Large self-insured employers acting alone come up short in hospital price negotiations
Employers may be better off building purchase alliances with state and local government employee groups to enhance their market power.
Despite their prevalence, large self-insured employers lack power to effectively negotiate hospital prices, according to a new study reported in the American Journal of Managed Care. According to the researchers:
- There is no evidence that greater employer market power is associated with lower hospital prices in the employer-sponsored insurance markets.
- Employer coalitions would need to enroll a considerable number of employers to have sufficient market power to negotiate with hospitals.
Self-insured employers may consider building purchase alliances with state and local government employee groups to enhance their market power and lower negotiated prices for hospital services.
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“It has been suggested that employers should take an active role in negotiating prices with hospitals rather than relying on administrative services-only insurers to do so,” researchers said. “Our study suggests that almost all employers, operating alone, simply do not have the market power to impose a threat of effective negotiation. Given that health insurers have not been effective in negotiating hospital prices, alternative approaches may be needed to constrain prices for self-insured employers.”
Instead of directly negotiating prices, some large self-insured employers have adopted other approaches to contain their health care spending, such as directing patients toward centers of excellence, improving incentives for in-network care, offering high-deductible health plans in combination with personal medical accounts and changing drug formularies to encourage generic drug use. However, the effectiveness of these tactics can be limited by local market hospital concentration, which forces employers to accept the prices that hospitals charge.
Creating purchasing alliances is another strategy for employers to increase their purchasing power. To be an effective negotiator, such purchasing alliances need to have substantial market power in their geographic area. Achieving such power often would require that many large employers agree on the same approach. Achieving this level of collective action may be a challenge; in many cities, the combined market share of major employers is relatively small.
One approach that may hold promise is creating purchase alliances of private and public employee groups, which can take a more active role in negotiating with hospitals using their combined large market share.
“Employer coalitions would need to enroll a considerable number of employers to have sufficient market power to negotiate with hospitals,” researchers concluded. “Self-insured employers may consider building purchase alliances with state and local government employee groups to enhance their market power and negotiate lower prices for hospital services.”
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