Price Differentials among Office-Based Providers - New Evidence from Multi-Payer Claims Data

Tuesday, June 14, 2016
Lobby (Annenberg Center)

Author(s): Eric T Roberts


Title: Price Differentials among Office-Based Providers: New Evidence from Multi-Payer Claims Data

Background: Increasing consolidation among health care providers, and the recent announcements of insurer mergers, have the potential to change the structure of health care markets, and consequently, the prices that insurers negotiate with providers.  To date, most studies on the relationship between prices and market structure have focused on hospitals.  Much of this literature tests for evidence of provider market power by examining variation in the prices that hospitals charge different payers for particular services.  A smaller number of studies attempt to provide insight into the structural determinants of price variation by modeling negotiations among insurers and providers directly.  Much of the work in this area has been limited to market-level analyses due to a lack of national data directly measuring the outcomes of price negotiations between individual providers and insurers.  In addition, no studies to date have examined the relationship between market structure and prices for outpatient physician services using provider- and insurer-level data.

Methods: In this paper, we use multi-payer claims data from FAIR Health to measure variation in the prices that the same providers negotiate with different insurers for common, office-based services. We measure the extent to which prices vary along two dimensions: one, insurer market power, and two, the size of provider groups that negotiate with different insurers.  We estimate regressions with provider fixed effects to measure the price discounts that insurers with differing degrees of market power obtain from the same providers.  In addition, we interact insurer market power with a measure of provider size to test whether these discounts vary when similarly sized insurers negotiate rates with differently sized providers. 

Results: We find that, for common office-based services, market-dominant insurers are able to obtain price discounts of approximately 22%, when compared to the smallest insurers.  This discount declines to approximately 17% when these large insurers purchase services from the largest providers in a particular market.

Conclusions: To our knowledge, this is the first study to examine the relationship between market structure and prices for office-based services on a national scale.  Our results show that insurers use their market power to obtain lower prices, but that providers also exhibit pricing power when their bargaining position is strong.  These findings may help to preview the outcomes of two trends towards consolidation in the health care sector: one driven by new payment models that may encourage providers to integrate, and a second driven by a recent wave of planned mergers among major health insurers.  However, to the extent that price variation simply leads to differences in the division of profits between providers and insurers, but not necessarily to changes in care quality or costs borne by consumers, our results do not indicate that either trend towards consolidation ultimately will be welfare improving.