Managed care, market consolidation, and universal coverage

1
Managed care, market consolidation, and universal
coverage

• N287E Spring 2006
• Professor Joanne Spetz
• 3 May 2006

2
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

3
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

4
What does it cost?
Plan Monthly premium Annual deduct Copay Gap coverage Formulary
Humana Standard 5.41 250 25 No 100
Humana Enhancd 11.25 0 7-60, 25 No 100
Humana Complete 50.91 0 7-60, 25 Generic Brand 100
5
What does it cost?
Plan Monthly premium Annual deduct Copay Gap coverage Formulary
Blue Cross Gold 35.29 0 10-60, 30 Generic only 99
Aetna Plus 36.94 0 7-35 Generic only 88
Health Net 17.65 0 5-35, 25 No 86
6
No REALLY what does it cost?
Case 1000 in drugs per year, 24 scrips
Plan Annual premium Copay deduct Gap pay Total
Humana stand. 64.92 437.50 0 502.42
Humana enhan 135.00 250.00 0 335.00
Humana compl 610.92 250.00 0 860.92
Blue Cross Gold 423.48 300.00 0 723.48
Aetna Plus 443.28 504.00 0 947.28
Health Net 211.80 250.00 0 461.80
7
No REALLY what does it cost?
Case 3000 in drugs per year, 60 scrips for 2250
Plan Annual premium Copay deduct Gap pay Total
Humana stand. 64.92 750.00 750.00 1564.92
Humana enhan 135.00 562.50 750.00 1447.50
Humana compl 610.92 562.50 0 1173.42
Blue Cross Gold 423.48 675.00 0 1098.48
Aetna Plus 443.28 1260.00 0 1703.28
Health Net 211.80 562.50 750.00 1524.30
8
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)

9
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 (?)

10
What about managed cares 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)

11
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)

12
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

13
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)

14
HMO/PPO bargaining power

• HMOs/PPOs want providers to think the providers
  need the insurers 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

15
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

16
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

17
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?

18
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)

19
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

20
Nonprofit hospital ownership is still the norm

• In 1997, 71 of hospitals were nonprofit
• 77 of hospital beds were nonprofit

21
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?

22
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

23
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

24
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

25
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)

26
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

27
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

28
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)

29
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

30
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

31
Strategies

• 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

32
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

33
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

34
Some evidence disputes Lynks 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

35
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

36
Do systems change staffing?

• Spetz, Seago, and Mitchell (2001)
• California data, 1986-1998
• Staffing of RNs, LVNs, aides, management/supervisi
  on, clerical/admin
• Fixed effects regressions
• Results
• Systems reduce RN staffing
• Systems increase aide staffing
• Systems reduce management/supervision

37
Universal coverage

• Problems and proposals

38
New data!

• Study published by the Commonwealth Fund

39
Uninsured Rates High Among Adults with Low and
Moderate Incomes, 20012005
Percent of adults ages 1964
53
52
49
41
35
28
28
26
24
18
16
13
7
4
4
2001
2003
2005
2001
2003
2005
2001
2003
2005
2001
2003
2005
2001
2003
2005
Total
Low income
Moderate income
Middle income
High income
Note Income refers to annual income. In 2001 and
2003, low income is lt20,000, moderate income is
20,00034,999, middle income is
35,00059,999, and high income is 60,000 or
more. In 2005, low income is lt20,000, moderate
income is 20,00039,999, middle income is
40,00059,999, and high income is 60,000 or
more. Source The Commonwealth Fund Biennial
Health Insurance Surveys (2001, 2003, and 2005).
40
Individual and Family Work Status, Adults with
Any Time Uninsured
Family Work Status
Adult Work Status
No worker in family 21
Not currently employed 36
At least one full-time worker 67
Full-time 49
Only part-time worker(s) 11
Part-time 15
Note Percentages may not sum to 100 because of
rounding. Source The Commonwealth Fund Biennial
Health Insurance Survey (2005).
41
More than Three of Five Working Adults with Any
Time Uninsured Are Employed in Firms with Less
than 100 Employees
Self-employed/1 employee 10
Dont know/ refused 4
500 employees 21
219 employees 31
100499 employees 11
2099 employees 22
Employed adults with any time uninsured ages
1964, 30.4 million
Note Percentages may not sum to 100 because of
rounding. Source The Commonwealth Fund Biennial
Health Insurance Survey (2005).
42
Length of Time Uninsured, Adults Ages 1964
Insured now, time uninsured in past year 16.2
million
Uninsured at the time of the survey 31.6 million
Dont know/refused 2
Dont know/refused 1
3 months or less 6
4 to 11 months 11
One year or more 26
3 months or less 34
One year or more 82
4 to 11 months 39
Note Percentages may not sum to 100 because of
rounding. Source The Commonwealth Fund Biennial
Health Insurance Survey (2005).
43
Lacking Health Insurance for Any PeriodThreatens
Access to Care
Percent of adults ages 1964 reporting the
following problems in the past year because of
cost
Source The Commonwealth Fund Biennial Health
Insurance Survey (2005).
44
Adults Without Insurance Are Less Likely to Be
Able to Manage Chronic Conditions
Percent of adults 1964 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).
45
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).
46
Only Two of Five Americans Are Very Satisfied
with the Quality of Health Care
Percent of adults ages 1964 who are very
satisfied
Source The Commonwealth Fund Biennial Health
Insurance Survey (2005).
47
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

48
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 dont have good coverage
  or guidelines

49
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

50
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

51
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

52
What reform ideas should we consider?

• Managed competition/play-or-pay
• Single payer
• Vouchers

53
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

54
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 dont need to try to
  think about each service they receive

55
How does managed competition work?

• Sponsors will provide group health insurance
• Employers
• Government programs
• Union health trusts
• Community purchasing cooperatives

56
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

57
What do sponsors do?

• Manage risk selection
• Ensure plans dont 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

58
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 cant exclude those with bad health risks
• HIPCs bear no risk
• HIPCs could sponsor government enrollees

59
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

60
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

61
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

62
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

63
What about a single payer system?

• This is the Canadian approach
• About 40-45 of US health spending is single
  payer
• Medicare
• Medicaid

64
Benefits of a single payer system

• Consistency
• Incentives
• Management
• Information
• Administration (?)
• Social decisions can be made explicitly

65
Drawbacks of single payer systems

• Bureaucracy
• Lack of choice
• Quality
• Technological stagnation

66
Some countries have hybrid systems

• Example Australia
• Government catastrophic insurance, sponsored
  hospitals
• Private insurance
• More extensive coverage
• Better quality facilities
• Example Medicare

67
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

68
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

69
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

70
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

71
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?