Managed care, market consolidation, and universal coverage N287E Spring 2006 Professor: Joanne Spetz 3 May 2006.

• Slide 1

Managed care, market consolidation, and universal coverage N287E Spring 2006 Professor: Joanne Spetz 3 May 2006 Slide 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 Slide 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 Slide 4 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% Slide 5 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% Slide 6 No REALLY what does it cost? PlanAnnual premium Copay+ deduct Gap payTotal 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 Case: $1000 in drugs per year, 24 scrips Slide 7 No REALLY what does it cost? PlanAnnual premium Copay+ deduct Gap payTotal Humana stand.$64.92$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 Case: $3000 in drugs per year, 60 scrips for $2250 Slide 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) Slide 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 (?) Slide 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) Slide 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) Slide 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 Slide 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) Slide 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 Slide 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 Slide 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 Slide 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? Slide 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) Slide 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 Slide 20 Nonprofit hospital ownership is still the norm In 1997, 71% of hospitals were nonprofit 77% of hospital beds were nonprofit Slide 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? Slide 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 Slide 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% Slide 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 Slide 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) Slide 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 Slide 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 Slide 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) Slide 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 Slide 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 Slide 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 Slide 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 Slide 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 Slide 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 Slide 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 Slide 36 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 Slide 37 Universal coverage Problems and proposals Slide 38 New data! Study published by the Commonwealth Fund Slide 39 Uninsured Rates High Among Adults with Low and Moderate Incomes, 20012005 Percent of adults ages 1964 Note: Income refers to annual income. In 2001 and 2003, low income is