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? PlanMonthly premium Annual deduct CopayGap coverage Formulary Humana Standard $5.41$25025%No100% Humana Enhancd $11.25$0$7-60, 25% No100% Humana Complete $50.91$0$7-60, 25% Generic & Brand 100%

What does it cost? PlanMonthly premium Annual deduct CopayGap coverage Formulary Blue Cross Gold $35.29$0$10- 60, 30% Generic only 99% Aetna Plus $36.94$0$7-35Generic only 88% Health Net $17.65$0$5-35, 25% No86%

No REALLY what does it cost? PlanAnnual premium Copay+ deduct Gap payTotal Humana stand.$64.92$437.50$0$ Humana enhan$135.00$250.00$0$ Humana compl$610.92$250.00$0$ Blue Cross Gold$423.48$300.00$0$ Aetna Plus$443.28$504.00$0$ Health Net$211.80$250.00$0$ Case: $1000 in drugs per year, 24 scrips

No REALLY what does it cost? PlanAnnual premium Copay+ deduct Gap payTotal Humana stand.$64.92$ $ Humana enhan$135.00$562.50$750.00$ Humana compl$610.92$562.50$0$ Blue Cross Gold$423.48$675.00$0$ Aetna Plus$443.28$ $0$ Health Net$211.80$562.50$750.00$ 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 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)

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 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

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, $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

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

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 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

Other studies find lower prices Connor et al., 1997, Which types of hospital mergers save consumers money? 3500 hospitals, 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, 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 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) TotalLow incomeModerate income Middle income High income

Individual and Family Work Status, Adults with Any Time Uninsured Family Work Status Adult Work Status At least one full-time worker 67% Only part-time worker(s) 11% Full-time 49% Part-time 15% Note: Percentages may not sum to 100% because of rounding. Source: The Commonwealth Fund Biennial Health Insurance Survey (2005). No worker in family 21% Not currently employed 36%

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% 2 – 19 employees 31% 20 – 99 employees 22% 100 – 499 employees 11% Note: Percentages may not sum to 100% because of rounding. Source: The Commonwealth Fund Biennial Health Insurance Survey (2005). Dont know/ refused 4% Employed adults with any time uninsured ages 19–64, 30.4 million 500+ employees 21%

Length of Time Uninsured, Adults Ages 19–64 Uninsured at the time of the survey 31.6 million Insured now, time uninsured in past year 16.2 million One year or more 82% 4 to 11 months 11% Dont know/ refused 2% One year or more 26% 4 to 11 months 39% Dont know/ refused 1% Note: Percentages may not sum to 100% because of rounding. Source: The Commonwealth Fund Biennial Health Insurance Survey (2005). 3 months or less 6% 3 months or less 34%

Lacking Health Insurance for Any Period Threatens Access to Care Source: The Commonwealth Fund Biennial Health Insurance Survey (2005). Percent of adults ages 19–64 reporting the following problems in the past year because of cost:

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 Source: The Commonwealth Fund Biennial Health Insurance Survey (2005). Percent of adults ages 19–64 who are very satisfied

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 dont 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 dont 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 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

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

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?