Factors related to the provision of hospital discounts for HMO inpatients.

Using 1986 AHA hospital survey data, we analyzed hospital-HMO contract provisions, hospital operating characteristics, and market conditions for a national sample of 801 hospitals with HMO contracts to determine the factors related to provision of a discount and the magnitude of the discount if present. Seventy-eight percent of the hospitals reported that at least one of their HMO contracts provided a discount for inpatient services. Risk-sharing provisions, the number of hospitals within a five-mile radius, the proportion of the population enrolled in HMOs, and the number of HMOs operating in the metropolitan statistical area (MSA) were directly related to provision of discounts. Public hospitals were less likely than other facilities to provide discounts. For the magnitude of the discounts, risk-sharing provisions and the number of hospitals within a five-mile radius were again related, as was the number of HMOs operating in the MSA--but this time the number-of-HMOs variable had an inverse relationship. The results suggest that increased HMO market activity does result in price competition for hospital services but that hospital discounting strategies are extremely complex and may not follow conventional market theories. Hospitals appear to be using contracts both to stabilize their relationships with HMOs and increase market share, and they are increasingly giving discounts to achieve those ends.     

Hospital and health maintenance organization financial agreements for inpatient services: a case study of the Minneapolis/St. Paul area.

With nearly a quarter of the population enrolled in Health Maintenance Organizations (HMOs) the Mineapolis/St. Paul metropolitan area provides a unique opportunity for studies dealing with the effects of prepaid health plans on the health care marketplace. This study explores one aspect of that market; discounts obtained by HMOs for hospital inpatient service. Using information gathered from structured interviews with the 7 HMOs and 30 hospitals in the Twin Cities area, the study addressed three areas of inquiry: (1) the nature of discount contracts between hospitals and HMOs, (2) the roles played by each party in initiating the contracts, and (3) factors influencing the establishment of the contracts. While each of the HMOs was found to have at least one hospital contract under which they received inpatient services for other than full-billed charges, the amount of the discount was not substantial in the majority of cases. Other factors such as hospital location and ability to provide a full range of services appear to be as important as financial discounts when HMOs select a hospital for inpatient services. It appears that hospitals played the lead role in initiating hospital/HMO contracts during the formative HMO years, but this initiative shifted to the HMOs as they gained market shares and bargaining power. Hospitals and HMOs agree that the most important factor influencing hospital willingness to consider discount contracts was and still is the surplus bed availability in the area. This surplus of beds has been exacerbated by a continued decline in hospital utilization. These conditions coupled with increased HMO market shares has recently resulted in intensified contract negotiations and further discounts for inpatient services.     

Competition among hospitals for HMO business: effect of price and nonprice attributes

OBJECTIVE: To investigate patterns of competition among hospitals for the business of health maintenance organizations (HMOs). The study focused on the relative importance of hospital price and nonprice attributes in the competition for HMO business. DATA SOURCES/STUDY SETTING: The study capitalized on hospital cost reports from Florida that are unique in their inclusion of financial data regarding HMO business activity. The time frame was 1992 to 1997. STUDY DESIGN: The study was designed as an observational investigation of acute care hospitals. PRINCIPAL FINDINGS: Results indicated that a hospital's share of HMO business was related to both its price and nonprice attributes. However, the importance of both price and nonprice attributes diminished as the number of HMOs in a market increased. Hospitals that were market share leaders in terms of HMO business (i.e., 30 percent or more market share) were superior, on average, to their competitors on both price and nonprice attributes. CONCLUSIONS: Study results indicate that competition among hospitals for HMO business involves a complex set of price and nonprice attributes. The HMOs do not appear to focus on price alone. Hospitals likely to be the most attractive to HMOs are those that can differentiate themselves on the basis of nonprice attributes while being competitive on price as well.     

Hospital competition in HMO networks

We develop a framework for analyzing bargaining relationships between hospitals and HMOs under selective contracting. Using a unique dataset on hospitals in the Los Angeles area from 1990 to 1993, we estimate the determinants of actual negotiated prices paid to hospitals by two major HMOs. We find that a hospital's bargaining power, and thus its price, decrease when the HMO can readily turn to alternative networks that exclude the hospital. We simulate the effect of hypothetical hospital mergers on bargaining power and find that some hospital mergers, even in urban areas with many nearby hospitals, can lead to significant price increases.     

Payer type and the returns to bypass surgery: evidence from hospital entry behavior

In this paper, we estimate the returns associated with the provision of coronary artery bypass graft (CABG) surgery, by payer type (Medicare, HMO, etc.). Because reliable measures of prices and treatment costs are often unobserved, we seek to infer returns from hospital entry behavior. We estimate a model of patient flows for CABG patients that provides inputs for an entry model. We find that FFS provides a high return throughout the study period. Medicare, which had been generous in the early 1980s, now provides a return that is close to zero. Medicaid appears to reimburse less than average variable costs. HMOs essentially pay at average variable costs, though the return varies inversely with competition.     

Does Competition Improve Health Care Quality?

Objective. To identify the effect of competition on health maintenance organizations' (HMOs) quality measures. Study Design. Longitudinal analysis of a 5‐year panel of the Healthcare Effectiveness Data and Information Set (HEDIS) and Consumer Assessment of Health Plans Survey® (CAHPS) data (calendar years 1998–2002). All plans submitting data to the National Committee for Quality Assurance (NCQA) were included regardless of their decision to allow NCQA to disclose their results publicly. Data Sources. NCQA, Interstudy, the Area Resource File, and the Bureau of Labor Statistics. Methods. Fixed‐effects models were estimated that relate HMO competition to HMO quality controlling for an unmeasured, time‐invariant plan, and market traits. Results are compared with estimates from models reliant on cross‐sectional variation. Principal Findings. Estimates suggest that plan quality does not improve with increased levels of HMO competition (as measured by either the Herfindahl index or the number of HMOs). Similarly, increased HMO penetration is generally not associated with improved quality. Cross‐sectional models tend to suggest an inverse relationship between competition and quality. Conclusions. The strategies that promote competition among HMOs in the current market setting may not lead to improved HMO quality. It is possible that price competition dominates, with purchasers and consumers preferring lower premiums at the expense of improved quality, as measured by HEDIS and CAHPS. It is also possible that the fragmentation associated with competition hinders quality improvement.     

Hospitals and health maintenance organizations: an analysis of the Minneapolis-St. Paul experience.

Minneapolis-St. Paul is recognized as a prime example of health care competition. Policymakers and others have been asked to look to the Twin Cities as a model upon which to base new competitive initiatives in the health care sector. Yet little is known about the impact of Health Maintenance Organizations (HMOs) on other health care providers. This study examines the effects of the area's seven health maintenance organizations on the local hospital community. Three questions are addressed. First, is the situation in the Twin Cities unique? A comparison of case study findings and the available literature together with hospital data from similarly HMO-penetrated markets suggests that the Twin Cities' hospital market is indeed different. Second, what is the nature of hospital-HMO interaction? The flexibility of contracting apparently allows hospitals to affiliate successfully with an HMO under a variety of service and reimbursement agreements. Third, what effect has HMO activity had on community-wide utilization? While HMO enrollees clearly use fewer hospital days and the trend in the community is toward fewer days, attributing the change to HMOs is difficult. A large portion of the differences between HMO and community-wide utilization levels is attributable to differences in population.     

State HMO Accreditation and External Quality Review Requirements: Implications for HMOs Serving Rural Areas

The purpose of this article is to analyze state regulations regarding health maintenance organization (HMO) accreditation and external quality review; to briefly describe states' experiences implementing these regulations; and to discuss the implications of these regulations for HMOs serving rural areas. The incorporation of HMO accreditation and external quality review requirements into state HMO licensure processes and state employee contracting raises many policy issues, including several that are especially relevant to HMOs serving rural populations. A key issue is whether the linkage of accreditation and external quality review requirements to HMO licensure will be an additional deterrent to the development of new HMOs or the expansion of existing HMOs into rural areas. Other issues relate to the costs and benefits of accreditation for HMOs serving rural populations, and the potential impact of HMO accreditation requirements on efforts to expand managed care enrollment of rural Medicaid and Medicare beneficiaries and rural state employees. Nine states were identified that have regulations requiring HMOs to seek accreditation or to undergo an external quality review as a condition of licensure. Four states were identified as implementing requirements that an HMO be accredited in order to serve state employees. Many of these requirements are still in the early stages of implementation. Several states with the requirements have significant rural populations and will provide opportunities to evaluate their impact on HMOs serving rural areas, rural providers and rural consumers.     

Hospital cost and quality performance in relation to market forces: an examination of U.S. community hospitals in the “post-managed care era”

Managed care substantially transformed the U.S. healthcare sector in the last two decades of the twentieth century, injecting price competition among hospitals for the first time in history. However, total HMO enrollment has declined since 2000. This study addresses whether managed care and hospital competition continued to show positive effects on hospital cost and quality performance in the “post-managed care era.” Using data for 1,521 urban hospitals drawn from the Healthcare Cost and Utilization Project, we examined hospital cost per stay and mortality rate in relation to HMO penetration and hospital competition between 2001 and 2005, controlling for patient, hospital, and other market characteristics. Regression analyses were employed to examine both cross-sectional and longitudinal variation in hospital performance. We found that in markets with high HMO penetration, increase in hospital competition over time was associated with decrease in mortality but no change in cost. In markets without high HMO penetration, increase in hospital competition was associated with increase in cost but no change in mortality. Overall, hospitals in high HMO penetration markets consistently showed lower average costs, and hospitals in markets with high hospital competition consistently showed lower mortality rates. Hospitals in markets with high HMO penetration also showed lower mortality rates in 2005 with no such difference found in 2001. Our findings suggest that while managed care may have lost its strength in slowing hospital cost growth, differences in average hospital cost associated with different levels of HMO penetration across markets still persist. Furthermore, these health plans appear to put quality of care on a higher priority than before.     

Physicians Contracting with Managed Care

It has been observed that enrollees in managed care systems such as HMOs and PPOs have lower expenditures and utilization rates than those in conventional insurance plans. Few studies have investigated this issue by examining providers. This paper studies whether physicians with low costs are more likely to sign contracts with HMOs and PPOs in order to help explain the observation of lower expenditures and utilization rates by HMO and PPO enrollees. A logistic regression is applied to the data from the 198401985 Physician Practice Costs and Income Survey. The results do not show strong evidence that a physician's likelihood of contracting with HMOs and PPOs is related to the physician's practice costs and utilization decision of contracting with managed care systems are the physician's socio-demographics, the physician's practice region, and the market conditions.     

Factors associated with high-quality/low-cost hospital performance

This study explores organizational and market characteristics associated with superior hospital performance in both quality and cost of care, using the Healthcare Cost and Utilization Project State Inpatient Databases for ten states in 1997 and 2001. After controlling for a variety of patient factors, we found that for-profit ownership, hospital competition, and the number of HMOs were positively associated with the likelihood of attaining high-quality/low-cost performance. Furthermore, we examined interactions between organizational and market characteristics and identified a number of significant interactions. For example, the positive likelihood associated with for-profit hospitals diminished in markets with high HMO penetration.     

The impact of HMO and hospital competition on hospital costs

This study examines the impact of HMO penetration and competition on health system performance, as measured by hospital cost per adjusted admissions. The study population consisted of acute-care hospitals in the United States. The findings of this study suggest that there is no relationship between HMO competition and hospital cost per adjusted admission. Governmental efforts to stimulate competition in the hospital market, if focused on promoting HMOs, are not likely to produce cost-containing results quickly.     

Assessing the evidence on HMO performance

HMOs contract to provide physician and hospital services to enrolled populations in return for fixed periodic payments. Total costs for HMO members are shown to be lower than for those enrolled in conventional insurance plans. But the explanation for this and related differences cannot be attributed solely to matters of efficiency, quality, or even consumer self-selection or physician satisfaction. Although public policy assumes that HMOs will encourage beneficial competitive responses by traditional health care providers, too little is known to predict the nature and extent of such probabilities.     

Contracts between hospitals and health maintenance organizations

This article describes the contractual relations that are emerging between health maintenance organizations (HMOs) and hospitals. Six HMOs in four large metropolitan areas provided information on 102 hospital contracts. The authors found that the HMOs are becoming more aggressive in placing hospitals in competition with each other for HMO patients. Staff and network HMOs are able to obtain a higher concentration of patients and substantially larger discounts for inpatient services than are individual practice association (IPA) plans in this study.     

United Health Care of North Carolina

Physicians. While many of the rural physicians interviewed in North Carolina would prefer not to deal with HMOs at all, they are generally positive about their relationships with United Healthcare of North Carolina. These physicians chose to contract with the HMO to obtain new patients and to retain existing patients. They are satisfied that their participation has accomplished these goals. Their reimbursement arrangements are easy to understand, and most view the payment amounts as satisfactory. The physicians regard the size of the HMOs provider network and the open-access structure of the HMO as positive features that allow them to make referrals without the restrictions imposed by some other HMOs. To date, participation in United Healthcare of North Carolina has imposed few burdens on rural physicians. They are reimbursed on a fee-for-service basis, and their financial risk has been limited. They do not perceive that the HMO has had a significant impact on the way they practice medicine. This situation may change in the future if enrollees from United Healthcare of North Carolina and other HMOs constitute a greater proportion of their practices and if these HMOs move toward capitated reimbursement. The attitudes of rural physicians toward United Healthcare of North Carolina also may change if the HMO attempts to more actively manage the care provided to its enrollees. United Healthcare of North Carolina plans to eliminate physician risk sharing (in the form of withholds) and replace it with bonus payments. As one HMO executive said, the plan wants to “put incentives where they belong.” If rewarding good performance instead of punishing poor performance yields intended consequences, it may provide United Healthcare of North Carolina with a competitive advantage in rural areas. First, because such a change offers an opportunity to augment a physician's income instead of diminishing it, physicians might prefer to contract with the HMO rather than with other HMOs. Second, because bonus payments depend on performance, United Healthcare of North Carolina providers may produce outcomes that allow reductions in premium prices or expansions of benefits compared with the HMOs competitors. Hospitals. Rural hospitals cited similar motivations (attracting and retaining business) for participating in United Healthcare of North Carolina and similar levels of satisfaction with their relationships. In their experiences, the HMO has been fair in its negotiations and reimbursement. Although they contract with multiple HMOs, these rural hospitals do not perceive that HMO participation has had a significant impact on hospital operations. Because these hospitals, like many rural hospitals, rely heavily on Medicare (and, to a lesser degree, on Medicaid) as revenue sources, the future impact of managed care on their operations will depend in large part on the extent to which significant proportions of their Medicare and Medicaid patients enroll in HMOs.     

Physicians contracting with managed care

It has been observed that enrollees in managed care systems such as HMOs and PPOs have lower expenditures and utilization rates than those in conventional insurance plans. Few studies have investigated this issue by examining providers. This paper studies whether physicians with low costs are more likely to sign contracts with HMOs and PPOs in order to help explain the observation of lower expenditures and utilization rates by HMO and PPO enrollees. A logistic regression is applied to the data from the 1984-1985 Physician Practice Costs and Income Survey. The results do not show strong evidence that a physician's likelihood of contracting with HMOs and PPOs is related to the physician's practice costs and utilization pattern. Instead, major factors that significantly affect a physician's decision of contracting with managed care systems are the physician's socio-demographics, the physician's practice region, and the market conditions.     

Trends in health care financing: opportunities for family planning agencies

In response to spiraling health care costs in the US, several alternative health care delivery systems have evolved. The delivery of subsidized family planning services in particular is being affected by declining levels of government support. The most rapidly growing of alternative delivery systems is the health maintenance organization (HMO). HMOs provide a voluntarily enrolled population a guaranteed, specific range of physician and hospital services in return for a fixed periodic payment. There are 3 types of HMO: the group model, in which doctors are members of a partnership or service corporation that contracts with employers or individuals to provide medical services; the taff model, in which physicians are direct employees of the HMO; and the independent practice association (IPA) model, a physicians' group that enters into a contract with an HMO and receives reimbursement for every patient seen. In 1986, over 21 million Americans were enrolled in approximately 262 HMOs around the country. HMOs are unequaled in their success at reducing hospital utilization; they have achieved savings of hospital costs of 20-40%. Another system for delivering and financing health care is the preferred provider organization (PPO) under which patients are assigned to a designated panel of health care providers who offer services according to a discounted fee schedule. New hybrid systems that combine many of the features of both systems are emerging. Most of the newly organized health care delivery systems described focus on utilization control and keeping costs down. A common way of ensuring coordinated health care delivery is through primary care case management. To initiate or establish relationships with HMOs or other health care delivery systems, family planning agencies should consider such activities as: undertaking surveys to study the market; training new employees on developments in health care financing; and recruiting board members with HMO experience.     

Service-level selection by HMOs in Medicare

In the federal Medicare program, contracting health maintenance organizations (HMOs) are paid on a capitated basis. There has long been concern that an "adverse selection" of risks remain in the traditional fee-for-service (FFS) sector, since beneficiaries with low costs may leave the FFS sector and join the HMOs. The distortion associated with this form of selection is that health plans may design their mix of health care services in order to effectuate favorable selection. This paper scrutinizes patterns of HMO membership and costs by service in the FFS sector for evidence consistent with the hypothesis that HMOs engage in service-level product distortion. We develop a multi-service model of choice between FFS and HMOs and show that if the HMO sector is underproviding (overproviding) a service relative to the FFS sector, we should observe a positive (negative) correlation between the HMO market share and average costs of those remaining in the FFS sector. We estimate the correlation between the HMO market share and the average FFS costs for different health care services using Medicare data for 1996. We find evidence indicating that there exists significant service-level selection by HMOs.     

Venturing into new territory--health systems as Medicare risk contractors

With each congressional budget debate, hospital and health system executives are reminded of their vulnerability to Medicare reimbursement rates. As health maintenance organizations (HMOs) have entered into Medicare risk contracts and negotiated separate hospital reimbursement rates, hospital and health system executives have recognized even less control of their Medicare reimbursement. One way for health systems to regain control of the Medicare dollar is to develop a Medicare risk contract that directly receives and distributes the Medicare risk premium. Before hospital and health system executives invest in the start-up and operational capital necessary to bid for a risk contract, careful analysis of the efficacy of the contract's contribution to the margin should be undertaken. The following will review observations and lessons from HMO Medicare risk contracting and introduce a methodology that health system executives can use to evaluate the annual financial impact of entering the business of direct Medicare risk contracting.     

Taking care of business: HMOs that spend more on administration deliver lower-quality care.

The authors analyzed health maintenance organizations' administrative costs and quality measures from the National Committee for Quality Assurance's Quality Compass database for the years 1997-2000. HMOs with higher administrative overhead had consistently worse quality scores in univariate analysis. Multivariate analyses controlling for geographic region (all years) and HMO model type (1997 and 1998 analyses only) confirmed that higher administrative costs were associated with lower quality. Excess HMO bureaucracy is not only wasteful but harmful.