Contracting Practices by Hospitals

01 July 2004
Dr. Thomas McCarthy

The rise in the cost of hospital care continues to make headlines. Why is this the case? Have health insurers lost their clout at the negotiating table? Are hospitals engaging in "full-line forcing" and other contracting practices that limit the ability of managed care plans to bargain for low reimbursement rates?

In this chapter from Economics of Antitrust: New Issues, Questions, and Insights, NERA Senior Vice President Dr. Thomas McCarthy addresses these questions. He begins with a history of the issues surrounding the rise in health care costs. At the center of this debate is the nature of contracting between health insurers and hospitals, and as Dr. McCarthy explains, there has been a shift in bargaining power that favors hospitals. By itself, this does not raise competitive concerns. However, when coupled with exclusive and/or systemwide contracting, the shift in bargaining power has attracted the attention of the antitrust agencies. The economics of these contracting practices is complex, and as Dr. McCarthy notes, the analysis is difficult because while the contracting practices at issue may raise competitive concerns, they also frequently have a procompetitive rationale.