of 1973, creating the managed care industry as we know it today. Health Maintenance Organizations (HMOs) have followed a rough road ever since that time. At the end of 2007, HMO companies covered 51.5 million people, approximately 20% of the insured population in the United States. This Business Strategy report looks at both health maintenance companies as well as health maintenance products from a promising beginning to the future outlook.

An Auspicious Start

The HMO Act of 1973 encouraged formation and operation of HMOs by providing Federal grants and loans to support expansion over a five year period. The Federal Government, believing the HMO model’s focus on preventive care would deliver better outcomes as well as cost containment, hoped to demonstrate the feasibility of HMOs during that time. The Act standardized the term health maintenance organization (HMO), allowed HMOs greater access to the employer-based market and provided the support needed for the rapid expansion of HMOs. Federal legislation required employers with 25 or more employees to offer federally certified HMO options with traditional health plans when requested by an employee. The Act also made it mandatory for employers to contribute as much to the HMO as they did to their regular plan. In hindsight, forcing employers to offer HMOs was perhaps not the best way to gain their acceptance of the product. In 1988, the Act was amended so that the employer gained greater flexibility in determining its HMO contributions. The requirement that employers offer an HMO alternative was repealed in 1993.

It is fairly safe to say that the Act did prove that HMOs are viable. However, thirty-six years later, organizations that define themselves as HMOs cover about 20% of the insured population of the United States. Moreover, during the last four years, enrollment declined -13.6%, an average rate of approximately -4.5% per year.

While enrollment in HMO companies declined, the number of plans offering HMO products has increased from 415 plans in December 2004 to 440 in December 2007. Average enrollment per plan fell from 144,000 in 2004 to 117,000 in 2007. Many new HMOs are focused on specific government segments such as Medicaid and Medicare. As more states embrace managed care for insuring Medicaid populations, HMOs may see gains from this niche.

HMO Company/Product

Today, the concept of HMOs – prepaid health care that covers preventive services and utilizes a network of providers – has become almost synonymous with health insurance. The health insurance market has evolved in such a way that companies, defining themselves as HMOs, now offer a diverse array of products. Furthermore, most businesses that define themselves as Hospital, Medical, Dental or Indemnity (HMDI) or Life, Accident and Health (Life) companies, as well as other carrier types offer HMO products. Most Blue Cross and Blue Shield companies are either an HMDI or Life type business. While 20% of insured are covered by HMO companies; 24% of insured are enrolled in HMO products.

It is no surprise however, that HMO companies still sell the vast majority of all HMO products. Furthermore, membership in HMO products for HMO companies is declining at a slower rate than in other types of organizations.

Penetration by State

HMOs are most popular in California with 71% of insured Californians enrolled in HMO products. In fact, three of the top five plans with HMO enrollment are located in CA. Hawaii and Massachusetts both have significant HMO enrollment penetration at 43% and 36%, respectively. The average HMO penetration for most states is 15%.

Paul Ellwood, often referred to as the “father of managed care,” envisioned an organization that would compete on the basis of price and quality, and that would combine insurance and health care in a single organization. The HMO idea was rooted in the notion of applying market forces to health care and three decades later the struggle continues. Economic strife typically results in reform. The Great Depression, of the late 1920s and early 1930s, gave birth to the health insurance industry. The 1970’s recession gave rise to health maintenance organizations. It will be interesting to see what the current economic situation will bring.

About Mark Farrah Associates (MFA)

Mark Farrah Associates (MFA) is a leading data aggregator and publisher providing health plan market data and analysis tools for the healthcare industry. MFA’s Health Coverage Portal includes both risk-based and administrative services only membership and financial data by plan, parent, state, region and nationally. Committed to simplifying analysis of health insurance business, our products include Medicare Business Online™, the Health Coverage Portal™, Health Insurer Insights™, and Health Plans USA™.

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Debra A. Donahue is Vice President Market Analysis and Online Products for Mark Farrah Associates