Health Care.

• Author: Garber, Alan M.

Alan M. Garber [*]

Managed care has brought with it numerous changes in health care delivery and financing. These changes, and the shifts in incentives that they create, can have important effects on the structure of markets for health care delivery and ultimately for the types of health care delivered, its costs, and outcomes. Most analyses of managed care compare HMOs and other managed care plans to non-managed care plans. But as managed care becomes more prevalent, its impact on the structure and functioning of the health care system as a whole may become more important than differences across plans.

In a body of work, Laurence C. Baker thus asks how managed care can bring about widespread effects on health care markets and health care delivery. In two papers on health care spending, [1] Baker finds that areas with high levels of HMO market share spent less on fee-for-service Medicare beneficiaries. Since prices for Medicare-covered services largely are fixed by regulation under Medicare's Prospective Payment System and physician fee schedule, the lower expenditures probably reflect reductions in the intensity of services that Medicare patients receive in areas with heavy penetration of managed care. Furthermore, because the patients studied were covered by the traditional fee-for-service Medicare program, the fact that their care appears to be influenced by the presence of managed care plans suggests that the managed care system can have important effects on the performance of the entire health care system.

Changes in health care spending lead to questions about the mechanisms by which managed care may affect expenditures on and outcomes of care. In more recent work, Baker and Martin L. Brown of the National Cancer Institute report [2] that areas with high HMO market shares saw consolidation in mammography facilities through the early 1990s. In other words, higher market share areas had fewer mammography providers, each doing higher volumes. Because there are significant economies of scale in providing mammography, consolidation is associated with reductions in the cost and often the price of mammograms. But consolidation also could harm patients if it made it more difficult to obtain the procedure. To determine whether this occurred, Baker and Brown study cancer diagnoses and mortality rates. Although they find that waiting times for appointments were sometimes longer in markets with greater consolidation, they also find no evidence that cancers were diagnosed at later (and more severe) stages, or that mortali ty rates were higher, in such markets.

Two other recent studies by Baker explore the impact of managed care on the adoption of new technologies and the related implications for costs and health outcomes. Baker and Ciaran S. Phibbs study the relationship between HMO market share and the adoption of neonatal intensive care units (NICUs). They report that areas with high levels of HMO activity saw slower adoption of NICUs than other areas between 1980 and 1996. [3] There are different kinds of NICUs, though, and HMOs appear to have little effect on the adoption of high-level NICUs, which offer the most advanced services for the sickest newborns and tend to be located in advanced teaching hospitals. The strongest effect of HMOs appears to be on the adoption of mid-level NICUs, which provide less sophisticated services and frequently are located in smaller hospitals that may be influenced by managed care activity.

Reductions in NICU adoption also may have produced cost savings. Moreover, Baker and Phibbs report that reductions in mid-level NICU availability seem to have improved outcomes because they were associated with increases in the probability that high-risk newborns would receive care in high-level NICUs, where outcomes are better. Interestingly, this runs counter to the typical assumption that managed-care induced reductions in technology availability are uniformly bad for patients.

Baker has also examined the relationship between HMO market share and the adoption of magnetic resonance imaging (MM) equipment during the 1980s and 1990s. [4] His results suggest that high managed care areas experience substantially slower adoption and diminished MRI availability as compared to low managed care areas. Reductions in adoption accompany reductions in MRI utilization, leaving open questions about the impact of such reductions on patient welfare, which hinge on the value of the less-frequently used MRI procedures in high managed care areas.

Baker's work builds the case that changes in financial incentives and other impacts of managed care can have important effects on the structure and functioning of the health care system. While each of his studies looks at different services, they all tend to support the conclusion that managed care has led markets toward reductions in spending. None of the studies show worse health outcomes (although, of course, they only include evidence for a small number of the many health care services that could be influenced). If managed care can influence how the health care delivery system is organized, then regulatory policy toward it could benefit from a consideration of the structural effects of managed care as well as of the care delivered by such plans per se.

One of the ways that HMOs are believed to lower premium costs is by restricting access to expensive medical treatments. But according to Daniel Altman, David M. Cutler, and Richard J. Zeckhauser, [5] HMOs do not save money that way. After analyzing data on 200,000 Massachusetts state and local employees and family members who are insured in a single pool, they find that cost differences arise because HMOs have a lower incidence of diseases among their generally healthier members and the HMOs pay lower prices for the same medical treatments, but not because HMO members receive fewer expensive treatments.

In other research Martin N. Baily and I, reporting on a project carried Out as part of the McKinsey Global Institute, examine the productivity of health care in the treatment of four conditions in the United States, Germany and England: diabetes, gallstones, lung cancer, and breast cancer. [6] This project looks at inputs used and types of health care delivered, along with overall resource utilization and health outcomes. We report that the United States generally uses higher levels of inputs than England and, with the exception of the management of diabetes, achieves better health outcomes. Germany uses high levels of resources for the various conditions but does not achieve better health outcomes. Much of the apparent increased health care costs for the management of these conditions in the United States could be attributed to higher prices for inputs, rather than the use of higher levels of each input.

Charles E. Phelps and I try to resolve controversies in the application of cost-effectiveness analysis by exploring the welfare theoretic foundations of the technique, which is used widely in studies of medical care...