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Transaction Prices and Managed Care Discounting for Selected Medical Technologies: A Bargaining Approach

  • Avi Dor
  • Michael Grossman
  • Siran M.Koroukian

It is generally assumed that managed care has been successful at capturing discounts from medical providers, but the implications have been a matter of debate. Critics argue that managed care organizations attain savings by reducing intensity of services, while others have argued that savings are 'real' and are a consequence of discounts per unit of care. To address this, we obtain separate transaction prices for hospital episodes (treatment) and for the narrowly defined surgical procedure, using the example of heart bypass surgery. Both sets of prices were drawn from a database of insurance claims of self-insured firms that offer a menu of insurance options. We use a Nash-Bargaining framework to obtain price discounts by type of insurance. Adjusting for product and patient heterogeneity, the per-procedure prices yield the anticipated pattern of discounts: Relative to traditional fee for service, point-of-service HMOs exhibited the largest discounts followed by Preferred-Provider-Organizations (18 and 12 percent, respectively). While reductions in intensity of services are not directly observable from the data, combining the results from the per-procedure and per-episode analysis yields a range of intensity reduction of 20-6 percent, with a corresponding per-unit price discount of 4-18 percent for the entire episode. We conclude that a large share cost savings by managed care organizations are due to per-unit price reductions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10377.

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Date of creation: Mar 2004
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Publication status: published as Dor, Avi, Michael Grossman and Siran M. Koroukian. “Hospital Transaction Prices and Managed-Care Discounting for Selected Medical Technologies.” American Economic Review 94, 2 (May 2004): 352-356.
Handle: RePEc:nbr:nberwo:10377
Note: HE
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  1. Wholey, Douglas & Feldman, Roger & Christianson, Jon B., 1995. "The effect of market structure on HMO premiums," Journal of Health Economics, Elsevier, vol. 14(1), pages 81-105, May.
  2. Melnick, Glenn A. & Zwanziger, Jack & Bamezai, Anil & Pattison, Robert, 1992. "The effects of market structure and bargaining position on hospital prices," Journal of Health Economics, Elsevier, vol. 11(3), pages 217-233, October.
  3. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2002. "Is More Information Better? The Effects of 'Report Cards' on Health Care Providers," NBER Working Papers 8697, National Bureau of Economic Research, Inc.
  4. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
  5. Dranove, David & Ludwick, Richard, 1999. "Competition and pricing by nonprofit hospitals: a reassessment of Lynk's analysis," Journal of Health Economics, Elsevier, vol. 18(1), pages 87-98, January.
  6. Chernew, Michael & Gowrisankaran, Gautam & Fendrick, A. Mark, 2002. "Payer type and the returns to bypass surgery: evidence from hospital entry behavior," Journal of Health Economics, Elsevier, vol. 21(3), pages 451-474, May.
  7. Keeler, Emmett B. & Melnick, Glenn & Zwanziger, Jack, 1999. "The changing effects of competition on non-profit and for-profit hospital pricing behavior," Journal of Health Economics, Elsevier, vol. 18(1), pages 69-86, January.
  8. Dor, Avi & Watson, Harry, 1995. "The hospital-physician interaction in U.S. hospitals: Evolving payment schemes and their incentives," European Economic Review, Elsevier, vol. 39(3-4), pages 795-802, April.
  9. David M. Cutler & Mark McClellan & Joseph P. Newhouse, 2000. "How Does Managed Care Do It?," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 526-548, Autumn.
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