Date and Time
September 28, 2005
1:30 PM - 3:00 PM

Availability
Open to the public
No RSVP required

Speaker
Yu-Chu Shen, PhD - Assistant Professor of Economics at the Naval Postgraduate School; Faculty Research Fellow at the National Bureau of Economic Research; CHP/PCOR Adjunct Associate

The managed care industry enjoyed a period of rapid growth in the early 1990s. However, managed care's aggressive cost-cutting strategies led to a deep mistrust among the public in the late 1990s. Several studies have found that in order to retain customers and to mitigate the impact of negative media exposure, managed care plans have relaxed their once-restrictive network requirements and deep discounts. At the same time, consolidation among healthcare providers has increased many hospitals' bargaining power. The continuing trend toward less restrictive management practices in managed care and the strengthening of hospitals' bargaining power have left researchers and policymakers pondering whether managed care can help achieve cost containment and what the implications are for quality of care.

In the paper to be presented at this Research in Progress seminar, we examine the interactive effects of overall managed care growth (including HMOs and PPOs) and the effect of increasing hospital market power on hospital costs and revenues in the United States between 1990 and 2003. We focus on hospitals' cost and revenue growth during three periods in which the managed care market can be characterized as follows: the boom period (1990-1994), the mature period (1994-1998), and the backlash period (1998-2003).

We find that while hospitals in high managed care growth areas experienced revenue and cost growth rates that were 18 percentage points below hospitals in low managed care areas between 1990 and 1998, this cost containment effect reached a plateau after 1998. On the other hand, the cost containment effect of managed care did not materialize for hospitals in medium managed care growth areas until 2003; those hospitals experienced rates of cost growth that were 12 percentage points below hospitals in low managed care areas between 1990 and 2003. The hospitals' own market power (measured by the Herfindahl-Hirschman index) substantially counteracts the cost containment effect from managed care; hospitals with high scores on the HHI index have much higher rates of cost and revenue growth than those with low scores on the index. This effect is stronger in high managed care growth areas than medium or low managed care growth areas.