In health care costs, Michigan is doing something right

May 29, 2015

Editor’s Note: This column was published in Bridge Magazine.

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.