In a recent Medical Care Research and Review paper led by Wang, a team from John Hopkins looked at prices insurers paid at hospitals for shoppable and non-shoppable services. They examined market power and wondered if the insurers with the most enrollees got better rates. This is a reasonable question.
For shoppable services, relative to nonmajor insurers, the largest, second largest, and other major insurers negotiated 23%, 16%, and 3% lower prices, respectively, while cash prices were 17% higher. For emergency room visits, while the largest insurers paid 5% less than nonmajor insurers, the second largest and other major insurers did not pay lower prices.
This makes a lot of sense on its face. Insurers have leverage when they can credibly threaten to move lots of people from Hospital A to Hospital B. Hospital A is motivated to give a good rate to get this discretionary volume. Not all services are discretionary and non-time dependent. Emergency services are typically a function of distance or time but some services can wait. Shoppable services by definition are services that don’t have to be done right now and are relatively common. A knee MRI fits into this category.
So a hospital that has a good rate from a single insurer will get a lot of that insurer’s volume for anything that is elective. Every other insurer can’t promise as much volume so they get worse rates. Hospital A might have a great deal with Insurer X and Hospital B might have a good deal with Insurer Y.
This falls apart when the insurer can’t steer people to or from preferred hospitals. This is the emergency room case. There is modest steering in areas with lots of hospitals but not a ton. I wonder if the No Surprises Act will eliminate the modest in-network discount for the largest insurer for ER cases?
Backing this out to a broader set of speculation, this shows how hard it is to break into a new market. Insurers compete heavily on price. Benefit value and network are real secondary levers of competition but the first decision is a price decision. To get a good price, an insurer needs lots of mass to get a good deal from enough hospitals and doctors in an area. However when an insurer is entering a new market, it is making promises that may or may not pan out that they can deliver tens of thousands of covered lives to the contracted hospitals. Some times that works. Some times it fails miserably. So they either get a good rate from the clinical side or they burn lots of money to subsidize their premiums as loss leaders so that future contracts are backed by a credible promise of steering lots of covered lives to a given location.
That is a tough business model to pull off.
Anonymous At Work
Also shows how you can have markets become local monopolies quite easily.
Also shows why insurance and Pharma are fighting drug price negotiations, etc. Nobody in the healthcare arena is larger than the government, so a true negotiation by the government will create larger discounts than private insurance could. Less hookers and blow.
Another Scott
Interesting post. Thanks for the pointer.
From the abstract:
Google tells me there were 6129 hospitals in the US in 2021 (obviously lots outside of “metropolitan areas”).
As you say, the elective vs emergency makes sense, but I wonder if there’s still too small a sample here. A hospital in, say, Reston, VA is likely to see far fewer gunshot wounds than at a major trauma hospital like Grady in Atlanta, but both would be in “metropolitan areas”, wouldn’t they? It would be great if there was enough relevant data to slice and dice it further to figure out, say, if hospitals with large proportions of federal employees (on the FEBH insurance system, where BCBS is huge) as patients is somehow different from one with more uninsured, or more Medicare/Medicaid, or more profit-uber-alles insurance companies dominating hospital payments. IOW, are there additional benefits beyond having a larger payer dominate the market – does the kind of payer matter (presumably so, given what you’ve taught us about Medicare/Medicaid rates)?
More data, and more thinking about the implications of the data, are good. Thanks for doing your part and keeping us in the loop. It’s appreciated.
Cheers,
Scott.
CaseyL
What @Anonymous At Work: said.
Here in Seattle, a major city where healthcare options seem abundant, our actual choices have narrowed because every major hospital is now part of a conglomerate group. Basically, every hospital in Western Washington is part of Kaiser Permanente (a co-op), UW Medicine, or Providence (Catholic, so there are a range of services it simply will not provide).
\UW Medicine also has a huge feeder network, in its affiliated neighborhood clinics (my PCP is among them). Kaiser does, too, since it is a co-op. I don’t know about Providence.
The few hospitals that have not been absorbed can’t offer the range of integrated services the congloms do offer, and I’m not sure what impact this has on pricing.
It’s kind of the obverse of your point: hospitals which can offer a wide range of locations and integrated services have a better negotiating position than small local hospitals, which may be partially offset by those small local hospitals being the only game in town. E.g.: Aberdeen General in Grays Harbor County, Oak Harbor General on Whidbey Island.
RevRick
@Anonymous At Work: Exactly! Pharma knows that the enormous market power of Medicare, which is their highest volume market, would put them at a huge disadvantage.
It’s the old question, “Where does a five-hundred pound gorilla sit?”, and the answer being, “anywhere they want.”
WeimarGerman
And also why the big tech companies and other startups are having a hard time breaking into these markets (Oscar, Babylon, etc.)
Chris T.
@Anonymous At Work:
You mean “Fewer hookers, less blow” 😀