Center for Studying Health System Change

Health Plan-Provider Contract Showdowns Simmer Down

Study Examines Whether Insurers and Hospitals are Getting Along or Going Along

News Release
Jan. 22, 2004

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ASHINGTON, D.C.— With the balance of power having tilted toward hospitals and doctors, hotly contested contract disputes between health plans and providers have cooled down in recent years, according to a study released today by the Center for Studying Health System Change (HSC).

"Health plan-provider contract negotiations remain tense, but we’ve seen a noticeable decline in the bitter public disputes that were commonplace a few years ago," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

"The balance of power has shifted to providers—especially hospitals—and health plans in many cases are going along with demands for higher payment rates and better contract terms," Ginsburg said. "Health plans are passing along higher costs through higher premiums, and employers and consumers appear to be the ultimate losers."

The study’s findings are detailed in a new HSC Issue Brief—Getting Along or Going Along? Health Plan-Provider Contract Showdowns Subside—is available here. Based on site visits to 12 nationally representative communities in 2002-03, the study examines health plan-provider contracting trends in Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

Several factors bolstering providers’ negotiating clout include strong consumer demand for broad provider networks, which undermines plans’ ability to threaten providers with exclusion from plan networks, and increased consolidation among hospitals and physicians. In some markets, tight capacity also has increased some hospitals’ leverage, reducing their incentives to accept discounts to maintain or increase patient volume.

However, the balance of power may shift back toward health plans because more employers are beginning to side with health plans in hopes of slowing premium increases and providers face public pressure to temper their payment demands, the study noted.

"Employer involvement can influence contract disputes and help plans hold the line against payment increases," said Justin White, an HSC consulting researcher from Mathematica Policy Research, who co-authored the study with Robert E. Hurley, Ph.D., an HSC consulting researcher from Virginia Commonwealth University, and HSC Research Analyst Bradley Strunk.

If providers push too hard for higher payment rates, they could face increased regulatory scrutiny, forcing them to soften their bargaining demands. Many employers and consumers view current high cost trends as untenable, and continued provider demands for higher payments could provoke stronger calls for rate regulation or more comprehensive health reform.

Other key findings include:

• To help regain bargaining leverage, health plans are experimenting with tiered networks, where consumers face different out-of-pocket costs depending on the cost or quality of the provider. Providers, however, often object to tiered networks, and employers have not yet embraced the concept on a wide basis.
• Plans also are using pay-for-performance initiatives to reward providers who meet quality-related goals. Providers are more accepting of these initiatives because they involve little risk and reward improved performance.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights 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 funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.