The impact of health maintenance organizations and competition on hospitals in Minneapolis/St. Paul

The Healthcare Educational and Research Foundation (HERF) in Minneapolis undertook a two-year research project to study the effects of health maintenance organizations (HMOs) and competition on the hospital industry in Minneapolis/St. Paul. This article summarizes HERF's major findings surrounding three key questions: (1) do the HMOs in Minneapolis/St. Paul use fewer hospital resources relative to conventional payers?; (2) do recent overall community trends in inpatient use suggest evidence of hospital utilization-reducing effects attributable to HMOs?; and (3) given the highly visible competitive process among Minneapolis/St. Paul providers, do hospital cost and revenue data suggest any evidence of cost-containment? The findings (based on data through 1982) indicate that for comparable patients, Twin Cities HMOs appear to use fewer medical care resources per hospitalized patient. There was, however, no clear evidence of community-wide, utilization-reducing effects directly attributable to the "competitive effect" of HMO introduction and development in the market. In addition, there was no empirical evidence that HMOs (which had enrolled 25 percent of the consumer market by 1982), or other large buyers of inpatient services, have selected hospitals on the basis of price as hypothesized by competition advocates.     

The competitive impact of health maintenance organizations on hospital finances: an exploratory study

In this study we explore whether HMO-induced competition has contained expenditures in Minneapolis/St. Paul hospitals. Specifically, we assessed the impact of HMOs on revenue, cost, and net income per admission in Twin Cities hospitals from 1979 to 1981. Some HMOs have obtained negotiated discounts from hospitals. We found that hospitals which gave larger discounts did not have lower costs per admission. This finding suggest that discounts do not force hospitals to operate more efficiently. In addition, hospitals with a large share of patients from HMOs or government Medicare and Medicaid programs did not have lower costs per admission than other hospitals during the years from 1979 to 1981. This finding casts doubt on the claim that discounts are justified by lower costs for HMO or government patients. Finally, neither HMO market share nor discounts had an adverse effect on hospital profits. During the three years studied, hospital profits in the Twin Cities showed an upward trend. This study concludes that if competition is to succeed it must encompass more than HMOs. HMOs may be important, but they are only one agent in the market. Thus, public policy created to induce competition must go beyond the simple stimulus of HMO growth.     

The competitive effects of health maintenance organizations: another look at the evidence from Hawaii, Rochester, and Minneapolis/St. Paul

There has been much discussion about the potential cost-containing impact of HMOs upon the local medical care market. Three areas have been identified by various observers as experiencing such beneficial effects: Hawaii, after the development of Kaiser in the late 1950s; Rochester, New York, which experienced rapid HMO growth and declining Blue Cross hospital use in the late 1970s; and Minneapolis/St. Paul, which has been the focus of vigorous HMO competition in the last decade. While comprehensive data on health care expenditures are not available, bits of evidence can be pieced together to develop case studies of each area. Careful review of the available data often identifies internal inconsistencies and contradictions, but in none of the three sites is there a reduction in hospital use that is most plausibly attributed to HMO competition. Instead, the reported reductions are in each case attributable to other factors--including biases in data, long-term trends predating HMOs, indirect effects of other policy changes, and other forms of competition.     

Any-Willing-Provider laws: their financial effect on HMOs

Any-Willing-Provider (AWP) legislation requires that health plans accept any health care provider who agrees to conform to the plan's conditions, terms, and reimbursement rates. Many states have adopted such legislation, raising questions about its effect on the managed care market. Those favoring this legislation argue that it will reduce restrictions on choice of provider, while opponents argue that it will reduce competition by increasing administrative and medical costs for managed care plans. Using cross-sectional time-series data for the period 1992-1995 (the period during which many of these laws were enacted), this study investigates the effect that these laws have on HMO financial performance. Our results show that "all-provider" AWP laws have a very limited effect on the financial performance measures we examine. "Pharmacy" AWP laws have a more significant effect, but neither type of law appears to affect the overall profitability of HMOs.     

The private sector and competition in health care markets

This paper reviews the historical trends in the regulatory and competitive approaches to containment of health care costs, covering efforts in both public and private sectors. The current interest in the potential of private-sector initiatives to stimulate competition in health care insurance and provider markets is highlighted. Since neither the workings of competition in health care nor the role and impact of the private sector in stimulating such competition are well understood, the concluding section discusses important research issues surrounding these topics.     

The political management of managed care: explaining variations in state health maintenance organization regulations

In the 1990s, strong incentives for managed care organizations to control costs, once regarded as a fortuitous confluence of interests, came to be seen as antithetical to consumers' interests in quality of care. In response to this change in political climate, many states have greatly increased their regulatory control of managed care organizations since the mid-1990s. This activity is surprising in an era when public policy on health care issues is usually described as frozen, gridlocked, and/or stalemated as a result of intense activity on the part of organized interests. We take advantage of the variation in state regulations of health maintenance organizations (HMOs) to discover why some governments are able to address policy problems that are often perceived as intractable in a political if not in a true policy sense. From the history of HMOs, the backlash against managed care, and state responses to that backlash, we first extract a number of hypotheses about state regulatory activity. We then test these hypotheses with data on regulatory adoptions by states during the late 1990s and the early 2000s. Last, we discuss the findings with special attention to the role of politics in health care.     

What is the HMO Act and what is its impact on employers?

The explosion in health care costs has spurred the development of Health Maintenance Organizations (HMOS). It is predicted that $180 billion will be spent on health care this year. The search for more economical alternatives to the traditional fee-for-service type of care has naturally focused attention on HMOs. Evidence indicates that the cost of HMO services can be one-fourth to one-third less than the cost of traditional care. Such figures make HMOs one of the most important, and least understood, topics confronting employers today.     

Medical liability and health care reform

We examine the impact of the Affordable Care Act (ACA) on medical liability and the controversy over whether federal medical reform including a damages cap could make a useful contribution to health care reform. By providing guaranteed access to health care insurance at community rates, the ACA could reduce the problem of under-compensation resulting from damages caps. However, it may also exacerbate the problem of under-claiming in the malpractice system, thereby reducing incentives to invest in loss prevention activities. Shifting losses from liability insurers to health insurers could further undermine the already weak deterrent effect of the medical liability system. Republicans in Congress and physician groups both pushed for the adoption of a federal damages cap as part of health care reform. Physician support for damages caps could be explained by concerns about the insurance cycle and the consequent instability of the market. Our own study presented here suggests that there is greater insurance market stability in states with caps on non-economic damages. Republicans in Congress argued that the enactment of damages caps would reduce aggregate health care costs. The Congressional Budget Office included savings from reduced health care utilization in its estimates of cost savings that would result from the enactment of a federal damages cap. But notwithstanding recent opinions offered by the CBO, it is not clear that caps will significantly reduce health care costs or that any savings will be passed on to consumers. The ACA included funding for state level demonstration projects for promising reforms such as offer and disclosure and health courts, but at this time the benefits of these reforms are also uncertain. There is a need for further studies on these issues.     

Health maintenance organizations; amendments of 1981--Health Resources and Services Administration. Notice of proposed rulemaking

This notice proposes to amend the Public Health Service rules on health maintenance organizations (HMOs) to conform with the 1981 amendments to the HMO statute regarding member protection in the event of insolvency, community rating by class, and primary care within the service area of a non-metropolitan HMO. In addition, this notice proposes: (a) to remove provisions of the rules that are considered unnecessary or burdensome, such as the regulatory specification of contractual provisions, and (b) to increase one of the regulatory limits on copayments to permit HMOs to become more competitive with alternative forms of health insurance.     

Preferred provider organization liability for physician malpractice

The preferred provider organization (PPO) is a recent innovation in the health care industry, designed to reduce costs through selective contracting and utilization controls. This Note examines malpractice liability theories potentially applicable to PPOs. The Note compares PPOs to other health care institutions, including hospitals and HMOs, and concludes that PPOs are at minimal risk of incurring liability for physician negligence.     

Some pitfalls in creating competition between HMOs and fee-for-service delivery

This paper examines four propositions inherent in competitive approaches to containing the growth of health care expenditures: (1) that health maintenance organizations can deliver health care less expensively than the fee-for-service system; (2) that under certain competitive conditions, HMOs would prosper; (3) that HMO successes would force FFS insurers and providers to become more efficient; and (4) that creating the competitive conditions would be politically feasible. Reasons for doubting the latter three propositions are plentiful, and the strategy is therefore judged unlikely to succeed.     

Health maintenance organizations--PHS. Final rule

This rule amends the Public Health Service regulations on health maintenance organizations (HMOs) to elaborate on the 1981 amendments to the HMO statute regarding member protection in the event of insolvency, community rating by class, and primary care within the service area of a non-metropolitan HMO. In addition, the rule removes regulatory provisions that are considered unnecessary or burdensome, such as the specification of contractual provisions, and increases one of the regulatory limits on copayments to permit HMOs to become more competitive. These amendments are made after consideration of public comments on the notice of proposed rulemaking (NPRM) published on March 22, 1983.     

Reform and remembrance: the place of the private sector in the future of health care policy

Although the nation failed during the past decade to enact large-scale, structural change in government health policy, it has seen health care in the private sector remodeled dramatically during the same period. In this article I argue that a new round of equally significant changes is quite possible, this time at the hands of the national government. More specifically, I argue that for a variety of reasons, both enduring and more recently born, support for the private sector and the market in health care is relatively weak: that given likely trends in costs, demographics, and inequalities, it is likely to get even weaker; and that in the potential coming crisis of the health care system. there will be a real opportunity for seizing the agenda and winning policy battles on the part of would-be reformers pushing large-scale, public sector-oriented changes that go well beyond the recent reform efforts directed at managed care and HMOs.     

Examining exclusionary conduct of HMOs and PPOs: a case comment on Northwest Medical Laboratories v. Blue Cross and Blue Shield of Oregon.

As the climate of the health care industry has changed to one of cost-containment and competition through the growth of HMOs and PPOs, health care providers have become the subjects of antitrust litigation. One such case, Northwest Medical Laboratories v. Blue Cross and Blue Shield of Oregon, involved a medical laboratory and a radiology center who claimed that they were victims of an illegal group boycott after defendant's pre-paid health plan denied them preferred provider status. The Oregon Court of Appeals, using the traditional antitrust analysis applied to other industries for decades, failed to consider the intricacies that exist within the health care industry. This result led to an inaccurate market share computation and an inadequate rule of reason analysis. This Comment examines the shortcomings of the Northwest Medical opinion and argues that, in applying the antitrust laws to the health care industry, courts in future cases must recognize and respect the unique features of the business of providing health care.     

The interplay between economic and political logics: path dependency in health care in England

The purpose of this article is to use the ideas of path dependency to understand why policies implemented by governments for health care in England were and are suboptimal in terms of the control of total costs, the equitable distribution of hospital services, and efficiency in delivery. We do this by relating the economic logic of achieving these objectives to the political logic of a state-hierarchical system in which ministers are accountable for the effects of policies and doctors largely decide the supply and demand of health care. The initial policy path of the National Health Service (NHS) controlled costs but lacked systems to achieve equity and efficiency in the funding of hospitals. Policies were introduced to achieve equity, but not efficiency, in the 1970s. The Thatcher government sought efficiency through a budgetary squeeze in the 1980s, which culminated in the NHS funding crisis of 1987 - 1988. The result was the policies of the NHS internal market, which promised efficiency by introducing a purchaser-provider split and a system of provider competition in which money would follow the patient. These promises justified an injection of extra funds for three years, but only a pallid model of the internal market was implemented. The Blair government abandoned the rhetoric of competition but maintained the purchaser-provider split and continued to constrain total NHS costs, which resulted in the funding crisis of 1998 - 1999. Current policies are to substantially increase spending on health care and reintroduce a system of provider competition in which money will follow the patient.     

TRICARE senior demonstration of military managed care--DOD. Notice of demonstration project

This notice is to advise interested parties of a demonstration project in which the Department of Defense (DoD) will provide health care services to Medicare-eligible military retirees in a managed care program, called TRICARE Senior, and receive reimbursement for such care from the Medicare Trust Fund. The program is authorized by section 1896 of the Social Security Act, amended by section 4015 of the Balanced Budget Act of 1997 (P.L. 105-33). The statue authorizes DoD and the Department of Health and Human Services (HHS) to conduct at six sites during January 1998 through December 2000, a three-year demonstration under which dual-eligible beneficiaries will be offered enrollment in a DoD-operated managed care plan, called TRICARE Senior Prime. The legislation also authorizes Medicare HMOs to make payments to DoD for care provided to HMO enrollees by military treatment facilities (MTFs) participating in the demonstration. This part of the demonstration, to be called Medicare Partners, will allow DoD to enter into contracts with Medicare HMOs to provide specialty and impatient care to dual-eligible beneficiaries currently provided on a space-available basis. Additional legal authority pertinent to this demonstration project is 10 U.S.C. section 1092. Under TRICARE Senior Prime, Medicare-eligible military retirees who enroll in the program will be assigned primary care manager (PCMs) at the MTF. Enrollees will be referred to specialty care providers at the MTF and to participating members of the existing TRICARE Prime network. TRICARE Senior Prime enrollees will be afforded the same priority access to MTF care as military retiree and retiree family member enrollees in TRICARE Prime. DoD will receive reimbursement from HCFA on a capitated basis at a rate which is 95 percent of the rate HCFA currently pays to Medicare-risk HMOs, less costs such as capital and graduate medical education, disproportionate share hospital payments, and some capital costs, which are already covered by DoD's annual appropriation. However, under the authorizing statute, DoD must meet its current level of effort for its Medicare-eligible beneficiaries before receiving payments from the Medicare Trust Fund. That is, DoD must continue to fund health care at a certain expenditure level for its Medicare-eligible population before it may be reimbursed by HCFA for care provided to TRICARE Senior Prime enrollees. The Balanced Budget Act of 1997 required DoD and HHS to complete a memorandum of agreement (MOA) specifying the operational requirements of the demonstration project. That MOA was completed on February 13, 1998, and is published below. Except as provided in the MOA, TRICARE Senior Prime will be implemented consistent with applicable provisions of the CHAMPUS/TRICARE regulation, particularly 32 CFR sections 199.17 and 199.18.     

Freestanding emergency centers: regulation and reimbursement

The freestanding emergency center, which combines the functions of a doctor's office and a hospital emergency room, has emerged as a new provider of health care. These centers have generated considerable controversy over their role in the health care market. Proponents argue that freestanding emergency centers reduce costs by providing care in a more efficient manner and cause other health care providers such as hospital emergency rooms to reduce costs and improve service. Opponents argue that the centers create an additional layer of health care which duplicates existing services and increases total health care costs. This Note examines the controversial issues of licensure, regulation and reimbursement. The Note concludes that freestanding emergency centers can help to reduce health care costs and discusses the steps that should be taken to aid centers in achieving this goal. reduce health care costs and discusses the steps that should be taken to     

HMO promotion and the privatization of health care in Chile

Since 1973 the Chilean junta has privatized sectors of the national economy. This paper analyzes the country's policy process of promoting private medical programs through HMO-like plans (ISAPREs, or Institutes of Provisional Health). These plans have captured less than half of their originally anticipated market share. It is argued that the future performance of ISAPREs will be undermined by their limited maternal benefits, their targeting to a small upper-income group which cannot sustain many private medical programs, and competition with less expensive yet equally competent public medical programs. The paper briefly compares privatization in Chile with the experiences of other countries, and specifically contrasts the restructuring of health services under military rule in Chile with those of Argentina and Uruguay. The paper concludes that the Chilean experience with HMOs epitomizes the perils of planning health care during short-term periods of economic prosperity as well as failing to consult medical care providers and consumers.     

Does all-payer rate setting work? The case of the New York Prospective Hospital Reimbursement Methodology

By 1983, four states had received waivers from the Health Care Financing Administration and adopted experimental reimbursement programs covering all third-party payers. In general, these programs were designed to moderate cost growth as well as to promote a number of broader distributive objectives. Among the concerns for equity were financing uncompensated care and spreading the costs across all payers, reducing the differential between hospital charges and costs, and rejuvenating fiscally distressed hospitals. These diverse goals represent a fundamental shift in the role of state rate setting; as a result, broader outcome measures are required to determine their overall impact. The New York Prospective Hospital Reimbursement Methodology (NYPHRM) is evaluated in this broader context. The NYPHRM successfully channeled revenues to fiscally blighted hospitals, increasing the volume of care to the uninsured while maintaining cost growth at national levels. According to this broader set of outcome measures, the NYPHRM would be viewed as a policy success.