Health Care Market Competition in Six States

This report is part of the Urban Institute's Assessing the New Federalism project, a multi-year effort to monitor and assess the devolution of social programs from the federal to the state and local levels. Alan Weil is the project director. The project analyzes changes in income support, social services, and health programs and their effects. In collaboration with Child Trends, the project studies child and family well-being.

The project has received funding from The Annie E. Casey Foundation, the W.K. Kellogg Foundation, The Robert Wood Johnson Foundation, The Henry J. Kaiser Family Foundation, The Ford Foundation, The John D. and Catherine T. MacArthur Foundation, the Charles Stewart Mott Foundation, The David and Lucile Packard Foundation, The Commonwealth Fund, the Stuart Foundation, the Weingart Foundation, The McKnight Foundation, The Fund for New Jersey, and The Rockefeller Foundation. Additional funding is provided by the Joyce Foundation and The Lynde and Harry Bradley Foundation through a subcontract with the University of Wisconsin at Madison.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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State Case Studies on Competition and Its Effects on the Poor

Health care competition has arrived. In the late 1990s, this observation has become a truism. Market changes have important effects for all consumers of health care but may especially affect traditional access to care for the low-income population.

The stimulus for market change has been buyers' demands for less expensive health coverage and care. In insurance markets, managed care is displacing traditional, free-choice-of-provider indemnity coverage. Indemnity plans retrospectively paid provider-set charges or costs for almost all physician-ordered services from almost any provider. Managed care plans instead use selective contracting to negotiate price and other terms of service in advance—and can also reduce utilization in various ways. Growth in managed care, prospective payment by Medicare and Medicaid programs, and increasing medical capabilities to replace inpatient with outpatient care—all have contributed to substantial excess capacity for hospital and specialist physician services in many markets. Ample supply has increased buyers' leverage over sellers in many areas.

In provider markets, professional and nonprofit determinations of resource allocation and prices are therefore giving way to price discounting to compete for health plan business and acceptance of fee-for-service Medicare and Medicaid payment limits. This price pressure is in turn stimulating hospital budget cutting, along with downsizing, consolidation into larger provider entities, and conversions of ownership status.

Doctors and hospitals, insurers and health plans—all sellers of services are increasingly having to compete on price as well as quality and amenities, and all have reorganized themselves to do so. Insurers and health plans are growing or merging so as to serve wide-flung employer group customers, achieve economies of scale, and afford expensive information technology. The former "cottage industry" of solo physician practices and independent, unaffiliated hospitals is also giving way to larger groupings. Corporate structures are displacing professional ones, and for-profit organization is growing relative to nonprofit, both for health plans and hospitals. Nonprofit missions and professional norms remain very important, yet under vigorous price competition, nonprofit behavior necessarily comes to resemble that of for-profits. Markets serve those who can afford to purchase services, so the effect on low-income people is a concern, especially if competition erodes the cross-subsidies that have financed their access to care.

This paper describes market shifts and state market-oriented policies, focusing on how they affect health coverage and care for the poor as of the mid- to late 1990s, a period that has seen dramatic increases in the competitiveness of health financing and delivery (Ginsberg et al. 1996). This section explains the issues of importance for the poor and describes our case study methods. Six individual state case studies follow. The final section presents conclusions from the states' experience and suggests what remains to be learned. Related reports by Urban Institute authors provide more detail on the specific issues of Medicaid managed care (Holahan et al. 1998, Hurley and Wallin 1998, Zuckerman et al. 1997), insurance regulation (Blumberg and Nichols 1995), and effects on safety net providers (Norton et al. 1998).

Note: This report is also available in the PDF format, which many users find more convenient when printing.

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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