Hospital Pricing and Public Payments

A longstanding debate in health economics and health policy concerns how hospitals adjust prices with private insurers following reductions in public funding. We enter this debate by examining actual private-payer payments from a large, multi-payer database merged to plausibly exogenous variation in Medicare payment rates generated by the Affordable Care Act. We find that hospitals facing net payment reductions from Medicare were able to negotiate 1.4% higher average private payments - approximately
$183,700 per hospital, based on an average relative reduction in Medicare payments of $271,000. We find no evidence that our results are driven by quality improvements or changes in hospital services.