Academic Articles Supply of Medical Services

Hospitals Negotiating Leverage

In the early- and mid- 1990s, hospitals were under pressure.  Managed care was taking off and forcing hospitals to reduce prices.  These managed care plans had the upper hand because:

  1. Competition between hospitals was intense.  Each hospital had to fight to secure contracts from managed plans in order to direct large chunks of patients to their hospital.
  2. Managed Care plans are more price sensitive than consumers because they pay a larger portion of the health care cost.
  3. When managed care instituted utilization review, the amount of hospital services demanded by patients decrease.

In the late 1990s, however, it seems that hospitals began winning back some bargaining power.  A paper by Devers, et al (2003) employs a mix of interviews and quantitative data in order to demonstrate that hospital bargaining power did increase in the late 1990s.  The authors give seven reasons why the hospitals bargaining power increased in this time period.

  1. Legislation – Congress passed acts (such as the Patient’s Bill of Rights in 1998) which gave patients more freedoms in their choice of providers and thus reduced the credibility managed care’s threats to entirely drop contracts with hospitals.
  2. Employer response – The late 1990s was one of a backlash from managed care.  In a time of an economic boom, employers began choosing more generous health plans to attract skilled employees.  More generous health plans give more money to hospitals thus increasing their bargaining position.
  3. Medicare/Medicaid managed care enrollment – Medicaid and Medicare managed care enrollment was lower then anticipated, thus weakening managed care’s bargaining power.
  4. Hospital Mergers – In this time period we see a spate of hospital mergers.  As proof of this phenomenon, data from the CTS in 12 markets show that the HHI increased on average 34% between 1996 and 2000. 
  5. Broader Provider Network – In order to attract more enrollees, managed care began to offer broader provider networks, thus reducing the credibility of a threat to remove all patients from a hospital’s rolls.
  6. Must have services – Hospitals increased their purchases of advanced technological equipment and added to their marketing budgets.  Through these two avenues, the hospital tried to convince consumers that their hospital provided essential services which could not be found elsewhere.
  7. Capacity Constraints – In the late 1990s, hospitals began to experience capacity constraints, and thus did not fear the loss of a moderate amount of patients.

One other interesting point made by the article centers on what happens when a managed care plan makes up a large percentage of a hospital patients.  On the one hand, the plan has significant power since moving the patients to another hospital would devastate the revenue of the original hospital.  On the other hand, we see diminishing returns in this bargaining power.  As the number of patients who are served at the original hospital increases, it will be more and more difficult for the plan to switch hospitals without upsetting their enrollee base.

Devers, Casalino; Rudell; Stoddard; Brewster; Lake; (2003) “Hospitals’ Negotiating Leverage with Health Plans: How and why has it changed?” Health Services Research, Vol 38(1), pp. 419-446.