The effect of selective contracting on hospital costs and revenues.

OBJECTIVE: To examine the effects of selective contracting on California hospital costs and revenues over the 1983-1997 period. DATA SOURCES/STUDY SETTING: Annual disclosure data and discharge data sets for 421 California general acute care hospitals from 1980 to 1997. ANALYSIS: Using measures of competition developed from patient-level discharge data, and financial and utilization measures from the disclosure data, we estimated a fixed effect multivariate regression model of hospital costs and revenues. FINDINGS: We found that hospitals in more competitive areas had a substantially lower rate of increase in both costs and revenues over this extended period of time. For-profit hospitals lowered their costs and revenues after selective contracting was initiated relative to the cost and revenue levels of not-for-profit hospitals. The Medicare PPS has also led high-cost hospitals to lower their costs. CONCLUSIONS: The more competitive the hospital's market, the greater degree to which it has had to lower the rate of increase in costs. A similar pattern exists with regard to hospital revenues. Both of these trends appear to result from the growth of selective contracting. It remains unclear to what extent these cost reductions were the result of increased efficiency or of reduced quality. Since hospital cost growth is sensitive to the competitiveness of its market, antitrust enforcement is a critical element in any cost containment policy.

Can cost shifting continue in a price competitive environment?

Both Medicare and Medicaid are reducing payments to hospitals, and there is widespread concern that hospitals may respond by increasing prices to privately insured patients. Theoretical models of hospital behaviour have ambiguous predictions as to whether, and under what circumstances, hospitals will shift costs to private payers. This paper extends previous theoretical models and then tests empirically using data from California for the 1983-1991 period, a time of increasingly intense price competition. Hospitals did increase their prices to private payers in response to reductions in Medicare rates; they had far smaller and generally insignificant responses to changes in Medicaid reimbursement. Hospital ownership and the competitiveness of the hospital market both affected this behaviour, but there was no significant change over time. The results suggest the need to broaden our models of hospital behaviour to 'embed' them in their local markets.

Price competition and hospital cost growth in the United States (1989-1994).

In recent years, most health care markets in the United States (US) have experienced rapid penetration by health maintenance organizations (HMOs) and preferred provider organizations (PPOs). During this same period, the US has also experienced slowing health care costs. Using a national database, we demonstrate that HMOs and PPOs have significantly restrained cost growth among hospitals located in competitive hospital markets, but not so in the case of hospitals located in relatively concentrated markets. In relative terms, we estimate that HMOs have contained cost growth more effectively than PPOs.

A profile of uncompensated hospital care, 1983-1995.

This DataWatch examines national trends in the provision of uncompensated hospital care. It shows that rapid growth from 1983-1986 was followed by modest growth through 1990, a time during which managed care was becoming established in some regions. There was then another spurt in uncompensated care from 1991-1993, a period that corresponds to sizable increases in disproportionate-share payments. Uncompensated care growth again slowed through 1995. The increase in uncompensated care levels after 1988 appears not to have kept pace with growth in hospital expenses or the number of uninsured. However, the trend data do not suggest a large-scale reduction of effort.

Differentiation and specialization in the California hospital industry 1983 to 1988.

This article examines changes in the service mix of California hospitals as part of their response to shifts in the system of reimbursement between 1983 and 1988. The Hospital Discharge Data Set and the Annual Hospital Disclosure Report produced by California Office of Statewide Health Planning and Development were used in this study. Characteristics of inpatient hospital services in California before and after the introduction of new reimbursement mechanisms (including the Medicare Prospective Payment System [PPS] and the growth of selective contracting plans) were compared. The factors that influence two measures of hospital service mix, one focusing on specialization and the other on differentiation, were studied. The factors included hospital characteristics and changes in hospital reimbursement. Variables describing a hospital's service mix and the level in its market were constructed from data in the annual discharge abstracts. Data pertaining to average hospital costs and reimbursements under the Medicare PPS were drawn from a file containing a 20% sample of hospital stay records for the year of PPS. Other hospital data, such as ownership and bed size, were taken from the California Annual Disclosure Report data set. The results indicate that completion among hospitals tended to increase differentiation whereas higher financial PPS pressure is associated with increased specialization. Hospitals tend to adopt some high visibility services offered by their competitors while filling market niches selectively overall. It also appears that the cost savings expected for specialization may prevail only for narrowly defined services. Study of subsequent data sets should show whether the cost containment strategies used by the hospitals to achieve these results have been maintained over a period of sustained financial pressure.

Can managed care plans control health care costs?

The health insurance sector has been transformed in the past fifteen years, with managed care replacing indemnity insurance as the norm. This transformation was intended to change the nature of competition in the health care system so that market forces could be used to control costs. Empirical studies have shown that this objective has been met, as areas with high managed care penetration have tended to have much lower rates of increase in their costs. Creating a more efficient health care system will require additional efforts to produce useful measures of quality and to maintain competitive markets.

State health care expenditures under competition and regulation, 1980 through 1991.

OBJECTIVES: This paper examines health expenditure growth under two alternative policy approaches: competition-based managed care and state government rate regulation. METHODS: Data are presented on cumulative growth in real per capita health expenditures between 1980 and 1991 so as to compare California, a state with a pro-competitive policy, with the US average and with four states with established regulation programs. RESULTS: Real per capita expenditures for hospital services in the United States grew 54% between 1980 and 1991, while in California the growth was half the national rate, or 27%. Real per capita expenditures for physician services and drug expenditures in the United States grew by 82% and 65%, respectively, while in California these expenditures increased only 58% and 41%, respectively. California's growth rate was below that of all four regulatory states for all measures of health care cost inflation. CONCLUSIONS: On the basis of these findings, a properly structured competitive approach could play a significant role in controlling health expenditures in the United States.

Costs and price competition in California hospitals, 1980-1990.

Critics of health care reform proposals that incorporate managed competition contend that it has never been broadly implemented. However, insurance plans that combine insurance with the provision of care have been widely implemented and have been tested most extensively in California. This DataWatch explores California's experience with health maintenance organizations (HMOs) and preferred provider organizations (PPOs), the introduction of which was followed by overall reductions in hospital costs. These reductions were larger in competitive markets. If implemented on a national scale, such selective contracting could be expected to reduce the growth of hospital costs even more rapidly than occurred in California.

The effects of market structure and bargaining position on hospital prices.

PPOs and HMOs have gained widespread acceptance due in part to the belief that excess capacity and competitive market conditions can be leveraged to negotiate lower prices with health care providers. We investigated prices obtained in different types of markets by the largest PPO in California. Our findings indicate that greater hospital competition leads to lower prices. Furthermore, as the importance of a hospital to the PPO in an area increases, the price rises substantially. Our testing of alternative methods for defining hospital geographic markets reveals that the common practice of using counties to define the market leads to an underestimate of the price-increasing effects of a merger.

Measures of hospital market structure: a review of the alternatives and a proposed approach.

Efforts to evaluate the plethora of recent programs adopted by public and private payers to promote hospital price competition critically depend on the availability of measures of local market structure. To gauge the effects of these policies, researchers must be able to delineate hospital market areas and measure the intensity of competition within these markets. This article reviews alternative methods that have been used to define hospital market areas and measure market structure. We propose an empirical patient origin-based method for measuring hospital market structure. The results of sensitivity analyses using data on California hospitals demonstrate the robustness of our measures over a broad range of parameter values.

The evolving role of the medical director.

A medical group, be it under one roof, as a single or multispecialty group, or in separate offices, as an independent practice association, develops with the size and make-up of its patient base. In this article we document the growth of selective contracting by third-party payers with medical groups in California and discuss the implications of these trends on the structure and management of medical practices. Specifically, we focus on the emerging role of the medical director.

Uncompensated emergency care in hospital markets in Los Angeles County.

A survey of hospital emergency rooms in Los Angeles County was conducted in March 1987. Analysis of the distribution of uninsured emergency care patients revealed that private hospitals play a significant frontline role in terms of entry into the hospital system for patients who are unable to pay--almost one-half of such patients were treated in the emergency rooms of private hospitals. Hospitals serving markets in which a higher proportion of residents had incomes below the poverty level provided a greater share of uncompensated emergency room services.

The growth and effects of hospital selective contracting.

Since the passage of California's ground-breaking PPO legislation in 1982, enrollment in managed-care systems has risen dramatically in California and throughout the United States. This article charts the growth of selective contracting and presents data on the effects of these programs on hospital costs.

Prospective payments to hospitals: should emergency admissions have higher rates?

Systematic variation in patient resource use can be a significant problem for a system based on diagnosis-related groups (DRG's) if this variation is not evenly distributed across hospitals. If certain hospitals routinely treat patients who require more services than average under DRG's, the long-run financial viability of these hospitals will be threatened. In this study, the authors examine whether patients who are admitted on an emergency or urgent basis represent an identifiable group of patients whose costs are systematically higher than those of electively admitted patients, controlling for DRG. Alternative approaches for incorporating admission status into a DRG payment system are developed and tested.

The effects of hospital competition and the Medicare PPS program on hospital cost behavior in California.

Previous studies of hospital competition have found that greater competition leads to higher hospital costs. In this paper we report how the behavior of California's hospitals has changed since the introduction of programs intended to contain the rate of increase of hospital costs. Using data that cover the period preceding and following the introduction of these programs, we found that hospitals in more competitive markets have lowered their costs significantly.

Hospital behavior under competition and cost-containment policies. The California experience, 1980 to 1985.

Previous studies of hospital competition have found that greater competition leads to higher hospital costs. We describe herein the change in behavior of California's hospitals since the introduction of competitive and cost-containment programs. To examine the impact of California's pro-competition policies on hospital performance, we grouped the state's short-term hospitals according to the level of competition within their markets. From 1983 through 1985, total inpatient costs (inflation adjusted) increased by less than 1% in hospitals in low-competition markets compared with a decrease of 11.29% in hospitals located in highly competitive markets. After controlling for the effects of the Medicare prospective payment system program, the rate of increase in cost per discharge in hospitals in highly competitive markets was 3.53% lower than the rate of increase in hospitals in low-competition markets during the period from 1983 through 1985. We conclude that these pro-competition policies are having dramatic and potentially far-reaching effects on the nature of hospital competition, leading to increased competition based on price.