Health Care Purchasing and Market Changes in California

Prologue: The relationships between purchasers of medical care and its providers are evolving in California more rapidly perhaps than in any other state as managed competition takes hold in the marketplace. The Clinton administration's failed effort to enact comprehensive reform included a regulatory prescription that configured managed competition around publicly sponsored purchasing cooperatives. The California model is decidedly more private, featuring efforts by large employers to negotiate lower costs and better-quality care for their substantial investment in keeping their employees healthy. In this paper Jamie Robinson discusses the impact of these negotiations on the cost of care and on how large purchasers are influencing the configuration of the delivery system. In short, Robinson concludes that purchasers and providers are moving from arm's-length contractual relationships to longer-term organizational ties, similar to bonds that are prevalent in Japan. Robinson, an associate professor of economics at the University of California, Berkeley, obtained his doctorate from the same institution. He has devoted his analytic and research skills to applying the principles of institutional economic theory to a study of health care organizations, a process he describes as “shoe-leather social science—collecting facts and analyzing them at the same time.” Robinsons multiyear effort is supported by an Investigator Award in Health Policy Research from The Robert Wood Johnson Foundation. His research has already resulted in two other recent publications. One, entitled “The Changing Boundaries of the American Hospital,” was published in The Milbank Quarterly (72, no. 2, 1994). A second paper, “The Growth of Medical Groups Paid through Capitation in California,” was published in The New England Journal of Medicine (21 December 1995). Abstract: This paper analyzes the process and outcomes of collective negotiations among large private employers and health maintenance organizations (HMOs) in California. In 1994, prior to collective negotiations, differences in benefit packages, risk mix, and volume of purchasing accounted for only one-third of the variance in premiums among firms and HMOs. The 1995 collective negotiations reduced the variance by 22 percent and the enrollment-weighted mean premium by approximately 9 percent, while enriching the standard benefit package. Savings for the eleven participating firms totaled $36.5 million. Large purchasers are reducing the number of health plans offered to their employees, standardizing the benefit package, using collective negotiations to contain costs, and shifting from vendor to partner relations with HMOs.