Healthcare Cost Differences in the 1990s: The Influence of Metropolitan Area Marketplace Dynamics

1. Healthcare Cost Differences in the 1990s: The Influence of Metropolitan Area Marketplace Dynamics Merton D. Finkler Lawrence University August 14, 2003

2. Scope of Study • How much variation in healthcare cost levels and growth rates exists across MSAs? • Are Medicare payments to providers cost-shifted onto private payers? • Do differences in demographic structure help explain differences in cost? • Do differences in purchaser and provider market power help explain differences in cost? Sponsor: Cobalt Corporation – Milwaukee, WI

3. Motivation • Proprietary reports suggest significant differences in cost across MSAs • Local policy makers suggest low Medicare payments drive higher commercial payment • Payment for health care features different national and local incidence implications

4. Cost Indicators • No comprehensive cost indicator at MSA level – Evidence: proprietary claims data and Medicare • Comprehensive indicators exist for Medicare recipients and HMO enrollees • Hospital indicators can be compared by MSA • Cost of serving FEHBP enrollees can be compared • Focus on expenditures –limited attempts to separate P from Q

5. Cost Shifting • Focus of Nov 2002 – HCFO Conference • Common Claim: Low Medicare pay implies high private pay • Morrissey: No shifting unless relative bargaining power change exists or unexploited power exists • Cutler – Evidence of cost shift in the 1980s and reduced resource use in the 1990s

6. Who Bears the Burden? • Argument parallels the incidence of the property tax (except as tax on labor) • National Level – Cost of health care is part of labor compensation, and labor bears most of the burden • Local Level – Cost of health care distinguishes MSA’s ability to attract and retain labor; thus, borne locally

7. Data • 20 large MSAs in the Central USA • Initial focus on Milwaukee (and 5 close MSAs) • Add 14 other MSAs – Madison,WI + 13 with population greater than 600K and within 750 miles • HMO data – InterStudy + U of MN • Hospitals – American Hospital Association • Demographics – Area Resource File, Census • Physicians – Area Resource File • FEHBP – Blue Cross Blue Shield Intermediary

8. Key Variables • HMO Premium PMPM • Non-Governmental Payments to Hospitals per Non-Elder • Medicare Payments (A and B) per Enrollee • AAPCC through 1997 • Old to Young Working Age Population • Population 45- 64 / Population 20-34 • Competitiveness – Herfindahl for hospitals; #of HMOs*HMO Penetration

9. Health Care Costs • HMO premium PMPM • 2000 range - $123 (DES) to $178 (MSP) • 1990 – 2000 growth – 33% (MEM) to 97% (MKE) • Non-Governmental Payment per Non-Elder • 2000 range - $587 (KC) -$1,165 (IND) • 1990 – 2000 growth - 18% (DAY) to 161% (LOU) • FEHBP – PPO - $PMPM • 2000 range - $114 (DAY) - $228 (MKE)

10. Table 1

11. Medicare Payment Levels • Total Medicare Payments – 2000 PEPM • $347 (FTW) to $559 (PIT) ; $464 (USA) • 1990 – 2000 Growth: 23% (DET) to 58% (FTW) ; 69% - (USA) • Medicare Part A – 2000 • $195 (FTW) to $353 (PIT); $263 (USA) • 1990 – 2000 Growth: 24% (DES) to 57% (COL) 66% - USA • Medicare Part B – 2000 • $140 (MAD) to $206 (PIT); $200.87 (USA) • 1990 – 2000 Growth: 11% (DET) to 96% (MEM) • 74% - USA

12. Table 2

13. Metropolitan Demographics • Per Capita Income • 2000 - $26,877 (FTW) to $32,540 (CHI) $28,738(USA) • 1990 – 2000 growth – all but St. Louis (45%-56%) – USA – 50% • Old/Young Ratio • 2000 – 84% (MEM) to 135% (PIT); 105% (USA) • 1990 – 2000 Growth - 23% (MEM) to 81% (MAD) USA – 44%

14. Table 3

15. Medical Care Providers • The # of Hospitals declined – 14 out of 20 • Commercial Admissions Share 2000 • 37% (PIT) to 58% (MAD) • Herfindahl Index for Commercial Admits • 2000: 416 (CHI) to 4265 (FTW) • Growth 1990 – 2000: -4% (GRA) to 288% (CLE) • Physicians per 1,000 residents • 2000: 1.6 (FTW,GRA) to 3.9 (MAD) • Growth 1990 – 2000: 0% (CIN) to 24% (DAY) • Specialists 2000: 1.0 (FTW) to 2.6 (MAD)

16. Table 4

17. HMO Characteristics • HMO Penetration Rate • 2000: 11% (MEM) to 61% (MAD) • 1990 – 2000 Growth: 50% (MSP) to 705% (IND) • HMO Competitiveness • 2000: 1.03 (OMA) to 7.27 (MAD) • 1990 – 2000 Growth: 50% (MSP) to 1992% (IND) • Capitation % - Specialist Revenue 2000 • 2000 0% (OMA,DAY) to 67% (MAD)

18. Table 5

19. Table 6Non-Governmental Payments to Hospitals

20. Implications of Regression • Commercial payments per NE increased $51/year • HMO competition reduced hospital payment • Hospital payments related to MDs/1000 • Medicare payments do not influence commercial payments • Age structure of population negatively influences commercial payment level • Hospital concentration is negatively but insignificantly related to commercial payment • Practice style (admissions/1000) matters

21. Table 7HMO Premium per Member per Month

22. Implications of Regression • HMO PMPM rose $6.13 per year • PMPM negatively related to hospital concentration level • HMO penetration rate positively influences PMPM (possible reverse causality) • HMO competitiveness measure does not influence PMPM • Medicare payment levels do not affect PMPM • Old/Young ratio does not affect PMPM

23. Conclusions • Indianapolis, Madison, Milwaukee, and Omaha deliver relatively expensive commercial healthcare • Akron, Cincinnati, Grand Rapids, and Pittsburgh deliver relatively cheap commercial healthcare • Medicare cost shifting non-existent in the aggregate for either specification • Age structure plays a limited role in explaining hospital payments or HMO premiums • Relative bargaining power seems to matter for hospital payments

24. Future Directions • Increase the number of MSAs analyzed • Investigate bargaining power e.g., MD group practices membership • Investigate reverse causality (HMO PMPM) through evaluation of enrollee age structure • Differentiate effects of hospital concentration: scale and contracting economies vs. bargaining power