Academy Health Annual Research Conference June 10, 2008 Yu-Chu Shen

1. The Changing Effect of HMO Market Structure: An Analysis of Penetration, Concentration, and Ownership 1994-2005 Academy Health Annual Research Conference June 10, 2008 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 for funding this research

2. Background • HMOs have experienced an expansion, competition period throughout the 1990s. It was followed by a contraction, consolidation period that started in the late 1990s. • The early competitive environment also cultivated for-profit ownership interest: enrollment in for-profit plans rose to dominate the HMO sector in the latter 1990s

4. Research objectives • Do different aspects of the HMO market structure (penetration, concentration, and for-profit share) have independent effects on hospital cost and revenue growth? • Do these effects over time (1994-1999 and 2000-2005)? • Does the magnitude of these effects depend on overall HMO penetration?

5. Data • 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 • System membership info from Kristin Madison and Sujoy Chakravarty – thanks

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

7. Methods Overview (1) • Dependent Variables • Log (total operating cost) • Log (net patient revenue) • Market Structure Variables • Measured at MSA level: • HMO penetration • HMO concentration (HHI) • HMO for-profit share • Measured at hospital level: • Hospital concentration (HHI)

8. Methods Overview (2) • 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.

9. Three Sets of Analysis • Main Models • Estimate whether the three market aspects have independent effects on hospital cost, revenue • Decline vs. Stable HMO Penetration Analysis • Separate two potential effects: dis-enrollment vs. product change • Dominant market analysis • Investigate relative concentration: divide markets into 4 quadrants based on the relative HHI of HMO and hospital markets • HMO dominant market: high HMO concentration/low hospital concentration

10. Main Regression Results on Operating Cost (Log Transformed)

11. Decline vs. Stable HMO Markets Analysis on Operating Cost

12. Dominant Market Analysis on Operating Cost

13. Summary (1) • Of the three market aspects, HMO penetration has the strongest effect on hospital costs and revenue. • Weakening cost and revenue containment effect post-2000 is related to dis-enrollment from HMOs to other products

14. Summary (2) • HMO concentration matters but so does so hospital concentration • For-profit plans are still aggressive in pursuing cost saving strategies relative to not-for-profit plans. • The economic magnitude, however, is relatively small.