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Variation in Health Care Prices Across Public and Private Payers

SIEPR
Sep 2020
Working Paper
20-036
By  Toren L. Fronsdal, Jay Bhattacharya, Suzanne Tamang

We study a unique all-payer data set spanning 38 U.S. 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. National MA insurers reimburse hospitals at rates similar to TM, but smaller, regional MA insurers pay more than TM. The correlation in mean risk-adjusted payments by private insurers and by TM at the same hospital for the same diagnosis is only 0.10. There is also significant variation in negotiated prices within and across private payers. For the five largest U.S. insurers, the least expensive insurer negotiates prices that are 6-27 percent lower on average than the mean price and 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 that a 10 percent increase in insurer market share corresponds to a 7 percent decrease in inpatient negotiated prices. Furthermore, a 10 percent increase in insurer market share is associated with a 10 percent decrease in the standard deviation of inpatient prices paid by the insurer at a given hospital for a specific diagnosis. 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.