Plans integrated with providers charge higher premiums

Here’s the headline finding of my new paper in Health Services Research, coauthored with Steve Pizer and Roger Feldman: Controlling for quality, Medicare Advantage (MA) plans that are fully integrated with providers (owned or controlled by the same entity) charge higher premiums, relative to plans that are not integrated in this way. We also found that such plans have higher star quality ratings, which is why it was important to control for them. Lastly, we found no evidence that integration is associated with more generous benefits.

Our work is in the context of the incentives of the Affordable Care Act (ACA), which promotes such integration.

Through bonus payments for quality improvement and cost reduction, the ACA encourages the formation of accountable care organizations (ACOs), networks of providers responsible for the care of a defined group of Medicare patients (Frakt and Mayes 2012). ACOs give providers an incentive to consolidate the spectrum of care under one management because bonus payments will be tied to performance on quality measures and a spending target based on the difference between a benchmark and all Medicare spending attributed to beneficiaries associated with the ACO—even when incurred for services provided outside the ACO. In addition, some ACO contracts put providers at financial risk if their costs are above a benchmark. Consequently, ACOs with risk management capabilities will be better positioned to succeed (Fuchs and Schaeffer 2012). Providers can develop these capabilities internally or acquire them by merging with an insurer. Finally, the ACA offers quality bonus payments to MA plans (Jacobson et al. 2011). To the extent that higher quality can be achieved through plan–provider integration, this is another incentive to integrate. [Hyperlinks added.]

The study was based on 910 MA plans operating in 2009 in U.S. states and D.C., excluding special need plans, private fee for service (PFFS) plans, plans not offering drug benefits, and other plan types with very low enrollment (like regional PPOs and medical savings accounts). (A sensitivity analysis focused on non-drug MA plans obtained similar results.) Supplementing public data from the Centers of Medicare and Medicaid Service (CMS), we constructed a unique database of fully integrated MA plans by reviewing plans’ websites and governing documents to determine which plan-offering firms had vertically integrated with a hospital or provider group.

We acknowledge that we examined an extreme form of integration, which can occur, for example, if a provider offers its own plan. It is a special case of the more general concept of vertical restraints or vertical behavior — contracts of various types between plans and providers. A recent example of vertical behavior is the Bon Secours-Aetna ACO deal.

Our models of plan premiums and benefits control for quality, market structure, cost, and demand factors (all standard in the literature in which our work is placed). Our model of plan quality also controls for market structure, cost, and demand factors.

We found that integration is associated with an increase of $28 per month in premiums and a monetized increase of just under $8 per month in quality. Consequently, about 70 percent of the total premium difference between integrated and nonintegrated plans is not attributable to quality. Some or all of this premium increase could be associated with benefit enhancements by plans, but we did not observe a statistically significant increase in benefit generosity with integration among the subset of benefit variables we examined. An alternative possibility is that higher premiums for integrated plans are related to higher market power commanded by those plans (whether due to integration or a causal factor of it). Because we did not examine all possible benefits, we cannot completely distinguish between these two possibilities, and that is a natural focus for future investigation.

Because ours was necessarily an observational study, one must make additional assumptions to infer the extent to which integration caused higher premiums and quality. First, prior theoretical and (limited) empirical literature suggests that our estimate of the extent to which integration causes higher quality is biased upwards. Most likely, integration causes less of a quality increase than we predict.

Second, we confirmed that our integration variable is historical, i.e., that plans that integrated with providers did so well before 2009. If one assumes that such lagged integration is not correlated with any unobserved factors that also affect premiums in 2009, then one can say that integration causes the premium increase we observed.


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