Hospital Prices under the Commonwealth Care Health Insurance Exchange

Existing research on health insurance exchanges has largely focused on the potential for managed competition to give consumers greater leverage over health plans. However, less has been said about how exchanges might affect the balance of power between plans and providers. To fill this gap, we examined Massachusetts hospital payment rates over the first seven years following the introduction of the state’s pioneering health insurance exchanges (2007-2013). We focused especially on the relationship between payment rates in Massachusetts’ exchange for subsidized plans (Commonwealth Care) and the five large payer categories that comprise the bulk of the state’s insurance market (Medicare, Medicare Advantage, Medicaid, Medicaid managed care, and commercial).

In order to assess differences in payment rates between Commonwealth Care and other payer categories, we used the detailed accounting data contained in Massachusetts hospital cost reports to develop two separate measures of price. Our measure at the hospital-level was the ratio of a hospital’s average payment rate from Commonwealth Care plans to its average payment rate from other payers (“price ratio”), which we calculated from payment-to-charge ratios. For each hospital in each year, we measured five price ratios using this method, each relating Commonwealth Care to one of the five comparison payers. We then assessed statewide means and percentiles for each comparison, and tracked changes over time.

Our second measure of price was payment per adjusted patient day, which we assessed at the aggregate statewide level for Commonwealth Care and each of the comparison payers. Here, we used reported costs and volumes to adjust for difference in service-intensity between payers.

For 2007, we found that the mean ratio of Commonwealth Care to commercial payment rates was 0.98 and the median 0.96. By 2013, the mean had dropped to 0.79 and the median to 0.67. Statewide, commercial payments per adjusted patient day increased by 8.2% per year over the period, Commonwealth Care by 2.5%, and Medicaid managed care by 2.4%. In 2013, the average Commonwealth Care payment rate was lower than the average commercial rate in 88% of hospitals.

Our findings demonstrate that exchanges can be extremely effective in restraining provider price increases even over long periods in which prices in the employer-based market rise rapidly. Generally, this result is consistent with the emerging indirect evidence from the ACA that exchanges exert considerable downward presure on provider prices. Though further research is needed to clarify which features of exchange-based markets most constrain provider prices, the Massachusetts experience points to spillovers from Medicaid and Medicaid managed care, active state regulation of exchange offerings, and high levels of hospital-insurer integration as promising avenues for further investigation.