Managed Care’s Price Bargaining
with Hospitals
AcademyHealth Annual Research Meeting
June 3, 2007
Vivian Wu
University of Southern California and RAND
Main Research Questions:
(1) Do MC plans get lower prices through
bargaining?
(2) What are the determinants of MC plans’
bargaining power?
Main Research Questions:
(1) Do MC plans get lower prices through
bargaining?
Yes
(2) What are the determinants of MC plans’
bargaining power?
Plan Size, Patient channeling
Background – Managed Care

Mechanism to reduce price:
 Selective Contracting (bargaining)



MC plans form selective networks and channel
patients into these providers
MC bargains with providers individually for volume
discounts
Mechanisms to reduce quantity:


financial: capitation
non-financial: utilization management, gate keepers,
guidelines
Methodology:
Observe Managed Care w/ Lower Prices
Per Diem Rate for a Hospital Admission
FFS
$100
HMO 1
$ 70
HMO 2
$ 62
HMO 3
$ 51
HMO 4
$ 75
HMO 5
$ 65
Q: Is the observed price difference related to
plans’ different bargaining power?
Methodology:
Three Hypotheses

Cost Difference


Hospitals’ 3rd-degree Price Discrimination


Case mix, use of lower cost/quality hospitals
Elasticity - Ramsey pricing rule
Managed Care’s Price Bargaining



Size
Elasticity: ability to channel patients
Excess capacity
Methodology:
Empirical Tests
Payer Size
Channeling
Ability
Excess
Capacity
H1: Cost Difference
H2: Hospital’s Price
Discrimination
No Relation
Negative
No Relation
H3: Managed Care’s
Price Bargaining
Negative
Negative
Negative
Data

Group Insurance Commission claims data



Mass Hospital Discharge data




Actual prices paid, diagnoses, patient demographics
July, 1993 to June, 2000
Size
“Channeling” measure
American Hospital Association
Sample


Boston, Worcester, and Springfield HRRs
General Acute Hospitals
Results: H1- Cost Difference
Dependent Variable = log(Per Diem Price)
Base †
Base + High Cost ††
Base + Hosp FE
PPO
-0.30*
-0.31*
-0.30*
HPHC
-0.38*
-0.37*
-0.36*
Tufts
-0.28*
-0.28*
-0.26*
Pilgrim
-0.35*
-0.32*
-0.32*
HCHP
-0.49*
-0.52*
-0.52*
Cen Mass
-0.30*
-0.29*
-0.27*
Fallon
-0.34*
-0.35*
-0.31*
Others
-0.24*
-0.25*
-0.26*
Adj R2
.52
.53
.54
* Significant at = .05 level.
† Base regression control for age, sex, income, DRG, market and year dummies.
†† High cost variables include major teaching hospitals, hospitals having angioplasty or cath lab, open heart surgery facilities, and hospital
beds, and ownership types.
Results: H1- Cost Difference
Dependent Variable = log(Per Diem Price)
25%
50%
75%
PPO
-0.23*
-0.24*
-0.31*
HPHC
-0.25*
-0.30*
-0.43*
Tufts
-0.12*
-0.23*
-0.38*
Pilgrim
-0.22*
-0.28*
-0.39*
HCHP
-0.47*
-0.51*
-0.56*
Cen Mass
-0.21*
-0.29*
-0.41*
Fallon
-0.22*
-0.29*
-0.43*
Others
-0.13*
-0.25*
-0.36*
*Significant at = .05 level.
**All controlled for age, sex, income, DRG, year, hospital and market dummies.
Results Summary:
H1- Cost Difference
Consistent discounts for all patients
 Discounts not from sending patients to
different set of hospitals
 From different prices within the hospitals.

=>R/O the cost difference hypothesis
Methodology:
Empirical Tests
Payer Size
Channeling
Ability
Excess
Capacity
H2: Hospital’s Price
Discrimination
No relation
Negative
No relation
H3: Managed Care’s
Price Bargaining
Negative
Negative
Negative
Methodology:
Empirical Model
Price ijkt = α*sizekmt + β*channelkmt
+ γ*excessjt + Σa δ*interactionsa
+ *Case mixijkt + Σt λt*Yeart
+ Σj ρj*Hospj + Σm m*Marketm + εijkt
where
i – IP dayi
j – hospital j
k – plan k
t – year t
m - market
Methodology: Variable Definition

Price


Payer Size


Inpatients days in the hospital’s market (year-1)
Channeling


Per Diem price
Difference between preferred vs. observed hospital
choices (year-1)
Excess Capacity
 Average daily census < 50%
Methodology: “Channeling”
Dissimilarity Index
Patient Distribution
Hosp 1
Hosp 2
Hosp 3
Hosp 4
Hosp 5
HMO1
predicted
10%
15%
30%
15%
10%
HMO 1
observed
0%
50%
25%
5%
10%
Difference
-10%
+35%
-5%
-10%
0%
“Channeling”
Index
30%
30%
30%
30%
30%
Methodology: “Channeling”
Dissimilarity Index
(1) Model a conditional hospital choice model
Uij = z’ij α + xi’βj + εij
(2) Compute expected hospital choices
exp(zij’α + xi’βj)
__________________
prob(Yi=j | zij, xi) =  exp(z ’α + x ’β )
j
ij
i j
(2) Calculate channeling index = | Sp – So |2
2
Empirical Results
Dependent Variable = log(Per Diem Price)
Size †
-0.82 **
0.96 **
Channel – I
-0.001
0.0003
Excess Capacity
0.018
0.029
Size*channel
---
-0.037**
Size* Excess
--
-0.26
† Size in millions.
Empirical Results
Dependent Variable = log(Per Diem Price)
Size †
-0.88 **
-0.64
Channel - II
-0.004 *
-0.0021
0.02
0.05
Size*channel
---
-0.09
Size* Excess
--
-0.27
Excess Capacity
† Size in millions.
Empirical Results
Dependent Variable = log(Per Diem Price)
Size †
-1.0 **
-0.65 *
Channel – III
-0.24
-0.21
Excess Capacity
0.02
0.06
Size*channel
---
-9.6 **
Size* Excess
--
-0.27
† Size in millions.
Empirical Results: Summary
Evidence support managed care engages in
price bargaining.
 Determinants:
 “Size” is important –large plans can get
lower prices.
 “Channeling” is also important; slightly
larger effect than size in determining
discounts.

Implications
Managed care can make hospital market
more price competitive
 through exclusive network, or,
 via channeling within the network
 Current models inadequate in describing
health plan bargaining power

Policy Implications

Implications on MC mergers
 little is known about these mergers
 my results suggest to be cautious
potential gains in hospital (input) market
may be limited
 potential losses in insurance (output) market
may be large.
