Managed care market consolidation and universal coverage
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Managed care, market consolidation, and universal coverage. N287E Spring 2006 Professor: Joanne Spetz 3 May 2006. What is Medicare Part D?. Coverage for prescription drugs Annual enrollment periods Pick a specific drug plan Monthly premium Yearly deductible, no more than $250 in 2006.

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Managed care, market consolidation, and universal coverage

N287E Spring 2006

Professor: Joanne Spetz

3 May 2006

What is Medicare Part D?

  • Coverage for prescription drugs

  • Annual enrollment periods

    • Pick a specific drug plan

    • Monthly premium

    • Yearly deductible, no more than $250 in 2006

What does Part D cover?

  • Total drug costs up to $2,250, with copayments

    • Copayments can be “tiered” or vary by type of drug

  • 95% of expenses after out-of-pocket costs exceed $3,600

  • Some plans offer coverage in this gap

What does it cost?

What does it cost?

No REALLY what does it cost?

Case: $1000 in drugs per year, 24 scrips

No REALLY what does it cost?

Case: $3000 in drugs per year, 60 scrips for $2250

Marketing of Part D

  • Pharmacies have their proprietary plans

  • Companies are creating user tools to pick plans

  • Medicare has a fancy web site to help choose plans

  • Medicare is using Part D to market “Medicare Advantage” (managed care)

How would managed care control costs?

  • Why would a provider contract with a HMO/PPO?

    • Guarantee a group of patients

    • Prevent competitor from getting those patients

    • Some benefits of HMO management services (?)

What about managed care’s effects?

  • Major literature reviews by Miller & Luft

    • Equal numbers of better and worse results

    • Worse quality for Medicare HMO enrollees with chronic conditions

  • Financial incentives to doctors have unclear effects on quality (Armour et al., 2001)

More managed care effects

  • Preventive care

    • Better cancer screening (Haas et al., 2002)

  • Mental health

    • Colorado study found no difference after managed care introduced (Cuffel et al., 2002)

Managed care & costs

  • Miller & Luft

    • No clear hospital/physician resource use differences

  • Managed care probably reduced costs through mid-1990s

    • Excess payments negotiated out of system

  • Resurgence of cost inflation in 2000s

Why is there high cost inflation?

  • Administrative costs

  • High quality of care

  • Prices of inputs

  • New technologies

    • Incentive to develop new technologies due to widespread insurance coverage

    • Hospitals compete by purchasing technologies (“medical arms race”)

HMO/PPO bargaining power

  • HMOs/PPOs want providers to think the providers need the insurer’s patients

    • The bigger the insurer, the more the providers need to contract with it

  • Insurers have merged to gain market power

  • Insurers have become for-profit companies

Provider bargaining power

  • Physicians developed groups

    • Management of contracts

    • Taking on risk in capitated contracts

  • Hospitals merged

    • Economies of scale

    • Bargaining power

  • Vertical integration

    • Care systems

Balance of power

  • Provider bargaining power

    • Through the 1980s, HMOs/PPOs had more power

      • Prices and overall costs of health care did not grow much

    • In the late 1990s, providers gained power

      • Patient revolt against management of care

      • Mergers of providers = bargaining power

      • Providers do not want financial risk

Issues with health care systems

  • Corporatization versus independence

    • Who makes the decisions?

  • Profit status

    • What benefits should nonprofits provide?

  • Anti-trust law

    • Will mergers reduce competition?

Specifically, we care about…

  • Prices of services

  • Viability of providers (efficiency, access)

  • Charity services

    • Quantity of charity

    • Mix of community benefits

  • Quality of care for patients

  • Employment levels and job quality

  • Availability of provider services (consolidation, closure)

We assume nonprofits provide more community benefits

  • Nonprofit hospitals have advantages

    • Tax-exempt

    • Issuance of tax-exempt bonds

  • In exchange for tax advantage, they are supposed to provide benefits to the community

  • Public goods will be provided in insufficient quantities in competitive markets

Nonprofit hospital ownership is still the norm

  • In 1997, 71% of hospitals were nonprofit

    • 77% of hospital beds were nonprofit

What is a community benefit?

  • Charity care

  • Services that produce an externality

    • Medical care for low-income persons

    • Losses on medical research

    • Unbilled public-good services (screening, classes)

    • Taxes

    • Medicaid/Medicare shortfalls?

    • Price discounts to privately insured patients?

    • Losses on medical education?

How much benefit should be provided?

  • Two approaches:

    • Value of tax exemption

    • Value of profits received by for-profit hospitals, plus the benefits provided by for-profit hospitals

Nicholson et al. (2000) method

  • Taxes, uncompensated care

  • 3 largest for-profit systems, 1996-1998

    • $1.2 billion per year average taxes

    • $1.2 billion per year average uncomp care

    • $1 billion per year average profit

  • If these systems kept their tax & uncomp care money, they would profit $3.4 billion

    • Return on equity would be 30.1%

    • Return on assets would be 10.3%

How much should be provided?

  • Apply the return on equity and assets to nonprofit hospitals

    • $9.1 to $13.2 million average per hospital

  • Average uncompensated costs are $3.3 million average

    • 25-36% of expected community spending

Conversions have been a big issue

  • Since 1980s, people think there have been many not-for-profit to for-profit conversions

  • Concerns:

    • For-profit firms take “charitable assets” from the public

    • For-profit firms do not continue to provide charity care

    • For-profit firms do not serve as good agents for patients (quality of care)

What factors motivate conversions?

  • Reduced income for nonprofits

    • Philanthropy to health care has declined

    • Reduced reimbursements

    • Reduced government grants

  • Reduced borrowing ability

    • Downgraded bond ratings

  • Need to grow and expand

    • Increased expenses

    • Competition from for-profit firms

What types of firms are converting?

  • Robinson 2000

    • Growth and mature industries convert because they need to grow

    • Declining industries do not convert because there is not enough profit opportunity

Conversions in California have produced huge foundations

  • HealthNet conversion (1992)

    • $300 million + 80 percent of the equity

    • Current assets of $1 billion

  • Blue Cross conversion (1996)

    • California Endowment ($200 million in grants in 2000)

    • California HealthCare Foundation

      • Holds stock in WellPoint, other assets - $2 trillion

      • 80% of stock proceeds go to the Endowment ($1.4 trillion)

      • 20% are used for research ($15 million a year)

Hospital mergers have increased

  • Number of mergers in US has been large

    • 1994 – 100 mergers & acquisitions

    • 1996 – 165 mergers & acquisitions

    • 1997 – 184 mergers & acquisitions

  • Publicly traded companies were less than 25% of transactions in 1997

How does a merger occur?

  • A nonprofit board decides to seek an affiliation

  • The board articulates its goals

    • Mission, community, quality, charity, access

    • Contracts, physicians

    • Almost never “financial returns”

  • Board prepares a RFP


  • Merge with a neighbor

    • Better market power, streamlined management

    • Hard to implement due to historical baggage

  • Merge into a system

    • Central management support

    • Loss of local control

  • Acquisition by a for-profit

    • Capital from the sale can extend the mission

    • Conversion can enable hospital to survive

  • Joint venture with a for-profit

Courts have allowed most mergers

  • 1996 Grand Rapids case

    • 2 largest hospitals were allowed to merge

    • New entity would have 73% of the market

    • Judge said nonprofit hospitals were not likely to raise prices even if they have monopoly power

      • Paper published by William Lynk in 1995 was cited in decision (1989 data)

      • Theory: nonprofit Board of Directors acts as a cooperative of public citizens

Systems, profit status, and prices

  • Hospital mergers could increase or decrease prices

    • More efficient production  lower prices

    • Market power  higher prices

  • The overall effect could depend on profit status

    • Nonprofits might be less willing to exercise market power because their objective is not profit maximization

Some evidence disputes Lynk’s theory

  • Melnick, Keeler, & Zwanziger:

    • Managed care puts financial pressure on hospitals, including nonprofits

    • Nonprofits have to be more aggressive financially to meet their other objectives

       Thus, nonprofits are more likely to raise prices as managed care grows

Other studies find lower prices

  • Connor et al., 1997, “Which types of hospital mergers save consumers money?”

    • 3500 hospitals, 1986-1994

    • Examined cost and price changes for each group

    • Lower cost and price growth of merging hospitals versus nonmerging hospitals (7.2 and 7.1 percent points)

  • Connor et al., 1998, “The effects of market concentration and horizontal mergers on hospital costs and prices.”

    • Multivariate analysis with same data confirms findings

Do systems change staffing?

  • Spetz, Seago, and Mitchell (2001)

    • California data, 1986-1998

    • Staffing of RNs, LVNs, aides, management/supervision, clerical/admin

    • Fixed effects regressions

    • Results

      • Systems reduce RN staffing

      • Systems increase aide staffing

      • Systems reduce management/supervision

Universal coverage

Problems and proposals

New data!

  • Study published by the Commonwealth Fund

Uninsured Rates High Among Adults with Low and Moderate Incomes, 2001–2005

Percent of adults ages 19–64
































Low income

Moderate income

Middle income

High income

Note: Income refers to annual income. In 2001 and 2003, low income is <$20,000, moderate income

is $20,000–$34,999, middle income is $35,000–$59,999, and high income is $60,000 or more. In 2005, low income is <$20,000, moderate income is $20,000–$39,999, middle income is $40,000–$59,999,

and high income is $60,000 or more.

Source: The Commonwealth Fund Biennial Health Insurance Surveys (2001, 2003, and 2005).

Individual and Family Work Status, Adults with Any Time Uninsured

Adult Work Status

Family Work Status

No worker in family


Not currently employed


At least


full-time worker





part-time worker(s)




Note: Percentages may not sum to 100% because of rounding.

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

More than Three of Five Working Adults with Any Time Uninsured Are Employed in Firms with Less than 100 Employees

Don’t know/ refused


Self-employed/1 employee


500+ employees


2–19 employees


100–499 employees


20–99 employees


Employed adults with any time uninsured

ages 19–64, 30.4 million

Note: Percentages may not sum to 100% because of rounding.

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Length of Time Uninsured, Adults Ages 19–64

Insured now,

time uninsured in past year

16.2 million

Uninsured at the

time of the survey

31.6 million

Don’t know/refused


Don’t know/refused


3 months or less


One year or more


4 to 11 months


3 months or less


One year or more


4 to 11 months


Note: Percentages may not sum to 100% because of rounding.

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Lacking Health Insurance for Any PeriodThreatens Access to Care

Percent of adults ages 19–64 reporting the following problems in the past year because of cost:

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Adults Without Insurance Are Less Likely to Be Able to Manage Chronic Conditions

Percent of adults 19–64 with at least one chronic condition*

*Hypertension, high blood pressure, or stroke; heart attack or heart disease; diabetes; asthma, emphysema, or lung disease.

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Adults Without Insurance Are Less Likely to Get Preventive Screening Tests

Percent of adults

Note: Pap test in past year for females ages 19-29, past three years age 30+; colon cancer screening in past five years for adults age 50+; and mammogram in past two years for females age 50+.

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Only Two of Five Americans Are Very Satisfied with the Quality of Health Care

Percent of adults ages 19–64 who are very satisfied

Source: The Commonwealth Fund Biennial Health Insurance Survey (2005).

Why do we think we need to reform our health system?

  • High number of uninsured, underinsured

    • Children are uninsured

    • Mental health and substance abuse often not covered

    • Some people are refused coverage

    • Long term care

Why do we think we need to reform our health system?

  • Current system has wrong focus

    • Prevention, not treatment

    • Quality of care information is not used

    • Experimental treatments don’t have good coverage or guidelines

Why do we think we need to change our health system?

  • Providers have wrong incentives

    • Overutilization

    • Profit motives

  • Costs are high

    • Administrative costs are double that of many other countries

    • Malpractice cases

What do we like about our health system?

  • Numerous surveys report:

    • High quality care

    • Choice of physicians, hospitals

    • Excellent training of providers

    • Excellent technology

    • Wellness programs

    • Community health centers for the poor

What must happen for reform to occur?

  • We must buy into the idea of equality in health care

  • We need to approach our national well-being collectively

  • We need more trust in government

  • We must acknowledge that we have scarce resources so we can allocate them well

What reform ideas should we consider?

  • Managed competition/play-or-pay

  • Single payer

  • Vouchers

What is managed competition?

  • Alain Enthoven, 25 years ago

  • Basic premise: price competition is good

  • Goal of managed competition:

    • Create competing groups of medical providers

      • Have these groups compete on price

    • Price is the premium for comprehensive services

Why should the price be comprehensive?

  • A single price per person per year makes the decision easy

  • No confusion about copays, deductibles

  • Comprehensive means the ill don’t need to try to think about each service they receive

How does managed competition work?

  • Sponsors will provide group health insurance

    • Employers

    • Government programs

    • Union health trusts

    • Community purchasing cooperatives

What do sponsors do?

  • Establish rules of equity

  • Subsidize access to the lowest-price plan

  • Ensure that coverage is continuous

  • Require community rating

  • Select plans to offer

  • Manage the enrollment process

What do sponsors do?

  • Manage risk selection

    • Ensure plans don’t drop people

    • Standard benefits reduce adverse selection

    • Risk-adjust premiums (to some extent)

  • Create price-elastic demand

    • Sponsor subsidizes lowest-cost plan fully

    • Standard package of benefits

    • Provide quality information

    • Give individuals choice of plans

How large are the sponsors?

  • Large firms can be sponsors

  • Government could be a sponsor

  • Small firms need to purchase together

    • Health Insurance Purchasing Cooperatives

      • HIPCs can’t exclude those with bad health risks

      • HIPCs bear no risk

      • HIPCs could sponsor government enrollees

Universal coverage in managed competition

  • Mandate insurance coverage by employers

    • Can specify for full-time employees or all employees

  • Tax firms that do not provide coverage

  • You could use a payroll tax for everyone, and then everyone purchases through a HIPC

  • Limit tax-free employer contributions

What problems are there with managed competition?

  • Rural areas and small cities

    • 1993 study by Rick Kronick says only mid-size and large cities can support this

  • How many firms are needed to sustain competition?

    • Collusion risk

    • If there are too many, no leverage with providers

  • Quality of care

  • How to risk adjust the premiums?

  • Insurers still might engage in quality competition, medical arms race

The US system has moved toward managed competition

  • Clinton plan loosely embraced managed competition

  • Major companies and groups are using the idea

    • CalPERS

    • PBGH

    • California HIPC

    • UC Benefits

  • Uninsurance rate is rising

What about universal coverage?

  • Provide individual coverage

    • Must be compulsory

    • Must be subsidized for the poor

  • Reality: all health care financing comes from households

    • This can be mediated through government or business

What about a single payer system?

  • This is the Canadian approach

  • About 40-45% of US health spending is “single payer”

    • Medicare

    • Medicaid

Benefits of a single payer system

  • Consistency

    • Incentives

    • Management

    • Information

  • Administration (?)

  • Social decisions can be made explicitly

Drawbacks of single payer systems

  • Bureaucracy

  • Lack of choice

  • Quality

  • Technological stagnation

Some countries have hybrid systems

  • Example: Australia

    • Government catastrophic insurance, sponsored hospitals

    • Private insurance

      • More extensive coverage

      • Better quality facilities

  • Example: Medicare

Single payer systems ration

  • Americans do not like rationing

  • In reality, rationing occurs now

    • Rationing is not explicit

    • Based on income, ability to pay

    • Gatekeepers

  • Rationing needs a safety valve

    • In Britain, some have additional private insurance

What about voucher systems?

  • Give people a voucher for a specific value health plan

    • Or, a specific benefit package

  • How do you ensure supply of insurance will be adequate for the voucher?

    • Mandate a benefit level, and a price for that minimum level

    • Mandate community rating

    • Offer government health plan as a fall-back choice

Benefits of voucher systems

  • Individual choice of plan

  • Price sensitivity

  • Explicit subsidization of voucher

    • Can give the poor a higher-value voucher than the rich

    • Can tax differentially and give everyone the same voucher

Drawbacks of voucher systems

  • Individual choice

    • Adverse selection

    • Can fail to enroll in a plan

  • Medical arms race can persist

  • Pricing of voucher is tricky

Should the US move to universal coverage?

  • Is the current safety net inadequate?

  • Which form of coverage?

    • Single payer?

    • Employer mandate?

    • Vouchers?

  • Will Americans accept the mandate?

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