Government and Health Care

It could be worse

Study shows Michigan has lower health care costs than neighboring states.

April 24, 2015
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If you think health care is expensive, just know that it could be worse.

Michigan’s Certificate of Need process and market conditions may play a role in its lower overall health care spending and hospital costs in comparison to Wisconsin and Indiana, based on a new study released this month.

The Center for Healthcare Research & Transformation, a nonprofit collaboration between University of Michigan and Blue Cross Blue Shield of Michigan, released a study April 20 examining the variation in health care spending by geographic region.

“A Tale of Three Cities: Hospital and Health System Costs in the Midwest” analyzed market conditions, state-level regulation and hospital cost variation in Detroit, Indianapolis and Milwaukee based on the diverse health care policies and conditions in the neighboring states, according to the issue brief.

Although there are a number of factors influencing costs in the health care industry, the study indicated state-level Certificate of Need laws and health insurance market conditions may play a role.

In terms of overall health care, Michigan had the lowest per capita spending from 2001 to 2009 among the three states and the lowest average annual growth of 5.2 percent in spending per capita from 1991 to 2009. Michigan’s total health care spending on an annual basis is not only less than Wisconsin’s 6 percent growth rate and Indiana’s 5.5 percent rate, but also below the national average of 5.3 percent.

During fiscal year 2013, Michigan also had the lowest per capita hospital costs at roughly $2,600, while Wisconsin had hospital costs per person of approximately $3,107, and Indiana of more than $2,900. The brief indicated the costs are driven by “the price per service and the total volume of services provided, both of which are affected by market conditions and state regulations.”

Another major finding indicated both Michigan and Indiana had one dominant insurance company with more than 50 percent market share, resulting in stronger bargaining power, while Wisconsin had 10 health plans with at least 5 percent of the market share.

Robert L. Hughes, president of Advantage Benefits Group in Grand Rapids and member of the Michigan Certificate of Need Commission, said although Blue Cross Blue Shield of Michigan and Priority Health have volume and bargaining power to negotiate discounts with health systems, the Certificate of Need process may have a bigger impact on what drives cost in the state.

“The competition is so big out there, and the discounts have gotten closer over the years from the different carriers,” said Hughes. “It is not so much the discounts the carriers might be able to get versus people’s utilization and not paying attention to things that are really driving cost.”

Although the percentage of responsibility for coverage varies by industry and employer, Hughes said the average employer pays roughly 75 percent of the premium and the employee pays the rest, and the top three biggest payers in the state are in favor of CON due to the lower cost.

“Chrysler, GM and Ford are in favor of CON and they don’t like regulation; they are businesses, and the last thing in the world they want is more regulation,” said Hughes.

“When they look at their data — these are the people paying the bills and their employees are paying a quarter of the bills — they clearly see the CON states like Michigan are less expensive than the states that don’t have it, where they have their other facilities.”

The Michigan CON program is intended to balance cost, quality and access by regulating new hospital construction and investment in technology. Health facilities proposing capital projects, which include increasing the number of licensed beds, relocation of beds, acquisition of an existing facility and construction, are subject to review by the 11-member independent body appointed by the governor.

Although there is debate about whether the CON program protects the organizations or providers and prevents competition, Hughes said the process is trying to stop duplication of services.

“Where services being provided now are at a good price and the quality is good, there is no reason to duplicate that facility, and the taxpayers end up paying for it,” said Hughes. “At the same time, we have to make sure CON is not a barrier to entry because competition is always good.”

In 2013, Michigan State University released the study “Do More Hospital Beds Lead to Higher Hospitalization Rates? A Spatial Examination of Roemer’s Law,” which examined the relationship between hospital bed availability and utilization. Based on roughly 1.1 million hospital admissions in 2010 at 169 Michigan hospitals, the study indicated for every 1,000 people there were 9.51 hospital admissions per month, which is higher than the national average.

“They found a strong correlation between bed availability and use: If they are out there, they tend to get filled. People get put in hospitals because they need to fill it, when they shouldn’t be,” said Hughes. “That is where something like the CON process is helpful because people would just build away beds left and right if there wasn’t some kind of restriction there. That is one example of how CON processes keep costs lower in the state.”

The Economic Alliance for Michigan released “Cost & Discharge Analysis of Select Procedures: CON States vs. Non-CON states” in March, which indicated the average CON facility cared for between 13 to 30 percent more Medicare patients for the same diagnosis as a non-CON facility, and charged between 12 and 27 percent less than a non-CON facility.

“If they are treating more people with shorter stays, they are using their facilities more efficiently than the places that are allowed to use more beds,” said Hughes. “If we look at this on a national threshold, only 30 percent of the CON-regulated facilities surpassed the threshold, in contrast to 50 percent of the non-CON facilities that were above the national average. So if you are a CON facility, there is only a 30 percent chance you are going to be above the national average for charging for a particular diagnosis.”

Although the CHRT study examined Detroit-based health systems, Hughes said there are a number of factors that may contribute to lower health care spending and hospital costs in West Michigan. Not only have employers adapted more quickly to changes in benefit plans, but also the community rallies to figure out how to accomplish a task without necessarily relying on the government, according to Hughes.

“Everything has been more efficient here because of the way people do business and act in West Michigan, and we have been notorious for getting things done right and not overspending,” said Hughes.

“We have embraced the consumerism, the higher deductible plans, the transparency and getting people involved in what things cost a lot sooner than other parts of the country. People here have made changes to their benefit plans quicker and adopted a more modern design than other parts of the country.”

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