1. The Changing Effect of HMO Market Structure: An Analysis of Penetration, Concentration, and Ownership 1994-2005 Academy Health Annual Research Conference June 10, 2008 Yu-Chu Shen Naval Postgraduate School and NBER Vivian Wu and Glenn Melnick University of Southern California and Rand We thank RWJF’s HCFO Initiative for funding this research

2. Background  HMOs have experienced an expansion, competition period throughout the 1990s. It was followed by a contraction, consolidation period that started in the late 1990s.  The early competitive environment also cultivated for-profit ownership interest: enrollment in for-profit plans rose to dominate the HMO sector in the latter 1990s

4. Research objectives  Do different aspects of the HMO market structure (penetration, concentration, and for-profit share) have independent effects on hospital cost and revenue growth?  Do these effects over time (1994- 1999 and 2000-2005)?  Does the magnitude of these effects depend on overall HMO penetration?

5. Data  Hospital data Medicare hospital cost reports (HCRIS) AHA surveys MEDPAR (to construct hospital competition measure)  HMO data Laurence Baker - thanks Interstudy  Other area characteristics Area Resource Files System membership info from Kristin Madison and Sujoy Chakravarty – thanks

6. Sample  All short-term, general, non-federal hospitals located in MSAs in the United States.  Time period covered: 1994-2005

7. Methods Overview (1)  Dependent Variables Log (total operating cost) Log (net patient revenue)  Market Structure Variables Measured at MSA level:  HMO penetration  HMO concentration (HHI)  HMO for-profit share Measured at hospital level:  Hospital concentration (HHI)

8. Methods Overview (2)  Other control variables Hospital characteristics Other Market characteristics  Unit of observation: hospital  Hospital/MSA fixed-effects translog model  Standard errors are adjusted to account for clustering at the MSA level.

9. Three Sets of Analysis  Main Models Estimate whether the three market aspects have independent effects on hospital cost, revenue  Decline vs. Stable HMO Penetration Analysis Separate two potential effects: dis-enrollment vs. product change  Dominant market analysis Investigate relative concentration: divide markets into 4 quadrants based on the relative HHI of HMO and hospital markets  HMO dominant market: high HMO concentration/low hospital concentration

10. Main Regression Results on Operating Cost (Log Transformed) Whole Sample HMO % LOW HMO % HIGH Overall HMO penetration -0.42**-0.52**-0.53** (0.10)(0.19)(0.13) X 2nd period (2000-2005) 0.16**0.34*0.04 (0.05)(0.14)(0.12) HMO HHI 0.030.010.04 (0.03) (0.11) X 2nd period (2000-2005) -0.04-0.02-0.10 (0.03)(0.04)(0.11) HMO for-profit share -0.020.01-0.11* (0.01) (0.05) X 2nd period (2000-2005) 0.00-0.04*0.07 (0.02) (0.05)

11. Decline vs. Stable HMO Markets Analysis on Operating Cost Decline Markets Stable Markets Overall HMO penetration effect -0.34**-0.76** (0.10)(0.14) X 2000-2005 0.19**-0.02 (0.05)(0.14)

12. Dominant Market Analysis on Operating Cost Whole Sample Low HMO Mkt High HMO Mkt HMO dominant markets X HMO penetration -0.16-0.150.22 (0.22)(0.30)(0.35) X 2000-2005 -0.06**-0.08**-0.05 (0.02) (0.04)

13. Summary (1)  Of the three market aspects, HMO penetration has the strongest effect on hospital costs and revenue. Weakening cost and revenue containment effect post-2000 is related to dis-enrollment from HMOs to other products

14. Summary (2)  HMO concentration matters but so does so hospital concentration  For-profit plans are still aggressive in pursuing cost saving strategies relative to not-for-profit plans. The economic magnitude, however, is relatively small.