Hospitals' Private Insurer Contracts: How Do They Work?

Hospitals and private insurers enter into contracts that determine the prices patients pay for treatment. The amount US hospitals receive for treating a patient depends on who is footing the bill. Private insurers negotiate prices with each hospital, and these negotiated prices are considered trade secrets. Payment structures vary, with some insurers negotiating prospective payments, while others pay a percentage of a hospital's list price. The size of the insurer matters, with larger insurers receiving better discounts. Contracts between hospitals and insurers often include language that aims to better position hospitals against rivals, such as requiring the insurer to include a hospital in all of its plans or discouraging the use of lower-cost rivals.

Insurers with more market share negotiate more favourable contracts

Insurer size matters. A 10% increase in market share is associated with a 6 to 7% decrease in negotiated prices. Insurers with dominant market positions tend to negotiate contract structures that are more prospective and based on diagnoses rather than the quantity of care provided. These contracts place financial risk on hospitals.

The researchers in one study did not control for differences in the makeup and competitiveness of the hospital market or for differences in hospital quality. However, they concluded that greater insurer market share improves the insurer's position in hospital-insurer bargaining and allows them to negotiate favourable payment structures.

Insurers tend to negotiate widely different prices at different hospitals. Although large insurers receive roughly similar discounts on average, the discounts they negotiate at any given hospital vary considerably.

Hospitals and insurers often rely on each other to keep their doors open. To become part of a network, a provider must have a contract with the health insurance company. This agreement usually gives the doctors and other providers a steady stream of patients and offers the health insurance companies service at reduced rates.

Hospitals use contracts to maintain market power

Hospitals can also use contracts to add extra fees, limit audits of claims, and prohibit insurers from including price information on online shopping tools for consumers. For instance, some contracts include provisions that insurers "must always include" a hospital system even if their costs are significantly higher for the same service as a less expensive provider. This additional cost is then passed on to the consumer in the form of higher premiums.

In addition to contract negotiations, hospitals can gain more leverage in negotiations with health payers by consolidating and gaining a larger market share. This increased market power allows hospitals to raise prices without making substantial quality improvements.

The structure of hospital-insurer contracts can also impact hospital performance and costs. For example, discounted charges contracts are associated with higher prices and costs, while fixed-rate contracts are associated with lower prices and costs. Hospitals with more market power are more likely to have discounted charges contracts, which incentivize them to use more services, potentially leading to inefficient spending.

Overall, hospitals use contracts as a tool to maintain and increase their market power, which can have significant implications for consumers, including higher prices and reduced access to lower-cost, high-quality healthcare providers.

Fixed-rate contracts are associated with lower prices and costs

Hospitals and insurers often include "secret" clauses in their contracts that aim to position hospitals favourably against their rivals. These clauses can include requirements for the insurer to include a hospital or an entire system in all its plans or to discourage the use of lower-cost rivals. Such contracts can prevent insurers from directing patients towards higher-quality or lower-cost providers, add extra fees, limit audits of claims, and prohibit insurers from including price information on online shopping tools.

These clauses can result in higher prices for patients and employers. For instance, contracts with restrictive terms can limit insurers' ability to design low-cost health plans for major employers. Insurers under certain restrictive contracts are required to include specific hospital systems in their network, even if they are the single provider in an area and can set their own prices as a monopoly.

To avoid such situations, insurers prefer fixed-rate contracts, which are associated with lower prices and costs. Fixed-rate contracts, also known as prospective payment structures, involve a fixed amount for each patient based on their diagnosis, treatment, severity, and comorbidities, rather than the quantity of services rendered. This means that hospitals are paid a predetermined amount for treating a patient, regardless of the specific services provided.

Medicare, the largest payer entity in the United States, operates on a fixed-rate system, paying a fixed amount for each patient falling into one of the Medicare Severity Diagnosis Related Groups (MS-DRGs). Private insurers, on the other hand, often negotiate prices with each hospital, and these negotiated prices are considered trade secrets.

The advantage of fixed-rate contracts is that they provide a clear and consistent framework for reimbursement, reducing the potential for unexpected costs. Hospitals know in advance how much they will receive for treating patients within each diagnostic group, allowing for better financial planning and cost management.

Additionally, fixed-rate contracts can incentivize hospitals to provide efficient and effective care. Since the reimbursement is not tied to the quantity of services, hospitals are encouraged to optimize their treatment processes and minimize unnecessary procedures or tests. This can lead to lower overall costs for both the hospital and the patient.

In conclusion, fixed-rate contracts between hospitals and private insurers are associated with lower prices and costs. They provide transparency, reduce financial risk, and promote efficient healthcare delivery, ultimately benefiting patients, insurers, and healthcare providers alike.

Discounted charges contracts are associated with higher prices and costs

Discounted charge contracts, also known as cost-plus or per-diem contracts, are a type of payment structure used in the healthcare industry. Under this model, hospitals and insurers agree on a discounted rate from the hospital's standard charges for various services. While this type of contract is intended to provide cost savings for insurers and patients, it is associated with higher prices and costs for several reasons.

Firstly, discounted charge contracts often lack transparency. The negotiated prices between hospitals and insurers are typically treated as trade secrets and are not disclosed publicly. This lack of transparency makes it challenging for patients to understand the actual cost of their care and makes it difficult to compare prices across different hospitals.

Secondly, the discount rates negotiated by insurers can vary significantly between different hospitals. Research has shown that insurers with larger market share and dominance tend to secure more favourable discounts. Smaller insurers, on the other hand, may end up paying higher rates, which can ultimately be passed on to consumers in the form of higher premiums.

Additionally, the structure of discounted charge contracts can incentivize higher costs. Since hospitals are paid based on a percentage of their list price or a negotiated rate for specific conditions, there is a potential incentive to increase charges over time or provide more costly treatments. This can lead to higher overall costs for insurers and patients.

Moreover, discounted charge contracts may not always result in lower prices compared to other payment models. For example, Medicare Advantage plans, which are a type of private Medicare insurance, pay an average of 10% more than traditional Medicare reimbursement rates. This suggests that even with discounted rates, private insurers may still face higher costs relative to public payers.

Lastly, the lack of standardisation in discounted charge contracts can contribute to higher prices. Each contract between a hospital and an insurer is unique, and the specific terms and conditions can vary. This variation can make it challenging for insurers to design low-cost health plans and can limit their ability to direct patients towards more affordable or higher-quality providers.

Hospitals and insurers form contracts to reduce administrative hassles

In the United States, private health insurance is typically provided by employers or purchased individually through the Affordable Care Act (ACA) marketplace. Insurers contract with hospitals to include them in their provider networks, which gives patients a choice of where to receive care. These contracts often involve negotiations between the hospital and the insurer to determine the rates at which the insurer will reimburse the hospital for services provided to its members.

The structure of these contracts can vary, with some hospitals having fixed-rate contracts or discounted charges contracts. Fixed-rate contracts reimburse a set amount for each admission or service, while discounted charges contracts involve the insurer paying a discounted rate off the hospital's list price. The specific rates and terms of these contracts are usually kept confidential and can vary significantly between insurers and hospitals.

By forming contracts, hospitals and insurers can work together to reduce administrative burdens and improve the overall patient experience. Contracts can help streamline billing and reimbursement processes, making it easier for patients to understand their financial responsibilities. Additionally, contracts can facilitate the sharing of data and information between hospitals and insurers, leading to better care coordination and potentially lower costs for patients.

It's important to note that the relationship between hospitals and insurers is complex and constantly evolving. Both parties need to navigate regulatory requirements, market dynamics, and financial pressures while also prioritizing patient care and satisfaction. As the healthcare industry continues to change, hospitals and insurers will need to adapt their contracting strategies to meet the needs of their patients and stay competitive in the market.

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