Managed Care’s Price Bargaining with Hospitals

1. Managed Care’s Price Bargaining with Hospitals AcademyHealth Annual Research Meeting June 3, 2007 Vivian Wu University of Southern California and RAND

2. Main Research Questions: (1) Do MC plans get lower prices through bargaining? (2) What are the determinants of MC plans’ bargaining power?

3. Main Research Questions: (1) Do MC plans get lower prices through bargaining? (2) What are the determinants of MC plans’ bargaining power? Yes Plan Size, Patient channeling

4. 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

5. Methodology:Observe Managed Care w/ Lower Prices Q: Is the observed price difference related to plans’ different bargaining power?

6. Methodology: Three Hypotheses • Cost Difference • Case mix, use of lower cost/quality hospitals • Hospitals’ 3rd-degree Price Discrimination • Elasticity - Ramsey pricing rule • Managed Care’s Price Bargaining • Size • Elasticity: ability to channel patients • Excess capacity

7. Methodology:Empirical Tests

8. Data • Group Insurance Commission claims data • Actual prices paid, diagnoses, patient demographics • July, 1993 to June, 2000 • Mass Hospital Discharge data • Size • “Channeling” measure • American Hospital Association • Sample • Boston, Worcester, and Springfield HRRs • General Acute Hospitals

9. Results: H1- Cost Difference * 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.

10. Results: H1- Cost Difference *Significant at = .05 level. **All controlled for age, sex, income, DRG, year, hospital and market dummies.

11. 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

12. Methodology: Empirical Tests

13. Methodology: Empirical Model Price ijkt = α*sizekmt + β*channelkmt + γ*excessjt + Σaδ*interactionsa + *Case mixijkt + Σt λt*Yeart + Σj ρj*Hospj + Σm m*Marketm + εijkt where i – IP dayi j – hospital j k – plan k m - market t – year t

14. Methodology: Variable Definition • Price • Per Diem price • Payer Size • Inpatients days in the hospital’s market (year-1) • Channeling • Difference between preferred vs. observed hospital choices (year-1) • Excess Capacity • Average daily census < 50%

15. Methodology: “Channeling” Dissimilarity Index Patient Distribution

16. 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) jexp(zij’α+ xi’βj) (2) Calculate channeling index = | Sp – So |2 2 __________________ prob(Yi=j | zij, xi) =

17. Empirical Results † Size in millions.

18. Empirical Results † Size in millions.

19. Empirical Results † Size in millions.

20. 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.

21. 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

22. 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.