1. Healthcare Cost Differences in the 1990s: The Influence of Metropolitan Area Marketplace Dynamics Merton D. Finkler Lawrence University August 14, 2003

2. Scope of Study How much variation in healthcare cost levels and growth rates exists across MSAs? Are Medicare payments to providers cost-shifted onto private payers? Do differences in demographic structure help explain differences in cost? Do differences in purchaser and provider market power help explain differences in cost? Sponsor: Cobalt Corporation – Milwaukee, WI

3. Motivation Proprietary reports suggest significant differences in cost across MSAs Local policy makers suggest low Medicare payments drive higher commercial payment Payment for health care features different national and local incidence implications

4. Cost Indicators No comprehensive cost indicator at MSA level – Evidence: proprietary claims data and Medicare Comprehensive indicators exist for Medicare recipients and HMO enrollees Hospital indicators can be compared by MSA Cost of serving FEHBP enrollees can be compared Focus on expenditures –limited attempts to separate P from Q

5. Cost Shifting Focus of Nov 2002 – HCFO Conference Common Claim: Low Medicare pay implies high private pay Morrissey: No shifting unless relative bargaining power change exists or unexploited power exists Cutler – Evidence of cost shift in the 1980s and reduced resource use in the 1990s

6. Who Bears the Burden? Argument parallels the incidence of the property tax (except as tax on labor) National Level – Cost of health care is part of labor compensation, and labor bears most of the burden Local Level – Cost of health care distinguishes MSA’s ability to attract and retain labor; thus, borne locally

7. Data 20 large MSAs in the Central USA –Initial focus on Milwaukee (and 5 close MSAs) –Add 14 other MSAs – Madison,WI + 13 with population greater than 600K and within 750 miles HMO data – InterStudy + U of MN Hospitals – American Hospital Association Demographics – Area Resource File, Census Physicians – Area Resource File FEHBP – Blue Cross Blue Shield Intermediary

8. Key Variables HMO Premium PMPM Non-Governmental Payments to Hospitals per Non-Elder Medicare Payments (A and B) per Enrollee –AAPCC through 1997 Old to Young Working Age Population –Population 45- 64 / Population 20-34 Competitiveness – Herfindahl for hospitals; #of HMOs*HMO Penetration

9. Health Care Costs HMO premium PMPM –2000 range - $123 (DES) to $178 (MSP) –1990 – 2000 growth – 33% (MEM) to 97% (MKE) Non-Governmental Payment per Non-Elder –2000 range - $587 (KC) -$1,165 (IND) –1990 – 2000 growth - 18% (DAY) to 161% (LOU) FEHBP – PPO - $PMPM –2000 range - $114 (DAY) - $228 (MKE)

10. Table 1

11. Medicare Payment Levels Total Medicare Payments – 2000 PEPM –$347 (FTW) to $559 (PIT) ; $464 (USA) –1990 – 2000 Growth: 23% (DET) to 58% (FTW) ; 69% - (USA) Medicare Part A – 2000 –$195 (FTW) to $353 (PIT); $263 (USA) –1990 – 2000 Growth: 24% (DES) to 57% (COL) 66% - USA Medicare Part B – 2000 –$140 (MAD) to $206 (PIT); $200.87 (USA) –1990 – 2000 Growth: 11% (DET) to 96% (MEM) –74% - USA

12. Table 2

13. Metropolitan Demographics Per Capita Income –2000 - $26,877 (FTW) to $32,540 (CHI) $28,738(USA) –1990 – 2000 growth – all but St. Louis (45%-56%) – USA – 50% Old/Young Ratio –2000 – 84% (MEM) to 135% (PIT); 105% (USA) –1990 – 2000 Growth - 23% (MEM) to 81% (MAD) USA – 44%

14. Table 3

15. Medical Care Providers The # of Hospitals declined – 14 out of 20 Commercial Admissions Share 2000 –37% (PIT) to 58% (MAD) Herfindahl Index for Commercial Admits –2000: 416 (CHI) to 4265 (FTW) –Growth 1990 – 2000: -4% (GRA) to 288% (CLE) Physicians per 1,000 residents –2000:1.6 (FTW,GRA) to 3.9 (MAD) –Growth 1990 – 2000: 0% (CIN) to 24% (DAY) –Specialists 2000: 1.0 (FTW) to 2.6 (MAD)

16. Table 4

17. HMO Characteristics HMO Penetration Rate –2000: 11% (MEM) to 61% (MAD) –1990 – 2000 Growth: 50% (MSP) to 705% (IND) HMO Competitiveness –2000:1.03 (OMA) to 7.27 (MAD) –1990 – 2000 Growth: 50% (MSP) to 1992% (IND) Capitation % - Specialist Revenue 2000 –20000% (OMA,DAY) to 67% (MAD)

18. Table 5

19. Table 6 Non-Governmental Payments to Hospitals

20. Implications of Regression Commercial payments per NE increased $51/year HMO competition reduced hospital payment Hospital payments related to MDs/1000 Medicare payments do not influence commercial payments Age structure of population negatively influences commercial payment level Hospital concentration is negatively but insignificantly related to commercial payment Practice style (admissions/1000) matters

21. Table 7 HMO Premium per Member per Month

22. Implications of Regression HMO PMPM rose $6.13 per year PMPM negatively related to hospital concentration level HMO penetration rate positively influences PMPM (possible reverse causality) HMO competitiveness measure does not influence PMPM Medicare payment levels do not affect PMPM Old/Young ratio does not affect PMPM

23. Conclusions Indianapolis, Madison, Milwaukee, and Omaha deliver relatively expensive commercial healthcare Akron, Cincinnati, Grand Rapids, and Pittsburgh deliver relatively cheap commercial healthcare Medicare cost shifting non-existent in the aggregate for either specification Age structure plays a limited role in explaining hospital payments or HMO premiums Relative bargaining power seems to matter for hospital payments

24. Future Directions Increase the number of MSAs analyzed Investigate bargaining power e.g., MD group practices membership Investigate reverse causality (HMO PMPM) through evaluation of enrollee age structure Differentiate effects of hospital concentration: scale and contracting economies vs. bargaining power