In health care costs, Michigan is doing something right

Variation in health care spending between states has been well documented for decades by many researchers, most notably, those who produce the Dartmouth Atlas of Health Care. The reasons behind this variation in spending have generally been less understood and much debated.

Our center wanted to understand this variation better, particularly to see how Michigan stacked up. To do that, we compared health care spending (particularly the largest part of health care spending: hospital costs) between states with different health policies. We chose two neighboring states, Indiana and Wisconsin, because they share similarities – as well as some significant structural and policy differences – to Michigan.

What does our study comparing health care spending in Michigan, Wisconsin and Indiana tell us?

We are doing something right in Michigan. And there is much that Indiana and Wisconsin can learn from Michigan when it comes to health care spending.

Our study’s findings were simple, yet complex. Health care spending overall, and hospital costs in particular, is lowest in Michigan, followed by Indiana and highest in Wisconsin. Hospital costs make up about a third of health care spending and these costs are considerably lower in Michigan than the states we looked at in the study. Wisconsin hospitals’ operating and total hospital margins far exceeded national benchmarks, while Michigan hospital margins were generally below those benchmarks.

The complexity of this comparison lies in trying to answer the question, “What causes these differences?” While cause and effect is difficult to analyze and there are numerous complex environmental differences between the states, certain differences are likely contributors to this variance.

First, Wisconsin is the most fragmented health insurance market in the country, with 10 health plans having at least 5 percent of the market. In contrast, both Indiana and Michigan have one dominant health plan. As found in other studies, having a dominant health plan is probably an important part of what keeps health care costs lower in Indiana and Michigan compared to Wisconsin. When a health plan has large market share, they have more leverage than small health plans in price negotiations and likely more impact from innovative cost strategies.

Second, Michigan is one of 36 states with Certificate of Need laws. Wisconsin and Indiana are not. Over the past several years, Michigan policy makers have debated the value and impact of these laws, which regulate a hospital’s (and sometimes, other providers’) ability to build new facilities and/or to purchase expensive new equipment.

The question is whether or not these laws are beneficial in terms of health care spending. Some argue that they give certain providers monopoly power and as such, could increase health care spending. Others believe that these laws are important tools to control overuse of services since health care doesn’t operate like most markets.

The research on Certificate of Need is not conclusive. Some research has shown that there is no effect on health care costs from these policies. But, there are also studies that show that these laws have a favorable effect on health care costs, particularly hospital costs.

There is continuing debate on the value of state Certificate of Need laws, but it is hard to believe that repealing or weakening these laws in Michigan would have a beneficial impact on health care spending. Fundamentally, our mix of market structures and state policies appear to be favorable when compared to Indiana and Wisconsin.

Michigan’s approach to health care financing along with regulation of costs is something to build on, not abandon.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan. Bridge does not endorse any individual guest commentary submission.

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Fri, 05/29/2015 - 12:32pm
I reviewed the economic literature on CON and published it in Michigan Med around 25 years ago. There were 14 studies, all had been undertaken by academics who assumed that CON would limit medical costs. Twelve found that costs in states with CON were higher than in those not afflicted with CON. The most prominent was by Herzlinger (now at Harvard Business) when she was at FTC. Costs generally were 10% higher with CON. The one study from Tennessee that asserted that CON diminished costs was contracted 3 years later by the same authors. I looked at the methods used in one study cited ("there are also studies") supporting the usefulness of CON. Mostly made up of assumptions, assertions, the kind of unsubstantiated theories anticipating a propaganda coup put out by the social sciences.
Sun, 05/31/2015 - 12:16pm
Could you provide a link to your CON research (or scan it for us)? I was on a CON and we were rendered almost impotent by the hospitals (many of whom, incredibly, were on the CON). 'The one study from Tennessee that asserted that CON diminished costs was contracted 3 years later by the same authors.' - 'contracted'? Did you mean to say 'contradicted'? Look at the hospital helicopter business and CONs and think about it. We had and have an 'arms race' among hospitals and it's wasting billions. Would you agree or disagree and why?
Sun, 05/31/2015 - 10:02am
Maybe they are doing something right but surely not everything. My friend has a good job in the health care industry and she pays $10,500 a year for her coverage and two children. Here copay and deductables are very high. She struggling with medical bills past and present ,so there is still work to be done. I also struggle with doctors who do not accept our insurance I have both Blue Cross and Medicare. Twice I have received a bill for $2000 and one for 600 that the Dr does not participate with. Let's also address Medicaid and Medicare fraud. Love to hear your comments. R.L.
Dick Olson
Sun, 05/31/2015 - 9:32pm
Does this study reflect the Republican legislation signed in2013 by Gov. Snyder that will make it easier for BCBS to get rate increases in the future?