Selective Contracting: Managed Care and Hospitals Chapter 9

Selective Contracting Some get contracts, and some do not THE comparative advantage of managed care

Hospitals in the “Golden Age” —Medical Arms Race— Typically competition is thought to drive price toward marginal cost Healthcare markets “different” Widespread insurance Cost-based reimbursement Competition for patients (and their doctors) based upon services, amenities, and quality, not price This implies that greater competition can lead to higher, not lower, prices

Figure 9-1 Hospital Adjusted Average Cost Per Admission, 1982 Dollars Neighboring Hospitals Source: Robinson and Luft (1985), Figure 1

Selective Contracting Purchasers able to exclude some providers from contracts Potentially adds price to the services-amenities-quality competition for patients Implies that in the presence of selective contracting, more providers could result in lower prices

California Legislation MediCal (Medicaid) is allowed to enter into contracts with a subset of hospitals based upon a competitive bidding process. Private insurers are explicitly allowed to contract with subsets of hospitals in any market.

Figure 9-2 Effects of California Selective Contracting Laws Percentage Change in Hospital Costs 1980–1982 1983–1985 Source: data from Melnick and Zwanziger (1988)

Competition and Hospital Prices —California Experience— Blue Cross of California PPO gets a lower price when: o More hospitals in the market o The PPO has a larger share of the hospital’s book of business o The hospital has a smaller share of the PPO’s book of business o Occupancy rates are lower - Own hospital - Neighboring hospital Source: Melnick et al. (1992)

Managed care plans selectively contract: —Studies Outside of California— Do Managed Care Plans Selectively Contract? Managed care plans selectively contract: 13 largest metropolitan statistical areas (MSAs) Typical managed care organization contracted with 44 percent of hospitals in its market Typical hospital had contracts with several managed care organizations Source: Zwanziger and Meirowitz (1998)

On What Bases Are Contracts Awarded? —What’s the Role of Price?— City HMO HMO Type Hospitals in Area Hospitals Used Percent of Hospitals Used 1 A Staff 71 7 10 B IPA 107 46 43 2 C 36 8 22 3 D Network 32 15 47 4 E 33 25 F 53 18 34 Note: IPA = independent practice association Source: data from Feldman et al. (1990) based on mid-1980s data

Who Gets the Contract, and Who Gets the Volume? Those getting the contracts had better “quality” teaching status and services provided costs (as a proxy for prices) did not matter Of those with contracts, price did matter For staff and network HMOs, a 1 percent lower price was associated with a 3 percent increase in volume Quality got the contract, price got the volume Source: Feldman et al. (1990)

Which Hospitals Get Managed Care Volume? 1992–1997 study of Florida hospitals Seek to explain a hospital’s share of the MSA’s HMO revenue as a function of hospital price, service offerings, teaching status, and location Provision of high-tech services, price, and central location were most important, in that order Investor-owned hospitals have greater share of HMO market Teaching hospitals have greater share of HMO market More than price matters Source: Young, Burgess, and Valley (2002)

Which Hospitals Get Managed Care Contracts? 1997 survey of 50 nationally representative HMOs that could have potentially contracted with 447 hospitals for coronary artery bypass graft surgery (CABG) Estimated whether or not a relevant HMO-hospital contract existed Probability of contracting increased with hospital quality and decreased with distance and cost Greater hospital competition decreased the likelihood of a contract Greater HMO competition increased the likelihood of a contract But no data on actual prices and patient volumes Source: Gaskin et al. (2002)

Which Hospitals Get Managed Care Volume? Study of 1995 and 1996 data from 80 large self-insured employers for angioplasty Actual price data Controlling for other factors, prices paid by HMOs were 27 percent lower than those paid by conventional plans PPOs paid prices that were 8.5 percent lower Source: Dor, Koroukian, and Grossman (2004)

Effects of Managed Care on Aggregate Hospital Costs Does higher HMO penetration lead to lower costs? 1985–1993 study of hospital costs in 84 MSAs Little evidence of effect in the late 1980s By 1993, hospital costs 7.8 percent lower than in the absence of HMOs Effects largest in markets with both large HMO market share and more rapid growth Source: Gaskin and Hadley (1997)

Effects of HMO Penetration on Hospital Costs Figure 9-4 Effects of HMO Penetration on Hospital Costs Source: Gaskin and Hadley (1997), Figure 3

Managed Care and Hospital Market Structure Do effects of managed care penetration differ with hospital market structure? 1989 and 1994 Medicare Cost Report data Separate HMO and PPO penetration measures No effect of penetration below 7 percent market share HMO and PPO effects very different Source: Bamezai et al. (1999)

Hospital Competition and Prices Study of 2001 hospital prices paid by managed care firms on behalf of Federal Employees Health Benefit Plan Hospital prices were 18 percent lower in the markets with the most competition compared to those with the least Source: U.S. GAO (2005)

How Big Are Hospital Discounts? Hospitals’ list prices are called “full billed charges” (FBC) Contractual adjustments (CA) include: Negotiated price reductions Implicit price reductions in governmentt rates Charity care Bad debt Discount = CA / FBC

Community Hospital Discounts Aggregate Discount in 2004 Aggregate Discount in 2006 Alabama 69.6 70.6 California 71.8 72.4 Indiana 52.0 56.2 Missouri 59.4 60.4 New Jersey 75.4 76.1 U.S. 62.0 64.2 Source: computed from AHA (2006, 2008) aggregate data

Managed Care and Travel Distance to Hospitals In seeking lower prices, managed care plans will seek contracts with distant providers that offer lower prices Competition among managed care plans will reduce travel distances

California Travel Distance Studies White and Morrisey (1998) 1985 and 1991 data Private payer distance relative to Medicare Weighted average distance and distance for selected DRGs: hernia, appendicitis, heart failure and shock, back and neck surgery, joint procedures, open heart surgery, kidney transplant No evidence that patients traveled farther relative to Medicare patients, and no pattern across DRGs Mobley and Frech (2000) 1984 and 1993 data Examined distance traveled controlling for HMO penetration Evidence supports greater travel distance as HMOs search for lower prices Evidence supports shorter travel distance when HMO penetration is higher Effects cancel out: no net effect on travel distance

Managed Care and Hospital Service Offerings Economies of scale implies specialization in particular services, allowing a hospital to offer a lower price Economies of scope implies that a broader mix of services lowers costs, allowing a hospital to offer a lower price

Managed Care and Hospital Service Offerings The evidence is mixed Increased managed care penetration may be reducing the availability of high-technology services, but the few studies do not agree, and there is little evidence on the effects on new technologies

Managed Care and Hospital Uncompensated Care Essentially, hospitals provide charity care out of “profits” If managed care reduces hospital profits, it should result in less charity care being provided Thorpe, Seiber, and Florence (2001) used 1991–1997 AHA data and concluded that a 10 percentage point increase in managed care penetration was associated with a 2 percentage point reduction in profit margin and a 0.6 percentage point reduction in uncompensated care.

Managed Care and Hospital Quality of Care Surprisingly little evidence of the effects of managed care on hospital quality Sari (2002) examined complication rates in 16 states between 1992 and 1997 Managed care increased quality of care when measured as inappropriate utilization, wound infections, and adverse/iatrogenic complications No statistically significant effects on other measures

Favorable Selection Versus Selective Contracting How much of the difference in costs between managed care plans and conventional plans is attributable to favorable selection into managed care plans, and how much to selective contracting?

“Enrollee Mix, Treatment Intensity and Cost in Competing Indemnity and HMO Plans” Plans offered by Group Insurance Commission of Massachusetts 1 indemnity plan 10 HMOs 1 PPO Offered to state and local government employees under age 65 Examination of data from fiscal years 1994 and 1995 Source: Altman, Cutler, and Zeckhauser (2003)

XPj = qPj [ ∑Ni=1 (dPij (∑Kk=1 tPijk rPijk))] Model XPj = qPj [ ∑Ni=1 (dPij (∑Kk=1 tPijk rPijk))] XPj = average per capita costs in plan P for condition j qPj = incidence of condition j in plan P dPij = fraction of type i people, with condition j, in plan P tPijk = fraction of type i people, with condition j, getting treatment k, in plan P rPijk = average payment in plan P for…i,j,k Source: Altman, Cutler, and Zeckhauser (2003)

Table 9-2 Incidence of Study Conditions Overall Incidence Incidence Adjusted for Demographics Indem. HMOs Ratio Acute myocardial infarction 0.67% 0.30% 2.23* 0.54% 0.40% 1.35* Live birth 6.09 5.05 1.21* 6.80 4.82 1.41* Breast cancer 1.33 0.59 2.25* 1.12 0.72 1.56* Cervical cancer .013 0.13 0.93 0.14 1.08 Colon cancer 0.21 0.08 2.62* 0.16 0.10 1.60* Prostate cancer 0.75 0.26 2.88* 0.52 0.38 1.37* Type I diabetes 1.39 0.55 2.53* 1.18 0.65 1.82* Type II diabetes 2.33 1.07 2.18* 1.76 1.36 1.29* * denotes that the ratio of the indemnity plan rate to the HMOs’ rate is statistically significant at the 95 percent confidence level. Source: Altman, Cutler, and Zeckhauser (2003), Table 4

Table 9-3 Treatment Path Frequency and Payment for Patients with Acute Myocardial Infarction (AMI) Indemnity HMOs Two-year incidence of AMI 0.54% 0.40%* Average cost per episode $29,488 $19,821* Share of treatment path Null 52.0% 53.4% Catheterization 22.3 13.2* PTCA 13.1 20.0* CABG 12.6 13.4 Payments, AMI episodes By path: Null $17,882 $10,573* 25,151 21,939 40,662 21,302* 72,693 51,885* Weighted by treatment path 29,791 19,282* * denotes that the means are significantly different at the 95 percent confidence level. Source: Altman, Cutler, and Zeckhauser (2003), Table 7

Table 9-4 Decomposition of Cost Differences across Plan Types Difference in Indemnity – HMO per Person Claims Cost Percent Due to Mix of Enrollees Percent Due to Treatment Intensity Percent Due to Price or Unobserved Selection Acute myocardial infarction $143 62.1% 1.0% 36.9% Live birth 152 51.8 11.3 36.9 Breast cancer 273 45.2 1.2 53.6 Cervical cancer 9 13.8 14.4 71.8 Colon cancer 56 41.1 5.3 Prostate cancer 100 64.5 -2.5 38.0 Type I diabetes 53 68.4 -- 31.5 Type II diabetes 70 61.4 38.6 Average 107 51.0 5.1 45.1 Source: adapted from Altman, Cutler, and Zeckhauser (2003)

Discussion Questions A colleague has described the difference between health policy and health administration programs as: “In health policy programs, one learns to break up little monopolies. In health administration programs, one learns to create little monopolies.” Evaluate the comment in light of selective contracting.

Discussion Questions So-called any willing provider laws require a managed care plan to accept into its network any provider that is willing to abide by the terms and conditions of the contract. To what extent is a managed care plan able to assure volume under such a law? Is such a law likely to enhance or retard price competition?

Discussion Questions Health savings accounts allow consumers to purchase a high-deductible health insurance plan and pay for the medical expenditures they incur prior to satisfying the deductible with tax-sheltered health savings. Advocates argue that this model gives consumers a strong incentive to shop for lower-priced, high- value medical care. Based upon the analysis of selective contracting, under what conditions would consumers be successful in negotiating lower provider prices?

Discussion Questions Suppose the dentists in a metropolitan area find that managed care plans have successfully negotiated substantially lower prices for dental services in their community. What does the theory of selective contracting and the empirical evidence from hospital markets say about how the dentists might respond?