March 29, 2018

Does managed competition constrain hospitals’ contract prices? Evidence from the Netherlands

In the Dutch health care system health insurers negotiate with hospitals about the pricing of hospital products in a managed competition framework. In this paper, we study these contract prices that became for the first time publicly available in 2016. The data show substantive price variation between hospitals for the same products, and within a hospital for the same product across insurers.

About 27% of the contract prices for a hospital product is 20% higher or lower than the average contract price in the market. For about half of the products the highest and lowest contract price across hospitals differ by a factor three or more. Moreover, hospital product prices do not follow a consistent ranking across hospitals, suggesting substantial cross subsidization between hospital products. Potential explanations for the large and seemingly random price variation are: (i) different cost pricing methods used by hospitals, (ii) uncertainty due to frequent changes in the hospital payment system; (iii) price adjustments related to negotiated lumpsum payments, and (iv) differences in hospital and insurer market power. Several policy options are discussed to reduce variation and increase transparency of hospital prices.