August 2003

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

This 1994–1997 project, conducted by Jack A. Hadley, Ph.D., and researchers at Georgetown University School of Medicine, Washington, evaluated managed care plans' use of selective contracting to purchase tertiary care services.

Hadley and his research team examined how managed care organizations negotiate contracts with tertiary care hospitals for coronary artery bypass graft surgery and neonatal intensive care, in order to understand the importance of quality and price factors in the negotiations.

This project was part of the Robert Wood Johnson Foundation (RWJF) national program Changes in Health Care Financing and Organization (HCFO) (for more information see Grant Results).

Key Findings
Researchers reported the following findings in a Findings Brief available on the HCFO Web site.

  • Managed care organizations employed similar negotiating processes for both coronary artery bypass graft surgery and neonatal intensive care. As a result, researchers suggest that these findings may be relevant in evaluating delivery of other tertiary care services.
  • Managed care organization market penetration was the strongest factor in whether price or quality was the priority in completing a contract.
  • As the level of HMO market competition increased, so did the proportion of HMOs that reported being actively involved in the care process through monitoring both length of stay and pre- and post-stay costs.
  • Researchers found that hospitals that charged higher prices to the managed care company for either coronary artery bypass graft surgery or neonatal infant care were less likely to be awarded a contract by a managed care organization.
  • In many areas, hospitals are not able to maintain needed patient volume unless they have contracted with managed care organizations. However, such contracts are not a guarantee that a health plan will send patients to a particular hospital.

Funding
RWJF provided a $553,631 grant to the project.

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THE PROJECT

Hadley and his research team at Georgetown University School of Medicine examined how managed care organizations negotiate contracts with tertiary care hospitals for coronary artery bypass graft surgery and neonatal intensive care, in order to understand the importance of quality and price factors in the negotiations. (Tertiary care hospitals bring together specialized skills, technology and support services to treat complex, rare or severe diseases involving multiple organ systems or requiring sophisticated technology and treatment skills.)

Researchers considered the following:

  • How managed care organizations choose hospitals for tertiary care contracts.
  • How the managed care structure in a health care market and the characteristics of the hospital market influence contract negotiations.
  • How a contract affects the way in which a managed care plan channels enrollees to tertiary care.

Surveys of both managed care organizations and hospital administrators provided national data on trends and variations in contract negotiations. Researchers focused on four variables to understand their impact on contracting decisions: price, quality of care, geographic convenience for enrollees and the managed care organization's market penetration.

The research team also interviewed managed care organization medical directors and contracting officers as well as hospital administrators responsible for contracting with managed care organizations. The interviews addressed the effect of community factors on the contracting process in three different markets with varied managed care penetration and enrollment, number of hospitals and hospital beds and number of primary and non-primary care physicians.

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FINDINGS

Researchers reported the following findings in a Findings Brief available on the HCFO Web site:

  • Managed care organizations employed similar negotiating processes for both coronary artery bypass graft surgery and neonatal intensive care. As a result, researchers suggest that these findings may be relevant in evaluating delivery of other tertiary care services.
  • Managed care organization market penetration was the strongest factor in whether price or quality was the priority in completing a contract. While quality is an important factor in contract negotiations between managed care organizations and hospitals, as competition among both managed care organizations and hospitals increases, price takes precedence. As result, consumers may pay less but will also receive less.
  • As the level of HMO market competition increased, so did the proportion of HMOs that reported being actively involved in the care process through monitoring both length of stay and pre- and post-stay costs.
  • When researchers removed the competition aspect from the equation and held quality and geographic convenience constant, they found that hospitals that charged higher prices to the managed care company for either coronary artery bypass graft surgery or neonatal infant care were less likely to be awarded a contract by a managed care organization. Conversely, when price and geographic convenience were held constant, the higher the quality measure, the more likely a managed care organization would award a contract. In addition, managed care organizations became less likely to award a contract to a hospital as the geographic distance between the hospital and enrollees grew, quality and cost remaining constant.
  • In many areas, hospitals are not able to maintain needed patient volume unless they have contracted with managed care organizations. However, such contracts are not a guarantee that a health plan will send patients to a particular hospital.

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GRANT DETAILS & CONTACT INFORMATION

Project

Selective Contracting for Tertiary Care Services by Managed Care Plans

Grantee

Georgetown University School of Medicine (Washington,  DC)

  • Amount: $ 553,631
    Dates: July 1994 to December 1997
    ID#:  024328

Contact

Jack L. Hadley, Ph.D.
(202) 687-0880
hadleyj@gunet.georgetown.edu

Web Site

http://www.hcfo.net

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Report prepared by: Mary Geisz
Reviewed by: Robert Crum
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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