By Toren L. Fronsdal, Jay Bhattacharya, Suzanne Tamang
National Bureau of Economic Research, July 2020
We study a unique all-payer data set spanning 38 states to examine the differences in inpatient reimbursement rates paid by traditional Medicare (TM), Medicare Advantage (MA), Medicaid, and private (under-65) insurers, and the differences in negotiated rates across the 60 largest private insurers. After controlling for enrollee and hospital mix, we find that private insurers pay 37 percent more than TM, and MA pays 10 percent more than TM for the five most common inpatient diagnoses. The correlation in risk-adjusted payments by private insurers and by TM at the same hospital for the same diagnosis is only 0.10. There is significant variation in negotiated prices within and across private payers. Among the five largest US insurers, the most expensive insurer negotiates prices that are 5-26 percent higher than the mean price for the 20 most common inpatient diagnoses. Additionally, we find a 10 percent increase in insurer market share corresponds to a 7 percent decrease in inpatient negotiated prices and a 10 percent decrease in the standard deviation of prices. This finding suggests that increased insurer market power allows payers to negotiate prospective payment contracts – rather than the more common fee-for-service payments – thereby offloading financial risk to providers.
From the Conclusion
We find an inverse relationship between insurer market share and negotiated prices. A 10 percent increase in insurer market share is associated with a 7 percent decrease in negotiated prices. Additionally, a 10 percent increase in insurer market share is associated with a 10 percent decrease in the standard deviation of negotiated prices at a provider. This suggests that insurers with greater market share are able to negotiate favorable payment structures that offload financial risk to the providers.
By Don McCanne, M.D.
Health care providers are paid to provide health care. Insurers are paid to accept and manage risk of health care costs. This study indicates that insurers with greater market share are able to offload financial risk to the providers. Then why do we need private insurers? About $600 billion of administrative costs could be recovered if we got rid of the private insurers – funds which could be used to expand comprehensive health care to everyone. The government should be the logical agent to accept and manage risk and would be under single payer Medicare for All.
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