NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Managed Care Has Slowed Growth in Medical Spending



"Today, over 75 percent of the privately insured population is enrolled in managed care. Enrollment in the most restrictive form of managed care--Health Maintenance Organizations (HMOs)--rose from 16 percent of insured workers in 1987 to 48 percent in 1995."

After years of increasing at double-digit rates, the growth in health insurance costs has ground to a halt. What accounts for the dramatic change? In Managed Care and the Growth of Medical Expenditures(NBER Working Paper No. 6140), NBER Research Associate David Cutler and co-author Louise Sheiner conclude that managed care is the explanation. Spending grows much more slowly, they find, in states with high enrollment in managed-care plans.

In the last 15 years, there has been a huge shift in health-care insurance toward managed care. In 1980, only about 5 percent of the privately insured population was in managed care. By 1987, that was up to 25 percent, and today, over 75 percent of the privately insured population is enrolled in managed care. Enrollment in the most restrictive form of managed care--Health Maintenance Organizations (HMOs)--rose from 16 percent of insured workers in 1987 to 48 percent in 1995. During that same time, enrollment in Preferred Provider Organizations (PPOs), the next most restrictive form of managed care, rose from 11 percent to 25 percent. But the extent of the managed-care revolution varies dramatically across states. In California, for example, about 80 percent of the insured population is in managed care, whereas in Alaska and Wyoming, managed care is almost non-existent. Cutler and Sheiner use this fact to compare spending growth across states.

The impact of managed care shows up clearly. In 1980, they note, California's per capita spending was 17 percent above the national average; by 1993, California's per capita spending equaled the national average. Of course, the lower growth of spending in managed-care states could be attributable to the fact that managed care tends to be adopted in high-spending states and that high-spending states naturally will have lower growth of spending over time.

Even allowing for this possibility, the authors find that for every 10-percentage-point increase in the HMO enrollment rate, the growth of health spending falls by 0.5 percentage points per year. Increases in HMO enrollment cause spending on hospital care to fall even more. Some of this fall is offset by a rise in spending on doctors, suggesting that HMOs shift some health care from the hospital to the doctor's office. Interestingly, HMOs have no significant effect on the number of admissions per person; rather, the entire reduction in hospital spending is attributable to a reduction in costs per admission, and most of this reduction is caused by a reduction in the length of stay at hospitals.

"Lengths of stay," the authors write, "can fall only so much." For managed care to keep spending growth lower permanently, it must slow the adoption of new technologies. Cutler and Sheiner study the diffusion of five groups of new technologies: cardiac technologies (catheterization lab, open heart surgery facilities, and angioplasty facilities), radiation therapy (megavoltage radiation, radioactive implants, therapeutic radioisotope, x-ray therapies, and stereotactic radiosurgery), diagnostic radiology (CT Scanner, diagnostic radioisotope, MRI, ultrasound, positron emission tomography, and single photon emission computed tomography), transplantation services (kidney, organ, tissue, bone marrow), and extracorporeal shock wave lithotripters. They find that increased HMO enrollment slows the diffusion of such new technologies. This suggests that increased HMO enrollment may have a long-run influence on the growth of medical spending.

In a related study, Managed Care and Health Care Expenditures: Evidence from Medicare, 1990-1994 (NBER Working Paper No. 6187), Laurence Baker and Sharmila Shankarkumar suggest that increases even in non-Medicare HMO enrollment in an area, by changing the way that health care providers practice, reduce traditional Medicare fee-for-service expenditures. An increase in the system-wide HMO market share from 10 to 20 percent reduces Medicare Part A (hospital) expenditures by 1.9 percent. Increasing the system-wide HMO market share from 20 to 30 percent reduces those expenditures by 2.5 percent. For Medicare Part B (physician) expenditures, increases in system-wide HMO enrollment from 10 to 20 percent reduce expenditures by 1.7 percent. Baker and Shankarkumar conclude that ". . . these results suggest that managed care transforms the functioning of the entire health care system."


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