Academy Health Annual Research Conference
June 29, 2009
Yu-Chu Shen
Naval Postgraduate School and NBER
Vivian Wu and Glenn Melnick
University of Southern California and Rand
We thank RWJF’s HCFO Initiative grant #56110 for funding this research

 Health care spending accelerated after
2000 after a decade of slow growth
 Current administration has two choices to control health care spending: through the market or through regulation
 In the past, look to managed care to rein in the provider spending

 How does market structure affect hospital revenue:
 HMO Penetration, HMO Concentration,
HMO For-profit share, hospital competition
 Are HMO effects on revenue through both price and quantity?
 Do these relationship change over time (1994-1999 and 2000-2005)?

Changes in HMO Market Structure 1995-2005
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1994-1999 2000-2005
HMO penetration
Percent with <-2%pt growth
1994-1999 2000-2005
HMO Herfindahl index
Percent with (-2,2)%pt growth
1994-1999 2000-2005
HMO for-profit share
Percent with >2%pt growth

 Hospital data
 Medicare hospital cost reports (HCRIS)
 AHA surveys
 MEDPAR (to construct hospital competition measure)
 HMO data
 Laurence Baker - thanks
 Interstudy
 Other area characteristics
 Area Resource Files
 Hospital system membership info from Kristin
Madison and Sujoy Chakravarty – thanks

 All short-term, general, non-federal hospitals located in MSAs in the
United States.
 Time period covered: 1994-2005

 Dependent Variables
 Net patient revenue
 Price proxy
 Quantity: adjusted patient days
 Market Structure Variables
 Measured at MSA level:
 HMO penetration
 HMO concentration (HHI)
 HMO for-profit share
 Measured at hospital level:
 Hospital concentration (HHI)

 Other control variables
 Hospital characteristics
 Other Market characteristics
 Unit of observation: hospital
 Hospital/MSA fixed-effects translog model
 Standard errors are adjusted to account for clustering at the MSA level.

Predicted Change in Patient Revenue
(in percentage difference)
All
Hospitals
Hospitals by Levels of HMO Penetration
Low HMO
Penetratio n
HMO penetration increases by 10 percentage points
1994-1999 -4.15** -4.12+
2000-2005 -2.06+
HMO Herfindahl index increases by 0.10
1994-1999 0.40
-1.35
0.25
2000-2005 -0.09
-0.07
HMO for-profit share increases by 10 percentage points
1994-1999 -0.21
-0.03
2000-2005 -0.17
-0.45*
High HMO
Penetratio n
-4.33**
-3.46+
1.33
0.24
-1.16*
-0.57

Predicted Change in Price and Quantity
Price
HMO penetration increases by 10 percentage points
1994-1999 -3.72**
2000-2005 -1.76
Quantity
-1.75*
-1.14+

 Of the three market aspects, HMO penetration has the strongest effect on hospital revenue.
 Overall revenue containment effects weaken post-2000
 Constrains prices and quantity in 1994-
1999 period
 Price effect disappears in 2000-2005

Analysis of Relative Bargaining Power –
HMOs vs Hospitals
All
Hospitals
Hospitals by Levels of HMO Penetration
Low HMO
Penetratio n
HMO penetration increases by 10 percentage points
1994-1999 -4.15** -4.12+
2000-2005 -2.06+
HMO Herfindahl index increases by 0.10
1994-1999 0.40
-1.35
0.25
2000-2005 -0.09
-0.07
HMO for-profit share increases by 10 percentage points
1994-1999 -0.21
-0.03
2000-2005 -0.17
-0.45*
High HMO
Penetratio n
-4.33**
-3.46+
1.33
0.24
-1.16*
-0.57

 No linear relationship between HMO concentration and revenue.
 Could be a threshold effect
 Divide markets into 4 quadrants
HMO HHI >3200 HMO HHI <= 3200
Hospital HHI >3200
Hospital HHI <=3200
Both markets concentrated
HMO dominant markets
Hospital dominant markets
Both markets competitive

Predicted Difference in Revenue, Price and Quantity by HMO Market’s
Relative Bargaining Power
Whole Sample
Revenue
Both are concentrated markets
HMO dominant market
Hospital dominant markets
Price
Both are concentrated markets
HMO dominant market
Hospital dominant markets
Quantity
Both are concentrated markets
HMO dominant market
Hospital dominant markets
1994-1999
--
2000-
2005
--
-19% ** -26% **
1% + 2% **
---
-22% ** -29% **
3% ** 3% **
---
-9% ** -11% **
7% ** 4% **

Similar Results When Analyzing
Managed Care (HMO+PPO) in 2001-
2004

 Only highly concentrated managed care markets (HHI>3200) can depress revenue and price substantially
 In 2001-2004, 11% of MSAs (7% of all hospitals) are in markets with
>3200 managed care HHI.

 High HMO penetration effect though weaker, still constrained hospital revenue growth in 2000s
 But fewer markets are in that category.
 Relative bargaining power between managed care and hospital markets matters
 Highly concentrated HMO markets can hold down hospital price, but very few markets are in that category.