Is the impact of managed care on hospital prices decreasing?
Introduction
For the better part of the 1990s, growth in managed care enrollments was accompanied by marked slowdown in the rate of growth of private health care spending. By the late 1990s and early 2000s, however, this period of relative calm had ended,1 raising questions about the ability of managed care organizations (MCOs) to contain costs.2 A key to cost containment may have been selective contracting, whereby MCOs extracted price discounts from providers.3 A necessary condition for this strategy to succeed is consumers’ willingness to accept restrictions on choice through the use of financial incentives by MCOs to “steer” them to “preferred providers.” A second necessary condition is competition among medical providers; the ability to “steer” patients serves little function if there is only a single provider in the market.
A range of studies confirm that by the early 1990s, selective contracting had, perhaps for the first time, generated a positive correlation between price and concentration in hospital markets.4 Yet recent marketplace changes – in particular the growing reluctance of patients to accept limitations on access – may be working to once again sever this relationship. In this paper, we test whether, in fact, the price/concentration relationship has begun to weaken, by documenting trends in the price/concentration relationship in California and Florida for the period 1990–2003.
Section 2 presents our conceptual framework. Section 3 discusses methods and data. We use data for inpatient services at urban hospitals in California and Florida for selected years between 1990 and 2003 and address the potential endogeneity of measures of market concentration. Section 4 presents our results and Section 5 discusses their implications. Consistent with the overall cost trends, we find an increasingly positive price/concentration relationship through the 1990s. But between 2001 and 2003, our findings suggest this pattern of growth came to a halt and possibly reversed, although we are cautious about concluding a major shift has occurred.
Section snippets
Conceptual framework
We draw on the literature on the industrial organization of health care to provide a conceptual framework for assessing the impact of managed care.5 In this literature, hospitals in urban markets are hypothesized to operate in an environment of monopolistic competition. The demand curve for care by privately insured patients (either expressed on their own, through the choices of referring physicians, or as intermediated by managed
Data
We use patient level discharge data and hospital financial data obtained from California Office of State Health Planning and Development (OSHPD) and Florida State Center for Health Statistics (SCHS) data files for 1990, 1995, 1999, 2001 and 2003. We select California and Florida for study because both states have a long history of managed care and consistent price and volume data are available over long periods.12
Measuring PRICE
For the purposes of this study, we would like to measure the net discounted price paid by private insurers to a hospital for a standardized basket of routine services (i.e. the net revenue a hospital receives for a standardized basket of services after deducting any price discounts from the hospital's official “list” price or “charges” for these services). Following Keeler et al. (1999), we estimate PRICEijt as the weighted average of the net revenues received by hospital in period t for
Results
Table 1 reports variable means and standard errors separately for California and Florida for our dependent variable PRICE, our measures of CONCENTRATION (HHISYS and ), our control variables for hospital characteristics (LARGE HOSPITAL, TECH INDEX, CASE-MIX, % MEDICARE and % MEDICAID), our control for the SENSIVITY of shopping (HIGH HMO), and our zip code level control variables. The unit of observation is an individual hospital and the sample means reported in the table are unweighted
Discussion
Our results uniformly suggest that the hospital price/concentration relationship grew stronger during the 1990s, consistent with an increase in the price sensitivity of shopping due to managed care. Our findings also suggest that at a minimum, managed care experienced a loss of momentum after 2001. OLS estimates using HHI measures based on actual patient flows are consistent with a plateau in the price–concentration relationship, while our IV results indicate a decline after 2001.
These findings
Acknowledgements
This research has been supported by Grant No. 051830 from the Robert Wood Johnson Foundation Changes in Health Care Financing and Organization (HCFO) Initiative. We would like to thank Kristin Madison and Sujoy Chakravarty for providing data on hospital system membership. We would also like to thank two anonymous referees and participants at presentations at meetings of the American Economics Association and the American Society of Health Economists for comments.
References (35)
- et al.
Competition and pricing by nonprofit hospitals: a reassessment of Lynk's analysis
Journal of Health Economics
(1999) - et al.
Determinants of managed care penetration
Journal of Health Economics
(1998) - et al.
The changing effects of competition on non-profit and for-profit hospital pricing behavior
Journal of Health Economics
(1999) - et al.
The impact of hospital market-structure on patient volume, average length of stay, and the cost of care
Journal of Health Economics
(1985) - et al.
Measuring levels of technology in hospitals
The Quarterly Review of Economics and Finance
(2004) - et al.
The effects of hospital competition and the Medicare PPS Program on hospital behavior in California
Journal of Health Economics
(1988) 1994–1995 Managed Care Overview
(1995)- et al.
How much should we trust difference-in-differences estimates
Quarterly Journal of Econometrics
(2004) - California Health Care Foundation, 2005. California Employer Health Benefits...
- et al.
Competition and market power in option demand markets
RAND Journal of Economics
(2003)
National health spending in 2005: the slowdown continues
Health Affairs
How does managed care do it?
RAND Journal of Economics
Hospitals’ negotiating leverage with health plans: how and why has it changed?
Health Services Research
The industrial organization of health care markets
The effect of injecting price-competition into the hospital market—the case of preferred provider organizations
Inquiry
Price and concentration in hospital markets: the switch from patient-driven to payor-driven competition
Journal Law & Economics
Cited by (28)
Reproductive health care in Catholic-owned hospitals
2019, Journal of Health EconomicsCitation Excerpt :The last hospital-merger wave in the 1990s led to substantial price increases without improvements in care quality (Gaynor and Town, 2012; Encinosa and Bernard, 2005; Dafny, 2009). Economic research using data from 1990 to 2003 has shown that hospital mergers increase both the market concentration and the price of hospital care (Dranove et al., 2008; Wu, 2009). Mergers in concentrated markets lead to significant price increases (Dafny, 2009; Tenn, 2011; Town et al., 2006).
Health insurer market power and primary care consolidation
2014, Economics LettersCitation Excerpt :Through negotiations and contracts with preferred hospitals, insurers with managed care arrangements were able negotiate lower hospital prices (Morrisey, 2001; Wu, 2009). Hospitals found that they could counter-act insurer market power with fewer competing hospitals (Melnick et al., 1992; Dranove et al., 2008) resulting in a wave of hospital consolidation (Vogt and Town, 2006).1 While the early years of managed care focused on the interaction of insurers and hospitals, in the past decade, insurer consolidation has become a concern of physicians who exert substantially less negotiating leverage over prices than hospitals, often placing them on the losing end of negotiations (Foreman, 2003).
An exploration of management practices in hospitals
2014, HealthcareCitation Excerpt :HHIs are indices of the competitiveness of the market and were calculated based on a hospital choice model. Following Dranove and colleagues,14 we used HHIs based on predicted zip code-level patient flows instead of actual patient flows, because predicted flows more closely approximated a measure of market pressure, rather than the patients actually referred to the hospital. Patient flows were estimated using a grouped McFadden choice model, with choice of hospital modeled as a function of hospital level variables interacted with the drive time between zip code centroids and all hospitals in the market, patient age range, and per capita income for the patient′s zip code.14,15
Competition in Health Care Markets
2011, Handbook of Health EconomicsEmployer-provided health insurance and hospital mergers
2013, Health Economics, Policy and Law