Fixed-Rate Hospital Contracts Are Associated with Lower Costs

Fixed-rate hospital contracts yield lower prices and costs compared to discounted charges contracts, according to a study from the American Journal of Managed Care (AJMC).

Hospital visits result in higher spending compared to other healthcare providers, with hospital spending accounting for more than 5 percent of US gross domestic product in 2018, the study noted. One way to potentially lower this spending is to modify hospital-insurer contracts.

To evaluate the relationship between hospital-insurer contracts and hospital performance, the study looked at 1,889 general acute care hospitals and noted the different types of contracts as well as outcomes such as prices, costs, charges, and length of stays.

The study looked at three types of contracts: fixed-rate (FR) contracts, per diem (PD) contracts, and discounted charges (DC) contracts.

“FR contracts reimburse a fixed amount for each admission based on the patient’s diagnosis, level of complications and comorbidities, and a general course of treatment,” the study explained. “PD contracts specify a fixed daily reimbursement based on the type of service, type of treatment, or some combination. Alternatively, DC contracts specify a payment rate for each billable service, usually in the form of a discount on the billed charge.”

Some hospital contracts are variations of these three types and could use one form for certain services and a different form for others.

By comparing contract types with patient-level outcome measures the study found that FR and PD contracts were associated with lower prices and costs. PD contracts were also associated with shorter length of stays. DC and mixed contracts were associated with higher prices and costs.

DC and mixed contracts correlated with prices 0.43 percent and 0.68 percent higher than FR contracts, respectively, according to the study findings. This data did not yield a significant price difference when applied to one claim, but when applied to the millions of claims that hospitals receive each year, it amounted to over $53 million more than the prices associated with FR contracts. 

DC and mixed contracts were associated with 0.09 percent and 0.40 percent higher costs per admission compared to FR contracts, respectively.

Hospital-insurer contracts may not be seen as an obvious way to lower healthcare spending for patients, providers, and payers alike, but early reports have predicted that switching from DC contracts to FR contracts can lead to increased savings. The AJMC study results support this prediction.

Negotiating a hospital contract has a great deal to do with the incentives the contract will provide. FR and PD contracts motivate hospitals to reduce the costs of treatments, but if a patient requires more treatment than anticipated the hospital must cover the extra cost.

DC contracts motivate hospitals to use more services, as there are separate prices for each service. This option may lead to hospitals providing excessive, unnecessary treatments, increasing spending for consumers.

In an effort to reduce out-of-pocket hospital spending, CMS introduced a price transparency rule that required all hospitals in the country to publicly provide price information about the services they provide.

However, some hospitals were still refusing to comply with the rule four months after it passed. Healthcare professionals have argued that this rule will not lead to a decrease in spending and will instead cause hospitals to increase their prices after seeing the rates that other hospitals offer.

CMS’s rule has not had much success in achieving its goal, which could potentially lead hospitals and payers to shift their focus to modifying their contracts in order to lower healthcare spending.