HMO Enrollment Grows in Metropolitan Areas and Declines in Rural Areas

InterStudy Publications
PO Box 4366
St. Paul, MN 55104

InterStudy Releases Latest Findings in its Updated
Regional Market Analysis

St. Paul, MN -- Enrollment in HMOs increased in metropolitan areas but decreased in rural areas in 1999, according to the latest edition of InterStudy Publications Regional Market Analysis. Enrollment in metropolitan areas increased by more than 900,000 enrollees or 1.3% between January 1, 1999 and January 1, 2000. During the same time, overall HMO enrollment dropped by approximately 430,000 enrollees or 0.5%. Metropolitan areas now account for 91% of all HMO enrollment, or 73.3 million enrollees. These and other industry trends appear in the recently released Regional Market Analysis 10.2, which is Part III of InterStudy Publications Competitive Edge series and joins companion reports HMO Directory 10.2 and HMO Industry Report 10.2.

The Regional Market Analysis 10.2 looks at the 319 Metropolitan Statistical Areas (MSAs) across the United States with active HMOs as of January 1, 2000. For each MSA, the report provides detailed information on HMO enrollment, market penetration, revenue and expenses. The report also provides benchmarks of HMO activity that can be used to compare MSAs nationwide.

Highlights from the Regional Market Analysis 10.2 include the following:
Growing Number of Metropolitan Areas Losing Enrollees: Of the 319 MSAs with active HMOs, 129 reported fewer HMO enrollees on January 1, 2000 than they did on January 1, 1999. Only 85 MSAs showed a decrease in HMO enrollment for the previous year. The growing number of metropolitan areas losing enrollees is not surprising given the overall decrease in total HMO enrollment. Total enrollment in the HMO industry decreased by more than 430,000 enrollees between January 1, 1999 and January 1, 2000.

HMO Enrollment Continues to be Concentrated in Large Markets: Almost three-quarters (74.2%) of the 73.3 million HMO members in metropolitan areas are in large markets with populations of 1 million or more. Another 20.1% are in medium-sized markets with populations between 250,000 and 999,999. The remaining 5.7% of HMO members are in small markets with populations less than 250,000.

The total HMO enrollment of an MSA ranges from 46 in Hattiesburg, Mississippi, to more than 5.2 million in Los Angeles-Long Beach, California.

Average HMO Penetration Rate Drops Slightly: The HMO penetration rate for all markets fell by 0.4% between January 1, 1999 and January 1, 2000, a slight decrease which almost exactly matches the annual decrease in total HMO enrollment of 0.5% for the same period. Medium-sized markets experienced the greatest decrease of 1.1%. Large markets declined by 0.3%, while small markets increased by 0.3%.

Milwaukee-Waukeshas penetration rate of 36.8% places the MSA slightly above the large market 50th percentile of 35.2%. 75% of the large MSAs have penetration rates of 47.4% or less. The midpoint of 35.2% for large markets indicates that half of all large MSAs have higher penetration rates, and the other half have penetration rates below 35.2%.

As of January 1, 2000, there were 147 MSAs with 25% or more of their population enrolled in HMOs. These MSAs serve 62.4 million members, or approximately 85.2% of all MSA HMO enrollment.

About one-quarter of HMO enrollees living in metropolitan areas are in markets highly penetrated by HMOs. As of January 1, 2000, there were 26 MSAs with penetration rates of at least 50%. These MSAs account for 19.6 million enrollees, or 26.8% of all MSA enrollment.

Of the 26 MSAs with penetration rates of 50% or higher, 12 are located in California. Four of these California MSAs (Oakland, San Francisco, Sacramento, and Vallejo-Fairfield-Napa) are among the top 10 most highly penetrated. The most highly penetrated MSA is New Haven-Meriden, Connecticut, with a penetration rate of 74.8%.

Large Markets Tend to be More Competitive Than Smaller Markets: The Index of Competition (IOC) is based on the Herfindahl Index, the squared sum of the HMO market shares of all HMOs operating in a given metropolitan market. The IOC equals one minus the Herfindahl. IOC values range from zero (a monopoly) to one (competition among numerous HMOs with similar market shares). As more HMOs enter a market, the IOC increases.

Milwaukee-Waukesha, Wisconsin, has an IOC of 0.777, falling just above the 25th percentile for large markets. HMO competition is fairly high in Milwaukee, a metropolitan area served by 15 HMOs. The most competitive large markets are listed on the following page, ranked by IOC.

Kansas City, Missouri-Kansas, is the most competitive large market with an IOC of 0.918. Boulder-Longmont, Colorado, has the highest IOC for medium-sized markets of 0.842, and Merced, California, is the most competitive small market with an IOC of 0.824.

Four Metro Areas Were Responsible for Almost 90% of Net MSA Enrollment Growth: The four metro areas gained more than 800,000 HMO enrollees between January 1, 1999 and January 1, 2000. This accounts for almost 90% of the more than 900,000 enrollees gained by metro areas during this time. The top two contributors--Fort Lauderdale, Florida, and Phoenix-Mesa, Arizona--accounted for 68% of net MSA enrollment growth.

Of the 319 MSAs listed in the Regional Market Analysis 10.2, 188 (58.9%) saw an increase in enrollment. These MSAs gained an additional 4.1 million HMO members between January 1, 1999 and January 1, 2000. There were 129 MSAs (40.4%) posting an enrollment decline, losing a total of 3.2 million members during this period. This left net growth at approximately 900,000 enrollees across all metropolitan areas. The remaining two MSAs are new to the Regional Market Analysis since January 1, 1999.

More MSAs in South Atlantic and East North Central Regions Lose Enrollment: The South Atlantic Region had the largest number of MSAs (26) losing enrollment from January 1, 1999 to January 1, 2000, followed by the East North Central region (19). A large number of plans exited from both of these regions during the same period. The South Atlantic region lost 13 HMOs and the East North Central region lost 15 HMOs due to plan closings, mergers, consolidations or acquisitions.

More than half (68) of the 129 MSAs losing enrollment between January 1, 1999 and January 1, 2000 lost fewer than 10,000 members. Eight MSAs lost more than 100,000 members during this time.

Operating Margin: HMOs in metro areas improved their average profitability between year-end 1998 and year-end 1999. Their average operating profit margin increased from -3.2% at year-end 1998 to
-1.3% at year-end 1999. Profitability also increased for these HMOs when broken down by market size.

Small markets improved from a -4.0% average operating profit margin as of year-end 1998 to -1.8% as of year-end 1999. Medium markets improved from a -3.0% average operating profit margin to -1.3%. Large markets improved from a -1.5% average operating profit margin to -0.2%. With profit margins averaging -0.2%, large markets fared better than small markets (-1.8%) and medium markets (-1.3%).

Premiums: Average HMO premiums for single coverage have increased for pure (traditional) products in all markets between year-end 1998 and year-end 1999. Average pure single premiums for medium markets increased the most, growing by $15.

Per-Member, Per-Month (PMPM) Revenue: Between year-end 1998 and year-end 1999, average commercial HMO PMPM revenue increased between $7 and $15, depending on market size. Average commercial PMPM revenue increased by $10 for small markets, $7 for medium markets, and $15 for large markets. Overall, the average commercial PMPM revenue for all markets increased by $10, from an average of $130 as of year-end 1998 to an average of $140 as of year-end 1999.

5 of the top 10 large markets with highest PMPM average total revenue were in Florida. Four of these large Florida markets were also among the top 10 at year-end 1998. They are: Jacksonville, Miami, Orlando and West Palm Beach-Boca Raton.

Administrative Expense Ratio: Administrative expense ratios, calculated by dividing total administrative expenses by operating revenue, range from a low of 2.7% (Rochester, New York) to a high of 28.8% (Hattiesburg, Mississippi). Among large markets, Las Vegas, Nevada-Arizona, has the highest administrative expense ratio of 16.1%. McAllen-Edinburg-Mission, Texas, has the highest administrative expense ratio (24.5%) among medium-sized markets, and Hattiesburg, Mississippi, reports the highest administrative expense ratio (28.8%) among small markets.

Medical Expense Ratio: The MSA with the highest administrative expense ratio--Hattiesburg, Mississippi--reported the lowest medical expense ratio of any MSA. Average medical expense ratios, calculated by dividing total medical expense by operating revenue, ranged from a low of 70.7% (Hattiesburg, Mississippi) to a high of 127.4% (McAllen-Edinburg-Mission, Texas).

Per-Member, Per-Month Expenses: The size of the metro market does not significantly affect PMPM expenses, as shown in the figure on the following page.

A comparison of the average expense for all medical services from year-end 1998 to year-end 1999 shows an increase in expenses across all size categories. On average, the all medical" expense category has increased between $8 (large markets) and $11 (small markets). Other expense categories showed smaller increases.

The InterStudy Competitive Edge series is published semi-annually by InterStudy Publications, a publications firm specializing in research and reports for market driven health care. Part I, the HMO Directory 10.2, was published in September. Part II, the HMO Industry Report 10.2, was published in October. The complete InterStudy Competitive Edge series (Parts I, II and III) is available for $525 (prepaid). Each book is also sold separately. The HMO Directory and Industry Report are available for $215 each (prepaid) and the Regional Market Analysis is available for $275 (prepaid). If you have any questions or would like to place an order, please call 800-844-3351, or visit our web site at www.interstudypublications.com.        
            
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