Jack Zwanziger, a health economist formerly at the University at Rochester and now at the School of Public Health at the University of Illinois at Chicago and Cathleen Mooney a researcher in the Department of Community and Preventive Medicine at the University at Rochester conclude in the latest Inquiry that, with some caveats and at least in the short term, hospital price deregulation led to price reductions for managed care plans in New York. Here's the abstract of their article, "Has Competition Lowered Hospital Prices" (subscription required):
On Jan. 1, 1997, New York ended its regulation of hospital prices with the intent of using competitive markets to control prices and increase efficiency. This paper uses data that come from annual reports filed by all health maintenance organizations (HMOs) operating in New York and include payments to and usage in the major hospitals in an HMO's network. We estimate the relationship between implied prices and hospital, plan, and market characteristics. The models show that after 1997, hospitals in more competitive markets paid less. Partially offsetting these price reductions were price increases associated with hospital mergers that reduced the competitiveness of the local market. Hospital deregulation was successful, at least in the short run, in using price competition to reduce hospital payments; it is unclear whether this success will be undermined by the structural changes taking place in the hospital industry.
For background, here's what we did in New York. And here's a summary of what we (at least some of us) thought was and was not accomplished.
Zwanziger and Mooney conclude that:
However, the key finding is the confirmation of a change in the pattern of prices negotiated between HMOs and hospitals after implementation of HCRA. Mean case-mix adjusted prices declined during this period, and the multivariate regression results showed that this decline in the average prices was related to decreases in prices paid to hospitals located in more competitive markets.
Actually the first real hint was a couple of years ago when Ken Raske, head of the Greater New York Hospital Association called for re-regulation. Why would he have wanted that? The same reason he didn't really want de-regulation, what economists call "regulatory capture," the effective control of regulatory policy by the regulated industry. But nobody bought that idea.
Zwanziger and Mooney also conclude that:
An increase in hospital costs tended to be reflected in the price it negotiated, but with an elasticity that was substantially less than 1; thus some of the cost increase was absorbed either by other payers or by the hospital in reduced profits. Similarly, an increase in the proportion of a hospital's patients insured by Medicaid was associated with an increase in prices. (Emphasis added.) Hospitals that became more heavily dependent on an HMO tended to agree to deeper price concessions.
Little acknowledged and discussed even less is the fact that New York did not change its method of calculating Medicaid prices when it deregulated private sector prices. However, its policies of using a variety of methods to shore up hospital finances have likely led to a reverse of the typical pattern, that of private payers cross-subsidizing Medicaid patients. In New York's case, the contrary appears to be true. Certainly there's been talk the past couple of years that Medicaid has become the "best payer" in New York.
The authors also document:
... this market change also induced hospitals to discover means of reducing their vulnerability to the pressures of price-based competitive markets.
It appears that the enactment of HCRA led many hospitals to become members of systems that included potential competitors. The resulting series of mergers has led to major structural changes in many hospital markets across the state with a concomitant decrease in the competitiveness of many hospital markets. The results of this study provide a preliminary indication that though HCRA may have increased price competition in the short term, in the longer term, the resulting increase in hospital concentration may have counteracted the observed effect on hospital prices.
So hospitals have reduced price competition by merging into systems. And now they've set up the State to further reduce price competition by forcing hospital closures. Nobody bought Raske's idea to re-regulate prices, but they did buy his proposal for the State to reduce competition. Different method. Likely to have the same effect.