Why Don’t Commercial Health Plans Use Prospective Payment?
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.
We would like to thank George Triantis for helpful conversations. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Baker has served as a consultant to Kaiser Permanente, the American Hospital Association, the National Institute for Health Care Management, Cornerstone Research and as an expert in litigation matters involving health insurers, health care providers, and makers of health care supplies and equipment.M. Kate Bundorf
In the last three years, I have received consulting fees from AON Service Corporation and Quinn Emanuel Urquhart and Sullivan, LLP. I have received grant support from the Agency for Healthcare Research and Quality, the National Institute of Health Care Management, the Patient Centered Outcomes Research Institute, and the Robert Wood Johnson Foundation.Daniel P. Kessler
In the last three years, Kessler has received speaking and/or consulting fees from the California State Compensation Insurance Fund, other insurers, Aon Hewitt, Sutter Health, and other hospitals. He is a senior advisor at Cornerstone Research, a provider of litigation consulting services.
- Rising health care costs are a perennial concern for the U.S. health care system. Increasing the degree to which health care...
Laurence Baker & M. Kate Bundorf & Aileen Devlin & Daniel P. Kessler, 2019. "Why Don't Commercial Health Plans Use Prospective Payment?," American Journal of Health Economics, vol 5(4), pages 465-480.