Health Plan-Provider Price Negotiations: Passing the Buck to Employers

Consolidation Only a Piece of the Provider Market Power Puzzle; Reputation, Specialized Services, Geographic Location, Other Factors Play Role

Media Advisory
May 7, 2012

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON, DC—Given the negotiating clout of so-called must-have hospitals and physician groups, even dominant health plans are wary of disrupting the status quo by trying to constrain prices, perhaps because insurers can simply pass along higher costs to employers and their workers, according to a study by the Center for Studying Health System Change (HSC) published in the May edition of Health Affairs.

“...although dominant health plans might be able to restrain prices and achieve other contracting advantages, they also must be sensitive to their employer customers’ preferences for stable provider networks. Therefore, they are willing to tolerate large price increases from provider—as long as these insurers’ competitors, other health plans, pay higher rates,” according to the article by HSC Senior Consulting Researcher Robert A. Berenson, M.D., also an institute fellow at the Urban Institute; HSC President Paul B. Ginsburg, Ph.D.; HSC Senior Consulting Researcher Jon B. Christianson, a University of Minnesota professor; and HSC Researcher Tracy Yee, Ph.D.

Funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform, the Health Affairs study is based on HSC’s 2010 site visits to 12 nationally representative metropolitan communities: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y. HSC has been tracking change in these markets since 1996.

Other key findings from the study, titled “The Growing Power of Some Providers to Win Steep Payment Increases from Insurers Suggests Policy Remedies May Be Needed,” and available online at www.hschange.org/CONTENT/1289/, include:

• Although there was an overall trend favoring hospitals, the study found substantial variation across and within the 12 markets in the balance of negotiating power among providers and health plans.
• While hospital consolidation is often cited as the reason for growing provider clout, another important factor is employer reluctance to limit workers’ choice of providers by excluding them from plan networks. According to study respondents, without a credible threat of excluding a provider, insurers lack a critical bargaining chip.
• Other factors contributing to provider market power include reputation, provision of specialized services and geographic location.

Possible responses to growing provider market power include both market-oriented and regulatory approaches, according to the article, which states, “Market-oriented approaches are generally based on benefit designs that make consumers more aware of costs and give them direct incentives to select low-cost option.... Alternatively, in the face of rising premiums, employers unwilling to adopt more restrictive benefit designs might support more direct regulation of provider rates, perhaps setting upper bounds on permissible rates negotiated between health plans and providers in relation to Medicare rates.”

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.