RESPONDING TO FINANCIAL PRESSURES. THE EFFECT OF MANAGED CARE ON HOSPITALS PROVISION OF CHARITY CARE

Transcription

1 Workng Paper WP-782 February, 2009 RESPONDING TO FINANCIAL PRESSURES. THE EFFECT OF MANAGED CARE ON HOSPITALS PROVISION OF CHARITY CARE Núra Mas IESE Busness School Unversty of Navarra Av. Pearson, Barcelona, Span. Phone: (34) Fax: (34) Camno del Cerro del Águla, 3 (Ctra. de Castlla, km 5,180) Madrd, Span. Phone: (34) Fax: (34) Copyrght 2009 IESE Busness School. IESE Busness School-Unversty of Navarra - 1

2 The Publc-Prvate Center s a Research Center based at IESE Busness School. Its msson s to develop research that analyses the relatonshps between the prvate and publc sectors prmarly n the followng areas: regulaton and competton, nnovaton, regonal economy and ndustral poltcs and health economcs. Research results are dssemnated through publcatons, conferences and colloqua. These actvtes are amed to foster cooperaton between the prvate sector and publc admnstratons, as well as the exchange of deas and ntatves. The sponsors of the SP-SP Center are the followng: Accenture Ajuntament de Barcelona Caxa Manresa Cambra Ofcal de Comerç, Indústra Navegacó de Barcelona Consell de l Audovsual de Catalunya Departamento de Economía y Fnanzas de la Generaltat de Catalunya Departamento de Innovacón, Unversdades y Empresa de la Generaltat de Catalunya Dputacó de Barcelona Fundacó AGBAR Garrgues Medapro Mcrosoft Sanof Avents VdaCaxa The contents of ths publcaton reflect the conclusons and fndngs of the ndvdual authors, and not the opnons of the Center's sponsors. IESE Busness School-Unversty of Navarra

3 RESPONDING TO FINANCIAL PRESSURES. THE EFFECT OF MANAGED CARE ON HOSPITALS PROVISION OF CHARITY CARE Núra Mas 1 Abstract The Unted States reles on charty to provde the unnsured wth medcal care, most of whch s offered by hosptals that act as provders of last resort and consttute the safety net. Tradtonally, these hosptals have been able to fnance ther provson of unfunded care through a complex system of cross-subsdes. The objectve of ths paper s to analyze the effects that fnancal pressures have on the provson of charty care by hosptals. To do so we look at the effect of prce pressures and at the cost-controllng mechansms mposed by managed care. Our hypothess s that prce competton, or other forms of fnancal pressure, undermnes the ablty of a hosptal to cross-subsdze and challenges ther survval. Our results show that managed care has a dsproportonately negatve effect on the closure of safety net hosptals. Moreover, amongst those that reman open, n areas where managed care penetraton ncreases the most, safety net hosptals react by closng the health servces (emergency rooms, obstetrcs and alcohol and drug treatments) most commonly used by the unnsured. Keywords: medcal, unnsured, hosptals, safety, net. 1 Professor of Economcs, IESE IESE Busness School-Unversty of Navarra

4 RESPONDING TO FINANCIAL PRESSURES. THE EFFECT OF MANAGED CARE ON HOSPITALS PROVISION OF CHARITY CARE 1 I. Introducton In 2007, more than 46 mllon people n the Unted States lacked health nsurance coverage. 2 Approxmately two-thrds of them lved n famles whose ncome was below 200 percent of the poverty lne (Kaser, 2008). The unnsured are reported to be less lkely to receve health care (Amercan College of Physcans-Amercan Socety of Internal Medcne, 2000) and more lkely to exhbt worst health outcomes (Meara, 1998; Doorslaer et al., 1997; Ettner, 1996). The Unted States reles on charty to provde the unnsured wth medcal care, most of whch s offered by hosptals that serve as provders of last resort. They consttute what s called the Safety Net and t conssts manly of teachng hosptals, publc hosptals and hosptals located n poor areas. For many years, those hosptals had been able to fnance ther provson of charty care through a complex system of cross-subsdes from prvately-nsured payng patents to the unnsured ones. Ths hdden tax has been estmated by the Amercan Hosptal Assocaton (1986) to be around 10.5 percent. Hence, a hosptal s ablty to obtan hgh revenues plays a crucal role n ts faclty to provde charty care. The objectve of ths paper s to analyze the effects that fnancal pressures have on the provson of charty care by hosptals. Our frst hypothess s that prce competton, or other forms of fnancal pressure, undermnes the ablty of a hosptal to cross-subsdze. Ths mposes a large stran on safety net hosptals, challengng ther fnancal sustanablty and ther survval. Hence, we expect to observe more safety net hosptal closures n areas where fnancal pressures are of greater magntude. Our second hypothess relates to the types of servces that the safety net hosptals wll provde n areas where fnancal pressures are more mportant. The Unted States system also establshes 1 We are grateful to SP-SP research Centre for research support. We thank Davd M. Cutler; Bruno Cassman, and the many partcpants n the Harvard publc fnance research semnar and workshop and n the ASHE meetngs for comments on a prevous draft. We are also grateful to Mrea Raluy and Ona Vlanou for outstandng research assstantshp. Fnancal support from Mnstero de Educacón y Cenca SEJ DeNavas-Walt, C.B. Proctor, and J. Smth, Income, Poverty, and Health Insurance Coverage n the Unted States: 2007, Unted States Census Bureau; August IESE Busness School-Unversty of Navarra

5 antdumpng 3 rules and requres the hosptals that have emergency rooms to supply emergency ndgent care n two stuatons: a lfe-threatenng health problem or actve labor. Gven ths, we expect that, for the hosptals that reman open, strong fnancal pressures lead to the closure of precsely the servces most commonly used by the unnsured - emergency rooms (Stern et al., 1991), obstetrcs (Sloan et al., 1986; Fourner and Campbell, 1997) and alcohol and drug treatment centers (Cousneau, 1997). For our analyss we wll focus on the dffuson of managed care because t s one of the most mportant changes that the Unted States healthcare market has experenced n the last decades and t has been dentfed as a prmary force affectng hosptal revenues (Duke, 1996). Managed care has mposed strong fnancal pressure and utlzaton controls on health provders to acheve ts cost-contanment objectve. Moreover, managed care has played a crucal role n shapng today s healthcare marketplace n the Unted States. And, today, t completely domnates the Unted States health care nsurance market. It has changed ts competton (Baker and Shankarkumar, 1997) and the rembursement mechansms for ever. For nstance, by ntally payng prces about 30 percent below those pad by tradtonal nsurers (Cutler and Barro, 1997), managed care organzatons affected the retrbuton system n the whole marketplace. It contrbuted to contan doctor wages, not only wthn the managed care network but also n the entre health care market, ncreasng competton amongst provders. Hence, even those hosptals that dd not belong to the managed care network ended up changng ther rembursement schemes. Understandng the effect of managed care on the provson of charty care by hosptals s a frst step n helpng us comprehend the role that current fnancal pressures could have on the health of the unnsured. Our analyss wll focus on the perod from 1985 to 1995, whch corresponds to the dffuson of managed care n the Unted States. The mpact of the managed care boom has been subjected to close scrutny n recent years. Most of the lterature has concentrated on analyzng the role of managed care n brngng effcency gans to the health care market or on studyng the mpact of managed care on the utlzaton and qualty of care for ts enrollees. In ths respect, Levt et al. (1998) and Melnck and Zwanznger (1996) pont out that managed care s responsble for a large part of the slowdown n expendture growth n health care. Mas and Senfeld (2008) show that, by reducng technology adopton, managed care can lead to an mportant reducton n health care costs, and Luft and Mller (1997) fnd mxed results for managed care performance on the qualty of care for those patents wth managed care nsurance. However, most of the research to date has focused on the performance of managed care as compared to other types of health nsurance, and very lttle work has been done to analyze the mpact of managed care on the provson of charty care by hosptals. Curre and Fahr (2001) show that, n Calforna, hgher rates of managed care penetraton lead to an ncrease n the share of unnsured patents treated by publc hosptals at the expense of losng the more proftable Medcad patents to prvate hosptals. Rchardson (2000) fnds a negatve mpact of managed care on access to care for the poor by observng how the provson of emergency room servces and the number of hosptals n poor areas changes wth the penetraton of managed care. 3 Dumpng occurs when a hosptal transfers an emergency patent to another or smply refuses any treatment based on the patent s nablty to pay. 2 - IESE Busness School-Unversty of Navarra

6 Ths paper contrbutes toward fllng the gap n the lterature by analyzng the effect that fnancal pressures and, n partcular, managed care penetraton have on the provson of uncompensated care by hosptals. Our results are twofold. Frst, we fnd that market pressures establshed by managed care have a postve effect on the closure of hosptals. As expected from our frst hypothess, ths outcome s more mportant for safety net hosptals snce they are now under more fnancal stress because managed care challenges ther ablty to keep cross-subsdzng. Second, our results confrm that, n areas where managed care penetraton has ncreased the most, more of those servces generally used by the unnsured have been termnated. Ths effect s greater for hosptals located n poor neghborhoods and for government hosptals. Fnally, we are also nterested n dervng some possble mplcaton that managed care mght have on access to care for the unnsured snce, by encouragng the closure of safety net hosptals, t can be negatvely affected. The remnder of the paper s organzed as follows. Secton 2 descrbes the most relevant characterstcs of managed care and the provson of charty care n the Unted States. Secton 3 presents the hypothess on the effect that fnancal pressures mposed by managed care mght have on the provson of charty care by hosptals. The data s descrbed n Secton 4 and the methodology and results are presented n Secton 5. Fnally, Secton 6 concludes. II. Managed Care and the Safety Net 2.1. Managed Care In the past several years, the health care market n the Unted States has undergone massve changes. The most mportant has been the shft from tradtonal nsurance to managed care. The percentage of prvately-nsured Amercans that had a health care managed care contract went from 27 percent n 1988 to 93 percent n Managed care ncludes a wde varety of health nsurance contracts, wth health mantenance organzatons (HMOs) beng the most restrctve ones. Other forms of managed care contracts are the Independent Practce Assocatons (IPAs), Preferred Provder Organzatons (PPOs) and the Pont-Of-Servce (POS). They dffer n the payment to network provders as well as n the copayments faced by the patents when they use servces nsde and outsde the network. For nstance, those patents who have an HMO contract are only allowed to vst the network provders and have to pay the full cost f they use someone outsde the network. Here, the nsurance and provson of health care are fully ntegrated, doctors are generally pad a salary and they work exclusvely for the HMO. In the IPAs, practtoners can contract wth as many networks as they wsh. Generally, the IPA wthholds a share of the fees as a reserve aganst hgh costs and ths share s gven back to the doctors f costs are kept suffcently low. In PPOs, the nsurance company contracts a selected group of provders, who are generally pad on a dscounted fee-for-servce bass. The nsured under ths type of contract pay lttle when they use a physcan from the network and more when they use other physcans. Fnally, the POS allows ts nsured to vst provders outsde the network but they then face hgher copayments. IESE Busness School-Unversty of Navarra - 3

7 Even though there are a wde varety of managed care contracts, they all have some aspects n common: they all nvolve a controlled form of fnancng and delverng health care that s based on cost-contanment and a controlled use of health care servces. In tradtonal health nsurance plans, a contract can be defned along three dmensons: a premum, a set of covered benefts and a certan copayment that apples to these benefts. In addton to these, managed care plans ntroduced some addtonal mechansms that comprse the selecton of provders, the methods used for payng provders and some systems to control servce utlzaton. Managed care removes free provder choce by establshng a network of pre-approved provders. In general the patent pays nothng (or very lttle) f she uses the provders n the network but she faces hgher costs (they can even be full cost) f she uses a provder that does not belong to the network. Tradtonal nsurance pad provders on a fee-for-servce bass. Managed care uses several rembursement mechansms: salares, captaton and fee-for-servce. Nonetheless, even fee-forservce managed care plans pay physcans prces that are below those usually pad by tradtonal nsurance. Cutler and Barro (1997) menton payments that are up to 30 percent below and Gold et al. (1995) also fnd evdence of a dscounted fee-for-servce pad by managed care. Managed care uses several methods to control the use of health care servces. For nstance, t uses prmary care physcans as gatekeepers, requrng ther prevous referral before the enrollees can consult a specalst. Many plans also lmt the number of hosptal days and requre physcans to follow some establshed gudelnes to treat a certan dagnoss The Safety Net The number of unnsured n the Unted States has been rsng snce 1987, jumpng from 31.8 mllon to almost 46 mllon n In 2007 about two thrds of the unnsured were poor or near poor (Kaser, 2008). Moreover, they are less lkely to have a regular source of care or get medcal care for serous condtons (Amercan College of Physcans, 2000). Tradtonally, the Unted States has reled on chartable medcal care to serve the unnsured. These provders of last resort consttute the Safety Net. The system also establshes antdumpng 4 rules and requres the hosptals that have emergency rooms to supply emergency ndgent care n two stuatons: a lfe threatenng health problem or actve labor. Unted States spendng on uncompensated care 5 has ncreased substantally n the past years, growng from 6.1 bllon dollars n 1983 to 17.5 bllon n 1995 and 24.9 bllon n 2003, when ts burden represented 5.5% of hosptal total expenses (Amercan Hosptal Assocaton). Hosptals have two sources to fnance care for the poor: publc and prvate fundng. Publc fnancng can be federal, state or local, but most of t comes from Medcare and Medcad Dsproportonate Share (DSH) Adjustments. Medcare DSH was establshed n 1986 to compensate hosptals for treatng a dsproportonately large number of Medcad patents. In 1997 these payments reached 4.8 bllon dollars. 93% of them went to large urban hosptals and 4 Dumpng occurs when a hosptal transfers an emergency patent to another or smply refuses any treatment based on the patent s nablty to pay. 5 Uncompensated care ncludes bad debt and charty care provded by the hosptal. 4 - IESE Busness School-Unversty of Navarra

8 65% went to teachng hosptals. Medcad DSH was establshed n 1981 to compensate hosptals wth a large share of ndgent patents who were not elgble for Medcad. Prvate fundng ncludes drect payments from patents as well as a complcated system of cross-subsdes, and hosptals used to rase prces for prvately nsured patents to cover the costs of provdng care to the unnsured (AHA 1991, 6 Cutler, ). The dstrbuton of uncompensated care vares greatly among hosptal types and locaton (Table 1): major teachng hosptals represent only 8% of the market but provde about 30% of overall uncompensated care. Government hosptals represent a smlar stuaton provdng almost 40 percent of the overall uncompensated care, whle they account only for 25% of the Amercan health care market. 8 The amount of charty care provded by a hosptal has two components: demand and supply. Demand: Dstance to the hosptal s an mportant determnant n hosptal choce (Burgess and DeFore, 1994; Curre and Reagan, 1998). Hence, a hosptal located n an area wth a hgh proporton of unnsured s more lkely to receve unnsured patents who cannot be turned away. Therefore, the demographc composton of the local populaton s an mportant determnant n the demand for uncompensated care that the hosptal may face. Supply: The hosptal s wllngness to provde uncompensated care may dffer dependng on ts ownershp. For nstance, not-for-proft and government hosptals may be more wllng to provde ths knd of communty servce than for-proft ones. Such a msson may be reflected n the servces and technologes that the hosptal may offer (a substantal number of the poor and unnsured use emergency rooms to receve medcal care, and obstetrc servces are also commonly used by the unnsured) as well as n the locaton of the hosptal (n poor areas as opposed to rch areas). 28.7% of teachng hosptals, 21.1% of not-for-proft hosptals and 20.4% of government hosptals are located n poor areas, whle only 15.2% of for-proft ones are encountered n poor neghborhoods. Fnally, lookng at Table 1, we can clearly see that those types of hosptals that provde care to a dsproportonate share of the unnsured are publc hosptals, teachng hosptals and those located n poor areas. These are the ones that we wll dentfy as safety net hosptals. III. Impact of Managed Care on the Hosptal s Provson of Charty Care. Hypothess In ths secton we summarze the effects that the fnancal pressures mposed by managed care can have on the provson of charty care by hosptals, and we formulate the hypothess that we wll then test emprcally. The frst thng that we have to take nto account s that dfferent hosptals may have dfferent reasons for provdng charty care. For nstance, they may care about the ndgent populaton 6 H. Aaron, n a study of the Amercan Hosptal Assocaton calculates that the average payng hosptal patent subsdzes charty care by payng a hdden tax of 10.6%. 7 Almost a thrd of uncompensated care s pad by extra charges to the nsured patents. 8 Those hosptals that have a hgher burden of charty care also provde care to a hgher proporton of Medcad patents (Amercan Hosptal Assocaton). IESE Busness School-Unversty of Navarra - 5

9 and extract some utlty from provdng care to the unnsured, wth publc and teachng hosptals beng more wllng to provde ths communty servce than the for-proft ones. Ths corresponds to what Frank and Salkever (1991) call a purely altrustc model. Another reason why hosptals may want to provde free care for the unnsured s because ths may ncrease ther reputaton n the communty or provde them wth more donatons or better fscal treatment. 9 In ths case hosptals may compete wth the rest of the provders n the market for charty care, and the amount that they provde wll also depend on the amount of charty care provded by ther rvals. Ths s what Frank and Salkever (1991) call an mpure altrusm model. Smlar reasonng can be appled to qualty. Some hosptals may obtan utlty drectly from provdng good qualty care to ther patents. Ths agan may vary wth the hosptal ownershp. Other hosptals may look at qualty as a way to mprove ther reputaton and, thus, to ncrease ther profts. Hence, n our emprcal specfcaton we wll nclude a dummy for each relevant hosptal type publc hosptal (P), teachng hosptal (T) and hosptals located n poor areas (P) to take ths nto account. Second, managed care can affect not only the hosptals that belong to ts network but also all the hosptals that are n an area where managed care enrollment s substantal. For the hosptals that belong to the network, managed care organzatons can have a drect effect snce they are able to negotate better prces and lower quanttes of care wth the hosptals. Ths lower rembursement for the nsured reduces the hosptal s excess revenues avalable to fnance charty care, and undermnes ts ablty to cross-subsdze uncompensated care. The fnancal stran that ths mght mply s stronger for those hosptals that are provdng a bg share of uncompensated care. Hence we wll not only look at the managed care enrollment effect, but we wll also nteract t wth the dfferent hosptal types to analyze whether managed care enrollment affects the safety net hosptals more severely. Hosptals that do not belong to the network observe how they lose some potental patents that have managed care contracts and are forced to go to ther network hosptals. Ths decrease n the number of nsured patents challenges ther possblty of survval f the hosptals keep provdng the same amount of care for the unnsured. Also, the overall market prces and physcan practces are affected by managed care (Baker and Shankarkumar, 1997). Hence, the hosptals that do not belong to the network also suffer a reducton n ther prces. Ths decreases hosptals revenues and makes cross-subsdzaton of uncompensated care more dffcult. Moreover, managed care organzatons may not be nterested n ncludng n ther network those hosptals that provde a lot of charty care because such hosptals may have to charge hgher prces n order to cross-subsdze ther unnsured patents. Snce a provder that does not belong to the network wll not receve any managed care patents, and gven the mportance of managed care, hosptals may be dscouraged from provdng uncompensated care n order to be more lkely to gan entry nto a managed care network. Ths s the reason why we wll use managed care enrollment measures at the level of the metropoltan area (henceforth, MSA). Takng ths nto account, we wll test the followng hypothess: 9 Fourner and Campbell (1997) fnd evdence showng that hosptals n Florda that provde greater amounts of care for the poor are systematcally awarded lcenses for certfcate-of-need approval. 6 - IESE Busness School-Unversty of Navarra

10 1. Our frst hypothess s that prce competton, or other forms of fnancal pressures, undermnes the ablty of a hosptal to cross-subsdze. Ths mposes a large stran on safety net hosptals, challengng ther fnancal sustanablty and ther survval. Hence, we expect to observe more safety net hosptal closures n areas where fnancal pressures are of greater magntude. 2. Our second hypothess relates to the types of servces that the safety net hosptals wll provde n areas where fnancal pressures are more mportant. Hosptals that are strugglng for survval have more ncentves to try to avod non-payng patents. One way of dong so s by closng the set of servces most commonly used by the unnsured. The Unted States system also establshes antdumpng rules and requres the hosptals that have emergency rooms to supply emergency ndgent care n two stuatons: a lfe threatenng health problem or actve labor. Gven ths, we expect that, for the hosptals that reman open, strong fnancal pressures lead to the closure of precsely those servces most commonly used by the unnsured. The effects should be partcularly severe for the safety net hosptals because they are the ones where the share of charty care patents s the largest. These servces nclude emergency rooms, obstetrcs and npatent and outpatent care for alcohol and drug dependency. Regardng emergency rooms, for many of the Unted States urban poor, gong to the doctor means showng up at a hosptal emergency room (Shoor and Hughes, 1993; Stern et al., 1991; Freeman et al., 1990). Moreover, a substantal number of poor unnsured patents use the emergency room for prmary care (Freeman and Corey, 1993), and Curre and Reagan (1998) reported that unnsured chldren are fve tmes more lkely than other chldren to use the emergency room as ther regular source of care. Obstetrc unts are the other group of servces most commonly used by the unnsured. Hosptals are requred to accept patents n actve labor (Fourner and Campbell, 1997), and about a half of the npatent admssons for charty care patents correspond to obstetrcal delveres and accdent cases (Sloan et al., 1986). Fnally, the ndgent populaton s more lkely to have alcohol or drug problems (Cousneau, 1997) and, hence, to dsproportonately requre the use of alcohol and drug treatment centers. 3. Our thrd hypothess takes nto account the fact that dfferent hosptals may have dfferent reasons for provdng charty care, and that safety net hosptals often act as provders of last resort. If ths s the case, a safety net hosptal that s the only one of ts type n the metropoltan area mght face many pressures (moral, poltcal, etc) to keep operatng, even f the fnancal envronment s very adverse. To test whether ths s the case, we wll nclude a dummy varable ONLY that s equal to one f the hosptal s the only one of ts type (teachng, government, etc.) n the MSA, and zero otherwse. Fnally, one of our objectves s to understand the effect that managed care, through ts effect on the provson of charty care by hosptals, could have on access to care for the unnsured. When we look at access to care, the relevant varable to start wth s the number of hosptals and servces avalable n the MSA. If one hosptal closes ts ER and another one opens t, the effect on access to care s less clear. Hence, we wll look at the effect that managed care has on the overall number of hosptals and the overall number of ER or obstetrc servces n the MSA. IV. Data Our goal s to understand the effect that managed care enrollment has had on the number of hosptals as well as on ther provson of those health servces more used by the unnsured. IESE Busness School-Unversty of Navarra - 7

11 And, n partcular, we want to test the hypothess that those fnancal pressures have partcularly strong effects for safety net hosptals. Summary statstcs of all the followng data are presented n Tables 2a and 2b. Hosptal data: Informaton on whether a hosptal closed or not and on the types of servces t provdes (emergency rooms, obstetrcs, etc.) comes from the Amercan Hosptal Assocaton (AHA). The AHA also provdes nformaton on whether the hosptal s publc or teachng and t ncludes ts address and zp code. To determne f a hosptal belongs to a poor neghborhood, we establsh a rankng of the average ncome per capta n all the zp codes n the Unted States to fnd the level correspondng to the thrty-thrd percentle. Then we compute the average per capta ncome for the fve-mle radus area surroundng the hosptal. If t les below the thrtythrd percentle level for the correspondng state, the hosptal s consdered to be located n a poor neghborhood. We also nclude a dummy varable ndcatng whether the hosptal s for proft or not-for-proft and we control for hosptal sze measured by the number of beds. Fnally, we have also hypotheszed the possblty that managed care has a dfferent effect for those hosptals that are the only ones of ther type n the MSA, especally f they are the only publc hosptal n the metropoltan area. We wll, then, defne a dummy varably ONLY that s equal to one f the hosptal f the only one of ts type n the MSA. Market data: Includes the occupancy rate n the MSA, the number of hosptals at the begnnng of the perod and the average hosptal sze. Managed care enrollment: To account for the effect of managed care on the qualty of care for the unnsured, we use the share of the MSA populaton enrolled n HMOs. Unfortunately, enrollment data on other types of managed care contracts s not avalable. Moreover, HMO enrollment has been the standard measure for managed care enrollment used n the lterature see, for nstance, Cutler and McClellan (1996); Baker, (1997); Cutler and Shener (1998). The Area Resource Fle has some nformaton on managed care enrollment at the county level. However, t s problematc because t assgns membershp n an HMO to the county where the HMO address s. However, members are usually located n many surroundng areas. In order to avod ths problem, we use data from the Baker estmates n managed care enrollment. Baker constructed estmates of county-level enrollment usng data from the Group Health Assocaton of Amerca and he dstrbuted HMO enrollment among the countes of ts servce area takng nto account ther populaton and the dstance to the HMO headquarters. Moreover, n order to further lessen any potental problem, our analyss s done at the MSA level. Fnally, there s the possblty that unobservable varables are correlated wth both managed care market share and the provson of charty care. For nstance, t could be the case that HMO enrollment ncreased more n the MSA where populaton also grew more. However, the correlaton between the change n HMO penetraton and populaton growth s only and hence ths should not be a problem. Another possble source of endogenety s that managed care organzatons may prefer those areas where hosptals are already provdng lttle charty care. There s also the possblty that unobservable varables are correlated wth both managed care market share and the probablty of provdng certan servces. For nstance, patents preferences for health care, or the health status of the populaton may be mportant omtted varables. To correct for these two problems we wll use an nstrumental varable (IV) approach. 8 - IESE Busness School-Unversty of Navarra

12 A possble nstrument for the change n HMO penetraton that has been wdely used n the lterature s the average frm sze n the correspondng MSA, as frst used by Baker (1997). Snce large frms are more lkely to offer managed care to ther employees, areas wth large frms are expected to have more managed care. However, large frms are not correlated wth the servces provded by the hosptals. The average frm sze n the MSA s workers. The correlaton between average MSA frm sze and the change n HMO penetraton s Demographc characterstcs: They nclude the logarthm of the average famly ncome n the MSA and the percentage of populaton older than 65. The demographc nformaton comes from the Current Populaton Survey (CPS). Other MSA characterstcs: They nclude the sze of the metropoltan area, the percentage of unnsured n the MSA and the percentage of the MSA populaton wth Medcad and Medcare. The nformaton comes from the Current Populaton Survey (CPS). V. Methods and Results The man objectve of the paper s to understand the role that fnancal pressures can play on the provson of charty care by hosptals. However, we would also lke to be able to understand the effect that managed care, through ts effect on the provson of charty care by hosptals, could have on access to care for the unnsured. For ths, we wll look at the effect that managed care has had on the overall number of hosptals and servces n an MSA, and, n partcular, whether ths effect s dfferent (.e., more negatve) for the hosptals and servces tradtonally used by the unnsured. For each MSA we consder four mutually exclusve hosptal types: government hosptals (henceforth, government), teachng-non-government hosptals (henceforth, teachng), nonteachng-non-government hosptals located n poor areas (henceforth, poor) and other hosptals (henceforth, other). Our unt of analyss wll be the group of hosptals. Notce that the mutually exclusve categores have been establshed n such a way to allow us to determne the drvng force behnd the provson of uncompensated care. Prevous lterature (Curre and Fahr, 2001) has already sngled-out publc hosptals from the rest. Ths s why we ncluded all publc hosptals n the frst group and the other two categores have been establshed to be mutually exclusve. The results obtaned f we group the hosptals as government, poor-non-government and teachng-non-poor-non-government are robust wth the ones presented here. To llustrate how our data wll look, consder a fcttous MSA such as the one depcted below. It contans three publc hosptals (P), two government (G), one teachng (T) and fve other hosptals (H). There are also two emergency rooms n poor hosptals, two n government hosptals, one n a teachng hosptal and three n other hosptals. In ths case, for each MSA we would have a maxmum of four observatons (correspondng to the four quas-hosptal types). For each observaton we would have some explanatory varables (such as dummes for the quas-hosptal type: teachng, government, poor and other) and a set of dependent varables (for example, number of hosptals or number of emergency rooms n the quas-hosptal group). IESE Busness School-Unversty of Navarra - 9

13 In the fcttous MSA consdered here, the data correspondng to the four observatons n a partcular year would look lke ths (the frst four columns are dummy explanatory varables and the last two correspond to dependent varables): Teachng Poor Government Other # hosptals # ER Obs Obs Obs Obs Our data contans 894 quas-hosptals n the 371 Unted States MSAs, wth a maxmum of four quas-hosptals per MSA. There are 122 quas-hosptals contanng only the teachng hosptals n the correspondng MSA, 257 ncludng only the non-teachng government hosptals n the MSA, 171 consstng of non-teachng-non-government hosptals located n poor neghborhoods, and 344 comprsng other hosptals. As usual, we have elmnated psychatrc hosptals, hosptals that are a unt of an nsttuton, and rehabltaton hosptals. Fnally, another thng to take nto account n our data s the hosptal mergers that took place between 1985 and 1995 n the Unted States. After mergng, the two hosptals responded the AHA survey as a sngle entty. In the AHA, the servce questons are of the type do you have an emergency room?, do you have an obstetrcs unt? and so on. Ths means that maybe what we encounter s a reducton on the number of servces smply due to the fact that hosptals had merged and are reportng as a sngle unt. In order to take ths nto account we have followed a procedure that has already been used n the lterature (see, for nstance, Mas and Senfeld, 2008). Imagne the case n whch two hosptals a and b merge n year 2 of our sample and that both these hosptals had an emergency room n year one. In our data ths would correspond to a reducton n the number of emergency rooms, snce n year 1 two hosptals would have reported havng one ER and n year 2 only one hosptal (the one resultng from the merger) would report havng emergency room. In order to avod ths and to be conservatve n the effect that managed care could have n the number of hosptals and servces provded, we have modfed our data n the followng way: we have gone backwards and for all the years pror to the merger, we have generated a consoldated hosptal that would correspond 10 - IESE Busness School-Unversty of Navarra

14 to the merged entty from a and b year 2 backwards. Thus, n year our example, n year 1, what we would see s only one hosptal that would nclude the servces from hosptals a and b Testng Whether Managed Care Has a More Severe Effect on the Closure of Safety Net Hosptals Accordng to our frst hypothess, we expect fnancal pressures mposed by managed care to dsproportonately affect the closure of safety net hosptals, snce they have now seen ther ablty to cross-subsdze amelorated by managed care. To test whether ths s the case we wll defne as our dependent varable the change n the number of hosptals of each type (government, teachng, poor and other) from 1985 and As prevously stated, these are the relevant years for the dffuson of managed care n the Unted States. We expect ths growth to be lower (or even negatve) n areas where the rse n managed care penetraton ( HMO ) s larger and we also expect the mpact of managed care to be partcularly severe for the safety net hosptals. Hence we wll also nclude the nteracton of the change n managed care enrollment wth each type of safety net hosptal government (G), teachng (T) and hosptals located n poor areas (P). As stated n our thrd hypothess, a hosptal s resstance to closure mght be dfferent f t s the only one of ts type n the MSA. Hence, we wll nclude also the ONLY dummy and we wll nteract t wth all the hosptal types, snce the type of pressure that a hosptal mght receve to reman open mght vary wth t. For nstance, there mght be a lot of publc pressure to keep the only publc hosptal n a metropoltan area open. Fnally, we wll also control for hosptal varables (SIZE) and for the demographc characterstcs (DEM) of the MSA. Our emprcal strategy uses the followng specfcaton: ( Number of hosptals 85 95) HMOmsa, HMOmsa, * P HMOmsa, * T HMOmsa, θ P ω T ρ G SIZE γ DEM l = φ msa α η λ ONLY ϕ ONLY * P ν ONLY * T ψ ONLY * G ε β δ * G Where the subndex ndcates each hosptal group n the MSA, and n each MSA there are four groups (the frst contans all the government hosptals n the MSA, the second one the teachng-non-government, etc.) HMO refers to the change n the level of HMO enrollment n the correspondng MSA. Government (G) s a dummy varable equal to one f the hosptal group contans the government hosptals n the MSA; teachng (T) s a dummy varable equal to one for the group composed by the MSA hosptals that are teachng-non-government; poor (P) s a dummy varable equal to one f the observaton ncludes the non-teachng-non-government hosptals located n poor areas; H refers to the characterstcs of the average hosptal n the quas-hosptal; M corresponds to the market characterstcs; D to the demographcs of the area consdered. Fnally, our regressons also nclude states fxed effects. Our benchmark case corresponds to the non-safety net hosptals. l 10 Another opton would be to smply elmnate the hosptals that have merged from our data and test whether the results are robust. These regressons are avalable from the authors and the results obtan are robust wth the ones presented n the paper. IESE Busness School-Unversty of Navarra - 11

15 The results are presented n Table 3. They nclude the OLS regressons (specfcaton [1]) as well as the correspondng results nstrumentng managed care enrollment wth frm sze. The coeffcents n both cases are consstent. To test for robustness we also run the same regressons usng logs for the dependent varable and wth and wthout demographc and market control varables. The results are robust. The frst column of Table 3 shows that the ncrease n managed care enrollment has had a negatve but not sgnfcant effect on the number of benchmark hosptals. However, ths effect becomes sgnfcantly negatve for government hosptals and hosptals located n poor areas. The average ncrease n HMO enrollment between 1985 and 1995 (0.111) mples that the number of hosptals would decrease by 2.6 and 1.8 percent more n poor areas and government hosptal groups respectvely, than n the benchmark case. Table 3 also confrms that beng the only hosptal of a certan type n the MSA has a postve effect on survval, as expected from our hypothess. However, surprsngly, ths plays a postve effect for hosptals located n poor areas, whle s not the case for government hosptals. Overall, ths frst set of results confrms our frst hypothess of managed care s fnancal pressures havng a negatve effect on the number of safety net hosptals. In partcular, the mpact s especally severe for publc hosptals and for those located n poor areas. a. Testng the effect of managed care on the provson of hosptal servces most used by the unnsured Our second hypothess states that hosptals facng strong fnancal pressures mposed by managed care mght react by tryng to avod non-payng patents. One way of achevng ths s by not offerng the servces most commonly used by the unnsured. As prevously establshed, these are emergency rooms (ER), obstetrcs these two both fall under the antdumpng regulaton and alcohol and drug treatments. We expect ths reacton to managed care penetraton to be stronger for the safety net hosptals, snce they are the ones faced wth the largest share of charty care patents that they now fnd harder to cross-subsdze. To test whether ths s the case, we wll look at the effect of the ncrease n managed care enrollment on the followng set of dependent varables (Y): the change n the number of emergency rooms, the change n the number of hosptals offerng obstetrc servces and the change n the number of hosptals that offer alcohol and drug treatment centers. Our emprcal strategy uses the followng expresson: ( Number of hosptals 85 95) HMO msa, HMO msa, * P HMO msa, * T HMO msa, θ P ω T ρ G SIZE γ DEM l = φ msa α η λ ONLY ϕ ONLY * P ν ONLY * T ψ ONLY * G ε β δ * G The explanatory varables are the same as n the prevous test and they are ncluded for the same reasons as the ones establshed n secton 4.2. Results are presented n Table 4. They show that a rse n HMO enrollment has a more negatve effect on the number of hosptals that offer ER, obstetrc unts and npatent centers for alcohol and drug treatment, for government hosptals and hosptals located n poor areas. Interestngly, ths s not the case for outpatent alcohol and drug treatment centers. The average ncrease n HMO enrollment between 1985 and 1995 mples that the number of hosptals wth ER servces would fall by 7.4 and 2.8 percent more n government hosptals and l 12 - IESE Busness School-Unversty of Navarra

16 n those located n poor areas, than n the baselne ones. The number of hosptals that offer obstetrc servces would decrease by 5.8 percent more n poor area hosptals than n the baselne case and the number of npatent alcohol and drug treatment centers would dmnsh by 5.8 and 1.9 percent more n poor hosptals and n government hosptals, respectvely, than n the baselne ones. The effect of managed care on the number of these servces provded by teachng hosptals s not sgnfcantly dfferent from zero. Fnally, we observe that the change n HMO enrollment does not have an effect on the number of alcohol and drug treatment centers provded on an outpatent bass. In fact, durng ths perod, 46 percent of the hosptals that closed ther npatent center for patents wth alcohol and drug problems already had an outpatent center, and the 12 percent of the hosptals that dd not have one opened new outpatent centers for alcohol and drug treatment (AHA Annual Survey). Hence, there seems to be a tendency for hosptals to substtute ths type of npatent care wth outpatent servce, especally n areas where managed care pressures are mportant. Ths tendency does not sgnfcantly dffer whether t s a teachng, government or poor hosptal group. To test whether ths s the case, we created a varable that accounts for the overall number of alcohol and drug treatment centers n a group of hosptals regardless of ther npatent or outpatent status. Results usng ths dependent varable are reported n columns [9] and [10] of Table 4, and show that managed care dd not dfferently affect dfferent hosptal types regardng the provson of the overall alcohol and drug npatent and outpatent centers. Another nterestng set of varables s the one that accounts for the fact that hosptals that are the only ones of ther type n an MSA may react dfferently as they face dfferent market pressures. On the other hand, certan types of hosptals, manly government ones, may be forced to reman open f they are the only one n the MSA. As expected accordng to our thrd hypothess, the ONLY dummy s postve. It s sgnfcantly dfferent from zero for the change n the number of hosptals n the market, obstetrcs and outpatent centers for alcohol and drug treatment. The nteracton of ths dummy wth government hosptal s postve and sgnfcant for the change n ER, obstetrcs and alcohol and drug treatment centers. However, all these results could only be reflectng the fact that safety net hosptals are less effcent to start wth, and they have been forced to shut down or to termnate ther servces wth the ntroducton of managed care. To see f managed care has a dfferental effect for the servces most commonly used by the unnsured, reflectng that t s makng t more dffcult for hosptals to cross-subsdze charty care, we wll also look at the effect of an ncrease n the HMO enrollment for other types of hosptal servces that are not dsproportonately used by charty care patents. Results are presented n Table 5. None of the coeffcents correspondng to the nteracton of the change n HMO enrollment and safety net hosptal types s sgnfcant. However, gven that the AHA survey only asks whether the hosptal provdes the servce, f a hosptal closes some of ts unts but s stll offerng the servce no change wll be shown n the data. Hence, our fndngs may show that managed care has no sgnfcantly dfferent effect on poor and teachng hosptals from the control group, when, n fact, the number of unts of servce avalable has been reduced. To rule out ths possblty, n the last three columns of Table 5 we take advantage of the fact that the AHA also asks about the number of beds assgned to cardac ntensve care, burn care and medcal/surgcal ntensve care. In none of the cases has managed care had a dfferental mpact on poor, government and teachng areas regardng the number of beds assgned to a partcular IESE Busness School-Unversty of Navarra - 13

17 servce. Here, the only dummy remans generally postve. When nteracted wth government markets t s only sgnfcant and postve for the change n dental servces. Our results from Table 4 and Table 5 confrm that managed care has had a dsproportonate effect on the number of servces often used by the unnsured, even more so for the safety net hosptals. V. Conclusons Tradtonally, safety net hosptals have been able to fnance part of the charty care they provde through a complex system of cross-subsdes. A rse n prce competton and a reducton of ther revenues from nsured patents mght threaten ths delcate equlbrum. To evaluate the mportance of fnancal pressures on the provson of charty care by hosptals, we look at the mpact of managed care. The managed care boom has been one of the most mportant changes n the Unted States healthcare market and t has contrbuted to decreasng the rembursement to hosptals and doctors n the whole marketplace. The results of ths paper show that managed care penetraton, by rsng prce competton and reducng hosptal revenues, has exacerbated the closure of safety net hosptals. Moreover, the ones that reman open dsproportonately termnate the provson of those servces generally used by the unnsured n areas where managed care enrollment s hgher. Ths s especally the case for government hosptals. These results have mportant mplcatons for unnsured patents access to care. A reducton of the number of safety net hosptals and ther hgher termnaton of the servces tradtonally used by the unnsured mples that the average patent n the area has to travel longer dstances to obtan medcal care. Numerous works n health economcs lterature fnd a negatve elastcty of dstance on access to care (see, for nstance, Curre and Reagan, 1998, or Goodman et al., 1997). Further research should focus on the ultmate mpact that managed care has had on access to care and qualty of care for the unnsured IESE Busness School-Unversty of Navarra

18 References Amercan College of Physcans-Amercan Socety of Internal Medcne (2000), No Health Insurance? It s enough to Make you Sck, Phladelpha, Amercan College of Physcans- Amercan Socety of Internal Medcne. Amercan Hosptal Assocaton (1986), Cost and Compasson: Recommendatons for Avodng a Crss n Care for the Medcally Indgent, Chcago. Baker, L. (1997), The effect of HMOs on fee-for-servce health care expendtures. Evdence from Medcare, Journal of Health Economcs, 16. Baker, L. (1999), Assocaton of managed care market share and health expendture for fee-forservce Medcare patents, Journal of the Amercan Medcal Assocaton, pp Baker, L. and S. Shankarkumar (1997), Managed Care and Health Care Expendtures: Evdence from Medcare, , NBER Workng Paper Burguess J., D. A. DeFore (1994), The effect of dstance to VA facltes on the choce and level of utlzaton of VA outpatent servces, Socal Scence and Medcne, July. Cousneau, M. (1997), Health Status of and Access to Health Servces by Resdents of Urban Encampments n Los Angeles, Journal of Health Care for the Poor and Underserved, February. Curre, J. and J. Fahr (2001), Hosptals, Managed Care and the Charty Caseload n Calforna, NBER Workng Paper Curre, J. and P. Reagan (1998), Dstance to hosptal and chldren s access to care: s beng closer better, and for whom?, NBER Workng Paper Cutler, D. and J. Barro (1997), Consoldaton n the Medcal care Marketplace: a Case Study for Massachusetts, NBER Workng Paper Cutler, D. and M. McClellan (1996), The Determnants of Technologcal Chance n Heart Attack Treatments," NBER Workng Paper Cutler, D. M. and L. Shener (1998), Managed care and the growth of medcal expendtures, NBER Workng Paper Doorslaer, E. et al. (1997), Income-Related Inequaltes n Health: some Internatonal Comparsons, Journal of Health Economcs, vol. 16, pp Duke, K. (1996), Hosptals n a changng healthcare system, Health Affars, 15(2), pp Ettner, S. (1996), New Evdence on the Relatonshp between Income and Health, Journal of Health Economcs, (15), pp Frank, R. and R. Salkever (1991), The Supply of Charty Servces by Not-For-Proft Hosptals: Motves and Market Structure, RAND Journal of Economcs, 22(3), pp Freeman, H., L. Aken, R. Blendon, and C. Corey (1990), Unnsured workng-age Adults: Characterstcs and Consequences, Health Servces Research, February. IESE Busness School-Unversty of Navarra - 15

19 Freeman, E. and C. Corey (1993), Insurance Status and Access to Health Servces among Poor Persons, Health Servces Research, 24(6). Fourner and Campbell (1997), Indgent Care as Qud Pro Quo n Hosptal Regulaton, The Revew of Economcs and Statstcs, November. Gold, M.R. et al. (1995), A Natonal survey of the arrangements Managed Care Plans Make wth Physcans, New England Journal of Medcne; 333 (25), pp Kaser (2008), The Unnsured: A Prmer, The Kaser Commsson on Medcad and the Unnsured, October. Levt, K., H. Lazenby, and B. Braden (1998), Natonal health Spendng Trends, Health Affars, 17. Luft, S. and R. Mller (1997), Does Managed Care Lead to Better or Worse Qualty of Care?, Health Affars, September-October. Mas, N. and J. Senfeld (2008), Is Managed care restranng the adopton of technology by hosptals?, Journal of Health Economcs, 27, pp Meara, E. (1998), Why s Socoeconomc Status Related to Health?, mmeo. Melnck, G. and J. Zwanzger (1995), State Health Care Expendtures under Competton and Regulaton, 1980 through 1991, Amercan Journal of Publc Health, 85(10). Rchardson, E. (1999), Managed Care and Access to Care by the Poor, mmeo. Shoor, R. and C. Hughes (1993), Ctes Struggle to Pay for Health Care, Busness and Health, Sloan, F., M. Morrsey, and J. Valvona (1986), Hosptal Care for the Self Pay Patent, Journal of Health Poltcs, Polcy and Law, vol. 13, pp Stern, R., J. Wessman, and A. Epsten (1991), The Emergency Department as a Pathway to Admsson for Poor and Hgh-Cost Patents, JAMA, IESE Busness School-Unversty of Navarra

20 Table 1 Uncompensated Care by Hosptal Type UC Share Mrkt Share UC/Expenses Hosptal type Ownershp Non-For-Proft 55.60% 55.80% 58.06% 59.64% 4.10% 5.00% For-Proft 4.10% 5.30% 15.10% 15.35% 3.10% 4.20% Government 40.30% 38.90% 26.84% 25.01% 11.12% 12.27% Teachng Status Major publc teachng 25.20% 26.50% 1.46% 1.52% 8.20% 9.10% Major prvate teachng 4.60% 12.40% 5.28% 4.88% 13.60% 14.50% Source: Amercan Hosptal Assocaton. UC refers to Uncompensated Care, that ncludes charty care and bad debt. UC share refers to the percentage of total uncompensated care provded by each hosptal type. MKT share refers to percentage of total hosptal beds provded by each hosptal group. Table 2.a Summany Statstcs. Dependent Varables Varable n 1985 Varable n 95/varable n 85 Varable Name Mean Std. Devaton Mean Std. Devaton # Hosptals Poor Teachng Government Other # Emergency Rooms Poor Teachng Government Other # Obstetrcs Poor Teachng Government Other # Inpatent Alcohol & Drug Care Unts Poor Teachng Government Other # Outpatent Alcohol & Drug Care Unts Poor Teachng Government Other # Any Alcohol & Drug Care Unts Poor Teachng Government Other IESE Busness School-Unversty of Navarra - 17