Self-Insured Employers Have Little Say in Hospital Price Negotiations

July 27, 2021 - Most self-insured employers in the US lack the market power necessary to take part in hospital price negotiations, according to a study published in the American Journal of Managed Care (AJMC). Hospital prices paid by employers are quickly exceeding inflation and have risen considerably above payments from public payers.

Between 2005 and 2019, the price differential paid by employers for hospital services compared to Medicare rates increased from 10 percent to over 100 percent. Most Americans under the age of 65 receive health insurance from their employers. A lack of power by employers to negotiate hospital prices could trickle down and negatively impact employee wages as employers look to cut costs.

Researchers used US Census Bureau County Business Partners (CBP) data to estimate year-by-year employer market power by metropolitan statistical area (MSA) between 2010 and 2016. They also used enrollment and commercial claims data from the Truven Health MarketScan to estimate hospitalization prices.

Results revealed that large, self-insured employers rarely had concentrated market power in most MSAs. The research also suggests that insurers may lack the incentive to negotiate lower hospital prices for their enrollees.

“Most large employers are self-insured, meaning that employers bear financial risk for their health plans. Previous research in this area has focused on how insurer concentration could lead to lower private-sector hospital prices,” the study explained. 

“However, most insurers are paid through administrative services only (ASO) contracts, do not assume risk, and may not have a direct incentive for lower prices.”

Researchers developed a county-level scoring system to calculate employer market power. A score of zero indicates a highly competitive labor market and a score of 10,000 indicates a monopsonistic employer, which is a market condition in which there is only one major buyer of goods and services from a variety of sellers.

The researchers used the weighted mean of the county-level measures to calculate each MSA’s employer market concentration.

Generally, the few employers with the most market power were located in smaller cities and consisted of large universities, health systems, and manufacturing companies. These MSAs typically had hospital prices that were lower than the mean.

The results indicated that large, self-insured employers did not have significant concentrated market power in most MSAs. In 2016, mean employer market power was 62, compared with 5410 for hospital market power.

“Our study suggests that almost all employers, operating alone, simply do not have the market power to impose a threat of effective negotiation,” the study concluded.

“Given that health insurers have not been effective in negotiating hospital prices, alternative approaches may be needed to constrain hospital prices for self-insured employers.”

Creating purchasing alliances with local government groups is one way that employers could boost their purchasing power, the study said. A group of employers in one MSA would have to have significant market power and a unified approach in order to produce change, which makes this method more challenging to deliver.

Since ASO insurers do not appear to be incentivized to negotiate for lower hospital prices, employers could also take an active role in negotiating directly with the hospitals instead of leaning on ASO insurers.

Some employers have adopted other strategies to control healthcare spending, including increasing incentives for in-network care, providing high-deductible health plans with personal medical accounts, and encouraging generic drug use.