Despite the increasing clout of HMOs in the 1990s, hospitals maintained a dominant position in determining healthcare pricing decisions.
A study appearing in the March issue of International Journal of Health Care Finance and Economics looked specifically at how cuts in Medicare lead to payment changes in private insurance plans in the aftermath of the 1997 Balanced Budget Act.
The findings, said researcher Vivian Wu, provide a glimpse of how hospitals might adapt to external pressures on heathcare pricing.
The 1997 Act aimed to cut $115 billion dollars in Medicare spending growth, primarily through eliminating certain reimbursements for inpatient, long-term hospital services and outpatient department. In the study, Wu – an assistant professor of health policy at the University of Southern California – determined how hospitals made up for the lost funding.
She discovered that 21 percent of the Medicare budget cuts were shifted to private insurance plans, which could then be passed on to people who have private health plans.
"The amount is actually quite significant when you consider the environment in which hospitals were operating in the 1990s, when managed care was believed to be dominant and powerful," she said.
Wu said that her research shows that hospitals have a large amount of market power, even though many believed that HMOs have had the upper hand in pricing negotiations.
Since HMO power has waned in recent years, she said, this would also indicate that hospitals' pricing power is even stronger these days.
Wu found that cost shifting is mainly dependent on how much a hospital relies on private insurers.
Hospitals that rely less on Medicare typically shifted their funding mechanisms: Up to 37 percent of the 1997 cuts were transferred to private payers through higher payments.
These hospitals, typically located in higher-income areas, have a greater bargaining power because private payers value these hospitals more, Wu said, and that means hospitals can negotiate higher prices.
Hospitals that relied more on Medicare funds – typically those in lower income, urban communities – ended up struggling financially since they were limited in their abilities to shift the cost differences and have lower bargaining power.