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

Avi Dor, Michael Grossman, Siran M.Koroukian

NBER Working Paper No. 10377
Issued in March 2004
NBER Program(s):Health Economics

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.

download in pdf format
   (638 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10377

Published: Dor, Avi, Michael Grossman and Siran M. Koroukian. “Hospital Transaction Prices and Managed-Care Discounting for Selected Medical Technologies.” American Economic Review 94, 2 (May 2004): 352-356.

Users who downloaded this paper also downloaded* these:
Dor, Koroukian, and Grossman w10437 Managed Care Discounting: Evidence from the MarketScan Database
Gaynor and Town w17208 Competition in Health Care Markets
Crown, Berndt, Baser, Finkelstein, and Witt w10062 Benefit Plan Design and Prescription Drug Utilization Among Asthmatics: Do Patient Copayments Matter?
Dor and Encinosa w10738 How Does Cost-Sharing Affect Drug Purchases? Insurance Regimes in the Private Market for Prescription Drugs
Dafny w11673 Estimation and Identification of Merger Effects: An Application to Hospital Mergers
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us