Managed Care’s Price Bargaining with Hospitals Main Research Questions: (1) Do MC plans get lower prices through bargaining? AcademyHealth Annual Research Meeting June 3, 2007 (2) What are the determinants of MC plans’ plans’ bargaining power? Vivian Wu University of Southern California and RAND Main Research Questions: Background – Managed Care (1) Do MC plans get lower prices through bargaining? Yes (2) What are the determinants of MC plans’ plans’ bargaining power? Observe Managed Care w/ Lower Prices MC plans form selective networks and channel patients into these providers MC bargains with providers individually for volume discounts Mechanisms to reduce quantity: Plan Size, Patient channeling Methodology: Mechanism to reduce price: Selective Contracting (bargaining) financial: capitation nonnon-financial: utilization management, gate keepers, guidelines Methodology: Three Hypotheses Per Diem Rate for a Hospital Admission FFS $100 Cost Difference HMO 1 HMO 2 $ 70 $ 62 Hospitals’ Hospitals’ 3rd-degree Price Discrimination HMO 3 $ 51 HMO 4 $ 75 HMO 5 $ 65 Q: Is the observed price difference related to plans’ different bargaining power? Managed Care's Buyer Power Case mix, use of lower cost/quality hospitals Elasticity - Ramsey pricing rule Managed Care’ Care’s Price Bargaining Size Elasticity: ability to channel patients Excess capacity 1 Methodology: Data Empirical Tests Payer Size Channeling Ability Excess Capacity H1: Cost Difference Group Insurance Commission claims data Mass Hospital Discharge data H2: Hospital’ Hospital’s Price Discrimination H3: Managed Care’ Care’s Price Bargaining No Relation Negative No Relation Negative Negative Negative Size “Channeling” Channeling” measure American Hospital Association Sample Results: H1- Cost Difference Actual prices paid, diagnoses, patient demographics July, 1993 to June, 2000 Boston, Worcester, and Springfield HRRs General Acute Hospitals Results: H1- Cost Difference Dependent Variable = log(Per Diem Price) Base † Base + High Cost †† Dependent Variable = log(Per Diem Price) Base + Hosp FE 25% 50% 75% PPO -0.30* -0.31* -0.30* PPO -0.23* -0.24* -0.31* HPHC -0.38* -0.37* -0.36* HPHC -0.25* -0.30* -0.43* Tufts -0.28* -0.28* -0.26* Tufts -0.12* -0.23* -0.38* Pilgrim -0.35* -0.32* -0.32* Pilgrim -0.22* -0.28* -0.39* HCHP -0.49* -0.52* -0.52* HCHP -0.47* -0.51* -0.56* Cen Mass -0.30* -0.29* -0.27* Cen Mass -0.21* -0.29* -0.41* Fallon -0.34* -0.35* -0.31* Fallon -0.22* -0.29* -0.43* Others -0.24* -0.25* -0.26* Others -0.13* -0.25* -0.36* Adj R2 .52 .53 .54 * Significant at α= .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 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. *Significant at α= .05 level. **All controlled for age, sex, income, DRG, year, hospital and market dummies. Methodology: Empirical Tests =>R/O =>R/O the cost difference hypothesis Managed Care's Buyer Power Payer Size Channeling Ability Excess Capacity H2: Hospital’ Hospital’s Price Discrimination No relation Negative No relation H3: Managed Care’ Care’s Price Bargaining Negative Negative Negative 2 Methodology: Methodology: Variable Definition Empirical Model Price ijkt = α*sizekmt + β*channelkmt + γ*excessjt + Σa δ*interactionsa + ϕ*Case mixijkt + Σt λt*Yeart Price Payer Size Channeling + Σj ρj*Hospj + Σm σm*Marketm + εijkt where i – IP dayi j – hospital j k – plan k t – year t m - market Methodology: “Channeling” Per Diem price Inpatients days in the hospital’ hospital’s market (year(year-1) Difference between preferred vs. observed hospital choices (year(year-1) Excess Capacity Average daily census < 50% Methodology: “Channeling” Dissimilarity Index 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” Channeling” Index 30% 30% 30% 30% 30% (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 prob(Yi=j | zij, xi) = Σ exp(z ’α + x ’β ) j ij i j (2) Calculate channeling index = | Sp – So |2 2 Empirical Results 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. Managed Care's Buyer Power Dependent Variable = log(Per Diem Price) Size † Channel - II Excess Capacity -0.88 ** -0.004 * -0.64 -0.0021 0.02 0.05 Size*channel --- -0.09 Size* Excess -- -0.27 † Size in millions. 3 Empirical Results: Summary 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 Evidence support managed care engages in price bargaining. Determinants: “Size” Size” is important –large plans can get lower prices. “Channeling” Channeling” is also important; slightly larger effect than size in determining discounts. † Size in millions. Implications Policy 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 Managed Care's Buyer Power 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. 4