Managed Care

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California’s Current Health Insurance Market

January 6, 2010 in Health Insurance, HSA, Managed Care | No comments

The California Healthcare Foundation looks at the latest health insurance trends in the nation’s most populous state.

  • In California, like in many states, there is a blurring line between what defines an HMO compared to other forms of health insurance.  Almost all insurance carriers now offer “a broad array of products, some of which do not conform to traditional product designs.”
  • While HMO enrollment has declined in other states recently, HMO enrollment has been steady in California.  Over 60% of commercial enrollees have either an HMO or POS plan.
  • California has 2 health insurance regulatory bodies: the Department of Managed Heath Care (DMHC) and the California Deparment of Insurance (CDI).  DMHC is responsible for regulating all HMO plans and some PPO plans, while CDI regulates other PPO plans.
  • Consumer Directed Health Plans are gaining ground.  Most large employer offer CDHPs as one choice among many health insurance options.  On the other hand, many small businesses are replacing traditional health insurance products with CDHPs as the employees only option.
  • Anthem, Aetna and Cigna have introduced 3 tiers of network physicians.  There is a high-performance tier (based on physician cost and quality), a second in-network tier, and an out-of-network tier.
  • Some employers have cut cost by giving employees a narrow network plan, which gives them access only to a narrow set of physicians out of the carrier’s entire network.  For instance, when Scripps Health System in San Diego started paying doctors via fee-for-service, many plays excluded Scripps doctors from many benefit packages.  Other plans are attempting to remove the UCSD Medical Center physicians.

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How has episode-based P4P worked in California?

November 30, 2009 in Health Insurance, Managed Care, P4P, Quality | No comments

Episodes of care are defined as the bundle of medical treatments used to treat an illness over  a specified time period.  Because all treatments are bundled together, these episodes have been thought to provide a superior unit of analysis in pay-for-performance (P4P) systems.  In fact, Oxford Health Plan pioneered episode payment in the 1990s.  [Later, the health plan abandoned episode payment due to data and computer system difficulties]

How has episode-based pay-for-performance worked in California?  A paper by Robinson, Williams and Yanagihara (2009) looks at Integrated Healthcare Association (IHA) initiative.  This association of health plans, hospital systems, and medical groups manages California’s P4P program.  The P4P program gives large physician groups a P4P score based on all of its commercial HMO patients. Using the Thomson Reuters Medical Episode Grouper (MEG), $264 million was spent on the California P4P between 2003 and 2007.  Although this is the largest P4P program in the nation, it amounts to less than 2% of California physician’s income.

Using medical groups rather than individual physicians has a number of advantages.  First, a larger number of patients are attributed at the medical group level compared to the individual provider.  Also, having multiple physicians within a single group treating a patient does not complicate the analysis.  Despite the use of medical groups rather than physicians, Robinson and co-authors found a number of problems with episode-based P4P:

  • Small Sample Size: The IHA technical committee stated that a physician organization must have a minimum of 30 episodes to be evaluated.  However, most physician organizations did not have enough episodes to be scored.  The main problem is that most enrollees are healthy during the year and thus do not generate as many episodes.  However, this may be less of a problem if P4P was to be applied to Medicare beneficiaries.
  • Data Completeness: “Prior to P4P, there was little incentive for the medical group to fully code what is done to the patient (procedures) and why it is done (diagnoses) on encounter forms.”  If P4P were applied to the Medicare population, procedure codes would likely be coded more accurately (because physicians are mostly paid by the procedure), but the diagnoses fields would likely suffer from similar problems.

Today in 2009, IHA has mostly abandoned episode-based P4P.  The metrics to be used going forward include: the percentage of prescriptions filled which are generic, the percentage of ambulatory surgery procedures that take place in freestanding centers compared to hospitals, ER visits per 1000 enrollees, non-maternity hospital visits per 1000 enrollees.

The authors note that episodes of care still may be appropriate for high-volume, high cost procedures in orthopedics and interventional cardiology, but California’s enthusiasms for episode-based P4P seems to be waning.

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Do for-profit hospitals reduce safety net services?

July 14, 2009 in Managed Care | 1 comment

Social safety net services are necessary, but often unprofitable for hospitals. Is the expansion of HMOs and for-profit hospitals jeopardizing these safety net servies? This is the question researcher Yu-Chu Shen investigates.

To test this hypothesis, Shen examines how changes in the market share of HMOs and for-profit HMOs affects probability of shutting down following safety net services: emergency department, HIV/AIDS services, inpatient substance abuse services, and outpatient substance abuse services. “Safety net services rely more on public finance than other types of hospital services. For example, almost two- thirds of revenue for substance abuse treatments comes from public sector…and less than 40% of emergency department revenue comes from private health insurance.”

HMO penetration is calculated using Laurence Baker‘s data. A proportional hazard specification models the probability each of the 4 safety net services shuts down as a function of whether the hospital is in a market with a high level of managed care and whether or not the hospital is for-profit.

The author finds that HMO penetration in a local market has no effect on the probability safety net services are offered. However, the probability of “shutting down safety net services do differ by levels of for-profit HMO share. In particular, in the current environment (post-2000), a higher for-profit HMO presence is associated with a higher risk of shutting down all safety net services examined in this study except for HIV/AIDS services.”

  • Yu-Chu Shen (2009) “Do HMO and its for-profit expansion jeopardize the survival of hospital safety net services?” Health Economics, 18(3):305-320.

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UnitedHealth Group Settlement

January 14, 2009 in Health Insurance, Managed Care | No comments

Marketplace reports that UnitedHealth Group has just reached a large settlement with the State of New York.  What did UnitedHealth Group do wrong?

According to the State of New York, it was overcharging patients who went out of the network.  The N.Y. Times gives a good example:  ”The patient might receive a doctor’s bill for $100, for example, and expect the insurer to pay at least $70. But if the insurance database says that doctor bill should have been only $72, based on local rates, the patient might get back less than $55.”

Your gut reaction to this is likely one of two things.  If you are a patient, you may be saying ”I can’t believe the insurance company would stick me with this bill!”  On the other hand, if you work in the insurance industry, you may realize that a provider who is out-of-network has an incentive to charge big bucks to the patient since their another insurance company will be paying the bill.

Having insurance companies pay the “customary” amount for medical care received outside of the network seems sensible.  The problem, however, was with the company setting the reimbursement schedule.  The “customary” payment amounts for UnitedHealth Group’s out-of-network reimbursements was calculated by a company that was owned by…UnitedHealth Group.  Thus, the company had an incentive to lower the “customary” payment and shift more of the cost to the consumer.

There is nothing wrong with having an independent company decide on customary payments for out-of-network care.  In fact, this will give patients an incentive to be more frugal with their care levels. UnitedHealth Group’s lack of transparancy with respect to how these fees were set and inherent conflict of interest from owning the fee-setting company, however, does cause concern. 

This is not the first time UnitedHealth Group has made it to the Healthcare Economist for unsavory behavior (see “Options Backdating” post).

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Did California’s Medicaid HMO contracts save the state money?

April 28, 2008 in Managed Care, Medicaid/Medicare, Public Policy | Permalink

Throughout its history, Medicaid provided health insurance for the nation’s poor. It did this by reimbursing providers on a fee-for-service basis. In the 1990s, however, California and other states decided to let private insurance companies bid for the right to provide services for Medicaid patients. These HMOs would receive a fixed per patient per month payment and the private insurer would be responsible for providing health care to Medicaid enrollees.

HMOs may be more efficient than the government since 1) they have an incentive to keep enrollees healthy to save cost, 2) they can negotiate lower input prices, and 3) competition may lead to higher quality, lower priced medical care. On the other hand, keeping the government run fee-for-service program may have been more efficient if 1) the government’s size and negotiating power could decrease input costs, 2) there may be increasing returns to scale, 3) the HMOs may include significant markups in their bids, and 4) HMOs may offer medical services which do not appeal to unhealthy enrollees (i.e., adverse selection).

A paper by Mark Duggan in the Journal of Public Economics in 2004 aims to see if contracting out Medicaid health care provision to private HMOs decreased costs. Duggan uses the fact that California enacted a mandate that all AFDC Medicaid enrollees must switch to a private HMO. For other individuals, such as those on SSI and those who were disabled, deaf or blind, the switch to the HMO was voluntary. This mandate was enacted between January 1993 and December 1999 depending on the county. The author uses variation in the county enactment date to find the effect of Medicaid HMOs on cost.

Background

The manner in which California instituted the transitioned individuals into private managed care plans can be categorized into 3 groupings:

  1. Geographic Managed Care. “the state government contracts with several commercial HMOs to coordinate care for Medicaid recipients. Plans initially applied by submitting a menu of prices at which they would be willing to insure each type of Medicaid recipient. The government then awarded contracts to the plans most likely to deliver high quality medical care at a low price, though the weight placed on quality and spending was not specified.”
  2. County Organized Health System (COHS). “Under this model, the not-for-profit, community-based HMO was reimbursed a fixed amount per recipient-month that varied by eligibility category.” Individuals did not have any plan choice and the state did not allow bids from for-profit firms.
  3. “Two plan” counties. In these counties, the Medicaid enrollees would be able to choose between one private, commercial plan and one not-for profit plan. “…the state solicited bids from private companies and awarded a contract to just one of the plans.”

The following chart gives the type and date of managed care mandate by county.

County Mandate Type Date of mandate Pre-mandate % MC
Santa Barbara COHS 9/83 –
San Mateo COHS 12/87 –
Sacramento GMC 4/94 8.5%
Solano COHS 5/94 1.4%
Orange COHS 10/95 22.3%
Alameda Two-plan 1/96 4.6%
Santa Cruz COHS 1/96 0.0%
San Joaquin Two-plan 2/96 0.9%
Kern Two-plan 7/96 0.0%
San Francisco Two-plan 7/96 14.1%
Riverside Two-plan 9/96 30.3%
San Bernardino Two-plan 9/96 30.2%
Santa Clara Two-plan 10/96 4.1%
Fresno Two-plan 11/96 4.3%
Contra Costa Two-plan 2/97 22.6%
Stanislaus Two-plan 2/97 0.0%
Los Angeles Two-plan 4/97 39.0%
Napa COHS 3/98 0.0%
San Diego GMC 7/98 58.3%
Tulare Two-plan 2/99 0.0%
Monterey COHS 10/99 0.0%

Methods

Duggan uses the following equations to estimate spending.

  • ManCarejkt = α1 + γ1Mandatekt + μ1Xjkt + θ1j + λ1t + t*ρ1k + ε1jkt
  • Spendingjkt = α2 + γ2Mandatekt + μ2Xjkt + θ2j + λ2t + t*ρ2k + ε2jkt

Subscripts j, k, and t index individuals, counties, and years respectively. The variable Mandate is equal to the fraction of individual j‘s Medicaid eligible months in which a mandate was in effect. ManCare is equal to the fraction of the j‘s eligible months in which he is actually enrolled in an HMO. Spending is equal to the Medicaid spending for person j at time t.

Results

Duggan finds that the managed care mandate increased Medicaid spending. Medicaid spending increased by between 17% and 23% for counties in which the mandate came into effect. These results, however, were less pronounced where there was competitive bidding between insurance companies (i.e., the Geographic Managed Care and “Two plan” counties).

Also, despite the increased spending, the author finds no evidence of increased quality in terms of better infant birth outcomes.

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Medicare Advantage funding to be cut

April 4, 2008 in Managed Care, Medicaid/Medicare | Permalink

David Whelan chronicles the rise (and possibly future fall) of Medicare Advantage programs in his article “Unfilled Prescription” in Forbes.

Earlier laws privatizing Medicare, starting with a pilot program in 1985, were written to give insurance companies only 95% of the money otherwise spent per Medicare member. The insurers were supposed to figure out how to make up the difference. It was a blunt way to save the Treasury money, but few companies stepped up…

The 2003 law hiked the payments to lure more insurers into the market. In some counties minimum payments to these plans reached as much as 128% of the amount Medicare traditionally spends per patient. Insurers rushed in, and costs soared. In the most remunerative counties, two times as many old people are enrolled in Medicare Advantage as the national average. As a result, taxpayers now pay an average of 12% more per private-plan beneficiary, not 5% less.

Whenever we talk about cost we also need to talk about quality.  Are people who opt for Medicare Advantage plans getting higher quality care than in traditional Medicare?  Are they able to see doctors in a more timely manner?  Is care more coordinated?  If this is the case, then the extra costs may be worth the money.

Nevertheless, an economist would guess that Medicare Advantage plans should be cheaper.  Even though the private plans have higher administration and advertising costs, they likely are more efficient than the government plans.  Further, one would anticipate that healthier seniors would choose the Medicare Advantage plans and sicker senior would be more likely to choose traditional Medicare.  This selection problem should make Medicare Advantage cheaper.

I agree that the federal government should not pay more money for private plans than it does for traditional Medicare.  It should reimburse the plans the same (or less if there is adverse selection) as it costs for the government to administer traditional Medicare and if firms want to increase the price, than seniors can pay the difference.  If seniors do not want to pay the difference, they can always opt for traditional Medicare.

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Consumer Channeling and Preferred Providers

February 19, 2008 in Health Insurance, Managed Care, Pharmaceuticals | Permalink

Doctors often complain that health insurers are squeezing their profit margins. These insurers offer the physicians access to patients as part of their network in exchange for discounted fees. Physicians can decide not to join the network and charge higher prices, but may be left with fewer patients. The bargaining power of the health insurer depends on how many patients they are able to channel towards these physicians.

In the U.S., most health insurers restrict provider choice ex ante by using either prohibiting patients from visiting providers outside the network or charging the patients significantly higher co-payment rates if go to a provider outside the network. In the Netherlands, almost all care is free to patients so insurer need to use ex post incentives (e.g.: bonuses, gift certificates, and extra services) in order to entice the patients to use the services of the preferred provider.

A paper by Boonen, Schut and Koolman in the most recent edition of Health Economics examines how well the ex post incentives function in the Netherlands’ pharmacy market. Since pharmacies are regulated and prescription drugs are a homogeneous commodity, quality differences between pharmacies are negligible. The authors use data from two health insurers who attempt to direct their enrollees to specific pharmacies.

Using a multinomial logit framework, the authors find that convenience (i.e.: distance to the pharmacy) has a large impact. The financial incentives offered by health insurer A and B cause many enrollees to use the preferred provider. Health insurer A, however, gave a 10 € for the patient’s first visit to the pharmacy and 5 € for their second visit to the pharmacy. Under this incentive structure, individuals were more likely to switch to the preferred provider and then return to their original pharmacy after the incentives had disappeared. Only 25% of those who switch to the preferred provider continue to use them after the financial incentives disappear.

Health insurer B offered a discounts on products offered at the preferred pharmacy and these incentives were made permanent. Unsurprisingly, enrollees also were more likely to go to the preferred provider after the financial incentive regime was enacted.

One interesting item of note is that Health insurer B’s preferred pharmacy was in the same building as a general practitioner (GP). Since GPs function as gatekeepers in the Dutch system (i.e.: one cannot a prescription without the GPs approval), having the GP in the same building as the pharmacy was a huge convenience. Further, the GP could influence the patient to use the preferred pharmacy.

In summary, it was shown in the Dutch setting that even small incentives can have a large effect on provider choice.

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PacifiCare fined $3.5 million for claims-processing violations

January 31, 2008 in Current Events, Health Insurance, Managed Care | Permalink

According to the San Diego Union Tribune, yesterday PacifiCare was fined $3.5 million and the California Department of Managed Health Care is seeking up to $1.3 billion in additional penalties for “130,000 alleged claims-processing violations…in California between July 1, 2005, and May 31, 2007.” PacifiCare is the second largest HMO in San Diego and the fourth largest health insurer in California.

These violations have prompted California Insurance Commissioner Steve Poizner begin an audit of the eight largest California health insurers to determine whether or not these companies have engaged in similar billing practice.

Joe Paduda of Managed Care Matters argues that the ruling is another piece of evidence which favors a  single-payer system.  Mr. Paduda states:

For those (including me) forever excoriating health systems and hospitals for their outrageous error rates, the debacle at Pacificare, the recently-acquired division of United Healthcare (one of my past employers) make the delivery sector look like a paragon of performance. I’m not overly surprised, as mergers involve systems conversions, the amalgamation of provider networks and contracts, and the shifting of work around to different call centers and processing locations. Duplicate staff positions are identified and people laid off, and when they walk out the door so does the expertise and understanding that enabled the operation to run smoothly.

The question remains, would a single-payer system perform better?  The government is not known as the paragon of efficiency.  With a single payer system, likely one of two things will happen:

  • Government administrators will make claims processing errors just as health insurance administrators do now, or
  • government administrators will deny less claims erroneously, but this will likely coincide with the acceptance of more unnecessary or false claims, thus increasing overall health care costs.

A single payer system may lead to improved claims processing.  However, for anyone to be convinced that a single payer system is the way to go, one must not only show that the present system is flawed, but that a single payer system is a significant improvement.

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Laurence Baker

May 23, 2007 in Managed Care | Permalink

Laurence Baker is a health economist at Stanford’s Center for Health Policy. Much of Mr. Baker’s work has dealt with how HMOs have affected care levels. Today I will briefly review three of Baker’s articles:

HMO Penetration and the Cost of Health Care (AER 1996)

In this paper, Baker and Corts look how HMO market penetration affected health care premiums. I think the article is most pertinent to the health care atmosphere in the late 80s and early 90s when the distinction between HMOs and other insurance plans was starker than it is now.

The authors argue that there are four reasons why increased HMO penetration may affect the cost of traditional insurance.

  1. Patient Self-Selection: Healthier patients may sort into HMO leaving traditional insurers with more unhealthy patients.
  2. Physician Selection: HMOs may attract physicians who prefer a more conservative style of medicine.
  3. Promulgation of Conservative Practice Styles: A higher level of HMO penetration may influence the ‘standard of care’ prevalent in a given metropolitan area.
  4. Cost shifting. If HMOs are good negotiators, providers may simply accept low margins for HMO patients and charge even higher rates to traditional insurance plans. This argument, however, is illogical if providers are assumed to be profit maximizers.
  5. Plan characteristics. Traditional insurers may make their plans less generous in order to compete with HMOs.

Using data from 1991, the authors do find that increased HMO market share decreases premiums when the HMOs first enter the market (i.e.: HMO market share is between 0-10%). Additional HMO market penetration (i.e.: HMO market share above 10%), however, is actually found to increase health insurance premium in a local area.

Effect of HMO Market Share on Cancer Screening

The authors posit that HMOs may be more likely to screen patients for cancer since these health plans are more cost-conscious and take a longer-term view of health care. Spillovers effects non-HMO providers may occur where 1) physician practice patterns change due to an increased HMO presence, 2) patients may be more exposed to information regarding cancer screening in areas with high HMO concentration, and 3) areas with a high HMO market share may attract providers who are more likely to screen patients.

The authors use the 1996 Medical Expenditure Panel Survey-Household Component (MEPS-HC) to test their hypothesis. HMO market concentration is measure by segmenting markets into highest, middle two and lowest quartiles, as well as by using a Hirschman-Herfindahl index (HHI). The authors find that an increase in HMO market share increases the probability of breast and cervical cancer screening, but does not affect the propensity for men to get a prostate exam.

Calculating HMO Market Shares

How do Baker and colleagues calculate HMO market share? A paper studying the factors association with mammography screening has an appendix which details how the HMO market shares were calculated. In the paper, the authors find that those who were more likely to be screened were younger, had smaller families, higher education and income, had a recent Pap smear; reported breast problems; lived in an area that had more mammography facilities with reminder systems, areas with higher HMO market shares and higher screen charges.

Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly

May 4, 2007 in Academic Articles, Health Insurance, Managed Care, Medicaid/Medicare | Permalink

The RAND health insurance experiment (HIE) demonstrated that increasing coinsurance rates decreases medical care utilization. The HIE also found that health outcomes did not vary between individuals with high, low and zero coinsurance rates.

A working paper by Chandra, Gruber and McKnight (“Patient Cost Sharing…“) re-examines whether or not this is the case using a more current dataset specifically focused on the elderly. The medical utilization data the authors use is for of all CalPERS retirees between January 2000 and September 2003. Almost all of the retirees are covered by Medicare, but since Medicare typically has a 20% coinsurance rate, CalPERS provides supplemental insurance to their retirees. The authors conduct a difference in difference estimation comparing copayment changes from the CalPERS decision to raise PPO copayment rates in February 2001 and then to raise HMO copayment rates beginning in January 2002.
The authors find that physician office visits and prescription drug utilization are very price sensitive. For office visits, the estimated price elasticity is between -1.38 and -1.90 and for pharmaceuticals the price elasticity is between -0.20 and -1.4. These findings are surprising since it is typically assumed that the demand for medical care is inelastic.

The authors also found that increased cost sharing led to a slight increase in hospitalizations. However, when the subpopulation of individuals with chronic health conditions is examined, large increases in hospitalization rates are found. This means that individuals with chronic health conditions forego office visits and drug purchases due to the increase in price, but this decision will worsen their health and thus increase the chance they are hospitalized.

Why would an insurance company want to increase the number of expensive hospitalizations? It turns out that the CalPERS insurance plans pay for the ‘first-dollar’ of office visit and pharmaceutical costs. Thus, by increasing copayments, office visits and drug use decrease. Since Medicare pays for the ‘last dollar’ of medical costs (i.e.: Medicare pays for expensive hospitalizations and surgical procedures), the CalPERS plans do not incur the cost of the increased hospitalizations. To summarize, CalPERS receives the majority of the cost savings from increased copayments whereas Medicare bears the cost of the increased hospitalizations when office visit and pharmaceutical demand decreases.

This papers shows that it is always important to take a more global, more systematic view whenever a researcher is investigating the medical field.

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