Testing the HMO competitive strategy: an analysis of its impact on medical resources

Competitive approaches to health care reform, including managed competition, are hypothesized to reduce health care expenditures and the resources devoted to medical care. Empirical evidence has been limited. The short- and long-run effects of an experiment closely resembling managed competition are analyzed. We examine effects on hospitals, technology diffusion, physicians, and health insurance premiums. The strategy reduces capital in hospitals, has minor effects on physicians and technology, and has only initial effects on average premiums.     

An "All-American" health reform proposal

Reforming the U.S. health care system is frequently thought of in absolutist terms: managed competition versus rate regulation; federal versus state administration; and business mandates versus individual insurance purchases. While these choices must be resolved over the long run, the transition to a new health care system will take several years and require more flexible solutions. The "All-American" Deal offers just that. It requires individual households to be insured and allows businesses to voluntarily offer health insurance; relies on the federal income tax system to collect income-based premiums and transfer funds to states through risk-adjusted payments; and lets states manage the disbursement of funds for uninsured residents.     

Market incentives, plan choice, and price increases

The Federal Employees Health Benefits Program (FEHBP) has attracted considerable interest for its ability to control health care costs. We examine the impact of the FEHBP's maximum dollar contribution on incentives to select low-cost plans and the growth in insurance premiums over time. Unless the maximum dollar contribution is pegged to a low-price plan, few enrollees select such plans. Moreover, premiums rise at least five percentage points per year faster among plans below this fixed subsidy level than they do in plans above it. Our results have important implications for the design of similar market-based approaches.     

Managed Care and Employer Premiums

This paper used 1993–1997 data from medium and large size employers to examine the effects of market wide managed care penetration on the premiums paid for employer sponsored health insurance. Regressions were run for weighted average single coverage premiums and for premiums on conventional, HMO, and PPO coverage. Four findings emerged from the analysis. First, increased managed care penetration had no statistically significant effect on weighted average employer premiums. Second, higher HMO penetration resulted in lower HMO premiums but higher conventional and PPO premiums. Third, higher PPO penetration had no statistically meaningful effects across plan types. Finally, the results depended critically on whether firms offered self-insured plans. Higher levels of HMO penetration led to smaller increases in conventional and PPO premiums for firms with self-insured plans, but also yielded smaller premium reductions from HMOs relative to those with purchased coverage.     

How do health insurer market concentration and bargaining power with hospitals affect health insurance premiums?

The US health insurance industry is highly concentrated, and health insurance premiums are high and rising rapidly. Policymakers have focused on the possible link between the two, leading to ACA provisions to increase insurer competition. However, while market power may enable insurers to include higher profit margins in their premiums, it may also result in stronger bargaining leverage with hospitals to negotiate lower payment rates to partially offset these higher premiums. We empirically examine the relationship between employer-sponsored fully-insured health insurance premiums and the level of concentration in local insurer and hospital markets using the nationally-representative 2006–2011 KFF/HRET Employer Health Benefits Survey. We exploit a unique feature of employer-sponsored insurance, in which self-insured employers purchase only administrative services from managed care organizations, to disentangle these different effects on insurer concentration by constructing one concentration measure representing fully-insured plans’ transactions with employers and the other concentration measure representing insurers’ bargaining with hospitals. As expected, we find that premiums are indeed higher for plans sold in markets with higher levels of concentration relevant to insurer transactions with employers, lower for plans in markets with higher levels of insurer concentration relevant to insurer bargaining with hospitals, and higher for plans in markets with higher levels of hospital market concentration.     

Federal employees health program experiences lack of competition in some areas, raising cost concerns for exchange plans

The Affordable Care Act calls for creation of health insurance exchanges designed to provide private health insurance plan choices. The Federal Employees Health Benefits Program is a national model that to some extent resembles the planned exchanges. Both offer plans at the state level but are also overseen by the federal government. We examined the availability of plans and enrollment levels in the Federal Employees Health Benefits Program throughout the United States in 2010. We found that although plans were widely available, enrollment was concentrated in plans owned by just a few organizations, typically Blue Cross/Blue Shield plans. Enrollment was more concentrated in rural areas, which may reflect historical patterns of enrollment or lack of provider networks. Average biweekly premiums for an individual were lowest ($58.48) in counties where competition was extremely high, rising to $65.13 where competition was extremely low. To make certain that coverage sold through exchanges is affordable, policy makers may need to pay attention to areas where there is little plan competition and take steps through risk-adjustment policies or other measures to narrow differences in premiums and out-of-pocket expenses for consumers.     

The effect of market structure on HMO premiums

We examine the effects of HMO market structure on HMO premiums from 1988 to 1991. More competition, measured by the number of HMOs in the market area, reduces HMO premiums. Although this effect does not appear for IPAs before the highest level of competition is reached, it appears throughout the competitive range for Group HMOs. More market penetration, measured by the percent of the market area population enrolled in HMOs, reduces premiums for IPAs. Since the goal of managed competition is to reduce health care costs by creating competition among managed health care plans, our results offer encouragement for managed competition advocates.     

Pricing behaviour of nonprofit insurers in a weakly competitive social health insurance market

In this paper we examine the pricing behaviour of nonprofit health insurers in the Dutch social health insurance market. Since for-profit insurers were not allowed in this market, potential spillover effects from the presence of for-profit insurers on the behaviour of nonprofit insurers were absent. Using a panel data set for all health insurers operating in the Dutch social health insurance market over the period 1996-2004, we estimate a premium model to determine which factors explain the price setting behaviour of nonprofit health insurers. We find that financial stability rather than profit maximisation offers the best explanation for health plan pricing behaviour. In the presence of weak price competition, health insurers did not set premiums to maximize profits. Nevertheless, our findings suggest that regulations on financial reserves are needed to restrict premiums.     

Did the Affordable Care Act's dependent coverage mandate increase premiums?

We investigate the impact of the Affordable Care Act's dependent coverage mandate on insurance premiums. The expansion of dependent coverage under the ACA allows young adults to remain on their parent's private health insurance plans until the age of 26. We find that the mandate has led to a 2.5–2.8 percent increase in premiums for health insurance plans that cover children, relative to single-coverage plans. We are able to conclude that employers did not pass on the entire premium increase to employees through higher required plan contributions.     

Differences in price elasticities of demand for health insurance: a systematic review

Many health insurance systems apply managed competition principles to control costs and quality of health care. Besides other factors, managed competition relies on a sufficient price-elastic demand. This paper presents a systematic review of empirical studies on price elasticity of demand for health insurance. The objective was to identify the differing international ranges of price elasticity and to find socio-economic as well as setting-oriented factors that influence price elasticity. Relevant literature for the topic was identified through a two-step identification process including a systematic search in appropriate databases and further searches within the references of the results. A total of 45 studies from countries such as the USA, Germany, the Netherlands, and Switzerland were found. Clear differences in price elasticity by countries were identified. While empirical studies showed a range between ?0.2 and ?1.0 for optional primary health insurance in the US, higher price elasticities between ?0.6 and ?4.2 for Germany and around ?2 for Switzerland were calculated for mandatory primary health insurance. Dutch studies found price elasticities below ?0.5. In consideration of all relevant studies, age and poorer health status were identified to decrease price elasticity. Other socio-economic factors had an unclear impact or too limited evidence. Premium level, range of premiums, homogeneity of benefits/coverage and degree of forced decision were found to have a major influence on price elasticity in their settings. Further influence was found from supplementary insurance and premium-dependent employer contribution.     

As the health insurance underwriting cycle turns: what next?

After twenty-five years of a consistent health insurance underwriting cycle, the pattern of insurer profitability changed greatly in the 1990s, raising speculation about the future. We conclude from interviews with industry experts that health plan competition and limits on plans' ability to predict costs will continue to drive a cycle, albeit one even more muted than it was in the 1990s because of changes in industry structure and forecasting improvements. Plans will price closer to cost trends and forego the more heated price competition that drove major losses in the past, reducing premium volatility but possibly leading to higher average premiums.     

Is there a business case for quality in The Netherlands? A critical analysis of the recent reforms of the health care system

Major reforms of the health insurance system and reimbursement systems for care providers are currently taking place in The Netherlands. These market-oriented health care reforms will transform the current central supply-driven system to a system of managed competition both among health care insurers and care providers. The reforms are not systematically linked to the discussions about quality of care and together with consumers who might be more interested in lower premiums; they offer almost no incentive for health care insurers and providers to steer on quality. Dutch policy makers should, therefore, be more explicit whether competition should take place on quality or price, and if the former is the case, additional incentives as part of the system reforms, are needed to create a business case for quality.     

Consumer information surplus and adverse selection in competitive health insurance markets: an empirical study

If premiums for health insurance are not risk related, there exists a consumer information surplus that may result in adverse selection. Our results indicate that insurers can greatly reduce this surplus by risk-adjusting the premium. We conclude that there need not be any substantial unavoidable consumer information surplus if consumers can choose whether to take a deductible for a one- or two-year health insurance contract with otherwise identical benefits. Therefore, adverse selection need not be a problem in a competitive insurance market with risk-adjusted premiums or vouchers and with such a consumer choice of health plan.     

Corporate benefit policies and health insurance costs

We tested the hypothesis that health insurance premium costs per employee are lower for employee groups where multiple health plans are offered and the employer pays a level dollar amount of the chosen premium than for employee groups where these two conditions are not met. Proposed national legislation relies on these conditions to create a competitive health care market. Data on 56 employee groups in 1981 and 66 employee groups in 1982 were collected from two surveys of large employers in Minnesota. Regression analysis of premium data from both surveys rejected the hypothesis. Indemnity plans in multiplan groups were cheaper if the employer paid a level dollar contribution versus a level percent (including 100) contribution. However, groups offered only an indemnity plan had lower premiums than groups meeting the two legislative conditions. These findings apply to both individual and family coverage premiums and are not caused by systematic differences in benefit provisions, employee demographics or factors influencing loading charges. Our findings cast doubt on attempts to achieve health care competition by legislative changes in insurance options and contribution methods.     

Medical malpractice reform and employer-sponsored health insurance premiums

Objective

Tort reform may affect health insurance premiums both by reducing medical malpractice premiums and by reducing the extent of defensive medicine. The objective of this study is to estimate the effects of noneconomic damage caps on the premiums for employer-sponsored health insurance.

Data Sources/Study Setting

Employer premium data and plan/establishment characteristics were obtained from the 1999 through 2004 Kaiser/HRET Employer Health Insurance Surveys. Damage caps were obtained and dated based on state annotated codes, statutes, and judicial decisions.

Study Design

Fixed effects regression models were run to estimate the effects of the size of inflation-adjusted damage caps on the weighted average single premiums.

Data Collection/Extraction Methods

State tort reform laws were identified using Westlaw, LEXIS, and statutory compilations. Legislative repeal and amendment of statutes and court decisions resulting in the overturning or repealing state statutes were also identified using LEXIS.

Principal Findings

Using a variety of empirical specifications, there was no statistically significant evidence that noneconomic damage caps exerted any meaningful influence on the cost of employer-sponsored health insurance.

Conclusions

The findings suggest that tort reforms have not translated into insurance savings.     

Does a mandatory telemedicine call prior to visiting a physician reduce costs or simply attract good risks?

This paper aims to estimate empirically the efficiency of a Swiss telemedicine service introduced in 2003. We used claims' data gathered by a major Swiss health insurer, over a period of 6 years and involving 160 000 insured adults. In Switzerland, health insurance is mandatory, but everyone has the option of choosing between a managed care plan and a fee‐for‐service plan. This paper focuses on a conventional fee‐for‐service plan including a mandatory access to a telemedicine service; the insured are obliged to phone this medical call centre before visiting a physician. This type of plan generates much lower average health expenditures than a conventional insurance plan. Reasons for this may include selection, incentive effects or efficiency. In our sample, about 90% of the difference in health expenditure can be explained by selection and incentive effects. The remaining 10% of savings due to the efficiency of the telemedicine service amount to about SFr 150 per year per insured, of which approximately 60% is saved by the insurer and 40% by the insured. Although the efficiency effect is greater than the cost of the plan, the big winners are the insured who not only save monetary and non‐monetary costs but also benefit from reduced premiums. Copyright © 2010 John Wiley & Sons, Ltd.     

Premium Variation in the Individual Health Insurance Market

Recent proposals to decrease the number of uninsured in the U.S. indicate that the individual health insurance market's role may increase. Amid fears of possible risk-segmentation in individual insurance, there exists limited information of the functioning of such markets. This paper examines the relationship between expected medical expense and actual paid premiums for households with individual insurance in the 1996–1997 Community Tracking Study's Household Survey. We find that premiums vary less than proportionately with expected expense and vary only with certain risk characteristics. We also explore how the relationship between risk and premiums is affected by local regulations and market characteristics. We find that premiums vary significantly less strongly with risk for persons insured by HMOs and in markets dominated by managed care insurers.     

Comparing employee health benefits in the public and private sectors, 1997

Data from the 1997 Robert Wood Johnson Foundation Employer Health Insurance Survey provide new information comparing public- and private-sector employee health benefits. The federal government is ahead of other employers in adopting managed competition principles using financial incentives and consumer information to promote choosing efficient plans. Federal employees experience a $200 annual compensation gap relative to those in the private sector, but it is partly explained by advantage in purchasing power. In contrast, state and local governments make higher payments toward health insurance than private-sector employers do. Their premiums are equivalent, but they pay a greater share of the total cost.     

Simulating the effects of employer contributions on adverse selection and health plan choice.

OBJECTIVE: To investigate the effect of employer contribution policy and adverse selection on employees' health plan choices. STUDY DESIGN: Microsimulation methods to predict employees' choices between two health plan options and to track changes in those choices over time. The simulation predicts choice given premiums, healthcare spending by enrollees in each plan, and premiums for the next period. DATA SOURCES: The simulation model is based on behavioral relationships originally estimated from the RAND Health Insurance Experiment (HIE). The model has been updated and recalibrated. The data processed in the simulation are from the 1993 Current Population Employee Benefits Supplement sample. PRINCIPAL FINDINGS: A higher fraction of employees choose a high-cost, high-benefit plan if employers contribute a proportional share of the premium or adjust their contribution for risk selection than if employees pay the full cost difference out-of-pocket. When employees pay the full cost difference, the extent of adverse selection can be substantial, which leads to a collapse in the market for the high-cost plan. CONCLUSIONS: Adverse selection can undermine the managed competition strategy, indicating the importance of good risk adjusters. A fixed employer contribution policy can encourage selection of more efficient plans. Ironically, however, it can also further adverse selection in the absence of risk adjusters.     

Integrating risk adjustment and enrollee premiums in health plan payment

In two important health policy contexts – private plans in Medicare and the new state-run “Exchanges” created as part of the Affordable Care Act (ACA) – plan payments come from two sources: risk-adjusted payments from a Regulator and premiums charged to individual enrollees. This paper derives principles for integrating risk-adjusted payments and premium policy in individual health insurance markets based on fitting total plan payments to health plan costs per person as closely as possible. A least squares regression including both health status and variables used in premiums reveals the weights a Regulator should put on risk adjusters when markets determine premiums. We apply the methods to an Exchange-eligible population drawn from the Medical Expenditure Panel Survey (MEPS).