Insurer-hospital Bargaining: Negotiated Discounts in Post-deregulation Connecticut

This paper uses unique data from the state of Connecticut to examine discounting patterns in the state’s hospital industry for the years following deregulation (1995-1998). The data provide a rare opportunity to study payer-level differences in negotiated discounts for hospital services. In addition to presenting descriptive evidence on how discounts vary across payers, payer types, and hospital types, this study uses matched revenue data to analyze the economic determinants of discount magnitudes. Payer size appears to affect bargaining power, but the economic significance of the effect is small. The data exhibit patterns consistent with a bargaining explanation in which discount magnitudes depend critically on payers’ abilities to channel patients to hospitals with which favorable discounts have been negotiated.