Massachusetts Institute of Technology
Department of Economics
50 Memorial Drive
Cambridge, MA 02142
NBER Working Papers and Publications
|October 2016||Why Don’t Commercial Health Plans Use Prospective Payment?|
with Laurence Baker, M. Kate Bundorf, Daniel P. Kessler: w22709
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 a...