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