The impact of managed care on the hospital industry

Managed care health plans have become an important new force in the US health care system, changing the delivery of health care and the nature of competition in the health care industry. Lower health care costs of managed care enrollees have led many to see 'managed care' as the solution to rising health care expenditures. Therefore, it is important to understand the impact of managed care on the health care industry. This dissertation focuses on the impact of 'managed care' on the acute care hospital industry and physicians who work in inpatient settings, using data on hospitals in Massachusetts between 1992 and 1998.; In the first essay, I investigate the impact of managed care penetration on the prices and costs of hospitals. Managed care plans provide coverage for health care through a predetermined group of providers selected by the plan. Their ability to direct demand potentially gives them power to extract lower prices from providers. However, the impact of managed care penetration on prices for the overall patient population depends on whether hospitals raise prices to non-managed care insurers. Using instrumental variables estimation, I find evidence that managed care penetration leads to significant reductions in hospital prices and costs for the overall patient population.; Managed care involves methods of financing and delivering health care services that manage, or intervene, in care decisions made by patients and physicians in order to reduce costs. The second essay empirically investigates whether managed care plans are able to reduce the resource use of physicians in inpatient settings. Using instrumental variables estimation, I find evidence that managed care involvement reduces physicians' resource use not only for managed care patients but for non-managed care patients as well.; The last essay investigates the relationship between Medicare reimbursement generosity and prices paid by private payers. The empirical estimation is couched as a test of two alternative hospital pricing models. If hospitals are maximizing profits, there should be no relationship between Medicare generosity and prices paid by private payers. If a hospital's utility function includes quantity of services as well as profits, then as Medicare generosity increases, the hospital lowers its price to private payers in order to increase the quantity of services, which I call 'cross-subsidization'. I find evidence that Medicare's hospital payments subsidize private plan patients, especially managed care patients.