Price competition and hospital cost growth in the United States (1989-1994)

Abstract

In recent years, most health care markets in the United States (US) have experienced rapid penetration by health maintenance organizations (HMOs) and preferred provider organizations (PPOs). During this same period, the US has also experienced slowing health care costs. Using a national database, we demonstrate that HMOs and PPOs have significantly restrained cost growth among hospitals located in competitive hospital markets, but not so in the case of hospitals located in relatively concentrated markets. In relative terms, we estimate that HMOs have contained cost growth more effectively than PPOs.

Is Managed Care Still an Effective Cost Containment Device?

“…Managed care plans had traditionally adopted strategies that allowed them to aggressively control health care costs, including the use of primary care gatekeepers, negotiating deep discounts with providers, and restricting access to providers outside of the network (Bamezai et al 1999;Draper et al 2002). However, such aggressive strategies created a deep mistrust in consumers in the later part of the 1990s (Swartz 1999, Robinson 2001.…”

“…Morrisey (2001) reviewed the empirical literature on the effects of selective contracting and hospital competition on various aspects of hospital performance such as prices, travel distance, services, and quality. In general, previous studies that examined the effect of managed care growth on hospital cost growth before the backlash have consistently found that HMO growth lowered hospital cost inflation (Gaskin and Hadley 1997;Connor et al 1998;Bamezai et al 1999;Shen and Melnick 2004) and that increased HMO buying power was associated with lower prices of hospital services (Feldman and Wholey 2001). However, there was no empirical evidence indicating whether such cost containment effect had continued after the start of the purported backlash period.…”

“…This market power effect continues in the backlash period in two studies that examined the negotiated prices managed care plans obtained after hospital mergers 2005, Capps andDranove 2004). A few studies explicitly examined the interactive effects between hospital competition and managed care: Connor et al (1998) and Bamezai et al (1999) both found that the ability of managed care plans to contain cost and revenue growth was substantially limited when the hospital market was highly concentrated.…”

“…This fixed-effects translog model has been used extensively in previous studies (Granneman et al 1986;Bamezai, et al 1999;Zwanziger, et al 2000). To the extent that the unobserved characteristics in the provider market remain stable over time, the hospital fixed-effects model would eliminate this potential selection bias.…”

Hospitals' Negotiating Leverage with Health Plans: How and Why Has It Changed?

“…The author also draws several other tentative conclusions by extrapolating from two national studies of the effects of managed care and hospital competition on costs (Gaskin and Hadley 1997;Bamezai et. al.…”