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In recent years, many health maintenance organizations (HMOs)have exited the market for Medicare managed care; since 1998, the number of participating plans has fallen from 346 to 174. As a result of this reduced participation by HMOs, hundreds of thousands of Medicare beneficiaries have been involuntarily disenrolled from the program at the end of each year from 1998 to 2001.This paper estimates the Centers for Medicare and Medicaid Services (CMS) capitation payments that are necessary to support the participation of various numbers of HMOs in Medicare managed care per county market. This paper does not make a normative statement about how many HMOs should be supported in this program; rather, it makes a positive statement about the levels of payment necessary to support various numbers of HMOs.The identification strategy is to observe how the number of participating HMOs varies over counties and time in response to CMS payment, while controlling for estimated costs. This paper studies the period 1993-2001 and focuses in particular on the variation in payment, independent of costs, that occurred as a result of the Balanced Budget Act of 1997, which dramatically changed the way that HMOs are paid in this program. In light of the fact that it may not be cost-effective for CMS to support HMO participation in relatively rural or unpopulated counties, the sample used in this paper is limited to the 60 percent of U.S. counties with the largest populations of Medicare beneficiaries.The ordered probit results presented in this paper indicate that, to support one Medicare HMO in 2001 in half of the counties in the sample, CMS would have to pay $682.08 per average enrollee per month in the marginal county. To support one Medicare HMO in 2001 in every county in the sample, CMS would need to pay $1,008.25 per enrollee per month in the maximum-payment county. For comparison, the maximum monthly payment paid by CMS to any county in 2001 was $833.55.This paper finds that 79.3 percent of counties in the sample received a CMS payment in 2001 that was less than what was necessary to support a single HMO in Medicare managed care. Compared to those counties that received a payment exceeding the estimated threshold for HMO participation, these counties are, on average, more rural and less populated, with citizens who are less wealthy and less educated. The relative disadvantage of rural and unpopulated counties persists three years after the Balanced Budget Act of 1997, designed in part to eliminate such disparities, took effect.

CMS Payments Necessary to Support HMO Participation in Medicare Managed Care