Market forces and health care costs

Article Abstract:

There is both good news and bad news for the payors of hospital bills in Professor Robinson's article, which appears in the November 20, 1991 issue of the Journal of the American Medical Association. This article discusses the influence of health maintenance organizations on health care costs. The good news is that market forces have helped to contain escalating hospital costs in California; the bad news is that these forces did not work effectively; the average per case costs still increased 74.5 percent from 1982 to 1988. Most employees are not fully aware of the cost aspects when they chose their health plan. Few employers require employees to pay the full cost difference if they chose a more costly health plan. Since insurance plans do not have to compete fully on price, they do not require hospitals to compete on price. If market forces are to work, the employee who chooses the more expensive health plan must pay the difference; Congress should reward those who chose the more economical plan and limits should be placed on the amount of tax-exempt, employer-provided health insurance an employee can receive. Small groups of employees account for about half of the work force; insurance administration expenses for these groups are greater compared with groups of more than 10,000 persons. Economies of scale could be achieved if these small groups could be collected into larger purchasing units; this could be done by public sponsors or by the private sector. If the public is to make choices on price, quality, and services, they need to have information available regarding specific hospitals, such as number and type of admissions, patient outcomes, and mortality. Competitors in the health care market place must be able to improve quality and efficiency; elective contracting for health services by insurance companies is a step in the right direction. However, what is needed are integrated financing and health care delivery systems which compete against each other. Physicians have a choice; they may either cooperate with changes to make the health care market work for the consumer or abdicate, and leave it to government. (The author of this editorial consults for Kaiser Permanente and has a financial interest in US Health care and United Healthcare.) (Consumer Summary produced by Reliance Medical Information, Inc.)

Editorial

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HMO market penetration and hospital cost inflation in California

Article Abstract:

Health maintenance organizations (HMOs) are an important part of current proposals to reform the health care system. Health care providers who treat a large number of HMO patients have been pressured to contain costs by controlling diagnostic procedures, treatments, and length of time spent in the hospital. The effect of price competition should help control costs of conventional medical care so that insurance premiums are competitive with those of the HMO. Using this theory, it would be expected that in areas where large segments of the insured public belong to an HMO, the medical costs in that area should be lower than areas with few HMO members. However, this has not been shown to be true, which may be due to the inability of hospitals to compete for patients on the basis of cost. If insurance companies cannot contract selectively with hospitals based on cost, they have no way of convincing hospitals to stop competing with each other on quality, which is a very costly exercise. In 1983, California conventional fee-for-service insurance plans were allowed to selectively contract with hospitals and health care providers. A study was undertaken to examine the influence of HMO market penetration on increases in hospital costs. California has experienced rapid growth of HMO membership. In 1983, 8.3 percent of hospital admissions were HMO members, which rose to 17 percent in 1988. The increase in cost per admission in private (non-HMO) hospitals in areas where there was high HMO market penetration was significantly lower than in areas where HMO market penetration was low. The average increase in hospital costs was 9.4 percent lower in high HMO market penetration areas. Although competition can reduce hospital cost inflation, the impact of competition by HMO's in California was modest, considering the average rate of hospital cost inflation of 74.5 percent in this time period. (Consumer Summary produced by Reliance Medical Information, Inc.)

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Consolidation of medical groups into physician practice management organizations

Article Abstract:

Many solo and group physician practices are joining physician practice management (PPM) organizations in order to compete effectively in the healthcare marketplace. PPMs are for-profit, investor-owned companies that contract with several hospitals rather than just one. Between 1994 and 1996, the number of physicians affiliated with MedPartners, FPA Medical Management and UniMed increased from 3,787 to 25,763. Patient enrollment in managed care increased from 285,503 patients to over three million and revenues increased from $190 million to $2.1 billion.

Management, Statistics, Managed care plans (Medical care), Health care teams

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