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Why Don’t Commercial Health Plans Use Prospective Payment?

Author

Listed:
  • Laurence Baker
  • M. Kate Bundorf
  • Aileen Devlin
  • Daniel P. Kessler

Abstract

One of the key terms in contracts between hospitals and insurers is how the parties apportion the financial risk of treating unexpectedly costly patients. “Prospective” payment contracts give hospitals a lump-sum amount, depending on the medical condition of the patient, with limited adjustment for the level of services provided. We use data from the Medicare Prospective Payment System and commercial insurance plans covering the nonelderly through the Health Care Cost Institute to measure the extent of prospective payment in 303 metropolitan statistical areas during 2008-12. We report three key findings. First, commercial insurance payments are less prospective than Medicare payments. Second, the extent of prospective payment in commercial insurance varies more than in Medicare, both across hospitals and geographic areas. Third, differences in prospective payment across hospitals are positively associated with the extent of hospital competition, the share of the hospital’s commercially insured patients covered by managed-care insurance, and the share of the hospital’s patients covered by Medicare’s Prospective Payment System.

Suggested Citation

  • Laurence Baker & M. Kate Bundorf & Aileen Devlin & Daniel P. Kessler, 2016. "Why Don’t Commercial Health Plans Use Prospective Payment?," NBER Working Papers 22709, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22709
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    References listed on IDEAS

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    1. Cooper, Zack & Craig, Stuart & Gaynor, Martin & Van Reenen, John, 2015. "The price ain’t right? hospital prices and healthspending on the privately insured," LSE Research Online Documents on Economics 66059, London School of Economics and Political Science, LSE Library.
    2. Robert Town & Roger Feldman & John Kralewski, 2011. "Market power and contract form: evidence from physician group practices," International Journal of Health Economics and Management, Springer, vol. 11(2), pages 115-132, June.
    3. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 577-615.
    4. Jeffrey Clemens & Joshua D. Gottlieb, 2017. "In the Shadow of a Giant: Medicare’s Influence on Private Physician Payments," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 1-39.
    5. Mark McClellan, 1997. "Hospital Reimbursement Incentives: An Empirical Analysis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 91-128, March.
    6. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
    7. Jeffrey Clemens & Joshua D. Gottlieb & Tímea Laura Molnár, 2015. "The Anatomy of Physician Payments: Contracting Subject to Complexity," NBER Working Papers 21642, National Bureau of Economic Research, Inc.
    8. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
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    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private

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