Managed Care’s Price Bargaining with Hospitals

AcademyHealth Annual Research MeetingAcademyHealth Annual Research MeetingJune 3, 2007June 3, 2007

Vivian WuUniversity of Southern California and RAND

(1) Do MC plans get lower prices through (1) Do MC plans get lower prices through bargaining?bargaining?

(2) What are the determinants of MC plans’ (2) What are the determinants of MC plans’ bargaining power? bargaining power?

Main Research Questions:

(1) Do MC plans get lower prices through (1) Do MC plans get lower prices through bargaining?bargaining?

(2) What are the determinants of MC plans’ (2) What are the determinants of MC plans’ bargaining power? bargaining power?

Main Research Questions:

Yes

Plan Size, Patient channeling

Background – Managed Care Mechanism to reduce price: Mechanism to reduce price:

Selective Contracting (bargaining)Selective Contracting (bargaining) MC plans form selective networks and channel MC plans form selective networks and channel

patients into these providerspatients into these providers MC bargains with providers individually for volume MC bargains with providers individually for volume

discountsdiscounts

Mechanisms to reduce quantity:Mechanisms to reduce quantity: financial: capitationfinancial: capitation non-financial: utilization management, gate keepers, non-financial: utilization management, gate keepers,

guidelinesguidelines

Methodology:Observe Managed Care w/ Lower Prices

Per Diem Rate for a Hospital AdmissionPer Diem Rate for a Hospital Admission

FFSFFS $100$100

HMO 1HMO 1 $ 70$ 70

HMO 2HMO 2 $ 62$ 62

HMO 3HMO 3 $ 51$ 51

HMO 4HMO 4 $ 75$ 75

HMO 5HMO 5 $ 65$ 65

Q: Is the observed price difference related to plans’ different bargaining power?

Methodology:Three Hypotheses

Cost DifferenceCost Difference Case mix, use of lower cost/quality hospitalsCase mix, use of lower cost/quality hospitals

Hospitals’ 3Hospitals’ 3rdrd-degree Price Discrimination-degree Price Discrimination Elasticity - Ramsey pricing rule Elasticity - Ramsey pricing rule

Managed Care’s Price BargainingManaged Care’s Price Bargaining SizeSize Elasticity: ability to channel patientsElasticity: ability to channel patients Excess capacityExcess capacity

Methodology:Empirical Tests

Payer SizePayer Size ChannelingChanneling

AbilityAbility

Excess Excess

CapacityCapacity

H1: Cost DifferenceH1: Cost Difference

H2: Hospital’s Price H2: Hospital’s Price DiscriminationDiscrimination No Relation No Relation NegativeNegative No Relation No Relation

H3: Managed Care’s H3: Managed Care’s Price BargainingPrice Bargaining NegativeNegative NegativeNegative NegativeNegative

Data Group Insurance Commission claims data Group Insurance Commission claims data

Actual prices paid, diagnoses, patient demographics Actual prices paid, diagnoses, patient demographics July, 1993 to June, 2000July, 1993 to June, 2000

Mass Hospital Discharge dataMass Hospital Discharge data SizeSize ““Channeling” measureChanneling” measure

American Hospital AssociationAmerican Hospital Association Sample Sample

Boston, Worcester, and Springfield HRRsBoston, Worcester, and Springfield HRRs General Acute HospitalsGeneral Acute Hospitals

Dependent Variable = log(Per Diem Price)Dependent Variable = log(Per Diem Price)

Base Base †† Base + High Cost Base + High Cost †††† Base + Hosp FEBase + Hosp FE

PPOPPO -0.30*-0.30* -0.31*-0.31* -0.30*-0.30*

HPHCHPHC -0.38*-0.38* -0.37*-0.37* -0.36*-0.36*

TuftsTufts -0.28*-0.28* -0.28*-0.28* -0.26*-0.26*

PilgrimPilgrim -0.35*-0.35* -0.32*-0.32* -0.32*-0.32*

HCHPHCHP -0.49*-0.49* -0.52*-0.52* -0.52*-0.52*

Cen MassCen Mass -0.30*-0.30* -0.29*-0.29* -0.27*-0.27*

FallonFallon -0.34*-0.34* -0.35*-0.35* -0.31*-0.31*

OthersOthers -0.24*-0.24* -0.25*-0.25* -0.26*-0.26*

Adj R2 Adj R2 .52.52 .53.53 .54.54* 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)Dependent Variable = log(Per Diem Price)

25%25% 50%50% 75%75%

PPOPPO -0.23*-0.23* -0.24*-0.24* -0.31*-0.31*

HPHCHPHC -0.25*-0.25* -0.30*-0.30* -0.43*-0.43*

TuftsTufts -0.12*-0.12* -0.23*-0.23* -0.38*-0.38*

PilgrimPilgrim -0.22*-0.22* -0.28*-0.28* -0.39*-0.39*

HCHPHCHP -0.47*-0.47* -0.51*-0.51* -0.56*-0.56*

Cen MassCen Mass -0.21*-0.21* -0.29*-0.29* -0.41*-0.41*

FallonFallon -0.22*-0.22* -0.29*-0.29* -0.43*-0.43*

OthersOthers -0.13*-0.13* -0.25*-0.25* -0.36*-0.36*

*Significant at = .05 level.

**All controlled for age, sex, income, DRG, year, hospital and market dummies.

Results: H1- Cost Difference

Results Summary: H1- Cost Difference

Consistent discounts for all patientsConsistent discounts for all patients Discounts Discounts notnot from sending patients to from sending patients to

different set of hospitalsdifferent set of hospitals From different prices within the hospitals. From different prices within the hospitals.

=>=>R/O the cost difference hypothesisR/O the cost difference hypothesis

Methodology:Empirical Tests

Payer SizePayer Size ChannelingChanneling

AbilityAbility

Excess Excess

CapacityCapacity

H2: Hospital’s Price H2: Hospital’s Price DiscriminationDiscrimination No relation No relation NegativeNegative No relation No relation

H3: Managed Care’s H3: Managed Care’s Price BargainingPrice Bargaining NegativeNegative NegativeNegative NegativeNegative

Methodology: Empirical Model

Price Price ijktijkt = = α*α*sizesizekmt kmt + + β*β*channelchannelkmt kmt

+ + γ*excessγ*excessjt jt + + ΣΣaa δ*interactionsδ*interactionsaa

+ + **Case mixCase mixijktijkt + + ΣΣt t λλtt**YearYeartt

+ + ΣΣj j ρρjj**HospHospj j + + ΣΣm m mm*Market*Marketmm + + εεijktijkt

where where i – IP dayi i – IP dayi j – hospital jj – hospital j

k – plan kk – plan k m - marketm - market

t – year tt – year t

Methodology: Variable Definition Price Price

Per Diem pricePer Diem price Payer Size Payer Size

Inpatients days in the hospital’s market (year-1) Inpatients days in the hospital’s market (year-1) ChannelingChanneling

Difference between preferred vs. observed hospital Difference between preferred vs. observed hospital choices (year-1)choices (year-1)

Excess CapacityExcess Capacity Average daily census < 50%Average daily census < 50%

DifferenceDifference -10%-10% +35%+35% -5%-5% -10%-10% 0%0%

““Channeling” Channeling” IndexIndex 30%30% 30%30% 30%30% 30%30% 30%30%

Patient Distribution

Hosp 1Hosp 1 Hosp 2 Hosp 2 Hosp 3Hosp 3 Hosp 4Hosp 4 Hosp 5Hosp 5

HMO1 HMO1 predictedpredicted 10%10% 15%15% 30%30% 15%15% 10%10%

HMO 1HMO 1

observedobserved0%0% 50%50% 25%25% 5%5% 10%10%

Methodology: “Channeling” Dissimilarity Index

(1) Model a conditional hospital choice model(1) Model a conditional hospital choice model

UUijij = = z’z’ijij α α + + xxii’β’βjj + + εεijij

(2) Compute expected hospital choices(2) Compute expected hospital choices

exp(zexp(zij’α’α + + xxii’β’βjj))

jexp(zexp(zij’α’α + + xxii’β’βjj))

(2) Calculate channeling index = (2) Calculate channeling index = | S | Spp – S – Soo | |22

22

__________________prob(Yi=j | zprob(Yi=j | zij, xxi) =) =

Methodology: “Channeling” Dissimilarity Index

Empirical Results

Dependent Variable = log(Per Diem Price) 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) Dependent Variable = log(Per Diem Price) 

Size † -0.88 ** -0.64

Channel - II -0.004 * -0.0021

Excess Capacity 0.02 0.05

Size*channel --- -0.09

Size* Excess -- -0.27

† Size in millions.

Empirical Results

Dependent Variable = log(Per Diem Price) 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 Evidence support managed care engages in price bargaining.price bargaining.

Determinants: Determinants: ““Size” is important –large plans can get Size” is important –large plans can get

lower prices.lower prices. ““Channeling” is also important; slightly Channeling” is also important; slightly

larger effect than size in determining larger effect than size in determining discounts. discounts.

Managed care can make hospital market Managed care can make hospital market more price competitivemore price competitive through exclusive network, or,through exclusive network, or, via channeling within the network via channeling within the network

Current models inadequate in describing Current models inadequate in describing health plan bargaining powerhealth plan bargaining power

Implications

Implications on MC mergersImplications on MC mergers little is known about these mergerslittle is known about these mergers my results suggest to be cautious my results suggest to be cautious

potential gains in hospital (input) market potential gains in hospital (input) market may be limitedmay be limited

potential losses in insurance (output) market potential losses in insurance (output) market may be large. may be large.

Policy Implications