How Important Is Price Variation Between Health Insurers?

Existing research has shown wide variation between hospitals in the prices they charge for procedures. Here, we show that variation between insurers in the prices negotiated is also substantial. Using the Massachusetts All-Payer Claims Database, we measure negotiated prices for each hospital-insurer pair in the state. We find that differences across payers explain about the same amount of price variation in the data. We also show important interactions between insurers and hospitals. These results have implications for insurance markets. In particular, we document the impact of these differences on the value of insurance to individuals. We find that an example high deductible health plan could have an actuarial value ranging from 0.3 to 0.6 depending the level of prices. We discuss the incentives for insurers to negotiate lower prices and how that depends on the sensitivity of individuals to both premiums and the insurer’s negotiated price level.