January 2001

Grant Results

National Program

Changes in Health Care Financing and Organization

SUMMARY

From 1996 to 1998, researchers at University of Alabama at Birmingham studied the behavior of managed care organizations (MCOs) in their contracting with hospitals. The study, based on eight years of data from Illinois, sought to shed light on why MCOs contract with particular hospitals and how stable these relationships are over time.

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 findings showed that:

  • HMO contracts with hospitals remained stable over time.
  • HMOs were less likely to contract with:
    • Hospitals with higher complication rates.
    • Very low cost hospitals.
    • Very high cost hospitals.
    • Teaching, for-profit, and government-owned hospitals.

Funding
RWJF supported this project through a grant of $421,487.

 See Grant Detail & Contact Information
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THE PROBLEM

Managed care insurers are increasingly involved in the organization and provision of health care services rather than just the financing of them. As a result, hospitals have redirected their marketing focus away from physicians and patients exclusively, and toward managed care organizations.

MCOs, through the contracts they establish with hospitals, are gatekeepers; they determine where and how patients are directed for hospital inpatient and outpatient care. Yet very little is known about why MCOs contract with particular hospitals and how stable these relationships are over time.

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THE PROJECT

This research project had four objectives:

  1. To examine the effects of insurance market competition on the hospital contracting behavior of HMOs and preferred provider organizations (PPO).
  2. To examine the importance of hospital costs, quality, services, and other factors in MCOs' decisions to contract with particular hospitals.
  3. To examine the stability of these contracts over time.
  4. To examine the effects of HMO and PPO contracting strategies on managed care market penetration over time.

Initially, the project team intended to use data from Illinois and New Jersey on patients discharged from their hospitals during the period 1987–1994. These states were selected because they had the only state data sets that provided information on the health plan in the patient record.

Subsequently, the investigators found that they were unable to get quality measures for the New Jersey data and therefore did not use these data in the analysis of contracting. The New Jersey data, however, were used for the analysis of hospital markets.

The researchers used a variety of secondary sources to add additional information to their analysis, such as the Group Health Association of America Annual Directory, which provides information on the HMO model type and enrollment.

The researchers also linked the state databases with hospital and market characteristics from the American Hospital Association Annual Survey and the Area Resource File. Using the Alabama Cray Supercomputer (because of the size and complexity of the state databases), the project team first defined hospital markets in the two states. The computer algorithm defined markets as an area in which "few people traveled in to get hospital care and few people left to get hospital care."

The researchers had intended to define insurance markets using the same approach but found that many HMOs defined their market as statewide or within a specific metropolitan area. As a result, the study team defined insurance markets as metropolitan statistical areas (MSAs).

Then, the investigators computed three measures of hospital-level quality:

  1. The casemix-adjusted probability that a patient would die in the hospital.
  2. The casemix-adjusted probability that a patient would develop a complication during the hospital stay.
  3. The case mix-adjusted length of stay.

The project team also developed a list of contracts for each hospital in Illinois. Because not all HMOs were willing to furnish information on their current contracts, the investigators took a three-step approach to gather this data:

  1. HMOs had to have 500 or more admissions in Illinois in a year to be regarded as active in Illinois.
  2. An HMO had to have 10 or more admissions in the MSA in a year to be regarded as active in that market.
  3. An HMO had to provide at least 1 percent of a hospital's admissions in a year to be regarded as having a contract with that hospital.

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FINDINGS

The findings from their analysis include:

  • Insurers view their markets as MSAs or entire states.
  • As hospital expenses per day increased, the probability of having a contract increased, then increased less rapidly, and ultimately decreased. This suggests that HMOs avoid contracting with both very low-cost and very high-cost hospitals.
  • As hospital quality increased, the probability of having a contract first decreased, then decreased more slowly, and ultimately increased. This suggests that HMOs are more likely to contract with higher quality hospitals.
  • HMOs were more likely to contract with hospitals with fewer case mix-adjusted complication rates.
  • As case mix-adjusted length of stay increased, hospitals were more likely to have contracts but the likelihood increased at a decreasing rate.
  • Larger hospitals and hospitals with a larger share of Medicare patients were more likely to have contracts.
  • Major teaching hospitals were less likely to have HMO contracts.
  • For-profit and government hospitals (state and local) were less likely to have HMO contracts.
  • Hospitals offering more complex services and those with higher occupancy rates were no more likely than other hospitals to have HMO contracts.
  • Hospitals located in less competitive markets were less likely to have HMO contracts.
  • It does not appear that HMOs in Illinois reduced or expanded their hospital networks over the first half of the 1990s.
  • Additionally, the researchers found that declines in hospital admission rates in both Illinois and New Jersey did not result in a decline in the number of hospitals in the states or a concentration of admissions within a subset of hospitals.

Communications

An article has been submitted to academic journals. In addition, the findings were presented at several national and international meetings and conferences.

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AFTER THE GRANT

As part of the project, the investigators also examined the effects of HMO contracting strategies on managed care market penetration. They developed several hypotheses but were unable to test them with existing data. They plan to conduct empirical analysis of these issues in future research.

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GRANT DETAILS & CONTACT INFORMATION

Project

Hospital Contracting under Managed Care

Grantee

University of Alabama at Birmingham (Birmingham,  AL)

  • Amount: $ 421,487
    Dates: June 1996 to December 1998
    ID#:  029388

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

Wedig GJ, Van Horn RL, Morrisey MA and Hassan M. "Dynamic Learning and the Evolution of Managed Health Care." Unpublished.

Presentations and Testimony

Gerard Wedig, R. Lawrence Van Horn, Michael Morrisey and Mahmud Hassan, "Dynamic Theory of Managed Health Care Based on Costly Learning," at the American Economic Association Convention, January 4, 1998, Chicago.

Gerard Wedig, R. Lawrence Van Horn, Michael Morrisey and Mahmud Hassan, "Dynamic Theory of Managed Health Care Based on Costly Learning," at the International Health Economics Association, June 6–8, 1999, Rotterdam, The Netherlands.

Gerard Wedig, R. Lawrence Van Horn, Michael Morrisey, and Mahmud Hassan, "Dynamic Theory of Managed Health Care Based on Costly Learning," at the Association for Health Services Research, June 27–29, 1999, Chicago.

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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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