January 2001

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

From 1996 to 1998, researchers at the University of Alabama studied the effect of any willing provider (AWP) and freedom of choice (FOC) laws on Health Maintenance Organizations (HMOs) and employers.

AWP laws require that any provider willing to accept the terms and conditions of a contract with a managed care organization must be allowed into the managed care network. FOC laws require managed care firms to allow subscribers to use non-participating health care providers for a larger out-of-pocket payment.

These laws had been enacted in more than 25 states by the mid-1990s.

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

  • The researchers found that AWP and FOC laws are typically enacted in states with little managed care activity, suggesting that states adopt them proactively as a tool to curb managed care growth.
  • In fact, the results showed that AWP laws pertaining to physicians reduced HMO penetration.
  • In addition, AWP laws pertaining to hospitals significantly increased HMO administrative costs.
  • The laws, however, do not appear to have decreased the number or type of managed care plans offered by employers or increased the premiums employers pay for these plans.

Funding
RWJF supported this project through a grant of $308,893.

 See Grant Detail & Contact Information
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THE PROBLEM

AWP and FOC laws were under debate at both state and federal levels at the time this grant was made. Their proponents argued that the laws increase consumer choice and assure quality by allowing consumers access to a much wider number of providers.

Opponents contended that the laws diminish managed care organizations' (MCOs) ability to control costs. If MCOs can't guarantee increased patient volume to a set group of providers, it is difficult for them to negotiate lower prices. Although little was known about their actual impact on HMOs and consumers, more than 25 states had enacted AWP and FOC laws by the mid-1990s.

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THE PROJECT

The project had five original objectives:

  1. To describe the nature of AWP laws and predict their spread.
  2. To estimate the effect of AWP laws pertaining to pharmacies on prescription drug prices paid by HMOs and Preferred Provider Organizations (PPOs), and to estimate the effect of these laws on out-of-pocket prescription co-payments paid by enrollees.
  3. To estimate the effects of AWP laws on the number of MCOs' participating providers and on MCO administrative costs.
  4. To estimate the effects of AWP laws on MCOs' penetration of the employer market.
  5. To estimate the effects of AWP laws on health insurance premiums paid by employers.

Objectives 2 and 3 were revised in December 1996 with RWJF approval after the project team found that MCOs contracted out their prescription drug benefits. In addition, MCO response rates to a pilot survey were extremely low (2 percent with substantial telephone follow-up), precluding a reliable analysis.

The revised objectives 2 and 3, which relied on existing data sources and thus obviated the need to survey MCOs, were: (2) to estimate the effect of AWP and FOC laws on HMO market share; and (3) to estimate the impact of AWP and FOC laws on the medical and administrative expenditures of HMOs and on the network size of PPOs. (The PPO analysis was later abandoned because of the low response rate of PPO's to the survey, and differences across states in PPO market definitions.)

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FINDINGS

AWP and FOC Law Findings

Review of the statutes governing MCOs in all 50 states and the District of Columbia showed that by 1996, 30 states had adopted AWP or FOC laws covering pharmacies, 17 had enacted laws covering physicians, and 14 had implemented laws covering hospitals.

The project team developed and applied a "public choice model" to the enactment of AWP and FOC legislation. The key determinants of this model were measures of proponent and opponent strength (proponents being those who argue that AWP and FOC laws expand consumer choice and opponents being those who say that the laws get in the way of selective contracting and increase costs) and the political environment.

The researchers found that the model had "mixed success" in predicting enactment and repeal of the laws; however, they determined that states with greater numbers of health care providers were more likely to enact AWP and FOC laws, while states with greater numbers of large employers were less likely to enact the laws.

In addition, according to the grantee's final report to RWJF, "conservative states were more likely to enact laws limiting selective contracting with both hospitals and physicians, while states with greater two-party competition were more likely to enact laws relating to hospitals only."

The researchers also found that the laws are more likely to be enacted in states where managed care has not yet arrived, suggesting that many of the laws are preemptive in nature. According to the project team, this latter finding is "a reminder to the public and policymakers that AWP and FOC laws are not necessarily designed to protect quality, but instead are often conceived as efforts to protect providers from the effects of competition."

Market Share Findings

In the second phase of the study, the project team used InterStudy enrollment data and financial data on HMOs from Health Care Investment Analysts to examine the effect of the laws on HMO market share and expenditures. Their analysis revealed the following:

  • These laws have varying effects on HMO market share depending on the type of provider covered. AWP laws covering physicians reduced HMO market share by almost 4 percent, yet there was no evidence that AWP laws covering hospitals or pharmacies reduced market share.
  • FOC laws had no statistically significant effect on HMO market share.

These findings suggest that state laws limiting the extent to which HMOs could selectively contract had only limited success during the 1989–1995 period.

Expenditure Findings

  • HMOs in states with AWP laws covering hospitals had total expenditures that were 24 percent higher; these costs were driven almost entirely by an increase in administrative costs.
  • As HMOs expand, they are able to achieve substantial administrative economies of scale. (In other words, the larger the HMO, the less the relative cost of the administrative infrastructure — e.g., computer networks, strategic planning, etc.) The researchers contend that this finding provides insight into why managed care organizations consolidate; horizontal integration in this industry may meaningfully affect health care costs and organization.

These findings suggest that the effects of AWP and FOC laws are not felt in higher negotiated prices but in higher costs of implementing and monitoring contracts.

Findings on the Effect of AWP and FOC Laws

In the third phase of the project, the investigators looked at how AWP and FOC laws affect HMO offerings by employers and the premiums employers pay for managed care plans. Using 1993 and 1995 data from national surveys of employers conducted by KPMG Peat Marwick (an international business consulting firm) and Wayne State University, the project team found no credible evidence that AWP or FOC laws have affected the provision of various types of managed care plans by employers or the premiums paid by employers. They consider these findings also "preliminary" in nature and intend to explore this area further.

Limitations of Findings

The research team concluded that the finding that AWP and FOC laws are preemptive in nature should signal to policymakers and researchers that state-level comparisons of the laws' effects may give a biased picture. The comparison of the status of managed care in states that do and do not have AWP and FOC laws may reveal more about the states' receptivity to managed care than about the effect of the laws.

In their final report, the project team stated: "… the measured impacts of the laws depend upon how one treats the underlying 'tastes' for regulation in the state or community. Failure to control for these key factors leads to very different results. The studies may serve as a warning of the dangers of too simple-minded analysis.quot;

In addition to the paper published below, the authors prepared three other working papers. Because the results are inconsistent across studies, the authors chose not to submit them for publication. The researchers suggest that methodologies need to be developed to separate the effects of laws from the underlying economic and political sentiments that led to their enactment. In addition, they suggest that methodological attention should be devoted to capturing differences in the intensity of enforcement of AWP and FOC laws.

Communications

The project team published the findings from their study in Health Services Research, which is a peer-reviewed journal. They discussed the project at seven professional conferences. See the Bibliography for details.

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AFTER THE GRANT

The project team will continue its analysis of the effect of AWP and FOC laws on HMO expenditures and employers' health plans offerings. At the close of the grant, they considered their findings for these two analyses to be "preliminary" in nature and wanted to examine the impact of including other types of expenses on the former and including state health regulation on the latter.

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GRANT DETAILS & CONTACT INFORMATION

Project

Research on the Effects of Any-Willing-Provider Laws

Grantee

University of Alabama (Birmingham,  AL)

  • Amount: $ 308,893
    Dates: April 1996 to March 1998
    ID#:  029014

Contact

Michael A. Morrisey, Ph.D.
(205) 975-8966

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BIBLIOGRAPHY

(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)

Articles

Ohsfeldt RL, Morrisey MA, Nelson L and Johnson V. "The Spread of Any Willing Providers Laws." Health Services Research, 33 (5, Pt. 2): 1537–1562, 1998. Abstract available online.

Manuals and Papers

Working papers available from Michael Morrisey, Ph.D., (morrisey@uab.edu) at UAB Lister Hill Center for Health Policy:

Morrisey MA, Ohsfeldt RL and Johnson V. "Effects of Any Willing Provider and Freedom of Choice Laws on HMO Market Share." June 1998.

Morrisey MA, Ohsfeldt RL and Johnson V. "The Impact of State Any Willing Provider Laws on Expenditures in Health Maintenance Organizations." June 1998.

Jensen GA, Morrisey MA and Bulycheva M. "Employers' Managed Care Plans Under Selective Contracting Laws." June 1998.

Presentations and Testimony

Ohsfeldt, Robert. "The Spread of Any Willing Provider Laws," at the annual Public Choice Society meeting, San Francisco, March 21–22, 1997.

Morrisey, Michael. "Effects of Any Willing Provider and Freedom of Choice Laws on HMO Market Share," poster session at the annual Association for Health Services Research meeting, Washington, June 22–23, 1998.

Morrisey, Michael. "The Effects of Any Willing Provider Laws on Managed Care," at the American Enterprise Institute Health Policy Lecture Series, Washington, October 16, 1998.

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Report prepared by: Karin Gillespie
Reviewed by: Marian Bass
Reviewed by: Molly McKaughan
Program Officer: Nancy L. Barrand

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