Working Paper: NBER ID: w22709
Authors: Laurence Baker; M. Kate Bundorf; Aileen Devlin; Daniel P. Kessler
Abstract: One of the key terms in contracts between hospitals and insurers is how the parties apportion the financial risk of treating unexpectedly costly patients. “Prospective” payment contracts give hospitals a lump-sum amount, depending on the medical condition of the patient, with limited adjustment for the level of services provided. We use data from the Medicare Prospective Payment System and commercial insurance plans covering the nonelderly through the Health Care Cost Institute to measure the extent of prospective payment in 303 metropolitan statistical areas during 2008-12. We report three key findings. First, commercial insurance payments are less prospective than Medicare payments. Second, the extent of prospective payment in commercial insurance varies more than in Medicare, both across hospitals and geographic areas. Third, differences in prospective payment across hospitals are positively associated with the extent of hospital competition, the share of the hospital’s commercially insured patients covered by managed-care insurance, and the share of the hospital’s patients covered by Medicare’s Prospective Payment System.
Keywords: prospective payment; commercial insurance; hospital competition
JEL Codes: I11; I13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| extent of prospective payment in commercial insurance (I13) | hospital competition (L19) |
| share of commercially insured patients covered by managed-care insurance (I13) | prospective payment (I13) |
| share of patients covered by Medicare's prospective payment system (I13) | commercial payment prospectivity (F10) |
| hospital competition (L19) | extent of prospective payment in commercial insurance (I13) |
| moving a hospital from the 75th to the 25th percentile of the Hirschman-Herfindahl Index (I14) | commercial prospectivity (R33) |