Why Don’t Commercial Health Plans Use Prospective Payment?

Laurence Baker, M. Kate Bundorf, Aileen Devlin and Daniel P. Kessler

No 22709, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: I1 I13 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-hea and nep-ias
Note: EH
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Published as 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.

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