Large self-insured employers lack power in hospital price negotiations


Dive Brief:

  • As some employers look to contract directly with hospitals in an effort to lower healthcare costs, researchers found that large self-insured employers likely do not have enough market power to extract lower prices, according to a study published in The American Journal of Managed Care.
  • The study examined the relationship between employer market power and hospital prices every year between 2010 and 2016 in the nation’s 10 most concentrated labor markets.
  • The study found that hospital market power far outweighs employer market power, suggesting employers will not be successful in lowering prices alone, but may want to consider forging purchase alliances with local government employee groups, the research paper said.

Dive Insight:

In recent years, some larger employers have cut out the middlemen to strike deals directly with hospitals.

For example, General Motors entered into an arrangement with Detroit’s Henry Ford Health System in 2018, joining other major employers such as Walmart, Walt Disney and Boeing.

Perhaps most notably, J.P. Morgan, Amazon and Berkshire Hathaway joined forces to bend the cost of care in the U.S. Despite all the fanfare, the venture, named Haven, later fell apart, illustrating how difficult it is to change the nation’s healthcare system.

By circumventing traditional health insurers, companies are hoping they themselves can negotiate better deals.

But this latest study throws cold water on that strategy, at least in part. “Our study suggests that almost all employers, operating alone, simply do not have the market power to impose a threat of effective negotiation,” the paper found.

One of the paper’s main aims is to measure market power of hospitals and employers, and the results are striking. The average hospital market power far exceeds that of the employer in the 10 metropolitan areas researchers examined.

The average hospital market power was more than 80 times greater than that of the employer, putting into context just how askew the power dynamics are.

These employers are not wrong for wanting to strike out on their own, the researchers point out.

Many self-insured employers bear the insurance risk while entering into administrative services only arrangements with insurers which provide just that, administrative type services.

But insurers in these arrangements may not have any incentive to lower prices. The paper pointed to another working research paper that found ASO plans pay more for the same service, at the same hospital compared to those in fully insured arrangements.

“The empirical evidence suggests that insurers, because they lack the incentive, may not be negotiating lower prices for their ASO enrollees,” according to the study.

Even though employers may not have enough market power on their own, researchers offered up a solution: team up with state or local government employee groups to increase market power to obtain lower hospital prices.

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