Why Don't Commercial Health Plans Use Prospective Payment?

25 Pages Posted: 10 Oct 2016

See all articles by Laurence C. Baker

Laurence C. Baker

Stanford University; National Bureau of Economic Research (NBER)

M. Kate Bundorf

Stanford University - Department of Health Research and Policy; National Bureau of Economic Research (NBER)

Aileen Devlin

Massachusetts Institute of Technology (MIT)

Daniel P. Kessler

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2016

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.

Suggested Citation

Baker, Laurence C. and Bundorf, M. Kate and Devlin, Aileen and Kessler, Daniel Philip, Why Don't Commercial Health Plans Use Prospective Payment? (October 2016). NBER Working Paper No. w22709. Available at SSRN: https://ssrn.com/abstract=2850224

Laurence C. Baker (Contact Author)

Stanford University ( email )

HRP Redwood Bldg., Room T253
Stanford, CA 94305
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(650) 723-4098 (Phone)
(650) 723-3786 (Fax)

National Bureau of Economic Research (NBER)

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M. Kate Bundorf

Stanford University - Department of Health Research and Policy ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Aileen Devlin

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Daniel Philip Kessler

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-4492 (Phone)
650-725-6152 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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