How Important is Price Variation between Insurers?

Existing research has shown wide variation between hospitals in the prices they negotiate for procedures. Here, we show that variation between insurers is also substantial, even within a hospital. 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 as hospitals. 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 on the level of prices. We discuss the incentives for insurers to negotiate lower price and how that depends on the sensitivity to both premiums and the insurer's negotiated price level.