Strategies For Hospitals: Negotiating With Insurance Companies

The process of negotiation between hospitals and insurance companies is complex and often shrouded in secrecy. Hospitals and insurance companies negotiate the price of every treatment, procedure, and service, with prices varying across hospitals and health plans. The negotiated rates, or adjusted rates, are typically treated as trade secrets, with only individuals having access to the prices paid for their care after receiving treatment. Several factors influence hospital competition and plan-hospital negotiations, including vertical integration, managed care regulations, and employer demands for greater consumer choice. Hospitals employ various strategies to strengthen their negotiating leverage, such as horizontal and vertical integration with other healthcare organizations. Additionally, the introduction of public option plans and premium subsidies aims to enhance insurance access and affordability. Understanding the dynamics between hospitals and insurance companies is crucial for patients to navigate their financial responsibilities and negotiate medical bills effectively.

Hospitals' competition for contracts with insurance plans

Hospitals compete for contracts with insurance plans by negotiating the prices they charge for their services. Hospitals with stronger negotiating leverage can secure better contracts with insurance plans, which can result in lower payment rates and more favourable terms.

The competition for insurance contracts has shifted the focus of hospitals from individual physicians and patients to securing contracts with insurance plans first. This shift has made price a critical dimension of competition, as purchasers are more sensitive to insurance premium increases than individual consumers. Hospitals with competitive pricing can attract more patients and insurance plans, improving their market position.

To enhance their negotiating power, hospitals pursue horizontal and vertical integration strategies with other hospitals, physicians, and healthcare organisations. By consolidating their resources and market presence, hospitals can gain more leverage in contract negotiations with insurance plans.

Additionally, hospitals have responded to the growth of managed care by implementing integrated delivery systems. They aim to transform themselves into systems that can manage financial risk and provide a continuum of care for a defined patient population. This strategic shift allows hospitals to align with the evolving landscape of insurance plans, such as HMOs, selective contracting, and capitation.

The structure of hospital-insurer contracts varies significantly, and hospitals contract with multiple payers. These contracts determine the prices that insurers pay to hospitals for covered services and allocate financial risk between the parties. The contract structure can influence hospital performance, including prices, charges, costs, and length of stay.

In summary, hospitals compete for contracts with insurance plans by offering competitive pricing, integrating with other healthcare providers, and adapting to the changing landscape of managed care. The negotiation dynamics between hospitals and insurance plans are complex and continually evolving, impacting the overall healthcare market.

Vertical integration between hospitals and insurers

However, there are concerns about the potential negative impacts of vertical integration between hospitals and insurers. One concern is the potential for reduced competition in the healthcare market. With larger, more integrated organizations, there may be less incentive for hospitals to compete on price, leading to higher costs for patients and insurance companies. This consolidation can also lead to an increase in market power for healthcare organizations, particularly in markets with significant barriers to entry, which can result in higher prices and premiums for consumers. Additionally, vertical integration can lead to skewed plan generosity and reduce double marginalization benefits.

Another concern with vertical integration is the potential for conflicts of interest and reduced patient choice. With hospitals and insurers under the same umbrella organization, there may be incentives to prioritize profits over patient care, or to steer patients towards specific providers or treatments within the integrated system. This can limit patient choice and potentially impact the quality of care.

Despite these concerns, vertical integration between hospitals and insurers has been occurring at an increasing rate. In 2017, pharmacy giant CVS made headlines with its $69 billion acquisition of insurer Aetna, in what was the largest healthcare merger at the time. More recently, the Biden administration has expressed skepticism about vertical mergers in the healthcare industry, issuing an executive order to increase competition and reduce anti-competitive consolidation. The order directs the Justice Department and FTC to vigorously enforce anti-trust laws and address consolidation in sectors including health insurance and pharmaceuticals.

While vertical integration between hospitals and insurers has the potential to streamline the healthcare delivery system, there are valid concerns about its impact on competition, costs, and patient choice. As such, there is a growing recognition of the need for more aggressive oversight and enforcement of anti-trust laws to protect consumers and ensure a competitive healthcare market.

Managed care plans and their impact on negotiations

Managed care plans have had a significant impact on the negotiations between hospitals and insurance companies. Managed care refers to a system where insurers contract with a network of healthcare providers to offer discounted services to their enrollees. Nearly all states in the US have some form of managed care in place, with a majority contracting with comprehensive, risk-based managed care plans for their Medicaid beneficiaries.

One of the key ways managed care plans have influenced negotiations is by shifting the focus of hospital competition. Hospitals now have to compete for contracts with managed care plans before they can compete for individual physicians and patients. This has made price a more important dimension of competition, as purchasers are more sensitive to insurance premium increases and bear a larger portion of the costs. As a result, hospitals face pressure to negotiate better contracts with lower payment rates and more favourable terms.

Managed care plans have also faced increased regulation at the state level, reducing their ability to selectively contract and manage utilization. This has increased hospitals' negotiating leverage with plans. Additionally, employers have become more sensitive to employees' concerns about managed care, demanding plans that offer greater consumer choice and improved benefits.

To adapt to the growth of managed care, hospitals have pursued horizontal and vertical integration strategies with other hospitals, physicians, and healthcare organizations. They aim to transform themselves into systems that can manage financial risk and provide a continuum of care for a defined population. However, there is limited empirical research on the impact of vertical integration on hospital competition and prices, and the field of managed care continues to evolve rapidly.

While managed care plans have driven changes in negotiations between hospitals and insurance companies, there are concerns about their impact on outcomes. Studies have found mixed results, with some suggesting that managed care enrollees face greater barriers to accessing primary and preventive healthcare services, leading to potential disparities in care quality and health outcomes.

Lack of transparency around negotiated rates

Negotiated rates between hospitals and insurance companies are often treated as trade secrets. Insurers and hospitals are reluctant to disclose the rates they have negotiated for procedures to their competitors. This lack of transparency makes it difficult for consumers to gauge the actual prices of their healthcare before purchasing insurance. Individuals can only see the prices their insurer paid for their care after receiving treatment and only if they are already insured.

The true cost of healthcare services is often obscured in a statement called an explanation of benefits. This statement contains the "adjusted rate" or "negotiated rate", which is the amount agreed upon between the insurance company and the provider. While Massachusetts has a law requiring insurers to disclose these prices in a transparent manner to patients, this is not always enforced, as seen in South Florida. As a result, individuals may know their monthly health insurance premiums but remain unaware of the actual cost of their healthcare services.

The lack of transparency around negotiated rates also extends to the variation in prices for the same procedure at the same hospital. Insurers negotiate different rates for the same treatment, resulting in price disparities. This makes it challenging for self-insured employers to find insurers who have negotiated lower procedure prices, as this information is not readily available.

Furthermore, health insurance exchange (HIX) plans often obtain lower negotiated rates than commercial group plans and higher rates than Medicare Advantage plans. The lack of clarity around relative provider prices in the HIX market has contributed to higher premiums in certain states. Policymakers aiming to improve affordability in the HIX market must understand the prices HIX plans pay providers, but data limitations hinder this process.

Variation in negotiated rates for the same procedure

Hospitals negotiate with insurance companies to agree on the price of every treatment, procedure, and medical service. The negotiated rates are treated as trade secrets, and they differ from hospital to hospital and even between health plans offered by the same hospital. The price variation is influenced by factors such as enrollee demand, the ability of payers to direct enrollees to specific hospitals, and bargaining power.

The variation in negotiated rates for the same procedure has been observed in multiple studies. For example, a study by Craig et al. (2021) used health insurance claims data to understand the variation in hospital prices faced by the privately insured. Another study by Ruiz Sánchez (2021) found substantial differences in cash prices for the same procedure across hospitals, with costs varying by up to eight times.

The variation in negotiated rates can have significant financial implications for consumers. For instance, choosing a lower negotiated rate over a higher one can result in average out-of-pocket savings of $182 in a high-deductible plan. Additionally, the variation in rates affects the value of insurance products, highlighting the welfare effects for consumers.

The reasons behind the variation in negotiated rates are complex and influenced by various factors. One factor is the insurer's incentives, which play a critical role in understanding the price variation. Additionally, the size of the insurer does not necessarily determine the negotiated rates; instead, the ability to "steer" enrollees to specific hospitals may be a contributing factor.

The impact of managed care on plan-hospital negotiations is also worth considering. Managed care plans have faced increased regulation, reducing their ability to selectively contract and manage utilization. This has resulted in hospitals gaining more negotiating leverage with plans. Employers have also played a role by demanding plans that offer greater consumer choice, which has shifted the focus from cost control to retaining employees by improving health insurance benefits.

Frequently asked questions