Competition in the Health Insurance Marketplace and its Effect on Quality: Intriguing Findings Should Influence Reform Debate

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In a previous post I discussed the relationship between the competitiveness of health insurance markets and the cost of insurance. Though the inverse relationship between competitiveness and cost is not unexpected, the studies revealed a complex relationship between the two variables that should be taken into account when reforming our health care system.

In that prior post, I promised to follow up with a discussion of current knowledge concerning the relationship between competitiveness and quality.  Much of the research out there is conflicting. This is somewhat unexpected, as one would assume as a matter of basic market economics that greater competition would force plans to compete on quality. However, as Professor Frank Pasquale has pointed out, there are a variety of activities that insurers engage in to compete, such as “cream skimming” or “cherry picking” their customer base, denying coverage based on preexisting conditions, and remaining largely opaque in their operations. In other words, it appears that a great deal of the competition seems to take the form of mitigating exposure to cost risk.

Instead of competition playing an important role in improving quality, the biggest impact may be the level of HMO penetration. Below I will provide a brief explanation of the “tools of the trade” used in these studies, as well as a brief description of some recent findings.

It is not uncommon to hear that “a public plan is needed because there is no competition in the marketplace” or conversely that “the public plan will destroy the competition that presently exists between private insurers.” Regardless of which of these statements may, or may not, be correct, there is a lingering question that must be answered: how do we know what level of competition exists, and how does competition affect the quality of health care?

Competition

There are three main ways that researchers measure competition in the health insurance market. One way is to simply count the number of insurers in a given market. This method, though instructive in some measure, may give the same weight to an insurer with a few policies as it does to one with a 100,000. Another method is to utilize the Herfindahl-Hirshman Index (HHI).  Simply put, HHI is an index based on the sum of the squares of the market share percentages of the competitors.  If the market share is primarily focused in one competitor, while scattered throughout the rest, then the HHI will tend to be large, since squaring that one large participant’s share greatly increases the resulting sum. Alternatively, squaring the shares of many smaller market participants produces a smaller HHI sum. Thus, a lower HHI corresponds to, at least in theory, a more competitive marketplace.

There are, however, problems with the HHI index. As mentioned in my prior post, health insurers often offer a variety of plans, many of which offer different benefits and heterogeneous provider networks. Therefore, even if a market’s HHI is numerically low, the HHI formula may nevertheless inflate the degree of competitiveness. In other words, we may not be comparing apples to apples.

A third way to look at competition, though less direct than the HII index, is to look at “HMO penetration”, that is, the percentage of individuals in a given market who are insured by HMO-style managed care. Given that HMOs are not the only insurer– the amount of penetration may uncover the competition between HMOs and other types of insurers.  Thus, measures of HMO penetration can offer a glimpse into the competitiveness of a market (e.g. the competition between Medicare vs. HMOs), as opposed to competition within a specific type of plan.

Quality

Determining quality is even messier. Two measurements are commonly used: the Healthcare Effectiveness Data and Information Set (HEDIS) and the Consumer Assessment of Healthcare Providers and Systems Survey (CAHPS) measurements.  In short, HEDIS measures different aspects of a health care plan such as its ability to control high blood pressure, its testing of adult BMI, antidepressant medication management, etc. CAHPS attempts to measure the quality of ambulatory and facility-level care by surveying and aggregating the actual first-hand experiences and reports of patients.

Using these tools, researchers have uncovered some conflicting and inconclusive results regarding competition, penetration and quality in the health insurance marketplace.

In a 2005 study, Scanlon et al. studied the relationship between HMO competition, penetration, and quality. They found that:

Greater competition, as measured by the Herfindahl index, was associated with inferior health plan performance on 3 of 6 quality dimensions. Plans in markets with greater HMO penetration perform better on HEDIS- but not CAHPS-based dimensions of performance. Plans that make their data available publicly perform significantly better on both the HEDIS and CAHPS domains, performing one third to three quarters of a standard deviation better than plans that don’t make their results available publicly.

Furthermore, in a 2008 study, Scanlon’s group did not find a consistent relationship between HMO competition (measured by HHI or the number of HMOs), and the quality of care (measured by CAHPS and HEDIS scores) (Scanlon, 9). Scanlon’s study also found that HMO penetration did not lead to improved quality. However, other studies have in fact found HMO penetration to positively affect quality.

Mukamel (2001) found only a marginally significant relationship between HMO competition and quality, but found a statistically significant association between HMO penetration and lower mortality rates.  Mukamel, however, cautioned about reading too much into the findings:

It is possible that the observed association is spurious, reflecting a separate association between HMO penetration, hospital quality, and a third unobserved variable. For example prior studies suggest selective entry by HMOs into higher cost markets…Such markets may, however also be characterized by better outcomes…

Spillover

The one area where Mukamel did find a strong beneficial relationship was between HMO penetration and the quality of care provided to non-HMO patients.  The group hypothesized that this spillover effect could be due to a positive effect on local practice styles or a preferential selection by HMOs for areas with better hospital care.

This spillover effect has been studied, often with conflicting results. One study looked at whether the mortality rate of ischemic stroke varies with Medicare HMO penetration in a particular market. The question becomes one of whether there has been an increase in quality since the introduction of Medicare Advantage. The study found that Medicare HMO penetration was not significantly associated with stroke mortality outcomes. However, the study did find that Medicare HMO penetration was associated with a significant shift in the proportion of deaths from hospitals to nursing homes.  Studies such as this raise questions about the effects that HMO competition and penetration have on the marketplace as a whole.

Another study found that HMO penetration may affect the rate of use of certain procedures without necessarily affecting mortality:

Among Medicare patients, increases in HMO penetration were associated with reduced odds of receiving cardiac catheterization, angioplasty, or coronary artery bypass grafting of 3% to 16%, but were not associated with any change in mortality risk. Increases in the number of HMOs within a metropolitan statistical area, our measure of HMO competition, were associated with small but significant increases in the odds of cardiac catheterization and angioplasty of about 2%. There was no pattern of changes in cardiac procedure rates or in-hospitality mortality among non-Medicare patients.

Regarding the managed care spillover effect, a study by Bundorf et al. found that:

…spillover effects influence the types of care that individual patients receive for specific conditions. Our results suggest that higher levels of managed care penetration are associated with reductions in the utilization of costly procedures such as revascularization and cardiac catheterization and increases in the use of low-cost preventive services such as smoking cessation counseling in fee-for-service patients.

Second, the results suggest that the spillover effects generated by managed care penetration are eroded somewhat by competition among managed care organizations, particularly the effects for costly procedures. Cardiac catheterization rates decreased with the level of HMO penetration in the market and increased with the level of HMO competition. Point estimates for revascularization rates revealed similar effects, although the effects of HMO competition were not statistically significant at conventional levels. These results are consistent with the notion that managed care organizations must have significant market power in order to engender marketwide changes in health care delivery. Greater market power improves the bargaining position of managed care organizations, allowing them to extract steeper discounts from providers. Lower provider payments, in turn, drive changes in practice patterns and technology availability, which spill over onto non-managed care patients.

Two things become clear from these studies. First, there is no consensus that increased competition in the managed care sector positively affects quality. Second, many studies have found that the market penetration of managed care has a significant effect on different aspects of non-managed care, seemingly through a “spillover effect.”

These two points should help shape the reform measures adopted. For example, how would the current levels of HMO penetration affect individuals under the much debated public plan possibility, or, alternatively how would HMO penetration affect the cooperative system that is being introduced to quell the uneasiness that some have with the public option. One might also ask what effect (i.e. “spillover”) would a government-run option have if it was essentially or primarily run as an HMO?