Managed Care Discounting: Evidence from the MarketScan Database

Analysis of price discounting by health maintenance organizations (HMOs) and preferred provider organizations (PPOs) in markets for hospital services shows that managed care discounts are “real,” after accounting for case severity and process of care.

Abstract

The paper examines price discounting by health maintenance organizations (HMOs) and preferred provider organizations (PPOs) in markets for hospital services. Our empirical analysis focuses on transaction prices for angioplasty, which is a relatively common procedure with well-defined "product" characteristics. After controlling for patient and procedure heterogeneity and market power, we find that on average angioplasty prices are 8% lower for PPOs than for fee-for-service plans, followed by point-of-service HMOs, which capture a 24% discount. Our results are in general agreement with earlier work by Cutler, McClellan, and Newhouse (2000), who show that managed care discounts are "real," after accounting for case severity and process of care.