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

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  • Avi Dor
  • Michael Grossman
  • Siran M.Koroukian

Abstract

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.

Suggested Citation

  • Avi Dor & Michael Grossman & Siran M.Koroukian, 2004. "Transaction Prices and Managed Care Discounting for Selected Medical Technologies: A Bargaining Approach," NBER Working Papers 10377, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:10377
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    1. 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.
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    4. David Dranove & Daniel Kessler & Mark McClellan & Mark Satterthwaite, 2003. "Is More Information Better? The Effects of "Report Cards" on Health Care Providers," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 555-588, June.
    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. 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.
    7. 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.
    8. 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.
    9. McClellan, Mark & Cutler, David & Newhous, Joseph P., 2000. "How Does Managed Care Do It?," Scholarly Articles 2643884, Harvard University Department of Economics.
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    Cited by:

    1. Tamara Hayford, 2011. "The Impact of Hospital Mergers on Treatment Intensity and Health Outcomes: Working Paper 2011-05," Working Papers 42753, Congressional Budget Office.
    2. Avi Dor & William Encinosa & Kathleen Carey, 2016. "Do Good Reports Mean Higher Prices? The Impact of Hospital Compare Ratings on Cardiac Pricing," NBER Working Papers 22858, National Bureau of Economic Research, Inc.
    3. Fomenko, Olesya & Gruber, Jonathan, 2017. "Claims-shifting: The problem of parallel reimbursement regimes," Journal of Health Economics, Elsevier, vol. 51(C), pages 13-25.

    More about this item

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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