Transaction Prices and Managed Care Discounting for Selected Medical Technologies: A Bargaining Approach

16 Pages Posted: 31 Mar 2004 Last revised: 2 Mar 2010

See all articles by Avi Dor

Avi Dor

Case Western Reserve University - Department of Economics; National Bureau of Economic Research (NBER)

Michael Grossman

National Bureau of Economic Research (NBER), NY Office; CUNY The Graduate Center - Department of Economics

Siran M. Koroukian-Hajinazarian

Case Western Reserve University - Department of Epidemiology and Biostatistics

Date Written: March 2004

Abstract

It is generally assumed that managed care has been successful at capturing discounts from medical providers, but the implications have been a matter of debate. Critics argue that managed care organizations attain savings by reducing intensity of services, while others have argued that savings are 'real' and are a consequence of discounts per unit of care. To address this, we obtain separate transaction prices for hospital episodes (treatment) and for the narrowly defined surgical procedure, using the example of heart bypass surgery. Both sets of prices were drawn from a database of insurance claims of self-insured firms that offer a menu of insurance options. We use a Nash-Bargaining framework to obtain price discounts by type of insurance. Adjusting for product and patient heterogeneity, the per-procedure prices yield the anticipated pattern of discounts: Relative to traditional fee for service, point-of-service HMOs exhibited the largest discounts followed by Preferred-Provider-Organizations (18 and 12 percent, respectively). While reductions in intensity of services are not directly observable from the data, combining the results from the per-procedure and per-episode analysis yields a range of intensity reduction of 20-6 percent, with a corresponding per-unit price discount of 4-18 percent for the entire episode. We conclude that a large share cost savings by managed care organizations are due to per-unit price reductions.

Suggested Citation

Dor, Avi and Grossman, Michael and Koroukian-Hajinazarian, Siran M., Transaction Prices and Managed Care Discounting for Selected Medical Technologies: A Bargaining Approach (March 2004). NBER Working Paper No. w10377. Available at SSRN: https://ssrn.com/abstract=519166

Avi Dor (Contact Author)

Case Western Reserve University - Department of Economics ( email )

Cleveland, OH 44106
United States
216-368-4110 (Phone)

National Bureau of Economic Research (NBER)

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Michael Grossman

National Bureau of Economic Research (NBER), NY Office ( email )

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HOME PAGE: http://mgrossman.ws.gc.cuny.edu

CUNY The Graduate Center - Department of Economics ( email )

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HOME PAGE: http://mgrossman.ws.gc.cuny.edu

Siran M. Koroukian-Hajinazarian

Case Western Reserve University - Department of Epidemiology and Biostatistics ( email )

10900 Euclid Avenue
Cleveland, OH 44106-4945
United States

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